The downturn in the oil market has been tough on energy companies of all sizes, including oil-field service giants like Halliburton (NYSE:HAL). The company believes, however, that it's better positioned to weather the downturn because it has a better strategy than its peers. Here's a closer look at the company's winning formula.

A strategy for any cycle
On the company's last quarterly conference call, Halliburton President Jeff Miller took some time to detail the company's strategy. He said that:

We have a two-pronged strategy. The first part being to control what we control in the short-term. And the second is looking beyond the cycle and preparing for the recovery. Q10 is our great example. The cost savings we derive from these new generation fleets is substantial compared to legacy equipment; 25% less capital on location, 30% less labor on site, and up to 50% less maintenance cost. Q10 spreads now represent close to 50% of our fleet, and we should be near 60% by the end of the year.

Miller notes that, while Halliburton's strategy is two-pronged, both strategies have the same endgame, which is to lower its costs. A big part of its overall strategy is the steady upgrade of its pumping fleet with its new Q10 pump. It's a step change for the company because of the significant cost savings of the Q10 compared to legacy pumps. The more Halliburton turns over its fleet in the short term, the better it will be able to manage the downturn, while also putting it in a better position to capture substantially more upside when conditions improve.

While Halliburton's goal is to eventually replace all its pumps with Q10s or a future next-generation system, the company is still trying to maximize the value of its legacy assets during the downturn. Miller continued by noting that, "At the same time, those legacy assets that are still deployed are being strategically placed to maximize our potential in locations, or functions that maximize their cost effectiveness."

While the Q10 is its future, Halliburton is making sure that it still gets the most out of its legacy equipment. It's a returns-maximization strategy that's quite different from the one many of its peers are taking.

A differentiated approach
C&J Energy Services (UNKNOWN:CJES.DL) is a perfect example of a company taking a different approach to managing its equipment through the downturn. CFO Randy McMullen noted on the company's last conference call that its response to weakening industry conditions would result in the company "stacking equipment that cannot generate acceptable rates of return."

Further, C&J Energy Services COO Don Gawick noted later during the call that the company was "still keeping some of that horsepower in the rotation, so that we've got equipment that we can keep functioning and working in the field as opposed to just completely parking it." This rotational approach will help to prevent C&J Energy Services from burning though its best equipment.

While C&J's approach is focused on only running equipment that will earn it an acceptable return, it's not the holistic returns-maximization approach that Halliburton is taking. That's because it's not an approach that C&J Energy Services, or others in the industry for that matter, can even pursue because it has neither Halliburton's proprietary equipment, nor its flexibility, due to its smaller scale.

The C&J Energy Services example shows the competitive advantage Halliburton has over its peers because of how it can strategically manage it fleet. It's a difference that Jeff Miller believes gives Halliburton a key edge by enabling it to offer "the lowest total cost of service to our customers at any point in the cycle."

Those services costs are not something that C&J Energy Services can match without really cutting into its profit margin. That was pretty clear when observing the company's actions last quarter to keep a key customer relationship. CEO Joshua Comstock lamented on the company's conference call that, "in an effort to maintain and increase the volume by committed work for one of our most active customers, we aggressively reduced pricing, which resulted in lower than expected margins." That really ate into the company's profit margin, leading to a very tough quarter. 

Investor takeaway
Halliburton not only has better equipment, but a better approach to managing its legacy equipment. That's why it's still able to earn a decent profit margin during the downturn, while peers like C&J Energy Services have seen their margins suffer. Those margins are a big competitive advantage that has enabled Halliburton to thrive compared to its peers.