Hercules Offshore Posts 2Q Loss, Amends Credit Facility
Hercules Offshore reported a loss from continuing operations of $7.6 million, or $0.09 per diluted share, on revenues of $183.7 million for the second quarter 2009, excluding the effects of non-recurring items, compared with income from continuing operations of $20.0 million, or $0.22 per diluted share, on revenues of $270.1 million for the second quarter 2008, also excluding non-recurring items.
When including the effect of non-recurring items, the Company reported a loss from continuing operations of $11.8 million, or $0.13 per diluted share for the second quarter 2009, compared with income from continuing operations of $16.4 million, or $0.18 per diluted share for the second quarter 2008. The second quarter 2009 results include a non-cash charge of $26.9 million to reflect the impairment of the Hercules 110 and a $13.7 million gain on the retirement of $65.8 million aggregate principal amount of our 3.375% Convertible Senior Notes, net of the related write-off of unamortized issuance cost. On an after-tax basis, these adjustments approximated $4.2 million, or $0.04 per share. The second quarter 2008 results include $5.5 million of separation and benefit related costs associated with the Company's executive management changes, or $3.6 million on an after-tax basis.
John T. Rynd, Chief Executive Officer and President of Hercules Offshore, stated, "While nearly every facet of our business has been impacted by the cyclical downturn in our industry, we have acted quickly and broadly to mitigate its effects. Since late 2008, we have taken numerous actions to dramatically reduce our cost structure and improve our cash flow, including cold stacking idle rigs and reducing capital spending. Our opportunistic retirement of debt at a discount to par, and the sale of non-core assets are recent measures that exemplify our commitment to strengthening our capital structure."
Rynd continued, "Further, today we are pleased to announce that we have reached an agreement with our lenders to amend our senior secured credit facility to provide the financial covenant relief that we believe will provide us with the flexibility needed to operate through the trough of this business cycle."
Rynd added, "We remain confident in the industry's positive long-term fundamentals; however, we do not anticipate a meaningful upswing in the near-term. Jackup demand in the U.S. Gulf of Mexico is weak, with current demand running at approximately half that of previous historical lows. International demand and pricing are largely still showing signs of slowing; however, we were recently able to extend our contracts on Platform 3 and Hercules 206 in Mexico. These additional contract days add to our solid international backlog which will also help us weather this downturn."
CREDIT FACILITY AMENDMENT
On July 22, 2009, the Company received the lender consents necessary to amend its Credit Agreement related to its $882.0 million term loan and $250.0 million revolving credit facility. The Amendment is subject to certain closing conditions, including a reduction of the revolving credit facility, which is currently unfunded, to $175 million, but is expected to close within the next few business days.
The Amendment modifies certain covenants of the Credit Agreement to, among other things:
- Eliminate the total leverage ratio financial covenant for the nine month period commencing October 1, 2009 and ending on June 30, 2010 and increase the total leverage ratio that we must maintain following the expiration of the nine month period to 8.0x for the quarter ended September 30, 2010, with step-downs thereafter,
- Revise the fixed charge coverage ratio definition and the minimum ratio that we must maintain to be more favorable to the Company,
- Add a minimum liquidity covenant, requiring the Company to maintain the sum of unrestricted cash and equivalents and revolving credit availability of at least $100 million through December 31, 2010, declining to $75 million through December 31, 2011, and declining to $50 million thereafter.
The initial interest rate of the amended facility will be 6.5% over LIBOR, with a 2.0% floor on LIBOR. The interest rate on the facility will decline by 1.5%, to 5.0% over LIBOR once the principal on the term loan is reduced by approximately $200.0 million to $684.3 million or less. The interest rate will decline further by an additional 1.0%, to 4.0% over LIBOR as the principal on the term loan is reduced by an additional $200.0 million to $484.3 million or less.
OPERATING RESULTS DISCUSSION
During the second quarter 2009, Domestic Offshore revenues decreased to $37.0 million from $97.4 million during the corresponding quarter of 2008, largely as a result of weak demand and lower average dayrates stemming from a steep reduction in exploration and production spending. Second quarter 2009 average revenue per day per rig decreased to $52,365 from $60,445 in the second quarter 2008, while operating days declined to 706 from 1,612 in the same periods, respectively. Domestic Offshore recorded an operating loss of $20.2 million for the second quarter 2009 compared to operating income of $23.6 million in the second quarter 2008.
International Offshore revenues increased by 37% to $101.8 million in the second quarter 2009 compared to $74.2 million for the same period of the previous year. The increase was due primarily to the commencement of operations on the Hercules 208, Hercules 261 and Hercules 262, which also helped to generate an increase in average revenue per day per rig to $129,133 from $115,556 in the same period a year ago. Utilization for International Offshore decreased slightly in the second quarter 2009 to 86.6% versus 87.7% in the second quarter 2008; however operating days increased to 788 from 642 in the same periods, respectively, as a result of the aforementioned incremental capacity. Average operating expense per day per rig decreased to $42,998 in the second quarter 2009 from $50,967 in the prior year period due to the warm stacking of the Hercules 156 and initial start-up costs incurred in the prior year related to our India operations. Including a $26.9 million non-cash impairment charge on Hercules 110, second quarter 2009 operating income was $17.2 million versus second quarter 2008 operating income of $27.4 million.
As a result of extremely weak demand, the Company's fleet of inland barges was not active during the second quarter 2009. Inland generated revenue of $40.3 million in the second quarter 2008. Cost reduction efforts led to a $22.4 million reduction in operating costs to $8.9 million in the second quarter 2009 relative to the year-ago quarter. The segment recorded an operating loss of $17.4 million during the second quarter 2009 versus an operating loss of $2.9 million during the corresponding quarter of 2008.
Domestic Liftboats recorded revenue of $18.9 million during the second quarter 2009 compared to $22.3 million in the second quarter 2008. As a result of increased shipyard time on larger vessels, the fleet mix in the second quarter of 2009 adversely impacted average revenue per vessel per day which declined to $7,727 in the second quarter 2009 from $9,030 in the same period of 2008. Utilization for the segment remained relatively flat at 63.6% in the second quarter 2009. The decline in revenue led to a reduction in operating income to $0.2 million for the second quarter 2009, from $3.0 million in the second quarter of the previous year.
International Liftboats revenues increased slightly in the second quarter 2009 to $20.7 million compared to $20.3 million in the second quarter 2008. Average revenue per vessel per day increased to $20,644 in the second quarter 2009 from $15,255 in the year-ago quarter, partly resulting from the commencement of operations of the Amberjack in the Middle East. Partially offsetting the higher revenue per vessel per day was a reduction in utilization to 58.1% from 83.7% in the same respective periods as a result of lower capital spending by our customers. Operating income increased by $1.6 million in the second quarter 2009 to $8.4 million.
Liquidity and Capitalization
At June 30, 2009, the Company had cash and cash equivalents totaling $129.9 million and total debt of $969.2 million. In April 2009, the Company purchased $20.0 million in notional amount of the Company's 3.375% Convertible Senior Notes for $6.1 million in cash, and in June 2009 the Company acquired and retired $45.8 million in notional amount of its 3.375% Convertible Senior Notes in exchange for the issuance of 7,755,440 shares of common stock. Since September 30, 2008, the Company has retired approximately $171.7 million of notional amount of debt for total cash of $68.6 million and equity consideration of $34.0 million.
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