Hercules Offshore's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: Hercules Offshore (HERO)

Hercules Offshore, Inc. (NASDAQ:HERO)

Q1 2014 Earnings Conference Call

April 23, 2013 11:00 AM ET

Executives

Son Vann - IR

John Rynd - CEO and President

Stephen Butz - EVP and CFO

Analyst

Gregory Lewis - Crédit Suisse AG, Research Division

Todd Scholl - Wunderlich Securities

Ian Macpherson - Simmons

Clayton Kovach - Tudor, Pickering, Holt

Zachary Sadow - Barclays Capital

Matthew Marietta - Stephens Inc.

Rollin Morris - Cowen & Company

Jeff Spittel - Clarkson Capital Markets

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2014 Hercules Offshore Earnings Conference Call. My name is Britney and I'll be the operator for today. At this time all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Son Vann. Please proceed, sir.

Son Vann

Thank you, Britney and good morning, and welcome everyone to our first quarter ’14 earnings call. With me today are; John Rynd, CEO and President; Stephen Butz, Executive Vice President and CFO; along with members of our senior management team, including Troy Carson, Senior Vice President and Chief Accounting Officer; Beau Thompson, General Counsel; and Craig Muirhead, Vice President and Treasurer.

This morning, we issued our first quarter results and filed an 8-K with SEC. The press release is available on our website, herculesoffshore.com. John will begin the call with some broad remarks regarding our quarterly performance and current market conditions, Stephen will follow up with a more detailed financial discussion and provide an update on our 2014 cost guidance. We will then open the call up for Q&A.

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 2014 and beyond, as well as activities, events or developments that we expect, estimate, 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. With that, it’s my pleasure to turn the call over to John.

John Rynd

Thank you. Good morning, everyone, and thanks for joining us today to discuss our quarterly results. For the first quarter of 2014 we reported income from continuing operations of 19.9 million or $0.12 per diluted share compared to income of 40.3 million or $0.25 per share in the first quarter of 2013. Our latest quarter results included charge of 15.2 million or $0.10 per share related to debt issuance fees and early retirement cost while last year’s quarter results included a 37.7 million or $0.23 per share gain related to our Seahawk acquisition.

Excluding the impact from these items, our adjusted first quarter 2014 income from continuing operations of $0.22 per share, a significant improvement compared to $0.02 per share for the first quarter 2013. Although overall conditions in the jackup rig business remain firm, investor sentiment has clearly weaken in recent months. Some of the concerns are industry driven while others are specific to our company. I think it would be helpful to address some of the key issues that the market is focused on and provide our outlook.

One of the main concerns specific to us relate to drilling activity in the U.S. Gulf of Mexico. As I discussed during our last call, so far this year contracting activity has started off a little slower than what we experienced over the past few years. But based on recent investor questions, I think the market may be overly cautious about the current pace of activity and what it implies to the outlook for our domestic drilling business.

Today the balance between demand and supply jackup rigs in U.S. Gulf of Mexico remains healthy. During the first quarter we were able to keep most of our rigs under contract and on the payroll. Excluding scheduled shipyard downtime, we only had approximately one month of contracted rig days across our 18 marketed rig fleet. While said another way, this downtime represented less than 2% of our available days for the quarter. This idle time was concentrated on the Hercules 209 which has been back on day rates since early April and to remain on contract at least through early July.

Now we could still see some modern contracting jacks developed on a select group of rigs but we don’t expect any long periods of idle time for any of our rigs in 2014. In fact the majority of our domestic rig fleet is contracted through the second quarter and our average days of backlog per rig remains at a comfortable range between a 120 to 140.

Pricing in the Gulf of Mexico remains stable. All of our new contracts and expansion is executed since the beginning of the year have been priced at leading edge day rates and I expect stable pricing over the current supply demand environment.

We are also starting to see some of the customers that stepped away from the market late last year reengage. One of the big end uses of jackups Fieldwood which brought the shallow water Gulf of Mexico assets of Apache as well as SandRidge has had what we believe to be a temporary reduction in rig demand as they digest these acquisitions.

Once they get their internal resource planning completed, I think Fieldwood can be more active customer than what they’re running today. Currently Fieldwood has three jackups under contract across the regions. At this time last year its predecessor companies ran seven rigs. We have been asked how the acquisition of EPO by Energy 21 will impact rig demand in the region. I believe that over the long term it will be neutral to positive for us. We have a strong relationship with Energy 21 and it worked for them on several occasions in the past.

