Update: Links to Ben’s post have been fixed.
In September last year Ben Bortner provided a guest post on Seahawk Drilling (NASDAQ: HAWK). I said at the time that HAWK was not a typical Greenbackd stock, but it warranted consideration at a discount to Ben’s estimate of liquidation value. HAWK has been cut in half since Ben’s post for reasons unforeseeable at the time (see Ben’s excellent September post for the background) and it seems to be living in interesting times, which makes it a typical Greenbackd stock, to wit:
HAWK was cheapish before BP filled the Gulf of Mexico with oil and golf balls (to paraphrase Wyatt Cenac on The Daily Show, BP’s challenge now is to remove the impurities from the Gulf, namely the dead shrimp and the seawater). Prior to the spill, low natural gas prices and the credit crunch led to reduced fleet utilization and day rates that had hurt drillers in the Gulf of Mexico generally. Several problems specific to HAWK – a largish Mexican tax dispute and older jackup rigs in an environment where a slew of new rigs are in production – made it cheaper still. BP’s oil spill and the accompanying regulatory uncertainty have caused a perfect storm for HAWK, which may lead to a liquidity crisis. In short, that’s why I like it. The mere absence of bad luck should see this stock trade higher.
It looks very interesting at a big discount to liquidation value. At its $12 close yesterday HAWK has a market capitalization of $142M, which is 30% of its $443M or $36.6 per share in tangible book value as at March 31. It’s got $6.5M in debt and $73M in cash and short term investments. Cash burn is around $10M per quarter if demand for the rigs doesn’t pick up. The moratorium on drilling applies to deep-water drillers, and HAWK’s rigs are shallow water rigs, so permitting is not the reason for the cash burn – it’s insurance and overcapacity. That said, it seems that demand for HAWK’s rigs is improving.
On the other hand, here’s the bear case from August last year on HAWK’s prospects in less interesting times.
[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.]
[…] (NASDAQ:HAWK) and the Hacienda – Greenbackd has written several nice write-ups for HAWK (See here and here), an undervalued driller that is trading for less than the price of its assets. The stock […]
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[…] 30, 2010 by greenbackd Seahawk Drilling, Inc. (NASDAQ: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 […]
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The only problem with book value in this case, and in any other commodity business, is that the book value is highly volatile. HAWK operates in the most commodity portion of rigs – shallow water. In the current environment a larger operator can withstand the down turn a lot more effectively than can HAWK. The cash balance on HAWK is a great buffer and will buy them time for sure. But say their tangible book is really half of what it is on the BS, which is not totally crazy. Then you have a scenario where the upside and downside are essentially equal and even if you assign a 60% probablility to the upside the risk/return tradeoff isn’t there. I am not saying this idea won’t work, it very well could…but the asset value is anything but rock solid.
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FYI, the links to Ben’s post appear to be broken.
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A lot of companies involved in the oil and gas business have been hit pretty hard after the oil spill. A company that I am pretty bullish about is Cal Dive International.
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