Hercules' Mythic Struggle

Ah, the offshore -- where the dayrates are choppier than the Gulf waters themselves. This is the playground of Hercules Offshore (Nasdaq: HERO  ) , a company that operates barges, tugs, liftboats, and drilling rigs.

Hercules streamlined its operations during the fourth quarter by divesting some land rigs inherited with last year's TODCO acquisition. This is great, and I wish land driller Helmerich & Payne (NYSE: HP  ) would do the same with its offshore fleet.

Results were pretty rough, as expected. In the domestic offshore segment, utilization went ker-splash, down to 56% from 70% last quarter. With such low activity, it's natural that the segment's cash drilling margin collapsed to roughly 33% of revenue. In dollar terms, that led to a drop in operating income of about $30 million.

Fortunately, international offshore results dwarfed the formerly dominant domestic business's income contribution. Utilization invariably dropped off from 100% last quarter, but dayrates firmed up a bit, and Hercules managed to cut its daily operating expenses, which is certainly impressive. This lifted cash margins to 59%. That's a ways off from Noble (NYSE: NE  ) nirvana, but it'll do.

Just recently, Hercules signed a pair of contracts with India's Oil and Natural Gas Corporation, or ONGC, which secured two jackups for three-year terms. Even if these rigs were to work every day of the year, for all three years, the deals would still come in above this quarter's average dayrate. If we see local Indian rigs moving to greener pastures in Iran, where American companies cannot tread, that would open the door to further incremental demand out of the already strong Indian market.

Hercules is looking pretty smart right about now for diversifying its asset base ahead of the dreary period here at home. That's not to say that things will remain stormy for long, though.

Management confidently asserted that Gulf of Mexico activity would firm up this year, aided by active drilling programs. Customers like Chevron (NYSE: CVX  ) , Noble Energy (NYSE: NBL  ) , and PetroQuest Energy (NYSE: PQ  ) are no doubt spurred in part by a healthy-looking natural gas "strip," which is the average futures price over the next 12 months. Now that the clouds are parting a bit, Hercules' year ahead could be sunny indeed.

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