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Hercules Offshore Swings to Surprise 4Q Profit

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Embattled driller Hercules Offshore Inc. posted its first profit in five years as energy production in the U.S. Gulf of Mexico roared back to life in 2012, prompting strong demand for shallow-water drilling rigs.

Hercules reported a fourth-quarter profit of $4.3 million, or three cents a share, compared with a year-earlier loss of $21.5 million, or 16 cents a share. Higher day rates, the daily price operators pay to rent a drilling rig or vessel, added to Hercules' revenue, which climbed 24% to $202.6 million during the quarter.

The results easily beat the expectations of analysts surveyed by Thomson Reuters, who recently had predicted a loss of seven cents a share on revenue of $188 million. The last time the company made money was the fourth quarter of 2008; since then it had been battered by waning interest in shallow-water drilling, as most producers focused on deeper waters rich with newly-discovered oil fields.

"Market fundamentals in the U.S. Gulf of Mexico strengthened throughout 2012, to levels that, in many respects, are the best they have been in the long history of drilling in the region," Hercules Chief Executive John T. Rynd said.

Shares of Hercules were up 2.4% at $7.20 in recent trading Tuesday.

Hercules's surprise turnaround underscores how producers are looking for profitable oil even in areas that were thought to be tapped out. The U.S. Gulf's shallow waters, exploited for oil since the late 1940s, in recent decades became natural-gas plays, but prospectors now are looking for crude there, said Barclays analyst James West.

The results also show how much U.S. Gulf activity has rebounded since the lull that followed the deadly Deepwater Horizon explosion, which in 2010 killed 11 workers and unleashed the largest offshore oil spill in U.S. history. Though the government never formally halted drilling in shallower water, the approval process for new wells slowed as regulators and drillers navigated new safety and environmental regulations enacted in response to the spill. According to a Barclays analysis of Bureau of Ocean Energy Management data, the government issued 35 shallow-water permits in January, including 11 for new wells. That followed December's figure of 35 permits issued, including three for new wells.

In 2011 Hercules acquired the rigs of rival Seahawk Drilling Inc., which also was weakened by the slowdown in permitting. But the company had in recent years sold many of its older rigs, including some for scrap. Others had been "stacked," or idle--at the end of the third quarter Hercules said it expected to have 11 "cold-stacked" jack-up rigs, which stand on support legs affixed to the ocean floor.

But Mr. Rynd said the company is for the first time reactivating a rig--a response to strong demand coupled with limited availability of rigs. Mr. Rynd said during a conference call with analysts that the reactivated rig had secured two months of work earning $90,000 a day, and the company expects to earn back within eight or nine months the costs of getting the rig ready.

Mr. Rynd also said the company's rebounding domestic operations will help fund "opportunistic investments" internationally.

"We are in the early stages of a transformation, where we seek to expand our global footprint and high-grade our asset mix in key offshore markets," he said.

In November, Standard & Poor's Ratings Services raised its rating on the company one notch closer to investment grade, pointing to the oil-rig company's improving day rates and utilization for its jack-up rigs in the Gulf of Mexico.

Domestic offshore operating income grew 11% to $10 million as revenue jumped 22% on stronger day rates. The utilization rate shrank to 81.3% from 85.7%. Average revenue per day rose 28%.

The international offshore business swung to a profit of $9.8 million, from a loss of $6 million a year earlier, while revenue increased 22%. Utilization rose to 78.7% from 74.1%. Average revenue per day was up 61%.

Copyright (c) 2012 Dow Jones & Company, Inc.

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