Stock to Sell: Energy stocks start to abandon Hercules Offshore

Hercules Offshore Inc. (symbol HERO on Nasdaq; www.herculesoffshore.com) provides shallow-water drilling and marine services to companies that produce and explore for oil and natural gas. The company’s operations span the majority of shallow-water, hydrocarbon producing areas around the world. Hercules uses a fleet of jack-up rigs and liftboats to service oil and gas exploration and development drilling, well service, platform inspection, maintenance and decommissioning operations. Oil and gas producers have sharply cut capital spending in response to lower oil and gas prices, hurting most offshore drillers.

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Energy stocks: World’s largest oil producer terminated its contract with Hercules in February

Drilling companies with modern gear, contractually protected backlogs and well-capitalized customers will cope more easily with the downturn. Hercules, however, will see a sharp decline in earnings as contracts expire on its mostly older-generation rigs. For example, Saudi Aramco, the world’s largest oil producer, terminated the contract on its Hercules rig in February 2015. The company ended 2014 with cash of $207.9 million. However, its long-term debt of $1.2 billion is a very high 9.5 times its $126.2-million market cap. If oil and gas prices remain low for an extended period, that debt load could push Hercules into bankruptcy. TSI Network recommendation: SELL.

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