Helmerich & Payne, Inc. (NYSE:HP) has worked for years to stay ahead of the competition in the oil drilling services space. That has long involved spending heavily on leading-edge equipment, but there's something different afoot today at the company. Here's what being an industry leader means today and, more important, what it could mean for both the future of Helmerich & Payne's business and the entire sector.
Taking the lead
Drilling a hole in the ground to find oil may not sound very difficult, but it is a highly complicated and technology-driven business. Helmerich & Payne has been at the forefront of technological change in the drilling industry for years. The physical manifestation of that is the company's industry-leading fleet of alternating current, or AC, drill rigs in the U.S. onshore drilling market.
AC rigs are more flexible and efficient than older direct current rigs, so it isn't complicated to see why Helmerich & Payne stands out: It has more AC rigs than any of its peers. But that required years of investment and a long-term view of the industry, since building a drill rig is an expensive and time-consuming effort. Helmerich & Payne is clearly focused on the long term, even if that means some near term pain (specifically the higher costs of building technologically advanced drill rigs).
But the long-term focus has paid off in a big way. For example, Helmerich & Payne actually gained market share when oil prices started to fall in mid-2014 even as oil companies across the industry were pulling back on drilling. Effectively, drillers kept Helmerich & Payne's rigs in the field because they were more profitable to run than older rigs.
The company's technology focus also paid off during the downturn on its balance sheet. The company wrote down the value of its fleet by a lesser amount than any of its closest peers because it had fewer older rigs.
Helmerich & Payne isn't sitting still today, either. It is currently working to upgrade its fleet to "super spec" status. That means taking an AC rig and outfitting it with new technology, like the ability to move by itself from location to location. It can cost as much as $8 million a rig to upgrade to super spec status, so this isn't a small investment, but upgraded rigs have a 98% utilization rate, compared to just a 60% or so rate for AC rigs that haven't been upgraded. Customers are clearly demanding super spec rigs, and Helmerich & Payne is doing what it needs to serve that demand.
But there's more to the picture here, because Helmerich & Payne offers a suite of services, including software to improve the results of a company's drilling. Essentially, everything that Helmerich & Payne does is meant to help drillers get better results. That, in the end, means lower costs and faster drill times.
Pause for one second on that last fact: faster drill times. CEO John Lindsay put the issue into plain English during the company's fiscal fourth quarter 2018 conference call, and it's a bit of a problem: "The fact of the matter is, what used to be a 20-day well or a 30-day well is now a 20-day well, or a 20-day well sometimes is a 15 or a 10-day well. And so, we obviously on a revenue basis are making less and less." Why is the company making less money? Because Helmerich & Payne gets paid based on the number of days a rig is used.
That's why Helmerich & Payne is starting to talk about a new revenue model in which it gets to share in the benefits that its cutting edge drilling technology allows its customers. The company sees itself as a partner, and has worked with some of its customers for decades. Helmerich & Payne is now working with these customers to try out new ways of charging for its services. That could end up meaning lump sum payments, revenue sharing, or something else entirely -- it's too soon to tell.
In fact, Helmerich & Payne openly admits it doesn't know what will work best for everyone. But it is taking the lead in testing pricing models right now to figure that out. Based on the performance improvements its technology spending has enabled, it really has to reexamine payment models if it wants to protect its top and bottom lines.
What you can see and what you can't
Helmerich & Payne shareholders should look at the results of the company's super spec upgrade efforts. That's important for the company's future, and will be a key issue to watch in 2019. However, you'll also want to watch for updates on the pricing issue. Although this is a behind-the-scenes effort still in the early stages of testing, it will have a big impact on Helmerich & Payne's future -- and, perhaps, the future of the entire drilling services industry.
As Helmerich & Payne upgrades the technology of its fleet to improve the results its customers achieve, it is also working to change the way in which customers pay for those improvements. And the tipping point for the pricing model change looks like it could start to take shape in 2019. Once again, Helmerich & Payne is trying to lead the industry forward, and investors need to pay close attention. In the end, this change might be even more important than the company's drill rig upgrading efforts.