Hercules Offshore - Complete Fleet Status As Of January 26... Time To Sell?

| About: Hercules Offshore (HERO)

Summary

Hercules Offshore released its fleet status on Jan. 26. There were only a few minor changes.

The liftboat business was disappointing again, with a revenue of $2.92 million, well below the breakeven point. HERO is losing approximately $2 million a month on this segment alone.

Perhaps selling the entire fleet or the company, and make a cash distribution to all shareholders, after paying for all expenses, is the right strategy?

This article is an update to my preceding article on Hercules Offshore (NASDAQ:HERO), published on Dec. 18, 2015.

Complete Fleet Analysis and Status as of Jan. 26, 2016

Data are taken from Hercules' website and Rigzone.

Jackup Fleet (Including Two Perisai Rigs)

Jackup

Year built

Contract Duration

Day rate

K $

Information Location
1 Hercules Highlander

Under construction

2016

4/20/16

7/31/16 en route

7/31/21

-

-

225

Company to receive a mobilization fee of approximately $9 million

[Maersk]

NSUK

2 Hercules Triumph

Keppel Fels Super A -HE

2013

Ready stacked

Ready for North Sea operations Netherlands
3 Hercules Resilience

Keppel Fels Super A -HE

2013

Ready stacked Gabon
4 Hercules 150 1979

Warm stacked

5 Hercules 173 1971

Warm stacked

US GOM

6 Hercules 201 1982

Warm stacked

US GOM
7 Hercules 205 1979

2/5/16

3/6/16

3/30/16

50

50

50

[Renaissance]

[Byron Energy]

US GOM

8 Hercules 208 1980

Warm stacked

Malaysia
9 Hercules 209 1981

warm stacked

US GOM
10 Hercules 260 1979 4/13/20 75 (if oil brent <$86)-125(if brent oil>$125)

[ENI]

Congo

11 Hercules 261 1979

1/1/15 - 12/31/16

12/31/16 - 9/29/19

67

118

[Aramco]

Saudi Arabia

12 Hercules 262 1982

1/1/15 - 12/31/16

12/31/16 - 11/8/19

67

118

[Aramco]

Saudi Arabia

13 Hercules 263 1982

Warm stacked

US GOM

14 Hercules 264 1976

2/10/16

70

[Linder]

US GOM

15 Hercules 266 1978

1/1/15- 4/7/16

67

[Aramco]

Saudi Arabia

16 Hercules 267 1980

Warm stacked

Gabon
17 Hercules 300 1974

6/22/16

55

[Arena]

US GOM

18 Hercules 350 1982

Ready stacked

US GOM

Management Only
1 Perisai Pacific 101

2014

8/4/17

4 + 12% Ebitda (See "1" below)

[Hess]

Malaysia

2 Perisai Pacific 102

2015

Under construction

3/31/16

4 + 12% Ebitda (See "1" below) Singapore
Rigs Cold Stacked
1 Hercules 120 2/15 US GoM
2 Hercules 200 1/15 US GoM
3 Hercules 202 10/14 US GoM
4 Hercules 204 10/14 US GoM
5 Hercules 212 11/14 US GoM
6 Hercules 213 1/15 US GoM
7 Hercules 214 1/15 US GoM
8 Hercules 251 1/15 US GoM
9 Hercules 253 1/15 US GoM

("1") Hercules Offshore acts as operations and maintenance manager for the rig, owned by a wholly owned subsidiary of Perisai Petroleum Teknologi Bhd ("Perisai"). Hercules will receive a daily management fee of approximately $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.

Hercules Fleet Status Snapshot

Total Domestic International (including 1 under-construction) Under Management
Working Jackups 8(10) 3 5 (2)
Warm Stacked JU 7 5 2 0
Ready Stacked JU 3 1 2 0
Cold Stacked JU 9 9 0 0
Total 27(29) 18 9 (2)

Liftboat Vessels (West Africa and the Middle East)

As per Hercules' website:

Liftboats, commonly referred to as the 'workhorse' of the offshore industry, are reliable, versatile and self-propelled. 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.

Data as of Dec. 31, 2015:

Liftboat Class

(Feet)

Number of Vessels Actively Marketed Day Rate $ Op. days Utilization % Vessel Drydock
230-280 4 4 40,281 17 14 (1v/1v) Jan/Feb
170-215 6 6 17,842 39 21
140-150 3 3 14,081 40 43
120-130 3 3 11,904 82 88 (1v) Jan.
105 3 *2 - 0 0
Total/Average 19 18 16,404 178 32

The liftboats vessel contract for December was worth $2.920 million, compared to $2.342 million for November. That's 24.7% increase, month to month (however January 2015 revenues were $7.443 million).

