Analyst Note| Katherine Olexa |
After taking a fresh look at Helmerich & Payne, we maintain our no-moat rating and neutral moat trend. We lower our fair value estimate slightly to $27 from $28 due to prolonged expectations around a tight rig market. Overall utilization remains low (around 40%) owing to conservative capital spending from large, public E&P firms in the near term. We expect low utilization will persist due to oversupply from past overinvestment by rig providers coupled with a broader downward shift in long-run demand. Drillers typically earn pricing power when utilization reaches about 80%. During periods of oversupply--as seen over the last five years--buyer power is much stronger, and drillers’ margins suffer as a result. About 84% of H&P’s business involves drilling, so industry dynamics greatly impact the firm’s performance.