HERO

Hercules Offshore, Inc. (HERO)

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Hercules Offshore (HERO)

Q3 2013 Earnings Call

October 24, 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

David Wilson - Howard Weil Incorporated, Research Division

Jeffrey Spittel

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Collin Gerry - Raymond James & Associates, Inc., Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Todd P. Scholl - Wunderlich Securities Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Hercules Offshore, Inc. Earnings Conference Call. My name is Regina, and I'll be your conference operator for today. [Operator Instructions] As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Son Vann. Son is the Vice President of Investor Relations. Please go ahead.

Son P. Vann

Thank you, Regina. Good morning, and welcome, everyone, to our third quarter 2013 earnings call. With me today are John Rynd, CEO and President; Stephen Butz, Executive Vice President and CFO; along with members of our senior management team, including Jim Noe, Executive Vice President; 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 third quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com.

John will begin the call with some broad remarks regarding our quarterly performance, current market conditions and recent company events. Stephen will follow with a more detailed financial discussion 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 in our SEC filings, which can be found on our website, as well as SEC's website, sec.gov.

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

John T. Rynd

Thank you, Son. Good morning, everyone, and thanks for joining us today. This morning, we reported third quarter 2013 income from continuing operations of $17.2 million or $0.11 per diluted share compared to a loss of $37.2 million or $0.20 -- $0.23 per share in the third quarter 2012. Last year's quarter results included an after-tax charge of $22.1 million or $0.14 per share related to several nonoperating items.

The third quarter marked another eventful period for our company. We completed the acquisition of Discovery Offshore, followed that up with the contracting of the Hercules Triumph at a very attractive day rate. To fund the Discovery acquisition of final shipyard payments, we issued $400 million of notes and used the proceeds from the sale of the Domestic Liftboat and Inland business, all of which closed during the third quarter. We also initiated the refinancing of $300 million of existing senior notes, which will lower the borrowing cost in this issue by 300 basis points and extend the maturity by 4 years. Demand for jackups in the Gulf of Mexico remains strong, and visibility that we have through next year prompted us to move forward with our second rig reactivation, the Hercules 203. Last but certainly not least, we received very attractive 5-year contract extensions for 2 of our Middle East rigs that will keep them contracted through late 2019 at dayrates that are approximately 50% higher than what they are currently earning. The contract extensions highlight the overall strength in the international jackup market, as well as Saudi Aramco's strong outlook for the oil markets through the end of the decade. It also shows the long-term demand for well-maintained equipment irrespective of its age. Outside observers may consider rigs as a commodity, but customers recognize that service is not. Aramco has a history rewarding service providers that can meet their high standards, and we have been able to do so while operating for these rigs for Aramco over the past 5 years. The Aramco extensions, along with the continued strength in the Gulf of Mexico, have pushed our revenue backlog to an all-time high of just over $1 billion, an increase of more than 50% since the end of the second quarter. We expect our revenue backlog to further expand as we have a number of contract extensions under discussion for several of our domestic rigs, as well as new contracts that we expect on a Super A class rigs. With regard to the Super A rigs, we are working on several opportunities. They include both long- and short-term jobs. The long-term opportunities are in West Africa, the Middle East and Southern North Sea, some of which have commencement dates in early 2014. However, commencement dates on several long-term opportunities, particularly in the North Sea, have been pushed to late 2014 and into 2015. Our rigs are well suited to compete for these long-term charters. But in the interim, we feel it's prudent to get both rigs on the payroll while still allowing flexibility to meet timing requirements for these long-term tenders. As a result, it is possible that by year end, we could have 1 rig contracted long term and the second 1 on shorter-term work. In any case, we remain confident that our second Super A rig, the Hercules Resilience, can get on contract by late first quarter 2014.

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