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Hercules Offshore Inc. (NASDAQ:HERO)

Q2 2008 Earnings Call

July 29, 2008 11:00 am ET

Executives

Stephen Butz - VP, Finance and Treasurer

John Rynd - CEO and President

Lisa Rodriguez - SVP and CFO

Analysts

Ian Macpherson - Simmons & Company

Dan Boyd - Goldman Sachs

Arun Jayaram - Credit Suisse

Robin Shoemaker - Citigroup

Pierre Conner - Capital One

Jeff Tillery - Tudor Pickering

Waqar Syed - Tristone Capital

Mike Drickamer - Morgan Keegan

Geoff Kieburtz - Weeden

Operator

Good day, ladies and gentleman and welcome to the second quarter 2008 Hercules Offshore Earnings Call. My name is Carissa and I'll be your coordinator 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 this 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, Carissa. Good morning, I would like to welcome everyone to our second quarter 2008 earnings conference call. Participating this morning from the Hercules Offshore management team are John Rynd, our Chief Executive Officer and President, and Lisa Rodriguez, our Senior Vice President and Chief Financial Officer. We issued our earnings results and filed an 8-K with the SEC this morning. The press release is available on our website at www.herculesoffshore.com.

Before John begins his remarks, I would like to remind everyone that this conference call will contain forward-looking statements, including our discussion regarding the outlook for 2008 and beyond. Our actual results may differ materially from those projected in the forward-looking statements.

There are a number of known and unknown risks and factors that may cause our actual results to differ from the results discussed in our forward-looking 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 www.sec.go.

John will begin the call with some general remarks, highlights and our view of the market and Lisa will detail second quarter financial results and provide some guidance for the balance of the year. We'll then open the call for question-and-answers.

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

John Rynd

Good morning and thank you for joining us on the call today. As Stephen mentioned, we reported our financial results earlier this morning. We recorded net income of $16.4 million or $0.18 per diluted share for the second quarter of 2008 compared with a net income of $4.5 million or $0.05 per diluted share for the first quarter of 2008.

Excluding separation and related expenses, we reported $0.23 per share in the second quarter of 2008. The second quarter largely progressed as we thought it would at the time of our last quarterly conference call with continued strong performance from our International segments, improving results from Domestic Offshore and Domestic Liftboats and unfortunately continued weakness in our Inland and other segments. I want to personally thank our 3,500 employees worldwide for their continued focus on providing injury-free, cost effective and reliable services to our customers. Our people are the most valuable asset.

One of the highlights in this quarter was the one year extension received on the Hercules 170 given us an additional $38.5 million of international offshore backlog. This comes on the heals of our two three year contracts for Saudi Aramco and several other significant extensions that we secured during the first quarter and two three year contracts with ONGC that we secured during the fourth quarter.

We have built a very solid international business in a short period of time. Our international backlog now stands at $956 million in an average of 619 days per rig. 67% and 47% of our available rig days for 2009 and 2010 are already contracted. This has been an important strategic goal of Hercules given the shorter term nature of the domestic market and I’m pleased with the progress, but expect this evolution to continue.

Even without any further mobilization of assets out of the Gulf of Mexico or any additional acquisitions at current market rates, we expect approximately 40% of our revenue to be derived internationally by the first quarter of 2009. Despite the significant new build order book of jackups, which stands at 85 rigs or 20% of the total existing fleet to be delivered over the next three years.

We believe the international outlook remains bright. We currently have tenders in-house for an incremental 10 jackups and over the next 12 months, we expect to see tenders for five to additional rigs. We believe PEMEX will come to the market for additional 46 jackups before year end and it appears at least four of these maybe incremental.

In addition the continued positive elements in the international contract status during the second quarter, the domestic offshore market steadily improved with an increase in our average days of backlog per rig to 78 from 62 at the time of our last call and we put additional rigs back to work.

Currently, U.S. Gulf of Mexico jackup demand stands at 64 on a supply of 79. Of the 15 rig excess capacity 11 are cold stacked and one is in the shipyard thus bringing the marketed rig count supply to 67. Three rigs are scheduled to leave the Gulf of Mexico and another three are like to leave based on recent bid announcements.

The mover of these three rigs even without further reductions will bring the marketed supply down to 62, 11 of which we believe will be supported by demand. This improvement in demand and backlog has led to an increasing leading hedge day rates to 85,000 per day for 200 mat cantilever jackups and 75,000 per day for 250 mat slot jackups from 72,565,000 respectively over the last three months.

With commodity prices at current levels driving attractive well economics and positive revisions to our customers' capital spending plans coupled with a flat to declining [Jackups] blend in the U.S. Gulf of Mexico. The Domestic Offshore outlook remains favorable. The near-term pullback in gas prices has not had impacted activity nor that we anticipated too. We'll have two incremental rigs to miss contracts this weekend. The Hercules 78, a submersible starts a 90-day contract to Century Offshore and Hercules 153, a 150 foot jackup will commence a two well plus options contract for Hall Houston.

