In early 2017, shares of Helmerich & Payne (NYSE:HP) were riding high thanks to increased drilling activity across North America. Producers were starting to open their wallets again after two years of budget cuts and scaled-back operations. While Wall Street was excited about the idea of more drilling activity, it seemed less enthusiastic about what that means for Helmerich & Payne's operations. This ultimately led to a 16% decline in the latter's shares last year. 

Recently, though, the stock is on the upswing as oil prices rise again. So, as an investor, you have to wonder if this is just like last year's red herring, or if this is the buy signal you've been waiting for. Let's take a more in-depth look at why 2017 wasn't as bad as Helmerich & Payne's stock price might suggest and whether investors should consider this drilling rig company in 2018 for their portfolio.

Drilling rig in forest during winter.

Image source: Getty Images.

A few fits and starts in 2017

Helmerich & Payne's performance in 2017 was both incredibly promising and utterly discouraging at the same time. On the one hand, rising oil prices and increased drilling activity meant it deployed a lot of idle equipment into the field. When the company entered 2017, it had 100 rigs in the field. Today, that number has jumped to 204, with most of those additions coming in the first half of the year. At one point early on in the year, Helmerich & Payne was reactivating a new rig every 52 hours

There have been some obvious benefits to this rapid expansion. Not only did it raise revenue and utilization rates, but the company also captured greater market share in the U.S. land drilling market. Since the previous peak of drilling activity in 2014, Helmerich & Payne's share of land rigs has increased from 5% to 20% of the market, and it still has quite a few rigs left that could be deployed.

Here's the issue, though. To meet that aggressive growth in the first half of the year, Helmerich & Payne had to spend boatloads of money. Reactivating rigs requires fitting them with equipment and, in some cases, upgrading the rig to meet the producer's specifications. Because the company had to spend so much money on rig reactivations, it essentially took away any chance at making a profit this past year. For fiscal year 2017 -- which ended in September -- it posted a $1.20-per-share loss, which was almost entirely attributed to higher operating and reactivation costs.

Those costs and capital spending on upgrading rigs to meet producer specifications also wiped out Helmerich & Payne's cash flow generation for the year. Fortunately, it started the year with more than $900 million in cash and was able to meet its spending requirements and continue its 45-year streak of paying a higher dividend.

More of the same in 2018?

So here is one thing that is working in Helmerich & Payne's favor this coming year: Rig reactivation costs are typically a one-time event. Once that rig is considered "hot" and working, it can normally go from job to job without substantial upgrades or retooling. That means costs and operating expenses should come down this year compared to last year and that gives it a chance to produce positive income results. The question investors will want to know is how much more the company can grow revenue. 

As it stands, Helmerich & Payne has about 120 idle AC drive rigs -- these are the high-powered ones necessary to drill shale wells. That is more idle equipment than its three largest competitors combined. So, clearly there is a lot of potential upside if there is an appetite for more rigs. That is where things get a little sticky, though, because the outlook for drilling doesn't look like it is going to grow that much. Even with oil prices above $60 a barrel in the U.S., oil and gas producers seem focused on keeping their capital spending budgets within their cash flows and generating returns for investors. Even with these more modest capital budgets, the U.S. is still growing production at a decent clip. So one has to wonder how many more rigs are needed for a while.

What management could do is try to capture even more market share by providing a superior rig than its competitors. Over the past several months, management has acquired two rig technology companies that focus on more precise drilling and real-time monitoring and evaluation. If the company can continue to provide a superior drilling product compared to its peers, then we could see an increase in active rigs by virtue of more producers wanting to use them over the competition.

HP Chart

HP data by YCharts.

Time to buy?

This coming year is likely going to be much more profitable for Helmerich & Payne than the previous one, so investors who have hung on through this tough time will likely be rewarded. For those looking at buying shares today, though, it's less clear as to whether they would get a good deal. Sure, the company's dividend yield of 3.91% looks enticing, but the stock is starting to look a little expensive -- it currently trades at a price to book value of 1.91 times, which is well above its historical valuation. 

For now, I think I might pass on Helmerich & Payne simply because of the valuation, but it certainly remains a must-watch stock. If the company posts a poor quarterly performance for something like high reactivation costs and the stock dips, it may provide a buying opportunity. 

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.