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What to Expect from Hercules Offshore's (HEROQ) Q2 Earnings?

Nilanjan Choudhury
Updated

Oil and gas drilling contractor Hercules Offshore Inc. HEROQ is expected to release its second-quarter 2016 results on Thursday, July 28.

In the preceding three-month period, the Houston, TX-based offshore specialist delivered a positive earnings surprise of 35.71% despite the challenges that a steep drop in oil price tagged along. This was primarily owing to strong cost control measures.

As far as the earnings surprise history is concerned, the company has a mixed record: its beaten estimates in 2 of the last four quarters with an average beat of 16.87%.

HERCULES OFFSHR Price and EPS Surprise

HERCULES OFFSHR Price and EPS Surprise | HERCULES OFFSHR Quote

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Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Unlike the previous few quarters, second-quarter 2016 turned out to be a rather good one with crude advancing more than 26% sequentially -- the best quarterly percentage gain in seven years. West Texas Intermediate (WTI) crude futures during the Apr–Jun 2016 period hovered mostly between $40 and $50 per barrel.

Therefore, producers are likely to revive spending on drilling activities that would spur rig count. This, in turn, will result in improved demand for oilfield equipments, thereby driving Hercules Offshore’s revenues, earnings and cash flow.

Moreover, to a large extent, Hercules Offshore’s successful cost reduction initiatives are expected to cushion the results.

However, despite oil’s massive recovery since February, it’s still under $50 – about half the level of two years ago – and far below the breakeven price for many energy companies. In particular, deepwater/ultra-deepwater drilling – with its associated risks and steep costs – require a far higher oil price than what is prevailing currently.  As a result, the struggling Hercules Offshore – that filed for bankruptcy last month for the second time – is expected to bear the brunt of narrow margins and a competitive price environment.

Earnings Whispers

Our proven model does not conclusively show that Hercules Offshore will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at a loss of $2.06.

Zacks Rank: Hercules Offshore has a Zacks Rank #2. Though a Zacks Rank #2 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Hercules Offshore, here are some energy players you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

SunCoke Energy Inc. SXC has an Earnings ESP of +400.00% and a Zacks Rank #1. The company is expected to release earnings results on July 28.

Pioneer Natural Resources Co. PXD has an Earnings ESP of +19.44% and a Zacks Rank #2. The company is anticipated to release earnings on July 27.

Anadarko Petroleum Corp. APC has an Earnings ESP of +1.30% and a Zacks Rank #2. The company is likely to release earnings on July 26.

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PIONEER NAT RES (PXD): Free Stock Analysis Report
 
ANADARKO PETROL (APC): Free Stock Analysis Report
 
SUNCOKE ENERGY (SXC): Free Stock Analysis Report
 
HERCULES OFFSHR (HEROQ): Free Stock Analysis Report
 
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