This leaves us with one remaining offshore rig to bring back in the market and we expect to be able to put this unit back in the service later this year. We believe market rates will likely continue to improve. The Domestic Liftboat bid has also improved dramatically during the second quarter with utilization increasing to 64% from a low of 23% at an average of 38% during the first quarter driven mainly by return to normal weather.

Our current total utilization is recently range from 70% to 80% and is well above our expectation giving some of the new supply that is coming to the market. This probably reflects pent up demand from the first quarter as well as simply slightly more robust environment. That said, given the additional eight liftboats that are said to hit the market over the next year, representing a 6% increase in the fleet in an essentially a flat market. We remain cautious as to the outlook for utilization and day rates.

Given our relatively flat longer-term outlook on the Gulf of Mexico Liftboat business, we took the opportunity to mobilize two of our larger liftboats to the Middle East sending them on the same heavy lift vessels that mobilized our Hercules 261 and 262 jackups. The Whale Shark arrived in (inaudible) with the Hercules 261 on June 4 and is undergoing some modifications repairs and will be ready for service in the Middle East later this year. The Hercules 262 in the Amberjack was scheduled to arrive on August 4. We expect to have both liftboats on contract in the fourth quarter.

We view the Middle East as a strategic long-term location for Hercules for both the Drilling and Liftboat segments. We are optimistic about the long-term demand for liftboats in the region due to the ongoing expansion of the offshore infrastructure.

Our International Liftboats in West Africa continued to perform very well. We recently received an average rate increase of approximately 10% on 9 of our 18 vessels. We also secured an average rate increase of 7% to 8% on 5 other contracts starting in September. Our new 200 class Black Jack went into service at mid May at a rate in the mid to half 30s. You might recall that we acquired just previously stack vessel in Latin America last year and refurbished the vessel at a total capital cost of $16 million. This should generate attractive return for our investment.

As we moved on to this market in late 2005, we are extremely dependent upon one customer and while we still have a meaningful concentration and that customer is key to our success we have been very successful in expanding our customer base and our geographic reach from just Nigeria two years ago to Cameroon, Angola, Gabon and the Ivory Coast.

However, while most of our segments were strong and improving, unfortunately the Inland Barge business continued to lag in a recovery. While our Inland Barge business utilization improved meaningfully during the quarter the backlog is still weak at 29 days and it will premature down 10% year-to-date versus 2007 with almost 80% of the permitted wells at 15,000 foot or shallower.

There appeared to be a number of factors that play here. One thing the high level of interest in the resource plays, which have drawn capital out of the Inland market. Secondly, we have had some dislocation in our customer base, as we did the past few years in our Domestic Offshore business for various reasons. Three of our top barge customers from 2006 and 2007 have focused their efforts in other exploration plays not necessarily due to a lack of success, but a shift to funding due to other activities.

Two other significant customers sold their businesses. While some customers have had good success in the deeper prospects, which take longer to drill, these opportunities have been slow to develop. It may provide more of a pickup and demand next year rather than 2008. One thing I would like to make clear, we'll not sit ideally and watch the market deteriorate in any of our segments without reducing our cost structure.

As it is becomes evident to us the Inland utilization will likely to climb during the third quarter. We planned to warm stack three additional drilling barges. I'm sure you'll remember last fall we quickly warm stacked six of our offshore rigs and one drilling barge, when the market was weak.

As I mentioned, as demand dictated, we have already brought or have plans to bring back five of the six offshore rigs into the market. This warm stacking strategy was extremely effective in our Domestic Offshore business and helped us reduce our costs, while maintaining flexibility to quickly respond to improve your market versus cold stacking the rigs.

This move will leave us with 13 barges that we are actively marketing and three that are warm stacked. Obviously, we do not believe the Inland softness will plosive too long in this commodity price environment or we would have cold stacked these units. We expect to reduce our daily operating cost on these rigs to approximately $8,000 per day from over $20,000 per day within two months.

Giving Delta Towing significant support of the Inland business, its results are also below our expectations, although well improved from the first quarter results. On our last conference call, we mentioned that we are evaluating strategic alternatives for Delta Towing. That process remains ongoing. We hope to have a more detailed update for you at the time of our next conference call.

Now, I would like to provide you with a brief update on some of our shipyard projects. First, we completed the contract preparation shipyard work for the Hercules 260 and the Hercules 258 on April 23rd and June 4th respectively and both rigs commenced their three year contracts with ONGC. The Hercules 208 has experienced ongoing delays in the shipyard, while disappointing we had expected some in efficiencies in the shipyard, as the selection of the shipyard was driven by factors beyond our control including customer demands.

