Equity Investment

6 Months Ended

Jun. 30, 2011

Equity Investment [Abstract]

Equity Investment

3. Equity Investment

     In January 2011, the Company made an initial investment of $10 million to purchase 5.0 million shares of a new entity incorporated in Luxembourg, Discovery Offshore S.A. (“Discovery Offshore”). Discovery Offshore has ordered two new-build ultra high specification harsh environment jackup drilling rigs (collectively the “Rigs” or individually “Rig”) and they hold options to purchase two additional rigs of the same specifications. In July 2011, Discovery Offshore announced that it was in negotiations with the shipyard to extend the exercise date and finalize the terms on the first of two independent options. The second option has a final exercise date of late October 2011. The Company also executed a construction management agreement (the “Construction Management Agreement”) and a services agreement (the “Services Agreement”) with Discovery Offshore with respect to each of the Rigs. Under the Construction Management Agreements, the Company will plan, supervise and manage the construction and commissioning of the Rigs in exchange for a fixed fee of $7.0 million per Rig, which the Company received in February 2011. Pursuant to the terms of the Services Agreements, the Company will market, manage, crew and operate the Rigs and any other rigs that Discovery Offshore subsequently acquires or controls, in exchange for a fixed daily fee of $6,000 per Rig plus five percent of Rig-based EBITDA (EBITDA excluding SG&A expense) generated per day per Rig, which commences once the Rigs are completed and operating. Under the Services Agreements, Discovery Offshore will be responsible for operational and capital expenses for the Rigs. The Company is entitled to a minimum fee of $5 million per Rig in the event Discovery Offshore terminates a Services Agreement in the absence of a breach of contract by Hercules Offshore. The Company has no other financial obligations or commitments with respect to the Rigs or its ownership in Discovery Offshore. Two of the Company’s officers are on the Board of Directors of Discovery Offshore.

     The Company’s total equity investment in Discovery Offshore was $22.7 million, or 17%, as of June 30, 2011, which includes the initial cash investment of $10.0 million, additional equity interest of $1.0 million related to 500,000 Discovery Offshore shares awarded to the Company for reimbursement of costs incurred and efforts expended in forming Discovery Offshore, additional purchases of Discovery Offshore shares on the open market totaling $11.9 million or 5.4 million shares as well as the Company’s proportionate share of Discovery Offshore’s losses. This investment is being accounted for using the equity method of accounting as the Company has the ability to exert significant influence, but not control, over operating and financial policies. The Company was issued warrants to purchase up to 5.0 million additional shares of Discovery Offshore, additional compensation for its costs incurred and efforts expended in forming Discovery Offshore, that, if exercised, would be recorded as an increase in the Company’s equity investment in Discovery Offshore (See Notes 1, 7 and 8). In July 2011, the Company’s investment in Discovery Offshore was increased to $24.1 million, or 18% (See Note 15).