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Seahawk Drilling Inc. Liquidation Value

June 30, 2010 | About:
guruek

Greenbackd

32 followers
Seahawk Drilling, Inc. (HAWK), which I’ve posted about before, has taken a pounding over the last few days, down over 11% just yesterday to close at $9.61. It seems crazy to me. HAWK is cheap as a going concern, but with its market capitalization at $113M, it’s now at a hefty discount to its liquidation value. Here’s how I figure it:

Here’s a list of HAWK’s rigs and their operating status from the June 9 Drilling Fleet Status Report:

hawk-31.png?w=500&h=285

There are two possible liquidation values for HAWK rigs. In the slightly more optimistic scenario, HAWK’s rigs are sold off as operating rigs to other drillers in the Gulf of Mexico. In the other more dour scenario, some of HAWK’s rigs are sold for scrap. HAWK is trading at a discount to both values.

Rig resale values

In March and April this year, ENSCO Plc (NYSE:ESV) sold three 300′ ILC rigs from the same vintage as HAWK’s rigs for ~$48M a piece (see press releases hereand here). These are clearly higher specification and therefore more valuable than HAWK’s rigs, but the sales do provide some insight into recent market conditions. Here’s a chart from HAWK’s presentation (.pdf) to the Macquarie Securities Small and Mid-Cap Conference on June 15 and 16 showing comparable sales since 2004:

hawk-32.png?w=500&h=366

When 300′ ILCs have sold in the past for ~$48M, rigs comparable to HAWK’s have sold for around $15M each. HAWK is presently trading as if its rigs are worth only $6M each. Retired rigs have sold recently for between $5M and more. Hercules Offshore, Inc.’s (NASDAQ:HERO) 31 December, 2009 10K is illustrative:

Additionally, the Company recently entered into an agreement to sell our retired jackups Hercules 191 and Hercules 255 for $5.0 million each.



In June 2009, the Company entered into an agreement to sell its Hercules 100 and Hercules 110 jackup drilling rigs for a total purchase price of $12.0 million. The Hercules 100 was classified as “retired” and was stacked in Sabine Pass, Texas, and the Hercules 110 was cold-stacked in Trinidad. The closing of the sale of the Hercules 100 and Hercules 110 occurred in August 2009 and the net proceeds of $11.8 million from the sale were used to repay a portion of the Company’s term loan facility. The Company realized approximately $26.9 million ($13.1 million, net of tax) of impairment charges related to the write-down of the Hercules 110 to fair value less costs to sell during the second quarter of 2009 (See Note 12). The financial information for the Hercules 100 has historically been reported as part of the Domestic Offshore Segment and the Hercules 110 financial information has been reported as part of the International Offshore Segment. In addition, the assets associated with the Hercules 100 and Hercules 110 are included in Assets Held for Sale on the Consolidated Balance Sheet at December 31, 2008.

During the second quarter of 2008, the Company sold Hercules 256 for gross proceeds of $8.5 million, which approximated the carrying value of this asset.

The rigs have a resale value well beyond the price implied by the company’s stock. Not convinced they can all be sold as operating rigs? How about as scrap?

Scrap value

In this audio of the presentation to the Macquarie Securities Small and Mid-Cap Conference, Randy Stilley, the President and CEO of HAWK, says in relation to the slide below, that the value of the scrap steel and equipment on HAWK’s rigs is worth roughly $8M to $9M each:

hawk-30.png?w=500&h=366

Randy Stilley (at about 21 minutes into the presentation):

This is something that is just kind of amazing in a way. If you look at the underlying asset value of our rigs: five million dollars. The scrap value of a jackup is about eight or nine [million dollars], and that’s assuming that you get almost nothing for the steel and you just start taking stuff off of there; mud pumps, engines, top drives, cranes, draw works. If you start adding all that up, that alone is worth more than our current asset values based on our equity.

Now you can also say, “Well, if they’re not working, they’re not worth much,” and we’re not likely to just start cutting them up for scrap, but I think that’s kind of an interesting reference point that you don’t want to forget about because we’re trading at a very low value today.