The refurbishment of this 200 foot mat cantilever jackup is now complete and we are undergoing acceptance, testing, commissioning. We expect the rig to enter service on or about August 21 and begin its three year contract at 110,000 a day. As mentioned earlier the Hercules 261 arrived in the UAE on June 4 and is expected to be completed by September 25 and the Hercules 262 is scheduled to arrive on August 4 and is expected to be completed by August 30th.

Now I would like to highlight some of our significant balance sheet related activities that occurred during the quarter. While our liquidity was adequate as we entered the second quarter, we made two moves that solidified our liquidity and put us in better position to capitalize on a smaller asset packages that may come to the market in the near-term without having to necessarily tap in to the capital markets.

First, we increased our revolving line of credit to $250 million from $150 million and other than letters of credit we do not have any balances outstanding. Secondly, we issued $250 million in convertible securities. Using the proceeds to purchase nearly $50 million or $1.45 million shares of common stock and repay $100 million that was outstanding on the revolver. The notes have a coupon of 3% and 3.8 % and a conversion premium of 47.5% so the closing price the day of the offering, which pushed the conversion price just over $50 a share.

Lastly, as you all know Randy Stilley, our former CEO and President recently stepped down from his post. Randy led this company from the $60 million domestic focus startup in late 2004 to a $4 billion global enterprise and industry leader in just under four years providing net company's initial shareholders return of 1140%. He will be missed and I want to partially and publicly thank him for leaving the company in such excellent shape.

With that, I'll hand the call over to Lisa.

Lisa Rodriguez

Thank you, John. I'll provide a little more detail with respect to our financial results for the second quarter as well as provide cost and capital spending guidance for the remainder of 2008. After excluding the $3.6 million net of tax the separation related costs from the second quarter result, the company generated earnings of $0.22 per share versus $0.05 per share during the first quarter.

The $0.17 increase in sequential quarterly diluted earnings per share was primarily driven by improving business conditions in Domestic Offshore and Domestic Liftboats offset by a decline in international offshore. Domestic Offshore contributed an incremental $0.18 in the second quarter. The increase was top line driven with increasing utilization accounting for approximately 90% of the revenue increase and the higher day rates accounting for 10%.

Domestic Liftboats realized a $0.05 improvement due fully to higher utilization. International offshore declined by $0.06 as a result of a slight decline in operating days coupled with costs incurred on Hercules 258 jackup, while between contracts and those cost associated with the startup of Hercules 250.

Now I’ll walk through some of the segment highlights. First, our Domestic Offshore segment experienced a very strong recovery in the second quarter with operating income of $23.6 million up from an operating loss of $1.9 million in the first quarter. As I mentioned, this was largely a result of higher activity levels. Utilization increased by nearly 25% quarter-over-quarter to just under 80% resulting in a 47% increase in operating days.

Average revenue per day per rig increased, while modestly by approximately $3600 to $60,400. However, as we repriced the majority of our fleet at higher current market rigs during the third quarter, we expect a more significant sequential increase to an average of approximately $70,000 per day per rig.

We experienced an increase of approximately $4000 in average operating cost per day per rigs to $27,800. This was largely due to startup costs that were incurred on the Hercules 350 as well as the reactivation of several warm stacked rigs coupled within an 11% average wage increase that went into effect on June 1.

Next, our International Offshore segment generated operating income of $27.4 million, down from $34.4 million in the first quarter. While, our average revenue per day per rig increased to $115,600 from $99,900 in the first quarter and a slight decline in operating days. Average operating expense per rigs pay day increased to $51,000 from $32,100. This increase in operating cost to $37.3 million was essentially as expected. As you remember, our guidance for the second quarter was $36 million.

On a per day basis, startup costs associated with the Hercules 260 and costs incurred on the Hercules 258, while it's the twin contracts accounted for approximately $6500 per day of the increase with mobilization and rebillable expenses contributing an additional $5,500 per day. Additionally during the first quarter operating costs were well below normal. As we discussed on the last call, the first quarter costs were reduced during the transit time on the Hercules 156 and during standby time on the Hercules 205.

Our Inland segment reported an operating loss of $2.9 million versus a loss of $1.9 million in the first quarter due to the market weakness that John has already discussed. While operating days increased slightly, our average daily revenue decreased from $39,600 from $42,900. Our daily operating costs were up slightly to $21,100 from $20,600 largely due to the aforementioned wage increase.

Our Domestic Liftboat segment generated $3 million of operating income. This was up from an operating loss of $4.6 million in the first quarter. As the weather offshore improve throughout the second quarter, average utilizations increased to 64% in the second quarter versus only 38% in the first quarter. Our utilization for the month of June was up to 77%.

Nonetheless, as day rates declined substantially towards the end of the first quarter, our average revenue per day per vessel for the second quarter came in just over $9000, whereas in the first quarter, it was nearly $10,000. This was better than we expected as we guided to the $8,000 to $8,500 range in our last call due to the pricing we saw in the market at that time but it has improved.

