There has been a lot of changes during the competition and we have been looking at the big winners only . Personally, I have bumped into some of the companies before just by doing the familiar stock screener for growth stocks . Today I will look into details at Hercules Offshore Inc. (ticker HERO).
The company is doing drilling and exploration for oil. The first thing that you have to think of when you see this particular industry should be the supply-demand graph that most of you are all familiar with from economics class. The demand for crude oil is increasing ,at the same time the supply is decreasing:
But enough of theory. The point is that the world supply of oil is substatially depleted , therefore the companies that make oil exploitation and have success in it , they will be the big winners. We may have to look at history to see what has happened :
What has happened back then in the period 2008-2009 is the aftermath of the recession that has affected the whole sector . I looked at the biggest companies in the sector as well .Back then offshore companies were particularly hard hit but the oil price quickly return to levels comparatively the same as before the crisis. However , some of the companies returned back to their pre crisis share price levels ,whereas HERO's price remained somewhat unchanged for the whole period 2009-2014. You can spot from the average volume that the company's shares are quite a lot traded relative to its competitors, which would imply high volatility.If you look at analysist's recommendation (it could be really biased) , it says that the target price is 7,15 . HERO has been valued as "hold positions" by both finviz.com and Reuters . Also it is a good idea to look at downgrades and upgrades of the rating agencies and the news that is given on finviz :
Universally , you have to look at whether the rating agencies are different since we want impartial mark that could be representative . The case with HERO is that it has been downgraded by three different rating agencies but at the same time there are articles (the green boxes) that are quite positive on HERO . The most recent article that is on seekingalpha says that back then in 2008 a lot of companies closed up because of the recession but HERO remained , although shallow water drilling is really a risky business . The thing about all oil companies is that the cost of exctraction is getting higher and higher making cost of revenue more than previous levels. It is important to note that extracting shallow water oil is easier than deep water reserves. The main driiling place for HERO is in Mexico but as the article states they have constatly been expanding since 2011 and they have new technologies for extracting oil and they can now look even deeper than before.It aslo has higher growth estimates than its competitors. Recently, US have been discussing exporting gas and oil to Ukraine and other European countries , which would imply that each US oil and gas company should increase its supply.
Link : http://seekingalpha.com/article/2110203-hercules-offshore-undervalued-titan-in-the-gulf
As far as the main indicators are concerned,well, it is does not give us its present P/E ratio but it gives a forecast of 6,36 and I looked the whole industry, it turned out that only companies that have a market cap of more than 2B are showing their present P/E ratio.Looking at P/S and P/B , this most probably mean that the company's share is undervalued . The liquidity ratios are problematic, in particular debt/eq. , but we will look at the balance sheets for more information. (Remember that Quick and Current ratio are important in the short run whereas Debt/Eq is more of a long-run factor) . EPS seems fine for this year but the projected EPS for the next year is smaller than this year's one , this could be a sign that investors are not very optimistic about the next year.My favourite indicator EPS Q/Q is missing as well , one of the most important number on the finviz list. Net profit margin is negative which could be bad if the competition was more than one month .It is really important to have in mind that the time frame of one month could be just enough to make the desired profit but the long-run , the price may plum.
We can now proceed at financial statements...
Looking at income statement .The first think that is literary poking you in the eyes is that for the last two years the company has doubled its profits from 196M to 398M
The gross profit increasing each quarter but operating income has decrease substatially for the quarter
Sep 30 2013 . Just to remind what operating income is : this is what is left from the gross profit after you exclude operating expenses, ammortization and depreciation . And if the gross income is positive this means that the some of these three exceeds the gross income. Always spot the huge changes , examples with HERO would be non recurring income and taxes .
Let's look at the balance sheets of HERO :
Note that the firm has a lot of assets that are long run . Calculating it you would get 25% of its assets are liquid (refer back to the balance sheet post about assets) .You see that for the whole period 2013 , the comapny has been constantly increasing its property plant and equipment ,which verifies what we have previously read that the company is growing(new plants , methods of extrating oil,etc.) . Many numbers are missing , which could be explained by the size of the company i.e. the numbers for them would be too small to be recorded.
Let's see the liabilities as well :
It is really important that after you read the articles and look the numbers at the balance sheets , you can make a complete "storyline" . Here the story would be that in the first quarter of 2013 the company needed money to accomplish its plans for the development and this was accumulated as a long term debt in the second quarter. The overall equity would be decreased but this does not necessarily mean that the company shrinks .
There are a lot more things to write about HERO but sometimes an analysis of a company is like an
open-ended book. To make a conclusion , I would say that this company is a hold position as we still need time to see what will happen with this new promissing equipment. I remember that when I first bump into this company I was looking for growth stock. The price was stable today , it would be really interesting to see how it is going to develop this story , although it may be a long term scenario.
Next time I will look at other companies on our competition list in the same sector as I promised!
Plamen Filipov
Chief Editor
Surrey Investing Society
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