Hercules, Todco merge to create Gulf of Mexico’s largest jackup operator
David Paganie, Managing Editor
Houston-based Hercules Offshore, founded in July 2004, started out as an operator of five jackups and 22 liftboats. Over the years and a number of acquisitions later, the company has expanded its fleet to nine rigs and 64 liftboats, making it the largest liftboat operator in the Gulf of Mexico, fourth largest jackup operator in the GoM, and the only company in the region to offer both drilling and liftboat services in water depths of 250 ft (76 m) and less.
Its latest deal, the $2.3-billon acquisition of Todco, will create the largest jackup operator in the GoM and the fourth largest jackup operator in the world. The transaction is expected to close mid-July. The combined company will operate a fleet of 33 jackup rigs, 27 barge rigs, 64 liftboats, three submersible rigs, nine land rigs, and one platform rig. Meanwhile, the exodus of jackups from the GoM continues.Offshore sat down with John T. Rynd, senior vice president of Hercules Offshore and president of Hercules Drilling Co. Llc., to discuss the strategy behind the merger.
Offshore: Why did Hercules merge with Todco?
Rynd: We are big believers in consolidation, and this merger is a perfect fit. It enables us to expand our economies of scale across the globe, which improves our access to materials, skilled employees, and insurance. Pre-merger, we are the largest liftboat provider in the Gulf of Mexico, but one of the smallest jackup operators in the region.
Post-merger, we will be the largest jackup operator in the GoM and the fourth largest jackup provider in the world. As a combined company, we will be working in 10 countries on five continents. This greater footprint allows us to expand our rig and liftboat operations. For example, we’ve been talking to people in Brazil about moving one or two liftboats down there. Pre-merger - that’s not economically feasible.
Now, with Todco already positioned in the area, relocating two liftboats post-merger is much easier to do. Likewise in Trinidad, Todco has a jackup working in the area. We now can run a liftboat down there for a six-month project with minimal overhead impact. We probably wouldn’t have considered this before. The drilling and liftboat business are both global markets. Increasing the number and diversity of our assets gives us flexibility to efficiently deploy assets in any shallow water location in the world.
Offshore: What is your outlook for the Gulf of Mexico?
Rynd: You know the GoM is the Dead Sea again this year, right? We don’t think it’s the Dead Sea. It’s cyclical. That’s the nature of the contracting business in the drilling market, and the GoM is the most cyclical drilling location in the world. But, we like the Gulf, despite our eye on expanding international locations such as the Middle East.
There has been a significant shift in the numbers of jackups working in the GoM. In July 2001, there were about 155 jackups in the area. Currently, (at print) there are 75. We’re not forecasting, or counting on, or relying on, a return to that specific top flight position, doubling day rates, all that. We think there will be a very steady rate of business here. Given the rig migration from the Gulf, we might be in a new paradigm where the jackup count doesn’t exceed 100. But, it is a very efficient business.
Offshore: Do you think these rigs will return?
Rynd: Yes. The jackup business is global - people go where the money is and where their customers want them. If deep gas is working, then the cycle will shift back here. I’ve seen it before. I can’t count the number of times I’ve seen rigs moved all over the world and then wind up back home (GoM). I think the difference this time, though, is that you are seeing growth in the jackup business with the national oil companies. For example, in the Middle East, premium jackups drilling for gas are landing multiple-year, three- to five-year contracts. It’s all economics - where can the contractor make the most money. Also, insurance cost per day is probably three times more for a rig working in the GoM compared to the Middle East.
Offshore: How has your customer base changed over the years?
Rynd: Our customer base has been changing since the mid to late 1990s. BP is running not one jackup right now. Shell isn’t running any either. If you go back to the late ’90s, they were all probably running five to 10 jackups. Since then we’ve seen the emergence of independent operators like Apache and W&T that have picked up the slack.
Also, there have been a number of property transfers in the GoM over the past 15 months, especially on the shelf, and they didn’t buy these properties to sell. They are going to get production up and it takes resources. So, we’re confident that business will be positive for us in the Gulf for at least the next five years.
Offshore: Post merger, will you keep your jackups in the GoM?
Rynd: Yes. But we will continue to look aggressively to get rigs out. We are realistic that it won’t be a wholesale move. It won’t be mass migration. Also, a number of our rigs are not likely candidates to move. The international market is looking for rigs rated to 250 ft (76 m) water depth or greater, and most of our rigs are limited to shallower waters.
But we like the international business for the reasons everybody else does - higher day rates, longer term contracts, and better insurance and tax rates. This gives us a portfolio approach to our contracting strategy, some short-term contracts, some medium, some long-term. In the Gulf, it’s tough to get any kind of term contract. Our ultimate goal is to achieve a 50/50 split in the domestic and international markets.
Offshore: Describe a typical drilling contract in the Gulf?
Rynd: Typically they are one well to 90 days right now. We saw some extension last year when the rigs got tight. Contracts got extended for longer than one year. Some contractors have rigs booked with a 10-year backlog of work. Companies like Chevron can see six or eight wells in front of them. They will contract a rig and it will stay with them for years. For example, our Rig 21 has been continuously working for Chevron for over a decade. Competition is tough right now. It always has been and it always will be, due primarily to the short-term nature of the contracts in the region.
Offshore: Is there any idle capacity in the Gulf right now?
Rynd: Right now I think there are 10 jackups stacked ready and nine cold-stacked jackups (five owned by Todco, four owned by Nabors). Nabors’ cold-stacked rigs are primarily for work-over, so there are very few rigs hanging around looking for work.
Offshore: Does the cyclical nature of jackup supply and demand follow commodity prices?
Rynd: The jackup business lends itself to be cyclical with commodity prices, especially gas prices. Gas prices are jumping around, and it is much more volatile than oil. And as your customer base gets smaller, they tend to try to stay within their cash flow. What we are experiencing right now is a result of what happened six months ago when gas prices dropped to the $4 to $5 range and service costs never faded. The rig count has dropped off considerably since January, when we were running 76 rigs, and people are probably more confident where gas prices are now.
But there’s typically a lag time of 90 to 120 days to correct the market and get the rig count back up to normal levels. Oil prices are important as well, especially with some of the bigger operators that have a significant amount of oil production to supplement their cash flow from gas production.
Offshore: How does this buy-and-sell era in the GoM impact drilling?
Rynd:Typically, there is a short-term negative and a long-term positive impact. If a company says it has some assets that are not core and it plans to sell them, the company is not allocating capital to these properties. But the new company comes in and has just made a significant investment to acquire the properties, so they are going to allocate capital and mature the properties and prospects. So, there’s a period of downtime after the transaction. But there really is an incremental positive in that the previous owner wasn’t going to spend much money on the properties.
Offshore: What are the new regulations that you have to be aware of for this hurricane season?
Rynd: Last year a number of deeper water jackups moved to shallow waters during hurricane season to mitigate risk. Since then, we’ve had more time to digest the newest regulations so you probably won’t see as much of that this year. The biggest adjustment that we need to make this year during hurricane season is to our air gap, which is the area between the bottom of the rig’s deck and the water line. In the past, during hurricane season, we were required to maintain a 50-ft (15-m) air gap. Now, while operating in 50 ft (15 m) of water or greater, a 12-ft (4-m) increase, or 62-ft (19-m) air gap is required. If you have a 250-ft (76-m) rig, it’s now a 238-ft (73-m) rig. This basically just reduces your water depth.
Offshore: Any more acquisitions or mergers planned?
Rynd: Our strategy is to grow, and we continue to review opportunities. If the appropriate opportunity came up, we would definitely go after it; whether its jackups, liftboats, or barges. We will continue to grow.
