EUR 850.00 For Business Accounts Only

Morningstar | H&P's Q1 Sees Best Operating Margin in Almost Four Years

No-moat Helmerich & Payne had an excellent first quarter. Although revenue slipped by 3% sequentially, adjusted operating margin improved to 12% from 7% previously following stronger pricing. This is the company's best operating margin in almost four years (since Q2 2015). Nevertheless, our bearish long-term view  for land drillers remains, and therefore our fair value estimate is unchanged at  $42,00.

Helmerich & Payne's largest segment, U.S. Land, drove the bulk of the improvement, with segment operating margins improving to 17% from 13% in the prior quarter. H&P's U.S. Land rig count actually fell by 1% sequentially, but gross margin per rig day jumped to $11,400 from $9,700. About $800 per day of this improvement was because of the abatement of one-time charges which hit the prior quarter, but the rest was mostly because of stronger pricing.

H&P's strong results were largely matched by peers. U.S. land drillers had a great first quarter overall. Although the U.S. horizontal rig count fell by 2% sequentially, Tier 1 rig utilization remained fairly strong (at about 80-85%), with "super spec" rig utilization above 90%. Tight utilization allowed for land drillers to continue to push pricing increases, and as a result gross margins per day for the driller increased 11% on average (to $10,400 per day from $9,400).

Unfortunately for U.S. land drillers, we forecast that the U.S. horizontal rig count will fall from almost 900 currently to about 700 by 2023 as U.S. shale drilling moderates and drilling efficiencies continue to improve. This means utilization and therefore pricing will fall in future (even for super spec rigs), pushing down drillers' financial results. The market doesn't seem to have grasped this fully yet, and Helmerich & Payne in particular is trading over 40% above our fair value estimate.