Hercules Offshore: Fleet Analysis As Of July 23 And Recent Second Quarter Results

Jul.24.14 | About: Hercules Offshore (HERO)

Summary

Hercules is a profitable mid-tier offshore drilling company with a large jackup fleet and liftboat vessels, both in the USA and Internationally.

On July 23 the company released its fleet status in July and indicated its second quarter results. The street was disappointed by the weak results and the stock tanked 7%.

The company is struggling to find its footing now, however, the next few quarters may show some improvement along with the whole sector. Let's look at the situation honestly.

Hercules Offshore, Inc. (NASDAQ:HERO) is a mid-tier offshore driller contractor and liftboat services with operations worldwide. The company operates:

  • 36 jackup drilling rigs, including two Keppel FELS Super A high specification, harsh environment jackup rigs.
  • 24 liftboat vessels (9 liftboat vessels are owned by a third party and operated by Hercules.)
  • 2 jackup drilling rigs. Hercules acts also as operation and maintenance manager for two rigs owned by Perisai Petroleum Teknologi BHP. Hercules will receive a daily management fee equal to $4,000 per rig, payable starting at the contract commencement date, and a daily operational fee equal to 12% of the rig-based EBITDA. Hercules will be reimbursed for all operating expenses and Perisai will pay for all capital expenditures with respect to the rig.

Hercules Offshore, Inc. Was founded in 2004 and is headquartered in Houston, Texas.

Complete fleet analysis and status as of July 23, 2014

Data are from the Hercules website and Rigzone.

1 - Jackup fleet (Including the 2 Perisai Rigs.)

Jackup

Year built

Contract Duration

Current

Day rate

K $

Location
1 Hercules TBN

Under construction

2016

6/5/14 dur. 5Y 225 UK
2 Hercules Triumph

Keppel Fels Super A

HE

2013

9/7/14 215 India
3 Hercules Resilience

Keppel Fels Super A

HE

2013

11/7/14 188 Congo
4 Hercules 85 X Cold stacked X X
5 Hercules 120 1958 12/31/14 82 GOM
6 Hercules 150 1979

Shipyard 8/8/14

X

X
7 Hercules 153 X Cold stacked X X
8 Hercules 156 X Cold stacked X X
9 Hercules 173 1971 12/31/14 82 GOM
10 Hercules 200 1979 8/15/14 106 GOM
11 Hercules 201 1982 Shipyard 7/23/14 X X
12

Hercules 202

1981 9/20/14 107 GOM
13 Hercules 203 X Cold stacked X X
14 Hercules 204 1981 Ready stacked X X
15 Hercules 205 1979

10/2/14

11/1/14

102

102

GOM

GOM

16 Hercules 206 X Cold stacked X X
17 Hercules 207 X Cold stacked X X
18 Hercules 208 1980 3/16/15 114 Australia
19 Hercules 209 1981

8/22/14

11/20/14

110

110

GOM
20 Hercules 211 X Cold stacked X X
21 Hercules 212 1982 Ready stacked X X
22 Hercules 213 1981

8/15/14

11/13/14

111 GOM
23 Hercules 214 1982 9/8/14 110 GOM
24 Hercules 250 X Sold 6/14 $8.5 million (gain $7.5 million in Q2) X X
25 Hercules 251 1978 7/30/14 103 GOM
26 Hercules 253 1982

Ready stacked 8/6/14

10/5/14

11/4/14

-

105

105

GOM
27 Hercules 260 1979

Ready stacked

X X
28 Hercules 261 1979

Shipyard 7/30/14

9/30/14

9/30/14-9/29/19

-

84

136

Saudi Arabia
29 Hercules 262 1982

11/8/14

11/7/19

80

118

Saudi Arabia
30 Hercules 263 1982

9/25/14

3/24/15

102

114

GOM
31 Hercules 264 1976

8/1/14

11/29/14

121

124

GOM
32 Hercules 266 1978 117 117 Saudi Arabia
33 Hercules 267 1980 Ready stacked

X

X

34 Hercules 300 1974

11/21/14

8/1/15

104

104

GOM
35 Hercules 350 1982 3/16/15 140 GOM
36 Hercules 2003 X Cold stacked X X
37 Hercules 2500 X Cold stacked X X
Management only
1 Perisai Pacific 101

2014

under construction

En route

8/15/14

? Malaysia
2 Perisai Pacific 102

2015

under construction

- - -
Click to enlarge

Average revenue per rig per day increased to $108,237 in the second quarter 2014.

2 - Liftboat vessels (Location: West Africa and Middle East.)

