The end of a value investing favorite
Back in June, Seahawk Drilling (HAWK) was a hot company on the value investing radar. Here's what I wrote about the company at the time:
If a cool company name and a cool logo were the secret to success, Seahawk 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 Pride 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.
Needless to say, this story didn't play out the way many famous value investors believed it would. I never established a real-life position in HAWK, but finally got sick of the company and pulled the plug on it in my CAPS portfolio last week at $7.40/share.
This morning it certainly looks as though that was a good move...
Seahawk Drilling seeks bankruptcy, to sell assets
Hawk is filing for bankruptcy and it agreed to sell its assets to Hercules Offshore (HERO) for $105 million in cash and stock. HAWK's stock is getting hammered, down more than 50% on the day to around $3.47/share. Ouch.