Executives
John Rynd - Chief Executive Officer & President
Lisa Rodriguez - Senior Vice President & Chief Financial Officer
Stephen Butz - Vice president of Finance & Treasurer
Analysts
Jeff Tillery - Tudor Pickering Holt
Robin Shoemaker - Citigroup
Collin Gerry - Raymond James
Brian Uhlmer - Pritchard Capital
Igor Levi - Morgan Stanley
Mike Drickamer - Morgan Keegan
Ian Macpherson - Simmons & Company
Pierre Connor - Capital One Southcoast
Waqar Syed - Tristone Capital
Jud Bailey - Jefferies & Company
Geoff Kieburtz - Weeden & Company
Hercules Offshore Inc. (HERO) Q2 2009 Earnings Call July 23, 2009 12:00 PM ET
Operator
Good day, ladies and gentlemen and welcome to the second quarter 2009 Hercules Offshore earnings conference call. My name is Stacy, and I’ll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions)
I would now like to turn the presentation over to your host for today’s call, Mr. Stephen Butz, Vice president of Finance and Treasurer. Please proceed.
Stephen Butz
Thank you, Stacy. Good morning, I would like to welcome everyone to our second quarter 2009 earnings conference call. Participating this morning from Hercules Offshore Management team are John Rynd, our Chief Executive Officer and President; and Lisa Rodriguez, our Senior Vice President and Chief Financial Officer.
This morning, we issued our financial results and filed an 8-K with the SEC. The press release is available on our website at www.herculesoffshore.com. We will follow our normal format today, but before John begins his remarks, I’d like to remind everyone that this conference call will contain forward-looking statements. All statements, other than statements of historical fact that address our outlook for 2009 and beyond, activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements.
Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual results could differ materially from those described in such statements. You can obtain more information about these risks and factors in our filings with the SEC, which can be found on our website and the SEC’s website, sec.gov.
John will begin the call with some general remarks and discussion regarding the outlook and Lisa will detail our second quarter financial results and provide some cost guidance for the remainder of 2009. I will then have some closing remarks, before opening the call for questions-and-answers.
John Rynd
Thank you, Stephen. Good morning and thank all of you for joining the call today. As previously mentioned, we reported our financial results before the market opened today. Excluding non-recurring items, we recorded a net loss from continuing operations of $7.6 million or $0.09 loss per diluted share for the second quarter 2009, compared with income from continuing operations of $20 million or $0.22 per diluted share for the second quarter of 2008.
Our reported results include an impairment on the Hercules 110, which is expected to be sold by mid August. The results also include a gain on the early retirement of debt. Lisa will cover these items in greater detail later in the call. Also, as noted in our release this morning we have reached an agreement with our lenders to amend our senior secured credit facility, which will provide us with a flexibly needed to operate to the trough of this cycle.
I want to thank all of the lenders who worked with us through the amendment process. Stephen will cover the particulars of amendment later in the call. The decrease in our second quarter 2009 earnings per share from the comparable quarter in 2008 can be attributed to very weak market conditions in our Domestic Offshore, Inland and Delta Towing segments, partially offset by growth in our international offshore segment and our stringent cost reduction efforts.
On our last several calling quarterly conference calls, we have struck a fairly cautious tone regarding the industry outlook. Unfortunately, we were right to be cautious as the market has continued to suffer from weak demand.
As of July 16, the domestic contract of jack-up rig count was 17, a low not seen since the early days of the industry and it appears as though the contracted rig count will continue to claim well into the summer, as natural gas prices remain stagnant coupled with operator reluctance to start work during hurricane season.
The previous cyclical rose projects of activity in the U.S. Gulf of Mexico were 42 in 1992 and 45 in 1986. For the first time in the history of offshore drilling, there are more Jack-up’s running offshore in Mexico than the U.S. Gulf of Mexico. Industry wide U.S. Gulf of Mexico, Jack-up drilling backlog now stands at 45 days, but if we exclude to long term contracts in account, backlog is closer to 19 days. For this 17 rigs contributing to the backlog of Hercules rigs.
At this time, last year U.S. Gulf of Mexico drilling backlog was around 85 days and Hercules along at 20 rigs operating. The Hercules 350 will mobilize this morning for a short term job, and we are confident we will have follow on work in direct continuation of this program. In addition we are close to securing 30 days of work to one of our Idle 200 mat Cantilever
Over the last six weeks only three plans have been filed with the MMS for shallow water drilling, this compares with 21 plans filed in the comparable period a year ago. Based on recent building activity in industry conditions, we believe we can maintain a rig count of 4 to 6 in our domestic offshore segment during the third quarter, with a potential for a modest increase in demand in the fourth quarter.
Although Inland barge activity remains extremely slow we are beginning to see signs of life. We have had a number of bids recently and we now have three inland barges contracted on the short term programs all be it in low day rates.
We are in negotiations for additional potential contracts for work during the fourth quarter. As we discussed previously this slow down was driven by lack of access to capital, high service cost, weak commodity prices and thus poor well economics. Well natural gas prices remain depressed the capital markets have improved significantly from late 2008 in early 2009 and service cost have also declined.
Since the high of September 2008, the domestic natural gas rig count has fallen by 58%. This decline in drilling activity will then be followed by a decline in production. Just as the decline was dramatic, we could see a short increase in drilling activity with the rebound in natural gas prices, and we feel Hercules is and we’ll continue to be well positioned to capitalize on the up-swing when the time comes.
Most international market remains soft despite the significant rise in oil prices of bottom, where supply continues to pass demand as rig roll off long term contracts. As rigs move to other regions to seek work, competition remains tough and day rates may experience continued downward pressure. We have seen our Hercules 156 and 170 both go idle this year on completion of their contracts.
