Hercules Plus Todco Equals One Powerful Company

Todco (THE) is a mid-cap energy company that primarily consists of shallow water drilling rigs, jackup rigs, tugs, barges and related equipment and work crews. Most of their work centers on the Gulf of Mexico. Hercules (HERO), which is about half of Todco’s market cap, is acquiring Todco on July 11th 2007. It owns a fleet of lift boats and jackup rigs, as well as a range of offshore support services.

This is one merger that makes me think one plus one equals three. The reason for this is the combined assets of Todco/Hercules means that Hercules will have approximately 50% of the jackup rig market in the Gulf. These rigs are in high demand currently as rigs have left the Gulf for international waters. The combined company also should enjoy pricing power advantages, operational benefits and increased flexibility.

These companies are truly cheap with an average trailing P/E of less than 11 and a forward P/E of less than 8. In addition, they have significant operating margins that have approached 40% and a quarterly revenue growth that combined is approximately 50% year over year.

The combined potential of Todco/Hercules offers strong earnings and revenue growth at a very reasonable price. I expect HERO to provide significant performance in the future.

THE/HERO 1-yr chart (combined)

Comments

[Richie:]

You have found what is perhaps the most prized merger of (near) equals in the shallow water drilling industry. The combination has explosive potential, even though usage as well as day rates are down YOY marginally. HERO will now dominate shallow water drilling in the Gulf.

The one problem I see is the massive "Naked Short" position in HERO's shares. I'm not sure how long these manipulators can keep the stock's price down. Does anyone have any input as to how the arbs ultimately resolve their short position --- or do they just eat their losses when/if a deal is finally consumated???

2007 Jun 27 12:36 PM

[dwolf:]

RAVERNON,

Thanks for the comment and question. You are correct in pointing out the large short position in the stock. I estimate the short position represents 31% of HERO's float.

My opinion is that the arbs's have decided to have their cake and eat it too. I mean that they hope to drive the price down over the short term, buy the stock at a "cheaper" price, and then make money on the long side. I don't think there is any risk of the Todco acquisition falling apart.

If you have another view on the topic please let me know.

Thanks!

David L. Wolf

2007 Jun 28 03:15 PM