Harvard Financial Analysts Club

forestsaintregisOil and Offshore

Nov 8, 2013 (3 years and 5 months ago)

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Harvard Financial Analysts Club

December 13, 2007

A Firm Summary


Services


Shallow
-
water and land contract drilling


Liftboat services


Gulf of Mexico, Qatar, India, West Africa



Clients


Major integrated energy companies


Independent oil and natural gas operators



Fleet


Jackup rigs (33): drilling in <250 ft depth


Barge rigs (27): drilling in <20 ft depth


Liftboats (65): oil rig maintenance platforms


Hercules Offshore Inc. (HERO)

Current Price

$24.08

Market Cap

$2.1 B

P/E Ratio

7.06

Price to Book

1.08

PEG

0.24

Debt/Equity

0.48

Operating
Margin


36.31%

Return on
Assets

6.71%

Annual Sales
Growth

202.80%

Annual EPS
Growth

242.43%

The Porter’s Five


Within Oil and Gas Exploration and Production


International Integrated Oil and Gas Companies


“Supermajors”


“Majors”


Independent Oil and Gas Production Companies


Not much brand identity


Companies are not producing at maximum
capacity, but falling OPEC spare capacity is
supporting rising oil prices


Some product differences


“Supermajors” and “Majors”


Advantages of scale


Agency cost advantages


Not much buyer power


People really need oil and gas


No buyers who have the power to affect the market price of
oil and gas


Some price sensitivity


Oil and gas are necessities


But it remains to be seen if oil prices remain high or whether
people will alter their consumption to a significant degree.


No legitimate substitutes for gasoline to power cars


Only hybrids can challenge gasoline, and even these use a
fair amount of gasoline to power cars.



No real supplier power


Once the exploration rights to a particular area
have been purchased, the next biggest cost is the
steel pipes that are used to get the oil and gas out
of the ground.



No presence of substitute inputs


There are few inputs to drilling and exploration






Some barriers to entry


Oil reserves in countries like Saudi Arabia where the
oil and gas companies have been nationalized and
independent companies cannot come in and
compete


Many other countries have nationalized production
even if its not always 100%


Very capital
-
intensive


Requires huge amounts of money and equipment



Renewable energy sources


However, most renewable energy sources are not cost
competitive with coal (the baseline fossil fuel), according
to estimates by the EIA



Main exception is the already competitive
hydroelectricity


Much of the growth in renewable generation is expected
to come from the completion of large hydroelectric
facilities in emerging economies, such as Asia.


Hydroelectric capacity is not expected to grow
substantially outside of emerging economies


The SWOT Matrix


Market Position


World’s largest liftboat fleet


Largest jackup rig fleet in Gulf of Mexico


4th largest jackup rig fleet worldwide



Flexibility


Operates in over 10 countries, 5 continents


Wide range of services


Diverse fleet composition



And more


Board has significant industry experience


Recently completed merger with TODCO



Company History


Established in November 2005


Short track record



Client Dependence


Client firms are major but relatively few



Finite Potential


Current focus on shallow
-
water drilling and liftboat
services may be limiting


Competition


International markets more difficult to penetrate


Several more established firms


Schlumberger


Transocean


Halliburton



Vulnerability


Exposed to changes in price of oil


Hurricanes negatively impact revenue


Season variability hurts ability to plan



Recent TODCO Merger


Increasing efficiencies brought by integration


New equipment


Introduced barge rig division


Tripled total number of jackup rigs


Now enables exploration of new markets


Land drilling


Barge rig drilling


Significant Potential for Growth


Rapidly increasing sales and earnings over past year


Rising demand for oil and natural gas is inevitable


Growing need for exploration drilling


Greater profits from higher rental rates


New international contracts


12/5
-

India’s Oil and Natural Gas Corp

Parker Drilling and Transocean

Three main services:


Land contract drilling in five continents


Offshore contract drilling in Gulf of Mexico


Rental tools for land and offshore drilling


Quick

Overview

Current

Price

$7.38

Market Cap

$825

M

P/E Ratio

7.50

Price

to Book

1.64

Annual Sales

Growth

5.16%

Return on Assets

10.77%


Strengths


Offers diverse variety of services


Operates in over 50 countries



Weaknesses


Relatively small company


High debt/equity ratio for the industry



Competition with HERO


Compete directly only in Gulf of Mexico


HERO’s fleet is larger and more versatile


Some highlights:


Provides offshore contract drilling


Operates 89 drilling units across the globe


Second largest company in industry


Quick

Overview

Current

Price

$135

Market Cap

$42.7 B

P/E Ratio

10.47

Price

to Book

3.21

Annual Sales

Growth

58.23%

Return on Assets

22.58%


Strengths


Recently merged with GlobalSantaFe Corp.


Operates diverse and flexible fleet



Weaknesses


Has only 11 units in Gulf of Mexico


Does not offer liftboats



Competition with HERO


Same clients: major oil and gas companies


HERO is better suited for oil exploration with jackup rigs


HERO also wins on Gulf drilling capacity


Get Ready for Some Numbers

HERO

PKD

RIG

Industry

Price

$24.08

$7.38

$135.07

---

Market Cap

$2.1 B

$825 M

$42.7 B

---

P/E Ratio

7.06

7.60

10.54

18.68

PEG Ratio

0.24

0.86

0.78

0.75

P/B Ratio

1.08

1.66

3.23

5.43

Sales Growth

202.80%

17.31%

50.00%

39.40%

Return on
Assets

6.71%

10.77%

22.58%

12.40%


HERO Balance Sheet:
http://finance.google.com/finance?fstype=bi&q=NASDAQ:HERO




Income Statement:
http://finance.yahoo.com/q/is?s=HERO&annual

A Few More Numbers


A total of two years of data



Assumptions based on Transocean’s metrics


Total operating cost


Capital expenditures



WACC


Estimate of 10%

Five Reasons


Strong Market Position


Dominant operator in Gulf of Mexico




Solid Balance Sheet




Natural Gas


Prices depressed now, but will rise rapidly in near future




Currently Undervalued


Near all
-
time low


Price to Book: 1.08


Price is unsustainably low


Increasing oil and natural gas prices


Expanding market share and client base


Explosive growth in sales and profits



Recent Insider Buying


100,000 shares at $23.50 on 12/3


12/4


Shoot away.