Hornbeck Offshore Services, Inc. (NYSE:HOS)
Q3 2008 Earnings Call Transcript
November 6, 2008 10:00 am ET
Ken Dennard – DRG&E – Managing Partner
Todd Hornbeck – Chairman, President and CEO
Jim Harp – EVP and CFO
Judson Bailey – Jefferies & Company
Mark Brown – Pritchard Capital Partners
Bo McKenzie – Lafayette Capital
Daniel Burke – Johnson Rice & Company
Good morning ladies and gentlemen. Thank you so much for standing by. Welcome to the Hornbeck Offshore Services third quarter conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) As a reminder, this conference is being recorded today Thursday November 6, 2008.
I’ll now turn the conference over to Mr. Ken Dennard with DRG&E.
Thank you and good morning everyone. Appreciate you joining us for Hornbeck Offshore’s conference call to review the third quarter 2008 results. We also welcome our internet participants listening to the call over the Web.
Please note that information reported on this call speaks only as of today November 6, 2008 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening.
During today’s conference, Todd and Jim will make certain projections about future financial performance, liquidity, operations and events that are not statements of historical fact and thus constitute forward-looking statements.
As noted in the press release today, these forward-looking statements are subject to risks, uncertainties and other factors that may cause such future matters including the company’s actual future performance to be materially different from that which is projected today.
In the company’s 2007, Form 10-K and in today’s press release announcing earnings, you can locate additional information about factors that could cause results to materially differ from those projected in the forward-looking statements. The Form 10-K and today’s press release are located under the investor relations/SEC filings section of our website and that is www.hornbeckoffshore.com and are also available through the SEC website.
This earnings call also contains references to EBITDA which is a non-GAAP financial measure, a reconciliation of this financial measure to the most directly comparable GAAP financial measure is provided in the press release issued by the company this morning.
With that behind us now, I would like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd.
Thank you Ken and good morning everyone. Welcome to our third quarter 2008 earnings conference call. Joining me today is Mr. Jim Harp, our Executive Vice President and Chief Financial Officer. Our agenda for today’s call is to review our third quarter 2008 financial results, provide a brief overview of our current market conditions and update you on our new build programs. After reviewing these matters, Jim and I will be available for questions.
Since our last call, a lot has changed in the world. We have witnessed a credit crunch that has led to temporary freezing of the capital markets, a stock market meltdown, a drop in worldwide oil prices from about $120 per barrel to about $65 per barrel and exploration of the moratorium on offshore drilling, signaling that the American people have finally woken up to the cost of foreign oil dependency, two hurricanes and the election of a new President, but also noteworthy is what has not changed.
The world’s need for energy has not changed and hydrocarbons remain the most efficient and cost effective source of BTU’s in the world. This is all the more certain when oil price in the mid ‘60s and when it is priced at over $100 per barrel.
The fundamentals of long-term demand for hydrocarbons remain unchanged. A growing world population, developing economies in China, India, Latin America, and the Far East and projected long-term overall economic growth despite current events will result in net increases in demand for hydrocarbons.
While the experts disagree around the fringes, the consensus is that by the year 2030 the world will require 678 quadrillion BTU’s per year compared to about 445 quadrillion today. Today about 275 quadrillion BTU’s are derived from oil and gas. By the year 2030 that number will climb to 385 quadrillion BTU’s, a 40% increase.
The financial strength of our customer base and their long-term investment horizons are unchanged. Our customers, many of which are major oil companies, continue to be among the largest and most creditworthy companies in the world. These companies are announcing record profits this quarter and are reaping the rewards of investments made several years ago in a far lower commodity price environment.
In other words, short-term pricing fluctuations do not appear to affect their long-range investment plans. Our customers will continue to look for, drill for and produce hydrocarbons to replenish their reserves and meet the world’s growing demand. Our strategic focus, which has weathered market turmoil in the past, has not changed. We remain focused on servicing the offshore especially the deepwater needs of our customers.
We’re doing this mainly by building, acquiring and operating some of the most sophisticated and cost effective offshore supply and multipurpose support vessels in the world. The cost of our capital and the confidence we have in our liquidity has not changed. The borrowings we made in the past at very attractive fixed interest rates have enabled us to execute our growth strategy at very favorable cost of capital.
