Exporting FlexRigs To Saudi Arabia Will Boost Operational Capacity

Key Takeaways

• The acquisition of KCA Deutag and exportation of FlexRigs are set to enhance international growth and diversify revenue streams.
  
• Technology integration and synergies from the KCAD acquisition aim to improve efficiency, margins, and cash flow.
  
• Rig suspensions and higher operating costs in Saudi Arabia, combined with softer Middle East markets, are negatively impacting Helmerich & Payne's margins and earnings.

Catalysts

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

• The completion of the exportation of 8 FlexRigs into Saudi Arabia for drilling in unconventional natural gas plays is expected to boost operational capacity, increasing future international revenues.
  
• The acquisition of KCA Deutag positions H&P as a global leader in onshore drilling solutions, which is anticipated to accelerate international growth and diversify revenue streams across the U.S. and international markets.
  
• H&P's strong market presence in North America, particularly in the Permian with a significant market share of super-spec rigs, supports an ability to maintain healthy net margins despite industry rig count declines.
  
• Integration of technology advancements, including performance-based contracts, aims to enhance customer alignment and operational efficiency, which could lead to improved margins and consistent earnings.
  
• Synergies from the KCAD acquisition are expected to reduce costs and increase operational efficiencies, contributing to stronger earnings and free cash flow generation.

Helmerich & Payne Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Helmerich & Payne's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.9% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $266.9 million (and earnings per share of $3.45) by about April 2028, down from $299.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $383.3 million in earnings, and the most bearish expecting $174 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from 6.3x today. This future PE is greater than the current PE for the US Energy Services industry at 10.0x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.96%, as per the Simply Wall St company report.

Helmerich & Payne Future Earnings Per Share Growth

Risks

• The rig suspensions in Saudi Arabia related to the KCA acquisition are expected to impact direct margins, particularly as the suspensions are anticipated to last for one year, affecting earnings negatively in the short term.
  
• Start-up costs associated with organic growth in Saudi Arabia have already led to higher-than-expected direct operating costs, potentially impacting net margins and earnings.
  
• North America Solutions segment is experiencing a slight reduction in daily recognized rig revenue and decreased contracted rigs, which may lead to a decline in revenue and direct margins.
  
• The broader market environment in the Middle East shows general softness, potentially limiting revenue growth and affecting financial performance.
  
• Variability in the financial results from quarter to quarter due to performance-based contracts and normal business fluctuations could lead to uncertainties in consistent earnings projections.

Valuation

• The analysts have a consensus price target of $33.2 for Helmerich & Payne based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $266.9 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 9.0%.
• Given the current share price of $18.98, the analyst price target of $33.2 is 42.8% higher.
• 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.