Hercules Offshore Inc., one of the largest global providers of offshore contract drilling and liftboat services to the oil and gas industry, filed for Chapter 11 bankruptcy protection on August 13. The company stated in court documents that it will implement a $1.2 billion debt-for-equity exchange with its senior bondholders.
Hercules Offshore cited years of declining profits due to a collapse in oil and gas prices for its decision to file for bankruptcy protection, according to the Wall Street Journal. In a statement with the court, Hercules Offshore Chief Financial Officer Troy Carson explained that the energy market downturn led to a drop in prices for drilling contracts. Carson specifically cited Saudi Aramco, which renegotiated its contract with Hercules Offshore on June 1 to reduce its rate from $136,000 to $67,000 for each rig per day. With the reduction in prices, Hercules’ second quarter domestic offshore revenues in 2015 fell to $40.6 million, down 71 percent from second quarter 2014. Similarly, its international offshore business recorded a net operating loss of $40.5 million in second quarter, compared with $6.7 million during the same time frame. Consequently, the company’s operating days were cut back by 66 percent, with its service fleet reduced from 18 rigs to nine.
In bankruptcy filings, the oil producer claimed $546 million in assets, with over $1.3 billion in debt. Carson noted that the company is “out of money” by more than $500 million, so Hercules was unable to pay creditors and maintain value for its shareholders.
The reorganization plan
Hercules filed a prepackaged restructuring plan that received support from a majority of its senior bondholders, including York Capital Management Global Advisors, Bowery GP, Carval Investors and Centerbridge Credit Partners LP. The proposed balance-sheet reshaping plan is intended to enable the company to fulfill its debts until the energy sector bounces back.
Specifically, the plan calls for its senior bondholders to swap $1.2 billion in outstanding senior notes for 96.9 percent of new common equity in the reorganized company. These bondholders will be offered a 3.1 percent share of equity and certain warrants subject to court approval. Further, an additional $450 million in new debt financing will be provided by these bondholders that wish to participate on a pro rata basis. With this agreement in place, the oil producer will fully fund construction costs for the Hercules Highlander rig development project, with additional liquidity to fund company operations.
Currently, Hercules has sufficient resources and revenues to continue operations and expects to emerge from the bankruptcy process as a viable business. In court papers, the company expected to be in bankruptcy proceedings for 45 to 60 days, and does anticipate further operational interruptions.