Average operating expense per day for the second quarter increased to approximately $3,500 from $3,300 in the first quarter. The operating cost for the second quarter came in below our guidance of $3,700 to $3,800 per day, partly due to the warm stacking of poor idle vessels. We have since brought one of these vessels back into the market due to the improving demand.

While we are pleased with the current levels of utilization on our Domestic Liftboats segment, we would not be surprised to see them slip as the year progresses barring an active hurricane season due to the additional capacity expected to enter the market. We'll continue to seek opportunities to mobilize our liftboats to international market.

Our International Liftboat segment reported operating income of $6.8 million in the second quarter compared with operating income of $8.1 million in the first quarter due to an increase in operating cost to $9.9 million from $7.2 million. Average revenue per liftboat per day increased to $15,300 from $15,000 and operating days increased by 9%, which led to a $2 million increase in revenue.

However the revenue growth was more than offset by the higher costs. The increase in operating cost resulted from a number of factors, which included the 200 class Black Jack entering the service in mid May and repair and maintenance expenses returning to normal levels. Repair and maintenance was abnormally low during the first quarter of 2008, while we had the Black Jack in our yard.

Our Other segment consisting of Delta Towing and the results associated with winding down our onshore business, which we sold in the fourth quarter improved during the second quarter with the segment generating operating income of $2.3 million, which was up from an operating loss of $1.3 million in the first quarter.

General and administrative expenses were $18.5 million in the second quarter after removing the aforementioned separation related cost. The increase from $16.4 million in the first quarter is a result of several factors including training related to our ERP implementation and the final retention payments that were related to the TODCO acquisition. Depreciation and amortization increased to $47.3 million from $43.6 million, due largely to the startup of operations on the Hercules 260, 350 and the Black Jack vessel.

Now I'd like to provide with you some cost guidance for the balance of the year. We anticipate our daily operating cost per rig for domestic offshore to be the end or low $28,000 range per day for the third and fourth quarters, which reflects the impact of the full quarter of the wage increase.

International offshore operating cost should increase to $40 million to $42 million range in the third quarter due to the startup of the Hercules 208 in Malaysia and the full quarter impact and the Hercules 260 startup in India. Cost should increased further in the fourth quarter till about $46 million to $48 million due to the startup of Hercules 261 and 262 in Saudi Arabia and the fully impact of the Hercules 208 in the fourth quarter.

In our inland segment, we expect daily operating cost per rig remain relatively flat in the third quarter and then decline to the $20,000 range in the fourth quarter, due to the warm stacking of the three additional rigs, and our expectation that we can reduce daily expenses on these rigs to the $8,000 range within two months.

In our Domestic Liftboat Segment, we expect daily operating cost per vessel to remain relatively flat for the remainder of 2008. We anticipate daily operating cost per vessel for international liftboats to average approximately $5,700 per day in the third quarter, increasing slightly in the fourth quarter, due to the startup operations in the Middle East and a slight mix shift towards the larger cost vessels.

General and administrative expenses are expected to be in the $17 million to $18 million range in the third and fourth quarter of 2008. Depreciation and amortization will increase again in the second half due to startup of several rigs in the international location. We expect depreciation and amortization to be approximately $51 million in the third quarter, increasing to $56 million to $57 million in the fourth quarter. Interest expenses will likely increase in the third quarter to $16 million due to the full quarter impact of the $250 million convertible senior note.

Moving into 2009, barring any acquisitions, cash interest expense should decline with the repayment of debt. We expect our tax rate will remain at the 36% to 37% for the duration of the year. Cash taxes for the second half of 2008 are expected to be approximately $20 million due to the usage of our NOL.

I would also like to make a few brief comments on our balance sheet and capital expenditures. As of June 30, we had cash and cash equivalents of approximately $100 million, total debt of slightly less than $1.2 billion and stockholders equity of $2 billion. Net debt capitalization was just under 35%.

Capital expenditures for the second quarter were $179 million, of which approximately $50 million related to our international rig upgrades including mobilization and contract preparation and $90 million went to the acquisition of the Hercules 262. We anticipate capital expenditures for the remaining quarters of 2008 to be approximately $140 million, which includes maintenance capital expenditures as well as contract specific upgrades.

In closing, we are continuing to generate strong operating cash flow and the outlook remains bright for continued growth and improvement in our domestic offshore and our international segment. We are taking aggressive measures to reduce the impact of the continued softness in the inland barged segment and we do expect it to recover in 2009 with the renewed focus on deeper gas targets.

Operator, at this time we would like to open the call up to Q&A.

Question-and-Answer Session

Operator

(Operators Instructions) And your first question comes from the line of Ian Macpherson of Simmons & Company. Please proceed.

Ian Macpherson - Simmons & Company

Hi, good morning.

John Rynd

Good morning.

Lisa Rodriguez

Good morning.