However, we have also received extensions for the Hercules 206 and platform rig 3 in Mexico. In addition we recently completed an upgrade of Hercules 185 and earlier this month it commits an 18 month expansion in Angola.
The outlook for near term incremental demand in the international jack-up market is weak, and with currently international Jack-up utilization hovering around 80%, in addition with only 16% of this 67 Jack-ups schedule for deliver to 2012 are contracted as, I said before we believe day rates to be under pressure for at least the reminder of this year and in the 2010.
Our domestic Liftboats fleet has not experience the steep decline in utilization of day rates as we’ve experienced in our domestic offshore and inland segments. After decline in market rates in the last first quarter, early second quarter our domestic Liftboats fleet has been able to generate stable utilization in mid 60% range, with day rates up 5% over the last month. This morning we have 31 Liftboats working, effectively 100% utilization as the non-contracted Liftboats are in for inspection of repair.
It appears we should be able to maintain the utilization in the 65% to 70% range remainder this year subject to hurricane season. In our international Liftboats segment, utilization has been in the 50% to low 60% range, favor our day rates have been strong. Both the well Whale Shark and Amberjack in the Middle East have secured work at attractive rates.
The Whale Shark commits its 90 day charter in South Arabia this morning at a rate of 40,000 per day. Many of our Nigerian Liftboats have also been an awarded long term contract expansion with strong day rates, thus somewhat insulating International Liftboat utilization revenues for the remainder of 2009.
We continue to believe that the Middle East and West African Liftboat markets offer long term growth opportunities for Hercules. All-in-all industry conditions continue to be soft and remain intensely focused on our cost structure and our liquidity. Upon, anticipating this downturn in the fourth quarter of 2008 albeit not to these levels, we acted aggressively and as a result have taken both proactive and opportunistic measures to reduce the effects of the down cycle.
To-date we have cold stack non-Jack-ups, three submersible and 14 inland barges, reduce the size of our overall work force by 37%, consolidated executive management and reduce paying benefits including executive compensation. These and other cost savings initiatives have had the effect of reducing our overall operating cost and general administrative expense by $67 million in the second quarter of 2009 relative to third quarter of 2008 levels or $268 million on an annualized basis.
We’ve also reduced our 2009 capital spending in Drydocking budget by approximately $155 million versus 2008 spending. Repurchase to $108 million of our senior convertible notes for $51 million in cash on an average price of 47% at par. Repurchased an additional $45.8 million is senior convertible notes, in exchange for equity consideration of $34 million, increased our efforts to the vast retired and other non-core assets, agreed to sell the Hercules 100 and110 for $12 million in cash.
The Hercules 110 did not work since the late 1990s. Hercules 110 failed to work in an old province during much of 2008, when oil prices were much higher and represented only operation in Trinidad. We’ve agreed to manage the two Mosvold Middle East Jack-ups which should contribute to our results in 2010. We’ve reached agreement to amend our credit facility, reduced our financial covenants.
In summary the second quarter proved quite challenging as expected and although we cannot know for certain when the eventual up-stream will begin, nor on the slope it will take, it would appear that we are reaching the bottom of the cycle in our domestic focus segments.
I believe our proactive approach, albeit not always the actions that we want to tale, will prove beneficial as the economy in all service sector begin the road to recovery. Before I turn the call over to Lisa for the financial summary, I want to thank all of our employees for their continued handwork and dedication in these challenging times and all of our stakeholders for their continue support of Hercules Offshore.
Now I’ll turn the call over to Lisa.
Lisa Rodriguez
Thank you, John. I will walk through our financial results for the second quarter comparing it to the first quarter, as well as providing our cost expectations for the reminder of 2009.
During the second quarter of 2009, we recorded a loss from continuing operations of $0.09 per share, compared to a loss of $0.05 per share in the first quarter, excluding the effects of non-recurring items.
During the second quarter, we took three initiatives to improve our capital structure, which resulted in the aforementioned non-recurring items. In April we repurchased $20 million of our convertible notes for approximately $6 million, this resulted in a non-recurring gain of $10.3 million. In June we entered into an agreement to sell the Hercules 110 and 100 for $12 million, in connection with the sale we have recorded an impairment of $26.9 million.
To further enhance our capital structure, in June we retired $45.8 million aggregate principle amount of our convertible notes, in exchange for approximately 7.8 million shares of common stock which resulted in non-recurring gains of $3.4 billion.
Now I’ll address the segment results. Our Domestic Offshore segment recorded an operating loss of $20.2 million in the second quarter, which was down compared to the operating loss of $11.9 million in the prior quarter. Revenue declined by $22 million.
Utilization for the second quarter was inline with first quarter levels, at 62%. However, the number of operating days declined by 18% in the second quarter, as we continue to stack idle rigs. Our average revenue per day also decline by 24%, as we began to work off older backlog at higher rates and re-contracted the rigs at much lower market rate.
Total operating cost declined by 25% to $40.7 million. This was a result of our cost reduction efforts that we undertook in the first quarter and early in the second quarter. Although, we do not expect to see a significant reduction in the third quarter of our total cost, we do have the opportunity to stack additional vessels if market conditions require it.
Excluding the impairment charge on the Hercules 110, our International Offshore segment generated operating income of $44.1 million, up from $42.9 million in the first quarter due to lower operating cost. Revenues declined slightly to $101.8 million from a $103.5 million in the first quarter, due to a modest decline in utilization to 87% from 94%.
