Offshore drilling contractor Hercules Offshore Inc. (HERO) is set to release its fourth-quarter 2014 results before the opening bell on Thursday, Feb 12.
In the preceding three-month period, Houston, TX-based firm met earnings estimates as its cost savings measures helped to offset the U.S. drilling slowdown.
Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
The current oil price plunge – with crude tumbling more than 50% since June – provide the latest threat to the offshore drilling fraternity that is already facing a bleak industry outlook. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, poor profit margins, weak operating cash flow and generally high debt management risk.
As the commodity enters a bearish territory and stays around the $50-a-barrel level, the top energy companies have cut spending (particularly on costly drilling projects) because of lower profit margins. This, in turn, means less work for the beleaguered drillers (like Hercules Offshore) that are facing an uphill battle to turn around.
Earnings Whispers
Our proven model does not conclusively show that Hercules Offshore is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: Earnings ESP which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -8.57%. The Most Accurate estimate for Hercules Offshore stands at a loss of 38 cents while the Zacks Consensus Estimate is pegged narrower at a loss of 35 cents.
Zacks Rank: Hercules Offshore carries a Zacks Rank #4 (Sell), which complicates the forecasting power of ESP.
As it is, we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
While an earnings beat looks uncertain for Hercules Offshore, here are some firms you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:
LRR Energy L.P. (LRE) has an Earnings ESP of +3.13% and a Zacks Rank #2 (Buy). The company is likely to release earnings on Mar 3.
Tesoro Corp. (TSO) has an Earnings ESP of +1.35% and a Zacks Rank #2. The company is slated to release earnings on Feb 11.
Seadrill Partners LLC (SDLP) has an Earnings ESP of +10.53% and a Zacks Rank #3 (Hold). The partnership is expected to release earnings on Feb 26.
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