Ian Macpherson - Simmons & Company

John, I appreciate your comments on the demand environment in the Gulf of Mexico. Can you elaborate a little bit? Sounds like you haven’t seen your customers making yet with the pullback in natural gas. Do you have an updated sense as to what their threshold gas prices are for the type of work that they’re drilling with your rigs? And where you begin to worry about demand getting choked off a little bit?

John Rynd

Well, I think if you go back to the fourth quarter of 2007 and early 2008 and what started the recovery was really when gas started moving north to six and got pretty solid in the 7 to 8 range. And as you know, so much of this business is psychology with directionally in which way are we going and so you started to see the ramp as people got comfortable that being down side risk was abating. So I think if people are confident we’re going to stay even in $8 to $10 range, our business will still be very, very good.

Ian Macpherson - Simmons & Company

Okay.

John Rynd

And I think the other key to our business is that you really haven't experienced in a long time is this even in this environment right now, there is just enough rigs to go around. So, there is not an excess supply to really damage the market that we've experienced from 20 years in other markets, where we are running pullout. So, even if we see a slight pullback the impact is not that great, but we don't see it right now. We had anybody over the last 30 days tell us they are shutting down because of gas prices.

Ian Macpherson - Simmons & Company

Okay. With regard to PEMEX and they could easily take four additional rigs by the end of the year. What's the latest outlook on the mix change between mats and IOCs?

John Rynd

Well, the incremental rigs right now look to be all IOCs either makes it 250, 300s and 350s. I think one thing to keep in mind when you look at the proposed swap out of the mat rigs with the independent leg rigs. If you just take the recent bid on the 250 IOC that was turned down and you run that on an annual basis you are looking at just a cost basis on day rate alone.

If you assume the $105,000 that we have on the 205 and the kind of current fixture for the 250 is at a 155 that's over $200 million year impact just on day rig. Plus if you take, let's say an average of $10 million more [mob] per rig, you are attacking on close to another $100 million. So, I think, as they digest that this move to a pure independent leg fleet might look hard at and changed your mind.

Ian Macpherson - Simmons & Company

So, would you say today you're comfortable that their mat demand stays flat from here onward for the time being?

John Rynd

It's actually a couple of comeback this year, no question about it. But I think you've seen some short renewals, one of our competitors' fleet, as they have been rolling out to a primary term. And I think as they potentially absorb the true cost impact of this swap out they might think otherwise.

Ian Macpherson - Simmons & Company

Okay, that's helpful. I appreciate your perspective there.

Operator

And your next question comes from the line of Dan Boyd of Goldman Sachs. Please proceed.

Dan Boyd - Goldman Sachs

Thanks. Just sticking with Mexico there and the potential for mat rigs to comeback to the Gulf, are there any independent leg rigs in the U.S Gulf that are working in sections that could be served by mat rigs?

John Rynd

Yeah. They are very much so in sort of what it has Dan, and locations interchangeable. When historically going back to PEMEX, they bid for either a 200 mat cantilever or a 250 IOC. They viewed those rigs as equal. And a lot of places in the Gulf they just swap out.

Dan Boyd - Goldman Sachs

Okay. So, coming back, you might unnecessarily see a mismatch in supply demand, you might actually see a tighter market just overall.

John Rynd

Correct.

Dan Boyd - Goldman Sachs

Okay. And then just one quick on International, it seems like costs are ramping up a little bit higher than what we expected going into the end of this year due to a couple of weak startups. Is there a potential for us to see those cost decline on a per day basis in 2009?

John Rynd

Yeah that is a possibility. But of course, we are continuing to see cost pressures in our segment that are strong like international offshore .So, while we could see some of those startup costs per day, at the same time, we might have continued the pressure on the labor side and on the R&M side.

Dan Boyd - Goldman Sachs

Okay. I guess, maybe a better way to put on my point is of the 46, 48 a day, what portion of that would you say is related to startup versus normal daily OpEx?

Lisa Rodriguez

On the --

John Rynd

The 260….

Lisa Rodriguez

Yeah. I mean the, majority of your increase that I talked to with startup like I said $6500 on the increase quarter-to-quarter. The other impact that you'll have going into 2009 is on the mobilization expenses, which are lower than your second quarter -- the impact in the second quarter 2008 they’re lower in 2009 and then they declined even more at the end of 2009. So, we do have a decline in the amortization and mob expenses.

Dan Boyd - Goldman Sachs

Okay. I'll follow-up later try to get more details on that. Thanks.

Lisa Rodriguez

Thanks.

John Rynd

Thanks, Dan.

Operator

Your next question comes from the line of Arun Jayaram of Credit Suisse. Please proceed.

Arun Jayaram - Credit Suisse

Good morning.

John Rynd

Good morning.

Arun Jayaram - Credit Suisse

John, I was wondering if you could elaborate a little bit more on the Middle East liftboat market you got a couple of bigger vessels, which are moving into that market. What do you expect in terms of pricing and what does the margin outlook look like is it similar to West Africa?

