HERO

Hercules Offshore, Inc. (HERO)

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Industry: Energy
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Hercules Offshore (HERO)

Q1 2013 Earnings Call

April 25, 2013 11:00 am ET

Executives

Son P. Vann - Vice President of Investor Relations & Planning

John T. Rynd - Chief Executive Officer, President and Executive Director

Stephen M. Butz - Chief Financial Officer and Executive Vice President

Analysts

Ian Macpherson - Simmons & Company International, Research Division

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

John Booth Lowe - Cowen Securities LLC, Research Division

Haithum Nokta - Clarkson Capital Markets, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Kathryn O'Connor - Deutsche Bank AG, Research Division

Gregg Brody - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 Hercules Offshore Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I turn the call over to Son Vann, Vice President of Investor Relations and Planning. Please proceed, sir.

Son P. Vann

Thank you, Clinton. Good morning, and welcome, everyone, to our First Quarter 2013 Earnings Conference Call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Executive Vice President and Chief Financial Officer; Jim Noe, Executive Vice President; and members of our senior management team, including Troy Carson, Senior Vice President and Chief Accounting Officer; Beau Thompson, General Counsel; and Craig Muirhead, Vice President and Treasurer.

This morning, we issued our first quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com. Following our usual format, John will begin the call with some broad remarks regarding our quarterly performance and current market conditions. Stephen will follow with more detailed financial discussions and provide cost guidance for 2013. We will then open the call up for Q&A.

Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2013 and beyond, as well as activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future, are forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings, which can be found on our website or the SEC's website, sec.gov.

Now it's my pleasure to turn the call over to John.

John T. Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported net income from continuing operations of $35.2 million or $0.22 per diluted share for the first quarter of 2013. This includes a $37.7 million or $0.24 per share gain related to the recharacterization of the Seahawk asset acquisition as a reorganization for tax purposes. I'll let Stephen provide more details on this gain. But excluding the impact of the tax benefit, our adjusted net loss from continuing operations are $2.6 million or $0.02 per diluted share. It compares favorably to a net loss of $38.3 million or $0.28 per share reported on the first quarter of 2012.

We were very active on the strategic front last quarter, making 2 attractive acquisitions. The first was the Ben Avon, a 250-foot independent leg cantilever rig, which we have renamed Hercules 267. Similar to prior rig repurchases, the acquisition came with a long-term commitment in hand, which substantially derisked the transaction and should deliver a solid return on investment.

With the Hercules 267, we have a 3-year commitment from CABGOC, which replaces the legacy contract in the Hercules 8 -- 185, where we're able to get a sizable dayrate increase and extend the term to a full 3-year period. The rig is in good condition, having recently completed its special survey, and the prior owner had invested approximately $35 million in the rig over the past 2 years. Based on a purchase price of $55 million and minimal additional capital to get the rig on contract, we estimate we will earn a return on capital in excess of 20%.

Our second acquisition was in the Liftboat business with the Titan 2, which we renamed the White Shark. This is another great acquisition for us and has several merits. The vessel is relatively new, constructed in 2008, and the purchase is consistent with our need to renew the fleet, both in liftboats and rigs. It is also one of the highest-capacity liftboats in West Africa with a robust long-term demand outlook.

Since acquiring the vessel in March for $42 million, we have already put it to work at $65,000 per day and are in discussions with several operators following on work at similar day rates. With operating cost running in the mid-teens, we expect solid returns on this investment over a long horizon. We estimate that the White Shark acquisition equates to less than 4x EBITDA, which is exceptional for such a new and high-specification asset.

Turning our attention to our core business, starting with the U.S. Gulf of Mexico. Market conditions remained strong with industry capacity of jackup rigs effectively at full utilization. Our most recent fleet status report shows an average contract backlog of 211 days per rig in the U.S., a level that we have maintained since last October. 85% of our 2013 available rig days are contracted, and we have 5 rigs that have contracts extending into 2014.

Read the rest of this transcript for free on seekingalpha.com