Hercules Offshore's CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: Hercules Offshore (HERO)

Hercules Offshore (NASDAQ:HERO)

Q4 2010 Earnings Call

March 09, 2011 11:00 am ET


John Rynd - Chief Executive Officer, President and Executive Director

Son Vann -

Stephen Butz - Chief Financial Officer, Senior Vice President and Treasurer


Arun Jayaram - Crédit Suisse AG

Matthew Beeby - Global Hunter Securities, LLC

David Wilson - Howard Weil Incorporated

David Smith - Johnson Rice & Company, L.L.C.


Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Hercules Offshore Earnings Conference Call. My name is Jasmine, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, to Mr. Son Vann, Director of Investor Relations. Please proceed, sir.

Son Vann

Thanks, Jasmine, and good morning. I'd like to welcome everyone to our Fourth Quarter and Year-end 2010 Earnings Conference Call. With me today are John Rynd, our Chief Executive Officer and President; and Stephen Butz, our Senior Vice President and Chief Financial Officer; as well as members of our senior management staff including Jim Noe, our Senior Vice President and General Counsel; and Troy Carson, our Chief Accounting Officer.

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

For today's call, John will begin with some remarks regarding our quarterly performance and current outlook, as well as give an update on our strategic initiatives. Steven will follow with a more detailed discussion on financial results, provide cost guidance and give an update on our cash flow, liquidity and an amendment to our credit agreement before opening the call up for Q&A.

Before John begins with his remarks, I'll remind everyone that this conference call will contain forward-looking statements. Other than statements of historical fact, all statements that address our outlook for 2011 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate, will or may occur in the future, are forward-looking statements.

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

Now it's my pleasure to turn the call over to John.

John Rynd

Good morning, and thanks for joining us today to discuss our fourth quarter and full year results for 2010. We will also provide an update of the status of the Seahawk transaction and other corporate initiatives.

I have to assume some of our friends in Louisiana are recovering this morning from Fat Tuesday. As many of my Aggie friends are still recovering from our loss to LSU in the Cotton Bowl.

For the fourth quarter, we reported a loss from continuing operations of $84.6 million or $0.74 per diluted share. This includes a non-cash pretax impairment charge of $125.1 million or $0.71 per diluted share. Steven will walk through the details behind the charge. But overall, excluding the impairment charge and certain other items outlined in the reconciliation table included in the earnings release, we recorded a loss from continuing operations of $3.3 million or $0.03 per diluted share for the fourth quarter 2010 compared to a loss of $25.8 million or $0.23 per diluted share for the fourth quarter 2009.

For the full year 2010, again, excluding the impairment charge and certain other items, we reported a loss from continuing operations of $53.3 million or $0.46 per diluted share compared to $75.2 million or $0.77 per diluted share for the full year 2009.

Before I go through our outlook for each segment, I would like to first address the strategic announcements that we had made just beginning of this year, starting with our investment in Discovery Offshore.

On January 24, we announced the $10 million investment in Discovery Offshore, a newly formed, Luxembourg-based, pure-play, ultra high-spec jackup company, which will loan two ultra high-spec jackup rigs, with the option for two additional rigs. The rigs are based on Keppel FELS' Super A class proprietary design. And upon the scheduled delivery in the second and fourth quarter of 2013, we believe they will be among the most capable jackup rigs in the world.

Keppel FELS is the premiere shipyard for jackups and will the construct the rigs at a turnkey cost of $208 million per copy. On the two option rigs, if exercised, the turnkey cost will be approximately $213 million and $215 million respectively, subject to standard cost escalations.

For our $10 million investment in Discovery Offshore, we've received an 8% ownership interest in the entity, as well as warrants exercisable for up to five years that could boost our ownership to 15%, if the stock price of Discovery increases to NOK 23 or the equivalent of USD $4 today. The stock is currently trading at NOK 12.5. We also received an additional $1 million in equity to compensate us for the effort in establishing Discovery offshore.

