Hercules: A Strong Turnaround?

06/23/2014 8:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Our latest turnaround idea is one of the leading global providers of offshore drilling and related services; it operates one of the largest fleets of jack-up drilling rigs, suggests George Putnam, editor of The Turnaround Letter.

Hercules (HERO) was crushed back in 2008-09 when investors worried that the recession would push down oil prices and reduce drilling activity.

Then, just as the stock was beginning to recover, it was hit again when the Macondo disaster in 2010 led to the shut-down of drilling activity in the Gulf of Mexico, which had been Hercules' largest market.

While Hercules was able to avoid bankruptcy in the aftermath of the Macondo spill, some of its competitors were not, and Hercules was able to acquire assets cheaply and solidify its market leadership in the Gulf.

Things are finally beginning to look up for Hercules. Demand for drilling in the Gulf of Mexico is picking up again and day rates for drilling platforms are increasing. Moreover, leasing activity for oil and gas tracts is also on the upswing, which bodes well for future demand.

In addition, the company has diversified internationally, expanding both its drilling platform and liftboat presence around the world. It operates the largest fleet of liftboats in the world; these are self-propelled vessels with legs that can be turned into stationary platforms to support offshore drilling activities.

The company recently signed a five-year $420 million contract to drill in the North Sea. This raises Hercules' backlog to $1.4 billion, roughly seven times what it was four years ago.

The seasoned management team appears to be very capable and forward-looking. It has been steadily modernizing the company's fleet and selling off non-core businesses.

Hercules could easily earn $0.50 per share this year and more next year. Nine times current earnings looks very cheap to us, for the company that has such a dominant position in the Gulf of Mexico as well as growing international potential.

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