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Near a 10-Year Low, Is Helmerich & Payne a Buy?

By Reuben Gregg Brewer - Mar 3, 2021 at 8:46AM

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Shares of this U.S.-focused oil services company are down a lot, but there is definitely solid rebound potential here.

The energy services sector has been suffering as exploration and production companies pull back on drilling, taking Helmerich & Payne's (HP 2.58%) stock down near 10-year lows. But oil prices are starting to recover, suggesting that the worst may be behind us. Is there a recovery in the cards for U.S.-focused Helmerich & Payne?

Is it over yet?

2020 was a difficult year for the energy sector. West Texas Intermediate, the key U.S. oil benchmark, actually fell to zero at one point. A confluence of complex factors led to that, but it was a shocking event since it meant that, at least for a brief moment, oil companies were paying customers to take their oil. But that was last year. As 2021 has gotten under way, oil has risen higher than where it was at the start of the coronavirus pandemic. 

A man wearing a hard hat and writing in a notebook in front of oil well.

Image source: Getty Images.

Helmerich & Payne, which provides drill rigs and drilling services to the energy sector, managed to muddle through. But that's not shocking when you step back and look at the company's balance sheet. For example, its debt-to-equity ratio is roughly 0.15 and less than half the level of its next-closest competitor. This isn't a new thing; the company has long taken a conservative approach to its finances because it knows that the energy industry is highly cyclical. That extra room on its balance sheet gives it the freedom to maneuver when times get tough, like last year. Though, as an example of how difficult the year was, Helmerich & Payne chose to cut its dividend to preserve cash after more than four decades of annual increases. 

That said, with oil prices solidifying, a strong financial foundation also gives Helmerich & Payne the leeway to move quickly when demand starts to pick up again -- which is where the story gets interesting.

Lots of available rigs

Helmerich & Payne has 262 onshore drilling rigs in its U.S. fleet. Right now, only 82 are being used, which means a dismal 31% are under contract. This is, by far, the company's largest business at about 80% of revenue, though it does have 32 onshore rigs in foreign markets (only three are working) and eight offshore rigs (five are under contract).   

The interesting thing about Helmerich & Payne's onshore portfolio is that it is filled to the brim with super-spec rigs (234, with another eight that could be upgraded). These rigs are more flexible and efficient than older rigs. The fact that so much of the company's equipment is cutting edge is not an accident -- Helmerich & Payne has long focused on being at the leading edge of industry technology.  

When demand starts to pick up, the first rigs to get back to work are going to be the most technologically advanced. So Helmerich & Payne is well positioned to participate in an energy industry recovery. And, going back to the balance sheet, it has the strength to act quickly. The company has roughly $1.3 billion in liquidity available. That consists of $524 million in cash and a completely undrawn revolving credit facility of $750 million.   

HP Chart

HP data by YCharts.

Meanwhile, it hasn't been sitting idle waiting for a rebound. Helmerich & Payne continues to work on digital solutions (both internally and via acquisition) that further enhance customer returns, and -- equally important -- it's developing new pricing models. Historically, drilling services providers were paid by the day, but enhanced productivity has reduced the time it takes to drill wells. So Helmerich & Payne is trying to better match its pricing to the actual needs of customers, including options like paying per foot of drilling and performance-based contacts. The end goal is to position the company to profitably serve customers -- a proposition that works well for everyone involved, including shareholders.  

An aggressive play

The global energy industry is not out of the woods just yet, even though oil prices have started to rise. Supply is still high and a huge uptick in drilling would most likely lead to energy prices falling anew. So a swift return to work isn't likely in the cards for Helmerich & Payne. However, with a roughly 3.5% dividend yield backed by rock-solid finances, you will be paid reasonably well to wait. And when demand does start to come back -- hopefully following a successful rollout of coronavirus vaccines -- it is highly likely that this drilling services company will be among the first to benefit. Conservative investors probably won't be attracted to this story, given that the energy sector is highly volatile, but more aggressive ones might find Helmerich & Payne's industry positioning compelling enough to add it to their portfolios.

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