Conclusion

If the ten cold stacked rigs are worth $80M in scrap, and the ten other operating rigs are worth $150M ($15M each), HAWK has $230M in rig value. Add HAWK’s $88M in cash and receivables, and deduct HAWK’s $164M in total liabilities, and HAWK is worth $154M in the most dour liquidation scenario. With a market capitalization of $113m, HAWK is trading at a hefty discount to this value, and HAWK is too cheap. It’s burning cash, it’s got a chunky payable to Pride and some Mexican tax issues, but subliquidation value never materializes without hair.

Hat tip BB.

[Full Disclosure: I hold HAWK. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Greenbackd

http://www.greenbackd.com


Rating: 3.9/5 (7 votes)

Comments

harison
Harison - 4 years ago


I saw the Mexican tax liability issue in a VIC post, could you expand upon it? That person seemed to think the tax liability could threaten the solvency of HAWK. Do you agree or disagree? Thanks for the work.
jeulrik
Jeulrik - 4 years ago


Following on Harrison's point, those tax issues are potentially 45 mio. USD for 2001 to 2003 and 90 mio. USD from 2003 to 2004, and finaly a potential contest of the opening years of around 100 mio. USD, so around 200 to 250 mio. USD. I would for sure make sure I had an idea of Mexican tax law, before I bought in to this.
hschacht
Hschacht - 4 years ago
As a fan of spin-offs I looked at HAWK... interesting situation and I looked at liquidation value too. On that basis, the company is cheap. The trouble is Seahawk isn't liquidating. And in the current environment they burn cash every day.

This is a classic value trap IF the situation doesn't change. The only question is whether or not the operating environment will change in time.

The people at HAWK are interested in their jobs too. The idea that they will do the above calculation and sell off their rigs for scrap to provide shareholders with a nice (quick) return is unrealistic.

I owned HAWK for a brief time and my discussions with the company led me to look elsewhere for value. There are so many cheap, profitable, dividend payers, that I decided it wasn't worth my time or money to deal with Seahawk.

Time will tell.
jeffdorr
Jeffdorr - 4 years ago
Are insiders buying?
mevsemt
Mevsemt - 4 years ago
Jeffdorr, Interestingly enough the company filled an 8K on June 29th.

Basically, the CEO and non-employee board members "will receive [their] salary in the form of Company restricted stock units in lieu of cash for the period beginning on June 19, 2010 and ending on December 31, 2010."

Further, "On June 25, 2010, Mr. Stilley was granted 31,019 Company restricted stock units representing his salary for the Equity Period divided by the price of the Company's stock at the close of trading on June 25, 2010." (The same applies to the board).

So, one of two things is happening here:

1. The CEO/Board are trying to mitigate the cash burn AND/OR

2. The CEO/Board are attempting to call a bottom in the stock price and profit by boosting their equity. i.e. it was interesting that they picked the June 25th stock price for ALL their restricted stock vs. having it awarded monthly...

My guess is their using #1 as an excuse to act on #2...

itznuthin1
Itznuthin1 - 4 years ago
I try to stay away from certain liquidation plays because many of the companies don't generate any cash. Instead they burn through cash. Unless there is a catalyst for value to be realized or there is a turnaround in the companies ability to generate free cash flow, I'm not interested.
JWD21
JWD21 - 4 years ago
huh, interesting post. So insiders may be forced to buy and own shares, but is anyone buying on their own accord?

It seems like if this company were obviously undervalued, insiders would be scooping up shares like no tomorrow
Hester1
Hester1 - 4 years ago
"So, one of two things is happening here:

1. The CEO/Board are trying to mitigate the cash burn AND/OR

2. The CEO/Board are attempting to call a bottom in the stock price and profit by boosting their equity. i.e. it was interesting that they picked the June 25th stock price for ALL their restricted stock vs. having it awarded monthly...

My guess is their using #1 as an excuse to act on #2..."
Wouldn't #1 and #2 be a good thing?

Liquidation
Liquidation - 1 year ago
Other afraid to file liquidation, but this could help you to monitor your companies is good or not.

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