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Hercules Offshore: Getting to Know a Hero

Matt - perhaps there's some confusion here but when HERO describes itself as a "driller", this means that the majority of the company's revenues come from the hiring out of jack-ups to E&P operators - it is the E&P companies that actually do the drilling, not HERO.

So, I certainly agree that following the TODCO acquistion, HERO is less dependent on liftboat revenues, but instead it is now largely dependent on revenues from hiring out its jack-up fleet. And it is the day rates at which the company hires out its jack-ups which are under threat (for the reasons I outlined above) - hence the threat to HERO's earnings.

Hercules Offshore: Getting to Know a Hero

Dayrates (the amount charged by a rig owner to an exploration company for the use of their rigs) for the type of jack-ups operated by HERO are falling - today they stand at $70-80k per day, but with the current oversupply of jack-ups in the Gulf of Mexico, these are expected to fall to $50-$60k.

Whereas most other jack-up operators (ie Rowan, Ensco, Pride, Noble) are able to mitigate this risk by moving their higher premium jack-ups into international waters (where day rates are higher), HERO's fleet can only operate in shallow water and, with the possible exception of being moved to Mexico, can't go anywhere.

Bottom line - HERO looks very good in valuation terms, but beware the threat to earnings posed by the company's exposure to the Gulf of Mexico and falling day rates.