Helmerich & Payne Posts a Rare Loss, but Its Outlook Should Give Investors Hope

By Tyler CroweMarketsFool.com

Image source: Getty Images.

Even well-run companies occasionally run into an operating environment that will really test their ability to generate profits. It would seem the rig market finally found the pain point for Helmerich & Payne (NYSE: HP). After several quarters of fighting off a bad market, the company's earnings finally slipped into a loss this past quarter. Despite the bad news, the company gave reason to hope things will only get better from here.

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Let's take a look at the numbers for Helmerich & Panye's most recent quarter to see why it was so bad, and why management is projecting things to improve.

By the numbers

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Results (in millions, except per share data) Q3 2016* Q2 2016 Q3 2015
Revenue $366.5 $438.2 $661.4

Operating income

($13.2) $41.6 $135.0
Net income ($21.2) $21.2 $90.9
EPS ($0.20) $0.19 $0.83

Data source: Helmerich & Payne earnings release. *The most recent quarter was the third fiscal quarter of 2016 for Helmerich & Payne.

The numbers for this quarter were not promising: Further declines in rig use led to a 16% decline in revenue that translated into the first quarterly loss that didn't involve a large asset writedown in more than 20 years. I can't think of any other way to describe the challenging environment for U.S.-based land rig owners than that statement right there.

If there's anything positive that can be pulled from this quarter, it's that the company is still generating enough operational cash flow -- $122 million this quarter -- to cover its capital spending -- $39 million -- with some left over to pay its dividend.

Even after all cash outlays were paid, Helmerich & Payne ended the quarter with more cash than it started. Today, it has $907 million on the books, which is more than double the amount of long-term debt outstanding for the company. This is important because it suggests the company can continue to weather these bad times while many of its peers have been languishing with operational losses for some time.

The highlights

If the first calendar quarter was rough for rig operators, this past quarter was even worse. The active rig count continued to decline and pretty much hit its bottom right around the end of the quarter. This quarter was quite possibly the worst quarter for rig activity in the U.S. in over a century.

U.S. Rig Count data by YCharts.

As a result of this bottoming out, Helmerich & Payne's utilization rate for its U.S. land segment dropped to just 24% compared to 47% this time last year, as well as a modest decline in rig margin. The company's smaller offshore and international land rig segments also saw declines in both utilization rates and rig margins.

From the mouth of management

Despite the decline into the red, CEO John Lindsay was much more focused on what appear to be better times ahead:

A look at the outlook

The good news is that things could start to get better from here. For the first time in a while, the company is guiding for greater increases in rig use across the board. The U.S. land rig segment has already put two more rigs to work and expects revenue days to increase 5%-7% for the following quarter. Rig margins will likely be a little lower because some of the new rig contracts have lower contract rates, but getting more rigs in the field will also help to offset fixed costs within the company.

10-second takeaway

Just as Helmerich & Payne posts its worst earnings result in decades, it looks as though the worst of it seems to be over. Oil prices are climbing in fits and starts, but today, oil prices are in the $45-$50 per barrel range, which is enough to get a couple of producers interested in drilling a few wells. With Helmerich & Payne's balance sheet in great shape and a fleet ready to handle the complex shale drilling jobs, chances are, the company will be able to capture greater market share as the industry rebounds. Hopefully this will be the last time Helmerich & Payne posts a loss for a while.

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Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool.

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