Hercules Offshore Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Hercules Offshore (HERO)

Hercules Offshore (NASDAQ:HERO)

Q4 2012 Earnings Call

February 12, 2013 11:00 am ET


Son P. Vann - Vice President of Investor Relations & Planning

John T. Rynd - Chief Executive Officer, President and Executive Director

Stephen M. Butz - Chief Financial Officer and Executive Vice President


Todd P. Scholl - Clarkson Capital Markets, Research Division

Collin Gerry - Raymond James & Associates, Inc., Research Division

David Wilson - Howard Weil Incorporated, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division


Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Hercules Offshore Earnings Conference Call. My name is Darcelle, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Son Vann, Vice President of Investor Relations and Planning. Please proceed.

Son P. Vann

Thank you, Darcelle, and good morning, everyone, for our quarter and year end 2012 earnings conference call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Senior Vice President and Chief Financial Officer; and members of our senior management team, including Troy Carson, Chief Accounting Officer; and Beau Thompson, General Counsel.

This morning, we issued our fourth quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com.

Following our usual format, John will begin the call with some broad remarks regarding our performance and current market conditions. Stephen will follow with a more detailed financial discussion and provide cost guidance for 2013. And we'll open up the call for Q&A thereafter.

Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2013 and beyond, as well as activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future are forward-looking statements.

Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings, which can be found on our website or the SEC's website, sec.gov

With that, let me turn the call over to John.

John T. Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported our fourth quarter and full year 2012 results. For the fourth quarter, we reported a net income from continuing operations of $4.3 million or $0.03 per diluted share, compared to a net loss from continuing operations of $21.5 million or $0.16 per diluted share in the fourth quarter of 2011.

For the full year 2012, we reported a net loss from continuing operations of $127 million or $0.83 per diluted share, compared to $66.5 million or $0.51 per share -- diluted share for 2011. The fourth quarter capped off what has been a very positive transitional year for the company. Business fundamentals in our Domestic business experienced significant gains throughout 2012, surpassing even our most bullish expectations. At no point during the last year did our customer show any hesitation on their desire to drill in the Gulf of Mexico, even when prices for WTI crude fell below $80 in June, and Henry Hub gas went well below $2 in the spring. As the drilling markets strengthened through the year, so did, too, our backlog. By year end, we had approximately 8 months of backlog per marketed rig, a record for our company, and almost double what we began the year with.

Our growing backlog, along with customers' increasing concerns about rig availability in 2013, gave us confidence to start the process of reactivating our first cold-stacked rig, which we announced last November. If current conditions for rig supply and demand persist, we see the possibility of further reactivations in the U.S. Gulf of Mexico, as we progress through 2013.

Our drilling operations on the international front faced a number of challenges in 2012, from the lag and spud can damage on the Hercules 185, which ultimately led to the vessel being declared a constructive total loss, to the extended downtime on 2 of our rigs in Saudi Arabia, as they completed their prior term contracts and prepared for the next 3-year contracts.

We expect our international drilling operations to rebound in 2013, with the bulk of the shipyard downtime behind us and the addition of the Hercules 266 through our contracted rig fleet in the second quarter.

I'm also proud to receive a clean bill of health on our FCPA investigation, a testament to our robust corporate compliance systems and unwavering ethical standards. In our liftboat business, we made some strategic asset repositioning and pricing moves, which we expect will translate to improved profitability going forward.

We continue to make significant progress on divesting of nonstrategic and idle assets. During 2012, we sold 11 cold-stacked rigs and our only asset in Mexico, Platform Rig 3, along with various other excess equipment, that generated $74 million in proceeds.

Finally, we removed a substantial overhang with our April debt refinancing. We ended 2012 with just shy of $260 million of unrestricted cash, almost double what we had a year ago. Given our contract backlog and the current industry environment, we expect to generate a growing amount of free cash flow in 2013. This gives us a lot of options going forward, to reinvest and grow our business, reduce debt or some combination of both.

Moving to an overview of our business by region, starting with the U.S. Gulf of Mexico. As I previously mentioned, conditions here are very strong and in many respects, stronger than the prior peak in 2007; visibility on the domestic jackup businesses at unprecedented levels. Based on our last fleet status report, we currently have an average backlog of approximately 8 months per rig. This is 2x to 3x greater than our backlog in 2007.

Roughly 3 quarters of our available rig days in 2013 are already contracted, and most of what has not been contracted is under some level of negotiation. In fact, we already have a few contracts that extended into 2014, and are talking to several operators about their 2014 drilling needs. Although dayrates have not reached 2007 peak levels, and the rate for 200-foot mat-cantilever jackup reached 120,000 per day. We are not that far behind, at just over 100,000 for the leading edge rate.

The gains in backlog and dayrates are a function of the tightness in rig supply and are a revival of the demand by customers, both existing and startups, that are largely targeting oil ridge drilling opportunities in the Gulf.

