Hercules Offshore, Inc. (HERO)

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Hercules Offshore, Inc. (HERO)

Barclays CEO Energy Conference

September 12, 2013 9:05 p.m. ET


John Rynd – President and CEO

James West – Barclays Capital Analyst


Unidentified Analysts


James West

We're going to be right along. Up next this morning is Hercules Offshore. Speaking for the company this morning is John Rynd, Hercules President and CEO.

John was named CEO of Hercules in 2008, just in time for an industry downturn and he and his management team successfully navigated. He was then faced with the Gulf of Mexico moratorium and [promatorium] which his team also successfully navigated. And now John has been doing a solid run in the Gulf of Mexico jack-up market with day rates improving, (contract) durations increasing as well. And during the moratorium, it should be noted they did acquire really its main competitor domestically. And more recently the company has started to push up the technology curve with their investment in Discovery Offshore. Prior to joining Hercules, John spent 13 years with Noble and a variety of other drillers before that.

Please welcome back to the CEO Energy Conference, John Rynd.

John Rynd

Thank you, James, and thanks for having us again, and thanks for those kind words. It's been a nice trip. And I think that what I'll show today is we've had a pretty busy and a pretty transformative year for Hercules Offshore, and I'll walk through some of the steps we've taken to get where we are today and talk about them, the specific markets where we participate in.

Starting out, those that know us, we have 40 jack-ups, 24 lift boats. All of our lift boats now are in the international market. And you can see where we have operated and are operating currently. And those of you that know our management team, we come with a lot of experience with all the major drillers and all of the major jack-up markets. So there is not a market we cannot work in. We have been qualified even to work in Norway for Statoil, went through that process. So the world is open to us as we can continue to grow our business.

Recent events, James talked about Discovery Offshore. We bought 100% of it in the end of June. We started out our investment at 8% in the first quarter 2011. Through open market transaction, had got our ownership up to 32%. And then this summer, went ahead and elected to take over the remaining percentage. So now we own 100%. And we did that on an all-debt deal (inaudible) know, Hercules (inaudible) get that done.

And coinciding with that, we sold our domestic lift boats. It was a business that we could not grow. The margins were very flat. We did not see any room for growth. And if you can't grow it, you got to get out of it. We had harvested seven of the highest spec boats out of the Gulf of Mexico, moved four to our major market in Nigeria. And then we have moved, subsequently moved, three of the big boats into the Middle East, and those boats are doing extremely well.

Again by going ahead and selling another non-core, non-performing division, the Inland Barge business, that's again another -- we generated proceeds of these sales of a little about $110 million which again we did not have to issue equity on the back of these two sales as we required the Discovery shares.

Again on the barge business, if you go back to the summer of 2008, we were running 17 barges, average day rate were $40,000 a day. We could barely run three of the barges and rates were high 20s, low 30s. We were basically cash flow breakeven. We were just looking for an exit, and fortunately we were able to do that.

Again we sold these two businesses combined at about 10 times our cash flow. So I think it was a very opportunistic time for us to get out of those divisions.

Why did we do the Discovery acquisition? I think there's numerous reasons. The obvious, as everybody in the industry is going through a fleet renewal, we had to participate. When we came up with this idea kind of in the back half of 2010, the shipyards at that time, the order due to the recession, had backed up and they were getting hungry. So we were able to finance the Discovery rigs at 20% down, 80% due. So we did it really off our balance sheet, very low risk, we were the manager.

Discovery had no employees, had an independent board, it was just the right thing for us to do at that time, with the goal ultimately to acquire all of it. And again this summer that came to a head. The first rig is under tow, I'll go into that a little bit to its first job. The second rig will be delivered, fully outfitted sometime November, December, really much on schedule and on budget.

Again what's the benefit to us? Obviously higher capacity, newer fleet, high day rates to our margins, lower capital - lower CapEx annually, overall drives down and lowers our cost to capital. Again it's all good. And we're very excited about the future of these assets.

There's rigs starting its tow. Its first contract is with Cairn Energy off the east coast of India. It's a high-pressure, high-temperature well right up the alley of this rig, fits what it was built for and what we are focusing on. It's 110 days. The effective day rate -- the day rate is about 215. We received a [MOB/DMOB] combination of about $14 million. That puts the effective rate over that 110 days for our operators willing to pay $330,000 a day to get that well drilled.

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