Average revenue per day, per rig was stable at a $129,000, compared with the $130,000 in the previous quarter. International operating expenses were $39.1 million in the second quarter, down from $44.1 million reported in the first quarter, due imparts from the warm stacking of Hercules 156.
In our inland segment, we’ve reported an operating loss of $17.4 million during the second quarter, just slightly more than the first quarter operating loss of $16.2 million in spite of the fact that due to extremely weak demand we had zero operating days in the second quarter, compared to 298 operating days in the first quarter.
We’ve reduced operating expenses to $8.9 million, from $20.3 million in the first quarter through our stacking efforts. We expect to see a slight improvement in our inland segment results in the third quarter as we currently had three barge rigs working albeit at low day rates and we also will realize the full quarter impact of our cost reduction efforts.
In our Domestic Liftboats segment, we generated $200,000 of operating income, a decrease from $3 million in the first quarter, mainly driven by a 17% reduction in our average revenue per Liftboat per day. The decline in average revenue per day to $7700 in the second quarter from 9300 in the first quarter was largely due to mix, as we had heavy drydock time and thus lower utilization on our 230-foot class vessels in the second quarter.
230-foot class vessels are our largest class vessels in the Gulf of Mexico and therefore earn a higher dayrate as compared to the fleet average. Overall utilization was flat at 64% in the second quarter, compared to the 63% in the prior quarter. Operating expenses decreased slightly to $12.4 million in the second quarter, versus $14.1 million in the prior quarter, due to lower labor and repair expenses.
The International Liftboats segment generated operating income of $8.4 million in the second quarter, compared with the $6.9 million in the first quarter. This was due primarily to a 9% increase in operating days as utilization increased to 58% in the second quarter from 54%. Average revenue per day for Liftboat was 20,600, roughly inline with first quarter average of 20,300.
Operating cost increased to an average of $5300 per day in the second quarter from $4700 in the first quarter, as the Amberjack had a full quarter of operations in the Middle East. Delta Towing reported an operating loss of $3.1 million, compared to an operating loss of $4.3 million in the first quarter.
As a reminder Delta’s results are largely driven by support for drilling related activity both offshore and in the transaction zone, so its results have been impacted by the same soft demand as our Domestic Offshore and Inland segment.
General and administrative expenses were $15.5 million in the second quarter, down from $16.3 million in the first quarter. We remain diligent in our cost control efforts and expect G&A to trend lower in the up coming quarters.
Capital expenditure and drydock expenses for the second quarter were $35 million, of which approximately 60% related to contract preparation and upgrades of our Jack-up rigs and Liftboats that commenced international contracts during 2009, that is Hercules 185 and Amberjack and Whale Shark Liftboat. We anticipate capital expenditures and drydock expenses for the remainder of 2009 will approximate $40 million, almost entirely related to maintenance.
Now I would like to provide our cost expectations, for the reminder of 2009; we estimate cost will be relatively flat in the third quarter. We expect our daily operating cost for rig for Domestic Offshore to remain between 28,000 and 30,000 for working or marketed rigs during 2009, including the Hercules 350 at $39,000 per day.
We estimate that cost per cold-stacked rigs will be approximately $7500 per day per rig for the rest of the year. International Offshore operating costs are expected to increase to $46 million to $48 million in the third quarter, as a result of Hercules 185 going on contract, offset impart by lower cost related to Hercules 170.
For the Inland segment, we expect our daily operating cost per rig to be 15,000 to 18,000 per day for marketed rigs during 2009 depending upon crewing level. We also expect cost to be approximately $3000 per day per rig, for the stacked barges.
In our Domestic Liftboats segment, we expect daily operating cost per vessel to be in the $3000 to $3200 per day range. We still anticipate daily operating costs per vessel for International Liftboats to come in at an average of approximately $6500 for the final two quarters of 2009 and this was due to the mix shift to larger vessels with the addition of the Amberjack and Whale Shark in the Middle East.
We expect general and administrative expenses to be $14 million to $15 million per quarter for reminder of the year, and depreciation and amortization expense to range between $53 million and $54 million per quarter. Interest expense will increase under the terms of the amendment to our credit agreement that Stephen will discuss in more detail in just a moment.
We expect interest expense to rise between $22 million and $23 million for the third quarter and then to about $26 million in the fourth quarter, and this is based on our current debt levels.
Now, I will turn the call back over to Stephen.
Stephen Butz
Thank you, Lisa. From the last several quarters now, we have discussed our expectations regarding, while we might stand against the two financial covenants contained in our current agreements.
Obviously, as we progress through the year despite all of our cost reduction in other efforts, it was becoming more evidence that our breach of our maximum leverage covenants will occur when we reported our year end 2009 results, partially as a result of the unprecedented decline in domestic drilling activity.
Now as John mentioned, we are pleased to announce this morning that we had received the required lender approval to amend our senior secured credit facility. We expect to close on the amendment within the next few days. The amendment will provide meaningful covenant release to the company.
Some of the key terms of the dealer are contained in our press release, but I would like to reiterate a few of them again here. First and most importantly, the agreement will eliminate our leverage ratios and maintenance covenants for the period commencing October 1, 2009 and ending June 30, 2010.
Once the leverage ratio is reinstated as a maintenance covenant in the third quarter 2010, the maximum level is reset at eight times. It will decline gradually there after, but remains at level above our previous limit of 3.75 times through maturity in 2013.
The agreement also amendments the definition of our fixed charge covered ratio and reduces the minimum level of coverage required. We agree to add a minimum liquidity test to the credit agreement. We will be required to maintain minimum liquidity of $ 100 million through 2010 declining thereafter. Minimum liquidity will include unrestricted cash and equivalent and availability under the revolving credit facility.
