Contract drilling services provider Helmerich & Payne Inc. (HP) reported robust third quarter fiscal 2011 results on July 29 with both revenue and earnings per share (EPS) exceeding the Zacks Consensus Estimates.
Second Quarter Recap
The quarter’s earnings of $1.00 per share beat the Zacks Consensus Estimate of 98 cents, attributable to strong contributions from most of its business units. The company generated revenue of $644.1 million, surpassing our projection by 1.6%
On a segmental basis, U.S. Land Operations and Offshore Operations registered year-over-year revenue growth of 47.0% and 2.8%, respectively. However, revenue from International Land Operations plunged 23.1% during the quarter.
(Read our full coverage on this earnings report: Helmerich & Payne Tops Estimates)
Agreement of Analysts
Looking at the estimates’ revision trends, it becomes clear that a majority of the analysts project a pessimistic outlook for Helmerich & Payne’s fourth quarter 2011 earnings. Of the total 18 analysts covering the stock, 3 have raised their estimates and 6 analysts have moved in the opposite direction over the last 30 days.
For fiscal 2011, 6 analysts have upped their estimates, while 5 analysts went for a downward revision. However, over the last 7 days, no earnings estimate revision was witnessed.
The estimate revisions for the upcoming quarter and full-year 2011 indicate a mixed sentiment on the part of the analysts based on the company’s superior drilling fleet and healthy financial profile, offset by weak oil and natural gas fundamentals.
Magnitude of Estimate Revisions
Showing no influence from analysts’ earnings revision, the Zacks Consensus Estimate for the third quarter and full year remained static at $1.04 and $3.90, respectively over the last 7 days and 30 days.
Earnings Surprise
With respect to earnings surprise, Helmerich & Payne shows a mixed trend in the last 4 quarters. The company has recorded a negative surprise of 3.1% in the second quarter of 2011 to the maximum of 14.6% in the first quarter of 2011. On average, the earnings surprise was a positive 5.9%. Based on the current flow, we expect the company to come up with healthy results in the upcoming quarters.
Our Recommendation
Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere, having the latest and most efficient drilling fleet. We believe the company’s technologically advanced FlexRigs will help expand its active rig count and maintain relatively strong daily-rate margins even during the ongoing market uncertainty. Moreover, the company’s strong contract drilling backlog, standing at nearly $3.7 billion, not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility.
However, unstable oil and natural gas fundamentals, supply-demand imbalance, challenging international operations and stiff competition from peers such as Nabors Industries Ltd. (NBR) and Noble Corp. (NE) remain our core areas of concern. Additionally, any significant reduction in energy prices will likely depress the exploration and production activity level, resulting in a corresponding decline in demand for the company’s services.
Considering these factors, we maintain our long-term Neutral rating on the stock. Helmerich & Payne currently retains a Zacks #3 Rank, which translates into short-term Hold recommendation.
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