When the oil downturn hit in mid-2014, it wasn't just giant oil companies like ExxonMobil and Chevron that took a hit. Drilling service providers like Helmerich & Payne, Inc. (NYSE:HP) saw demand plummet as customers pulled back on spending to save cash.

However, with oil prices higher and demand picking up, this high-yield stock has recovered some of its lost ground. Here's how it plans to keep the current business upturn going.

How bad it got

There's no way to candy coat the oil downturn -- for Helmerich & Payne, it was really bad. The company had 374 drilling rigs in 2014, 297 of which were actively working in the U.S. onshore market. When oil prices started to fall, customers stopped drilling and the company's active rig count declined to 87 over the next 18 months. That's a massive 70% decline.

A man writing in a notebook with an oil well in the background.

Image source: Getty Images

It shouldn't be shocking, then, to learn that Helmerich & Payne saw revenues decline from $3.7 billion in fiscal 2014 to just $1.6 billion in fiscal 2016. Earnings went from $6.44 a share to a loss of $0.54 a share over that span, and fell even further in fiscal 2017, dropping to a loss of $1.20 a share as the company chose to spend money upgrading its drilling fleet throughout the downturn (more on this in a second).

The upturn and what's next

With oil prices having recovered some of the lost ground during the broad upturn in commodity prices that started in early 2016, demand for Helmerich & Payne's rigs has picked up. As of mid-May, the company had 218 rigs working in the U.S. onshore market. That's a huge improvement, though still well off the heights reached in mid-2014. Earnings, meanwhile, have been slowly climbing toward positive territory. (Note that the fiscal first quarter of 2018 saw a huge earnings advance, driven by one-time gains from the tax law change; without that gain the company lost money.) In the fiscal third quarter of 2018 the company lost $0.08 a share.

HP Total Depreciation and Amortization (Quarterly) Chart

HP Total Depreciation and Amortization (Quarterly) data by YCharts

With so much of its U.S. fleet working again, you might wonder why the company hasn't started to turn a profit. The answer is that Helmerich & Payne has long focused on occupying the leading edge of the drilling services sector, and that requires spending money to upgrade drilling rigs to the highest specifications. Right now so-called Super Spec rigs are in demand. These high-tech machines are capable of drilling longer wells, and can more easily be moved from drilling location to drilling location, often "walking" by themselves.

In fiscal 2014 Helmerich & Payne didn't have any of these rigs in its fleet. It's steadily built up this capacity, with the first additions taking place during fiscal 2015 -- right in the middle of the oil downturn that pummeled demand. By the end of fiscal 2018, the company hopes to have roughly half of its fleet upgraded. The problem is that upgrading requires capital spending, which burns cash and increases depreciation (a non-cash charge that lowers earnings).

That management started this spending during the downturn to prepare for the next upturn is a huge statement. With the spending cycle not quite over yet, there could be a continued drag on earnings over the near term.

HP Revenue (Quarterly) Chart

HP Revenue (Quarterly) data by YCharts

However, the benefit has been material. Since the downturn began, Helmerich & Payne has gained over four percentage points of market share. The next closest competitor, Precision Drilling Corporation, has only gained around one percentage point of market share. Helmerich & Payne's revenues, meanwhile, were the highest they've been in over two and half years in the company's fiscal third quarter, up a massive 30% year over year. Clearly the drilling services provider's continuing investment in the new upgrade cycle is paying off.

In fact, by September 2018 it expects to have around 230 rigs operating, an increase of almost 6% from the May figure. It's done all of this without over leveraging itself, with long-term debt accounting for just about 10% of the capital structure, making it one of the least leveraged companies in the industry.

Still time for investors

The problem for investors is that all of the spending on these new upgrades, despite the top line and market share benefits, has put a damper on earnings. The ongoing losses at Helmerich & Payne have hidden the underlying improvement. With the company still inching toward profitability, however, investors have a chance to buy this high yielding stock (the dividend yield is an impressive 4.6%) before the red ink stops and the black ink starts flowing. When that happens, investors are likely to take a second look at Helmerich & Payne and start boosting the price higher.