Long-time readers know that I used to have
Hercules Offshore 's (Nasdaq: HERO) back. But
by last summer, I'd
come to regretthe support I'd thrown the scrappy
driller's way. Better to be in one of the higher-quality
operators like
Ensco International (NYSE: ESV) or
Noble (NYSE: NE), I concluded.
By that time, the stock had tanked from nearly $40 per
share down to the mid-$20s. My change of heart may have
seemed like it came far too late at the time, but that was
still a good time for investors to sell Hercules. The stock
may never see those trading levels again.
For anyone who toughed out the subsequent plunge to just
above $1 per share in March, or for the dice-rollers who
picked up shares at those levels, another good opportunity to
sell Hercules arose earlier this month, after Hercules
presented at the Barclays Capital 2009 CEO Energy
Conference.
In its presentation to the Street, Hercules pointed to the
many improvements it has made in its capital structure and
liquidity. The signs of a business on the skids were still
abundant, however.
Hercules described the domestic offshore business
environment as "challenging," which is one way to put it. I
don't know how much time the presenters spent on the rig
supply/demand slide, but it clearly shows that marketed
jackup rig supply in the Gulf of Mexico is more than double
present demand. This is one reason why I told Fools that
Pride International (NYSE: PDE) spin-off
Seahawk Drilling (Nasdaq: HAWK) is
for the birds.
Hercules pointed out that its revenue balance has shifted
in favor of international markets, but then conceded that
business conditions abroad are weakening as well. While
capital spending may improve next year, there will be a fresh
slate of newbuild vessels to contend with, pressuring
utilization and dayrates. There are 70 newbuilds on order,
and construction has commenced on all but 14 of those.
The bottom line is that Hercules has a big pile of debt
relative to its current earning power. To raise capital, the
company can sell assets (the broker
hired in Aprilto sell 16 retired rigs appears to have
found a buyer for two barge rigs for $600,000), issue new
debt, or sell more shares.
Seizing the ebullient market sentiment of late, Hercules
this week announced an offering of 17.5 million shares, which
has been priced at $5 per share. If this offering caught you
by surprise, you really haven't been
paying attention. But if you think I'm being too harsh on
Hercules or
overly critical of dilutive share offeringsin general,
let me know in the comments below.
This article was originally published as
You Had Your Chance to Dump This Drilleron
Fool.com
Copyright © 2009 The Motley Fool, LLC. All rights
reserved.
|