Analysis: Hercules Flexes Its Muscles

Hercules Offshore won bankruptcy court approval on April 4th to buy Seahawk Drilling, which filed for Chapter 11 in February.

Seahawk, which owns and operates 20 mat-supported jackups in the US and Mexican Gulf of Mexico, was created as a spin-off from Pride International in August 2009. Pride divested of its shallow water fleet in an effort to concentrate its business in the deepwater markets.

Seahawk never had a profitable quarter once it split from Pride, due largely to the global financial crisis that hit the market during that time. In addition, Seahawk CEO, Randy Stilley, blames the Bureau of Ocean Energy Management (BOEM) for "arbitrarily constructing unnecessary barriers to obtaining permits they had traditionally authorized" following the Macondo blowout in April 2010.

Shallow water drilling in the GOM wasn't under the drilling moratorium that followed the Macondo blowout, but the drilling permit process slowed significantly. Commenting on its Q2 2010 earnings report, Stilley said, "new drilling permit requirements … have caused delays for permit approvals, as our customers and regulators work to understand the new regulations. We continue to work with our customers and the BOEM on improving the efficiency of the permitting process. I am optimistic that the BOEM will be able to more quickly process the backlog of drilling permit applications so that current applications will be reviewed and approved allowing us to put our idle rigs back to work, as well as enter into new contracts for our rigs that are currently working and keep our personnel employed."

However, in March 2011 Stilley said, "in the 11 months after the Deepwater Horizon accident, it became clear that Seahawk's greatest rival was no longer an industry competitor but the US government."

Seahawk is not the only shallow water driller affected by the slowed permitting process. Companies like Hercules have been hit hard, but have rigs contracted outside of the US GOM that draw in revenue to help the company stay in the game.

Hercules purchased Seahawk's fleet for about $176.8 million. The agreement was based on $25 million in cash and 22.3 million of its shares, which closed at $6.80 a share on Monday, April 4, the day a judge approved the sale.

Back in February when Hercules agreed to purchase Seahawk's rigs, John T. Rynd, president and CEO of Hercules Offshore said, "We believe that the strategic rationale and value proposition of this transaction are very compelling for our shareholders. This is a unique opportunity to acquire assets at an attractive price, and we expect significant synergies once they are added to our rig fleet. Furthermore, the structure and terms by which we are acquiring these assets will provide benefits to our shareholders, allowing us to fully dedicate our time to operate these assets to their maximum potential. We will have the ability to operate a significantly larger fleet of rigs for our customers, with a small amount of incremental cost."

While court approval to buy Seahawk was positive news for Hercules last week, the company ended the week on a sour note. On April 7, Hercules announced that the company is being investigated by the Securities and Exchange Commission and the Department of Justice. The SEC has requested documents associated with the possible violations of securities laws, including possible violations by its international operations of anti-bribery laws.

In regards to the filing, Hercules said, "At this time, it is not possible to predict the outcome of the investigations, the expenses we will incur associated with these matters, or the impact on the price of our common stock or other securities if the SEC or DOJ takes any actions regarding these investigations."

As a result, shares of Hercules fell 65 cents (10.2%) to $5.73 in aftermarket trading. Shares ended the regular session up 15 cents (2.4%) to $6.38.

Fleet

Hercules has added Seahawk's 20 jackups to its original fleet of 33 jackups, two of which are under construction.

Hercules has 16 active jackups. These rigs are capable of operating in water depths from nine to 350 ft. According to Hercules, the majority of its fleet is capable of drilling as deep as 20,000 ft, and the Hercules 350 can drill up to 25,000 ft.

Comparatively, only seven of Seahawk's rigs are contracted. These jackups are capable of operating in water depths from 200 to 300 ft and drilling as deep as 25,000 ft, except for the Seahawk 2602, which can drill down to 20,000 ft.

Hercules points to its diverse geographic footprint as a key to its business strategy. According to Riglogix, the rig manager currently has 10 jackups in the GOM, two jackups in both the Middle East and South Asia and one jackup in Southeast Asia and West Africa. All of Seahawk's rigs that Hercules has acquired are in the Gulf of Mexico.

If we look at the other jackup players, Ensco has 31 active jackups in its fleet. Of Ensco's jackup fleet, 10 are in Southeast Asia, eight are in the North Sea, another eight are in the GOM, four are working off Mexico, three are in the Persian Gulf, and one is off Australia. Rowan's active fleet includes 25 jackups contracted world-wide. Ten jackups are in the GOM, seven are in the Persian Gulf, five are in the North Sea, and one each are working off Southeast Asia, South America, and Mexico.

Number of jackups around the world

Worldwide, the average fleet age is about 21 years old with an average dayrate in the low $100s. Ensco's fleet is right on target with an average age of 21 years old and an average dayrate of $95k/day. However, Hercules' fleet is 32 years old and commands a dayrate in the mid-$50k range, while Seahawk complements it with a 31 year old fleet, which commands a dayrate in the low $40k range. Rowan's fleet is the youngest by far at an average of 13 years old and has the highest earning jackup fleet with average dayrates in the $130s.

Average dayrate per jackup manager

Worldwide, 320 of 488 jackups are currently contracted, which puts worldwide utilization at about 66%. Hercules' fleet is below the utilization average at 52% and Seahawk is reporting a 35% utilization rate. Combined, the new Hercules fleet is averaging 45% utilization. However, both Ensco and Rowan's utilization rates are above the worldwide average at 76% and 71%, respectively.

Average utilization per jackup manager

Protecting the future

Hercules Offshore along with Apache Corp., Arena Offshore, Chevron, Delta Towing, Dynamic Offshore Resources, Energy XXI, Ensco, Hall-Houston Exploration, Helis Oil and Gas, Phoenix Exploration, Rowan Companies, Seahawk, W&T Offshore, and Walter Oil & Gas formed the Shallow Water Energy Security Coalition shortly after the administration declared a moratorium on offshore drilling. According to the coalition, its goal "is to educate policymakers and the general public about our business, including the industry's impressive record of safety and environmental responsibility, as well as the importance of drilling in shallow water to the economy and the security of US energy."

Despite the coalition's efforts, Seahawk could not survive the post-Deepwater Horizon GOM regulations. Though the BOEMRE has started granting permits to drill in the deepwater GOM again, the shallow water and deepwater permitting process remains slow. Unless things change soon, Seahawk Drilling won't be alone.

Follow Hercules and its projects worldwide by visiting SubseaIQ, or follow the developments, contracts and initiatives of the rigs through RigLogix.

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