Charging for results beats charging by the day

Oilfield services were long sold by the day: a rig, a crew, a piece of equipment at a day rate. The better business is technology priced on what it saves the producer, because a producer will pay for fewer days far more willingly than for more of them.

Day rates versus value

A day rate is a commodity. Competitors undercut it whenever activity slows. A service that drills faster, completes wells better or reduces downtime is priced on the value it creates, and that value holds up even when the price of oil does not.

The shift is gradual and it shows up in margins more than in revenue.

What I'm watching

• Margins in the digital and technology segments
• Contracts priced on performance rather than time
• Revenue per rig, which rises as technology content grows

Where I stand

Long, on a mix moving toward services priced by results. It is a steadier business than the day-rate history suggests.

What would change my mind

Producers pushing back to day-rate pricing in a downturn. If performance pricing only works when activity is strong, it is a cyclical feature rather than a structural one.