A Hercules Offshore (Nasdaq: HERO) jackup caught fire at 10:50 p.m. July 23 as the rig suffered a blowout in the Gulf of Mexico and began spewing natural gas, the company said July 24.

It’s unclear how much damage the $50 million Hercules 265 has suffered. Hercules is working with its customer, Walter Oil & Gas, and regulatory authorities to determine a cause of the incident.

Operating costs in the region are likely to rise due to higher regulatory scrutiny and higher insurance premiums, analysts said. Hercules has also lost market value because of the incident, though it stands to benefit the most because of its presence in the Gulf’s tight jackup market.

A fire-fighting vessel was reported to be on location July 23 with both water and foam fire-fighting capabilities. The Coast Guard has also deployed an 87-foot cutter, helicopter and fixed-wing aircraft to the scene.

“Our immediate focus is on stopping the flow of natural gas from the well,” Hercules said, adding it may drill a relief well to siphon off the flow.

No oil appears to have been released. The rig initially released methane into the air, which the Environmental Protection Agency describes as a greenhouse gas. However burning natural gas emits negligible amounts of sulfur dioxide and mercury compounds, according to the EPA.

All personnel aboard the rig have been evacuated and no injuries were reported, Hercules said.

J.B. Lowe, vice president of Cowen and Co., said July 24 that experts are currently on the scene developing a plan to bring the well under control.

Since the blowout was announced, Hercules shares have lost about $32 million in value. Lowe said the Hercules 265 contributes about $21 million in EBITDA to Cowen’s 2014 EBITDA estimate of $528 million, or about 4%.

“We are not adjusting our estimates yet due to the uncertainty of the event, but the rig will likely be out of service for some time given the fire damage and could be deemed a total loss,” Lowe said.

For the market, the removal of the Hercules 265 from the already tight Gulf jackup market is a positive for jackup dayrates going forward, Lowe said. Hercules operates 18 of the 35 active jackups in the Gulf, excluding the Hercules 265. The company would be the main beneficiary of higher dayrates.

The Hercules 265 is insured.

“Even if the Hercules 265 is a total loss, the company will likely collect nearly the full book value amount in insurance,” Lowe said.

In September 2011, for instance, the Hercules 185 was declared a total loss after sustaining leg damage. The company wrote down the rig’s $47 million book value and collected $41 million in insurance proceeds.

Hercules said July 23 that efforts were ongoing to regain control of the natural gas well. The rig is operating for Walter in the Gulf’s OCS lease block South Timbalier 220.

“Our first and foremost concern is for the safety of all personnel aboard our drilling rig and we have taken every necessary precaution to safely evacuate the rig. Furthermore, efforts are ongoing with our client, Walter Oil & Gas, to mobilize the necessary resources to regain control of the well and minimize any potential impact on the environment,” John T. Rynd, CEO and president of Hercules Offshore, said July 23.

The Hercules 265 is rated at a water depth of 81 m (265 ft) and can drill 6,096 m (20,000 ft) below the surface. The Bureau of Safety and Environmental Enforcement (BSEE) said the well was 89 km (55 miles) off the coast of Louisiana in 47 m (154 ft) of water.

BSEE inspectors conducting an overflight reported a light sheen one-half mile by 50 ft in area which was dissipating almost immediately. The 44 personnel aboard the rig were evacuated by two life boats and transported to the PSV Max Cheramie, a US cargo ship.

Photo by BSEE.

Offshore