Both EPO and Energy 21 have been very successful drilling in the U.S. Gulf of Mexico. Some of the key fields that attracted Energy 21 through EPO are in the ship show in West Delta Blocks. The four rigs we have with EPO are working in these core areas. EPO announced an attractive deep oil discovery at ship show 208 late last year. This is one of the areas that they’re planning to further delineate using their new 3D seismic; we drilled that exploration well with Hercules 201 which reached a total depth of over 15,000 feet. We can drill these intermediate and deeper depths wells with our rigs.

The acquisition also solidifies Energy XXI’s commitment to the US Gulf of Mexico. One of the key positives of this acquisition that I think the market missed is that as a result of the EPO acquisition, Energy XXI abandoned its previously planned purchase of assets in Malaysia for 100 million. Energy XXI will now keep its entire capital program in the US Gulf. On the recent central Gulf of Mexico lease sale I thought that there was some pretty interesting developments.

We saw a healthy increase in the bid for shallow water acreage. There was 56 million spent on shallow water blocks, more than double the prior lease sale and a 131 blocks of Seahawk bids up from 85. Most interesting Apache who sold all their shallow water Gulf of Mexico assets to Fieldwood last year was high bidder on 17 shallow water blocks of which nine were 100% owned. It will be interesting to see how aggressive Apache becomes as it reenters the show. One of the biggest market concerns for our industry is the influx of new bills scheduled to be delivered over next three years. Today there are approximately 144 jackup rigs under construction or on order.

For the balance of 2014, there are 32 rigs scheduled for delivery, a quarter of which are already contracted and I think the market can readily absorb the 24 or so rigs that are currently un-contracted. Keep in mind that the industry has delivered nine jackup rigs since the beginning of last year and the market is actually tightened over this period. 2015 is the year to watch with approximately 63 new built rigs scheduled to enter the market.

A number of this new builds are owned by non-traditional rig operators, several owned by Mexican companies in anticipation of getting work from Pemex some of who have limited experience operating jackup rigs. There are approximately 15 un-contracted new builds to be delivered over the next two years that follow this category.

The risk is, as these new builds enter Mexico, the existing fleet will be released and migrate to the US. So far, Pemex has taken delivery of six new build rigs since last October and is yet to release any of its legacy fleet. If there are rigs that get released over the next two years, the owners of many of these rigs have sizeable operations in West Africa and the Middle East. These markets are currently more attractive than US Gulf of Mexico. So we would suspect at least a portion of these rigs could end up in markets outside the US, assuming Pemex were to release them.

Turning our attention to our international rig fleet, during the first quarter we placed the Hercules Resilience on its maiden contract a check down well in Vietnam. Operational performance of the rig has been exceptional, we have also signed an approximate four month contract for the Resilience in West Africa at 188,000 per day with the possibility of extensions depending on the durations of the wells scheduled to be drilled. We are preparing the Resilience for the heavy lift of West Africa with departure scheduled for April 28, and the rigs should be on contract around mid to late June. There are several prospects in the region for the Resilience as well as the Triumph, including the multiyear opportunity that we spoke of during the last earnings call.

We still have work to do, to comply with the various host country requirements. We are staying patient with this long term opportunity as is with one of our key customers. However we are also marketing the Triumph on other short and long term opportunities in the event the deal falls through. In the meantime the Triumph continues to work in India.

We are working on a few short term opportunities to extend the work on the Hercules 208 and 260 at day rates that are similar to current levels. As for the remainder of international fleet, we have contract coverage well into late 2015, 2016, and 2019.

Moving on to our international liftboat business, activity levels in West Africa were fairly weak during the first quarter. This was driven by project delays with some of the large customers in Nigeria as well as extended shipyard downtown on certain vessels.

We could continue to see choppiness in utilization but expect overall activity levels to improve as the year progresses. Our largest vessel, the Blue Ray continues to perform well, it will be dry docked for about six weeks in the second quarter but will return to work on a three month contract at 65,000 per day and there are several interested parties for that vessel after this contract.

The Middle East liftboat lock remains very firm, all three vessels are currently working and with the exception of planned downtime for dry docking or contract preparation work, we have good visibility for these vessels through the year.

