In a new report, Deutsche Bank analyst Mike Urban has upgraded Hercules Offshore from Sell to Hold based on the completion of the company’s bankruptcy restructuring. Despite the upgrade, Deutsche Bank remains cautious on the stock.
A Stronger Company
Assuming a 20 million share count for Hercules, Deutsche Bank has set its new price target at $7. The bankruptcy unloaded all of the company’s prior debt, and the new company now has access to a $450 million senior secured credit facility and $130 million of cash on hand.
A Challenging Market
Even with a fresh start, Hercules still faces a difficult environment. Urban maintains his concern that the international jack-up market will “continue to deteriorate,” and that Hercules will simply go right back to burning through its cash.
Outlook
Deutsche Bank is now forecasting 2015/2016/2017 EPS of ($2.10)/($11.92)/($9.25) for the restructured Hercules. Potential upside for the stock could come if shallow water Gulf of Mexico demand recovery is quicker and/or stronger than predicted. However, potential downside of demand weakness remains due to "newbuild" supply growth.
“While the company should be viable for quite some time and the near-term existential threat has passed, the global shallow water market remains extremely challenging, hence the neutral view,” Urban explained.
Deutsche Bank expects the new Hercules to have a market cap of about $1.26 billion, near the peak market cap of the old stock during 2013. By the end of 2014, Hercules had lost nearly 90 percent of its value due to the collapse in the global oil market.
Disclosure: The author has no position in the stocks mentioned.
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