In the terms of overall rig supply, there are currently only 36 competitive jackups in the region, all of which have been essentially fully contracted for over a year now. We own 1/2 of these 36 rigs.

Most of the industry's available rig days in 2013 are already contracted, and we felt that this was the prudent time to move forward with our first rig reactivation, Hercules 209. Since we announced the reactivation last November, we have secured approximately 2 months of work at an average rate of over 90,000 per day, and we are in negotiation for additional work for this rig at current leading edge rates. Capital costs to reactivate the rigs are approximately $14 million.

Based on these economics, we estimate full capital payback of approximately 8 to 9 months. By the time the Hercules 209 completes its shipyard time in late April, we expect to have contracts in place to recoup the majority of our incremental investment.

Additional reactivations are possible and will depend on customer demand, our ability to add backlog to the existing marketing fleets, including the Hercules 209, and our overall outlook on the jackup market in the U.S. Gulf.

Is it possible that we may see additional rig supply beyond our reactivations? Sure. One of our competitors recently moved a rig from the Mediterranean to the U.S. Gulf, and there may be a handful of other rigs relocating to the U.S. over time. But we don't expect a large influx of jackups to the region. This is because dayrates and contract terms in the U.S. Gulf still lag most major international jackup markets, especially when you factor in the mobilization and high cost to operate in the U.S.

Mexico is always an area to watch, given its close proximity to the U.S. The PEMEX has been very active in recontracting their incumbent rigs to multiyear contracts and are aggressively trying to add jackups to their fleet. The factors that have led to a more than a decade-long trend of net mobilizations out in the region are still in place.

So while you see -- may see a one-off jackup mobilized to the U.S. Gulf of Mexico from time to time, we would expect that you will continue to see selected departures as well. Reactivations of cold-stacked rigs by our competitors is also unlikely, given their own demanding new build programs and focus on the Deepwater. Hence, we see limited to incremental supply coming to the U.S. Gulf of Mexico over the next several years.

On the demand side, big acreage holders, Chevron, Apache, Arena and Energy XXI remain very active drillers and active bidders of lease sales. We have also seen a surge in demand from smaller independents, public and private, as well as several newly formed private equity-backed E&P companies that are getting active in acquiring assets and employing new capital in the U.S. Gulf of Mexico. We have 3 rigs contracted to these newly formed entities and are in discussions with several of these groups for additional work. The point is, there are a lot of customers active in the U.S. Gulf of Mexico today, with very few rigs available.

Over the past 2 years, we alone have worked for 35 different E&P companies. In comparison, between us and our peers, there are only 36 competitive jackup rigs available in the entire region. Most of our customers are focusing their drilling efforts on oil and liquids-rich opportunities. Client discussions suggest that there is a multiyear inventory list of oil prospects across our customer base.

The near absence of natural gas drilling in the U.S. Gulf has not materially impacted our business. And we don't expect much recovery in natural gas prices in the coming year. If prices were to strengthen to above $4 and sustain at these levels, we could see another layer of rig demand open up. All in all, we still see a number of catalysts that could drive a jackup market higher in the U.S. Gulf of Mexico.

The international markets are also quite strong. International utilization rates of market at jackups remained high at approximately 94%, with most major international regions near full utilization when you exclude lesser competitive rigs. Dayrates have also risen over the past year, as evidenced by our latest contract extension on the Hercules 260 in West Africa, where we achieved roughly a 20% increase from our prior rate.

Overseas demand continues to grow, and most regions have surpassed their prior peaks in 2007. Demand growth has allowed the industry to absorb the influx of new builds in an orderly manner.

During the last 3 years, the shipyards have delivered 52 jackups, nearly all of which are under contract. Over the next 3 years, there are currently 88 new builds scheduled for delivery. Of this amount, we estimate approximately 20 rigs are owner-operated or for captive markets, Russia, Iran and China. There are also approximately 25 new build rigs similar to Discovery Offshore rigs, which are targeting new markets not accessible with the standard jackup fleet. Given the market segmentation of the new build fleet, the continued retirement cycle the legacy jackup fleet, as well as a modest amount of demand growth, we don't expect a disruption to pricing utilization as these new builds enter the market. Our own international jackup fleet has limited near-term market exposure, as most of our rigs are contracted through 2014.

To briefly summarize on the status of our international rig fleet. The Hercules 266, which is contracted to Saudi Aramco through late 2015, encountered some shipyard-related issues late last year. Among those issues, one of the shipyard cranes toppled over our rig, which damaged both of our 2 of our 3 rig cranes, which extended our time in the yard by several weeks. We are finalizing our time at the shipyard and will be prepared with a rig for its excess as tested by Aramco. If all goes as expected, we should be on contract by late March.

Our Hercules 266, along with the Hercules to 261 and 262, will all work for Aramco under multiyear contracts to provide a stable source of cash flow to the International Offshore segment. As previously mentioned, we received a 1-year extension on the Hercules 260, that will keep the rig contracted through April 2014. The extension has an average dayrate of just under 110,000 per day.