Our expectation is that we will continue to derive liquidity from our operations as well as dry powder available under our revolver in order to complete our current build programs. Jim Harp will go over the liquidity in detail with you during this presentation.
Our focus on securing multi-year contracts at attractive day rates has not changed. As we head into 2009, we do so with strong contract coverage. In the first quarter of 2009, 64% of our available vessel days are already contracted and we are working on multiple opportunities that we believe will continue that trend in succeeding quarters.
Overall, 46% of available vessel days for the full calendar year of 2009 are now contracted. I believe that is the strongest start of a new calendar year our company has ever enjoyed and given the day rates we have secured, is a good signal that our strategy is paying off.
Finally, our short-term outlook has not changed. As you read in the press release this morning, we have reaffirmed our guidance for the calendar year 2008. Before I turn the call over to Jim to go over the numbers, I want to touch on a few of the highlights in our business since our last conference call.
We made significant progress in our strategic review of the tug and tank barge segment. Current conditions in the capital markets do not support a transaction at this time involving that segment. However, as we’ve gone through the process of reviewing the tug and tank barge segment, we have been reminded of the stable underpinnings of that business and the unique will test market niche that we have developed in it.
We remain committed to unlocking maximum value from that business for our shareholders, and as we have always done we will remain alert and opportunistic to grow or to consolidate that business.
The recent economic slowdown will likely impact all segments of the economy including ours at some point. We have and will continue to take steps to reign in cost and look critically at our business processes to improve operating efficiencies. However, for several reasons, we do see ourselves as well positioned to take advantage of the opportunities that often present themselves in these uncertain times.
First; experience has shown us that our fleet of new generation offshore supply vessels servicing the deepwater, deep well markets generally experience less volatility compared to the 180 foot conventional OSV’s. In the deepwater, the investment horizon is much longer and projects are not easily discontinued. Mainly a deepwater player, we believe we will be impacted less by the general economic challenges ahead than other service companies that may be exposed to more volatile shelf-based project portfolios.
Second; in addition to the strong contract coverage that we have as we finish 2008 and head into 2009, we also enjoy a diverse customer base that we support not only in the Gulf of Mexico but also in diverse international markets. Today our OSV’s are working for 23 different customers. Our OSV’s are deployed in the US Gulf of Mexico, the East Coast and West Coast, Trinidad, Cutter and Mexico.
We are diversified in our service offering as well and in addition to our traditional supply vessel operations, we’re engaged in construction and ROV support, deepwater reel service, well stimulation and highly specialized military operations. Of the 12 new generation OSV’s yet to be delivered under our fourth OSV new build program, seven of those OSV’s have already been committed to multi-year contracts.
Of the vessels that are already committed, only three will provide traditional deepwater oilfield services, the remainder will be engaged in specialized and military operations.
Finally, the current supply of demand fundamentals for deepwater focused companies remains sound. In fact, tighter credit markets have a beneficial effect. While the worldwide OSV order book remains heavy, we have not observed any signs of deterioration in demand for our vessels even as new vessels enter the market, but perhaps more importantly as credit markets have deteriorated, new build announcements have slowed considerably and the order book has essentially remained flat over the past three months.
In other words, stricter financial discipline among speculative and private operators will be required, which is a welcome sight for companies like ours that are committed to the long-term.
We have heard some questions lately about the sanctity of contracts in this current environment and whether term contracts might be broken.
First; I would not expect that any of our customers will break a contract. While I can’t guess the future, I can say that we spend a lot of time reviewing and negotiating our contracts and look at each of them critically in order to maximize the protection that we can derive for the company. While it is certainly possible that a customer might try to break a contract, I don’t foresee that as a systematic risk for this company.
In the past, I’ve walked you through detailed visible supply and demand drivers for our OSV segment primarily for the Gulf of Mexico. Rather than take the time on our calls to do this, I’d like to refer you to the Investor Relations section of our website, where the information will be updated quarterly and is available for your review.
Let me wrap up by giving you a quick update on our new build programs which are outlined in further detail in our press release this morning.
