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Hercules Offshore: A Case Study In Risk Aversion

In passing the Foreign Corrupt Practices Act, Congress (and the Executive branch) accepted the fact that U.S. companies would lose out on certain business by complying with the FCPA’s provisions.  For instance, as highlighted in “The Story of the Foreign Corrupt Practices Act,” Treasury Secretary Michael Blumenthal stated during Congressional hearings:

“To the very, very small extent a particular company may lose a particular contract because it refuses to engage in [improper payments], I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”

Losing business because of a refusal to make improper payments is one thing, losing business because of risk aversion is quite another.

This post concerns Hercules Offshore and how its FCPA risk aversion resulted in the company abandoning a $92 million contract in Angola, which when disclosed, resulted in the company’s stock falling approximately 11% (see here).

In this recent SEC filing, Hercules disclosed:

“Due to the failure of Sonangol [an entity the DOJ/SEC have alleged in past FCPA enforcement actions is the state-owned and controlled oil and gas company of Angola] officials to accept a local representative that meets the Company’s international legal compliance standards, the Company has experienced delays in obtaining Angolan visas for required crewmembers and delays in importing required parts and equipment into Angola to support operations under the drilling contract for the Hercules 267 (the “Contract”). As a result of these delays, the Contract will be terminated. Pursuant to an agreement with the customer, the Company will not have any contractual exposure to the customer as a result of the Contract termination.Sonangol has failed to accept any of three different local representatives proposed by the Company who meet our legal compliance standards, notwithstanding the legal and technical sufficiency of our proposals. The Company understands that working with a local representative is required under the Contract, and the transition to a representative meeting our compliance standards is a necessary condition for the Company to continue to perform its obligations under the Contract in Angola.

As previously disclosed in our fleet status report on May 20, 2014, the Company recently moved the Hercules 267 to Gabon from Angola. The Hercules 267 has been on zero dayrate since late April 2014, and final cessation of the rig’s operations under the Contract will reduce our current estimated future backlog by an estimated $91.8 million, until we are able to obtain a contract for the rig in another location.

Also as a result of these circumstances, the Company will voluntarily forgo a three-year contract award it previously received in Angola for the Hercules Triumph.”

Regarding the above circumstances, Hercules Offshore CEO and President John Rynd stated at the recent Global Hunter Securities 100 Energy Conference:
“And I guess compliance — if you have followed us, you know what — we pulled out of Angola last Friday. Tough decision for us. We could not get comfortable, and then the agents that we sent to Sonangol that had gone through our vetting process they would not accept. So we walked away from 2 1/2 years at $110,000 a day and three years at north of $200,000 a day on two assets, but it’s the right thing to do.We’re not going to get embroiled in an FCPA investigation. So it was a tough decision, but it was the right decision, and a decision we will make every time around the world every day.”
As with most root causes of FCPA risk and scrutiny, Hercules Offshore encountered various trade distortions and barriers in attempting to conduct business in Angola.  In this case, it was Angolan bureaucracy and requirements that the company work with a local representative (a circumstance that was, in part, the root cause of the 2013 FCPA enforcement action against Weatherford International – see here for the prior post).

The FCPA risk aversion of Hercules Offshore was no doubt heightened given that the company was the subject of FCPA scrutiny in 2011-2012 (see here).

Regardless, does anyone benefit from Hercules Offshore’s risk aversion?

Clearly, the company’s shareholders did not benefit, to the contrary shareholder value has been surrendered because of risk aversion.

The Angolan government (and by extension its people if one follows it down to that level) had the opportunity to have a local representative involved in a contract that was vetted through the compliance standards of a respected U.S. company.  Seemingly no benefits there because of Hercules Offshore’s risk aversion.

In the eyes of the DOJ and SEC, is Hercules Offshore’s risk aversion a success that ought to be celebrated?  Is there something the DOJ or SEC can do in instances such as the above rather just enforce the FCPA?  Was Hercules Offshore’s risk aversion a prime candidate for submission under the FCPA’s Opinion Procedure Release program?  If so, how would the DOJ have analyzed the situation?  Perhaps the DOJ did analyze the situation, but because of the de facto “mulligan rule,” there was no Opinion Procedure release.

This new era of FCPA enforcement has many effects besides “hard” enforcement.  Often times, the FCPA’s greatest impact is “soft” enforcement and the reluctance of risk averse companies to encounter potential FCPA risk.

Hercules Offshore’s risk aversion is an example of this, yet an example that raises several big picture policy questions.

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