In closing we’re still operating in a fairly attractive overall business climate, utilization across all major jackup markets worldwide remains high. While there is a relatively large amount of new build supply this supply is having a market when demand is growing.

Our core region the US Gulf of Mexico has had a slight pullback in activity but activity remains adequate to keep most of the rigs in the region working and there are positive signs that demand could pick up from current levels.

Internationally our standard fleet is well positioned and I am confident that the Triumph and Resilience will continue to find attractive work. Despite recent volatility our international liftboat segment is expected to improve throughout the year, this is an attractive business, one where we may look to deploy some growth capital.

Needless to say there are host of challenges in our industry and it’s easy to lose perspective. Let`s remember that despite these challenges we generated almost a $100 million of EBITDA in the first three months of the year, we have just under 200 million of cash on the balance sheet and we’re in good position to generate healthy amount of free cash flow in 2014 which we can use to grow our business, reduce our leverage or some combination of both. We remain diligent, enthusiastic and opportunistic.

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

Stephen Butz

Thank you John and good morning every one. It’s normal, my comments today will focus on sequential comparison of our quarterly results. I’ll also provide an update to our operating cost and capital spending guidance before opening the call for Q&A.

For the first quarter we reported income from continuing operations of 19.9 million or $0.12 per diluted share. This includes an after tax charge of 15.2 million or $0.10 per share for debt issuance fees and early retirement costs. Excluding these charge, our adjusted net income from continuing operations was $0.22 per share. This compares to adjusted fourth quarter 2013 income from continuing operations of $0.14 per share which excludes several non-operational items that totaled $0.77 per share.

Moving on to our segment results, I’ll begin with domestic offshore. Domestic offshore reported operating income of 52 million, this compares to an adjusted operating income of 49 million in the fourth quarter of 2013 which excludes the asset impairment charge of 114 million in insurance gain of 32 million. The improvement was driven by an increase in average revenue per day to 107,000 from 100,000 in the previous quarter, as various rigs in the U.S. Gulf of Mexico rolled the higher priced contract.

We have been able to extend most of our rigs at current leading edge rates and even have a few rigs commencing a higher price contract during the second quarter. As a result, we expect our average day rates to be flat to modestly higher in the second quarter. Utilization was relatively flat at 83% in the first quarter versus 82% in the fourth quarter.

The Hercules 205 and 264 were down for most of the first quarter to complete their five year surveys. Additionally, the Hercules 150 was down for approximately one month to commence its survey and the Hercules 209 incurred nearly one month of down time in between contracts.

Domestic offshore operating expenses of 73 million increased 12% from adjusted fourth quarter expenses of 65 million when excluding the insurance gain of 32 million. This increase was driven mainly by higher workers compensation and stay in local sales tax expenses.

We expect to incur second quarter operating expenses for domestic offshore in the mid to high 70 million range, as repair and maintenance previously planned for the first quarter is expected to be spent in this quarter and throughout the rest of 2014.

Our international offshore segment reported operating income of 14.6 million in the first quarter compared to adjusted operating income of 4.7 million last quarter. Adjusted fourth quarter income excludes a 11.5 million impairment from the sale of the Hercules 170. Revenue increased 27% to 81 million from 64 million in the prior quarter. The increase is primarily due to the start-up of the Hercules Resilience a full quarter of operations on the Hercules Triumph and Hercules 267 and the Hercules 208 returning to work after completing its special survey. These factors contributed to a 30% increase in operating days.

Operating expenses for the first quarter were 47.5 million compared to adjusted operating expenses of 40.4 million in the previous quarter, again excluding the impairment on the Hercules 170. Much of this increase in cost is related to the incremental cost from the start-up of the Resilience as well as the full quarter of operations on the Triumph and 267. We expect international offshore operating cost for the second quarter to be in the mid $50 million range as we incur a full quarter of costs on the Resilience. We will also be incurring some costs related to our Perisai management agreement which we will receive associated revenues along with the slim margins. Those margins are expected to improve once the rigs are on contract.

Now turning to our International Liftboats segment. Operating income declined to 5.6 million from 9.7 million in the fourth quarter. Reduced activity levels in West Africa combined with the heavy maintenance schedule for the small to mid-sized vessels caused overall utilization to decline to 58% from 66% during the fourth quarter.

