Sinking: It’s Not Just For the Offshore Drillers Anymore

Offshore drillers have company now that falling oil prices are hitting the shares of Helmerich & Payne (HP), Patterson-UTI Energy (PTEN), Nabors Industries (NBR) and Seventy Seven Energy (SSE)–and for good reason, say Susquehanna’s Charles Minervino and Kai Wang. They explain:

Reuters

Recent weakness in WTI and Brent, coupled with geopolitical issues and less urgency offshore are posing a broader threat to E&P capital budgets in 2015…We view the Land Drillers as being among those with more risk to estimate revisions, given high current dayrates and significant newbuild construction activity, which may potentially be problematic if lower crude prices persist or a weaker outlook on U.S. E&P spending came out of earnings season. That said, valuations screen much better in land drilling right now and we prefer Patterson-UTI Energy (3.7x 2015 EBITDA) and Nabors Industires (4.5x 2015 EBITDA).

Minervino and Kai Wang also think shareholder returns will become more important for Helmerich & Payne, Patterson-UTI Energy Nabors Industries, and Seventy Seven Energy. He explains why:

While the Land Drillers are still the best performing subsector in our coverage universe (up 17% YTD), the stocks have pulled back 23% since July. We are anticipating attractive free cash flow generation for the land drillers, and given the pullback in these stocks, we estimate free cash flow yields are 1.6%, 8.7%, 6.5%, and 9.1% for Helmerich & Payne, Patterson-UTI Energy, Nabors Industries, and Seventy Seven Energy. Helmerich & Payne has actively increased its dividend in the past 12 months and we are anticipating the company will generate $166mn of free cash flow in 2015. Patterson-UTI Energy still has about $187mn remaining on its share repurchase authorization, while Nabors Industries recently announced a $250mn buyback transaction from Pamplona. We believe there is more in the cards for shareholder returns from these three companies as we progress into 2015. We do not expect Seventy Seven Energy to buy back stock or announce a dividend at this time.

Shares of Helmerich & Payne have dropped 4.3% to $85.61 at 3:16 p.m., while Patterson-UTI Energy has fallen 7.3% to $27.04, Nabors Industries has declined 5.7% to $19.67, and Seventy Seven Energy is off 5.1% at $20.27.