In addition to our ownership stake, we have also entered into a Construction Supervision Agreement [ph] and a Services Agreement with Discovery. Under the Construction Supervision Agreement, Discovery paid us $7 million per rig upfront to supervise the construction of each new build rig that was ordered. Once the jackups are delivered, we will be responsible for all marketing and operations of the rigs, as well as administrative services required of Discovery under the Services Agreement.

As compensation for our marketing, operational and administrative services, we will receive a fixed fee of $6,000 per day, per rig, plus 5% of rig-based EBITDA. All operating, third-party, administrative and capital costs on the rigs will be paid by Discovery.

From a long-term strategic perspective, we are very excited about our investment in Discovery Offshore. Aside from the cash flow that we generate from our investment, which can grow substantially if Discovery exercises the two options or otherwise grows its rig fleet, it offers our shareholders an opportunity to participate in the high-end jackup business. This segment has held up very well during the industry downturn over the past couple of years, and we believe it is at the early stages of a multi-year upturn. Furthermore, given the structure of our investment and the 20-80 shipyard financing terms with the two rigs on order and two options, we get incredible leverage to this space with minimal capital at risk.

With regard to our Seahawk transaction, we are making progress in obtaining the necessary approvals to close on this purchase. The transaction is subject to a number of customary closing conditions, including the termination of the Hart-Scott-Rodino waiting period, bankruptcy court approval of the sale and the consent of Hercules lenders.

Last week, we finalized an amendment to our credit facility that will allow us to consummate the transaction if the other closing conditions are satisfied. Steven will go into more detail in the amendment. But along with lenders' approval for this transaction, we have also received greater flexibility under the new financial covenant package and the increase in our investment basket. The bankruptcy court is scheduled to conduct a hearing on the motion to approve the sale to Hercules on March 22.

As we've discussed in our earlier conference call, we believe the Seahawk transaction is very attractive for our shareholders, given the substantial cost/synergy opportunities that exist for our combined fleet, as well as the compelling asset values that we are acquiring these rigs at. We have also received a lot of positive feedback from our customers, as they trust us and know we are best suited to safely and efficiently operate these assets. By cutting redundant overhead and public company expense, we'll be able to offer a larger and more capable and diverse fleet to our customers at a lower cost on a per-rig basis.

Moving on to our results and outlook for each of our segments. Activity levels in our Domestic Offshore segment picked up in the fourth quarter of 2010, from the lows that we experienced midyear after new federal regulations were handed down on offshore drilling in the Gulf of Mexico last June.

Utilization on our 11 marketed rigs improved to 88% in the fourth quarter, up from only 63% in the third quarter of 2010. This improvement was largely driven by an increased number of drilling permits issued by the BOEM. To give you some idea of the pace of permitting, from June through September of 2010, an average of 10 shallow-water permits per month were issued by the BOEM. During the fourth quarter of 2010, that average increased to 17 permits per month. Although this is still only about half the average number of permits issued prior to the new regulations, we grew more optimistic heading into 2011, given this improving trend.

This year started off rather slowly but maybe picking up some steam. While only eight permits were issued in January, 15 were issued in February. We are hopeful that recent actions and body language from the BOEM maybe a positive indication of the direction of permitting, but it is still very hard to handicap.

Our Domestic customers continue to find work in spite of the permitting issues and recent transactions such as Energy XXI's purchase of shelf properties from Exxon, EPL's acquisition of Anglo-Suisse properties, demonstrate that there are operators eager to have an active program in the shallow water Gulf of Mexico.

The permitting slowdown at the beginning of this year has impacted our backlog. Our latest fleet status in February showed an average backlog days in Domestic Offshore of 60 days compared to 78 days in December. And as of this morning, we have 10 of 11 marketed rigs contracted, none of which earning a day rate. This compares to 46 marketed jackups in the U.S. Gulf of Mexico, of which 36 rigs are contracted, or approximately 78% utilization on the marketed fleet.