From Hercules website:

Liftboats, commonly referred to as the "workhorse" of the offshore industry, are reliable, versatile and self-contained. They provide a cost-effective and efficient alternative to traditional pipelay/derrick vessels. With their large, open deck areas, they are self-propelling and self-elevating. Our fleet provides a work platform for a wide range of services, from coiled tubing and wireline operations to well intervention.

Click here for more information on HERO liftboats.

As of July 23, 2014.

Liftboat Class

(Feet)

Number of Vessels Actively Marketed Day rate $ Operating days Utilization % Vessel Drydock
230-280 4 4 43,175 62 60 (1) 6/14
170-215 6 6 30,092 153 63 (1) 6/14-7/14
140-150 4 4 16,222 93 90 (1) 6/14
120-130 7 7 11,342 192 91 (2) 6/14-7/14
105 3 *2 - - - (1) 6/14
TOTAL/Average 24 23 22,934 304 44
Click to enlarge

The age average liftboat vessels is 26 years (From SEC 10K table.)

*1 liftboat West Africa is cold stacked.

International Liftboats revenue was $30.9 million in the second quarter 2014 compared to $35.7 million in Q2 2013.

Fleet status snapshot as of July 23, 2014:

Total Cold stacked Idled/ready stacked Working unit Age average (Year)
Jackups 36 9 5 22 32
Liftboat vessels 24 1 0 23 n/a
Click to enlarge

Q2 2014 results and conference call on July 23, 2014 and commentary:

Important links:

Link: Conference call Q2 2014 transcript.

Link: Q2 results' press release.

Comparison from Q2 2013 and per sector:

Domestic Rig Offshore International Rig Offshore International Liftboat
Q2 2014 Q2 2013

Q2 2014

Q2 2013 Q2 2014 Q2 2013

Revenue

$ Million

140.4 127.0 71.7 48.8 30.9 35.7

Average

Day-rate

$

108,237 84,238 157,637 116,079 24,162 24,207

Utilization

%

79.2 88.8 62.5 78.1 61.0 70.5

Operating expense

$ Million

63.5 65.6 44.1 33.7 19.1 19.6

Operating income

$ Million

57.3 39.9 6.7 -3.3 -0.7 9.9
Click to enlarge

Total revenue for Q2 2014 was $243 million with income from operating operations of $6.6 million or 0.04 per share.

Commentary:

Hercules Offshore just released its Q2 results and it is time to analyze all these numbers.

John T. Rynd, Chief Executive Officer, discussed these results and explained the major issues.

1 - Domestic slowdown.

HERO is experiencing a slowdown in domestic drilling due to a transfer and consolidation among its customer base, which has led to disruptions in their drilling strategy. This is a temporary negative element that the company believes will reverse later this year, after a survey among its customers. The company is taking proactive steps to reduce costs until the future trend will be clearer. Nonetheless, revenue jumped almost 11% from Q2 2013 to Q2 2014. Average Day rates are firm and stable in the Gulf of Mexico and crude oil prices are still trading at a healthy level.

2 - Idle time on International rigs.

Hercules 267 contract termination in Angola and also the survey downtime of the Hercules 261, had a negative effect on the International segment of the company balance sheet. It is not a surprise and has been discussed at length recently. The continuing effect of this downtime will impact also Q3 2014 and until Hercules 267 will be able to be contracted again.

3 - Liftboat segment experienced wide fluctuations in utilization.

This segment also has been weak for at least two reasons:

  • The weather in West Africa was unusually bad and push utilization down.
  • The Nigerian customers have been reducing spending notably.

These two factors reduced utilization to 61% in Q2 2014, as you can see in the table above.

It is important to look at the financial from a long investor's perspective as always. Of course, I am not outrageously impressed with the numbers; however, I believe the company has a very good prospect going forward, especially for 2015. The stock price has dropped to an attractive level, which offers a good opportunity to profit both short and long term, in my view.

Most of the slowdown experienced is due to some circumstantial events that have not a real deep impact to the long-term outlook and will be resolved in a short period of time. Hercules 267 termination of its Angola contract had a very negative impact short-term, but will reverse effect when the company is able to relocate successfully the rig soon.

Savvy investors will look at any significant weaknesses as a good potential to accumulate at a discount price to fair value. It is often in these contrarian situations that value investors can profit the most.

I recently traded HERO successfully, and I am ready to accumulate again under $3.70 with a target around $4.50 to $5 at the end of 2014.

John Rynd, CEO, said at the last conference call:

In closing, we are facing several near-term challenges. In the US we'll have to get past this current demand low and we see activity levels improving late in 2014. While the international drilling fleet has near-term availability, I'm confident that our marketing efforts will find suitable work for these rigs.

YTD chart:

HERO Chart

HERO data by YCharts

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. I will buy and accumulate HERO at or under 3.70.