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The end of a value investing favorite

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February 14, 2011 – Comments (8) | RELATED TICKERS: HERO , HAWKQ.DL

 

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.

Deej

8 Comments – Post Your Own

#1) On February 14, 2011 at 10:14 AM, Momentum21 (95.24) wrote:

What do you make of the sudden move higher to $4.60? 

HAWK shares exchanged to HERO? I am holding a good bunch of shares trying to figure this out... 

 

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#2) On February 14, 2011 at 10:14 AM, Momentum21 (95.24) wrote:

What do you make of the sudden move higher to $4.60? 

HAWK shares exchanged to HERO? I am holding a good bunch of shares trying to figure this out... 

 

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#3) On February 14, 2011 at 11:09 AM, TMFDeej (99.43) wrote:

Great question.  I can't say that I've studied the bankruptcy and deal with HERO very closely.  I don't think that the HAWK is going to emerge from bankruptcy.  My interpretation of the news was that it was going under and selling its assets to HERO and that HAWK will cease to exist.

The question is, how much money is HAWK getting for its assets relative to its debt.  If the answer is that it's getting a lot more then there might be a chance that the company's equity would be an interesting buy.  It certainly appears as though someone out there believes that this is the case because HAWK's stock has ralled from down over 50% at open to down only 35% right now.

I don't feel comfortable recommending the stock one way or the other because I haven't looked at it all that closely.

Deej

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#4) On February 14, 2011 at 12:25 PM, TDRH (99.66) wrote:

The assets being transferred/sold to HERO are near the end of their useful lives.   Pride spun off the "junk" to invest in new assets.  There is a glut of shallow water/shelf rigs that are idle.     

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#5) On February 14, 2011 at 6:55 PM, QualityPicks (76.17) wrote:

I'm always surprised the market's ability to "know better" than me. I often find "cheap stocks ignored by the market". I read all the news, look at the numbers in Yahoo, or wherever, and it all seems to point to a "good and incredibly undervalued company". Then, a few months later, I find a key piece of information, or a news event like this, that finally, tells me why the company is so "undervalued". In this case, it was on the brink of bankruptcy.  And there is "all kinds of reasons". Sometimes their products are obsolete. Other times, they are heavily diluting shareholders. Some times, their fleet or assets are really old and the company cannot afford to replace them, etc etc. And the reasons often are hard to find or don't show in financial statements.

And that is why, 99 out of 100, if a stock looks "very cheap" in a good market, I stay away. The market knows something I don't. Of course, you may know the business, the industry, etc. and may actually find a bargain. But if one is just going from "news" and "finance information in Yahoo", you are very likely to screw up most of the time. The market (reflected in stock price) more often than not, "knows better".

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#6) On February 15, 2011 at 2:04 PM, Momentum21 (95.24) wrote:

QualityPicks (94.01) - so I take it you only invest in index funds then? Or only buy "expensive" stocks? : )

The point of this game is to work towards beating the benchmark right?  

People do avoid these stocks because the risk is higher but all stocks have those little pieces of information that reveal themselves at a later date.  

Many "deep value plays" will not pan out or continue to underperform. Obviously the key is to manage your risk within your portfolio and find more winners than losers over time.

The fact that most people find it shocking to have to come to grips with a 50% (or more) loss on one stock can work in your favor if you don't get too fearful or greedy.

It's perfectly cool to avoid the HAWK's of the world...but not all cheap stocks are dogs.   

 

 

 

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#7) On February 16, 2011 at 9:04 PM, ChrisGraley (29.67) wrote:

The Company believes that it has defenses to the claims set forth in the Notice and expects to contest such claims in the Bankruptcy Case. The ability of Pride to seek remedies to enforce its rights under the Tax Support Agreement is automatically stayed as a result of the filing of the Bankruptcy Case, and Pride's rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.

That may explain why people are holding on to the shares. The key is how much debt that write off. It might not be any. It might be all.

 

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#8) On February 16, 2011 at 9:34 PM, Momentum21 (95.24) wrote:

Chris - people seem to think they are getting a clear path to zero from here. Could happen but I see a twist or two coming...maybe someone knows what they are doing here. 

Imagine the action if this gets settled before going to court.. 

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