Of the 10 or so marketed rigs that are un-contracted, we believe that some are truly not capable of returning to work any time soon and may need some capital to get them ready. So we feel the market of excess rigs in the Gulf of Mexico may be tighter than these numbers imply. These rig count numbers do not include rigs that we expect to mobilize out of the U.S. Gulf in short order and return to PEMEX.

Pricing in the U.S. Gulf of Mexico has also started to inch higher since last year by a few thousand dollars per day. Leading edge day rates for our standard 200-foot rigs are pushing into the mid- and high-30s. And our Hercules 150 recently received a 100-day contract at $40,000 per day.

Turning to our International Offshore segment. Fourth quarter utilization was negatively impacted by the downtime on the Hercules 261 for some repair work that extended into early December. The rig is currently working.

In terms of our outlook for 2011 for International Offshore, as many of you know, six of the seven rigs working today will face contract expiration this year. As we have stated in past calls, we feel confident that we can maintain solid utilization on our International fleet. Market rates are lower than existing contracted rates, and there's still a good deal of auto rigs in these international markets. However, given the robust commodity price environment and expanding international capital budget trends, we believe that day rates overseas have already started to show signs of improvement. We expect this trend to continue as we progress through this year.

In reviewing our international jackup rig fleet. The Hercules 260 is scheduled to come off contract at the end of March, and we have received the termination letter from the operator, ONGC. However, there's a possibility that ONGC may ask for a short extension. Outside of this possible extension, we are in discussions with other potential operators to pick up the rig after ONGC, and I am confident that we will find a home for the Hercules 260, possibly as early as mid-year.

The Hercules 258 is also contracted to ONGC through early June. We believe there will be a tender issued by ONGC to extend the contract for another three years, with some downtime of a few months in between contracts.

The Hercules 208, we're in discussions with several operators to pick up the rig after a contract expires in late August. Demand for mat-supported jackups in the region is very strong. We have a number of inquiries on this rig and feel confident we will find work shortly after its release.

The Hercules 261 and 262, both are contracted to Saudi Aramco through the end of September and both stand an excellent chance of an extension for Aramco before expiration. Platform 3, we feel confident that PEMEX will extend the contract when it expires in late April, at rates that are at, or slightly lower than the current contracted rates.

The Hercules 185 started work in February for CABGOC in Angola under a three-year contract at approximately $60,000 per day. Operating cost per day for the Hercules 185 are expected to be in the low $40,000 per day range, so we expect to generate a decent cash margin on this contract.

Separately, we released/received the $5 million payment from Angola Drilling Company related to our prior contract with ADC for the Hercules 185, for which we have written off all associated receivables in the fourth quarter of 2009. While the balance of the receivables from ADC remain outside our revenue recognition requirements, and future payments are highly uncertain, we continued to press ADC for full payment.

The Hercules 170 is currently warm-stacked in Bahrain. We are exploring a few opportunities to put the rig to work, probably late this year. In the fourth quarter of 2010, we secured an LOI for the Hercules 170 but were unable to come to agreement on the terms and conditions in the proposed contract, and had elected to pass on this opportunity, as the risks far outweigh the returns.

The Hercules 156 is cold-stacked next to the Hercules 170 in Bahrain, in order to reduce stacking costs. While we will continue to seek opportunities for the rig, at this point, we don't expect the rig to find work this year.

Activity levels in our Inland Barge business remains challenged, with anywhere from 18 to 20 rigs working out of 25 -- 24-or-so marketed rigs. We are actively marketing three barge rigs, all of which, as of this morning, are currently working. Base day rates for inland barges have also stayed fairly competent over the last few quarters into the high-teens and low-20s. Following a material increase in natural gas prices, or property exchanges in the region, we don't expect the operating conditions in the inland barge market to change much from the current levels.

In our Domestic Liftboats segment, normal seasonal declines and the absence of Macondo-related cleanup work, which concluded in the third quarter led to a reduction in the fourth quarter utilization. We expect seasonality will continue to impact our fleet utilization through the first quarter of 2011, rebounding in the second quarter.

