Macando Takes Out Another Seabird

Given the scope and scale of the Macando explosion and oil spill disaster in the Gulf of Mexico, it is not at all surprising that it pushed a company out of business. Many people will be angry to learn, though, that it was not one of the prime culprits like BP (NYSE:BP) or Halliburton (NYSE:HAL) that was taken down by the disaster. Instead, a relative small offshore driller is the first to go.

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Seahawk Clipped
Seahawk Drilling (Nasdaq:HAWK) had the second-largest jackup fleet in the Gulf of Mexico, but not the staying power to surmount several fundamental problems with its business model. Spun out of Pride International (NYSE:PDE) in August of 2009, Seahawk had issues from the start.


Of the company's rigs, none were built later than 1982 and some were built in the 1970's. While 10 rigs were upgraded in 2002, the fact remains that this was an old and out-of-date fleet. Perhaps even more problematic, Seahawk was entirely dependent upon the Gulf of Mexico (a region seen as in decline) and hugely dependent on Pemex, Mexico's state oil company, as a customer. More than 70% of the company's revenue in 2009 came from Pemex and this is even more problematic considering that Pemex is not particularly well-run and that Seahawk had an ongoing tax dispute with the Mexican government. (For more, see A Primer On Offshore Drilling.)

When the U.S. government elected to ban drilling in the Gulf after the Macando mess, that was basically the final nail in the Seahawk coffin. The company is now intending to file Chapter 11 bankruptcy and effectively wind down operations.

A HERO to the Rescue ... Sort of
Seahawk is not disappearing without a last act, though. The company announced late Friday that it would sell its jackup rigs to Hercules Offshore (Nasdaq:HERO) in a transaction worth about $105 million. The deal is initially set to involve $25 million of cash from Hercules and over 22 million of its shares, but that ratio could change depending on Seahawk's debtor-in-possession funding, working capital, and so on. Either way, though, the purchase price is going to stay around $100 million. In effect, then, the company's management is getting some cash for its otherwise bankrupt business, though it is unclear at this point how much (if any) of this will make its way to shareholders.


This is an interesting deal for Hercules to contemplate. Hercules will probably keep the seven active Seahawk rigs on the job, but will likely look to sell the rigs that Seahawk has idle or cold-stacked. Jackup rig values are low right now, but Hercules can afford to wait and may ultimately be able to reap an average price of around $10 million per rig if it sells the whole lot. That, then, is the virtue of liquidity - Hercules can afford to sit and wait to sell these rigs whereas Seahawk cannot. Still, creditors like the Mexican government and Pride (which alleges that Seahawk owes it money) may try to block this deal in court and/or may object to the price of the deal.


The Bottom Line
These are tough times in the Gulf and Seahawk is not the only company to suffer. Others like Cal-Dive (NYSE:DVR) and Helix Energy (NYSE:HLX) have seen the going get tough since the Feds stepped in to the picture. It seems probable that the Feds will eventually reverse themselves and permit new activity in the Gulf again, but the "when" is still very much up in the air. In the meantime, investors may want to devote more of their attention to larger and more diversified operators like Transocean (NYSE:RIG) or Atwood (NYSE:ATW) or equipment providers like Cameron (NYSE:CAM) and National Oilwell (NYSE:NOV). (For more, see Offshore Drilling Will Change And That Is Good For Cameron)

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