As expected, Hercules Offshore Inc. plans to file for Chapter 11 bankruptcy protection next month as a final solution to its US$1.2 billion debt woes. The firm is one of the first to crash and burn as a result of insufficient cash flow due to the oil-price plunge and the resultant industry-wide lack of high-value offshore drilling vessel contracts.
According to its report, Hercules agreed with 67% of its bondholders that it would transfer the ownership to them in exchange for cancelling borrowed debt. The plan calls for the conversion of senior debt into new equity. As a result, the new debt-to-equity holders will own about 97% of the company’s shares, with the existing shareholders retaining 3.1% of Hercules’ shares. Accordingly, Hercules plans to file for bankruptcy on or before 8 July 2015.
Also, as agreed, the new owners will backstop a $450 million capital raise to pay for a new drilling jackup rig, the Hercules Highlander, among other corporate purposes. Hercules reports its operations will continue as usual in that service and supply companies will be paid and contracts will continue to be served. Prior to the filing, Hercules cut 40% of its 1800 employees and cold-stacked 11 of its 20 Gulf rigs, but such measures failed to save the company.
Houston-based consultancy, Tudor, Pickering, Holt & Co., says the deal reflects the “depressing state of the US Gulf of Mexico” (typically one of the bellwether regions of the industry) and international jackup markets. The consulting firm also points to Hercules’ highly levered balance sheet as a contributing factor.
Logically, the next domino to fall will be Vantage Drilling, which is currently seeking “strategic options” with Lazard Freres & Co. By some accounts, the company might not last until yearend.
According to Seeking Alpha, Vantage Drilling is “debt-laden” with “the right products at the wrong time.” Vantage’s $2 billion contract backlog is reaching its 2015 end dates, and the company has failed to secure new vessel contracts for 2016. With no new contracts acquired for following terms, the company's projected EBITDA in 2016 “would not be sufficient to cover its $200 million interest expenses,” reports Seeking Alpha.
Vantage owns a fleet of three ultra deepwater drillships, including the Platinum Explorer, the Titanium Explorer and the Tungsten Explorer and four Baker Marine Pacific Class 375 ultra premium jackups. An ultra deepwater drillship, the Cobalt Explorer, is now under construction for Vantage.
And the damage continues. According to industry-standard Baker Hughes rig count, during the week ending 19 June 19 2015, in one week the US offshore rig count fell by two more, and now stands at 27. The offshore rig counts in this region have averaged only 30 during the past two months.
As a comparison, the US offshore rig count is nearly 59% down from its four-year high of 66 in August 2014. In the 12 months leading up to 19 June, the offshore rig count fell by 32, although this count is better than the mid-2010 low of 12 that was due to the Gulf drilling moratorium after the Deepwater Horizon accident. Still, that’s not saying much.
According to industry reports, US jackup utilization is about 60%, compared to more than 75% a year ago, and there are predictions that jackup counts will fall below an average 50% during 2015 due to low crude oil prices.
Unfortunately, as Saudi Arabia continues its market share-protection strategy, as new crude production comes online from Iran and elsewhere, and as the US onshore crude production continues apace, the news remains the same until further notice, and more offshore vessel companies will likely be in jeopardy.
Image: Hercules Triumph jackup / Hercules
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Vantage hires Lazard to review options
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