The HOS Achiever, the first vessel and our multipurpose support vessel fleet arrived in the Gulf of Mexico and commenced our first charter supporting offshore construction work. The HOS Centerline, the first of our 370 class MPSVs was mobilized to the Gulf of Mexico shipyard for final commissioning. We expect that vessel to enter service by year-end or early 2009.
Our other two MPSVs are expected to be delivered during the fourth quarter of 2009. Our OSV new build program which consists of one 290, nine 250 EDFs and six 240 EDs continues to progress. We have taken delivery of the first to vessels under this program and expect to take delivery of three additional OSVs in the fourth quarter.
Among the vessels that we have recently placed into service are first 250 EDF design vessel. Upon delivery, we immediately put the vessel to work on a two year contract with a major oil company in the Gulf of Mexico. We expect to deliver the remainder of the vessels still under construction over the next two years, six in 2009 and five in 2010.
On a final note, in keeping with our strategy of being a pure-play new generation vessel operator, we have continued to rationalize the 10 conventional vessels that we acquired from Sea Mar as we said we would when we bought them in 2007.
During the third quarter of 2008 we sold three more of these non-core OSVs to a foreign buyer for net cash proceeds of approximately $14.7 million, which certainly helps our liquidity and lowers our implied average cost of the Sea Mar vessels that remain in our fleet.
These formally U.S. flag vessels along with one foreign flag conventional vessel we sold earlier this year will be redeployed to foreign operating locations and are no longer qualified for coast wide trade in the Gulf of Mexico.
At this time I’d like to turn the call over to Jim to review our third quarter financial results.
Thanks Todd. Good morning everyone. As reported this morning, we’ve had another record quarter in our new generation OSV segment and in our company in general. Our third quarter earnings per share were $1.24 per share or 14% higher than the year ago quarter on a weighted average share count of roughly 27.1 million diluted shares. Our third quarter EBITDA was $65.5 million. Included in our third quarter results was a gain of $6.4 million or $0.15 per diluted share after-tax resulting from the $14.7 million sale of the three conventional OSV’s that Todd just mentioned a moment ago.
After making adjustments to EBITDA, required to compute ratios used in the financial covenants of certain of our credit agreements, adjusted EBITDA for the third quarter of ‘08 was $68.5 million. For additional information regarding EBITDA and adjusted EBITDA as non-GAAP financial measures, please refer to note 10, to the data tables in this morning’s earnings release.
Moving into our segmented data on the OSV side, void by incremental contributions from recent new build vessel deliveries, as well as strong market conditions in the U.S. Gulf of Mexico in the aftermath of two hurricanes, the damaged offshore oil and gas infrastructure. Our work quarterly OSV segment revenue, EBITDA, operating income and net income hit new all time highs in the third quarter of ‘08 exceeding the previous highs set last quarter.
OSV revenue of $88 million for the third quarter of ‘08 topped last quarter’s revenue by over $9 million for another double digit quarter over quarter percentage increase. Average day rates for our new generation fleet in the third quarter exceeded $23,000 for the first time, while our OSV fleet was operating at full practical utilization of 96%.
Our average new generation OSV day rates for the third quarter of ‘08 were about $1300 higher than the year ago quarter and about $1700 higher than the sequential quarter. New generation OSV day rates were favorably impacted by the continued market strength in the Gulf.
OSV demand in the Gulf during the third quarter was bolstered by offshore construction and repair activity as a result of Hurricanes Gustav and Ike. Utilization for the third quarter was roughly 96% which was in line with our expectations in the prior year quarter. Our effective or utilization adjusted fleet wide OSVs day rates were up roughly $1400 over the year ago quarter and $1500 sequentially.
As a reminder, based on our current operating cost structure and share count each $1000 change in our effective new generation average OSV day rate on our current fleet of 38 new generation vessels should result in a $13.9 million change to our annualized revenue, EBITDA and pretax net income. This translates into a potential change in earnings per share of roughly $0.33 per year for each $1000 change in effective new generation OSV day rate.
To be clear, this sensitivity analysis does not include the effect of any operating leverage from our six remaining conventional vessels or any additional new generation OSV or MPSV new builds that are scheduled to come online over the next couple of years. Our conventional OSVs also contributed to our record OSV results as effective day rates are six vessels of $9500 increased nearly $1200 or 14% over the last quarter.