Activity levels in West Africa have improved in April but we could continue to see some variability in utilization throughout the year. Pricing by vessel class remains relatively flat but at attractive levels. However as a result of mix, our average revenue per day actually increased 5% during the first quarter to 27,100 from 25,900.

Operating expenses of 20.4 million were flat with fourth quarter levels and second quarter operating expenses are expected to remain in the low $20 million range before gradually increasing through the last two quarters of the year.

Moving on to other income statement, cash flow items, general and administrative expenses declined to 18.2 million from fourth quarter level of 19.6 million. We expect G&A expenses to range between 19 million and 20 million per quarter for the remainder of the year. Depreciation and amortization expense of 40 million in the first quarter is expected to increase to the mid $40 million range in the second quarter, partly as a result of a full quarter of depreciation related to the Resilience as well as incremental depreciation from various capital projects that are in progress.

Interest expense was 22.9 million compared to 18.8 million in the fourth quarter. Approximately 3 million of interest was capitalized during the first quarter compared to 8 million in the fourth quarter. We do not expect to capitalize much interest for the remainder of the year. Thus, quarterly interest expense is expected to rise to approximately 26 million starting in the second quarter.

Moving onto income taxes, even though we generated almost 20 million of pre-tax income we recorded a small tax benefit during the first quarter. This was primarily driven by an estimated annual tax rate which benefits from an anticipated release to valuation allowance associated with our domestic net operating loss carry forwards.

In addition, we recorded a tax benefit associated with the reversal of a previously recorded foreign income tax liability whose statute of limitations expired during the quarter. Based on our current estimates, we expect our effective income tax rate for the remainder of 2014 to be in the mid 20% to mid-30% range. Our estimate for cash taxes remains in the mid $20 million range for the year.

As per capital and dry docking expenditures, we spent approximately 41 million during the first quarter, mostly associated with rigs under going their special surveys and final expenditures for the start-up of the Hercules Resilience. We expect capital expenditures for the remainder of 2014 to be in the 85 million to 100 million range consistent with our prior guidance.

With respect to our balance sheet and liquidity, we ended the first quarter with 197 million of cash and equivalents and 140 million available under our $150 million revolving credit facility. In March we issued 300 million of eight year unsecured notes with a coupon of six and three quarter. We also tendered for our existing 7 and 1/8 senior secured notes due 2017. At closing of the notes offering, we used 220 million to settle a portion of the tender. At the end of the first quarter we still had 80 million of senior secured outstanding which we intend to redeem later this month with the remaining proceeds from the offering and cash on hand.

The cash which will be utilized to redeem the remaining senior secured notes has been classified on our balance sheet as cash designated for debt retirement and is excluded from the 197 million of cash I mentioned earlier. Separately, upon redemption we expect that we will incur a one-time expense of approximately 5 million.

There are a number of positives with our issuance of the new unsecured notes and redemption of our secured notes. With the redemption, all of our outstanding debt is now unsecured. We also pushed out maturity on a quarter of our debt structure by five years to 2022 and we lowered our borrowing cost by 0.3725 on this amount. With the refinance, now over 80% of our debt does not mature until 2021 or beyond.

The debt refinance is consistent with our ongoing efforts to improve our credit profile, lower our cost of capital and improve our financial flexibility. These efforts in conjunction with the progress that we are making to high grade our asset base will enhance our long term competitive position, generate attractive sustainable returns over the long term and should lead over time to an improved valuation on our common stock.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Gregory Lewis with Crédit Suisse. Please proceed.

Gregory Lewis - Crédit Suisse AG, Research Division

John you mentioned a little bit about the potential for idle time on some jackups that you have in between contracts. When we think about this in terms of you have a fewer rigs in the shipyards, you’ve a few rigs and on and off contract in the sort of June-July period. How should we think about those -- that idle item in terms of -- is it more something where the rigs in the shipyards probably experience a little bit more time or is it really just a function of when these opportunities or these contract renewals come up in finding the opportunity put those rigs to work?

