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Morningstar | Helmerich & Payne Reports Sequential Improvement in the Fourth Quarter Owing to U.S. Land Drilling

Land driller Helmerich & Payne reported a solid fourth quarter, with revenue increasing 6% sequentially and adjusted operating margins improving to 6.6% from 5.6% previously. The improvement was driven chiefly by the U.S. Land segment, which benefited unsurprisingly from higher activity levels and strengthening rig pricing. Our fair value estimate and no-moat rating are unchanged.

In U.S. Land, H&P's rig count increased 4% sequentially, slightly outpacing the 2% increase in the overall U.S. horizontal rig count. Combined with a slight increase in day rates, segment revenue increased 6%. The segment's bottom-line improvement was driven almost entirely by the abatement of accelerated depreciation expense that had occurred in the prior quarter. Gross margins per rig day actually decreased to about $9,700 from $10,200 previously, as increasing rig expense per day outweighed higher day rates. However, the higher rig expense per day was chiefly attributable to one-time lawsuit settlement charges.

Management is guiding for a strong first-quarter improvement in profitability, with U.S. Land gross margins per day increasing to about $10,900 owing to the rollover of lower priced contracts to currently higher market pricing as well as the end of the aforementioned lawsuit settlement charges. We think H&P is closing in on its profitability peak, however. The current U.S. horizontal rig count of about 900 is way above our midcycle expectations of about 650. As industry rig counts fall in coming years, H&P's results will be pressured with declining utilization and pricing headwinds.