Should Helmerich & Payne Investors Hold On?
With the Covid-19 pandemic bringing world economies to a halt, the oil industry is facing a dual shock – demand decline due to no travel and price fall resulting from excess supply. Contract drilling services companies have been particularly affected as oil producers cut down capital expenditures, delay payments due, and push back new projects. Helmerich & Payne(NYSE: HP) is one such company which has seen its stock take a huge 50% dive this year (as of June beginning). What happens next? Can it survive 2020 without a cash injection? How vulnerable is it from a liquidity stand point? We answer this question in our dashboard Does Helmerich & Payne Have Enough Liquidity To Survive Covid-19 Demand Shock, which examines the company’s cash flow generation ability, resilience of cost structure and operational runway, and compares it to that of its peers. It is surprising to know that the company can absorb, at best, -4% revenue decline before its operating income becomes negative. It struggled with its net margins in 2019 leaving little room for demand fluctuation. However, it still has the capability to stay cash flow positive. In a no-demand scenario, the company has nearly 7 months of operational runway.
How Much Revenue Hit Can Helmerich & Payne Take Before It Starts Losing Money?
In 2019, Helmerich & Payne posted net income of $ -34 million on revenue of $2.8 billion. We estimate that variable operating expenses were $2 billion, representing 73% of total operating expenses. Based on this we calculate that variable operating expenses represent 73% of revenues and determine that the company could post operating losses if revenues decline by more than -4% vs 2019. Helmerich & Payne does not have enough margin cushion to absorb a demand shock. Even at the break even point, it needs to cover its interest expenses and capital expenditures. As of the beginning of May 2020, the company had outstanding debt of $480 million.
Will Helmerich & Payne Survive If It Takes Until Q4 For Demand To Bounce Back?
Consider a case where the demand slump takes until Q4 to rebound, and results in a 30% decline in Helmerich & Payne’s annual revenue vs 2019. However, the company has capital expenditure as a lever to stem cash outflow and we assume that in case of a sharp revenue decline, it will cut capex by at least 50%. We further assume no share repurchases and use of cash only for operational purpose. In this case, while we expect annual loss – $179 million to be booked in the P&L statement, we estimate that Helmerich & Payne will still be cash flow positive, generating $481 million in cash after accounting for $229 million in capital expenditures (50% cut vs 2019). That’s a sigh of relief! On top of that it had nearly $336 million of cash balance as of the beginning of May 2020.
Extreme Stress Test: Helmerich & Payne Has 6.9 Months Of Runway In Case Of No Demand
But what about an extreme case where operations completely stop and there is no demand? In this case Helmerich & Payne has nearly 6.9 months of runway according to our estimates. Even though the oil industry has received a lot of attention amid demand shock and supply glut, Helmerich & Payne’s analysis suggest that it may still be better positioned than many companies in the retail sector. Check out why this retail company is looking at significant debt raise to stay liquid.
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