HERO

Hercules Offshore, Inc. (HERO)

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Hercules Offshore (HERO)

Q3 2012 Earnings Call

October 25, 2012 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 Senior Vice President

Analysts

Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Ian Macpherson - Simmons & Company International, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Todd P. Scholl - Clarkson Capital Markets, Research Division

Robert MacKenzie - FBR Capital Markets & Co., Research Division

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

Judson E. Bailey - ISI Group Inc., Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Nigel Browne - Macquarie Research

Kathryn O'Connor - Deutsche Bank AG, Research Division

Matthew H. Beeby - Williams Financial Group, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Hercules Offshore, Inc. Earnings Conference Call. My name is Ben, and I will be operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Son Vann, Vice President of Investor Relations. Please proceed, sir.

Son P. Vann

Thanks, Ben. Good morning, everyone, and welcome to our third quarter earnings conference call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Senior Vice President and Chief Financial Officer; and members of our senior management team, including Troy Carson, Chief Accounting Officer; and Greg Muirhead, 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.

Following our usual format, John will begin the call with some broad remarks regarding our quarterly performance and current outlook. Stephen will follow with a more detailed financial discussion and provide cost guidance. 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 2012 and beyond, 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 and other factors on our SEC filings, which you can find on our website or the SEC's website, sec.gov.

Now with that, let me turn the call over to John Rynd.

John T. Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported a third quarter 2012 adjusted net loss from continuing operations of $15.7 million or $0.10 per diluted share compared to an adjusted loss of $17 million or $0.12 per share in the third quarter 2011.

Our third quarter results contain several large nonoperating items that Stephen will walk through in detail. From my discussion, I will focus on adjusted results where we continue to see improvement in the Domestic Offshore and International Offshore segments.

Moving on to our market overview, starting with the U.S. Gulf of Mexico. Rig demand started picking up around this time last year and has showed no signs of slowing down ever since. Meanwhile, rig departures to international markets from us and our competitors have resulted in a fairly tight supply/demand environment for jackups over this period. Today, there are 34 drilling-capable jackups in the U.S. Gulf of Mexico, excluding the workover rigs, all of which are contracted.

Average contract backlog per rig between our fleet and our competitors exceeds 6 months. As our customers look to secure access to rigs in 2013, they are seeking much longer contract terms than what we have seen in the past. About a year ago, typical contract terms were in the 30- to 60-day range. In recent months many of the contracts signed have ranked between 3 to 6 months, and today we are in discussion with customers seeking contract terms as long as a year on our existing marketed rigs.

We continued to look for opportunities to move rig rates higher. Our latest fleet status report show the leading edge rate for our 200 mat-cantilever is now at $90,000 per day and we are working to move rates for the rest of the 200 mat-cantilever rigs to this level.

As rig availability in 2013 tightens, reactivations are coming more likely, especially as some of the contract negotiations that I alluded to earlier continue to develop. We have no rigs available until late first quarter 2013, and about 1/3 of our fleet is already locked up through mid-2013. We will also have 4 rigs undergoing special surveys next year, further reducing rig availability in 2013.

Any operator looking to have an active drilling program in the U.S. Gulf of Mexico shelf needs to realize that we may be short in jackups in 2013 if current market conditions persists.

We currently have over 1,400 days of backlog under negotiation and are in discussion with varied customers regarding reactivations. Given where our customers economics are along with our economics on reactivation, we believe it is increasingly likely that we will announce a reactivation of at least one jackup by year end.

Turning to the international jackup markets. Rig availability is relatively limited. Market utilization of international jackups is approaching -- is approximately 93% and several regions are at full utilization. We projected addition of 92 new build rigs over the next 3 years continues to be a source of concern for many industry observers, ourselves included.

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