John Rynd

It is similar to maybe slightly better than West Africa, it's operated in both. If we take the Black Jack as an example the assets that we moved into the Middle East are similar to the Black Jack. So, I think the margins will be similar to maybe slightly better, as things level out after we get through some of the startup cost. And we just think right now we've got two in there we got to get those established and probably within a year there's an opportunity to maybe move one or two more.

But right now I think for us it's going to be a two vessel market at least through the first half of 2009.

Arun Jayaram - Credit Suisse

Okay, that's helpful. John can you give us, you have several classes of mat rigs in your portfolio. Can you give us kind of current bid rates for some of the 250 mat slots, the 200 foot mat cantilevers and some of the other smaller mats today? Where you bidding these rigs?

John Rynd

As we mentioned in our prepared remarks the 200 mat cantilevers leading edge is 85, the 250 mat slots are at about 75, and then the smaller 150s are anywhere from about 60 to 75 depending on timing and customer.

Arun Jayaram - Credit Suisse

Okay. And last question, in terms of your 350 independent leg unit, are you bidding that for international opportunities or plan to keep that rig in the Gulf of Mexico?

John Rynd

We are opportunistically looking to move the rig in international markets.

Arun Jayaram - Credit Suisse

Okay, that's helpful. Thanks, guys.

John Rynd

Thank you.

Operator

Your next question comes from the line of Robin Shoemaker of Citigroup. Please proceed.

Robin Shoemaker - Citigroup

Thanks, John. I just wanted to return to your comments about Mexico and the mat market there. Do you know if PEMEX concluded its’ investigation as to the accident that occurred there with the mat supported rig and whether that conclusion is driving there, henceforth hiring jackups going forward?

John Rynd

Can't answer that, Robin? I think it's still ongoing. But I do think that incident has probably swayed their near-term thinking. But if they are true with the incident investigation, we are not aware of that.

Robin Shoemaker - Citigroup

Okay. And in terms of your marketed supply figures that you gave earlier, there are several late '08 new rig deliveries from Gulf of Mexico yards, Atwood, Scorpion, Rowan. Are you assuming that those are all leaving the market or that they may pursue opportunities in the Gulf? In other words, are they part of your marketed supply?

John Rynd

Not currently, because they are in the shipyard under construction, but I think as you look out as they get near delivery, Robin, by all in intended purposes they're trying to get those rigs out of the Gulf of Mexico. Now, does that mean they'll come in here and drill a couple of wells if there's between a contract internationally, by all means I will try to find work here but I think your ultimate destination is out of the Gulf of Mexico.

Robin Shoemaker - Citigroup

Okay, and then lastly, your smaller asset packages or rig packages, might you would still you would be bidding on. Are those out there? Either from the major joint contractors or startups?

John Rynd

Not so much the start ups but yes some of the more seasoned drillers have are looking at within their asset mix and looking at may be disposing of some.

Robin Shoemaker - Citigroup

So similar to the kind of package you bought earlier this year.

John Rynd

Correct.

Robin Shoemaker - Citigroup

Yeah, right. Okay thank you.

John Rynd

You are welcome.

Operator

Your next question comes from the line of Jeff Tillery of Tudor Pickering, please proceed.

Jeff Tillery - Tudor Pickering

Hi, good morning.

John Rynd

Good morning.

Jeff Tillery - Tudor Pickering

John, on the inland barge segment, do we watch well permits? What do you think we should be focusing on to watch for indications in that market?

John Rynd

You don’t have much visibility in the inland barge business that you do in the offshore business. So it is a little tougher, but that is one piece of information obviously that’s their ticket to drill. So that is the key thing to watch and it's just been slow. And I think the other thing that’s impacted us, is I mentioned about 80% of the well permits are for wells shallower than 15,000 feet and we have more of the robust higher capacity barges.

So it's tougher for us to compete with some of the 1,000 or 1,500 horsepower barges that can drill the majority of those shallower wells. So we have just got ourselves caught right here near term and a little dislocation on where the activity is.

Jeff Tillery - Tudor Pickering

And other than mix some of the 3,000 horsepower rigs being idle in July, it looks like pricing is holding up relatively well. Is that a fair characterization on what you are seeing from a bid rate perspective?

John Rynd

It's holding up fairly well. We had sequential decline, modest sequential decline. It’s just that with the backlog managed as short as it is, it’s not just our plate that's got a short backlog, if you look across the whole inland fleet, its going to be a challenging quarter. Hence, as Lisa and I both said in our prepared comments, that’s why we are taking these actions, is that near term its going to be a challenge.

Jeff Tillery - Tudor Pickering

And my last question is for Lisa. Could you give us a feel for what the mobilization revenue was in the second quarter and how that progresses in the back half of the year?

