Hercules Offshore: 2Q Net Income at $16.6 Million

Hercules Offshore, Inc. today reported net income from continuing operations of $16.6 million, or $0.10 per diluted share, on revenue of $211.5 million for the second quarter 2013, compared with a net loss from continuing operations of $52.5 million, or $0.33 per diluted share, on revenue of $154.5 million for the second quarter 2012.

As outlined in the Reconciliation of GAAP to Non-GAAP Financial Measures, second quarter 2013 results include a non-cash capital gain of $14.9 million related to the Company’s investment in Discovery Offshore S.A., while second quarter 2012 results include the following pre-tax items:

• Non-cash charge of $47.5 million to reflect the impairment of the Hercules 185 and related deferred costs;
• A $6.4 million expense related to the April 2012 debt refinancing; and
• A non-cash charge of $1.4 million and $1.3 million related to the termination of the Company’s prior term loan facility and the early retirement of a portion of the Company’s 3.375% Convertible Senior Notes, respectively.

On an after-tax basis, the second quarter 2013 gain approximated $14.9 million, or $0.09 per diluted share, while these second quarter 2012 items approximated $36.8 million, or $0.23 per diluted share.

John T. Rynd, Chief Executive Officer and President of Hercules Offshore stated, “Over the past few months, we have taken significant steps to transform the Company to a more focused provider of offshore drilling and international liftboat services, culminating in our acquisition of Discovery Offshore. This acquisition represents a major step forward in our fleet renewal efforts, and adds two world-class jackup rigs with market leading capabilities.  Demand for rigs of this caliber is increasing, and we are actively seeking attractive contract opportunities in various international regions.  At the same time we high-graded our drilling fleet with Discovery, we also divested of lower performing assets through the sale of our Domestic Liftboats and Inland segments. Given these strategic moves, we expect to be a more geographically diverse company, operating in regions that have attractive long term growth fundamentals.

“In terms of our existing business segments, the positive pricing momentum in the U.S. Gulf of Mexico jackup market remains intact, and contract visibility for the majority of our domestic jackup fleet now extends well into 2014.   We continue to add scale in our international rig fleet, with contract commencement on the Hercules 266 during the second quarter, and start-up of the Hercules 267 expected shortly.  Market conditions for our International Liftboats segment are also strong, evidenced by the recent contracting of the Bull Ray (formerly Titan 2) in West Africa and the high level of activity in the Middle East.

“While the incident at South Timbalier 220 involving the Hercules 265 will create some challenges, it should not detract from the positive developments that we have undertaken in recent months.  Our culture of safety, which emphasizes crisis training and management, helped prepare us to respond to the incident in an effective and efficient manner.  We also credit the quick response and leadership of the crew onboard to safely evacuate with no injuries. We are working closely with the governmental agencies and the customer to gather and assess details of the incident.”

Domestic Offshore

Revenue generated from Domestic Offshore for the second quarter 2013 increased by approximately 41.0% to $127.0 millionfrom $90.1 million in the second quarter 2012, primarily due to higher dayrates.  Average revenue per rig per day increased by approximately 38.8% to $84,328 in the second quarter 2013 from $60,734 in the comparable 2012 period.  Contract commencement of the Hercules 209, which completed its reactivation during the second quarter 2013, contributed to the increase in available days and operating days.  However, downtime on various rigs primarily for repair and maintenance resulted in a modest decline in average fleet utilization to 88.8% during the second quarter 2013, compared to 90.5% in the second quarter 2012.  Operating expenses increased to $65.6 million in the second quarter 2013 compared to $54.7 millionin the respective 2012 period.  The increase was primarily due to incremental operating cost associated with the Hercules 209, as well as higher labor and repair and maintenance expenses.  In addition, second quarter 2012 results included gains from asset sales of $5.3 million.  Domestic Offshore generated operating income of $39.9 million in the second quarter 2013 compared to operating income of $14.9 million in the second quarter 2012.

