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A spin-off that's trading for less than its liquidation value



June 04, 2010 – Comments (6) | RELATED TICKERS: HAWKQ.DL


If a cool company name and a cool logo were the secret to success, Swahawk Drilling (HAWK) would be Google. Unfortunately they're not and it definitely is not.  I have always a big fan of spin-offs, so when Price spun off its shallow water jackup assets into a new company last year it caught my eye.  I never pulled the trigger on it in CAPS or in real life, thank goodness, well...mainly because the company was involved in well drilling in shallow water using jackup rigs.  The pricing for said activity was terrible.  It still is, but it appears to be getting better. 

The sector that this company operates in certainly is not the reason that I'm interested in it.  I like it because it has been completely left for dead by Mr. Market.  At yesterday's closing price, HAWK was trading at 32% of its stated book value.  Thirty-two percent.  Even assuming that its book value is somewhat overstated, and I am assuming that it is, that's one cheap stock.  Heck one could probably cut up its rigs and sell them off as scrap metal an come close to getting that much money out of them.

Let's take a look at HAWK's assets.  It currently owns 20 jackup rigs of varying quality. Many of these rigs are not being used.  Not surprisingly, as a result of this Seahawk has not been very profitable lately.  Having said that, the company's 50% utilization rate is actually an improvement over the eight rigs that HAWK was using not that long ago.  The bid activity for shallow water rigs was actually up 20% in Q1 versus Q4.  Seahawk has been getting stronger bids than its competitors are getting for similar rigs.  Another potential positive for jackup pricing that natural gas prices have improved a little lately.  Furthermore, if the moratorium on deepwater drilling in the Gulf of Mexico is extended for a long time the demand for shallow water rigs might increase.

The well-publicized problems with drilling in the Gulf of Mexico seem to have created an opportunity to purchase a company in an improving market at significantly below the liquidation value of its assets.  I am adding HAWK to my CAPS portfolio today at around $11.75.


6 Comments – Post Your Own

#1) On June 04, 2010 at 7:39 AM, Dobbes (< 20) wrote:

Cool find.  I'll add it to my CAPS too.

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#2) On June 04, 2010 at 9:52 AM, portefeuille (98.85) wrote:


Guest post: Ben Bortner on Seahawk Drilling (NASDAQ:HAWK)



Seahawk Drilling (NASDAQ: HAWK) is a compelling investment opportunity with very little risk of a permanent loss of capital. The company was recently spun-off from Pride International (NYSE: PDE) is a leading jack-up driller in the Gulf of Mexico (GOM). Seahawk is a cash generating machine with strong liquidity and no long-term debt. During 2009, the company will likely yield 13-19% of its market capitalization in cash flow and 6-11% in free cash flow (FCF). However, on a more normalized basis, Seahawk is likely to yield more than 65% of its current market capitalization in cash flow and 50% in FCF.

The company’s current market cap is approximately $270m ($23.3 x 11.6m shares outstanding). Based on first quarter results, and a schedule of current rig utilization and contracted dayrates provided by Investor Relations, we expect the company to earn $35-50m in cash from operations during 2009. However, based on results from the past three years, a return to more normalized natural gas prices could easily boost the company’s cash flow to more than $175m a year. A recovery in Seahawk’s cash flow would likely happen 1-2 years after a recovery in natural gas prices.

As a result of the spin-off, the share price of HAWK has experienced significant selling pressure from Pride shareholders who are not interested in Seahawk for whatever reason (difference in core business activities, cyclical recession within the industry, bylaws prohibiting ownership of small cap companies, index funds forced to sell non-index stocks, and etc.). The natural gas exploration and drilling industry is also suffering from a severe recession and has become extremely out-of-favor with investors. The combination of these factors has created a terrific opportunity for the value investor.



