Todco is a mid-cap energy company that primarily consists of shallow water drilling rigs, jackup rigs, tugs, barges and related equipment and work crews. Most of their work centers on the Gulf of Mexico. Hercules (NasdaqGS: HERO - News), which is about half of Todco’s market cap, is acquiring Todco on July 11th 2007. It owns a fleet of lift boats and jackup rigs, as well as a range of offshore support services.
This is one merger that makes me think one plus one equals three. The reason for this is the combined assets of Todco/Hercules means that Hercules will have approximately 50% of the jackup rig market in the Gulf. These rigs are in high demand currently as rigs have left the Gulf for international waters. The combined company also should enjoy pricing power advantages, operational benefits and increased flexibility.
These companies are truly cheap with an average trailing P/E of less than 11 and a forward P/E of less than 8. In addition, they have significant operating margins that have approached 40% and a quarterly revenue growth that combined is approximately 50% year over year.
The combined potential of Todco/Hercules offers strong earnings and revenue growth at a very reasonable price. I expect HERO to provide significant performance in the future.
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