Two weeks ago, we heard how Noble (NYSE: NE ) is dealing with the Gulf disaster. Next, we learned that Ensco (NYSE: ESV ) was the first driller back in the deepwater. Both quarterly reports were encouraging. Let's now turn to the trio of shallow-water drillers reporting this week, to see how they are holding up amid the uncertainty.
A mythic muddle
We'll begin with Hercules Offshore (Nasdaq: HERO ) , which I turned negative on two years ago. The firm's shares have shed about 90% of their value since then. I am not interested in Hercules as a potential investment, given the unimpressive collection of assets and staggering debt load (higher than that carried by Noble, a firm with more than five times the revenue). But I was curious to hear what the firm had to say about the current permitting environment in the shallow-water Gulf of Mexico.
Hercules provided this handy bit of background during its conference call: "Prior to the new regulatory requirements, there were a total of 99 permits approved between January through May of this year. Since then there's only been 19 new permits approved." Only two permits have been issued since the release of a second set of regulations requiring a "worst-case discharge scenario" in the event of another well blowout. Eight new wells, plus six sidetracks, are still pending approval, according to the BOEMRE (the agency formerly known as the Minerals Management Service and now known as the Bureau of Ocean Energy Management Regulation and Enforcement).
Industrywide, there are 33 jackup rigs under contract in the Gulf of Mexico. Hercules tells us that 19 are set to come off contract by the end of next month, so the new permitting process needs to get streamlined, pronto. Otherwise, it'll be the Dead Sea out there.
The true titan
Next to report was Rowan Companies (NYSE: RDC ) . As Hercules' contract drilling business is buffeted somewhat by its liftboat activities, Rowan also has other business lines. The company has both a land drilling and a manufacturing arm. This diversification can come in handy when offshore drilling takes a dive.
That said, Rowan's offshore business is nothing like that of Hercules. This firm has a seriously high-powered fleet, with only three conventional rigs. The rest are "high-spec" jackups, capable of more demanding work. Rowan's fleet utilization in the quarter was 75%, which is a very strong number, given the soggy conditions of the global jackup market. Hercules' reported utilization was even higher, but that's because none of the firm's many, many nonmarketed rigs figure into the calculation.
The most difficult future to divine
From strength back to struggle, we turn to Seahawk Drilling (Nasdaq: HAWK ) , the third of our drillers to report this week. The firm achieved a modest 33% utilization in the U.S., while utilization in Mexico dropped to 0%. Seahawk is doing very little drilling at the moment, and unlike the other two companies, that is the entire game for this Pride International (NYSE: PDE ) spinoff.
In the quarter, cash and equivalents dropped from $73.4 million to $47.9 million. I realize that Seahawk is now trading at a discount to the point at which I said I would be comfortable swooping on the stock, but that was before the BP (NYSE: BP ) disaster. Life has gotten even tougher for this driller, and the rate of cash burn is pretty alarming. Those long the stock argue that Seahawk is worth more dead than alive, and I've made the same argument. The problem is that Seahawk is alive, and consuming cash every day that it remains so.
That is, of course, until things turn around in the shallow Gulf. Seahawk, more than any other company I track, really needs those new well permits to start flowing. I am cautiously optimistic that the situation will improve over the next two to three months. Seahawk probably has the balance sheet strength to ride out this drilling depression for the balance of 2010, but I would expect the firm to tap the equity or debt markets before too long. Each time the company is forced to do so, it will come to look more like Hercules Offshore. That's a future to be avoided at all costs.