John Rynd

That’s a fair question Greg. I think that one thing we’re not going to sit around the shipyard and extend the shipyards stake as time is money, so we’re not going to take that out of tax, [indiscernible]. I think it will be somewhat consistent with the way we saw the first quarter. We know we had the two on down and I think you’re going to see that as I mentioned in the prepared remarks, just a continued choppiness, but nothing earth shattering. I think as we said I mean if you look at that downtime only represented 2% of our operating day, so it may marginally grow from there or may not grow at all. But I think it’s not -- we’re not overly concerned that we’re going to see extended periods of idle time on rigs at this point. Again, we see some of the big rig consumers that have not -- who are not back to where they were a year ago and the fundamentals of our business are as good or better than they were a year ago. So a lot of this consolidation that has taken place since late 2010 with $14 billion exposed on the shelf, there’s going to be some short term disruptions but over time that’s nothing but a positive.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, great and then just another one for me, on the 253, I mean, I guess as I think about that rig, that rig was fixed forward and there was a contract stacked with another contract, when we think about that, was that more a function of that rig’s location or was it just simply that’s a bit of a bigger rig and the new customer just wanted that rig for that, was there any other reason for that.

John Rynd

No I just think it’s still, I mean everybody, I mean the demand is still relatively healthy, again everybody wants to compare it to 2013 which is almost a year that doesn’t happen very often, so demand is still very strong. The water depth fit that rig, it fit their program, but if you look across the Gulf of Mexico, just going through others fleet status reports the average backlog across the US Gulf of Mexico inclusive of ours and our competitors is a little over four months. So it’s still a very healthy environment there.

Operator

And your next question comes from Todd Scholl with Wunderlich Securities, please proceed.

Todd Scholl - Wunderlich Securities

Congrats on another solid quarter, so my question, you guys have talked in the past about, you have cash on the balance sheet and you’re going to looking to throw off some free cash flow here and you said your first priority would be to kind of reinvest in the business, so can you tell me if you’re seeing opportunities out there right now and which of the regions you most likely be, well, I guess which of the segments would you be most likely to deploy any capital with regard to that.

John Rynd

Fair question, we are seeing opportunities to continue the growth and to move up the age scale of our asset base. Nothing is imminent but there are opportunities and we’re going to stay as I said, we’re going to stay diligent in that and also disciplined. As I mentioned in the prepared remarks, one area that we like very much and continue to think long term has got great promise is our international liftboat segment, so don’t be surprised if you see us put some growth capital to work in that segment.

Todd Scholl - Wunderlich Securities

In that same vein, the international liftboat segment (read) [ph] the history has been a bit of a tailwind for you guys, but it seems like it might be a bit more of a headwind in the near term. Can you kind of talk about what needs to happen to reverse that and a consolidation particularly in West Africa something that might be able to help or kind of reverse that?

John Rynd

Fair observation, if you look at the headwinds, it’s really been specific in West Africa, specifically Nigeria in West Africa and really more on the lower end vessels, the bigger vessels as you see our day rate quarter over quarter grew even though our utilization went down and that’s the mix of the bigger vessels very much in demand. We don’t see a consolidation opportunity in West Africa at this point, obviously if there was one, we’d be working on it, but we like the international segment, we think it’s going to grow in the Middle East, we think South East Asia is a growth market over the next three or five years and up and down West Africa still going to be very robust but you’re just seeing the weakness in the smaller vessels.

Operator

And your next question comes from the line of Ian Macpherson with Simmons, please proceed.

Ian Macpherson - Simmons

Hey thank you, John I don’t know if I, I might have missed this in your prepared remarks, but can you just update us on the near term outlook for the Triumph rolling off, I guess some five or six weeks and how you see the utilization prospects for that rig and [Multiple Speakers] as we walk towards the longer term demand.

John Rynd

Sure, as we talked about in the last quarter and this quarter we have a multiyear very attractive contract basically there for us, we’re working through host country issues. We are optimistic we’re going to work through that, we’ve been working diligently on that really since late in the fourth quarter of last year. That being said, it’s not a 100% slam dunk so we are marketing the unit elsewhere both as I mentioned on short and long term opportunities. If you look at the schedule the rig would come off right now, it looks like roughly June 1st to the 14th depending how the well progresses and as I think we got it in the first quarter, we’re going to be down 60 to 90 days between we come off that contract and go to a new contract, you got to get to a heavy lift, you got to mobilize and get accepted into the new country. From there still very optimistic I think the three year deal that we talked about is going to work, but it’s not done yet. But there’s good demand in West Africa. I think the outlook for the Resilience post its first set of contracts there, we’ve got, we’re building up some very solid activity, like we got about just between those two rigs there are if you count just a firm period of the contract, it’s almost 12 years of work and if you include the option it goes to 16 years of work that we’re focused on just on those two rigs.

