Shallow Water Drilling = Big Losses

Shallow water drilling is taking slow steps forward, but it hasn't been enough to save Hercules Offshore (NAS: HERO) from continuing to lose money. The driller has fallen far behind deepwater drillers and the financial results show how far behind the company is falling.

During the first quarter, Hercules' revenue fell 10% to $143.3 million and its loss from continuing operations nearly tripled to $38.3 million, or $0.28 per share. A massive drop in international revenue of shipyard projects for contract-specific items accounted for the decline. The utilization rate of these rigs is supposed to increase as the year goes on and earnings should pick up as a result.

Only the domestic offshore and international liftboat segments were able to generate positive operating income this quarter, a measly $1.8 million and $8.6 million respectively.

Companies with dependence on shallow water drilling have faced the same challenges as Hercules; namely, low utilization rates and low dayrates, leading to losses. Parker Drilling (NYS: PKD) has been no different, posting losses in each of the last two years. Meanwhile, further offshore, SeaDrill (NYS: SDRL) , Transocean (NYS: RIG) , and Noble (NYS: NE) are capturing high dayrates in a constrained ultra-deepwater market.

Foolish bottom line
The shallow water market may in fact pick up as management predicted, but $771 million of debt still hangs over Hercules and that will keep the company from posting much of a profit in the near future. The company had $20 million in interest expense this quarter and a $28.6 million operating loss so it will take a big turnaround to swing into a profit. Even if Hercules does swing to a profit, I like ultra-deepwater drillers better because they are highly profitable and pay extremely high dividends.

For that thesis to change I will need to see dayrates and utilization improve dramatically, something to watch for in coming quarters.

For another stock that should profit whether drilling is in shallow or deep-water check out our report highlighting the only energy stock you'll ever need. The report is free when you click here.

At the time this article was published Fool contributorTravis Hoiummanages an account that owns shares of SeaDrill. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Transocean and SeaDrill.Motley Fool newsletter serviceshave recommended buying shares of SeaDrill. The Motley Fool has adisclosure policy. We Fools may not 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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