With oil prices rebounding from the dark days in February 2016, the drilling industry has been gradually picking up pace. Nonetheless, structural oversupply and margin pressure still weighs on most of the companies within the industry. However, one company that is shining in the drilling space is Oklahoma-based Helmerich & Payne, Inc. (HP - Free Report) . In fact, this is the only company within the industry that sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Notably, shares of Helmerich have gained 7.7% over a year against its industry’s decline of around 19%.
Let’s delve deeper and analyze what’s working in favor of the company.
Differentiating Technology Drives Demand
As we know, the demand for Helmerich’s drill rigs had taken a beating amid the crude slump, with its rig count in the U.S. segment plunging from 297 in 2015 to 87 in just a year and a half. Moreover, even during the downturn, Helmerich kept spending on its drilling fleet upgrades, which spiked costs. Needless to say, the company’s top line and bottom lines were severely impacted.
However, Helmerich’s efforts did pay off as prices were on a rise since the start of the year, owing to crude uptick. Consequently, the demand for rigs also started fueling up, with its active fleet bouncing back to 227. Moreover, the company has already upgraded most of its drilling feet with the latest technology, and is currently having the youngest as well as most efficient drilling feet. In fact, Helmerich’s technologically-advanced FlexRigs are actually much in demand and command strong daily rate margins.
While oil prices have been on a decline of late owing to oversupply conditions and geo-political tensions, most industry experts feel that prices have bottomed out and are on the cusp of a pick-up. Much of their optimism lies in the anticipation of a production cut at OPEC’s December meeting, wherein the members are expected to commit to cutting output by 1-1.4 million barrels per day from October levels, in an attempt to drain inventories and boost prices. With oil prices expected to escalate again, the scenario will become more positive for drilling companies, including Helmerich.
As it is, the contract driller is relatively immune to economic turmoil as it has contracts with well-capitalized oil majors and larger independent companies. Additionally, term contracts and shale drilling demand for its rigs have helped Helmerich maintain a relatively high level of utilization.
Robust Financials & Investor Friendly Moves Bode Well
The debt levels of Helmrich are not only low on an absolute basis but also on a relative basis. The company’s leverage stands at just around 10% compared with many of its peers that are hugely burdened with debts, accounting for around 50% of their total capital structure. Recently in November, Helmerich also expanded its revolving credit facility, boosting its liquidity buy another $450 million. Its low debt levels and high cash coverage reflect the ability to utilize its borrowing effectively to generate enough cash flow. The company is a dividend aristocrat and has managed to hike its payout in each of the last 47 years.
Upbeat Guidance Buoys Optimism
The company expects activity in the U.S. land segment to rise 4-5% sequentially during the first quarter of fiscal 2019. While average rig revenues per day are likely to be in the band of $24,500-$25,000, daily average rig cost is expected within $14,500-$14,900 during the said quarter. Coming to the offshore segment, Helmerich & Payne expects average rig margin per day within $8,500-$11,000 in first-quarter fiscal 2019 and revenue days to increase 5% sequentially.
Other Stocks to Consider
Investors interested in the energy sector can opt for some better-ranked stocks given below:
Houston, TX-based Enterprise Products Partners L.P. (EPD - Free Report) holds a Zacks Rank #1. The company’s earnings for 2018 are expected to surge more than 36% year over year.
Rome, Italy-based Eni S.p.A. (E - Free Report) has a Zacks Rank #1. Its earnings for 2018 are expected to grow more than 100% from the 2017 level.
Houston, TX-based Shell Midstream Partners, L.P. (SHLX - Free Report) carries a Zacks Rank #2 (Buy). The company’s profits for 2018 are expected to grow nearly 20% from 2017.
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