HERO

Hercules Offshore, Inc. (HERO)

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Hercules Offshore (HERO)

Q2 2011 Earnings Call

July 28, 2011 12:00 pm ET

Executives

Stephen Butz - Chief Financial Officer and Senior Vice President

John Rynd - Chief Executive Officer, President and Executive Director

Son Vann -

Analysts

Collin Gerry - Raymond James & Associates, Inc.

Robert MacKenzie - FBR Capital Markets & Co.

Ian Macpherson - Simmons & Company

Darren Gacicia - Vertical Research Partners Inc.

Judson Bailey - Jefferies & Company, Inc.

Arun Jayaram - Crédit Suisse AG

Matthew Beeby - Global Hunter Securities, LLC

David Wilson - Howard Weil Incorporated

Geoff Kieburtz - Weeden & Co., LP

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

Robin Shoemaker - Citigroup Inc

Matthew Conlan - Wells Fargo Securities, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Hercules Offshore Earnings Conference Call. My name is Carissa, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call, Mr. Son Vann, Director of Investor Relations. Please proceed.

Son Vann

Thank you, Carissa, and welcome, everyone to our second quarter 2011 earnings conference call. With me today are John Rynd, Chief Executive Officer and President; and Stephen Butz, Senior Vice President and Chief Financial Officer as well as a numbers of our senior management team including Jim Noe, our Senior Vice President and General Counsel; and Troy Carson, our Chief Accounting Officer.

This morning, we issued our second quarter results and filed an 8-K with SEC. The press release is available on our website, herculesoffshore.com. John will begin today's call with some broad remarks regarding our quarterly performance and current outlook. Stephen will follow with a more detailed discussion on financial results, provide cost guidance and give an update on our liquidity. We'll then open the call up for Q&A.

Before we begin, please note that this conference call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2011 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate, may or will occur in the future are all forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. The 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 on our website or the SEC's website, sec.gov.

with that, it's my pleasure to turn the call over to John.

John Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported a second quarter 2011 net loss from continuing operations of $14.3 million or $0.11 per diluted share, compared to a loss of $18.4 million or $0.16 per diluted share for the second quarter of 2010.

Second quarter results included 2 months of operations from the Seahawk assets, which added approximately $17 million in revenue and almost $5 million in gross profit. This was partially offset by approximately $1.6 million of onetime G&A expense related to the closing of the Seahawk purchase.

We also incurred approximately $8 million for the permanent importation of Rig 3 in preparation for its 4-year contract award from PEMEX.

Not included in the results from the continuing operations is Delta Towing, which we sold in May for $30 million cash and retained approximately $6 million in working capital. The sale of Delta is consistent with our strategy to divest of non-core assets and redirect this capital to enhance our core Offshore services or on debt reduction.

Continuing on this theme, we finalized the sale of the Hercules 78, one of our cold-stacked submersible rigs in May for a scrap value of $1.8 million. Since the end of the second quarter, we sold the Hercules 152, one of our cold-stacked jackups in the Gulf of Mexico for gross proceeds of $5 million. Including the divestiture of the Hercules 152, we have generated $44 million in proceeds from asset sales year-to-date.

We also expect to finalize the previously announced sale of the Hercules 190 and Hercules 254, 2 retired jackup rigs that have been stacked for a decade, by late third quarter this year for a combined price of $4 million, and we are in discussions to scrap our 2 remaining submersibles.

We will continue to seek opportunities to selectively pare down non-core assets and reduce stacking costs.

Turning to review of each market segment. Shallow water drilling activity in the U.S. Gulf of Mexico continues to show healthy signs of improvement even as we enter the heart of the hurricane season. Our latest Fleet Status Report issued this morning showed roughly 1/2 of our 18 marketed jackups contracted into September. Although our average backlog shows only 52 days per rig, this masked a number of quality commitments from customers waiting on permits. Right now we have an excess of 800 days of backlog under negotiations.

On some of our more recent contracts, operators are contracting out our rigs over multi-month term and we're getting inquiries for rig availability into the first half of 2012. As more of our domestic rigs get locked up over longer periods of time, this will add pressure on operators of having locked up rigs to do the same.

Domestic Offshore utilization for the second half of this year should also benefit from less shipyard downtime for ABS surveys and repair work. Second quarter utilization averaged only 73%, well below where it could have been had it not been for almost 200 shipyard days. To put this into context, that equates to almost 14% of our available days. Most of this downtime came on 3 rigs: the Hercules 120, which has been down since February; the Hercules 173, which has been in the yard since May; and the Hercules 200, which was down for about half of the second quarter. Both the Hercules 120 and 200 have completed their repairs and are currently on day rate. And the Hercules 173 is scheduled to leave Friday subject to weather.

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