On the Hercules 208, we are on contract in Myanmar at just under 100,000 per day through May. Thereafter, the rig is due for its special survey. We are pursuing opportunities for the rig in Southeast Asia after it finishes with the survey and are optimistic about its future.

Finally, we were not able to come to terms on the unique opportunities that we've been pursuing for the Hercules 170. We continue to market the rig, but do not expect anything imminently.

As for the rigs owned by Discovery Offshore that we are managing, interest levels for these rigs are exceptionally strong, particularly over the past few months. I'm confident that we will secure contracts for 1, if not both rigs, in the next few months, and that both rigs will be delivered on schedule. The first rig, the Discovery Triumph, is scheduled for delivery in June and the Discovery Resilience will be out in October.

Turning to our liftboat business. The fourth quarter typically marks the start of a seasonally slow period for our Domestic Liftboat segment. However, utilization during the fourth quarter of 2012 was exceptionally strong, due in part to what we believe were customers that delayed maintenance work until late in the year. By Mid-December, activity levels have pulled back to their more normal seasonal levels, which we expect will extend through the first quarter this year, before improving in the second quarter. Throughout last year, we have been successful at raising rates on our Domestic Liftboat fleet, despite not having much in the way of demand catalysts to drive this growth. Year-over-year average dayrates rose by 12%. This is more impressive when you consider that we moved one of our largest highest-earning vessels to the Middle East earlier in the year.

For 2013, we believe that these rate gains will hold. We will also continue to look for opportunities to maximize the profitability of these assets, including additional redeployment of assets through other regions, a realignment of marketed supply to match demand.

Our International Liftboat segment rebounded in the fourth quarter, mainly due to reduced shipyard time and operating cost improvements. We've completed the upgrade of the Kingfish, the vessel that we moved from the U.S. Gulf of Mexico to the Middle East last year. The Kingfish went on its maiden contract in the region at a rate that was roughly 50% higher than it was earning in the U.S. We now have 3 vessels in the Middle East, where we expect very solid long-term demand. This market tends to offer longer-term contracts for liftboats, although these opportunities can cluster together at times.

Our first quarter 2013 is one of those times, when all 3 vessels are coming off contract at the beginning of the year to prep for the next opportunities. All 3 have been recontracted, and we will recommence on their next jobs late in the first quarter. 2 of the 3 vessels received long-term contracts, with nearly 2 years of term, at attractive rates. But expect some softness and utilization in the first quarter, before picking up for the remainder of 2013.

Our liftboats in West Africa continue to perform well, particularly in light of the growing competition from local suppliers. While historically, the majority of our business in West Africa is out of Nigeria, we are starting to get more inquiries from other countries in the region, Gabon, DRC and Angola. Growing demand for these markets is positive for us, as we try to expand and diversify our liftboat business in the region.

Finally on the Inland Barge segment. There is not much new to report since our last call. Industry conditions remain anemic. We continue to do a good job to find work for our 3 marketed barge rigs. However, activity levels curtailed toward the end of last year, and we don't expect much improvement in demand until the second quarter.

Pricing remains firm despite the soft industry [ph] conditions. We continue to run this business as efficiently as possible, and we were able to stay cash flow breakeven for 2012. This gives us some hope that we are near a trough and well-positioned should conditions improve.

In closing, we entered 2013 with probably the strongest fundamentals in the U.S. Gulf of Mexico that I have experienced in my 33 years as a driller. The robust environments should remain intact, at least through the end of this year, and unless there's a major downdraft in oil prices, or a significant influx of jackups into the region, which I don't expect, we can see the market strength in the Gulf of Mexico, easily extend well into 2014.

International markets are also very strong, supported by firm crude oil prices that will drive capital spending growth. We need to expand our international presence. The acquisition of Hercules 266 is along these lines, and we'll seek other opportunities, whether it be on the drilling or liftboat side, to grow our global footprint. But we will stay disciplined with any transaction, recognizing that debt reduction is a great alternative use for excess cash.

Lastly, the strong industry environment does come with some drawbacks, principally as it puts pressure on the very facets of our operations. In addition, everyone in our industry is aware of the amount of new capacity, both in the shallow and Deepwater markets, that is scheduled to be delivered over the next 3 years. In order to provide the high-quality services that customers come to expect from us, we must maintain competitiveness with our people and our equipment. Consequently, the tight environment will likely cause our operating cost to rise, particularly on labor and insurance. Stephen will go into greater detail during his remarks on our cost expectations, but let me emphasize that our pricing gains far outstrip these cost creeps, and we expect profit margins to materially expand in 2013, based on existing contracts and current pricing trends.

With that overview, let me turn the call over to Stephen.