Ian Macpherson - Simmons

Okay, that’s good thanks, follow up, just more of a structural question on the jackup market, what do you think the time frame is for when we’re likely to see more of a consolidation cycle for the older jackups around the world to begin, I think we've generally been -- probably the market has been too bearish too early, when the jackup market gets oversupplied it’s not oversupplied today but clearly you know the forward looking fundamentals are supply rich. When do you think it makes sense for consolidation to begin and how do you see the opportunities for Hercules in that context?

John Rynd

Well I think that -- I think it does need to be -- the industry needs to further consolidate. We’re adding a lot of capacity to top end, but the lower end I think we’ll just see the market. I think you know the shelf there and now with a noble spin Paragon those are the obvious candidates that as you look around to the legacy assets around the world. Economy is always tough to dictate. I think people are going to gravitate probably first with the supplier rigs coming in about over half of the new rigs being built there are being built in China. And about two-thirds of those roughly are built by just pure investors that don’t have any drilling experience.

So that’s going to be the interesting thing to really pay attention to as we go into 2015. Do those rigs get built? Are they on time? Are they on budget and what happens to them? So I think that’s probably where people are going to spend a lot of the focus of their intention because everybody needs to renew the fleet and that may be the focus whether they consolidate in the low end.

Operator

And your next question comes from Clayton Kovach with Tudor, Pickering, Holt. Please proceed.

Clayton Kovach - Tudor, Pickering, Holt

So you guys just mentioned potential investors, are these rigs being built by potential investors instead of actual drilling contractors? So are you guys seeing more opportunities potentially for rig management agreements?

John Rynd

No we’re kind of happy where we are with the Perisai Group. And so we’re not really looking aggressively to manage anymore assets then we got with the Perisai Group.

Clayton Kovach - Tudor, Pickering, Holt

And then my second question, you mentioned Southeast Asia and the Middle East is being growth markets on the liftboat side. Could you elaborate a bit more on that? Is this being driven simply by incremental rigs or is it by attractive M&A opportunities?

John Rynd

I think it’s being driven by whenever you’ve had robust activity in the jackup business, you’re going to have robust production facility growth and hence that drives ultimately liftboat demand. So we’ve had very active jackup activity in the Middle East and Southeast Asia and that coincides with, you’re going to see a growing demand for liftboat services to access those platforms and do the work that liftboats do.

Operator

And your next question comes from Zachary Sadow with Barclays. Please proceed.

Zachary Sadow - Barclays Capital

Thank you. Hey John thanks for taking my call here, I've questions here. Hoping you could just give us an update on where we are on the divestiture program? You obviously have a bunch of fair amount of [indiscernible] units still in place here. Are we pretty much done there or is there anything you might try to do there? And also some of the rigs that are still working as well.

Stephen Butz

Hi Zachary this is Stephen, we still have some work cut out for us on the divestiture program even though the bulk of it's behind this. We have a number of cold stacked rigs in the [indiscernible] internationally, that we plan on divesting the majority of those, we will probably keep a few stacked for optionality. But we didn’t have any firm update this quarter but it does look like the second quarter and third quarter we could make some progress, I am working through some of that cold stacked fleet. And we’re not actively looking to divest of any of the working vessels, but at the same time we’re opportunistic if offer comes in, we’re going to evaluate it.

Zachary Sadow - Barclays Capital

And there's been some concerns that jackup demand in Saudi Arabia is slowing a little bit, still moving up but slowing. Can you give us an update on some of the pace of tendering and what you’re seeing out of Saudi Aramco please?

John Rynd

Yes, it is -- you nailed it. It has come off pretty tolerant pace over a three year run where they basically tripled their rig fleet. So relative to that its slow. I still think they are going to pick up incremental jackups as we progress through this year and into ‘15. Not at the level we've seen previously. I think you’re going to see continued extension of the existing rigs in the region, their demand is not following, I think the pace of growth has slowed.

Zachary Sadow - Barclays Capital

Okay great, I'll be respectful for my peers here, but if I could sneak in one more. John I was very interested in getting your thoughts on the long-term, help the jackup market considering the recent orders we have seen, seems like we have seen a lot of orders from some of the established guys and some new entrants as well in addition to your comments about the Chinese guard new entrance here. What do you think of the market kind of '16, '17?

