Helmerich & Payne, Inc.'s (NYSE:HP) business struggled in 2016. That's not unique -- all of the oil and gas drilling services industry hit a performance wall last year. Relatively speaking, Helmerich & Payne handled the downturn in rig demand fairly well. But that doesn't change the facts. Here's just how ugly the numbers were in its core business -- and why you shouldn't despair.

An image of Helmerich and Payne employees in a control room.

Helmerich & Payne employees in a control room.   Image source: Helmerich & Payne   

Big and bad

Helmerich & Payne breaks its business into three segments: U.S. land, U.S. offshore, and international land. By far the largest business is the U.S. onshore segment, which accounts for nearly 90% of the 395 oil and gas drilling rigs the company owned at the end of fiscal 2016. That's a problem because the active rig count in the United States plummeted after oil prices started to fall in mid-2014.  

A graph depicting a material decline in the number of operating U.S. land rigs.

The number of drilling rigs in the United States has fallen sharply.  Image source: Helmerich & Payne   

It's been bad for Helmerich & Payne, too, with rig utilization falling throughout fiscal 2016. To put some numbers on that, the company ended fiscal 2015 with 43% of its U.S. rigs working. By the end of the first quarter of 2016, that number was down to 39% and it had fallen to just 24% by the end of the third quarter. Utilization actually ticked up to 25% by the end of the company's fiscal year, but it's hard to call that positive news. In fact, if you flip that number around, you'll find that, by the end of fiscal 2016, 75% of Helmerich & Payne's oil rigs were idle.  

Generally speaking, rigs that aren't working aren't earning the company any money. So you can see why this division's troubles, combined with its size within the company, made it the worst business segment of 2016. But don't get too caught up in the bad news.

Overshadowed by negatives

The first thing to understand is that Helmerich & Payne doesn't just build rigs, it builds industry-leading rigs. Staying at the leading edge of drilling technology is part of the business model. The company owns more of the most desirable AC drive rigs, which are faster and more efficient than other types, than any other industry player. That means that, when demand picks up again, Helmerich & Payne's rigs will be in high demand.

A bar chart showing Helmerich and Payne's material lead in AC drilling rigs.

Helmerich & Payne has more cutting-edge drill rigs than anyone else.  Image source: Helmerich & Payne   

Then there's the fact that Helmerich & Payne generally doesn't build a new drilling rig without a customer ready to use it -- which helps explain why its rig count has pretty much flatlined over the last couple of years. In fact, at this point, the company's forecast is for a net total of two additional rig builds in all of fiscal 2017.  

There are two positive takeaways from the disciplined building program. First, investors don't have to worry much about Helmerich & Payne making the utilization problem worse than it already is. And, second, the drop-off in new construction has materially reduced capital spending. The benefit of this shows up on the cash flow statement.

While Helmerich & Payne's top and bottom lines look horrible, the driller is actually generating plenty of cash -- the lifeblood of every business. That's because GAAP earnings include the depreciation expense for all the rigs the company has already built. That's a non-cash item that doesn't impact cash flow, as the money has already been spent.

New-rig construction costs would ordinarily offset the add-back of depreciation on the cash flow statement. Since the company isn't building new rigs, however, all that cash just flows through to the company's bank account. In fiscal 2016, Helmerich & Payne's cash balance actually increased by $175 million despite the troubles of its largest business segment.  

Ready for better times

Helmerich & Payne's main business is its U.S. onshore drilling segment, and it was horrible last year. It easily earns the ignominious distinction of being the company's most disappointing business segment in 2016. But that shouldn't stop you from seeing the positives hidden under all the bad news. Helmerich & Payne is financially strong and its portfolio of rigs is positioned well for when demand picks up again. When that eventually happens, the worst segment will quickly become the best again.