The initial interest rate on the amended facility will be LIBOR plus 6.5% with the 2% of LIBOR floor. Once we reduced the principal amount on the term loan by $200 million from its June 30, level the interest rate was step down by 150 basis points to LIBOR plus 5%.
The agreement has a further step down by an additional 100 basis points to LIBOR plus 4%, as the principle on the term loans has reduced by an addition of $200 million. As part of the agreement, the size of our revolving credit facility will be reduced to $175 million from $250 million. We do not currently have any balance outstanding under the loan and availability is only reduced by approximately $14 million in routine letters of credit outstanding.
The new remaining availability of the facility post amendment of approximately $161 million, coupled with our cash and equivalents of $130 million at June 30 will leave us with more than $290 million of liquidity.
We firmly believe this strong liquidity, in addition to the improved cushion under the financial covenants we’ll provide the company with the necessary flexibility to operate through the downturn, and we’ll position our shareholders to capture attractive upside as our business begins to recover.
I want to echo John’s comment, that we appreciate the support we receive from our lenders in allowing us to achieve the mutually beneficial solutions to the potential issues we face.
Lastly, I would like to update you on the solid progress we have made on our debt reduction initiative. Our total debt was just over $969 million at June 30, reflecting the retirement repayment of approximately $68 million in the second quarter. The company has now retired approximately $170 million of debt since December 1, 2008.
With that we’re ready to open the call for questions-and-answers.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Jeff Tillery with Tudor Pickering Holt; please proceed.
Jeff Tillery - Tudor Pickering Holt
Hi, good morning.
John Rynd
Morning Jeff.
Jeff Tillery - Tudor Pickering Holt
John I wonder if you can give us a figure for what the prospect looks like for the rig 170 in the Middle East, as well as for 156 kind of over the next nine to 12 months? You work out the potential for those?
John Rynd
There is potential, albeit right now we see just kind a short-term programs Jeff and highly competitive. So I think that we have kind of forecasted a pretty bleak outlook on the utilization for those two units, for 2010, albeit that doesn’t mean we are not trying to find job at every available spot, but it’s very competitive in both those regions.
I think right now there’s 27 jack-ups available in the Middle East and there’s currently over 17 available now and 24 by the end of the year. In West Africa we’ve got 12 available right now, about 50% utilization. So, it’s going to be very, very competitive.
Jeff Tillery - Tudor Pickering Holt
Sure, that makes sense. Then the same question for the two rigs on contract in the fall in Mexico. What is the feel for, the potential for those to plotter along and continue working down there?
John Rynd
Well, we saw the effect of working for paying backs earlier this year. We received the termination notice of about 80 days early on the 206. We had that for about two weeks and then we turn around and get a nice 140 day extension, that maybe it for that rig. At this time we don’t have any further visibility that there is impending work there.
The 205, we’re a little more confident on. We thank it has a fair chance to stay down there through 2010. As I look right now and as you noticed on the release, the fleet status report, we’ve got a nice 140 day extension on platform three. There’s a good chance it stays down through 2010 as well. Again, it changes fairly rapidly, so you’ve got to be fairly light on your feet.
Jeff Tillery - Tudor Pickering Holt
Sure, that’s helpful. Then my last question, just kind of a looking 2010 CapEx, how should we think about the run rate you guys are experiencing the second half of this year as a decent baseline for 2010?
John Rynd
That’s perfect.
Jeff Tillery - Tudor Pickering Holt
Okay, thank you very much.
John Rynd
Thank you.
Operator
Your next question comes from the line of Robin Shoemaker with Citigroup; please proceed.
Robin Shoemaker - Citigroup
Thank you and I was listening attainably to all the conditions in the revised convents and so forth and there’s a lot there, but just what is the kind of baseline level of activity revenue?
John you mentioned you have a four to six jack-ups running in the Gulf of Mexico, maybe two or three barges, a couple of rigs in Mexico. I mean if you project that out just for argument sake through 2010, is that the kind of scenario under which you would continue to meet those revised covenants?
John Rynd
Yes, we believe we would under that type of scenario.
Robin Shoemaker – Citigroup
Okay, under that scenario, okay. So you’re pretty flexible with regard to now your ability to compete and have adequate financial resources. Are you looking at the high yield bond market as a potential new source of capital for yourself and you’ve obviously seen what other oil service companies have done in that?
John Rynd
Robin, we continually evaluate the capital markets in and what avenue is available that is best for our shareholders and all of our stakeholders. I think Stephen outlined in his prepared remarks, we’ve been pretty diligent about managing the balance sheet and that will not change post the amendment. So we will make the call at a time which we think is the best use of the capital markets; that brings the best value overall to everybody involved.
Robin Shoemaker - Citigroup
Okay and I just had one other thing. Did you revise your rig insurance in the most recent quarter and was there a change there?
John Rynd
Yes, I think everybody had a little revision to their insurance as we headed into renewal this year. We considered various options and we were able to secure an all risk coverage, for named Gulf of Mexico windstorm, and specifically we included coverage for removal of wreck and liability. Now obviously our deductible is up, our limits are down, relative to a year ago period, but we do have all risk coverage.
Robin Shoemaker - Citigroup
All risk included in windstorm and so forth.
John Rynd
That’s correct.
Robin Shoemaker - Citigroup
Okay, thank you.
John Rynd
You’re welcome.
Operator
Your next question comes from the line of Collin Gerry with Raymond James. Please proceed.
Collin Gerry - Raymond James
Hey, good morning guys.
John Rynd
Good morning.
