Matt Callow_

Hercules Offshore: Getting to Know a Hero

I'm not sure you read my last comment, or maybe you just disagree with it. HERO is not in the liftboat business anymore (my opinion). Revenue from liftboats will fall from 52% to 9%. That is a huge statement! They are a driller now with their own liftboat fleet. Day rates will not matter much as they will be using their own boats to service their own drilling rigs. They will have the lowest operating costs of any driller. If they do use their own boats to service their own drills, revenue from liftboats will fall even further, which is the right move for this company seeking to move into the more profitable drilling sector.

Hercules Offshore: Getting to Know a Hero

In their Q207 earnings report, they stated that 48% of revenue came from drilling and 52% came from liftboats. At a recent Oil & Gas Conference, they presented a pie chart which showed where their revenue would have came from if combined with TODCOs assets for the First Half of 2007. TOTAL drilling accounted for 84% of revenues (my article incorrectly said 75%), Liftboats 9%, and the Delta Towing segment accounted for 8%. So you see why I make the claim that they are now a driller. So you have a drilling company that owns its own servicing fleet. Meaning, not only can they control their own liftboat utilization rate, they can pay wholesale costs for it as well, a HUGE advantage on the rest of the drillers. I don't think anyone knows what the bottomline will be, except the insiders maybe, and you know what they are doing.

Hercules Offshore: Getting to Know a Hero

Thanks for the insightful comment.

1) On the day that I drafted up this article, HERO was above its' 50 DMA. Just barely, but the price trend was up and the 50 DMA line was moving down rapidly. I still see a good case for upward momentum here. I prefer to focus more on fundamental analysis than technical.

2) HERO is more multinational than they ever have been. With the TODCO purchase they have positioned themselves well in global waters. Even though they may receive dollars, the dayrates they receive have been moving up as the dollar falls and demand increases. I have no doubt that the revenue will be there at the end of the quarter.

3) I agree with you on this point. I figured about 75% utilization. If you look at the relationship between the price of oil to the price of natural gas, historically, it has been about 7 to 1. Right now, it sits at 10 to 1. Natural gas is currently undervalued. If you look at the prices on futures of natural gas, you can see that traders believe that the price of natural gas is going to rise over the next 6 months, filling in this gap back to 7 to 1.

I expected many comments about the $100-$150 oil call. Your's does not surprise me. Only time will tell. But keep in mind, as the dollar falls, the value of oil to the rest of the world falls as well, unless the price of oil goes up. Even if supply and demand remained stagnant (highly unlikely) oil would still rise in price if the dollar continued to fall. As I pointed out, demand rising, supply and dollar falling, oil will continue to go up.