Offshore Drilling Finds No Heroes in Shallow Water

The offshore drilling industry is recovering nicely after an oil spill and new regulations, but some operators are still struggling to turn that into financial results. Hercules Offshore (Nasdaq: HERO  ) , which has hitched its wagon to shallow water drilling, is posting losses instead of profiting from the ultra-deepwater drilling boom where most drillers are focused.

In the fourth quarter of 2011, the company saw revenue fall to $162.8 million from $164.8 million a year ago. Loss from continuing operations was $21.5 million, or $0.16 per share, which is a big improvement from an $82.5 million loss a year ago when the company wrote down $122.7 million in assets, but a loss nonetheless.

Revenue per rig day increased 31% to $52,686, but revenue didn't jump correspondingly because contract work on some of the company's international rigs affected availability. The improved rates have management considering bringing some rigs back into service, which is the biggest thing that could turn the company's loss into a profit.

Missing out on the deepwater boom
While Noble (NYSE: NE  ) , SeaDrill (NYSE: SDRL  ) , and Transocean (NYSE: RIG  ) are adding to their ultra-deepwater capabilities, Hercules Offshore is left toiling in much shallower water. The company's large fleet of cold-stacked rigs, or rigs that are out of service, shows just how much slower shallow water drilling has been than the scramble to contract ultra-deepwater rigs.

Of the 42 offshore rigs the company owns, just 20.6 were operating each day during the third quarter. So, even though day rates are up and operating expenses are down, the company still isn't posting a profit.

Cold stack these shares
Hercules may in fact turn a profit if it can return some of its rigs to operation and improve utilization rates. But investors should look to deeper water rig owners like Noble, SeaDrill, and Transocean with their investing dollars. New discoveries of oil have been concentrated in much deeper water than where Hercules is drilling, and these companies all pay a dividend, something Hercules can't do while posting losses.

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