Collin Gerry - Raymond James
I wanted to ask, I think I heard the guidance, for the third quarter you’re expecting on the domestic jack-up front somewhere in the range of 4 to 6 rigs?
John Rynd
Correct.
Collin Gerry - Raymond James
You’re marketing 11 right now, so are you going to cold-stack additional rigs or is that just idling additional rigs?
John Rynd
That’s just idling additional rigs and we’ll make the call and go from warm to cold subject to where we see the outlook. That moves weekly as we evaluate the market conditions and overall cost structure.
Collin Gerry - Raymond James
Okay, so the idea that we’re approaching the bottom in terms of the marketed fleet at 11, we could go down to 10, nine, maybe eight?
John Rynd
We may. Again, we’re very judicious about watching activity and cost.
Collin Gerry - Raymond James
Okay and then I guess on the more positive sides, we looked at 2010; hopefully we’re looking at a better market. What is the incremental cost going to be activate some of these recently cold stacked rigs or more importantly, what is your strategy? Is it first get the rates up to 50-plus and then maybe look at that? Just kind of give us a sense of what the strategy is going to look like and the market moving on the out?
John Rynd
Yes, I think overall if you go back to what the recent past, kind of fourth quarter 2007 and then go into first quarter 2008, as you know, if you remember, we stacked a number of rigs in the fourth quarter of 2007, and through first quarter of 2008, we’re putting them back to work.
So we’re going to continue to build backlog first on the existing fleet and then seek on the idle rigs, seek on the warm stack or ready stack rigs we’ll go shorter, but the rigs that are being cold stacked, we’d like a little more term behind it.
On the recently on cold stacked rigs, the cost is not that great. It’s anywhere from 100,000 to 500,000 on those units. They were well maintained. They haven’t sat that long, about 2010, and they’re in class, etc. So it’s not a significant capital drain for the first response to an up tick.
Collin Gerry - Raymond James
Okay and just for the nine rigs you’ve cold stacked, how many of those would fall into that category where it’ll be only 100,000 to 500,000?
John Rynd
100,000 to 500,000 would be all but two.
Collin Gerry - Raymond James
All but two?
John Rynd
That’s correct.
Collin Gerry - Raymond James
Okay, and then my last question, just kind of bigger picture here. Again, we’re all trying to figure out what ‘10 looks like, we’ve seen the rig count get decimated here and presumably we’re looking at better gas prices. So I don’t know, in a $6 to $7 gas price environment, what’s your gut telling you in term of how many rigs are working in the Gulf of Mexico. We’re at 17 now, but what does that look like maybe in a $6 or $7 environment and what does Hercules fleet look like?
John Rynd
Well I think, if you think you’ve got that kind of gas price environment and also as importantly the capital markets are flowing, if all of that is working in concert, you could double this, go up to two to two and a half time from this current rig count.
Collin Gerry - Raymond James
Okay. Thanks a lot guys.
John Rynd
Thank you.
Operator
Your next question comes from the line of Brian Uhlmer with Pritchard Capital. Please proceed.
Brian Uhlmer - Pritchard Capital
Pardon me if you guys already answered this, but I was trying to figure out what kind of cost did you pay for restructuring the debt? The second question is, on the pay down in the $200 million, in increments of $200 million you’d have to build the cash or can you pay it down based on strong quarters; what’s your outlook for how fast you’re trying to pay that down?
John Rynd
Okay first on the cost, we did agree to pay a 50 basis point fee to any lender that consented to the amendment, and then I think we went over the increased spread on the loan.
As far as the step downs, it doesn’t matter what source that cash comes from. It’s just once the balance on the loan declines to that, approximately $684 million, we’ll achieve the 150 basis point step down, and once it declines to about $484 million, again, regardless of where the cash came from, we would achieve that additional 100 basis point step down.
Lisa Rodriguez
As we mentioned on previous calls, we are looking at sales of non-core assets, which an example of one, is the sale of the Hercules 110 and 100. So those incremental proceeds will help us pay down the term loan.
Brian Uhlmer - Pritchard Capital
My follow-on question is relating to India. I was looking through expressions of interest yesterday and I saw some mat requirements in India. Is it possible that you can move mat rigs over to India or potentially sell them into that market? Have you seen anything on that recently?
John Rynd
The only activity level on current attending process that I’m aware of, is they are coming out or have come out for a three rig package, three rigs, five years; but it’s against three incumbents sitting on location. So I don’t think that can be viewed as incremental demand. We have a mat rig currently operating 40 in GC, and I’m not aware and our guys aren’t I’m sure, because I would have heard about it of incremental mat rig demand within India.
On the East Coast of India, it is mat rig friendly, on the West Coast it is not. We also as you know have the two rigs working in Southeast Asia and Malaysia. There is opportunity, but I will say in this environment it’s going to be very tough to mobilize kind of a commodity rig and I include 300-foot cantilevers in that commodity definition, kind of western hemisphere to eastern hemisphere.
As I mentioned in my prepared remarks, we’ve got 80% utilization in the international jack-up market and there’s idle equipment in every major operating area and to think you can move something from west to east right now, it probably won’t happen.
Brian Uhlmer - Pritchard Capital
Okay, thanks. Yes, I saw Karen was looking for it?
John Rynd
The 258 worked 18 months for Karen. It’s a program out of the shipyard.
Brian Uhlmer - Pritchard Capital
Thank you. I appreciate the answers.
Operator
Your next question comes from the line of Igor Levi with Morgan Stanley.
