Abusive Naked Short-Selling Lands Hercules Offshore's Shares On FINRA's RegSHO Radar

| About: Hercules Offshore (HERO)

Shares of Hercules Offshore (NASDAQ:HERO) were awarded a (-15.13%) haircut on Thursday after a downgrade to Neutral from Buy at Global Hunter Securities, after the release of their January Fleet Status Report.

In a subsequent downgrade Capital One issued a similar call with a downgrade from Overweight to Equal Weight however not much attention was given to the downgrade or the BUY rating that was reiterated by Wunderlich Securities with a target price of $11.00., which is well above that of Global Hunter or Capital One. In fact there are a plethora of firms that have targets and buy recommendations well above those issued today including: Barclays, FBR Capital, Deutsche Bank, and Dahlman Rose with an average target of $9.39 per share.

The overlapping analysts issue quite conflicting reports but all point to the same January Fleet Status Report which all three firms claim was negative. In reality the report was non-eventful, and the only potential negative was the absence of a few extensions of existing contracts.

The better part of today's amusement came from Motley Fool writer, Travis Hoium who wrote, "The shallow water market, where Hercules Offshore is focused, is more up and down than in deeper water because it's quicker to drill wells, and there's more supply in the market. Competitor Noble recently pointed to weakness in new contracts, which would affect Hercules more than companies that contract rigs for years at a time. Downgrade or not, I don't like Hercules' position in the market, and would focus on ultra-deepwater, where margins are higher and there's more stability."

To claim you "don't like a company's position in the market" and offer very little else to support the statement is reckless especially when attempting to compare a deep water drilling company to a shallow water market driller.

So, if you were trapped by today's rhetoric, let's take a moment to actually perform research and take a closer look at why shares of Hercules Offshore really took a beating today.

Hercules has been the victim of Illegal Abusive Naked Short Selling since July of 2013 when the equity peaked at $7.96 a share and a short position just shy of 1.7 million shares. After that peak the short position increased three fold to 4.3 million shares in just two weeks and has hovered between 1 million and 2 million additional shares short from July through December of 2013 leaving an open short position just shy of 8.1 million shares. Hercules beneficial share volume has been less than light to say the least and once you subtract out the High Frequency Trading of Phantom shares, the short sellers were increasing their short position exponentially within options trades to further drive the price lower and in one case on January the 7th, the short sales accounted for nearly 75% of the total beneficial shares traded.

In the past 15 trading sessions the short position significantly increased with over 50% of the beneficial volume being shorted daily and is easily accessible at FINRA's RegSHO daily reporting site. I will save you the trip but this is how the numbers break down; from January 2nd to the 22nd an additional 5.9 million shares were shorted and on the 23rd when the downgrades were issued by Capital One and Global Hunter, an additional 2.7 million shares were shorted sending Hercules Shares into a RegSHO violation for multiple fails to deliver by institutional traders. Shares also touched a new 52 week low of $4.62 which is quite absurd given the more recent developments at the Houston based driller.

There is one day that really stands out for the abusive naked short selling action and that is Friday January 17th where 902,488 shares were sold short on beneficial volume of 1.5 million shares, just a few short days before the downgrades were issued.

Now that we are educated as to why the shares really plummeted today, as well as the past few months, let's break down some of the finer points of what is occurring within the company rather than in the shares of Hercules as well as ignore the coordinated illegal naked short selling and bear raiding.

  • Since March of 2012 drilling revenue has increased 85% through September of 2013.
  • Since March of 2012 EPS has increased from (-.29) to +.11 through September of 2013.
  • Domestic Utilization has remained steady at 91% in the same time frame.
  • International Utilization has increased from 39% to 77% in the same time frame.
  • Average Day Rate Domestically has increased from $63 to $91.
  • International Average Day Rate has increased from $61 to $109.
  • Annualized ROC has increased from (-6%) to +7% in the same time frame.
  • EBTIDA margin has increased from 10% to 37% and is one of the best in the industry.
  • Hercules backlog should push higher anywhere from 15-20% on the current 1.1 Billion and US GoM Jack renewals would most likely be priced 15% higher or within a tight range.
  • The settlement for 50MM on 265 will most likely be used to reactivate 1-2 jackups.
  • Liftboat Revenue was up 12% QoQ and 30% YoY and margins are expected to trend between 35 and 40% through 2014.
  • Hercules recently retired 400M in senior notes (10.5% due 2017) and reissued (8.75% Due 2021.) Net Debt to Capitalization should drop to between 35-40% in Q4 of 2014 which will leave the company extremely cash rich.

Let's also take a look at some fundamentals within the financials:

  • EPS (trailing 12) .49 cents per share.
  • P/E of 9.96
  • Forward P/E 6.48
  • Forward EPS Forecast of .75 cents per share
  • Forward EPS growth forecast for 2015 at 284.18%
  • Sales QoQ +40.6%
  • EPS QoQ +147.8%
  • Gross Margins of +44.6%
  • Operating Margins of +16.5%
  • Profit Margin of 4.5%
  • Book Value of $5.90 a share.
  • Cash per share $2.29 (not including the 50M for 265 loss)
  • Enterprise Value of 6.88 a share or 1.81 billion with a current cap of 780m.

In SHORT the most recent price action in shares of Hercules have little to do with what is unfolding in the financials and fundamentals, and has everything to do with Illegal Abusive Naked Short Selling and at these artificially depressed levels the shorts have made the fundamentals look even better. With Hercules set to release earnings on February 6th, 2014 BMO; that is roughly 17 million short shares that now have to cover on a severely undervalued company with substantially improving earnings trends and fundamentals. Given that total shares owned are hovering around 82% that leaves little wriggle room on a 27 million share open float trading against a 17 million short position. It is apparent the short and distort campaign as well as the RegSHO violations has over-extended the short sellers and the retrace will most likely be twice as violent than the bear raid.

Disclosure: I am long HERO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.