International Offshore

International Offshore generated revenue of $48.8 million in the second quarter 2013, an increase of 62.1% compared to$30.1 million in the second quarter 2012, as both utilization and dayrates improved over this period.  Utilization increased to 78.1% from 51.6% due to contract commencement on the Hercules 266, and the recommencement of operations for theHercules 261 and Hercules 262, as these rigs incurred downtime for contract preparation work during the second quarter 2012.  Average revenue per rig per day for the second quarter 2013 increased to $116,079 from $91,404 in the second quarter 2012, as higher dayrate earned on the Hercules 266 was a key factor in the improvement. Operating expenses for the second quarter 2013 increased to $33.7 million from $28.8 million in the respective 2012 period. The increase can be attributed primarily to incremental operating costs for the Hercules 266 and Hercules 262, which operated the entire second quarter of 2013 and higher costs on the Hercules 260. Second quarter 2013 operating expense also includes a $1.7 million loss on the agreement to sell the Hercules 185. International Offshore recorded an operating loss of $3.3 million in the second quarter 2013 compared to an operating loss of $51.6 million in the second quarter 2012, which included a $47.5 million non-cash asset impairment charge related to the Hercules 185.

Liftboats

International Liftboats revenue increased to $35.7 million in the second quarter 2013 from $34.4 million in the prior year period.  Operating days increased by 96 days, as there were three additional vessels available for hire during the second quarter 2013 compared to a year ago.  However, average utilization declined to 70.5% from 75.5% in the same periods, due primarily to greater shipyard downtime for regulatory maintenance and repair.  Average revenue per liftboat per day decreased slightly to $24,207 in the second quarter 2013 from $24,915 in the second quarter 2012. Operating expenses during the second quarter 2013 were $19.6 million compared to $17.1 million in the second quarter 2012, with the majority of the increase due to incremental operating costs associated with the additional vessels available for hire and higher labor costs.  International Liftboats recorded operating income of $9.9 million in the second quarter 2013 compared to operating income of$11.9 million in the second quarter 2012.

Discontinued Operations

The financial results from the Domestic Liftboats and Inland segments, which were sold in July 2013, have been classified as discontinued operations. The Company reported a net loss from discontinued operations of $44.0 million, or $0.27 per diluted share, for the second quarter 2013, which includes pre-tax impairment charges of $3.5 million and $40.9 million related to the sale of Domestic Liftboats and Inland assets, respectively. The second quarter 2012 reported a net loss from discontinued operations of $2.6 million, or $0.02 per diluted share.

Due to the current period classification of the Domestic Liftboats and Inland segments as discontinued operations, we have recast the Company’s historical information to reflect the results of operations of these two segments as discontinued operations for all periods presented.

Liquidity and Capitalization

At June 30, 2013, the Company had unrestricted cash and cash equivalents totaling $40.7 million, and total debt of $805.5 million. During the second quarter 2013, the Company repurchased approximately $61.3 million aggregate principal amount of the 3.375% Convertible Senior Notes, and acquired a majority ownership in Discovery Offshore S.A. which amounted to a net cash outlay of approximately $81.1 million. During July 2013, a number of events have occurred which have had an impact on the Company’s liquidity, including:

• the completion of a private placement of $400.0 million of 8.75% Senior Notes due July 2021, with net proceeds of approximately $393.0 million after deducting the initial purchasers’ discount and offering expenses;
• the amendment of our outstanding revolving credit facility to $150.0 million from $75 million, and extending the maturity by approximately 15 months to July 2018. The facility is currently unfunded and is subject to certain borrowing limitations;
• the completion of the sale of Domestic Liftboats and Inland assets, generating proceeds of $54.4 million and $40.7 million respectively, net of previously collected deposits;
• the payment of the final shipyard installment on the Discovery Triumph of $167 million.

Non-GAAP

Certain non-GAAP performance measures and corresponding reconciliations to GAAP financial measures for the Company have been provided for meaningful comparisons between current results and prior operating periods. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles. In order to fully assess the financial operating results, management believes that the adjusted income (loss) from continuing operations figures included in this release are appropriate measures of the continuing and normal operations of the Company. However, these measures should be considered in addition to, income (loss) from continuing operations, and not as a substitute for, or superior to, net income (loss), operating income (loss), cash flows from operations, or other measures of financial performance prepared in accordance with GAAP. The non-GAAP measures included in this press release have been reconciled to the nearest GAAP measure in the table that follows the financial statements. Please see the attached Reconciliation of GAAP to Non-GAAP Financial Measures for a complete description of the adjustments made to Operating Income (Loss), Income (Loss) from Continuing Operations and Diluted Earnings (Loss) per Share.

 Additional Information

Headquartered in Houston, Hercules Offshore, Inc. operates a fleet of 40 jackup rig, including two Keppel FELS Super A high-specification, harsh-environment jackup rigs, and 24 liftboats. The Company offers a range of services to oil and gas producers to meet their needs during drilling, well service, platform inspection, maintenance, and decommissioning operations in several key shallow water provinces around the world.