John Rynd

Well I think that you kind of tell me where commodity prices are going to be and where year-over-year spending growth is and I can probably solve a pretty good answer. I do think it’s going to stay relatively healthy if the commodity prices stay relatively healthy. The demand is still growing internationally. You’re saying the demand in deepwater kind of slides to the right, we’re not seeing that yet at all. As I mentioned, we’re working on 12 years of work just for two rigs and that’s not in kind of the rest of the work we’re working on internationally on the tender. So the tendering activity is still very robust.

I think for the first time in my career I’ve had the least sense of where the supply really is than I ever have and that’s driven by the order book over the last nine months in China. If you go through that list of what’s being ordered in China, just about half the new builds now are in China.

And again as I mentioned on the previous Q&A, the ownership, we don’t know, we don’t know who they are and that’s unknown, usually how our business we know who is ordering and then they’re also ordering some rig designs that have not been built in yards that have not built rigs. I am not saying they’re not going to get built, but when you try to get your handle on where are they truly going to hit the market, who is going to run them, who is going to ultimately own them, those kind of questions it makes trying to figure out the supply side of our equation, very tough to get your arms around. So it’s a unique period I think in the jackup business where we can’t nail supply and historically we’ve been able to nail supply.

Operator

And your next question comes from the line of Matthew Marietta with Stephens. Please proceed.

Matthew Marietta - Stephens Inc.

I wanted to hit on the Gulf of Mexico with a positive outlook you guys provided, is there an opportunity yet for a potential reactivation again or is that opportunity or option kind of been tabled indefinitely?

John Rynd

It’s been tabled but not indefinitely. And I think really right now we’ve got to see kind of get that demand up a little bit, again it’s a very thin market that it doesn’t take much moving either way. I think that if you're getting bullish on gas I think we’ve got a great upside to the gas story, we’re not there yet, but I think that could be start seeing your incremental demand in the Gulf of Mexico as these gas prices, if they stay kind of on the trajectory they own and we get the storage and question and things and you get a little strength in gas prices, you may see incremental demand on the gas side.

For about the last 30 months plus or minus Matt of the 18 rigs we’ve run consistently 16 have been drilling oil and liquids and two have been on gas related projects. And that we don’t see that shift yet, but that if you see that shift, that’s going to be the incremental demand because go back to the second quarter 2010 and there was 45 jackups under contract and we’re at 32 today 34 we kind of flat lined it 34 for almost two years. What's some of that delta, some of that delta is gas drilling because at the time in the second quarter 10 gases, 475 to $5 and we really haven’t seen that level again. So I do think albeit we’re not predicting it, we're not gas (bulls) [ph] yet that you could see the incremental demand for jackups in the Gulf be driven by natural gas.

Matthew Marietta - Stephens Inc.

That’s very helpful.

John Rynd

[Indiscernible] as a segment, the Gulf of Mexico shale could respond quicker I think to take advantage of high gas prices may be quicker than they could on land right now given so much resources are driven to the old side of that equation.

Matthew Marietta - Stephens Inc.

Thanks I appreciate it. And staying in the Gulf, are you guys trying to push out terminal or is the kind of one to three months' timeframe where you think we’ll stay for the foreseeable future and given that timeframe of about one to three months, do you think that environment actually discourages other operators from attempting to move rigs into the Gulf and what are your thoughts on term and the structure of the contracts as activity sort of picks up here into the back half?

John Rynd

We very rarely have influence on term, that’s typically driven by our customer. And we don’t feel like and we haven’t feel like we have to trade rate for term, so we’ll kind of take what they give us right now and I think that again it’s almost operator dependent on how big they are, what’s their prospectively, what’s their few of their wells dictates their term and so we’ll kind of take the term we get. But I do think a very key point is if you look at 120 days of backlog, 140 days of backlog and you have a rig out somewhere in the world, you’re not coming to the Gulf of Mexico because you can still get six months to two years of work outside the U.S. at margin that are equal or better. And that’s not even factoring your lost opportunity cost by moving. So I do think it’s a turn.

Operator

And your next question comes from the line of Rollin Morris with Cowen & Company. Please proceed.

Rollin Morris - Cowen & Company

Hey guys, thanks for taking the question. I just wanted to see if you guys would comment a little bit more, you briefly mentioned Fieldwood and wanted to get an idea of capacity there. How much could they actually ramp up, are they, is there possibility longer term that they could be four, five, six, seven rigs or is that just never going to happen, are they -- where are we there?