Lisa Rodriguez

Mobilization revenue ran about $4 million. It declined to slightly under $3 million. The amortization expense declined at a greater pace than the revenue.

Jeff Tillery - Tudor Pickering

Okay. Thank you very much.

Operator

Your next question comes from the line of Pierre Conner of Capital One, please proceed.

Pierre Conner - Capital One

Good morning to everyone.

John Rynd

Good morning.

Pierre Conner - Capital One

John, I am sorry I may have missed it but I wondered if could give us little more details on the contracting plans on 153? You expect that one to come back from warm stack and when would it go to work? How long do you think?

John Rynd

Right now, it’s scheduled to leave this weekend on a two well contract with Hall Houston.

Pierre Conner - Capital One

Okay

John Rynd

First thirty days are at 60,000 a day, the next thirty days are at 65.

Pierre Conner - Capital One

Okay. And then, the outlook from there, John? Any color on, do you see some additional back log behind it?

John Rynd

Yes. Otherwise we wouldn’t bring it out on short term notice. We are sticking to our plan of putting into place in the fourth quarter of 2007.

Pierre Conner - Capital One

Right. That leads me into the next question because we now see a number of rigs with sequentially higher rates running right through hurricane season. And so, obviously, the behavior from your customers is different then it was last year, any comment on that?

John Rynd

Yeah. I think there's two drivers, primary drivers Pierre one is a more robust outlook on natural gas prices albeit given that recent weakness I think that is not as important as you go back to last year during hurricane season, gas prices [hovering] in $4 to $5 range and the demand was -- you had excess capacity on the market. You are going into this hurricane season outlook for gas prices is more robust the rig market is very tight and people aren't as prevalent to take the hurricane season off. As they come back in October and not get access to equipment as they continue to see rigs migrate out of Gulf of Mexico.

Pierre Conner - Capital One

Okay. So, but on the liftboat side with the additional potential new capacity, you don't see that behavior even though we have in the past, where there has been a desire to have available assets sort of during this period?

John Rynd

Yeah. I think that it's just the market is better than we anticipated given everything we went through in the fourth and first quarter. It can maintain this level (inaudible) we have hurricane, it could really ramp up the business. But people aren't turning to both solutions, as hurricanes enter the Gulf as they did historically.

Pierre Conner - Capital One

Okay, that's fine.

John Rynd

One change is, we are able to maintain that contract status albeit that reduce rate when hurricane enters the Gulf.

Pierre Conner - Capital One

Okay. So, you are doing that, right. One more going back to the domestic jackup business, so if this unfold has anticipated with three IOCs departing from Mexico, Venezuela and then we start we getting to the marketed supply below current activities. What are your criteria relative to dipping into your cold stack rigs?

John Rynd

Pierre that's a real challenge for us and that we'll probably looking at capital expenditure as a minimum of $40 million --

Pierre Conner - Capital One

Okay

John Rynd

Per unit with a nine to twelve months lead time. And the visibility in the Gulf of Mexico has never been that great. And if we got a contract of a year or greater to do the refurb we would do it. But to do it on spec, we think there is better use of our capital in other segments of our business and put it there.

Pierre Conner - Capital One

And will there be an interest if that were approached for term contracting for your current fleet in the Gulf, if that was potentially headed that way?

John Rynd

Yeah. We would go, absolutely, we would go long with the current fleet.

Pierre Conner - Capital One

Okay, all right. Thanks gentlemen. I'll turn it back.

John Rynd

Thank you.

Operator

Your next question comes from the line of Waqar Syed of Tristone Capital. Please proceed.

Waqar Syed - Tristone Capital

Good morning. Couple of questions here. First, Randy, John, I'm sorry you mentioned that in Mexico you saw incremental demand of about four jackups at the end of the year, does that include the two [Island] jackups that were the low bidders recently?

John Rynd

No, it does not. That is purely incremental from what we know today.

Waqar Syed - Tristone Capital

Okay, okay, great. And is it also net of any mat cantilevers jackups that may come back into Gulf of Mexico.

John Rynd

As I said, we think there is a four to six rig demand in Mexico and we're not sure everyone is incremental. You could have a replacement in two of those mat rigs.

Waqar Syed - Tristone Capital

Okay, okay. Now, of the remaining U.S jackup fleet right now, how many rigs do you think could move internationally or without any major investment on them they have the right quarters and sizes and all that?

John Rynd

Well I think, two things, I think, if you look at any independent leg cantilever of 250 foot or greater wall depth capability is a candidate. And if you look at all the contract requirements that we face in any of the regions that we work internationally everybody is going to have to spend some money and sometime in the shipyard. Others less or more depending on the state of the equipment, but every rig is going to have to enter the yard.

So, I would say just about across the board [INCOS] fleet could leave. Although maybe a couple of the Rowan rigs, diamond and obviously Blake's moving one out so that’s a candidate on the 150. So, just about when you look at the independent leg cantilever market for share of 250 and greater candidates to leave.

