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Hercules Offshore (HERO) |
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WIKI ANALYSIS
Hercules Offshore (NASDAQ: HERO) provides shallow-water and land contract drilling to both integrated energy companies and independent oil and natural gas companies. HERO focuses its operations in the Gulf of Mexico region, but also operates in Qatar, India, and West Africa.
HERO remains susceptible to global oil demand and oil prices. Rising demand and limited supply contribute to higher prices, which in turn make drilling in unconventional reserves more profitable. This means that companies will move increasingly from land reserves, which are generally the lowest cost, to offshore reserves as prices rise. However, if prices rise even more and as offshore and land reserves are depleted, deepwater drilling may become more feasible as an alternative.
News
A HERO shareholder sued the company's directors and top executives, demanding that they return pay increases that shareholders voted against. At last month's shareholder meeting, 59% of Hercules' shareholders voted against the 2010 pay package, a rare defeat of a compensation package. These non-binding votes are now required as part of the Dodd-Frank reforms.[1] Less than 2% of the 2300 compensation plans voted upon have been rejected by shareholders. In addition to seeking to claw back the pay, the lawsuit seeks to reform the company's pay structure.
Company Overview
Hercules Offshore owns a fleet of 30 jackup rigs, 17 barge rigs, three submersible rigs, one platform rig, a fleet of marine support vessels and 60 liftboat vessels. In addition, Hercules Offshore operates five liftboat vessels owned by a third party. The company owns four retired jackup rigs and eight retired inland barges, all located in the United States Gulf of Mexico, which are not expected to re-enter active service.
Business Segments
Domestic offshore[2]
Domestic offshore includes 22 jackup rigs and three submersible rigs in the United States Gulf of Mexico. Eleven of the jackup rigs are either working on short-term contracts or available for contracts, 10 are cold-stacked and one is mobilizing to the United States Gulf of Mexico from Mexico. All three submersibles are cold-stacked.
International offshore[2]
International offshore includes eight jackup rigs and one platform rig outside of the United States Gulf of Mexico. The Company has two jackup rigs working offshore in each of India and Saudi Arabia. Hercules Offshore has one jackup rig contracted offshore in Malaysia and one platform rig under contract in Mexico. In addition, it has one jackup rig warm-stacked in each of Bahrain and Gabon and one jackup rig contracted to a customer in Angola. In August 2009, the Company closed the sale of the Hercules 110, which was cold-stacked in Trinidad.
Inland[2]
Inland includes a fleet of six conventional and 11 posted barge rigs that operate inland in marshes, rivers, lakes and shallow bay or coastal waterways along the United States Gulf Coast. Three of its inland barges are either operating on short-term contracts or available and 14 are cold-stacked.
Domestic liftboats[2]
Domestic liftboats includes 41 liftboats in the United States Gulf of Mexico, of which 38 are operating and three are cold-stacked.
International liftboats[2]
International liftboats includes 24 liftboats, of which 22 are operating or available for contract offshore West Africa, including five liftboats owned by a third party, and two are operating or available for contract in the Middle East region.
Delta towing[2]
Delta towing business operates a fleet of 29 inland tugs, 12 offshore tugs, 34 crew boats, 46 deck barges, 16 shale barges and five spud barges along and in the United States Gulf of Mexico and along the Southeastern coast . Of these vessels, 21 crew boats, 16 inland tugs, five offshore tugs, one deck barge and one spud barge are cold-stacked, and the remaining are working or available for contracts.
| Segment[3] | Operating Days | Available Days | Utilization Rate | Average Revenue per Day | Average Expense per Day |
| Domestic Offshore | 3,265 | 4,958 | 65.9% | $73,952 | $24,633 |
| International Offshore | 1,549 | 1,625 | 95.3% | $93,465 | $36,673 |
| Inland | 2,279 | 2,941 | 77.5% | $46,994 | $19,257 |
| Domestic Liftboats | 11,265 | 16,749 | 67.3% | $12,228 | $3,576 |
| International Liftboats | 5,077 | 6,149 | 82.6% | $12,464 | $5,184 |
Trends and Forces
Moratorium of offshore drilling in the Gulf of Mexico[5]
On May 6, 2010, the U.S. Department of the Interior announced that no applications for drilling permits for operations on the Outer Continental Shelf would be issued until the Department of the Interior completed a safety review process of offshore drilling. HERO had three jackup drilling rigs that completed their contracts during the moratorium, resulting in under-utilization of its fleet during the moratorium.
Additionally, HERO suffered from the unofficial moratorium on shallow-water drilling. While shallow-water drilling was not banned by the government, the Bureau of Ocean Energy Management, Regulation and Enforcement, underwent a reorganization in the wake of the BP oil spill and was slow to issue permits. During the moratorium, HERO was hesitant to lay off employees because there was no guarantee former employees would be available to return to work if permits were are issued again.[6]
The U.S. Department of Interior has announced that oil and gas companies operating in the Gulf of Mexico must plug 3,500 oil wells that have sat idle for five years or more. The Interior ruling also requires the dismantling of about 650 oil and gas production platforms if they are no longer being used for exploration or production.[7] This will negatively affect Hercules Offshore as it must incur additional expenses to plug its non-operating wells.
