Hercules Offshore's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Hercules Offshore (HERO)

Q1 2012 Earnings Call

April 26, 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

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

Ian Macpherson - Simmons & Company International, Research Division

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

Catherine O'Connor

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

Todd P. Scholl - Clarkson Capital Markets, Research Division

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2012 Hercules Offshore, Inc. Earnings Conference Call. My name is Brian, and I will be the operator for today's call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Now I would like to introduce to you Mr. Son Vann, Vice President of Investor Relations. Please proceed, Mr. Vann.

Son P. Vann

Thank you, Brian, and welcome to our first quarter 2012 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 Jim Noe, General Counsel; Troy Carson, Chief Accounting Officer; and Craig Muirhead, Treasurer. This morning, we issued our first quarter results and filed an 8-K with SEC. A 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 discussion on the financial results as well as provide cost guidance. We will 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 fact, 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 see more information about these risks and factors 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, and good morning, everyone. And thanks for joining us today. This morning, we reported our first quarter 2012 results. We also filed an 8-K disclosing how we recently received notice from the Department of Justice that they have concluded their FCPA investigation and will not pursue any enforcement action against the company. We're obviously pleased with the result. One of the factors cited by the Department of Justice in closing the inquiry was the company's thorough investigation conducted through a special counsel and cited the company's existing compliance program and ongoing efforts to strengthen our program. We also believe that our strong cooperation with the DOJ throughout the investigative process contributed to this outcome.

Regarding our quarterly results, we reported a net loss from continuing operations of $38.3 million or $0.28 per diluted share during the first quarter of 2012, compared to a loss of $13.6 million or $0.12 per diluted share for the first quarter 2011. As we previously discussed on our prior earnings call, the first quarter 2012 was a transitional trough period for us as we incurred significant shipyard downtime, primarily on our international rig fleet with the Hercules 261 and 262 each recently completing their multiyear contracts with Saudi Aramco, and in the shipyard further refurbishment and contract preparation work, as we prepare the rigs to commence their new 3-year contracts with Aramco.

The quarter was also impacted by the normal seasonal decline in our Domestic Liftboat business, together with an episodic uptick in the number of rigs in the shipyard for their 5-year ABS special surveys or other repair work. Some of the shipyard time will extend in the second quarter 2012. But the bulk of the downtime particularly with our international rig fleet should conclude before quarter end, after which our company be well positioned for a much more robust performance during the second half of 2012, and we expect to have most of our international rig fleet back in operations and our domestic jackup fleet roller to high day rate contracts that we have secured over the last several months.

Our first quarter financial results masked what was otherwise a very successful quarter for us strategically, starting with the acquisition and concurrent contracting of the Ocean Columbia, which we have renamed the Hercules 266. Between the rig acquisition, mob and contract preparation costs, our all-in investment is estimated at $85 million. Once the rig has completed the contract prep work, it will commence on a 3-year contract with a 1-year option for Saudi Aramco and at a day rate of 125,000 per day. We will also receive a lump-sum mob fee of $25 million from Aramco, which should be amortized visibly across the 3-year term. The effective day rate is closer to 148,000 per day. We estimate full payback of the investment within the 3-year contract term. Along with contributing to substantial amount of earnings and cash flow through our international drilling operations, this contract builds on our relationship with Aramco, a key international client. And I am confident that Aramco will be a good customer of this rig for many years to come after this initial term. We have already closed on the acquisition of the rig and are currently preparing it for heavy lift journey to the Middle East scheduled early May.

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