Stephen M. Butz

Thank you, John, and good morning, everyone. In keeping with our normal practice, my comments will focus on a sequential comparison on the quarterly result, as opposed to a year-over-year comparison. I'll provide our 2013 cost expectations and details regarding our capital spending plan, before closing with some remarks on our liquidity and capitalization.

For the fourth quarter, we have reported net income from continuing operations of $0.03 per share, compared to a loss of $0.10 per share in the third quarter, excluding certain nonoperating items in the prior quarter. Overall, the improvement in Gulf of Mexico dayrates and strong performance on liftboats, more than offset higher-than-expected operating expenses in Domestic Offshore and a heavy shipyard schedule. We will also continue to benefit from our asset divestiture efforts, and we collected another $10 million from Angola Drilling Company related to a prior contract on the Hercules 185.

With this latest payment, we have collected a total of $38 million from ADC, with a balance of $44 million owed to us.

Moving onto our segment results, starting with Domestic Offshore. Average dayrates continue to move higher, although extended shipyard time, including some on our highest-earning rig, the Hercules 350, limited the improvement. As a result, fourth quarter revenues of $91.1 million were slightly below third quarter levels. Average dayrates increased by 7% to $67,700 during the fourth quarter.

Based on our current backlog, we estimate our first quarter average dayrate will approximate $80,000, and with leading edge rates well above that level, we would expect our average dayrates to continue to move higher as we progress throughout the year.

Fourth quarter utilization declined 81% from 88%, as we upgraded the electrical system on the Hercules 205 and performed special surveys on the Hercules 253 and 350. Utilization should improve in the first quarter, as these rigs are now out of the yard and on dayrate, and we have not scheduled any further survey work on our domestic rigs until late second quarter.

Operating expenses totaled $60.9 million in the fourth quarter, which benefited from approximately $7.4 million of net gains from asset sales. Excluding these gains, fourth quarter operating expense was $68.3 million, compared to $62.3 million in the third quarter. The increase was mainly driven by larger-than-anticipated workers compensation expense and higher repair and maintenance expense. In total, these unanticipated items added over $6 million to the fourth quarter operating expenses.

For the full year 2013, we currently estimate segment operating expenses will range between $270 million and $280 million or between 39,000 and 41,000 per day, including an allocation of cold-stacking and shore-based cost. The midpoint of our per day range estimate represents an approximate 6% increase from 2012, excluding the impact of gains or losses on asset sales.

Cost inflation will largely be driven by higher-than-anticipated -- or higher anticipated labor and burden expenses, which reflects our expectation of continued tightness in the labor market and our efforts to maintain competitiveness within our workforce. We expect higher insurance cost given our claim history in 2012 and to a lesser extent, higher repair and maintenance expense.

Our 2013 cost estimate assumes only 1 rig reactivation, the Hercules 209. Of course, cost estimates would increase further if we undertake additional reactivations. We estimate operating cost for a reactivated rig should to be between $33,000 and $35,000 per day, compared to cold-stacking cost of $2,000 per day.

For the first quarter 2013, we estimate Domestic Offshore operating expense will range between $65 million and $70 million.

Our International Offshore segment reported operating income of $9.8 million, compared to the third quarter income of $3.5 million, excluding certain nonoperating items in the prior quarter. Fourth quarter revenue was $49.8 million, compared to $37.1 million in the third quarter. The increase in revenue was due to the $10 million payment from Angola Drilling Company on the Hercules 185, higher dayrates on the Hercules 260 and a full quarter of operations on the Hercules 262. These items were partially offset by the absence of Rig 3, which we sold in August.

And excluding the impact of the ADC payment, average revenue per day for the International Offshore segment rose to $110,000 from $94,400 in the third quarter, while utilization declined by 31 operating days.

International Offshore operating costs were $27.1 million, down from $31.8 million in the third quarter, when we exclude the gains on the sale of Rig 3 and the insurance settlement on the Hercules 185. The decline in expenses was due to the elimination of expenses on Rig 3 and after its sale, and reduced operating expense on the Hercules 208.

Looking forward, our first quarter results will be impacted by $4 million of incremental repair expense on the Hercules 260. The rig recently incurred damage to one of its spud cans while mobilizing off-location. A portion of this expense is expected to be recovered from the client, but in any case, this has increased our operating cost estimates. As a result, our first quarter operating cost estimate for International Offshore is in the low to mid $30 million range.

For the full year, we expect International Offshore operating expenses to range between $115 million and $125 million. This includes the repair cost on the Hercules 260, as well as the incremental cost on the Hercules 266, once it goes into service late this quarter. Partially offsetting these incremental costs is the elimination of expenses on Rig 3 and reduced stacking expenses on the 258.

Our Inland segment narrowed its operating loss to $600,000, compared to a loss of $2.8 million in the third quarter. Revenue increased by 10% to $8.1 million, as we generated modest improvements in dayrates and utilization. Revenue per day improved by $700 and utilization rose to 90% from 83%.

