It's an absolute stock market bloodbath in the oil sector. Industry companies are suffering double-digit drops in share prices, slashing spending left and right, and a few -- lookin' at you, Occidental Petroleum -- have already cut their dividends. 

Ordinarily, this might be a good time to go shopping for bargains, but there's one industry player you'll probably want to avoid. Not only is it in exactly the wrong subsector, but the wrong geographic location to boot. Here's why Helmerich & Payne (HP 0.73%) might be the worst bet in the industry. 

An onshore rig with workers in silhouette.

Onshore rig operator Helmerich & Payne has most of its eggs in a shaky basket. Image source: Getty Images.

The wrong time

You might never have heard of Helmerich & Payne, and there's a reason for that. The oilfield services company is primarily an onshore rig operator, meaning it provides oil rigs and related operational support to exploration and production companies. H&P has managed to stake out a niche as a leader in technologically advanced rigs specialized for shale operations. 

The problem is that shale production -- which is largely responsible for the U.S. energy boom -- has suddenly become a dicey proposition.

When production curtailment talks broke down among OPEC members and Russia last week, Saudi Arabia and Russia both vowed to ramp up crude oil production in April, after the current curtailment agreement expires. That would flood the market with crude, sending the price down. In addition, Saudi Arabia and other OPEC countries like Iraq and Kuwait also announced that they'd be offering deep discounts to their customers, essentially reducing the price of oil even further. In response, oil prices have fallen below $30/barrel: their lowest level since the big oil price downturn of 2014-2017.

Most onshore production in the U.S., if not all, isn't profitable at that price. Most analysts put the break-even price for a barrel of shale oil at $40/barrel or more. As a result, numerous shale producers have announced they'll cut back on rigs. Other companies like Occidental have also announced plans to cut capital spending. 

In other words, it's a bad time to be in the onshore rig business.

The wrong place

H&P has other operations and operates rigs in other places besides the U.S., but its business is sharply skewed toward U.S. onshore production:

Helmerich & Payne Business Segment % of Revenue*
U.S. onshore drilling 83%
International onshore drilling 8%
Offshore drilling 6%
Technology 3%

Data source: Helmerich & Payne. Percentages rounded to the nearest whole percent. 

Onshore drilling makes up about 91% of the company's revenue, and the vast majority of that is U.S. onshore drilling. Almost all of that drilling is in shale. All of the 197 onshore rigs the company has under contract in the U.S. are operating in shale formations, including 123 in the Permian Basin, 32 in the Eagle Ford Shale, and 15 in the Woodford Shale.

In other words, it's a particularly bad time to be in the U.S. shale drilling business.

The wrong direction

Even before the current oil price crisis, things weren't going so well for H&P. In its first quarter of FY2020, which ended Dec. 31, H&P's revenue dropped 17% year over year. That was hardly surprising, considering its rig revenue days -- a measure of fleet utilization, derived by adding up the number of days on which each rig in the entire fleet earned revenue -- was down 19.4% from the prior-year quarter. Operating income fell by 42.2% and operating cash flow fell by 46.6% from the first quarter of 2019.

Unlike offshore rig operators, H&P doesn't provide detailed information about its onshore rig contracts, like to whom they're contracted, when those contracts expire, etc. But as of Feb. 3, only 42.8% of its U.S. onshore fleet was under long-term contract; 23.1% were on "spot contracts" and 34.1% were idle. If H&P expects to grow revenue, it will need to improve its fleet utilization. But it's hard to see how that will happen in the current environment. 

With U.S. shale producers cutting expenses and production left and right, it's likely that many of those spot contracts will dry up. Some producers may even decide to pay to get out of their long-term rig contracts. While that might provide a small short-term benefit for H&P, its fleet utilization is likely to suffer.

The market seems to be aware of the problems facing H&P: Its shares have fallen 64.7% in the last month, while its dividend yield has spiked to an uncomfortably high 17.8%.

A slim silver lining

Although H&P is in the wrong business, in the wrong place, at the wrong time, and seeing key numbers head in the wrong direction, there is a bit of a silver lining.

Specifically, H&P is starting off in a comparatively strong financial position. It has very low debt compared to its oilfield services peers and most oil producers. During the oil price downturn of 2014-2017, the company still managed to churn out positive net income every quarter and maintain its dividend -- although the yield never got above 6.5% during that time. If oil prices stage a quick recovery, things might not be so bad for H&P (although, that's true for most oil companies).

That said, U.S. shale production was one of the bright spots of the oil industry during the previous downturn. Now, not so much. And while Helmerich & Payne's strong balance sheet may help it keep the wolf from the door for a while, investors should anticipate plummeting fleet utilization and revenue, which may even lead to a dividend cut if the share price keeps falling.

Helmerich & Payne may not be the absolute worst bet in the energy industry right now, but it's certainly a poor one. Smart investors will want to steer clear unless they're gluttons for risk.