Higher oil and natural gas prices increase the demand for HERO's drilling and liftboat services
With the rise of rapidly-developing economies such as those of India and China, the global demand for energy has been rising rapidly. As developing economies gain in wealth and industrialize, their ability to pay for energy rises. More specifically, wealthier countries are able to move from coal power to oil and natural gas, which are relatively cleaner, but more expensive, sources of energy. Rising global demand for energy, combined with restricted supply from oil-producing regions such as the Middle East have contributed to rising oil prices in recent years. Prices of natural gas, which are highly correlated with oil prices, have also been rising, due to potential shortages arising from depletion of reserves and rising demand from seasonal fluctuations, as natural gas is commonly used for heating. Higher oil prices mean that it is economically feasible for companies to tap into reserves that were previously too expensive to drill from profitably. This boosts demand for companies such as HERO, which can provide companies with drilling and maintenance services for offshore drilling, which is generally more expensive than onshore drilling, but is becoming more and more important as existing onshore drilling sites are depleted.
Adverse weather in the Gulf of Mexico could cause significant fleet damage
The Gulf of Mexico is HERO's most important region. HERO's fleet in this area is vulnerable to hurricanes and tropical storms. Furthermore, recent adverse weather such as Hurricanes Ivan, Katrina, and Rita have pushed up insurance prices for companies that operate in the Gulf of Mexico.[8]
Depletion of shallow-water reserves and higher oil prices could promote deepwater drilling as a feasible alternative to offshore drilling
The U.S. Gulf of Mexico, where HERO generates about half of its revenue, is a mature region that has already experienced significant exploration and drilling activity. The average size of oil and natural gas deposits discovered in the Gulf of Mexico has been declining since the early 1990s[9]. Higher oil prices, combined with depleted shallow-water and land reserves, could promote deepwater drilling, which is typically more expensive and requires heavier equipment than offshore drilling. HERO is not exposed to deepwater drilling whereas many of its competitors, such as Transocean (RIG), are active in the deepwater segment. This trend may harm HERO's competitiveness by replacing HERO's offshore drilling in the Gulf of Mexico with deepwater drilling services of other companies.
Competition
Hercules Offshore's main competitors in jackup rig drilling are:
- Transocean (RIG): Transocean is an offshore and deepwater contract drilling company with 89 drilling units around the world. However, Transocean has only a weak presence in the Gulf of Mexico, with only 11 total units in the Gulf.
- ENSCO International (ESV): ENSCO is an international and U.S. offshore contract drilling company serving government-owned, international, and independent oil and gas companies. ENSCO operates in the Americas, Europe, Africa, and Asia Pacific, and is HERO's closest competitor in jackup rig drilling in the Gulf of Mexico.
- Noble (NE): Noble provides contract drilling in Middle East, India, the North Sea, Brazil, West Africa, and Canada. NE also offers other drilling-related services, such as project management services and engineering services.
Of these larger drilling companies, only ENSCO and Transocean have drilling presence in the Gulf of Mexico, which is HERO's primary focus, and Transocean's operations in the Gulf are extremely small (3 jackup rigs). HERO has as many jackup rigs in the Gulf of Mexico as its two closest competitors combined.
HERO now also has a strong barge drilling fleet, with 27 barge rigs, more than twice the number of its next closest competitor, Parker Drilling Company (PKD)[10]. Barge rigs, while a significant new market for HERO to explore, are limited in their usefulness because they are limited to waters up to only 20 feet deep.
In liftboat services, HERO divides its units between the Gulf of Mexico and in West Africa, and is a leader in both regions. About two-thirds of HERO's liftboats are in the Gulf of Mexico, which is the more competitive market, with over 115 liftboats operated by 15 companies. The market in West Africa is much smaller, with HERO operating 18 liftboats and 4 other firms operating a combined total of 7 liftboats.
References
- ↑ Upstream Online: "Hercules faces lawsuit on exec pay" June 23, 2011
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 Reuters: HERCULES OFFSHORE, INC. (HERO.O)
- ↑ HERO 10-K 2009: "Results of Operations" p. 39
- ↑ Hercules Offshore Investor Relations: Annual Report 2009, p. 2
- ↑ "Form 8-K for HERCULES OFFSHORE, INC." 13 May 2010
- ↑
- ↑ Houston Business Journal: "Tetra, Hercules shares jump on Interior requirement" September 15, 2010
- ↑ From HERO's 2006 10-k Filing, pages 11-12.
- ↑ From HERO's 2006 10-k Filing, page 10.
- ↑ Data from HERO's presentation at the January 2008 Goldman Sachs Energy Conference, page 5.
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