There is no denying the suffering going on today in the oil and gas services industry. Helmerich & Payne, Inc.'s (NYSE: HP) weak top- and bottom-line results in fiscal 2016 are clear evidence of that. But there's more going on here than the stock market seems to realize, and that's why it would be a mistake to sell this industry leader today. Here are three things that might have you worried -- and why they aren't as big of a deal as you think.
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Helmerich & Payne employees. Image source: Helmerich & Payne, Inc.
All that red
One of the most obvious things to be concerned about at Helmerich & Payne is revenues and earnings. Both plummeted in fiscal 2016, with the top line basically getting cut in half, year over year. Earnings fell from a profit of $3.85 a share in 2015 to a loss of $0.54 in fiscal 2016. That's clearly not a good sign.
Here's the thing, though: GAAP earnings are important, but cash flow is what keeps a company alive. On that score, Helmerich & Payne's business is doing just fine, adding roughly $175 million in cash to its bank accounts in fiscal 2016. And it didn't issue any debt, so this was cash generated by the company's business.
How did it do that while bleeding red ink? The company builds expensive equipment that it then leases out to others. When there's demand for additional rigs, it builds them; when there's no demand, it stops. It hasn't been building rigs in the current market, which removed roughly $875 million worth of capital expenses from the equation last year. And then there's the depreciation from the expensive rigs it has already built, which reduces GAAP earnings over their useful lives but doesn't have an impact on cash flow since they've already been paid for. Add it all up, and Helmerich's bottom line isn't a great representation of how well the company is doing today -- you're better off following the cash.
The next issue to fret over is the utilization of the company's fleet of oil and gas rigs. It was downright dismal at 30% in fiscal 2016. And it ended the year at just 25% in the fourth quarter. That basically means Helmerich & Payne ended fiscal 2016 with 75% of its rigs not being used. Generally speaking, the company isn't getting paid if a rig isn't drilling.
Helmerich & Payne has more in-demand AC rigs than anyone else. Image source: Helmerich & Payne, Inc.
There's no "secret" math on this one like with cash flow, a low utilization rate is bad news. There is a twist, though: Helmerich focuses on building the best rigs. So, its portfolio is stacked with in-demand AC drive rigs that are more efficient and faster than older rigs. These are the types of rigs that will be put to work first when the cyclical oil and gas drilling industry picks up again. And Helmerich & Payne happens to have more of these rigs than any other industry player.
So, a low utilization rate is bad today. But there's a good reason to believe the outlook is brighter for Helmerich than for its peers.
How long will it last?
So far, so good for Helmerich & Payne. But a lot depends on an industry upturn in the oil and gas sectors. Sure, energy prices have risen lately, but they aren't what they used to be. And there's no way to tell when a more robust recovery might take place. Don't dump Helmerich because of that, though. It's built for survival.
Helmerich & Payne is more durable than peers because it has less debt. Image source: Helmerich & Payne, Inc.
The best example of that is the company's rock-solid balance sheet. At the end of September, long-term debt made up around 10% of the company's capital structure. That number was closer to 50% at competitors Nabors Industries (NYSE: NBR) and Precision Drilling (NYSE: PDS). That gives Helmerich & Payne a lot more breathing room when times get tough, since it doesn't have to worry nearly as much about interest expenses as some of its largest peers.
More important for investors, low debt levels mean Helmerich & Payne is well positioned to weather this downturn. And, of course, make it out the other side in one piece so it can fully benefit from the next upturn.
If you look at the surface results at Helmerich & Payne without doing a deep dive, you'd rightly think it wasn't worth owning, but that would be a mistake. For example, GAAP earnings were in the red in fiscal 2016, but cash flow, the lifeblood of a business, was robust. Sure, only 25% of its drill rigs actually doing any drilling, but that problem will eventually fix itself since most of the rigs the company owns are top-of-the-line offerings. And while the oil and gas services industry has indeed been out of favor, Helmerich's rock-solid balance sheet means it will be an industry survivor. Add it all up, and now is not the time to sell Helmerich & Payne.
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