Monday, FBR Capital Markets initiated coverage of Hercules Offshore, Inc. (HERO) stock with a Market Perform rating and a price target of $5.
Analyst Robert MacKenzie believes the company is well positioned to benefit from a strengthening jackup market. Natural gas prices, however, are an overhang as the commodity price is insufficient to boost meaningfully U.S. Gulf of Mexico jackup rig utilization.
The analyst believes shares should trade at the top end of the company's historical EV/EBITDA range through the current trough due to the significant upside potential of a recovering jackup market. The analyst, thus, derived his 8.0x 2011 EV/EBITDA target multiple based on the high end of the historical forward EV/EBITDA trading range.
The analyst said that as the jackup market recovers, the multiple is likely to compress more than peers due to the heightened short-term cyclicality of the U.S. Gulf of Mexico jackup rig market.
Currently, HERO is up $0.17 or 3.50% and trading at $5.03.
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