HERO

Hercules Offshore, Inc. (HERO)

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Hercules Offshore (HERO)

Q4 2010 Earnings Call

March 09, 2011 11:00 am ET

Executives

John Rynd - Chief Executive Officer, President and Executive Director

Son Vann -

Stephen Butz - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Arun Jayaram - Crédit Suisse AG

Matthew Beeby - Global Hunter Securities, LLC

David Wilson - Howard Weil Incorporated

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Hercules Offshore Earnings Conference Call. My name is Jasmine, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, to Mr. Son Vann, Director of Investor Relations. Please proceed, sir.

Son Vann

Thanks, Jasmine, and good morning. I'd like to welcome everyone to our Fourth Quarter and Year-end 2010 Earnings Conference Call. With me today are John Rynd, our Chief Executive Officer and President; and Stephen Butz, our Senior Vice President and Chief Financial Officer; as well as members of our senior management staff including Jim Noe, our Senior Vice President and General Counsel; and Troy Carson, our Chief Accounting Officer.

This morning, we issued our fourth quarter financial results and filed an 8-K with SEC. A press release is available on our website at herculesoffshore.com.

For today's call, John will begin with some remarks regarding our quarterly performance and current outlook, as well as give an update on our strategic initiatives. Steven will follow with a more detailed discussion on financial results, provide cost guidance and give an update on our cash flow, liquidity and an amendment to our credit agreement before opening the call up for Q&A.

Before John begins with his remarks, I'll remind everyone that this conference call will contain forward-looking statements. Other than statements of historical fact, all statements that address our outlook for 2011 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate, will or may occur in the future, are forward-looking statements.

Forward-looking statements involve substantial risks and uncertainties that could significantly affect actual or expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and factors in our SEC filings, which can be found in our website and SEC's website, sec.gov.

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

John Rynd

Good morning, and thanks for joining us today to discuss our fourth quarter and full year results for 2010. We will also provide an update of the status of the Seahawk transaction and other corporate initiatives.

I have to assume some of our friends in Louisiana are recovering this morning from Fat Tuesday. As many of my Aggie friends are still recovering from our loss to LSU in the Cotton Bowl.

For the fourth quarter, we reported a loss from continuing operations of $84.6 million or $0.74 per diluted share. This includes a non-cash pretax impairment charge of $125.1 million or $0.71 per diluted share. Steven will walk through the details behind the charge. But overall, excluding the impairment charge and certain other items outlined in the reconciliation table included in the earnings release, we recorded a loss from continuing operations of $3.3 million or $0.03 per diluted share for the fourth quarter 2010 compared to a loss of $25.8 million or $0.23 per diluted share for the fourth quarter 2009.

For the full year 2010, again, excluding the impairment charge and certain other items, we reported a loss from continuing operations of $53.3 million or $0.46 per diluted share compared to $75.2 million or $0.77 per diluted share for the full year 2009.

Before I go through our outlook for each segment, I would like to first address the strategic announcements that we had made just beginning of this year, starting with our investment in Discovery Offshore.

On January 24, we announced the $10 million investment in Discovery Offshore, a newly formed, Luxembourg-based, pure-play, ultra high-spec jackup company, which will loan two ultra high-spec jackup rigs, with the option for two additional rigs. The rigs are based on Keppel FELS' Super A class proprietary design. And upon the scheduled delivery in the second and fourth quarter of 2013, we believe they will be among the most capable jackup rigs in the world.

Keppel FELS is the premiere shipyard for jackups and will the construct the rigs at a turnkey cost of $208 million per copy. On the two option rigs, if exercised, the turnkey cost will be approximately $213 million and $215 million respectively, subject to standard cost escalations.

For our $10 million investment in Discovery Offshore, we've received an 8% ownership interest in the entity, as well as warrants exercisable for up to five years that could boost our ownership to 15%, if the stock price of Discovery increases to NOK 23 or the equivalent of USD $4 today. The stock is currently trading at NOK 12.5. We also received an additional $1 million in equity to compensate us for the effort in establishing Discovery offshore.

In addition to our ownership stake, we have also entered into a Construction Supervision Agreement [ph] and a Services Agreement with Discovery. Under the Construction Supervision Agreement, Discovery paid us $7 million per rig upfront to supervise the construction of each new build rig that was ordered. Once the jackups are delivered, we will be responsible for all marketing and operations of the rigs, as well as administrative services required of Discovery under the Services Agreement.

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