While we do wish we had better historical information, the lack of perfect information creates opportunity as other investors willing to do less work are likely to shy away from the company. If we can purchase the company at extremely attractive valuations relative to conservative financial estimates, we will have a large margin of safety and can be confident in our investment.

If the company were to be liquidated today, we believe it could be liquidated for roughly $280-290m. This represents a collection of the entire cash balance (~$65m), 85% of accounts receivable and other current assets (~$94m), 60% of book value for PP&E, less 100% of the current liabilities (~$90m), $10m in liquidation expenses, unrecorded contractual obligations of $21.4m, 60% of the deferred tax liability (you would only pay tax on the difference you were actually able to realize, ~$52m), and $4 in other long-term liabilities. Given that the company is trading below what we believe to be a conservative estimate of liquidation value and not burning any cash, we believe there is very little risk of a permanent loss of capital at current prices.

With a market cap of $270m, Seahawk is trading at less than 0.5x our estimates of its true book value and 2.6x 2008 earnings. Seahawk’s enterprise value is only 1.2x our estimates of normalized cash flows and 4.1-5.8x our estimated 2009 cash flow. These ratios seem to indicate that Seahawk is trading based on depressed 2009 cash flow levels. We believe this is indicative of Wall Street’s short-sightedness. While we view it as highly unlikely that $35m-$50m in cash from operations is the new norm, current prices still represent a reasonable investment with a 13%-19% cash flow yield and a 6-11% FCF yield (not to mention half of BV). However, a return to our estimates of normal cash flows represents a roughly 65% annual cash flow yield and a 46-50% FCF yield.

Another possible scenario is that both 2009 and 2008 cash flow levels are two opposite extremes and that Seahawk’s cash flows may never recover to 2008 levels. In this scenario, a recovery to the midpoint would still represent hefty cash flow and FCF yields of 38-40% and 20-25%, respectively. With high cash flow yields and a strong balance sheet with $65m in net cash, Seahawk is extremely attractive on an absolute basis.

While no two companies are the same, it is often useful to compare a company’s valuation to that of its closest competitors. Since a number of the firms in the offshore jack-up market have a significant amount of debt, and Seahawk does not, we compared the companies on the basis of enterprise values. Hercules is Seahawk’s closest competitor, and, at first glance, the second most attractive investment on a relative basis. However, Hercules and Seahawk have extremely different capital structures. Hercules has a long-term debt to equity ratio of 1.0x while Seahawk has no long-term debt; this ratio would be the equivalent of $500-$550m in long-term debt for Seahawk. Even more concerning is the fact that 92% of Hercules long-term debt is due within less than four years (July 2013) and the company is currently burning a significant amount of cash. Also, using the same estimated recovery ratios, our estimate of Hercules’ liquidation value is less than half of its current market value. Given this analysis, Seahawk is by far the cheapest company in the industry with the largest margin of safety.





Seahawk Drilling (NASDAQ:HAWK) redux


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.


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#3) On June 04, 2010 at 4:13 PM, TMFDeej (97.73) wrote:

I just noticed a typo, Seahawk was a spin-off from Pride (PDE), not Price.


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#4) On June 04, 2010 at 6:38 PM, awallejr (39.43) wrote:

EPS is not very good for this stock.  2010 est is -5.86 and 2011 is -3.90 according to this site.  Also you are talking older rigs and we don't know what new regs are going to come into play.


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#5) On June 04, 2010 at 7:38 PM, Teacherman1 (< 20) wrote:

Have it, and have had it on my limit order list, but it has not quite reached the price I want it at.

If I were just picking stocks for CAPS, and not actually buying them, I would pick it at around this price. 

Since all of my picks are real life money picks, I am going to be patient a little longer.

Good company and good post.


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#6) On June 13, 2010 at 11:30 PM, dollarfor40cents (< 20) wrote:

Here is what gives me pause. In latest 10q they have issues with the Mexican government over tax disputes. To the tune of $241 million. ($141 existing disputes and $100 potential future assessments)

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