What has been in demand year-to-date are the larger class vessels, which favorably impacts our revenue mix. It is still a little too early to see how much of an impact the idle iron NTL will have on our Domestic Liftboats segment. But we suspect that part of the reason why we have been able to keep our larger liftboats working during the last couple of months, is that operators may be trying to get a head start on the P&A activity for this year. We will closely monitor this activity and capitalize on opportunities where we can.

In our International Liftboats segment, we're able to secure some short-term work on our liftboats in the Middle East during the fourth quarter and saw some utilization in the lower-class vessels in West Africa, which were idle for much of last year. As a result, fourth quarter utilization jumped to 71% from the mid-50s in the prior quarter.

Looking at 2011, while tender activity for International Liftboats can be choppy, we are seeing a good deal of opportunities both short- and long-term for liftboats as the year progresses. These opportunities will be competitive, but we feel that we're in a good position on several of these jobs.

Delta towing experienced a curtailment in activity levels during the fourth quarter, similar to that of our Domestic Liftboats segment, as coastal restoration work stemming from Macondo that boosted Delta results earlier in the year, had essentially concluded by the end of the third quarter. Going forward, demand for Delta services likely to be tabbed in the general drilling activity levels in shallow water Gulf of Mexico.

Turning to our asset sales efforts. In December, we closed on the sale of the Hercules 155, a retired jackup that we have had in cold-stack since 2001 for $4.8 million. We sold the Hercules 7 [ph], a retired barge that have been cold-stacked since 2002 for approximately $800,000. We also have an agreement in place to sell the Hercules 190 [ph] and Hercules 254, two retired jackups for a combined price of $4.8 million, which was expected to close over the next few weeks. We continue to look for opportunities to divest of our non-core assets.

In closing, let me just say that the last couple of years have been some of the most challenging times for our business. First, with the global economic crisis, followed shortly thereafter by the Macondo incident and subsequent regulatory fallout. In spite of these challenges, we have maintained strong liquidity, reduced debt and enhanced our financial flexibility. Operationally, we have significantly reduced our cost structure, divested of non-core assets and improved our safety performance.

As we begin 2011, we have taken action to position the company for long-term sustainability and growth. With both our Discovery Offshore investment and the Seahawk asset purchase, these unique opportunities allow us to leverage our people and expertise in a way that will add significant value to all of our stakeholders and our customers.

There are still a lot of challenges for our business, but there are also a number of positive developments, and I'm very excited for our future prospects. With that, let me turn the call over to Stephen.

Stephen Butz

Thank you, John. I would like to start by briefly reviewing our fourth quarter financial results in comparison to the third quarter 2010 and provide our cost expectations for 2011, before touching on the recent amendment to our credit facility.

For the fourth quarter 2010, we recorded a loss from continuing operations of $0.74 per diluted share compared to a loss of $0.13 per share in the third quarter 2010.

As we previously discussed, we incurred a non-cash impairment charge during the fourth quarter of $125.1 million or $0.71 per share. Excluding the impairment charge, our fourth quarter operating loss from continuing operations was $0.03 per diluted share. The impairment charge pertained to five cold-stacked rigs in our Domestic Offshore segment, which accounts for approximately $85 million of the total charge, a $38 million impairment of the Hercules 156 in Bahrain and $2.4 million impairment for various Delta Towing vessels.

The charge resulted from the continuing weakness in market conditions, coupled with an increase in estimated reactivation costs, which reduced the ultimate likelihood of reactivation. The charge is excluded from our financial covenant compliance calculations and does not affect the marketability of these assets or our ultimate decision to reactivate, if conditions sufficiently improve.

Now turning to operating results by segment. Domestic Offshore recorded an operating loss of $14.9 million in the fourth quarter, which excludes a non-cash impairment charge of $84.7 million as compared to a loss of $32.1 million in the third quarter. Domestic Offshore generated EBITDA of $2.4 million in the fourth quarter when excluding the impairment charge. This is the first time the segment has generated positive EBITDA since the first quarter of 2009.

