Hercules Offshore Making a Risky Bet on Shallow Water

At a time when nearly every drilling company is expanding capabilities farther and farther offshore, Hercules Offshore (Nasdaq: HERO  ) is bulking up on shallow-water rigs. And the company isn't ditching out on the Gulf of Mexico either.

When shallow-water competitor Seahawk Drilling filed for Chapter 11 bankruptcy protection, Hercules Offshore was the one that wanted to buy its assets. So Hercules added 20 jack-up rigs, giving Hercules 42 rigs in the Gulf, more than half of the shallow-water rigs in the Gulf.

Seeing an opportunity others are missing?
Hercules is betting that going against the grain will pay off in the long run. SeaDrill (NYSE: SDRL  ) , Transocean (NYSE: RIG  ) , and relative newcomer DryShips (Nasdaq: DRYS  ) are all building ultra-deepwater rigs as fast as they can to meet deepwater demand. That plan has paid off so far. Recently, two of Dryships' new rigs to be completed this year have lined up $1.1 billion in contracts and SeaDrill recently signed an $850 million deal for a deepwater semisubmersible.

So with drilling slowing down in the Gulf's shallow waters, can this possibly be a good bet? Considering the Bureau of Ocean Energy Management calculation that just 14% of the Gulf's recoverable oil is in water under 800 feet, I have to question the strategy. Plus, net loss increased to $134.6 million last year, from $91.7 million in 2009, and losses continue in 2011. In the first quarter, revenue fell sequentially and the company posted a $14.2 million loss for the quarter.

Foolish bottom line
Sticking to shallow water is a risky move for Hercules, even if it got the Seahawk assets at a discount. Nearly half of the company's rigs are stacked, or taken out of service, and there isn't nearly the demand in shallow water that deepwater rigs are seeing. Hercules Offshore's stock has had a nice run this year, but I don't see how it continues without an unforeseen pickup in shallow-water drilling.

Keep track of offshore drillers with the Fool's free My Watchlist feature.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2011, at 2:33 AM, justice215 wrote:

    I think you have shorted HERO stock , for HERO is a nat gas driller and nat gas being a gas tends to pocket high up in the earths core oil being a heavy liquid tends to settle deep not allways but this is a good starting point to find what you are drilling for a deep water nat gas driller would not be very wise when it is abundant in the shallow waters of the gulf, oil in the gulf is deep as you stated buy nat gas is plentiful in shallow waters of the gulf plus ocean nat gas drillers will not have the litigation problems from legal lawsuits that onshore nat gas drillers will have from fracing and polluting fresh waterwells for drinking water offshore nat gas drillers will supply us with clean cheap gas to power our utility plants and one day our vehicles the deep water drillers will price there product out of the market with $4.00 plus a gallon gas oil is and will be around for ages but the energy of the future is nat gas and the time to get in is when everyone is down on nat gas and its drillers but for the fortunate that get in now will benefit greatly in years ahead. I try and buy HERO everytime it dips below $6.00 a share this is a great stock with basically a monopoly in nat gas in shallow water with unlimited upside as the fed starts to give out permits to drill again good luck everyone and buy some HERO and have gains as market seesaws watch out for the shorts many having their heads handed to them because they got HERO wrong they keep trying to beat this stock down but it keeps going up they keep trying to stampede stock holders into selling but to many wise investors keep purchasing on every dip foiling the shorts.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1503005, ~/Articles/ArticleHandler.aspx, 10/24/2014 10:53:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement