Helmerich & Payne, Inc. (HP)

(Bloomberg) -- Gasoline demand surged to a a record high as Americans took to the road for the July 4th holiday weekend.
Gasoline supplied, a proxy for demand, rose to 10 million barrels a day the week ended July 2, the highest in data going back to 1990, according to the Energy Information Administration.
Demand has regained its footing as vaccinations and easing economic restrictions propel more Americans to resume their pre-pandemic lifestyles. Oil prices have risen almost 50% this year as U.S. refineries run close to full-bore to keep up with fuel demand. While the U.S. recovery quickens, the world’s largest oil producers can’t agree on how to supply the market with Saudi Arabia advocating for tempered supply increases given the potential headwinds that still exist.
“Demand is bucking with the price spikes and summer driving, but with high gas prices and inflation, the picture in September may look different,” said Trisha Curtis, co-founder of PetroNerds.
The moving average for demand also climbed higher, reaching the most since late 2019. But on a seasonal basis the figure was still about 150,000 barrels a day short of July 2019, suggesting the market still has some room to recover.
U.S. motorists hit the road in large numbers despite contending with the highest gasoline prices since 2014. The average pump price Thursday was $3.14 a gallon, according to auto club AAA.
© 2021 Bloomberg L.P.

$CLR $RIG $OXY $COP $VLO $HFC $NOV $HP $RES $MUR $XOM $CVX $BP $KMI $MRO $DVN $PXD $HAL $BKR $SLB $MPC

I cut about 20% of my long-term position in HP over the past week. I am still bullish for 2021 but I am starting to get a little bit worried about overall market volatility in 1Q. I will buy more if it dips below $23.

Key upcoming risks: GA senate runoff results, continued lockdowns, new administration crackdown on oil, OPEC decisions in 1Q, any vaccine setback, low oil demand in 1Q.
Potential upsides: Vaccine success, weakening dollar, COVID cases start declining, OPEC continues cuts at a reasonable level, spike in travel bookings, investors start transitioning out of inflated tech stocks, mideast unrest (Not hoping for this but it is always a possibility over there), high likelihood of record travel / vacation numbers next summer.

2020 was all about sexy stocks and less about valuation, dividends, etc. I am of the opinion that will come to a halt as soon as more of the upsides above start happening and investors have safer places to go. Overall I think that this should be a $35-$40 stock by the end of next year.

Long-term, next year will be a huge year for EV's with a record number of them hitting the roads from multiple companies. We are years away from it having a major impact to oil but the writing is on the wall. You also need to take into account that oil demand will likely never be where it was as more companies are now used to WFH and less business travel. I believe the upsides in 2021 will offset this, but heading into 2022 this could trade flat or decline.

Finally had a chance to read through the report and earnings call transcript in detail. IMO the selling was way overdone due to all oil related stocks taking a beating at the same time. Very interesting to see the details behind public vs. private E&P active rigs right now and I think it is positive that H&P still gained market share even though they have historically banked on the public companies. It appears they will exist the post COVID chaos with a much larger market share than pre COVID.

Skid vs. walking demand was also interesting since other peers currently have walking rigs available but they instead want them from H&P. This is causing some CapEx increases that wall street seems to be worried about but the ROI case is still there in the long-term.

Rig demand increase in CY 4Q is impressive and as they have stated sets them up for FCF at the back end of 22. Although that may be a quarter later than some of the finance weenies wanted, I think this puts them in a really good long-term position to outperform.

While inflation is a concern for all industries, I think that most of the impact will passed on to customers in pricing, especially labor due to their contract terms. Cost of materials (steel) seems to be a bit of an issue but I like that they are using internal funding to place advanced orders. I fully expect steel pricing to somewhat stabilize and eventually move lower.

Market technicals are indicating a bottom forming in oil stocks and I expect them to recover next week and eventually move to new highs. The risk is the continued over-reaction to COVID by the media and countries that still appear to ignore data. SPR releases are also a short term risk but at this point I believe it has already been priced in. While I still think HP is a good long-term investment I think that you may do a lot better in the short term with some of the producers that have taken a beating lately. These companies are generating record FCF today while HP is still ~6 months away from seeing positive FCF. My favorites are CVE, SU, CLR, FANG, OXY, DVN, PXD, ROCC, and XOM. OIH is a great way to play all of the services companies for the long term (SLB, HAL, HP, etc.). Personally I prefer SLB and HAL over HP at the moment.

According to the Baker Hughes Rig Count there were 10 new OIL rigs added the week of 10/30/20 with 9 added in the Permian basin which is HP's prime area for rigs. Each Rig added for HP equals around $30k per day; so in one year, that would be $10 million dollars. So if they got say 5, then that's annual revenues increasing by $50 million for 5 rigs added this week (hypothetically speaking). Good news that the positive rig trend continues. As you will notice OIL majors have all mostly reported and are showing oil production declines which will continue until they add more Rigs to the Permian.

US Oil Rig count up +10 again this week. Three big upcoming events:

- Hopefully positive news from Moderna on their vaccine
- Quarterly report and conference call. Really want to hear more about the impact that the increased rig counts are having.
- OPEC Cuts next year

This is setting up really nice for 2021. Everyone that stuck around this year deserves it.