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Helmerich & Payne Stock: More Rally After Consolidation

  • Helmerich & Payne (HP) stock looks attractive for further rally in the next few quarters.
  • HP stock has revenue upside visibility along with EBITDA margin expansion.
  • This company has an investment grade balance sheet with an attractive dividend yield.
A photo of the Helmerich Payne Company logo on a smartphone screen in front of a computer, being held in a hand.

Source: Trismegist san/ShutterStock.com

With energy prices higher on geopolitical tensions, oil and gas exploration stocks have surged in the last few months. At the same time, the outlook has changed for associated sectors, such as onshore and offshore oil and gas rig providers. Helmerich & Payne (NYSE:HP) stock is an attractive name among onshore drilling rig service providers. Year-to-date, HP stock has surged by 94% as Brent trades above $100 per barrel.

However, I believe that there is a further rally impending. The stock has witnessed a minor correction from highs. This seems like a good accumulation opportunity for the next leg of the rally.

HP Helmerich & Payne, Inc. $46.13

Strong Fundamentals for HP Stock

It’s worth noting that in the first half of 2020, oil price futures briefly plunged to negative territory. The balance sheets of several companies were impacted during this period.

Helmerich & Payne has managed to navigate the worst phase for the industry with strong fundamentals. As of March 2022, the company reported a total liquidity buffer of $1.2 billion. For the same period, the company’s total debt-to-capitalization was less than 20%. With an investment grade balance sheet, the company seems positioned for growth as the industry recovers.

HP stock also has a healthy dividend yield of 2.11%. Considering the balance sheet and improved growth outlook, dividends are sustainable.

I also like the fact that the company has no major debt repayment outstanding through 2024. There is no immediate debt refinancing pressure. Additionally, with a strong credit rating, the cost of debt is unlikely to increase.

Visibility for Revenue Growth

For the second quarter of 2022, Helmerich & Payne reported revenue of $468 million. On a year-over-year basis, revenue surged by 58%. With improved rig utilization, the company’s revenue growth is likely to remain healthy.

An important thing to note is that as of March 2022, Helmerich & Payne reported a total fleet of 271 rigs. For the same period, 184 rigs were contracted. Therefore, only 68% of the rigs are contracted. If the oil price remains firm, an increase in exploration activity would imply contracts for idle rigs. This provides revenue and cash flow upside visibility.

Helmerich & Payne has also been pursuing international expansion. The company already has operating rig presence in Argentina, Bahrain and Columbia. With presence in more geographies, the company’s growth is likely to accelerate.

I also believe that Helmerich & Payne is positioned for EBITDA margin expansion in the next few quarters. The new contracts are likely at a higher day-rate and will imply margin expansion and higher cash flows.

The Recession Risk Factor

There are concerns about a potential recession in the U.S. in 2023. This can negatively impact crude oil price. However, I believe that the recession factor is likely to be offset due to two reasons.

First and foremost, oil prices have discounted the geopolitical risk premium. With Russia-Ukraine tensions ongoing, it’s unlikely that oil will decline significantly.

Furthermore, a key objective of policymakers is to reduce dependence on Russia for oil and gas. One way to achieve this is increased investment in drilling and exploration in U.S. and some European regions. The Norwegian Continental Shelf is a good example. Therefore, beyond near term headwinds, the demand for onshore drilling is likely to remain robust.

It is also worth noting that any meaningful slowdown in economic activity would imply renewed expansionary policies. This has the potential to trigger another rally in energy and commodities.

Bullish on HP Stock

Overall, HP stock looks attractive with revenue growth and EBITDA margin expansion visibility. The company has a strong balance sheet that will help in potential expansion if market conditions remain favorable.

Additionally, the company’s modern super specification flex-rigs provide a competitive advantage over peers. While HP stock has surged in the last few months, I see visibility for a further rally after some consolidation.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


Article printed from InvestorPlace Media, https://investorplace.com/2022/05/hp-stock-more-rally-after-consolidation/.

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