As shale drilling started picking up again in 2016, land-rig owner Helmerich & Payne (NYSE:HP) was possibly one of the best-positioned companies to benefit from the uptick in activity. It had the most-capable fleet of rigs and plenty of them available for producers to contract. But more than two years since the turnaround started, Helmerich & Payne is still posting quarterly losses. 

From an investor perspective, this seems a bit puzzling. So let's look at some of the reasons Helmerich & Payne's bottom line has been so slow to rebound.

Drilling rig in mountains.

Image source: Getty Images.

By the numbers

Metric Q3 2018 Q2 2018 Q3 2018
Revenue $648.9 million $577.5 million $498.6 million
Operating income (loss) $6.22 million ($1.2 million) ($28.0 million)
Diluted EPS ($0.08) ($0.12) ($0.21)
Free cash flow $45 million $26.7 million ($93 million)

DATA SOURCE: HELMERICH & PAYNE EARNINGS RELEASE.

So here's the good news. Helmreich & Payne's revenue continues to grow at a respectable rate. Its U.S. Land Drilling segment -- its largest -- grew revenues by 32% as its fleet utilization rate increased to 63% and the average revenue per rig day increased 7.9% to $23,700. At the same time, though, its per-day rig expenses remain high -- $14,900 -- as management continues to incur costs related to upgrading rigs to meet producer specifications, as well as charges for retiring older rigs. Similarly, higher expenses ate into the revenue gains for its offshore and international land segments this past quarter.

HP operating income by business segment for fiscal Q3 2017, Q2 2018, and Q3 2018. Show's improving results from U.S. land.

Data source: Helmerich & Payne earnings release. Chart by author.

The promising aspect of these results is that the company is still generating enough cash from operations to cover its capital spending lately. It has burned through some cash to maintain its dividend, but at the end of the quarter, it still had $350 million in cash and short-term investments, $493 million in total long-term debt, and a debt-to-capital ratio of 10%.

What management had to say

In CEO John Lindsay's press release, he highlighted Helmerich & Payne's progress at upgrading its fleet of rigs to meet market demand and how it is helping drive revenue growth. 

We have upgraded 38 FlexRigs to super-spec during the first nine months of the fiscal year, bringing the total to 191 super-spec FlexRigs in our U.S. land fleet. The market is tight for super-spec FlexRigs, and day-rate improvements have accelerated, with the average spot day rate increasing 11% during the quarter. Offsetting these benefits during the quarter, however, were unexpected one-time costs which led to a slight decline in our U.S. Land margins.

Also, he highlighted one of the largest concerns for any oil and gas company with significant operations in the Permian Basin: pipeline capacity. While he expects this to be a slight headwind, there are other things working in Helmerich & Payne's favor:

Permian bottleneck headlines have clouded the near-term outlook; however, we continue to experience strong demand and are adding rigs accordingly. Oil prices have remained strong during the quarter and we're optimistic that [exploration and production] spending in 2018 is not yet fully reflecting the inherent potential in these higher than expected oil prices or the prospects for continued momentum into 2019. In addition to the Permian growth, we are seeing improved rig activity in the Eagle Ford, the SCOOP/STACK play in Oklahoma, as well as the Bakken.

HP Chart

HP data by YCharts.

What's taking so long?

Considering how quickly Helmerich & Payne was putting new rigs into the field around a year ago, I think it's fair to say that earnings results should look better than they do right now. The costs of upgrading such a significant portion of its fleet, though, has been a drag on operating income. Fortunately, these investments have reaped rewards because its rigs that have been upgraded are being utilized at a high rate and are commanding a premium. So eventually, the decision to incur high costs now will show up in the bottom line further along. 

Aside from the slow rate at which Helmerich & Payne's results have recovered, there isn't anything structurally wrong with the company. It still has the most-capable fleet, a large queue of rigs yet to be put to work, and the best balance sheet in the business. These factors are all working in Helmerich & Payne's favor, and should eventually lead to much better results.

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.