As anticipated, during the third quarter ‘08 increased demand for the conventional OSV fleet was primarily driven by the normal seasonal return of shallow water offshore construction and repair activity on the shelf.
While conventional OSV average day rates are currently in the $11,000 range, we do expect some seasonal decline to occur with our conventional vessels in the latter half of the fourth quarter. OSV segment operating margins were 58% for the third quarter compared to 49% for the sequential quarter and 54% for the year ago period. Excluding the gain on sale of the conventional vessels, our OSV segment operating margins for the third quarter were still over 50% at 51%.
The year-over-year decrease in OSV operating margin was primarily due to higher crew wages and an increase in the cost to maintain and operate our vessels. The sequential margin increase was largely due to a $1500 step-up in effective day rates.
Moving into the tug and barge segment, the revenue for that segment for the third quarter of ‘08 decreased for the second consecutive quarter and is down approximately 26% compared to the third quarter of ‘07.
The decrease in revenues was partially offset by the full quarter contribution of three double hull tank barge new-builds which replaced in service on various dates during the latter half of ‘07 and the first quarter of ‘08. Soft market conditions related to weak demand for petroleum products continue to negatively impact this business segment especially in the single-hulled equipment.
Consumer demand for gasoline during the traditional summer driving season of the third and second quarters was adversely affected by high commodity prices at the pump. The EIA reported a 2.4% year-over-year decline in miles traveled in the United States in the second quarter and had forecasted a similar decline in the third quarter.
In recognition of the soft market conditions for our single-hull equipment that began early in the second quarter of ‘08 and are expected to continue through at least the remainder of ‘08, we strategically ready-stacked seven single hull tank barges and two lower-horsepower tugs on various dates since April 1, ‘08. Subsequent to third quarter end, we have returned to service one stacked single-hull tank barge and one stacked lower-horsepower tug for a customer contract.
In contrast to our single-hull barges, our double-hulled tank barge day rates for the third quarter remained at steady at levels above $22,000 which is roughly in line with the trailing four quarters, give or take a few hundred dollars.
Our double-hull tank barge utilization for the third quarter was around 80% compared to our recent run rate in the high 80’s, low 90’s. This decrease in utilization was mainly driven by shift in contract mix from time charters to COA’s and incremental dry-dock days this quarter for a double-hulled tank barge that has been pre-positioned and modified for a charter that will commence in early ‘09.
Our non-double-hull tank barges are among the youngest in the industry with an average age of only three years versus an industry average for our niche of nearly nine years. Our newer equipment is powered by non-higher horsepower tugs, eight of which were substantially rebuilt in the past two years.
Our single-hull tank barge average day-rates were about 15,850 or 16,000 for this quarter, an increase of 5% over the 15,000 we posted for the third quarter of ‘08. Our single-hull tank barge utilization was 34% for the quarter ended September 30 compared to 90% for the same period in ‘07 due to the recent soft market conditions in the Northeast for single-hull tank barges.
Our effective single-hull tank barge utilization which excludes the impact of stack barges was 51% for the third quarter of ‘08 which is in line with the sequential quarter. Based on current contract cover, we expect a modest pickup in single-hull barge utilization in the fourth quarter.
Moving into operating expenses on a segmented basis, cash OpEx for the third quarter of ‘08 was $28.6 million for the OSV segment and $12.7 million for the TTB segment. We expect our 2008 cash OpEx on a per vessel day basis to increase between 5% and 10% over comparable 2007 levels due in part to an increase in FAS 123R compensation expense.
As we reported on our last call, 2008 marks the third consecutive year that we have granted restricted stock units to mariners. We expect an incremental FAS 123R expense to contribute to our OpEx per day trending higher year-over-year and then leveling out in ‘09 and beyond. This unique strategy of using stock based compensation for mariners has enhanced our recruitment and retention efforts in a competitive labor market.
Moving into overhead; as a percentage of revenue our third quarter G&A expenses of $8.7 million, were 8% of revenues which is slightly lower than our 2008 guidance range and the industry average of our peers of 9% to 10% of revenues.
