Offshore drilling company Hercules Offshore Inc. (HERO, Financial) has entered into a restructuring support aggrement (RSA) with its lenders as a first step of the bankruptcy protection process. According to the company's press release, Hercules Offshore will make various restructuring reforms under it's RSA, including: soliciting and filing Chapter 11 petitions to its first-lien lenders, providing shareholder recoveries, and transfering unsold assets into wind-down vehicles.
Incorporated in Delaware July 2004, Hercules Offshore serves natural gas companies through shallow-water drilling. A major oil and gas company, Hercules Offshore provides services ranging from oil and gas exploration, development drilling and other services tailored to shallow-water provinces.
Before the Great Financial Crisis of 2008, Hercules Offshore’s stock price peaked at $11,281.91 in mid-2006. However, the stock price dropped below $2,000 (over an 80% decrease) as the financial crisis occurred in September 2008. Hercules Offshore never reached precrisis levels, and the stock price gradually decreased to zero amid sharp decreases in oil prices. Today, the stock price of Hercules Offshore reached $1.
As the company’s financials continue to weaken, many gurus have sold out their positions in the stock. The profitability and growth rating of Hercules Offshore is a miserable 2 out of 10, and most of its valuation ratios are in the lowest 30% of stocks in the global oil and gas drilling industry. With an ROE of -41.96%, Hercules Offshore has an ROE that is lower than 84% of stocks in its industry. Furthermore, Hercules Offshore’s ROE troughed at -72.93% in 2008.
The distressed offshore drilling company has poor valuation ratios. Although the P/S ratios are at 10-year lows, the current P/S ratio of 0.01 is higher than 98% of companies in the global oil and gas drilling industry. Hercules Offshore also has a relatively high P/B ratio than its peers: the current P/B ratio of 0.04 is higher than 96% of companies in Hercules Offshore’s industry.
Two other factors that suggest that Hercules Offshore is in financial distress are its relatively high payable days and low Piotroski F-rating. Hercules Offshore currently has 56.72 days payable, which is higher than 72% of companies in the industry. Hercules Offshore has a return on invested capital of negative 15.56%, which is severely worse than its WACC. This suggests that the company struggles to make positive capital returns on its investments. Furthermore, Hercules Offshore currently has a Piotroski F-rating of 3, suggesting that the company has an unhealthy business operation and very weak financials.
Despite the weak financials, a few gurus have recently bought shares of Hercules Offshore. On Nov. 6, 2015, George Soros of Soros Fund Management, LLC bought 5,227 shares at an average price of $16.26. Soros increased his position in Hercules Offshore to 1,404,596 shares by the end of 2015. Third Avenue Management (Trades, Portfolio) also invested 812,553 shares in this oil drilling company.
Start a free seven-day trial of Premium Membership to GuruFocus.