Domestic Offshore revenue increased 43% to $35.9 million in the fourth quarter 2010 from $25.1 million in the third quarter, as utilization rose to 88% versus 63%, and average revenue per day improved marginally by $800 per day to $40,100 per day. The increase in utilization was largely a function of our customers' improved ability to obtain drilling permits in the fourth quarter relative to the third quarter.

Domestic Offshore operating expenses decreased by $6.1 million to $32.6 million during the fourth quarter. The decrease reflects a $4 million gain from the sale of the Hercules 155 in the fourth quarter. The third quarter also had a gain from asset sales, but this was largely offset by state sales and user tax accruals.

When adjusting both quarters for asset sales gains and tax accruals, operating expenses declined by $2.3 million between the third and fourth quarter of 2010 due to lower shore-based expenses, a reduction in our cold-stacking costs, and modestly lower operating cost for our marketed rigs.

Average operating cost per marketed rigs, excluding shore-based expenses and gain on asset sales, was approximately $28,100 per day on 11 marketed rigs during the fourth quarter, slightly lower than the third quarter average of $28,600 per day.

For the first quarter of 2011, we estimate operating cost for the marketed rigs will increase to between $32,000 and $33,000 per day, as our repair and maintenance expenses are typically front-end loaded. Costs should decline as the year progresses and full year 2011 operating costs are expected to be closer to $30,000 per day per marketed rig.

Cold-stacking cost per rig averaged approximately $3,900 per day in the fourth quarter, down from $4,700 per day in the third quarter. We estimate that costs will decline further to the $2,200 to $2,500 range by the second quarter, as a result of recent cost-reduction measures. These estimates exclude any gain or loss on asset sales.

Moving on to International Offshore. International Offshore segment generated operating income of $21.2 million in the fourth quarter, which excludes an impairment charge of $38 million. This represents a slight decline from operating income of $26.9 million in the third quarter. Revenue declined by $4.3 million in the fourth quarter to $70.2 million, mainly due to lower utilization as we incurred some downtime on the Hercules 261.

International Offshore operating costs rose modestly by $1 million during the fourth quarter to $32.1 million. We expect operating costs for International Offshore will approximate $35 million during the first quarter, up from fourth quarter levels, largely reflecting the fact that the Hercules 185 commenced a three-year contract during February, after being idle during 2010.

As John mentioned, we received a $5 million payment from Angola Drilling Company earlier this week. As a reminder, we have previously contracted the Hercules 185 to ADC for a 549-day contract that commenced in mid-July in 2009.

In the fourth quarter of 2009, we established a reserve for our ADC-related receivable, and discontinued recognition of all future revenues associated with the ADC contract, as it no longer met our criteria for revenue recognition. This $5 million payment will reduce the reserve we established and reduce International Offshore's general and administrative expenses in the first quarter of 2011.

While we have now collected approximately $10 million from ADC under this contract since the time we established the reserve and discontinued recognizing revenue under the contract, the ultimate collectability of the remaining $75 million owed to Hercules remains uncertain.

Our Inland segment recorded an operating loss of $6.2 million for the fourth quarter 2010 versus the loss of $8.6 million in the previous quarter. Revenues increased modestly to $6.2 million from $5.7 million.

Revenue per rig increased by approximately $6,000 per day, driven by higher rebuild. However, this is partially offset by a decrease in operating days to 227 from 269.

Operating expenses declined by almost $1 million to $7.3 million in the fourth quarter. We expect similar operating cost levels for Inland during the first quarter of 2011 in the range of $6 million to $8 million.

Domestic Liftboats generated operating income of approximately $2.2 million in the fourth quarter, down from $9.4 million in the third quarter. The decrease was driven by a return to normalized activity levels, as BP-related cleanup work was essentially completed by the end of the third quarter, and we experienced the normal seasonal activity slowdown during the fourth quarter. As a result, fourth quarter utilization averaged 63% compared to 92% in the third quarter. Average revenue per vessel per day was essentially flat and approximately $7,600.