Igor Levi - Morgan Stanley
Hey guys. You’re doing a great job in getting the covenants renegotiated. My question is, do you guys see 3Q as the trough in Gulf of Mexico drilling activity and perhaps the trough in your earnings? Would you expect the fourth quarter to benefit from operators trying to get a certain work done before the end of the year, to finish off CapEx budgets?
Stephen Butz
We sure like that. No, I think that you could feel fairly confident that September will probably be the low point, maybe dribbling into October, just again hurricane issues. You may see some pent up demand come back to the market in the fourth quarter. So from an overall jack-up demand situation in the Gulf of Mexico, this could be the bottom quarter here in the third quarter.
Igor Levi - Morgan Stanley
Any words, operators are saying going into 2010 or is this too early?
Stephen Butz
Too early yet.
Operator
Your next question comes from Mike Drickamer - Morgan Keegan.
Mike Drickamer - Morgan Keegan
Hey, good morning gentlemen.
Stephen Butz
Good morning Mike.
Mike Drickamer - Morgan Keegan
Looking at your guidance then for the third quarter, I guess really for the rest of the 2009 operating costs, does this infer basically wrong everything out of the operating cost line, that you can without further stacking additional rigs?
Lisa Rodriguez
I think we’ve taken the significant steps that we can. We’re continuing always to monitor, and we may have some small incremental cost reductions that we can make. From here on out primarily it will be from stacking additional vessels if we need to.
Mike Drickamer - Morgan Keegan
Okay, and as you said earlier, the decision to stack rigs is something you’re looking at on a consistent basis. Correct?
John Rynd
Correct.
Mike Drickamer - Morgan Keegan
John, one more. Are there more opportunities out there to sell some of these lower spec rigs for you that aren’t working?
John Rynd
Yes Mike, we have a fair amount of tire kickers kind of coming through the building. We sold the 256, six or eight months ago. We just announced the sale of the 100 and 110. Yes, but the problem is they got to show us the money. So we’ve had some people that have great ideas, but can’t come up with the cash, but they’re out there. It’s not going to blow the doors down, but we’ll do some onezie and twozies.
Operator
Your next question comes from Ian Macpherson - Simmons & Company.
Ian Macpherson - Simmons & Company
Hey, good morning and congrats as well on the debt renegotiation. John, I noticed maybe a few new unfamiliar names on your status sheet. Can you talk about the incentive for some of these privates to pickup rigs, the day rates are getting now in kind of a 350 put oil and gas world.
John Rynd
If you look, I think the new names you’re probably referring to is on the inland barge side, most of those are on the offshore side? A lot of those are old directed projects, so costs are down, oil is up, people are being opportunistic.
Ian McPherson - Simmons & Company
Okay. When you stated that you think September is probably the trough for the Gulf of Mexico jack-ups, projecting that out to next year, I mean if the price of gas, the spot price of gas today is true and not necessarily the forward strip, how would you project that into that scenario?
John Rynd
Well, yes. I think we haven’t hit bottom yet domestically. I think we’re going to see the rig count is up, as I mentioned in our prepared remarks. It’ll probably take a little step down as we get closer to the heart of the Hurricane season. If I could predict, I wouldn’t be sitting here.
In a $3 to $4 gas environment, it’s going to be still very challenged, no question. The costs are recalibrated so there is some opportunities with the newer, lower cost structure. If you look out, the one thing that gives you some level of comfort in the domestic business, there is 42 jack-ups that can work today; and as I mentioned in our prepared remarks, that’s equal to the previous lowdemand level.
So it won’t take much of a run to start getting some backlog and then hopefully get some help on the day rates, but it’s very much hard to predict 2010 at this point. There’s still a lot of uncertainty out there.
Ian McPherson - Simmons & Company
Yes, absolutely. Okay. Thanks, John.
John Rynd
Thank you.
Operator
Your next question comes from the line of Pierre Connor with Capital One Southcoast. Please proceed.
Pierre Connor - Capital One Southcoast
Good morning, everyone.
John Rynd
Good morning.
Pierre Connor - Capital One Southcoast
I wanted to just ask about the insurance again, John. So with the cost guidance Lisa gave, did that include additional cost; I’m assuming you had to pay more for this coverage and you must have offset that with some other cost savings. Is that right?
John Rynd
The cost of the insurance policy is in the numbers. We renewed May 1, so what we did is keep the dollar spend about flat year-over-year. We just had to increase our deductibles, etc.
Pierre Connor - Capital One Southcoast
And are those going to be some requirements for some of the recently renegotiated covenants to maintain that some windstorm coverage on your equipment?
John Rynd
No, the only language in the agreement is standard and customary insurance coverage.
Pierre Connor - Capital One Southcoast
Okay. All right. Let me ask another question about the Gulf of Mexico in a different way John and put to you from what you know of your customers’ economics? Assuming that capital markets stay reasonable, what is the gas price that we would need to see double the activity in the Gulf of Mexico shallow?
John Rynd
Right. I think four to six range, five to seven range, as well as what is their thought? Is it four to six going to three or is it four to six stable with an upside from there; that gets the incremental go into market if there is some upside bias on gas prices. I think in a $5 to $7 gas environment, it provides a platform for us domestically to have a stable business.
Pierre Connor - Capital One Southcoast
Okay. I appreciate it. Let me move to the barge business; it is interesting and encouraging to see if you’re at three rigs this morning and it’s your marketed fleet at the moment, are you firm because of the short term nature of what you have, that you’re not itching to crew up any other equipment, I take it?
John Rynd
Three it is.
Pierre Connor - Capital One Southcoast
And that it will be. Last one on the liftboat side John, you did see the uptick and you mentioned that. What’s the mechanics of that? Is that really mix driven? How did you get that actual average day rate up sequentially?