Fourth quarter operating costs were $5.2 million, down from $6.7 million in the third quarter, primarily on lower workers compensation expense. Both quarters contain approximately $1.3 million of gains from asset sales.

We expect full year 2013 Inland segment operating expenses to range between $30 million and $33 million. Using the midpoint of this range represents roughly a 5% increase year-over-year, excluding the impact of gains from asset sales.

First quarter operating costs are expected to range from $7 million to $8 million.

Turning to our liftboat operations. Operating income in the Domestic Liftboat segment increased to $4.7 million from $2.6 million in the third quarter, with improvements in both utilization and dayrates. As John mentioned, Domestic Liftboats had a very strong performance in the fourth quarter. Typically, the fourth quarter marks the start of the seasonally soft period for demand. However, last year, we maintained the healthy level of activities through mid-December. In fact, utilization increased during October and November, leading to an overall fourth quarter utilization that actually expanded to 72% from 67% in the third quarter. Utilization did taper off during January, but still remains above demand levels through the same time in 2012.

Average revenue per day also increased by 4% to $9,300. Throughout 2012, we took aggressive steps and were successful in achieving rate increases across each asset class. We've also been successful at controlling costs in Domestic Liftboats.

Operating expenses rose modestly to $10.5 million from $9.9 million in the third quarter. We expect that pricing gains achieved in 2012 will hold during 2013 and we will look for additional opportunities to enhance the performance of this segment.

Along these lines, we have elected to stack 3 of our smallest liftboats at the beginning of February. These liftboats have historically achieved utilization of 50% or less and by stacking the vessels, we will reduce overall cost and better align our capacity with demand. As a result of our stacking efforts, we expect first quarter operating expenses to approximate fourth quarter levels and full year 2013 to be flat with 2012.

International Liftboats experienced a strong improvement in the fourth quarter with operating income rebounding to $11.6 million from $6.5 million in the third quarter. Utilization increased to 75% from 68% as we put the Kingfish to work in the Middle East and experienced greater utilization in West Africa particularly on the smaller 120 to 130-foot class vessels.

Our average dayrate of $23,000 was essentially flat with the third quarter level. Operating costs declined by $4 million to $16.4 million in the fourth quarter as we incurred lower workers compensation and [indiscernible] expenses in West Africa during the current quarter, while third quarter expenses were burdened by some incremental repair costs on the Whale Shark.

For 2013, we expect International Liftboat operating expenses will increase by 5% to the low $70 million range, partly reflecting a full year of operations on the Kingfish. We estimate first quarter operating expenses will range between $17 million and $19 million.

Moving onto some of the other income statement and cash flow items. General and administrative expenses for the fourth quarter were $20.7 million, up from $15.7 million in the third quarter. Fourth quarter G&A was higher than our guidance driven by higher labor costs and incentive plan accruals. We expect full year 2013 consolidated G&A to range from $72 million to $75 million. This represents an approximate 6% increase from last year after you eliminate the $8.8 million benefit recorded from the earlier ADC payment that we received in April of 2012.

For the first quarter, we estimate the decline in G&A to around $18 million to $19 million. Depreciation and amortization expense was $40.2 million, down from the third quarter of $40.8 million. We expect first quarter D&A to be similar to the fourth quarter. Full year 2013 depreciation and amortization is expected to increase modestly to the low $170 million range, reflecting the addition of the Hercules 266 in the Middle East and the Hercules 209 which we are reactivating in the U.S. Gulf.

Interest expense was $19.3 million, a modest decline from $19.9 million in the third quarter. We expect full year interest expense of just under $80 million, assuming no major changes to our debt structure other than the repayment of our convertible notes in June 2013.

Moving onto income taxes. We reported a fourth quarter income tax benefit of 29%. For calendar 2012, our effective tax rate was 15% but cash taxes were only $10 million. In our third quarter conference call, we provided some fairly detailed guidance on 2013 tax assumptions, which I will reiterate again today.

To summarize, our cash taxes are expected to remain relatively low in 2013 in the $15 million to $20 million range. Our effective book tax rate is dependent on your estimate of our profitability and how much pretax profit is generated in the U.S. versus various foreign jurisdictions. Though we don't provide earnings guidance, using the current consensus estimate for 2013 EBITDA of approximately $325 million, we estimate our reported income tax rate would approximate 50%. If you estimate EBITDA to be 10% higher than current consensus with the debt difference stemming from better domestic performance, the tax rate should decline to the mid-40% range.

Going the other way up to EBITDA estimate was 10% below consensus, the effective tax rate could be the 60% range. The relatively high effective book tax rate is driven by the fact that at these EBITDA levels, we're relatively close to breakeven on our pretax income for the effective rate is not particularly meaningful. As we move further into profitability, the rates should decline closer to the effective U.S. rate of 35%.

