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Hercules Offshore Inc. Reports Operating Results (10-Q)

July 29, 2009 | About:

Hercules Offshore Inc. (HERO) filed Quarterly Report for the period ended 2009-06-30.

Hercules Offshore is uniquely qualified to meet operators\' needs for exploration workover and development drilling and liftboat services in shallow water depths in the Gulf of Mexico and international markets. It is dedicated to maintaining its fleets reliability and continually improving their performance. It conducts rigorous maintenance programs on all of the rigs and liftboats on a regular basis and invest in advanced equipment and safety upgrades. And it also offers a diversified fleet with a full range of vessel classes. To meet customers\' needs vessels operate in various water depths and provide a variety of crane capabilities based on vessel selection. And its fleet works for customers across the Gulf of Mexico and they are also seeking opportunities in international areas with similar water depths and bottom conditions. Hercules Offshore Inc. has a market cap of $410.2 million; its shares were traded at around $4.66 with a P/E ratio of 7.2 and P/S ratio of 0.4.

Highlight of Business Operations:

In connection with the credit facility, in July 2007, we entered into hedge transactions with the purpose of fixing the interest rate on decreasing notional amounts beginning with $400.0 million with a settlement date of December 31, 2007 and ending with $50.0 million which was settled on April 1, 2009. We also entered into a zero cost LIBOR collar on $300.0 million of term loan principal with a final settlement date of October 1, 2010 with a ceiling of 5.75% and a floor of 4.99%.

In addition, as it relates to our credit facility, in May 2008 we entered into a floating to fixed interest rate swap with the purpose of fixing the interest rate on varying notional amounts beginning with $100.0 million with a settlement date of October 1, 2008 and ending with $75.0 million with a settlement date of December 31, 2009. The table below provides the schedule of notional amounts related to the interest rate swap (in thousands):

Our business depends on the level of activity in oil and natural gas exploration, development and production in the U.S. Gulf of Mexico and internationally, and in particular, the level of exploration, development and production expenditures of our customers. Demand for our drilling services is adversely affected by declines associated with depressed oil and natural gas prices. Even the perceived risk of a decline in oil or natural gas prices often causes oil and gas companies to reduce spending on exploration, development and production. Reductions in capital expenditures of our customers have reduced rig utilization and day rates. In particular, changes in the price of natural gas materially affect our operations because drilling in the shallow-water U.S. Gulf of Mexico is primarily focused on developing and producing natural gas reserves. However, higher prices do not necessarily translate into increased drilling activity since our clients expectations about future commodity prices typically drive demand for our services. Oil and natural gas prices are extremely volatile and have recently declined considerably. On July 2, 2008 natural gas prices were $13.31 per million British thermal unit, or MMBtu, at the Henry Hub. They subsequently declined sharply, reaching a low of $3.17 per MMBtu at the Henry Hub on July 13, 2009. As of July 21, 2009, the closing price of natural gas at the Henry Hub was $3.48 per MMBtu. The spot price for West Texas intermediate crude has recently ranged from a high of $145.29 as of July 3, 2008, to a low of $31.41 as of December 22, 2008, with a closing price of $64.72 as of July 21, 2009. Commodity prices are affected by numerous factors, including the following:

Prolonged periods of low rig utilization and dayrates, the cold stacking of idle rigs or the sale of assets below their then carrying value may cause us to experience losses. These events may also result in the recognition of impairment charges on certain of our drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that their carrying value may not be recoverable or if we sell assets at below their then current carrying value. We recognized impairments of property and equipment of approximately $26.9 million and $376.7 million for the six months ended June 30, 2009 and the year ended December 31, 2008, respectively. We may be required to recognize additional impairments in the future.

As of June 30, 2009, we had total outstanding debt of approximately $969.2 million. This debt represented approximately 50.4% of our total book capitalization. As of June 30, 2009, we had $235.9 million of available capacity under our revolving credit facility, after the commitment of $14.1 million for standby letters of credit. Pursuant to our recent Credit Amendment, the size of our revolving credit facility has been reduced by $75.0 million to $175.0 million, leaving $161.0 million of available capacity at July 27, 2009 under our revolving credit facility after taking into account outstanding letters of credit. We may continue to borrow under our revolving credit facility to fund working capital or other needs in the near term up to the remaining availability. Our debt and the limitations imposed on us by our existing or future debt agreements could have significant consequences for our business and future prospects, including the following:

Read the The complete ReportHERO is in the portfolios of Richard Snow of Snow Capital Management, L.P., Robert Bruce of Bruce & Co., Inc., David Williams of Columbia Value and Restructuring Fund, Jean-Marie Eveillard of Arnhold & S. Bleichroeder Advisers, LLC, David Dreman of Dreman Value Management.

Rating: 3.8/5 (6 votes)


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