Hercules Offshore (Nasdaq: HERO) shares are lower on the session amid positive comments out of Barron's recently, saying the jack-up rig provider is set to make some sizable medium-term gains.
One analyst from Hodges said that now was the time to be getting back into the shallow water jack-up market, as companies return to drilling in the Gulf and day-rates are heading higher.
Expectations haven't fallen by the wayside either; over the past year, Hercules has seen a 50 percent gain in its stock price. Amid the rise, however, shares are going for just 10 times forward earnings, versus 12.8 times for Noble Energy (NYSE: NBL) and 8 times for Parker Drilling (NYSE: PKD).
Barron's notes that many six-month contracts valued at about $80,000 or less per day are expiring and being replaced with $100,000 per day contracts. Another analyst from Stephens says the demand is high in the Gulf and given the tight supply, utilization is essentially at 100 percent right now.
Risks include competition and the fluctuating price of crude, not to mention macro trends and growth. Shorter contracts also make Hercules more cyclical than others.
But, Hercules has a strong management team, has leading technology to find new deposits, and controls just about half the Gulf market.
Hercules also has the ability to manage older assets well, noted one T. Rowe Price analyst. That means the company is able to take rigs other companies don't want and make a profit off of them.
Another Barron's headline..... Credit Suisse We expect high-specification jack-ups to outpace ultra-deepwater returns. Additionally, the shorter term nature of jack-up contracts provides additional repricing opportunities into the current upcycle. We expect offshore-drilling day rates to push higher for floaters and jack-ups through 2013. ...
I like the sound of that headline! Just confirms what we already know. HERO is the last man standing after a brutal shakeup in the GOM. Massive upside potential going forward. The price swings are tough to take, but I believe that shorts will be crushed next week and we could easily see $10 in the near future. I also think that a takeover is a very real possibility for a quick double or triple in pps. Late.