Year-to-date utilization in Domestic Liftboats, particularly, for the smaller craft vessels, has been hampered by the seasonal slowdown. However, our larger liftboats have stayed fairly active during this time, and we expect that to continue. Operating costs per vessel declined modestly to $3,000 per day in the fourth quarter compared to $3,200 in the third quarter. We anticipate operating cost to remain in the low $3,000 per day range for the first quarter of 2011.

International Liftboats generated operating income of $16 million, a significant improvement from $9.4 million in the third quarter. Utilization drove most of this increase, as fourth quarter utilization averaged 71%, up from 57% in the third quarter. During the fourth quarter, we were able to secure jobs for both vessels in the Middle East, and we also secured work for a number of our smaller vessels in West Africa.

Average revenue per liftboat per day was essentially flat at $23,700. Operating costs increased slightly to $13.6 million in the fourth quarter compared to $13 million in the previous quarter. For the first quarter, we expect operating cost for this segment to range from $14 million to $15 million.

Our Delta Towing segment recorded an operating loss of $500,000 in the first quarter, which excludes the impairment charge of $2.4 million compared to operating income of $2.4 million in the third quarter. Similar to Domestic Liftboats, the decline in Delta's results reflects a reduction in vessel demand as oil spill response-related activities largely concluded in the third quarter.

Our consolidated general and administrative expenses were $15.8 million in the fourth quarter, compared to $14.5 million in the previous quarter. We expect G&A expense to be relatively flat in the first quarter 2011, excluding the impact of the ADC payment.

Interest expense declined to $18.6 million during the fourth quarter compared to $21.4 million during the third quarter due to the expiration of our interest rate collar, which added approximately $2.7 million to interest costs during the third quarter.

Given the recent amendment to our credit facility and the resulting increase in the margin on the loan by 150 basis points, we expect first quarter 2011 interest expense will increase slightly with an increase to just over $20 million in the second quarter.

We reported an income tax benefit of $51.1 million for the fourth quarter, which equates to an effective rate of 38%. For the fiscal year 2010, our effective income tax rate was 40%. For 2011, we estimate our income tax rate to be in the high 20% to low 30% range. The reduction largely reflects the shift in the percentage of earnings between our Domestic and International operations.

Turning to cash flow and liquidity. We ended the fourth quarter with unrestricted cash and cash equivalents of approximately $137 million. Since year end, we have funded the $10 million investment in Discovery Offshore, and received a lump-sum payment of $14 million from Discovery for the construction service received. Today, our liquidity stands at approximately $280 million, consisting of approximately $151 million in unrestricted cash and $129 million of remaining availability under our $140 million revolving credit facility, net of $11 million in letters of credit.

Capital expenditures and deferred dry docking costs for the fourth quarter were $9.7 million and for the year totaled only $37.1 million. We maintain strict discipline with our capital spending during the year, deferring certain projects where we could.

For 2011, we currently estimate capital expenditures and dry docking costs will range from $55 million the $65 million. This increase reflects various special surveys and repair work on our marketed rig fleet, as well as expenditures related to retooling our International rigs, as they come off multi-year contracts.

Now I would like to touch on the amendment to our credit facility that we finalized last week. As we previously disclosed, we needed our lenders' approval to consummate the Seahawk transaction in order to allow us to provide some cash consideration and to exempt the pro forma treatment of the transaction under our financial covenants.

As consideration for the amendment, we agreed to pay an upfront fee of 25 basis points to consenting lenders and to an increase of 150 basis points on the margin of the loan. As of today, interest rate on the loan stands at 7.5%. We also agreed to reduce the availability on the revolving credit facility to $140 million from $175 million. While in negotiations for the amendment, we went ahead and thought to reset the thresholds on our maximum leverage ratio covenant to provide more flexibility going forward.

The agreement with our lenders provides for separate schedules outlining new maximum leverage ratio requirements. One schedule if the Seahawk transaction is closed, a different schedule if it has not. In either case, the new levels are materially higher than our prior requirement, as outlined in our press release last week and Form 8-K filed yesterday and in our view, significantly reduced the threat of a covenant breach moving forward.

That concludes our prepared remarks this morning. So we are now ready to open the call for questions. Operator?

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Arun Jayaram from Crédit Suisse.

Arun Jayaram - Crédit Suisse AG

John, I wanted to see if you could elaborate a little bit on the 261, 262 in the Saudi Arabia. I think they're pre-tendering for a lot of units, 11 units. And just give us a sense of how you think that plays out? And just give us -- it seems like you're pretty confident, but what gives you that confidence around these two rigs going forward?

John Rynd

We have a number of reasons to be confident, A. J. One is just operationally, we've done a very good job for Saudi Aramco. Secondly, we go and visit the client quite frequently, both of our guys that are in country and then those of us from here. And on their rig schedule, which is always tentative, but they have a rig schedule that shows the 261 and 262 after 2015. So we just have high confidence that it will be renewed.

Arun Jayaram - Crédit Suisse AG

It's good. John, assuming you're able to close Seahawk, it does give you more the mat cantilever units in terms of their portfolio. Are you seeing any mixed shift towards the mat cantilever units versus the mat slots? And do you think that this helps you longer term by adding these units? I assume they're relatively fungible with the ICs, is that fair in the Gulf?

John Rynd

Yes, they're very fungible. They're interchangeable on almost every case. Obviously, any cantilever rig, whether it be an independent leg rig, or a mat-supported rig, offers more flexibility, both to the owner of the asset and to the end-user, as you can get on more structures. But they are more fungible. They can switch back and forth.

Arun Jayaram - Crédit Suisse AG

So in a sense, this is going to help you, as you think about marketing your broader Gulf of Mexico fleet?

John Rynd

Yes. It just gives you -- a cantilever unit, again, whether it's independent leg or mat-supported, gives you more opportunities to work. You're not as restricted as a slot rig. So yes, I think, utilization, historical, we all know the numbers. Cantilever units have higher utilizations than slot rigs.

Arun Jayaram - Crédit Suisse AG

My final question, John, is can you give us a sense -- obviously, some of your larger competitors, the Noble and the RIG, have talked about intentions to dispose of some rigs, as some of them focus on new builds. Are you having any of those discussions about Hercules participating in some opportunities to get some premium jackups in the fleet?

John Rynd

I don't mean to be flip, but defined discussions, we talk all the time about our various opportunities around the world, but nothing is imminent, nothing has any detail. It's just watching the fleets around the world and see what makes it for us et cetera.


Your next question comes from the line of David Smith with Johnson Rice.

David Smith - Johnson Rice & Company, L.L.C.

I hear discussions from some smaller private players of a lot of prospectivity for drilling oil and liquids targets on the shelf, with oil at $100-plus. Can you give us any color on whether you're hearing this, the same thing? And maybe how the permitting process is evolving, particularly for oil and liquids-rich targets on the shelf?

John Rynd

That's a great question, and I could take you back to the fourth quarter of 2009, when the activity came off its lows in the summer, coming off the global economic crisis. Gas was at $4, they never get above $5, kind of from the fourth quarter 2009 through the first quarter of 2010. And the rig count tripled almost. And so it had us scratching our heads a little bit, and it was being driven by the disparity between oil and natural gas. And at that time, oil was kind of $70 to $80 range, and nat gas was kind of maybe a little above where it is today, but it wasn't the driver, and it was just that. They were looking at the oil and liquids content of the wells and playing off that disparity in the price. As you go forward, the permitting process on the natural gas wells, albeit, we got stunted, kind of June through September, did increase, but we saw a slowdown in the permitting process for the oil or liquids-content wells. But if you look currently, what's been permitted, I think, obviously, we like the overall trend in the number of permits. But if you look at the number of new wells in relation to the total permits, they're starting to increase. We worked most of the back half of last year on sidetrack-type opportunities. If you look at kind of the permits through March 7, which are 26, because there's been three permits through March 7, 11 of those are new wells, and that's a good number. And if you look at the 20 permits that are pending, there's 12 new wells and eight sidetracks, so you've got about 60% of the permits now are new wells. There's also been 11 permits above the 20 that have been sent back. So you're starting to get a backlog of permits which is positive. And we're also seeing, as you laid out, a move to a more oil liquids-type content in the wellbore.

