The Company provides shallow water drilling and liftboat services to the oil and natural gas exploration and production industry in the U.S. Gulf of Mexico and internationally.
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I initiated this pick at $1.78. I went long on this in real life at $3.80. HERO is now trading around $4.15.
HERO's net tangible assets are worth $10.33 per share as of March 31, 2009. Debt-to-value is moderately high at 64.1%, but that's not actually that high compared to other companies operating in this industry. HERO has relatively strong liquidity. Current ratio is 1.71 and quick ratio is 1.51. Add to that strong operating cash flows.
While HERO is currently losing money on their income statement, the cash flow picture is much better. For Q1 for FY '09, they had a loss per share of 5 cents, but they brought in 87 cents per share in operating cash flows and 51 cents per share in free cash flows. A substantial portion of that can be attributed to depreciation and amortization charges, which are recurring non-cash items.
The most surprising thing about this first quarter performance is that it covered a period where oil prices were more suppressed than they have been in awhile. The logical conclusion is that demand for their services will increase as oil prices continue their inevitable march up towards $70+/gallon. At that point, offshore oil becomes more attractive and investors become more interested in companies like HERO.
HERO has actually had positive operating cash flows for the past three fiscal years. However, their free cash flows have been negative as they, like most other companies in the oil service industry, took on debt to rapidly expand their operations. They have suffered with all the others, but under $5, I think the stock is a good, but risky, buy.
After running a DCF analysis, my most probable valuation for HERO was around $23. Downside probable valuation is $15. Upside probable valuation is $32. Downside risk is $0 due to their moderately heavy debt load. Upside potential might be around $45.