Hercules Offshore Announces 85-Day Contract Extension For Hercules 266 With Aramco

| About: Hercules Offshore (HERO)

Summary

HERO announced It received a notice from Saudi Aramco extending the contract for the Hercules 266 to June 30, 2016 at a day rate of $63.65K/d.

This contract extension represents only an 85-day extension which is a disappointment if we compare it to the Hercules 261 and Hercules 262.

My opinion is that HERO is overvalued, right now, and may come under pressure during Q2'16. However, HERO may present a trading opportunity with the Hercules Highlander.

This article is an update of my earlier article on Hercules Offshore (NASDAQ:HERO) from April 1, 2016, regarding the company's fourth-quarter earnings results.

Today, Hercules Offshore announced the following:

It received a notice from Saudi Aramco extending the contract for the Hercules 266 to June 30, 2016. The dayrate for the Hercules 266 will remain at $63,650 per day through the term of the contract extension.

Assuming the extension starting today, April 7, 2016 and ending on June 30, 2016, the contract extension represents 85 days @ 63.65K/d or $5.41 million in added backlog.

Here is the Fleet status table:

HERO 4/1/2016 2016 2017 2018 2019 2020 2021 D-R + Mob
Highlander 5 12 12 12 12 7 230,5
Triumph 0 0 0 0 0 0 0
Resilience 0 0 0 0 0 0 0
Hercules 150 0 0 0 0 0 0 0
Hercules 173 0 0 0 0 0 0 0
Hercules 201 0 0 0 0 0 0 0
Hercules 205 1 0 0 0 0 0 50
Hercules 208 0 0 0 0 0 0 0
Hercules 209 0 0 0 0 0 0 0
Hercules 260 9 12 12 12 3 0 75
Hercules 261 9 12 12 9 0 0 63,65
Hercules 262 9 12 12 10 0 0 63,65
Hercules 263 0 0 0 0 0 0 0
Hercules 264 0 0 0 0 0 0 0
Hercules 266 3 0 0 0 0 0 63,65
Hercules 267 0 0 0 0 0 0 0
Hercules 300 1 0 0 0 0 0 55
Hercules 350 0 0 0 0 0 0 0
Perisai Pacific 101 9 12 7 0 0 0 8
Perisai Pacific 102 0 0 0 0 0 0 0
37 48 48 43 15 7
Click to enlarge

Commentary:

Hercules Offshore announced that the Hercules 266 was extended an extra 85 days, which is quite a disappointment, because I was expecting a long-term extension similar to the Hercules 261 and Hercules 262 which are contracted until the end of 2018. The added backlog is low, with only $5.4 million, which represents a total backlog for 2016 of approximately $99 million, excluding the liftboat revenue. However, any new contract is welcome for this struggling company.

In my preceding article, I projected the 2Q'16 revenue of approximately $32 million, but this extension will add nearly $6 million for 2Q'16, which is what HERO needed before the start of the Hercules Highlander. This is really what will move HERO for the next several months. So far, the rig completion is on schedule and commissioning should start soon?

Conclusion:

My opinion is that HERO appears overvalued, right now, and may come under pressure during Q2'16 with a low point in revenue. I do not see any potential takeover even at distressed prices. The market is extremely difficult and no other offshore drillers such as Rowan companies (NYSE:RDC) or Ensco (NYSE:ESV) will be interested in a total acquisition.

The only potential is still an acquisition coming from Maersk, however, the company will have to liquidate a significant part of its obsolete fleet to trigger an offer.

HERO is now a perfect trading vehicle, based on the oil prices and the success of the Hercules Highlander.

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 trade HERO from time to time.