John Rynd
It’s some of its mixed, as Lisa mentioned, we’re starting to trickle out the higher spec vessels coming out of dry-docks if that helps. Also from the activity levels, there is still some repair work going on, albeit not at the level we experienced in the first quarter.
We have seen kind of post rush to get the repair work done from Mike and Gustav, refocused on the P&A front. So we’ve shifted that activity if you will, coming off the major repair programs, to an uptick in the P&A programs.
Pierre Connor - Capital One Southcoast
Okay, alright, understand. Alright, very good and congratulations on the work on all the covenants.
John Rynd
Thank you.
Lisa Rodriguez
Thank you
Operator
Your next question comes from the line of Waqar Syed with Tristone Capital. Please proceed.
Waqar Syed - Tristone Capital
Good morning. Lisa, I have a question for you. First, in the International Segment there are some mobilization revenues and costs that you amortize on a quarterly basis. Which rigs are those associated with and how long will they last?
Lisa Rodriguez
It’s running at about $800,000 per quarter and I can offline tell you when the different ones roll-off.
Waqar Syed - Tristone Capital
Okay, yes it’s about $800,000 per quarter on the costs and I think it’s about $4 million on the revenue side per quarter. Secondly, John on the 110 jack-up, the sale, do you know the buyer what they’re going to use the rig for?
John Rynd
No idea.
Waqar Syed - Tristone Capital
And have you disclosed the buyer?
John Rynd
We have not.
Waqar Syed - Tristone Capital
Okay and what are the chances that you may have another transaction on the sell side in the next maybe quarter, this quarter third quarter?
John Rynd
It’s tough to handicap what are, just because of the number of inquiries we get and sift through to try to find a real buyer. So it’s hard to handicap that. One could walk-in today and we could have a deal done and it maybe another 90 days before we get something done.
Waqar Syed - Tristone Capital
Now the buyers that come in to take a look at it, do you know what the intention is? Are they looking to buy the rig for drilling purposes, domestically or internationally or just trying to look for just the scrap value? Do you know what the purpose is for the people coming in?
John Rynd
Well, two sides to that. I would say on the barge front, it’s the scrap dealers that appears; occasional somebody needs to take one maybe to an international region. On the jack-up front, it is for alternate use, i.e. accommodations or mobile offshore production offshore units.
We do try to put drilling restrictions associated with the sale. So we’re not coming back and getting undercut in a bid on a rig that we just sold, but again, we’ll continue to market all of our non-core assets.
One reason we elected to go with a third party to do this, is just the volume of deal flow that was coming in and then ultimately the close rate was fairly low. We elected to outsource that, so Stephen who primarily handles that could focus on truly real value added things that we are working on this year.
Waqar Syed - Tristone Capital
Thank you very much. That answers my questions.
John Rynd
You’re welcome.
Operator
Your next question comes from the line of Jud Bailey with Jefferies & Company; please proceed.
Jud Bailey - Jefferies & Company
Thanks, good morning. First a follow-up, Stephen I apologize if I missed this, but did you give out what the new fixed charge ratio is going to be?
Stephen Butz
No, we didn’t, because we did change the definition and I don’t want to go through the whole definition, we will have it filed with the SEC once that’s finalized, but just to briefly summarize the change.
Previously the definition, and these were the fine terms in the credit agreement words, consolidated EBITDA over our consolidated fixed charges and the new definition will basically provide us with the basket of approximately $130 million, which was our cash at June 30, that we could add to the numerator of that definition on an as-needed basis to meet the new level. The level is set at one times through the end of 2010 with step-ups thereafter to 1.15 eventually.
Jud Bailey - Jefferies & Company
Okay, now that’s helpful. Next question is on the Mosvold jack-ups, any update on from a timing perspective when we should think about working those into the model in 2010, any delays in the delivery or any update there?
John Rynd
So far the delivery is kind of on the original schedule, but given this market condition right now, if we’re thinking the rig units is going to be completing commission late first, early second, the first unit, I’d model it in late second, early third just to give you some comfort and some cushion.
Then on the second unit, you can start modeling in mid-third quarter maybe or early fourth. Again, the market as you know is fairly soft right now, so we’re trying to pick a time that you’re going to come right out and go to work is rather difficult.
Jud Bailey - Jefferies & Company
Okay and then my last question, just out of curiosity John; one thing that characterizes the goal or has characterized it is the many number of small operators who are in and out of the market constantly and right now with only 17 rigs working, there are clearly a lot of guys who are doing nothing.
I’m just curious, are you in dialog with a lot of those guys? Are they completely silent? Have they gone away? I’m just curious, what you hear from these operators that are basically doing nothing and have been doing nothing for a while.
John Rynd
No, they’re still there, but I think it’s going to be predominantly driven by the private end piece. I mean the four largest leaseholders on the shelf collectively today, I may be off a couple of rigs, might have six rigs running. The deal flows are out there, they like this business, it’s a cash return business, its not a production profile business. When things get right, they’ll come back.
We went into it this year with a total meltdown in the capital markets. There was no access to capital. Those that had loans tied to their production at a much higher price knew that was going to be re-determined, did not want to get out in front of their skies. So, they played it very conservative, which was the right thing to do, as they were going in to sit-down with their backs.
We get through this, business will get better. The question is when and it’s been very difficult to pick that, but we’re still very optimistic about the long term fundamentals of the Gulf of Mexico. It’s just a matter of winning, when is it going to turn? We’ve got a line, the stars have to align.
