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Shallow Water Drilling = Big Losses

Shallow water drilling is taking slow steps forward, but it hasn't been enough to save Hercules Offshore (Nasdaq: HERO  ) from continuing to lose money. The driller has fallen far behind deepwater drillers and the financial results show how far behind the company is falling.

During the first quarter, Hercules' revenue fell 10% to $143.3 million and its loss from continuing operations nearly tripled to $38.3 million, or $0.28 per share. A massive drop in international revenue of shipyard projects for contract-specific items accounted for the decline. The utilization rate of these rigs is supposed to increase as the year goes on and earnings should pick up as a result.

Only the domestic offshore and international liftboat segments were able to generate positive operating income this quarter, a measly $1.8 million and $8.6 million respectively.

Companies with dependence on shallow water drilling have faced the same challenges as Hercules; namely, low utilization rates and low dayrates, leading to losses. Parker Drilling (NYSE: PKD  ) has been no different, posting losses in each of the last two years. Meanwhile, further offshore, SeaDrill (NYSE: SDRL  ) , Transocean (NYSE: RIG  ) , and Noble (NYSE: NE  ) are capturing high dayrates in a constrained ultra-deepwater market.

Foolish bottom line
The shallow water market may in fact pick up as management predicted, but $771 million of debt still hangs over Hercules and that will keep the company from posting much of a profit in the near future. The company had $20 million in interest expense this quarter and a $28.6 million operating loss so it will take a big turnaround to swing into a profit. Even if Hercules does swing to a profit, I like ultra-deepwater drillers better because they are highly profitable and pay extremely high dividends.

For that thesis to change I will need to see dayrates and utilization improve dramatically, something to watch for in coming quarters.

For another stock that should profit whether drilling is in shallow or deep-water check out our report highlighting the only energy stock you'll ever need. The report is free when you click here.

Fool contributor Travis Hoium manages an account that owns shares of SeaDrill. 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 and SeaDrill. Motley Fool newsletter services have recommended buying shares of SeaDrill. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | 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 May 01, 2012, at 1:16 PM, prginww wrote:

    YES due to what factor- OBAMA the lying chief Socialist has made the permit process go from 30 pages to 300 putting close to 1 milion out of work- hang on to HERO sure they will succeed

    HLX is a better buy below $20

  • Report this Comment On May 15, 2012, at 9:15 PM, prginww wrote:

    Travis, the smart choice would be to choose Transocean, which currently trades below book value, rather than Seadrill, which was trading at some 2.7 times book.

    Transocean is weighed down by concerns over litigation (for which there are indemnity clauses) and particularly high shipyard expenses (which are transitional).

    There are always "negatives" when you look for good, contrarian plays...

    ... I can't think of a single, legendary investor who didn't invest on the principle that you look for solid companies with both current, resolvable problems, and lots of potential.

    Viva-la-$650k-per-day-ultra-deepwaters, Travis.


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Related Tickers

8/10/2016 2:32 PM
HERO.DL $1.16 Down -0.02 -1.50%
Hercules Offshore CAPS Rating: **
NE $5.76 Down -0.21 -3.52%
Noble CAPS Rating: ****
PKD $2.25 Down +0.00 +0.00%
Parker Drilling CAPS Rating: ****
RIG $10.11 Down -0.39 -3.71%
Transocean CAPS Rating: ****
SDRL $2.26 Down -0.05 -2.16%
Seadrill CAPS Rating: ***