Seahawk Drilling Files Chapter 11: Macondo Fallout Continues

| About: Seahawk Drilling, (HAWKQ)

On Friday, Seahawk Drilling Inc. (NASDAQ:HAWK) filed Chapter 11 bankruptcy and will be selling 20 jackup rigs to Hercules Offshore Inc. (NASDAQ:HERO). As difficult as the Macondo disaster was - and continues to be - it has changed the lives of many people and businesses in the Gulf of Mexico. The ripple effects have now negatively impacted the stockholders of Seahawk.

This company's stock price has consistently moved to the lower right corner for the past 52 weeks. This is to be expected as many companies operating shallow water jackups have seen share prices drop in the past year. The important factor is what variables caused Seahawk to go belly up. One thing that should be noted is that when Seahawk was spun off from Pride International (NYSE:PDE), there was no talk of whether this company would be viable. The only clambering was about how much Seahawk's stock was worth.

At the time of Macondo, there were about 41 or so shallow water jackups contracted in the Gulf of Mexico. The Macondo disaster happened in mid-April of 2010. Jackups contracted and working remained at or above forty until the first week of July. This is important, as permits were still good for jackups working, so until contracts expired and new permits were needed, it had little effect on the industry. By July 30th of 2010, the number of Jackups contracted in the Gulf of Mexico was down to 32. Permits began to taper off about three weeks after the spill. A three week period from June 11th to July 2nd had no permits given and two weeks after only two total were issued.

Before the spill, from March 12th to April 9th, 29 total permits were signed. In total 99 permits were issued from January to May of 2010. Since June a total of 70 permits were issued. Most importantly, only 19 were issued for new wells. In November of 2010, there was a marked change in supply/demand dynamic. The Gulf of Mexico jackup supply is 77. 35 of those are either cold stacked or out of service. Of the 42 marketed supply, the GOM only has demand for 33. That is a 79% marketed utilization. This new demand of 33 is a significant decrease from the 43 permitted the week of May 7th, 2010. This demand decrease seems to be from new regulatory requirements for drilling permits slowing the process down which is limiting jackup utilization.

New regulations in the Gulf of Mexico were written in two parts. The NTL-05 was issued June 8, 2010. It mandated independent 3rd party verification of BOP operating effectiveness. New inspection and reporting requirements for BOP and well control system configuration. Documentation that the BOP has been maintained according to regulations. Certification from a professional engineer of all well casing and cement design. Certification by the operator's CEO indicating compliance with operating safety and environmental regulations. If this wasnt enough, on June 18th of 2010, the NTL-06 was issued, with respect to plans requiring additional information on blowout scenario description including estimated flow rate, total volume and maximum duration of the potential blowout, and assumptions and calculations of worst case discharge. Since these new safety and environmental rules have been adopted, only 16 permits to drill new wells have been issued.

There are several scenarios that led to Seahawk's bankruptcy. Much of their fleet is cold stacked and would take significant revenue to repair and/or update. Its fleet is older and does not have the technology of its competitors, but since 69% of the global jackup fleet is 25 years or older, I am unsure if it was a direct cause of their bankruptcy (Transocean's fleet averages 28 years of age). Utilization and dayrates are much lower for older rigs then high tech jackups. Seahawk had a significant portion of its revenue disappear (Mexico). They also had a significant debt associated with taxes. The straw that broke the camel's back was a deal falling through with Essar OIlfield Services to sell one of its 20 jackups.

Seahawk states only two of their jackups needed significant capital to reactivate. Without the ability to permit quickly, its already difficult situation grew much worse. The July of 2010 jackup rates seems to be much higher then they received:

  • 200 MC $21 million
  • 250 MS $17 million
  • 250 ILC $45 million
  • 300 ILC $60 million

It seems this deal places the value of the rigs well below $10 million a piece. It is difficult to value these assets now, as most of them have been cold stacked, and there is uncertainty in the market.

In summary, it seems there are many variables with respect to Seahawk's bankruptcy. Most notably the economic downturn and low natural gas prices. Hercules seems to have been the winner here. Not only did they add to their rig inventory, but they finished off a competitor. Hercules also received 20 jackups for the same amount you could recycle the steel for. In most cases a company would have tried to hold on as the economy recovers, but in this case increased regulation finished them off.

Looking at permits and the regulatory changes, it seems Seahawk had no chance to hold on. It is not so important that this company survives, as they come and go. I have no economic gain or loss here, as I have never owned Seahawk stock, but one can't help but wonder if 600 people would still have their jobs if the red tape was a little shorter.

Sources: Bureau of Ocean Energy Management, Regulation and Enforcement and ODS Petro Data

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.