Beyond the tax guidance that I just discussed, I want to bring to your attention one other tax item that will have a positive impact on the first quarter results. It relates to our acquisition in the Seahawk's asset. As you may recall, when we closed on this acquisition in April 2011, we characterized the transaction as a purchase of assets for income tax purposes as opposed to reorganization as it didn't qualify for that characterization at the time. We have recently been able to reclassify the transaction as a reorganization, which means that we essentially take on Seahawk's tax attributes, which included tax credits and then operating loss carryforwards.

As a result, we expect to record a noncash gain in the first quarter to reflect the estimated future asset. Due to the uncertainty and timing of these tax assets and because they're used in subject to various limitations, we're still finalizing the amount but expect to book the gain in the first quarter results. While this will represent a noncash benefit in the first quarter, we expect it to translate to a cash benefit in the future to the extent we're able to reduce our future domestic cash income tax expense.

As for our capital and drydocking expenditures, for 2012 we spent $179 million. This includes $86 million to acquire transport and upgrade the Hercules 266 and another $5 million to transport and upgrade the Kingfish, leaving just under $90 million for maintenance capital and drydocking expenditures. This maintenance CapEx included 6 special surveys of our domestic rigs and contract-specific upgrade work for the 261 and 262 for Saudi Aramco.

In 2013, we estimate our maintenance capital and drydocking expenditures will approximate $100 million, which includes special surveys on 4 of our Domestic Offshore rigs and 2 international rigs. Our total spend when including growth-related CapEx is expected to range from $130 million to $140 million as a result of ongoing preparation for the 266 for its contract with Aramco and reactivation of the Hercules 209. We will be reimbursed by Aramco for a lump sum of $25 million, which will be recognized in revenue over the contract period once the rig passes acceptance testing. After reactivation, should we elect to reactivate a second jackup, the incremental CapEx is estimated to be $14 million. Thereafter, reactivate some costs will likely increase.

With respect to our balance sheet and liquidity, at year end 2012, we had unrestricted cash and equivalents of $259 million. As of today, we have approximately $290 million of cash and full availability under our $75 million revolver, providing ample liquidity to meet our capital spending program and pursue further growth opportunities.

We also continue to make progress on divesting of cold-stacked assets. During the fourth quarter, we sold 3 cold-stacked jackups for alternate use along with 2 submersibles and 1 inland barge rig for scrap. In total, we generated proceeds of $23 million in the fourth quarter from asset sales, bringing our total proceeds in 2012 to $73 million. We still have outstanding an agreement to sell the Hercules 27 inland barge for $5 million, on which we've already collected a sizable deposit and are in dialogue with various parties on possible sale opportunities for other rigs.

In closing, we're looking forward to a bright 2013. Based on our backlog in our domestic jackup business and limited contract rollover exposure with our international jackups, we expect to be in a position to generate greatly improved free cash flow this year. If the market strength extends into 2014, free cash flow generation could be even better next year. With our strong liquidity, we have a lot of options to reinvest capital and grow the company.

With that said, we have and will remain very disciplined with our capital investment decisions. Over the past year alone, we passed on numerous opportunities that were strategic but did not meet our return requirements. And we've been careful not to reactivate rigs prematurely.

Beyond Growth through acquisition and reactivations, we also have the opportunity to further strengthen our credit profile starting with the repayment of our convertible notes in the second quarter and possibly, the early redemption on our $300 million of 10.5% notes in October, which could be refinanced at a much lower rate today.

All in all, we have a lot of options to deliver value to our shareholders and we'll judiciously to execute in the most attractive long-term opportunities for the company.

With that, we're now ready to open the call for questions. Operator?

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Todd Scholl with Clarkson Capital Markets.

Todd P. Scholl - Clarkson Capital Markets, Research Division

I know you kind of addressed this a little bit earlier in the call, but you do have about -- you do have a large amount of cash that's about 17% of your enterprise value now. And I know you talk about either repaying debt or potentially doing something with Discovery. Is that a decision that we should expect to be made in kind of the short to intermediate term because it is a lot of cash.

Stephen M. Butz

Yes, I think if you just look at the first half though, we do have some uses for the cash with the extensive cap spend we have in the first half. We have the reactivation. We also have the contract-specific work on the 266, as well as $68 million in convertible debt that we'll have to repay in the first half. So the cash will likely decline even in the absence of other opportunities in the first half. But yes, we're continuing to look at other uses, whether that's further debt repayment later in the year when we have the opportunity in October, for early redemption on the 10.5, as well as we always have, I can't remember, Tom, when we haven't had acquisitions in various phases of negotiation. Of course, most of the time, they don't happen. But we have a number of irons in fire as we usually do and we're optimistic that we'll be able to put the cash to work in a positive fashion.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Okay. And then just kind of an unrelated follow-up. Just on the Hercules 266, is there any kind of recourse that you can get for Lamprell in terms of the -- related to the downtime and the lower rate as a result of the incident with the crane falling on the rig?

John T. Rynd

Yes, we're going to pursue all remedies that are available to us.