Our quarterly year-over-year G&A increases were primarily driven by higher personnel costs due to our substantial fleet growth and greater FAS 123R stock based compensation related to restricted stock unit awards granted to shore based employees.
G&A costs for the quarter were allocated 73% to the OSV fleet and 27% to the TTB fleet. For the balance of 2008, we expect G&A to remain at the low end of our 9% to 10% guidance range.
Moving into our balance sheet, I’ll now review some key balance sheet items relatives for the third quarter. Like many other companies, we have been keeping a close eye on the state of the financial markets. As Todd mentioned earlier, the meltdown in the credit markets was one of the key determinants driving the outcome of our strategic review of the TTB segment. With the failures of several large banks and the resulting tight credit conditions, we have reviewed all of our debt agreements as well as our liquidity position and future cash needs.
Despite the recent volatility in financial and commodity markets, we remained confident in our current financial position, the strength of our balance sheet, and the short and long term viability of our business model. We strongly believe that our cash on hand, projected operating cash flow and existing revolver capacity will be sufficient to operate the company, complete our remaining new build programs and meet our other obligations and commitments.
As of September 30, 2008 we had total cash and cash equivalents of about $21 million. Our total debt was $660 million and our book equity was just under $660 million. Our total debt was comprised of three charges of low-rate, long-term obligations including a $110 million balance drawn on our $250 million senior secured revolving credit facility due 2011, $300 million of 608 senior unsecured notes due 2014, and $250 million of 1 5/8 convertible senior unsecured notes due in 2026.
None of our debt instruments mature any sooner than 2011, and the earliest put-call protection on our convertible notes is October 2013. Unlike many of our competitors, we currently have no need to refinance existing facilities or access new ones to fund our announced growth initiatives. Therefore, we believe we have minimal if any financing risk.
Subsequent to September 2008, we have drawn an additional $10 million on our revolver for major milestone payments under our fourth OSV new build program during the month of October. The total amount outstanding under that credit facility today is $120 million which leaves us with approximately $130 million of remaining borrowing capacity under that revolver today.
We are currently paying a blended average cash coupon of about 4.2% on our $660 million of total debt which resulted in annual run rate of cash interest expense for the entire company of only $29 million. This really represents our total debt service because we don’t have any scheduled principal payments.
We have had recent discussions with our lead agent bank and the majority of lenders in our revolver bank group. Based on those conversations we are not aware of any matters that would cause availability of liquidity under our existing revolver to be adversely impacted by the current credit crisis.
We believe that all of our lenders, which are comprised of Wells Fargo, JPMorgan Chase, Comerica, Capital One, D&B Norbank, Fortis, Amegy, Nordea and the Whitney are financially sound.
Our gross CapEx budget excluding the August 2007 Sea Mar fleet acquisition is currently at around $978 million of which we have already paid roughly $672 million or 68% through September of ‘08. The remaining construction costs related to our MPSV program and our fourth OSV new build program of approximately $306 million is expected to be paid over the next couple of years with about $65 million of that figure to be incurred in the fourth quarter of ‘08, $174 million in 2009 and $66 million in 2010.
These costs will be funded primarily by cash on hand, projected free cash flow from operations and additional revolver draws. Since we have now completed our second TTB new build program, no additional costs will be incurred or borrowings related to that program will occur.
The extent and timing of further draws on our revolving credit facility will depend upon several factors such as the potential sale of additional assets, cash flows generated from operations, shipyard schedules and the timing of construction milestones.
We are currently projecting the high point of our aggregate construction draw schedule to result in a peak draw under our revolving credit facility of approximately $175 million sometime in mid 2009 assuming a maximum draw of $175 million, as a reminder we are already at 120 today. So only an incremental $55 million draw on that revolver in relatively stable market conditions, we project that we will pay our revolving credit facility in full and replenish our cash position to somewhere between $100million and $150 million by the end of 2010.
By that time all vessels under our new build and conversion programs will be delivered. How much cash we replenish depends on OSV day rate spot deck assumptions. Bear in mind that as Todd mentioned 46% of our available OSV vessel days for 2009 are already contracted.
