Hercules Offshore Still Faces an Uphill Climb in Shallow Water Drilling

Fourth-quarter results were decent for Hercules Offshore, but that doesn't make this a great investment.

Feb 7, 2014 at 4:55PM

Even better-than-expected earnings couldn't get investors excited about Hercules Offshore (NASDAQ:HERO) today. Revenue was up 35%, to $235.3 million, but the company lost $101.1 million, or $0.63 per share.

After pulling out one-time items that resulted in a $123.4 million, or $0.77 per share, decrease in earnings, the company would have made $22.3 million, or $0.14 per share. That's ahead of the $0.08 estimate from analysts, but it still didn't excite investors. 

On the wrong side of the drilling market
The domestic offshore market continues to be Hercules's largest, and dayrates rose from an average of $67,681 a year ago to $100,160 in the fourth quarter. But international markets weren't as strong and, while dayrates rose slightly to $139,037, utilization fell from 78.7% to 71.7%, and operating expenses rose sharply.

What's challenging Hercules is that the shallow water market where it focuses is no longer a growth market for the energy industry. Deep and ultra-deepwater are where the profits are as you can see from the net income of Seadrill (NYSE:SDRL) and Transocean (NYSE:RIG) during the past five years. Note that Transocean's loss was due to the Deepwater Horizon disaster.

HERO Net Income (TTM) Chart

HERO Net Income (TTM) data by YCharts

Hercules has definitely benefited from an uptick in demand and that may continue, but returns are volatile. If dayrates rise far enough, there are stacked rigs waiting to fill the demand in shallow water. That limits upside in a way that isn't limited in ultra-deepwater, where demand exceeds supply today.

Despite the fact that the stock is down, I didn't think this was a terrible quarter for Hercules Offshore; I just don't like its long-term position. There's a reason Transocean sold most of its shallow water fleet last year, and why it and Seadrill are building ultra-deepwater rigs at a rapid clip. That's where the growth is, and Hercules Offshore is fighting an uphill battle to generate the margins that those two can.

Energy stocks for today's market
There are simply better ways to play energy, and finding the right plays while historic amounts of capital expenditures are flooding the industry, will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Travis Hoium manages an account that owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers