Well that was quick. The first frog to be kissed that turned out to be a frog and nothing more, possibly less. Seahawk is entering bankruptcy. Two weeks ago I commented how it was too hard to kill, and seemed like a good opportunity. Apparently it was all too easy. I do not understand the need for a bankruptcy process at this time or a $105m price (75% stock, 25% cash) for rigs that the CEO said " if we were to just start cutting them up, you could, over time, sell the drilling equipment of a rig to generate $6 to $8 million in income by doing that." Hercules is getting 20 rigs for $5.25m a piece. Even more shocking is that the CEO sold shares last week!
With a $35m DIP facility from DE Shaw and $124m in total liabilities compared to $105m from Hercules, it appears there will be nothing left for shareholders. Kudos to Hercules for getting a great deal and DE Shaw making a quick buck. The only possible upside exists in a better offer for the assets, but I won't be banking on that.
Looking back, it appears I took way too much away in a positive sense from the failed attempt at selling a rig. I thought the company really was turning the corner and had the assets to do so in a way that created shareholder value. It appears that the cash burn was just too great for the company to act in time. I failed to properly anticipate this problem and properly extrapolate out the financial situation of the company. I was too attached to the idea that they were debt free when I bought the company and that the revolver they had started to take money out on as of last filing was a signal that things were not dire because there were covenants on the revolver. Their last 10-Q was filed in November, and apparently things have only gotten worse. I should stop using the term too hard to kill unless it is with treasury bonds or things that are already dead. I have a bad taste in my mouth because the CEO got to sell his shares and it seems like this would be the kind of thing he would know about in advance. Mostly though, I'm disappointed in myself for losing money, possibly losing readers money, and for being dumb. As you can now see all too clearly, I make mistakes and you should question me and do your own research.
Tell Andrew how much of a moron he is
Edit - I think the fundamental error here was trying to predict how much money the company would lose. If trying to predict future earnings is a fool's game, predicting losses is about 10x harder. Frog's Kiss Fail.
Showing posts with label Seahawk Drilling (HAWK). Show all posts
Showing posts with label Seahawk Drilling (HAWK). Show all posts
Friday, February 11, 2011
Monday, January 31, 2011
Seahawk Drilling - a psychological nightmare, but too hard to kill
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
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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