Even better-than-expected earnings couldn't get investors excited about Hercules Offshore (NASDAQ:HERO.DL) 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.

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