Hercules Offshore: What a Difference Six Weeks Can Make

by: David L. Wolf

Approximately six weeks ago, I wrote an article in which I recommended that Hercules Offshore (NASDAQ:HERO) was a stock that was not a timely purchase at that particular moment. The main reasons for that included falling natural gas prices, a looming hurricane season with drillers reluctant to rent rigs, and approximately a quarter of their rigs were without long term contracts.

My concerns were correct and HERO declined to approximately $25 a share. This seems to be it’s base point as it’s touched this level multiple times only to rebound. At that point several things have changed which now make me recommend HERO as a terrific value with the potential for excellent appreciation.

First, as the Wall Street Journal noted, insiders had been buying HERO shares. They have bought $1.2 million dollars in last month and $2.9 million dollars in the last year. Even more impressively, institutions have been steadily purchasing HERO’s stock and have purchased 30 million shares in the last nine months.

In addition the price of natural gas, to which the value of HERO is closely attached, has been slowly, if not steadily, increasing in value. The majority of the hurricane season is behind us with no major damage to HERO’s rigs. It seems reasonable that the number of rigs under contract may be increasing. I don’t have any direct evidence for that, but it would certainly help explain the insider and institutional buying.

In addition, the valuations are compelling. The PE is 7.64 with an operating margin of 43%. It has a return on equity of 31%. The technical charts seem to indicate an excellent point for buying.

Disclosure: I have long positions in HERO.