This past Tuesday (11/2) after market hours, Seahawk Drilling (NASDAQ:HAWK) announced
[it [has initiated a process to explore and consider possible strategic alternatives for enhancing shareholder value. These alternatives could include, but are not limited to, transactions involving a sale of assets, a recapitalization, or a sale or merger of Seahawk (Full release here).
I wrote about Seahawk on my blog back on September 12. With a grossly undervalued asset base as well as high cash balance, I believed that shares were moderately to severely undervalued even in the very dire conditions that existed at the time. A number of catalysts have occurred that have pushed shares over 30% higher from the day I published my analysis. While it was difficult at the time to place a timeline on the occurrence of these catalysts, shares were so cheap at that point that you could have practically melted the rig steel and found more value than the market was giving credit. Below are summaries of a few of the recent developments that have helped move shares higher since my writeup:
Immediately after my article was published, the BOEMRE [Bureau of Ocean Energy Managment, Regulation and Enforcement] and Ken Salazar issued a notice to lessees that all non-working wells in the GoM would need to be permanently capped. This amounts to approximately 3,500 wells that will need capping over the next few years. Starting October 15, companies with non-operating wells have 120 days to submit proposals on capping and work should begin following approval. Because these cappings are just work overs that will take days to a few weeks to complete, lower spec rigs like HAWK's should end up getting utilized and would help provide much needed cash flow.
Early Lifting of Deepwater Moratorium: While this did not directly affect HAWK as a shallow water driller, the move restored confidence that eventually the GoM would return to normal drilling, even if it would be more difficult to get a permit going forward. While the BOEMRE is still an unorganized mess according to a source, there is at least hope now that things can return to normal faster than expected.
Seahawk entered into a Memorandum of Understanding with Essar Oilfield Services to sell the Seahawk 2025 drilling rig for $14.55MM, subject to Essar being awarded a tender on or prior to February 8, 2011. If the deal closes, Seahawk will also receive $135K for training and services on the new rig. While this may be a nice win from a cash flow perspective, more importantly it helped rationalize the market value of their entire rig base to a certain degree. Since the announcement, shares have climbed significantly as the market mulls whether there will be further rig sales as well as whether the cash may be used to acquire a rig outside the U.S. GoM that may be accretive to cash flow. For a more fulsome explanation of the the sale and the tax effects, check out Longterm Investing.
Announcement of Strategic Initiatives: Since late spring, HAWK has been at the center of a perfect storm of bad industry trends. Just about the time of the Macondo blowout, things were just getting going in the GoM after a sluggish previous year. Rig counts were increasing and HAWK expected to climb out of the operational hole that was most of 2009. However, the ensuing moratorium, while not affecting shallow water, caused the pace of permits to slow to almost nothing, as mentioned in my previous article. Coupled with a steady decrease in the price of natural gas, demand for HAWK rigs has remained sluggish and the company has been burning cash at an alarming rate.
While I welcome the exploration of strategic initiatives, I would argue this latest piece of news is somewhat of a non-event. Clearly, with the sale the 2025 rig, HAWK has been actively exploring ways to work through these tough times and maximize shareholder value and have done a pretty good job at making this clear since the share price lows in August.
I sincerely hope Seahawk's new strategic advisor, Simmons & Co., is able to help HAWK think outside of the box and come up with a solution to sell rigs, raise cash or merge the business at a price that is commensurate with the fair value of its rigs and operations. It is unfortunate that the company has come to this conclusion when it is still in a tight spot operationally and time is of the essence to stop hemorrhaging cash. However, these moves should at least help put a floor on the share price in the near term. HAWK may not be able to get top dollar for its rigs and its current book of business is extremely thin, but even with the recent increase in share price, an outright sale or a sale of individual assets could provide further upside to shares. If you are bold enough to base the valuation on the 2025 sale, shares could be worth closer to $20/share...but I'm not sure I'd hold out hope, there's still a steep hill to climb.
Third quarter earnings next week will help provide a better picture into plans going forward as well as upcoming rig activity and the all important cash burn, which will allow investor to make a fresh determination of the value the market is placing on HAWK's rig fleet.
Disclosure: Author is long HAWK