Commentary

Hercules Offshore released its January fleet status:

1 - Only one minor change involving the Hercules 205, and the Hercules 264. The Hercules 205 is picking up a contract from the Hercules 264 for Byron Energy, in between two contracts from Renaissance. The Hercules 264 will work for Linder until 2/10/16.

2 - The Hercules 263 is now warm stacked from ready stacked.

3 - The liftboat revenues increased from $2.342 million to $2.920 million this month, but it is still well under the breakeven point. My estimate is a loss of $2 million per month.

Just a reminder, for the ones who are not familiar about Hercules offshore:

Hercules Offshore emerged from bankruptcy on Nov. 6, 2015. The stock switched from HEROQ -- which was trading at $0.065 -- to the ticker HERO using a conversion where old shareholders received one HERO share for 268 shares of HEROQ, and worthless warrants were also distributed.

About the warrants, the 8-A12G is indicating the following:

The company will issue warrants to the holders of equity interests ... totaling 5,000,000 warrants outstanding, exercisable until the expiration date, to purchase up to an aggregate of 5,000,000 shares of common stock at an initial exercise price of $70.50 per share.

Chart of HERO:

I am not really optimistic about the chance of HERO survival, despite the fact that the company is debt free, now. The company is burning cash at an increasing rate and there is no relief in sight.

Obviously, I am not the only who thinks that HERO should not be in business any longer, and should "close the door". A simple look at the PPS just shows what I mean.

Perhaps selling the entire fleet, and make a cash distribution to all shareholders, after paying for all expenses, is the right strategy?

The business model is definitely not working and the actual shareholders may get a good premium, if the company can be sold in part or even much better as a whole, to another offshore driller (Pick your choice).

What represents the value of Hercules Offshore, as it is today?

The fleet is comprised of 27 Jackups and 2 Jackups Perisai.

19 Jackups are warm stacked, ready stacked and cold stacked with a minimum value.

8 Jackups plus one Perisai are actually (or will for the Hercules Highlander) generating revenues.

Jackup 2016 2017 2018 2019 2020 2021 Dayrate Backlog
Hercules Highlander 5 12 12 12 12 7 229,6 413,28
Hercules 205 2 0 0 0 0 0 50 3,00
Hercules 260 11 12 12 12 4 0 75 114,75
Hercules 261 11 12 12 10 0 0 67 90,45
Hercules 262 11 12 12 11 0 0 67 92,46
Hercules 264 0,03 0 0 0 0 0 70 0,06
Hercules 266 2,2 0 0 0 0 0 67 4,42
Hercules 300 5 0 0 0 0 0 55 8,25
Perisai Pacific 101 11 8 0 0 0 0 8 4,56
Total contract in month 58,23 56 48 45 16 7 - 731

I came up with a total backlog of approximately $731 million, including the Hercules Highlander ($413 million with mobilization fee)

Obviously, the major part of HERO's value is essentially based on the Hercules Highlander, and the rest of the fleet -- which is either cold stacked, idle or contracted at under-breakeven point -- will not be estimated more than their scrap value, if HERO want to have a chance to find an acqueror.

Some JUs are quite valuable, of course, such as the Hercules Triumph, which has been equipped to work in harsh environment recently and is stacked in North Sea. However, the market situation is not offering any potential work for this unit and selling it, now, will involve a large discount.

The liftboat segment has a residual value, however, the entire segment is losing about $2 million a month, as we speak. Thus, this value will be certainly very low.

I will not guess a price, but I have given what could be the base of such estimate.

It seems that from a shareholder's point of view, the best and only solution would be to sell the entire company at a distress price, which will eventually represent more value per share than the actual PPS.

The cash proceeds will then be distributed to HERO shareholders, or the company who will acquire HERO, may pay with a certain amount of shares instead of cash -- acquisition and shares swap. This situation will eventually be a good synergy after all for another major offshore driller.

The main problem is that management will lose their lucrative job, even if a large compensation is awarded to them. Thus, the idea will not be accepted at the management/board level, even so it is the best solution for the company and its shareholders, in my opinion. The second element is about the Hercules highlander contract? How good it has been negotiated and what if the shipyard is late for delivery?

However, trying to survive in this environment is a lost battle for HERO and its shareholders. The more the company waits to end this ordeal the less shareholders will get at the end.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade the PPS again soon.

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