It takes a lot of things going wrong for shares of a company to lose more than two-thirds of its value in a single year. Unfortunately for Hercules Offshore (UNKNOWN:HERO.DL) it has been on the losing end of several trends playing out in its industry of offshore rigs. If that isn't enough to make you ill to your stomach, shares of Hercules have fallen by more than 90% since the company's IPO back in 2005.

HERO Total Return Price Chart

HERO Total Return Price data by YCharts

Let's take a look at what has gone so disasterously wrong at Hercules over this past year and whether there is any chance of investors gaining back some of that lost investment over the past nine years. 

The term "well-aged" doesn't go over well in the offshore rig market

The original value proposition from Hercules Offshore was that it has a large fleet of jackup rigs in places such as the Gulf of Mexico and the North Sea where demand was rather high, and its older rigs had very low costs that would bring in decent margins despite earning less than the average rig out there. However, one of the biggest problems for Hercules is that it has a fleet of offshore rigs old enough that many of its competitors could start making "Your fleet is so old..." jokes. In fact, of the company's fleet of 34 jackup rigs, seven of them are cold stacked (a nice way of "we took them out of commission") and eight of them are ready stacked (an even nicer way of saying "we can't get a contract for them").

CompanyAverage age of stationary fleet (Jackups and Platforms) (in years)% of stationary fleet less than 10 years
Hercules Offshore 33.0 5%
Atwood Oceanics 4.4 80%
North Atlantic Drilling 11.6 66% 
Rowan Companies 17.5 46%

Source: Company Rig Fleet Status

The biggest issue with having so many older rigs is that many simply aren't capable of handling more complex drilling jobs such as those in harsh environments like the Arctic, or in challenging oil and gas reservoirs such as those really deep high pressure, high temperature reservoirs that some oil producers are trying to access in places like the Gulf of Mexico and the North Sea. 

One thing that is making matters worse is the fact that many of its competitors are spending big bucks on new equipment. According to Bloomberg, more than 100 new jackup rigs have been ordered in the past three years, and many of those are now coming out of the shipyards and looking for work.

Source: Bloomberg Industries

Can Hercules turn it around?

There are two major things standing in Hercules' way from becoming a better investment down the road: 1) The company is making rather limited investments in new equipment. The company has recently brought on one new rig this year and has one under construction that should be ready by the second quarter of 2016. 

The second aspect that is working against it is the fact that it has a rather sizable debt load that makes it difficult to secure financing for new rigs. With a debt to capital ratio of 58% and an interest expense to EBITDA multiple of 3.9 times, there isn't a lot of wiggle room for management to turn over its fleet into newer, higher specification rigs that can command higher prices on contracts. 

To add insult to injury, demand for offshore rigs could potentially be weak over the next couple of years as many big spenders such as integrated oil and gas companies pull back on capital expenditures. While there is no major fear of the company's debt causing problems anytime soon -- the first major debt maturity isn't until 2019 -- a loss of a rig contract here or some declining contract rates there could put the company in a bit of a bind.

What a Fool Believes

Investors who look for companies trading at bargain basement prices will probably take a good hard look at Hercules Offshore. With shares trading at only 65% of book value and half of the company's share price in cash and short term investments, a quick turnaround in the rig market could lead to better times for the company. However, longer term the company still needs to address its aging fleet, and its capital structure is a little too debt heavy to change that anytime soon. This one may be worth staying away from for the time being until the company starts showing more encouraging signs of financial health.

Tyler Crowe has no position in any stocks mentioned. You can follow Tyler at under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool.

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