Sunday, July 11, 2010

Transaction Alert: Bought HAWK

This post is a couple days late, so my apologies. On 7/7/2010 I purchased 1000 shares of Seahawk Drilling, symbol HAWK, for $9.10 a share. As with most purchases, this new holding makes up about 10% of my portfolio.

By way of background, HAWK is a shallow water offshore drilling company in the Gulf of Mexico. They became a public company in August 2009 after being spunoff from Pride International. In addition to the typical market inefficiencies that can accompany a spinoff, the BP Gulf disaster has contributed to make the price of HAWK shares very very cheap IMO.

I've been following HAWK since it was spunoff almost a year ago, and as a result I stumbled upon an excellent blog, Greenbackd's analysis of HAWK is perhaps the single best write up I've ever seen on a blog - this is serious stuff here, in fact it's more insightful and intelligent than just about any Wall Street report I've read (and I've read quite a few). So, rather than try to do my own write-up (which would pale in comparison), I'm just going to link to Greenback'd's.

The above links are a long read, so here is a summary of the most pertinent information I used to make my decision:

  • HAWK is probably worth $154 MM in a forced liquidation scenario where it's rigs are sold as scrap. However, even in this type of scenario the rigs would probably be sold as operational, in which case the liquidation value is probably closer to $300 MM. (As of 7/9/2010, at a stock price of $10.71, HAWK had a market cap of $126.6 MM!!)
  • In the good old days (2006 to 2008), HAWK generated a pro forma net income in the $150 MM range on an annual basis. It probably won't ever get back to those results, but given it's PE ratio is less than 1x peak earnings shows how cheap the stock has become.
  • On July 29th, an 8K was filed that basically said the CEO and board members wouldn't receive a cash salary for the rest of 2010, but rather they would get an equivalent amount of restricted stock based on the June 25th closing price - so effectively they're "buying" a huge slug of stock. However, what's so interesting about this isn't the stock "purchase," but rather the timing - ALL of the stock is being awarded at the June 25th price (as opposed to a monthly price). If I were to read between the lines my guess would be management thinks the stock is CHEAP and it's NOT going to stay this cheap for long.

So, that's basically my investment thesis boiled down to a couple of bullet points. In a way, HAWK reminds me of my experience with USG. I purchased USG in March of 2009 when the outlook couldn't have been bleaker for the home builder supply industry. Things didn't get materially better, BUT the outlook went from bleak to slightly-less-bleak, and the stock went from a purchase price of <$5 to a selling price >$21 over my 13 month holding period. Will HAWK do the same? (Obviously I have no idea, but I've placed my bet!)