Accelerating Energy Transition Will Squeeze Drilling Margins Despite Offshore Prospects

Key Takeaways

• The accelerating energy transition and stricter regulations will shrink drilling demand and raise costs, putting long-term revenue and margins under pressure.
  
• Heavy investment needs, technological risks, and industry-wide volatility expose the company to unstable earnings and persistent profitability challenges.
  
• Global expansion, technological innovation, operational efficiencies, and disciplined financial management position the company for resilient growth, margin improvement, and increased investor appeal.

Catalysts

Provides drilling solutions and technologies for oil and gas exploration and production companies.

• Rapid acceleration of the global energy transition and policy-driven decarbonization is expected to curtail long-term oil and gas drilling demand, materially shrinking Helmerich & Payne's addressable market and leading to sustained pressure on future revenues.
  
• Stricter environmental regulations, rising carbon taxes, and growing barriers for hydrocarbon development worldwide will drive up operating costs and reduce drilling contract volumes, causing persistent downward pressure on long-term net margins.
  
• Ongoing need for heavy capital investment to upgrade and automate the rig fleet risks compressing free cash flow and increasing the likelihood of technological obsolescence, especially if pricing power and utilization do not keep pace with expenditures, which could weigh on long-run earnings quality.
  
• High customer concentration in North American shale basins combined with regional overcapacity and heightened price competition exposes the company to outsized revenue and margin volatility, increasing the risk of earnings instability and structurally weaker profitability.
  
• The oilfield services industry's exposure to labor shortages, rising wage inflation, and cyclical volatility in commodity prices will further strain cost structures, making it increasingly difficult for Helmerich & Payne to defend current earnings or maintain historical dividend levels over multiple cycles.

Helmerich & Payne Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Helmerich & Payne compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Helmerich & Payne's revenue will decrease by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.0% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach $272.5 million (and earnings per share of $2.69) by about August 2028, up from $-35.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from -48.3x today. This future PE is lower than the current PE for the US Energy Services industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 0.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.3%, as per the Simply Wall St company report.

Helmerich & Payne Future Earnings Per Share Growth

Risks

• Helmerich & Payne is broadening its global footprint and expanding activity in international and offshore markets, including significant inroads in the Middle East, South America, and Australia, which could offset any regional downturn and provide new revenue streams and earnings resilience.
  
• The company has demonstrated consistent market share gains, particularly in core basins like the Permian, even as overall rig counts decline, indicating competitive advantages that could support both top-line growth and stable margins.
  
• Increased adoption and value creation from digital applications, automation, and performance-based contracts position H&P to command premium pricing and capture more share in both established and emerging markets, supporting margin expansion and improved long-term revenue.
  
• Integration of the KCAD acquisition is yielding cost synergies, operational efficiency, and an expanded customer base, enabling further margin expansion and strengthening the company's ability to generate higher net earnings and cash flow.
  
• Ongoing disciplined capital management and debt reduction, combined with a focus on maintaining a sustainable dividend and strong balance sheet, enhance financial flexibility and attractiveness to investors, which may help support share price appreciation.

Valuation

• The assumed bearish price target for Helmerich & Payne is $17.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Helmerich & Payne's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $272.5 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $17.29, the bearish analyst price target of $17.0 is 1.7% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.