Low Oil Demand Weighing On Helmerich & Payne Stock

The shares of Helmerich & Payne (NYSE: HP) have recovered a substantial portion of their lost value since OPEC guided mandatory production curtailments last year. The company is a drilling services provider to exploration and production companies in the U.S. In 2020, the U.S. and international operations contributed 92% and 8% of total revenues of the company, respectively. While the company has implemented organizational changes to focus on integrated solution-based approaches to focus on software and digital services, Trefis believes that the stock currently faces downside risk due to newly imposed restriction measures in Europe lowering demand for crude oil and natural gas. Moreover, EIA expects benchmark prices to trend downward during the latter half of the year as OPEC eases production curtailments. Our interactive dashboard analysis highlights Helmerich & Payne’s stock performance during the current crisis with that during the 2008 recession.

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 78% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how HP and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Helmerich & Payne Stock vs S&P500 Performance Over 2007-08 Financial Crisis

HP stock declined from levels of around $52 in September 2008 (pre-crisis peak) to levels of around $24 in March 2009 (as the markets bottomed out), implying HP stock lost 54% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $40 in early 2010 – rising by 68% between March 2009 and January 2010. In comparison, the S&P500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Asset impairments have slashed company’s asset base by 20%

Helmerich & Payne’s revenues declined by 28% from $2.5 billion in 2018 to $1.8 billion in 2020 as the pandemic led to a slump in demand and drove down benchmark prices. While the earnings margin fell further due to a $500 million impairment charge, the company’s balance sheet shrunk by 17% (y-o-y) in 2020. Improvement in the company’s finances largely depends on global crude oil demand and supply constraints by the OPEC. With oil majors including Exxon Mobil, Chevron, BP, and Royal Dutch Shell also registering sizable impairment charges, we expect oil demand to improve gradually in the post-pandemic period.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

While the company plans to maintain a prudent capital investment plan in 2021 to focus on long-term shareholder returns, Trefis believes that the stock has reached its near-term potential considering EIA’s expectation of lower benchmark prices during the latter half of the year.

2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for New Jersey Resources vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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