Randy Stilley, Chief Executive Officer and President of Hercules Offshore, Inc., commented on the outlook: "Looking forward, we expect continued positive earnings momentum throughout 2006, driven not only by the strong backlog of work for both our liftboats and jackups, but also because of increased operating days stemming from our acquisitions completed during 2005 and 2006 and the return to work of equipment that was in the shipyard during the first quarter. We will continue to focus our growth strategy on acquiring complementary assets and on expanding our international operations."
Contract Drilling Services Highlights
During the first quarter of 2006, revenues from Contract Drilling Services were $27.0 million, compared to revenues of $24.9 million in the first quarter of 2005. Operating income increased to $12.4 million in the first quarter of 2006 from $11.2 million in the first quarter of 2005 despite the fact that operating days declined to 382 from 610 days in the respective periods. Operating days declined primarily as a result of the loss of Rig 25, which was severely damaged during Hurricane Katrina, and shipyard time for repairs to Rigs 15 and 21 and for an upgrade to Rig 22. These three rigs are now all back under contract. The average daily revenue per rig in the segment increased to $70,673 in the first quarter of 2006, compared to $40,883 in the first quarter of 2005.
During the first quarter of 2006, the Company reached a settlement with its insurance underwriters for the loss of Rig 25. A gain of $29.6 million was recognized in March 2006 related to the insurance claim. The gain represents the gross proceeds expected to be received of $50.0 million, less the rig book value of $20.1 million and less $0.3 million in items related to the salvage operation not expected to be reimbursed by the Company's insurance carriers. In addition, the gross proceeds will be reduced by the $1.3 million salvage value of the rig. The Company will retain title to the rig, and intends to remove usable materials and equipment to be used on its other rigs and to sell the remaining material for scrap.
Domestic Marine Services Highlights
Domestic Marine Services revenues were $25.6 million in the first quarter of 2006, up from $9.2 million in the first quarter of 2005. Operating income increased to $11.7 million in the first quarter of 2006 from $3.0 million in the first quarter of 2005. The average daily revenue per liftboat increased to $8,981 in the first quarter of 2006 from $6,311 in the first quarter of 2005. Utilization for the Company's domestic liftboats increased to 82.4% in the first quarter of 2006 from 73.3% in the first quarter of 2005.
International Marine Services Highlights
The Company's International Marine Services segment was created in the fourth quarter of 2005 in connection with the acquisition of four liftboats operating offshore Nigeria in November 2005. International Marine Services revenues were $3.5 million in the first quarter of 2006 and operating income was $0.9 million. The average daily revenue per liftboat was $9,913 in the first quarter of 2006 and utilization was 99.0%.
Update on Recent Events
During the first quarter of 2006, the Company entered into letters of intent to contract its drilling rigs Rig 16 and Rig 31 for work offshore Qatar and India, respectively. Under the letter of intent for Rig 16, the dayrate would escalate from a rate of $49,500, which would apply from the date of the customer's acceptance of the rig to May 31, 2006. From June 1, 2006 until the end of the two year contract term, the dayrate would be $69,500. The Company signed a definitive drilling contract in April 2006 for Rig 16 for the terms agreed to in the letter of intent. Under the letter of intent for Rig 31, the drilling contract, if completed, would cover the drilling of seven wells with five one-well options, and would commence in September 2006. The dayrate under the contract would be $110,000 for the first well and $140,000 for each additional well. The letter of intent for Rig 31 is conditioned upon, among other things, the completion of a definitive drilling contract.
On April 3, 2006 the Company agreed to acquire five liftboats from Laborde Marine Lifts, Inc. The Company agreed to assume construction of an additional liftboat pursuant to a construction agreement to be assigned to the Company by Laborde at the closing. The total purchase price to be paid in connection with the transaction is $52.0 million. The purchase price will be reduced by the total amount remaining due under the construction agreement as of the closing date. The Company expects to close the transaction in the second quarter of 2006.
The Company completed a public offering of 9,200,000 shares of common stock at $36.00 per share in April 2006. The Company issued 1,600,000 shares of common stock, while the remaining 7,600,000 shares were sold by certain selling stockholders. The Company received approximately $54.3 million of proceeds from the offering, net of underwriter discounts and commissions and estimated expenses. The Company plans to use the net proceeds from the 1,600,000 shares it sold for general corporate purposes, which may include the acquisition and refurbishment of rigs and liftboats.
Headquartered in Houston, Hercules Offshore, Inc. owns a fleet of nine jackup drilling rigs and 46 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 shallow waters.
The Company is providing net income before the gain on the insurance settlement of Rig 25 because management believes that this measure better reflects the normal operations of the Company as it excludes a significant gain realized on the loss of a rig in a recent hurricane.
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