Why Hercules Offshore, Inc. Shares Could Slump 15%

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Hercules Offshore, slipped about 3% today after Goldman Sachs downgraded the shallow-water driller from neutral to sell.

So what: Along with the downgrade, analyst Waqar Syed lowered his price target to $3.60 (from $4.60), representing about 17% worth of downside to Friday's close. So while contrarian traders might be attracted to Hercules' big drop on Friday, Freedman's call could reflect a sense on Wall Street that its operating challenges are just too difficult to allow for a significant turnaround.

Now what: Goldman cut its 2014 and 2015 EBITDA outlook for Hercules by 25% and 13%, respectively. "After the close on June 19, HERO announced contract cancellation for 2 jack-ups putting at risk ~$300mn of revenues modeled for the next 3 years," noted Syed. "While the stock's 11.7% fall on June 20 somewhat reflects this news, it doesn't fully incorporate weakening near-to-medium term fundamentals. Moreover, revised consensus estimates are still too high, in our view. HERO's GOM based jack-up fleet faces utilization challenges owing to hurricane season, customer consolidation and likely influx of rigs from Mexico." Given Goldman's solid track-record of call-making -- currently ranked in the top 10% of our CAPS community with an accuracy of 75% -- Hercules bulls might want to take a closer look at those risks.