Obviously gas price is a driver, capital markets is a driver. Cost right now are very compelling for these guys to drill. They’ve had the risk of Hurricane. The E&Ps and the drillers had a rough go in London this year and that’s just a very stark reminder of the risk associated with the Hurricane season. We’ll get into next year if we get some help from gas prices.
Again, it doesn’t take a big up tick to get back to close to full utilization. We have to get back to the lowest demand we’ve seen into this cycle to reach the lowest demand we’ve seen. So I think that’s our optimism here and the question is “When is it?” It’s a duration question.
Jud Bailey - Jefferies & Company
Yes, and just one more if I may. On the barge side, you have three working now, and based on discussions you’re having with your customers, do you think we could see those kind of keep consistent work through year-end or is it just too early to tell.
John Rynd
It’s too early to tell. I think if we can keep two running we would be happy. Obviously, we’re trying to run all three and then do our level best to line up work behind them. Three kind of fully utilized the rest of the year we would view as upside, to running full out was kind of would meet our expectations. So we’ll see what we can do.
Jud Bailey - Jefferies & Company
Okay. Great, thanks and congratulations on the credit agreement as well.
John Rynd
Thank you.
Lisa Rodriguez
Thank you.
John Rynd
Stacy, we have time for one final question.
Operator
Your next question comes from the line of Geoff Kieburtz with Weeden & Company. Please proceed.
Geoff Kieburtz - Weeden & Company
Thanks. I’m going to take advantage in asking a couple of questions. John, in your comments around the asset sales, just so I understand. I understand strategically you have a plan to get rid of non core assets, but if I understood your comment, we should not expect that to be a significant contributor to your debt pay down?
John Rynd
On the non core side, yes I mean again, it’s kind of hit and miss. Imentioned a couple of times. There is a fair amount of interest; it’s just trying to get some interest to close.
Geoff Kieburtz - Weeden & Company
Right, but in terms of thinking about progressing down the debt reduction, primarily that’s going to come out of operating cash flow.
Lisa Rodriguez
Geoff, I mean we’ll evaluate any offer that we receive, and if we feel that it’s beneficial to our shareholders, then it could result in a sale of another group of non-core assets, which we would use to pay down debt. In the amendment, we do have a sweep of cash that comes from asset sales, that goes to pay down debt, which of course would be why we would do an asset sale in the first place.
Geoff Kieburtz - Weeden & Company
Okay. Alright and that‘s fine. Second question, when you talk about, you just kind of went through your thoughts on the barges, when you talk about two barges fully utilized, is that 90% utilization or is it…?
John Rynd
Yes, I would say somewhere between 80 and 90. Again, we do our best to try to back them up in direct continuation, but you’re going to have potentially five to seven days between contracts.
Geoff Kieburtz - Weeden & Company
When you think about the four is to six jack-ups in the U.S. gulf, is that similarly kind 80% to 90% utilization?
John Rynd
Yes, same issue.
Geoff Kieburtz - Weeden & Company
On the international side, which has been a real solid source of revenues and cash flow here, is there anything as you look out over the next say 18 months that you’re concerned about, maybe not being there over that time period?
John Rynd
No, I think the regions have historically gone with a lot of rig activity; Middle East, India, West Africa and Southeast Asia will continue to do that. The question is at what levels and again as I mentioned in my prepared remarks, we have been worring about this new build oversupply even when the market was robust. So it becomes a bigger concern as these rigs enter the market over the next three years.
The gross numbers I think are quoted in the opening remarks is about 67 to be delivered. I think you can argue that about 10 or maybe 15 of those do not get delivered. 10 of those haven’t even started construction yet, so it’s not as bleak as I kind of laid out in the gross numbers, but then again, we just saw an announcement this week that somebody in China was going to build 10 more, so it is a moving target.
I would just say, where is bottom in the international market we haven’t seen that, yet. Rates have been kind of 80 to 120 for a normal kind of 250 foot cantilever. Not sure for on bottom yet and then once they say go again, where do we start and what’s the incremental demand, how fast does that pick up the excess capacity.
Geoff Kieburtz - Weeden & Company
My last question is kind of longer term strategic in nature. You referenced earlier you kind of had a three or four standard deviation sort of event here in the domestic market. As you kind of moved from being very concentrated on the near term and covenant relief and so on, is there any sort of thought about you kind of revisiting the underlying strategic model of Hercules and shifting over time what the company is made up of.
John Rynd
Well I think, if you look at the strategy, we went public in the fourth quarter of 2005, we were 100% domestic. We’ve made great strides both on the drilling side and the liftboat side to expand internationally, get the backlog, upgrade some of the equipment and build that base of cash flow. That won’t change.
We will continue to try to kind of balance our gas oil exposure. You would argue now that you should have much of all exposure, but again it’s a balance. We have a fleet of assets that are destined to stay in the Gulf of Mexico. So, we’ll look at opportunities to move liftboats and on the drilling rig side I think it’ll be difficult over the next couple of years, again because of the imbalance in supply and demand West to East
We get out of this, the world looks a little better, we feel a little better, I still think there is going to be opportunities to expand our fleet and the time arising is 2.5 to 3 years, because I don’t foresee at this point racing to the top in the international jack-up market over the next 18 months or two years, so I think there will be opportunity to expand there.
Geoff Kieburtz - Weeden & Company
Would you expand in the Gulf of Mexico?
John Rynd
With the right assets, we would in the right price. The focus should be more international, no question.
Geoff Kieburtz - Weeden & Company
I appreciate it, thanks very much.
Stephen Butz
We would like to once again thank everyone for joining the call today and for your continued interest in Hercules. Thank you.
Operator
We thank for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.
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