David Smith - Johnson Rice & Company, L.L.C.

Great, appreciate it. The stock assets could be pretty exciting. Just a housekeeping question, what was your adjusted EBITDA number in 4Q '10?

Stephen Butz

$54.3 million.


[Operator Instructions] Your next question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated

Quick one on the dispositions, those rigs that you plan to close the sale on this quarter, are those rigs staying in the Gulf, are they moving out?

John Rynd

No, Dave, we just -- they'll be moving out of the business. They're going to use those as mobile offshore production.

David Wilson - Howard Weil Incorporated

And then same on the disposition front, the Inland Barge business, how do you look at that now? It seems like that's continual drain on earnings from an operational perspective. So from that perspective, it seems like the company would be better served if it were shut down or sold. I understand that's been kind of a hard pill to swallow, at kind of the bottom of the market, but is there anything -- are you just holding on to the segment in hopes that gas prices get better down the road?

John Rynd

No. Dave, it's a great question. It's one that we kind of go over and over again, almost every month. They are more valuable right now in their parts than they are in their whole. So I think, right now, again, we've done a very good job of reducing the costs. And we do think there's more value running it and ultimately selling the total package or potentially disposing of certain units that have been stacked. So we don't have a clear cut answer yet, but you can't run a business waiting on next month. So we've been proactive on the cost-cutting side. Now we've got to watch activity levels, which have picked up modestly, but it's hard to get too excited about it right now. And then we've got to make a decision what we do going forward.


Your next question comes from the line of Matt Beeby with Global Hunter Securities.

Matthew Beeby - Global Hunter Securities, LLC

John, you have talked about some potential mat strength internationally, I think, Malaysia specifically. With some larger mat rigs, now assuming the 'Hawk deal goes through, the larger -- continuism, some higher end mat rigs, is there some opportunities for international mobilization? You may have a couple of international rigs currently idle.

John Rynd

Yes, Matt, we are operating two mat rigs in the international segment, the 258 [Hercules 258] for ONGC in India, and the 208 [Hercules 208] currently with Murphy in Malaysia. They have proven themselves to be very efficient tools, and we are constantly evaluating opportunities to move our assets from here to the international market. Again, it's tough to move right now, given the overhang of the current markets, but it's a global market and rigs can move from the Gulf to the international markets; the international markets back here. But yes, we have always -- after we were successful on 258 and the 208, continued to explore opportunities to move our rigs internationally. But I just think right now, with the overhang internationally, it could be tough. But that doesn't mean we're not constantly trying to create opportunities.

Matthew Beeby - Global Hunter Securities, LLC

Also, speaking of potentially moving U.S. Gulf rigs out, the 350 [Hercules 350], I know some competitors of yours that have been talking about the strength in Mexico. We've seen more and more tenders coming, is the 350 a viable option? Are you bidding it into Mexico?

John Rynd

We're not currently bidding it in Mexico, but it is a viable option. But it comes down to economics, Matt. We're currently enjoying a term relationship with one of our key clients, with Chevron, and if that is one of their core rigs. And they like it, they intend to keep it, so it would be tough for us to pull the rig from them just from a relationship basis. But also look at the mat, I think our day rates in the low-70s right now with Chevron, if we secure the contract with PEMEX, we'd be idle in the shipyard at zero revenue for plus or minus, pick a number, 60 to 120 days. We'd have to have incremental CapEx put in the rig of $10 million to $15 million to meet specific PEMEX requirements, and they have a 30-day cancellation clause for convenience. So we have good visibility, good relationship with a client that likes the rig, we're going to stick with them.


[Operator Instructions] And at this time, we have no further questions. I would like to turn the call back to Son Vann for closing remarks.

Son Vann

We want to thank everyone for joining us today. Feel free to contact us if you have any follow-up questions. And we look forward to talking to you guys again after our first quarter.


Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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