John Rynd

I think you can have another time line is I am not sure on but I think one thing when Fieldwood made that acquisition of Apache that we felt was a positive for anybody in all service business in the shallow water U.S. Gulf is all that capital is going to stay in the Gulf, there is not capital competition on projects around the world. So I think they’re going through a digestive period that once they get -- they made two very big acquisitions, kind of back to back and that’s a big challenge for any organization. They got very good people, they’re focused on the shelf and I think you’re going to start to see their rig count incrementally glow, it might be the back half of this year. But I do think in a normalized environment they could run seven rigs.

Rollin Morris - Cowen & Company

And then maybe could you comment similarly on Energy XXI [indiscernible] where you think that would be?

John Rynd

I think it's, like I said in the prepared remarks I think it’s worth neutral with some upside, we fortunately have very good relationship with both parties and have a long standing relationship with Energy XXI. And again there is going to be a digestive period, a reordering of priorities that short-term could be a dislocation. But again, I think over time that’s nothing but a positive.

Operator

And your next question comes from the line of Jeff Spittel with Clarkson Capital Markets. Please proceed.

Jeff Spittel - Clarkson Capital Markets

Maybe we talked a lot about Energy XXI and Fieldwood, with your initial conversations with them post this round of consolidation, is there anything in their inventory that looks as if it might require some modest capital investments and new rigs in order to drill it up. And if it that is the case, what might the implications be in terms of duration of those contracts that go with that work.

John Rynd

It’s a little early to opine on that, but there could be as these wells start to get a little bit deeper, you can add a little bit, low capacity or pump capacity, no significant amount of capital and not significant amounts of down time. But it’s a little early kind of to figure out which direction you’re going to really talk about that.

Jeff Spittel - Clarkson Capital Markets

Sure, understandable. And then as we assess what’s in the yard and under construction in places like China and I know you want to devote potentially some growth CapEx of lift off business and you get debt reduction plans, but as we start to look out a little further, are the designs on those rigs and where they’re being built necessarily deal breakers for you as you kind of think about, if the market gets a little sloppy and particularly asset prices might become a little bit more attractive on the acquisition front.

John Rynd

We have to do a lot more diligence than we've done already, we made a round through China third quarter last year to the various yards, we've got a sense of where -- if rigs are coming out of certain yards that we would look hard at and at this point without a lot more diligence, there is yards that would be less likely to look hard. But again, it requires more diligence on our part.

Operator

And your next question comes from Todd Scholl with Wunderlich Securities. Please proceed.

Todd Scholl - Wunderlich Securities

Hey guys, I thought I’d follow up with this question. We kind of talked a little bit earlier about some of the kind of a spin off companies that are coming into the market like Paragon and Shell. And my question is, do you think that these likely disruptive to the market and what I mean by that is, I think that most people kind of thought that when these new high spec jackups entered the market, that there will be some displacement of some of the older standard jackups, because they wouldn’t really have any market to go to.

And I think we’ve talked about why they would end up moving to the Gulf of Mexico, but now it seems like that with these companies, the life of new jackups couldn’t get extended. Do you think that’s a possibility and do you think that that’s may be a threat eventually because some of these new companies will have to keep those rigs working and then just out of desperation they might ultimately end up moving into some other markets maybe even the U.S. Gulf.

John Rynd

Yes, that could always happen, I think really the backdrop going to be where is demand, right now there has been plenty of work for all the old rigs and all the new rigs. And as we said we got about 24 un-contracted rigs that are going to be delivered this year, we think they’ll be absorbed in the market. And it just depends on their view of the world and what’s their balance sheet, what’s their capital requirements, there is a lot of factors to go in the decision to work a rig or not. So I think time will tell. You could paint a rosy picture and you could paint a picture not quite as rosy.

Operator

And there are no further questions in the queue at this time. I would now like to turn the call back over to Son Vann for further remarks.

Son Vann

Thanks Britney and thanks everyone for joining us today. A replay of this call will be available in our web site in next couple of hours and we’ll talk to you next quarter.

Operator

Ladies and gentlemen that concludes the presentation for today’s conference. You may now all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Hercules Offshore (HERO): Q1 EPS of $0.22 beats by $0.09. Revenue of $256.7M (+25.0% Y/Y) misses by $7.12M.