Investing

Having listened to the Hercules Offshore (HERO) and Seahawk (HAWK) quarterly calls there is some interesting information on the current state of offshore and potential minor changes to the HAWK thesis both positive and negative. This should be ready in conjunction with my original analysis on HAWK .

Interesting

• Across US GOM there are 47-48 marketed jackups, 32-33 are contracted and of those 9 are waiting on permits. 19 have contracts that expire by the end of September. Operators will need to secure new permits before the jackups will be contracted.
• Before the freeze HAWK had 90% utilization of their marketed rigs.
• There are +/- 70 jackups uncontracted in international markets and 20 more on order. Though international E&P is expected to increase over the second half. Remember that this only impacts HAWK to the extent that rigs would be moved back in to the GOM because of the lack of demand elsewhere. There is no reason to think that will occur as the economics remain poor and the matt supported jackups all-in costs are cheaper (because the rigs themselves are old and not worth much compared to newer, more flexible rigs)
• HERO have sold another retired rig for scrap for 4.8M (the Hercules 155 a 150m rig).
• Rigs are costing about 8-10k per day while idle. Compared to 4-5k per day for cold stacked rigs. The primary cost for cold stacked rigs is insurance.
• There are two new permit requirements out of the Bureau of Ocean Energy Management relating to shallow GOM. Notice to leasees 05 (NTL 05) and NTL 06. Meeting NTL 05 has been relatively easy and is mostly the responsibility of the rig owners. It’s primarily around blowout preventers. Most of the HAWK rigs were already compliant. They are all compliant now, even the cold stacked ones would only need minor work if any. NTL 06 is much less clear and is the responsibility of the operator. There have been a few permits issued that met NTL 06 but they were for wells with few liquids. The BOEM is still trying to figure out what compliance with NTL 06 really means.
• Rates are much better than last year and day rates are not likely to come down from these levels. The issue is not supply and demand (economic) but permit driven. Neither HAWK nor HERO is likely to take a contract below current levels. There is not likely to be a double dip in rig rates. There is also a belief (though I'm not sure of the foundation) that natural gas prices will improve.
• Insurance rates for the next 12 months have been set and are (only) about 10% higher.
• There is no additional news on the Mexican tax issues
• Valuations for jackups have come down a little more since the first half of the year. This isn’t scrap value but orderly sales.
• To be cash flow neutral HAWK would need 9-10 rigs at 90% utilization.
• HAWK’s cash burn is about 10M per quarter but will be effected by, as yet unknown, repair costs on Seahawk 3000 which is about to go into dry dock for repairs.
• HAWK’s current revolver is drawn by 6.4M.
• There was no new news on the Mexican Tax dispute.

Changes the HAWK thesis positively

• PEMEX has requested a 54% increase in their 2011 budget. The PEMEX capital process is subject to the vagaries of the Mexican political system so there is a great chance that between the request and the allocation the amounts will change. This is similar to the story told for 2010 which did not amount to much. There are 26 Jackups in the Mexican GOM. 13 are scheduled to come off contract in 2011. 28 to 35 rigs in Mexican GOM has remained constant throughout the cycle. The headline number is an additional 21 rigs if the CAPEX is allocated as requested. HERO would not be surprised if there were 35-38 rigs operating (net addition on 8-10) there by this time next year. Though PEMEX may not request matt supported rigs, whatever they request is likely to leave US GOM, further reducing supply in US GOM.
• The combination of additional demand from PEMEX, scrapping of GOM rigs and rigs leaving the GOM is going to be very bullish, one day!
• HERO and HAWK will not sell their rigs to potential competitors in the GOM. It makes selling them for scrap or repurposing them as accommodation units, mobile production units etc. HAWK are exploring selling cold stacked rigs as mobile production units. That said if there is a cash squeeze anything is possible
• The pace of permits has improved in the last few weeks. If this momentum continues then the silver lining is the demand once the backlog of permits is cleared.

Changes the HAWK thesis negatively

• HAWK is looking to add one or more packages of 2-3 IC rigs from outside the GOM that will be immediately cash flow accretive. Ideally in West Africa, Middle East, Far East or India. HAWK is one of the only potential buyers for jackup rigs world wide at the moment. For example, any acquisitions for HERO would need to be 100% equity financed as they have no room to take on further debt.
• On their conference call HAWK was asked if they would sell rigs to buy back shares. After all why purchase someone else’s rigs when you can buy back your own greatly discounted rigs. The CEO said they want to diversify their sources of cash and that the float is already too small. I was very disappointed with this answer. Concerns about Randy Stilley (HAWK CEO) are magnified by this response. It is clear that he is not going to be a great capital allocator and is more interested in building HAWK into an empire than guaranteeing low risk returns to shareholders. The only way for them to add rigs is to take on additional debt which means they will look more like HERO where Randy originally came from (and oversaw a potentially equity killing expansion program). In his defence he has taken his compensation as stock for the rest of the year. This isn’t enough of a reason to get out of HAWK but it makes me more likely to get out in the low 20s. Also it is possible they will come up with a way to finance the additional rigs without taking the liability at the company level (i.e. a non-recourse loan) in which case, depending on how much equity they need to use, I’ll be proved wrong.

posted by Neil  # 2:47 AM