Hercules Offshore to operate Discovery newbuild jack-ups

Hercules Offshore, Inc. (Nasdaq: HERO) has invested $10 million in Discovery Offshore S.A., a newly formed Luxembourg-based company, focused on ownership of ultra high-specification jack-up offshore rigs.

Singapore’s Keppel FELS Limited today announced it has secured a contract worth about $416 million from Discovery Offshore to construct two harsh environment jack-up rigs based on the proprietary KFELS Super A Class design. Discovery Offshore has options to order two additional jack-up units as part of its contract with Keppel FELS. If exercised, the options for the additional units will bring the total contract value to above $840 million.

The rigs are scheduled for delivery from the shipyard in the first and second halves of 2013 respectively.

The construction, marketing and operation of both units will be managed by Hercules Offshore.

“We are pleased to announce our investment in Discovery Offshore and the Construction Management and Service Agreements for their ultra high-specification jack-up rigs,” said Hercules President and CEO John T. Rynd, “This marks a new and exciting chapter in our company’s history, and is an example of how we continue to seek creative and unique opportunities to add value for our stakeholders. These rigs will be among the most capable jack-ups in the world, and have been designed to meet the exacting requirements of our most demanding customers. Well beyond our equity investment, the value that we bring to Discovery Offshore includes our in-house expertise in engineering, rig management and operations, global marketing presence, and strong customer relationships with key national and international oil companies. With the improving outlook for the offshore drilling industry, we believe that the rig design chosen by Discovery Offshore will be well positioned to take advantage of these positive long-term fundamentals over an extended period of time.”

The two rigs will be capable of operating in harsh environments at water depths of up to 400 feet and drill to depths of 35,000 feet. The rigs will have two million pounds of static hook load, 75 foot cantilever reach, off-line pipe handling capability, high capacity mud circulating systems, 15,000 psi blowout preventer systems, and accommodations capacity for up to 150 personnel.

While Keppel FELS will build the initial two rigs at a turnkey cost of approximately $208 million per rig, Hercules Offshore says that, Including project management, spares, commissioning and other fees, total delivery cost is currently estimated at $231 million per rig. Payment terms to Keppel FELS are 20 percent of the turnkey construction price at contract signing, and the remainder due at rig delivery. The two options have the same payment terms, with a turnkey cost of $213 million and $215 million, respectively, subject to standard market adjustments.

The new KFELS Super A Class brings together winning features of the company’s proven jackup rig designs to provide operators with a viable and cost-effective solution for harsh environments and cold climate areas.

Mr. Wong Kok Seng, Managing Director of Keppel FELS, said, “The KFELS Super A Class debuts at an opportune time when the industry is looking for newer and higher performance assets, which offer improved safety and better efficiency.

“This North Sea-compliant rig would be able to operate efficiently in virtually all parts of the world outside Norway and the Arctic. Discovery Offshore’s acceptance of the KFELS Super A Class design attests to its potential, as well as our ability and commitment to deliver.

“We are confident of completing these rigs to the satisfaction of our customer, and look forward to nurture this partnership with them.”

Customised to meet the requirements of Discovery Offshore for high-specification jackups that can be safely deployed in most areas worldwide.

For greater operational safety, the KFELS Super A Class is equipped with the latest pinion overload detection, rack phase difference detection, and brake failure and overload protection devices, thus meeting the stringent Health, Safety and Environment (HSE) standards of the U.K. sector in the North Sea.

January 27, 2011