Helmerich & Payne ratings downgraded due to weak international operations: S&P Global

Investing.com -- S&P Global Ratings has lowered the ratings of U.S.-based onshore contract drilling company Helmerich & Payne Inc (NYSE:HP). (H&P) to ’BBB’ from ’BBB+’. The downgrade is due to weaker international operations and potential U.S. market headwinds.

Earlier this year, H&P completed its acquisition of international driller KCA DEUTAG Alpha Ltd. However, the company’s pro forma guidance for fiscal 2025 fell short of S&P’s previous expectations. The ratings agency also anticipates a moderation in overall U.S. oil and gas activity compared to 2024.

S&P has revised its revenue and EBITDA estimates for H&P downwards for fiscal years 2025 to 2027. This adjustment brings the average funds from operations (FFO) to debt below S&P’s downgrade trigger of 60%.

The negative outlook reflects S&P’s view that H&P’s credit ratios will be weak for fiscal 2025. Improvement in 2026 and 2027 will depend on the company’s ability to increase utilization and operating margins in its international solutions business. The company is also expected to maintain utilization in the U.S. and use the majority of its free operating cash flow (FOCF) to reduce debt.

The downgrade reflects lower-than-expected utilization and margins in H&P’s international segment. Despite the acquisition of KCA Deutag, which expanded H&P’s position in the Middle East, South America and other international markets, the company has since lowered its expectations for international revenues and margins for fiscal 2025. This was mainly due to the suspension of 12 rigs by Saudi Aramco (TADAWUL:2222), its primary customer in Saudi Arabia.

The acquisition of KCA has increased H&P’s rig fleet by nearly 45%, adding 121 international rigs. This has led to increased scale and diversification for the company. The transaction also added an asset-light offshore management contract business and a manufacturing and engineering business. H&P now has a current backlog of $7 billion, with nearly 75% of that from KCA, providing revenue visibility for the next three years.

Despite these improvements, H&P’s results will continue to be impacted by U.S. upstream spending trends. The company’s North American gross margin remained essentially flat year-over-year in 2024, but S&P expects a 5-10% decline in 2025.

H&P is expected to prioritize debt reduction. The company is estimated to generate $200 million to $225 million of FOCF in fiscal 2025, and $350 million to $400 million in fiscal 2026. H&P is expected to maintain its current base dividend of about $100 million annually but will not pay supplemental dividends or execute share repurchases until its net leverage reaches its near-term target of at or below 1.0x.

S&P could lower H&P’s rating further if it no longer expects FFO to debt to improve above 45% or debt to EBITDA to remain below 2.0x for a sustained period. Conversely, the outlook could be revised to stable if the company can bring FFO to debt comfortably above 45% and debt to EBITDA below 2.0x for a sustained period, starting in fiscal 2026.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.