Waqar Syed - Tristone Capital

Okay. In the past I believe it's been mentioned that the rates next year for mat cantilever could be in the $100,000 a day range up from $85 or so. Do you think that’s still a possibility in the $8 to $9 gas price range?

John Rynd

Yeah. I think it is a possibility and here is why because at that point if you think the migration continues you are going to be undersupplied. And that will drive it more than the gas price. It will become that market phenomenon of the drives day rates. We are not predicting that.

Waqar Syed - Tristone Capital

Yeah.

John Rynd

That's what we are driving.

Waqar Syed - Tristone Capital

Okay. Then on the liftboats market are your competitors the small amount of companies, are they still ordering new liftboats or has that slowed down now?

John Rynd

It is slowed.

Waqar Syed - Tristone Capital

But there been new orders in the last month or two?

John Rynd

Not in last month or two.

Waqar Syed - Tristone Capital

Okay.

John Rynd

Well it may have seized. But we are at this point predicting it slowed.

Waqar Syed - Tristone Capital

Okay. And then just finally any thoughts on the acquisition opportunities either for existing rigs or for new builds and how do you see the returns on older equipment versus new builds right now?

John Rynd

I'll think we will continue to look to consolidate the existing jackup fleet or liftboat fleet whatever makes the best sense on a return basis. And we still feel like, given the right asset, the returns are better on used equipment than they are on new equipment.

Waqar Syed - Tristone Capital

Okay. And just one other question I just thought of. Any thoughts on, you mentioned the boat business that maybe a candidate for divestiture. Any other assets that you have that you think are not part of your core business going forward?

John Rynd

No, Waqar. Our any of our active, either liftboats, jackups or submersibles or inland barges are not a candidate.

Waqar Syed - Tristone Capital

Okay. That's right. Thank you very much.

John Rynd

You’re welcome.

Operator

And your next question comes from the line of Mike Drickamer of Morgan Keegan. Please proceed.

Michael Drickamer - Morgan Keegan

Hi. Good morning, guys.

John Rynd

Good morning.

Lisa Rodriguez

Good morning.

Mike Drickamer - Morgan Keegan

Hi. I am kind of following a long goose, if you look at the last transaction you guys did buying those rigs from Transocean, overall they were a better quality rigs than what you got head on in the existing fleet previously. Is that what's you kind of looking for now as perhaps some packages from a seasoned drillers selling some of the lower end stuff they have, but perhaps better than what you have? Or would you be willing to look at some of the lower end equipment that's still out there in the market?

John Rynd

It will come down to price and returns. And what that will drive the decision. And also, I think the other thing is we've been fairly consistent in our strategies to try and consolidated in a market to gain market share. So if we can pick up two mat rigs somewhere that gives us a leg up, fine. If it was the right price and the right returns. It's going to return driven.

Mike Drickamer - Morgan Keegan

Right. That's it for me, guys. Thank you.

Operator

And your next question comes from the line of Geoff Kieburtz of Weeden. Please proceed.

Geoff Kieburtz - Weeden

Good morning.

Lisa Rodriguez

Good morning.

Geoff Kieburtz - Weeden

John, just wanted to come back on your comments about the cold stacked rigs the kind of way you described it those may be museum pieces

John Rynd

Well. I think you have to take a realistic view when you approach capital, investing your capital and there's a reason there those four are left they are in the worst shape and the least capable otherwise they would have been further up the queue and been in the market already.

So, I think as you deploy capital you have to take a realistic view on what the long-term revenue generation and return generation of that asset is and given that they are by and large destined for the Gulf of Mexico, which is going to continue to be cyclical the surety of a return becomes less and we feel like there are other opportunities around the world to invest that capital to generate better returns.

Geoff Kieburtz - Weeden

Is the embedded option value just bigger than what you might be able to get if you sold them or is there any other.

John Rynd

Yes. I think the option value still very strong for us.

Geoff Kieburtz - Weeden

Okay. So, you wouldn't consider kind of restructuring the equipment for a different market take the drilling package off or something like that.

John Rynd

For the right price, we would look to dispose of those assets that go into a non-drilling mode that we would not compete against ever.

Geoff Kieburtz - Weeden

Okay, all right. And how long can they sit idle and still be even physically capable of going back to work.

John Rynd

Well. I mean, still we got a long way to go. I mean we have one of the rigs in that cluster is manned and we do the minimum maintenance to maintain the integrity of the other assets that are cold stacked.

Geoff Kieburtz - Weeden

Great, thank you.

Operator

And there are no further questions. At this time, I would like to turn the call back over to Mr. Stephen Butz for closing remarks.

Stephen Butz

I would just like to thank everyone for joining our call for your continuing interest in Hercules and we look forward to listening with you again next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Hercules Offshore Inc. Q2 2008 Earnings Call Transcript

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