HERO

Hercules Offshore, Inc. (HERO)

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Hercules Offshore, Inc. (HERO)

Deutsche Bank Leveraged Finance Conference

October 1, 2013 4:00 p.m. ET

Executives

Stephen Butz – CFO and EVP

Analysts

Kathryn O'Connor - Deutsche Bank

Presentation

Kathryn O'Connor - Deutsche Bank

Thanks again for joining us after the lunch speakers. We’re continuing on with our energy panel and here we have HERO, and this year we’ve done a lot of work with, especially in the last few weeks even. And from the company we have CFO Stephen Butz.

Stephen Butz

Thank you, Kathryn. And good afternoon everyone. Thanks for joining us today. I see couple familiar faces and also some new faces. So we’ll start out the presentation with just really a brief overview of the company for those of you that aren’t familiar with us. But we’ll spend the bulk of the presentation walking you through these fundamentals in each of our business segments and talking about our outlook and some of our strategic plans going forward.

So first, our company is a relatively young company by the industry standards. We were just formed in 2004 but we’ve grown rapidly. Scale is very important in our business and in that time we’ve amassed world’s third largest fleet of jackup rigs as well as the largest fleet of liftboats that work in international markets. You can see on the map that we have established operations really around the world, with the exception in the North Sea and of course, we’ve opened the office there last year and we look to expand there with our discovery rigs.

We have a very experienced management team that hails from a lot of the household names in the energy business. And our customer base includes some of the premier companies in the industry, including Saudi Aramco and Chevron which the two largest customers.

The last quarter was very active for us and we had a number of strategic events. Probably the most significant was the Discovery Offshore acquisition. Discovery Offshore was a company that we formed in January of 2011 which ordered two new ultra-high specification rigs from Keppel FELS. That was really our first step towards significant fleet renewal and we’ll walk through some of the key aspects of that transaction in a couple of slides.

Also, really simultaneous to that move, just coincidentally we were able to reach agreement to sell our Inland Barge segment and our Domestic Liftboats segment, both of which were not really core to the company, particularly the Inland segment. But the Domestic Liftboats segment was one that was also plagued by overcapacity and we really didn’t see that changing for the foreseeable future. And so the returns there were low. Neither those businesses were generating cash. So we were able to use some of those proceeds from the sale to help fund the Discovery acquisition.

Then two weeks ago, we announced that we had secured two new five-year contracts with Saudi Aramco, with two of our jackups that were already in the region, working for Aramco through the end of ’14. So now those are contracted through the end of the decade. So we’re very excited about those new contracts and we’ll touch on those in more detail shortly. And also two weeks ago, we issued $300 million of new senior unsecured notes to refinance the issues that we put in place in 2009 and so that will reduce our interest cost by about 9 million per year. It also extends our maturity profile and has a number of other benefits.

Okay. Now just again with a little more on the Discovery acquisition. I think the rationale for this acquisition is pretty straightforward. Again, we, like most of our competitors, need to get some newer assets into the fleet. These rigs can be maintained and continue to work for the foreseeable future, but at the same time over time some of the newer rigs will be more competitive, particularly when you get in the down cycle when the rates tend to compress. And so we’d like to have a little more balance in our portfolio between some of the newer rigs and some of the older rigs. And the older rigs, typically the capital cost is much lower. And so your returns can be much higher during the up-cycle, but over the cycle we think it's important to have some of our earnings coming from some of the newer assets, which will provide more stable earnings profile for the company.

Over time as well, you would expect over the longer run the maintenance capital spending to increase on the older assets. Right now it's certainly not at the level that’s very, very onerous but over time that will increase. And again as I mentioned, this is a company that we formed back in 2011 but we only owned 8% of it initially. And as our financial profile improved, we increased our stake to just under a third and then in the summer, we made the move to bring the entire company in-house, so to speak, and it really -- there is a number of benefits to that. It certainly reduces the administrative burden versus managing two public companies in different jurisdictions created in different markets as well as just the fact that the companies with newer assets tend to have lower cost of capital, that's a big benefit as well.

So while this doesn’t seem maybe that significant when you think about two rigs versus the size of our existing fleet, the earnings power that these two rigs can generate is very meaningful. You couple that with the new liftboat that we acquired in the spring and those three new assets could generate somewhere in the range of 20% of our EBITDA even during upcycle. Then during a downcycle you might expect that to be even more significant.

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