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Rating Action:

Moody's downgrades Hercules Offshore, Inc. to Caa1 from B2; outlook remains negative

15 Nov 2010

Approximately $950 million of debt securities affected

New York, November 15, 2010 -- Moody's Investors Service downgraded the Corporate Family Rating of Hercules Offshore Inc. (Hercules) and the Probability of Default Rating to Caa1 from B2. Moody's also downgraded Hercules' 10.5% senior secured notes due 2017, its senior secured revolving credit facility due 2012, and its senior secured term loan B due 2013, all to Caa1 with LGD3, 45%. The outlook remains negative.

RATINGS RATIONALE

"The inability of Hercules to generate meaningful free cash flow despite limited reinvestment in its aging fleet of rigs is cause for concern," commented Stuart Miller, Moody's Senior Analyst. "Without a significant de-leveraging of its balance sheet, Hercules is following a path that could lead to financial hardship at the first sign of a market softening."

Hercules' Caa1 CFR rating reflects its highly leveraged balance sheet and limited ability to generate free cash flow. The Caa1 rating on the senior secured notes reflects their pari passu secured position in Hercules' capital structure relative to the senior secured credit facilities.

Hercules' primary area of operation is in the shallow water GOM, a region that is slowly recovering from the impact of the Macondo well blow out. Fortunately, Hercules' operating results were not negatively impacted by the GOM drilling moratorium, and in fact their liftboat business benefited from the clean-up operations. However, the company's current cash flow is not sufficient to fund a meaningful reduction in leverage in the near future. Hercules remains burdened with over half of its rigs cold-stacked (at a cost of roughly $25 million annually) and a declining backlog of work. The company's contracted backlog has dropped by more than 50% to $233 million as of October 2010 as its international rigs work their way through their three year contracts. With limited free cash flow, Hercules has reduced its capital spending to levels that are unsustainable over the long term without repercussions to the quality of its fleet and its competitiveness.

The negative outlook reflects an expectation of a continuing deterioration of the company's financial profile despite a short term pick up in operating performance in the GOM. For the last year, Hercules benefited from relatively high dayrates for its international rigs. But as these contracts roll off in 2011, we expect renewals for these newer and higher spec rigs, but at lower dayrates. Therefore, we are concerned that there may be weakening performance in the second half of 2011 putting the company in a challenging position to deal with debt maturities that begin in 2012.

Near term liquidity is approximately $264 million comprised of $100 million of cash on hand and $164 million in availability under a senior secured bank revolving credit facility. However, availability under the revolver is subject to a minimum level of liquidity (currently $100 million) which effectively limits the "available" liquidity to $164 million. Availability is also subject to compliance with financial covenants that become more restrictive over time. For these reasons, barring a rapid improvement in operating performance, the repayment of debt through the sale of assets, or the issuance of junior capital, we are concerned that liquidity may become strained by the end of 2011.

Moody's last rating action on Hercules was on October 5, 2009 when Moody's assigned a B2 rating to the 10.5% senior secured notes due 2017 and affirmed the company's CFR and PDR at B2.

The principal methodology used in this rating was Global Oilfield Services Rating Methodology rating methodology published in December 2009.

Hercules Offshore, Inc. is headquartered in Houston, Texas.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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New York
Stuart Miller
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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New York, NY 10007
U.S.A.

Moody's downgrades Hercules Offshore, Inc. to Caa1 from B2; outlook remains negative
No Related Data.
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