Hercules Offshore Gets $420M Drilling Contract - Analyst Blog

Contract drilling services provider, Hercules Offshore Inc. HERO announced that it has entered into a drilling agreement with Maersk Oil North Sea UK Limited. The deal requires Hercules Offshore to deploy a newbuild jackup rig to develop Maersk Oil North Sea's Culzean Field in the Central North Sea. Following this announcement, shares of Hercules Offshore gained about 4.6% in after-hours trading.
 
The five-year contract is valued at around $420.0 million (including about $9 million as mobilization fees) and is expected to come into effect from the middle of 2016. Hercules Offshore would be the owner and operator of the newbuild.

The company has also entered into a deal with Singapore-based Jurong Shipyard Pte Ltd. for the construction of a rig. The shipyard cost of this High Specification, Harsh Environment (HSHE) rig stands at around $236.0 million. Taking into consideration project management and other associated costs, the total delivery cost of the rig is projected at approximately $270.0 million.  

Hercules Offshore stated that it would initially pay approximately $24.0 million (10% of the shipyard cost). Another 10% will be paid a year after the first payment. The remaining amount will be settled after the rig is delivered most likely in Apr 2016. Hercules Offshore mentioned that the initial payments would be made using the cash in hand. However, for the remaining payment, the company intends to secure project financing.  

Hercules Offshore management believes that the drilling contract provides it an opportunity to expand operations in the North Sea. Moreover, the company anticipates the demand for the newbuild to exceed the initial five-year contract.

Hercules Offshore currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can consider better-ranked players from the oil and gas drilling industry such as Pioneer Energy Services Corp. PES, Helmerich & Payne, Inc. HP and Parker Drilling Co. PKD. While Pioneer Energy sports a Zacks Rank #1 (Strong Buy), Helmerich & Payne and Parker Drilling hold a Zacks Rank #2 (Buy).