Today, I’m adding an American petroleum contract drilling company, Helmerich & Payne, Inc. (HP).
Market Overview
While the same concerns that haunted the market for months continue to lurk in the background, the bulls have staged a rather impressive rally off the lows two weeks ago.
This last week the Dow gained 0.3%, the S&P 500 advanced 1.8% and the tech-heavy Nasdaq rose 2.0%.
The rally was seemingly sparked back on March 16, when the Fed raised interest rates by 25 basis points and signaled the potential for seven hikes in 2022. In the hours after the announcement the market began to tumble, but it didn’t last long. The red bar, circled in the graph below (actually it’s a rectangle), marked the moment the intra-day decline ceased, and the market began to skyrocket higher…for weeks.
What led to the rally?
Perhaps it was Fed Chair Jerome Powell scoffing at a question about whether or not the U.S. economy was headed for a recession.
His statement marked the low and may have launched what has been an incredible rally. However, let’s not forget, this is the same man who said for months on end that inflation would be transitory, only to retract his statement as inflation soared throughout the economy.
The coming weeks should give us greater insight as to where this market is headed.
Today, I’m adding an American petroleum contract drilling company, Helmerich & Payne, Inc. (HP).
New Recommendation
The Stock – Helmerich & Payne, Inc. (HP)
Why the Strength
The need for increased petroleum production to relieve record-high fuel prices has rarely been greater, with the White House calling on oil drillers to boost production in order to ease the pain at the gas pump. While some big oil producers are slow to increase output, others have answered the call, and overall it’s a sure bet demand for drilling services is headed higher after a multi-year dry spell.
Tulsa-based Helmerich & Payne is a well-managed oil services and contract drilling outfit that has survived the downcycle in great shape (no debt maturities until 2031; investment grade debt rating; plenty of liquidity and a dividend that yields 2.3%) and is poised to see results turn up dramatically in the quarters to come. Although H&P’s North America Solutions segment sustained a $29 million operating loss in Q4 (due to higher costs), the company said it exited the quarter with 154 of its rigs in use, 21% higher than the prior quarter and up 64% from a year ago.
Consequently, total revenue in Q1 soared 66% from a year ago, while a per-share loss of 45 cents topped estimates by 2 cents. And that momentum has continued, with its rig count rising to 174 by the end of January! Back to Q4, by operating segment, revenue from the company’s International Solutions leaped 254% from a year ago, North America Solutions rose 69% and Offshore Gulf of Mexico edged up 9%.
H&P said that while increasing demand for its super-spec rigs has led to a “very tight” market this year due to near-term scarcity of readily available rigs, it has 271 total rigs in its fleet (including 162 super-spec available in the U.S.) so there’s still upside ahead. Management added that drilling activity in the international market is positive, while South American activity is slowly improving and the firm anticipated additional growth in the coming quarters and beyond.
Looking ahead, analysts still see the firm losing money this fiscal year (ending in September), but (a) cash flow looks stronger than earnings and (b) those estimates are probably too conservative.
Technical Analysis
For much of 2021, HP lagged its industry peers as shares churned mostly sideways for the first 10 months of that year, gyrating between the 25 and 35 levels. After tagging the high end of the range in November, the stock plunged to 22 on earnings. But that dip to multi-month lows was the final shakeout—with oil prices surging, the stock bottomed quickly and was in recovery mode by December and has trended higher since. As with many energy names, we think HP can go higher, but also think further near-term pullbacks are likely. Stop—34.5
The Covered Call Trade
Buy Helmrich & Payne (HP) Stock at 42.5, Sell to Open April 42.5 Strike Calls (exp. 4/14) for $1.50 or a Net Price of 41 or less
Static Return: $150 per covered call (3.66%)
Breakeven: 41
Covered Call Return (if assigned): $150 per covered call (3.66%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 41 or less. (In this case 42.50 minus 1.50 = 41. Or another example is you could pay 42 for the stock and sell the 42.5 call for 1, which also equals 41.)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Corning (GLW) | 42.20 | 38.00 | 37.0 | April 39 -- 0.75 | $0.45 |
| Barrick Gold (GOLD) | 23.10 | 24.00 | 19.5 | April 22 -- $1.85 | $2.20 |
| OnSemi (ON) | 54.15 | 65.00 | 48.0 | April 55 -- $4.20 | $10.00 |
| Cameco (CCJ) | 24.30 | 28.00 | 21.5 | April 22 -- $3.30 | $6.00 |
| Pure Storage (PSTG) | 35.30 | 36.00 | 29.5 | April 34 -- $2.28 | $2.50 |
The next Cabot Profit Booster issue will be published on April 5, 2022.