And your next question comes from the line of Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

You all did a great commentary on the markets and I have a little bit of a different question. We're going around [indiscernible] this past week and talking with some operators. And we heard some of the smaller private guys mentioning some of the regulations changing in the shallow water Gulf of Mexico as it relates to government bonding and having insurance against catastrophes and stuff like that. And that being a significant cost increase for the smaller guys. Are you hearing anything about that? Are you seeing anything in your business? Are you hearing anything from your customers in terms of costs going up because of government regulations or insurance needs?

John T. Rynd

Collin, that's a great question. That was really one of the hot topics post Macondo, but that has really laid off the radar screen since then. And we have not heard any pending legislation or rule change coming out of the government affecting the bonding. Right now, the max bonding is $35 million. But it's something we have to watch because last thing we need is further expenses laid on our customers.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Right. And so, if there was an increase in expense, it happened close the resolution of Macondo and since then, there hasn't been a huge increase. It's kind of just been a status quo.

John T. Rynd


Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. Sticking to the cost side and just changes in the industry, when I think about your business, you've got the land market going gangbusters, especially in Texas, and you've got a resurgence in the Deepwater side. Talk to us about personnel. I mean, is that becoming a bottleneck for you guys? Are you guys seeing your competitors in those 2 markets come and try to poach some of your experienced crews? And how are you able to mitigate some of that?

John T. Rynd

Good question. I think the first -- as far as really we benefited from the slowdown in the land rig count. We've had numerous inbounds and we've hired numerous guys that came off land drillers as the rig went stacked. And if you look at kind of wage pressure, we saw it really first quarter of last year and we made amends on that. We raised our kind of a 7% across the board, pay increase to offshore guys. Post that, we haven't seen any near-term waste pressure on our fleet. If you go back to really the first -- second quarter of '11, it's really kind of a perfect storm for us. We had just closed Seahawk and they were paying 17% by position greater than we were paying. And they were matching the 401(k) at 6% and our match was 0. At the same time, the moratorium had been lifted in October of 2010 for Deepwater and they were going back to work. So we had pressure on both fronts i.e., entry level people going to Deepwater and then trying to match and then keep the dense Seahawk employees happy. So we have matched -- we went up to a 3% match in our 401(k) with the aforementioned 7% increase in 2012. Right now it feels like wage pressure has eased off near term. But I think as I said in our prepared remarks, you look around the world, the amount of capacity that's going to enter this market, do a headcount per floater, per jackup. I mean, this industry needs a lot of people. Right now, we have enough people and we're not sensing a real push to wages. But saying that, we have budgeted for that event to happen.


And your next question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

John, just going back to some of your prepared comments as far as the demand you're seeing. I wanted to get a better understanding or kind of -- and the potential conversations that you're having with customers that don't already show up on your Fleet Status Report, and if that's more the private companies or any other public companies out there that are making inquiries.

John T. Rynd

It's predominantly people that don't have rigs right now is the private guys. If you look at our fleet status, Chevron, Apache, EPL, Energy 21, I'll have 1 to 3 of our rigs and then we have a host of very solid private companies, long-term players in the Gulf of Mexico arena, Hall-Houston, Tana, who've been around long time and are very good customers. So it's more of the private equity backed entrants that are into the game. As I mentioned in my prepared remarks, currently we have rigs contracted to 3 of those. We're in discussions with a couple of others for ongoing work.

David Wilson - Howard Weil Incorporated, Research Division

With that characterization, do you think there's -- would there be more dayrate pressure or I guess, ability to reach dayrates with those guys versus public guys are in the past has there been no distinction between the 2 groups really?

John T. Rynd

I think you can pick your spots and raise your rates.

David Wilson - Howard Weil Incorporated, Research Division

And then kind of sticking here with dayrates and again I think you touched on this a bit in your prepared remarks, but what level do you think dayrates have to get to in the Gulf of Mexico to see the possibility that we'll see just more than just 1 or 2 rigs come back to the Gulf? Considering mob cost and maybe some reactivation cost for other guys, but what levels in the Gulf of Mexico do you think they need to get to today?

