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    Thursday, August 12, 2010


    Seahawk ( HAWK ) Mexican tax issue and fleet comparison with Hercules ( HERO )

    Hercules offshore has had similar, albeit much smaller, tax issues with Mexico. In March 2007 HERO received a tax assessment from the Mexican government for the 2004 tax year. The Mexican government then commenced an audit for 2005. This related to deductions and remittance of withholding tax for these deductions. HERO reserved 17M for the tax assessment and posted a bond for 13.2M. They settled for 10.8M. HAWK’s total assessment is for 93M plus $5M as a result of indemnifying PRIDE. Furthermore HAWK believes that the Mexican authorities could level a further 100M using the same methodology for other tax years. HAWK is being much more aggressive than HERO, especially as they have essentially no assets in Mexico. In this quarter HAWK have reduced their future exposure to the Mexican tax issue by 10M out of the 93M. It seems unlikely that HAWK will get any meaningful work in Mexico after likely walking away from their tax liability. However, demand in the Mexican GOM will divert vessels from the US GOM, tightening supply there.

    There is a fantastic analysis of the tax issue at . The possibility that paying the IRS ends up paying the Mexican authorities rather than HAWK is at least intriguing.

    The tax issues relate to work for PEMEX. They are a major source of revenues for the Mexican government and the only way they are even going to sustain current, much lower, production is through substantial capital investment. There are currently about 50 rigs marketed and 70 or so including cold stacked in the US GOM. Demand was for about 90 from 2002-05. Maybe 70 since 2005 until the drop off in early 09. The commodity jackup demand has been almost constant at around 55 until early 09. As premium rigs abandon the GOM, never to return then demand will be met by commodity rigs or rates that are sufficiently high to lure the premium rigs back. If demand for commodity rigs stays at 55 with 10 of the 70 supplied off to PEMEX then HAWK will be running 18 rigs. If there is small additional demand from the lost premium rigs then HAWK easily gets to 100% utilization. That assumes HERO can bring their cold stacked rigs back online. Some of them apparently require a lot of Capex. 

    I have heard concern that PEMEX will lay off their jackup rigs and look to upgrade. The truth is that there are only 2 matt supported jackups in Mexican GOM so worst case they are a few percent addition to the US GOM commodity fleet. To the extent that PEMEX can add matt supported jackups then they’ll be getting more bang for their E&P buck.

    On a different note I had a discussion on seekingalpha regarding the suitability of HAWK’s rigs and whether or not they would be the last to get contracts because their rigs were less desirable.

    Comparison of HAWK and HERO GOM Fleet:


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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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