Is This Drilling Stock a Buy?

Updated

It's been an up and down year for Hercules Offshore (NAS: HERO) . The company has posted revenue growth and smaller losses, but despite high oil prices, the company can't keep up with competitors that are posting strong profits.

The company is hoping that some recent moves will turn around those losses. In a recently announced share offering, the company said it will raise up to $117.3 million, which will be used to pay off short-term debt and acquire a new vessel. The acquisition of the rig Ocean Columbia from Diamond Offshore (NYS: DO) comes with an $85 million total price tag, including upgrades, but has also been signed to a $160 million contract. Paying off short-term debt will reduce not only leverage, but also the company's interest payments.

Shallow water has been Hercules Offshore's biggest strategic weakness in the current market. While SeaDrill (NYS: SDRL) , Transocean (NYS: RIG) , and Noble (NYS: NE) are commanding more and more for ultra-deepwater rigs, which are in short supply, Hercules is battling low utilization rates for shallow water rigs.


The positive for Hercules Offshore is that utilization rates are rising and debt should be down after the recent share offering. But the rest of the operations concern me. The company generated just $52 million in operating cash last year and has $818.1 million of long-term cash. Either cash generation is going to need to improve or debt is going to have to come down to justify a $693.6 million market cap. An enterprise value 29 times bigger than operating cash flow simply isn't a good value in this market.

Right now I simply can't see Herclues Offshore as a buy over SeaDrill, Transocean, or Noble. All three are paying dividends and have exposure to the very profitable ultra-deepwater market. If utilization rates pick up and oil prices continue to rise, the story may change, but for now there are better options than Hercules Offshore.

Hercules Offshore may not be a buy right now, but our analysts have found one energy stock that is. In the free report, found here, they reveal why it's the only energy stock you need.

At the time thisarticle was published Fool contributorTravis Hoiummanages an account that owns shares of SeaDrill. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdings, or follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Transocean.Motley Fool newsletter serviceshave recommended buying shares of SeaDrill and Hercules Offshore. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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