John T. Rynd

Well, let me give you just kind of an example we run internally, and we use our Hercules 208. Which just commenced this program in Myanmar. As far through May, we got a 90-day survey. We're working on opportunities beyond the survey, but nothing firm. So let's say, we elect to bring that rig back to the U.S. Gulf of Mexico, it would be the most capable 200-foot mat-cantilever in the Gulf. But here's the math, the mob is going to be easy $7 million. We have consistently earned $100,000 or greater in that region, and we're going to be down for 90 days during the tows. That's another $9 million. So you've got a cost impact, you've got to recover of about $16 million. If you round that up over a year, that's $45,000 a day. You've take in your upcost, round it to $35,000 for ease of math, you've got an $80,000 a day hurdle that you've got to overcome. And right now the leading edge rate for that class of rig is 102. So you got a $22,000 day cash margin. You just left the region where you've got a $60,000 cash margin. So let's assume the market continues to strengthen and we get back to previous peak dayrates and the 200 mat-cantilevers go to 120,000 a day. You have a $40,000 day cash margin, but you just left the region that has $50,000 to $60,000 a day margin. So I think that's not dissimilar that math what other drillers go through when they're in a region with active rigs. Now let's take stacked rigs. Well, right now in the international market, there's more jackups working than ever that we've had in offshore drilling business. We're beyond previous peaks. So the rigs that aren't working today, they're not working for a reason, either their capabilities are light or they need a heavy CapEx. So let's say you've got a rig in the Middle East, you got a mob here, that's $7 million to $10 million, and you've got to spend $30 million to $40 million. So the math even gets worse for the cold-stacked rigs. So I mean, that's why when you look out for share through 2013, we don't see any real significant supply creep. And of course, our biggest concern always, every year, is what's Mexico going to do? Well, Mexico just renewed the Diamond rig for 3 years at almost $100,000. That's their intent. They're going to try to go long on everything on all the incumbent rigs, and they're still in the market for 10 to 12 incremental rigs. So again at least through '13, we don't see a lot of rigs coming back to the U.S. Gulf. And if the international market stays robust, if oil prices stay in this level, you're going to have CapEx growth into '14 off of a pretty strong 2013 base. Those markets are tight. Again, it could be the same story in '14. We're not predicting that yet, we've got to progress through '13. But you can see where you could look out into '14 and not see substantial supply growth.


And your next question comes from the line of Gregory Lewis with Credit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

John, you mentioned that you were going to -- I guess in February, you were going to stack 3 liftboats in the U.S. market. Just sort of looking at the numbers, it looks like that the U.S. liftboat market has actually been improving. So just see if you could provide a little bit more color around maybe what the decision was to sort of stack those boats and then stacking those for modeling respective. You can sort of give the class of those 3 liftboats that were stacked?

John T. Rynd

Yes. We're going to stack 3 105 class, which is the lowest class vessels. And as Stephen mentioned in his prepared remarks, historically that utilization is 50%. And then the other -- 2 other pieces to that equation as we evaluated at that decision, one is as you well know, the liftboats are the most highly regulated marine vessels. So we have every year, we have some CapEx R&M to spend on the vessels. So you look at what's coming up. You're not going to repay that incremental dollars at a 50% utilization at about a $5,000 a day average day rate. And then beyond that, if you're the market leader, you should allocate your imbalanced supply and demand. And if you can take capacity off to balance that supply and demand plus reduce your overall cost, it's the right thing to do.

Stephen M. Butz

And we think this will ultimately lead to a higher utilization on the remaining 105s.


And your last question comes the line of Byron Pope with Tudor Pickering Holt.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

John, just wanted to get your thoughts. It certainly seems like you mentioned the leading edge has gone from $90,000 a day to just over $100,000 a day for the 200 mat-cantilevers. Is it -- given the tightness in the Gulf of Mexico jackup market, is it fair to think about for your -- and I know over 2/3 of your available rig days are already contracted. But is it fair to think about your rigs that roll into the spot, let's say, in the back half of the year kind of migrating toward that leading edge $100,000 a day? Just trying to make sure I'm being realistic in terms of how I think about your spot market exposure and the dayrates are likely to get for the 200 mats.

John T. Rynd

Yes, I think you're thinking just like we are that everything will roll to then -- whatever that then current leading edge rate is. I think, a perfect example is the 209. We got a 30-day deal, we backed it up with another contract, we're in negotiations at now at the current leading edge rates. So the 209 turned out to be the kind of the -- the rig pricing on the margin. So is there upside in rates? Yes. We're not good at predicting rates, otherwise, we wouldn't be in this business, we'd be making money somewhere else if we could be that condition [ph]. But is there upside in rates? Yes. And as we look at the second reactivation, I think the model will be similar to what we used on the 209. If you go back through last year, I was fairly adamant on the 6-month term plus or minus $80,000 a day to take the risk of that new capital. But really, the guys that have term have the ability to go long on rigs have the rigs they need, so they're not going to take the rig out of cold-stacked at 6 months. They don't need to. Their plate is basically full. So we'll go short contract that at the leading edge rate, while we're doing any reactivation, add backlog. So I think as we market the 203, it's going to be similar to how we've progressed on the 209.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And just on the international side, it seems as though the recent fixtures for jackups that have the high-spec capabilities as the 2 Discovery rigs have been, call it, north of $200,000 a day for term. No reason to think that as you discussed placing those 2 Discovery rigs into the market that they wouldn't be in that same ballpark?

John T. Rynd

That is correct.


And there are no further questions at this time.

Son P. Vann

Thank you, Darcelle, and thanks, everyone, for joining us today. A replay of this call will be available on our website in the coming hours. And as always, if you have any questions, feel free to give us a call. Thanks again.


Ladies and gentlemen, that conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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