Seahawk Drilling is an interesting company that has received ample press around the blogosphere. Greenbackd has an excellent series of posts covering the background, possible downside from taxes , and done an in depth look at the valuation of the company's rigs, which becomes a de facto liquidation value. I don't have much to add on the background of the stock. I'd just like to look at the recent developments, because the stock has been moving even lower in recent weeks.
First of all, this stock is such a classic example of what Wall Street hates. Natural gas pricing is down, there's risk in government regulation, HAWK is a spinoff, a lack of profits makes earnings based valuations difficult, and most importantly shallow water drilling is not nearly as sexy as deepwater drilling. This company just can't seem to get a break.
Second, as much as a psychological gut reaction is to be repulsed by the stock, looking at the liquidation value and cash burn still gives investors time for the company to turn the corner. Due to a good portion of the rigs being cold stacked (in minimal cash burning state) and having shown a willingness to sell rigs, the company has flexibility going forward.
Other than time passing and more cash being burned, I believe that the canceled sale of a rig has been a drag on the stock. The company has taken money out on its credit facility. The company has some pending contracts for work, although a large amount number of rigs are not making money. The balance sheet has only gotten messier as the company has tried to manage its cash flow and taken on some debt.
While the cancellation of the rig sale is a negative, I'd like to look at the silver lining. Most importantly, the cancellation of the rig sale was a result of the purchaser failing to get the contract that the purchase of the rig was contingent on. While this does mean the company will have to continue to look for ways to generate cash, it clearly indicates the company is doing what it can to remain in operation.
In a previous post, I discussed the upside case for natural gas presented by Ken Peak of Contango Oil & Gas. Natural gas pricing does play a role in the upside of HAWK as well, but the downside is well protected by the value of the rigs. Since the company has so far shown that it is willing to sell off assets to remain afloat, the company is not responding in a flat footed fashion. While there is some worry that it might not be able to execute on attempts to sell rigs, that the company has gotten more work for some of its rigs indicates that a market exists for the services.
Long HAWK, do your own research before investing
Talk to Andrew about Seahawk Drilling
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