Hercules' Unheroic Outing

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On Tuesday, Hercules Offshore (Nasdaq: HERO) reported results that didn't exactly make big daddy Zeus proud. Heck, they didn't even make Kevin Sorbo proud. Hercules performed about as well as could be expected, though, given the dreary market environment.

The quarter's weakness shouldn't have caught anyone by surprise, mind you -- save for maybe management's whiff on utilization for its Gulf of Mexico jackup fleet. Inquietude was late summer's insignia, with worries of hurricanes and a natural gas glut holding back drilling activity.

I won't step through year-over-year financial comparisons as I did for Ensco International (NYSE: ESV) and Noble Corp (NYSE: NE), because they're not meaningful here. Hercules acquired TODCO, and has a completely overhauled fleet. All segments, save for domestic liftboats, have been bolstered, and there's a brand-new barge business.

This larger footprint should eventually enhance margins, but this wasn't the quarter for synergy. Operating margins fell from 49% last year to 32%. It's hard to demonstrate one's newfound strength when domestic dayrates are down almost double digits. Sure, international rates ratcheted higher, but the domestic segment had more than twice the operating days, and nearly three times as many rigs on the market.

Whereas other folks are beating a steady retreat from the Gulf, Hercules is generally opting to tough it out. Management has warm-stacked six jackups and one barge drilling rig, meaning that these units will retain only essential personnel and will not be actively marketed until rates pick up. Given that a return to equilibrium in 2008 "does not take a far-fetched scenario" in management's view, warm-stacking seems wiser than sending rigs packing.

When (not if) the shallow Gulf of Mexico market improves, Hercules will be able to flex its muscle. So back off, Sorbo, and give this company some time.