We expect to remain in compliance with all of the covenants of our three primary debt obligations with substantial headroom with respect to our projected compliance, with the leverage ratio and coverage ratio maintenance covenants defined in our revolver, even when we stress test our capital structure at its peak draw by sensitizing our spot day rate assumptions.
In order to facilitate your ability to project our free cash flow, we have provided all of the major building blocks you need to model that metric in our press release and in this call this morning including more granular detail regarding expected in-service dates for our remaining pending new builds as well as our cash debt service run rate, our maintenance CapEx outlook for the next couple of years.
The only data you need to complete that picture are our expected cash tax payments which are expected to be roughly $6 million this year, $15.5 million in ‘09 and $4.2 million in 2010; very modest amounts given the accelerated tax depreciation ability we have in our industry in our substantial growth plan.
In connection with our sale of our convertible notes, we entered into convertible note hedge transactions with respect to our common stock with three counterparties; Bear Stearns, AIG and Jeffries. The Bear Stearns position has been assumed by JP Morgan Chase in its acquisition of Bear Stearns, and AIG was recently recapitalized by the U.S. government.
We are not aware of any financial issues with Jeffries. We do not have any counterparty exposure with Lehman Brothers. As a reminder, the effective conversion premium on our convertible bonds is a strike price of $62.59 a share and as you know we’re substantially out of money on that instrument today.
Moving into dry-dock activity, for the full year 2008 according to our current maintenance CapEx plan, we plan to dry-dock 11 new generation OSVs covering about 248 days out of service. That’s for the whole year.
During the third quarter we dry-docked three OSVs at a total project cost of $4.5 million of which we incurred $3.1 million in the third quarter, these four OSV dry-dockings represent roughly 80 days of downtime.
During the fourth quarter we expect to dry-dock three new generation OSVs and one conventional OSV representing roughly 75 days of out of service time. However, due to our spot contracting strategy which is designed to maximize our effective day rates, we are guiding to the 90% range or mid-90% range for utilization in this segment for fiscal ‘08.
Our total projected OSV dry-docking costs for 2008 are estimated to be around $11.6 million for the OSV fleet. Note that this amount only reflects the dry-docking costs for 11 of the 19 OSVs to be dry-docked in ‘08.
The other eight vessels to be dry-docked in ‘08 are recently acquired Sea Mar vessels whose dry-dock costs under our accounting methodology were included in our purchase price allocation which was finalized effective in April of this year. These costs are currently running through vessel capital improvements in the maintenance CapEx table of our press release.
In our tug and tank barge fleet, we plan to dry-dock 500 double-hulled barges, four single-hull barges and five tugs in calendar 2008. During the third quarter of ‘08 we dry-docked one double-hull barge and one single-hull barge covering a total of 59 barge days out of service at a total project cost of $900,000 of which $200,000 was incurred as of September 30.
During the fourth quarter of 2008 we expect to dry-dock four double-hull tank barges including the continuing conversion of one double-hull barge from black oil service to dual service such that it can work in both clean and dirty service which will take a total of 106 barge days out of service for those four vessels. We also plan to dry-dock two tugs during the quarter.
For fiscal 2008, we now project a total dry-dock cost of about $6.5 million for the entire TTB fleet. Over the next couple of years we expect that the annually recurring cash maintenance capital expenditure budget inclusive of regulatory dry-dockings for our growing fleet of vessels for both segments will range between $40million and $50 million per year to a midpoint $45 million for your free cash flow planning.
Wrapping up with our forward guidance, as a reminder, all of the forward-looking guidance figures include a full-year contribution from our August ‘07 acquisition of the Sea Mar fleet and recent TTB as well as other OSV and MPSV recent new build deliveries.
Our annual 2008 guidance in recognition of our actual results for the first nine months ‘08 including an $8.4 billion gain, we now expect total EBITDA for the full year ‘08 to range between $225 million and $235 million which is reaffirming the midpoint of our guidance for the last three quarters.
Diluted EPS for full year ‘08 is now expected to range between $3.94 and $4.18. The TTB segment is expected to contribute EBITDA in the range of 13% to 15% of the midpoint of the Companywide 2008 guidance range or roughly $30 million to $35 million.
We did also update the pro forma run-rate EBITDA illustration included in our tables of our press release this morning to reflect the assumptions outlined in footnote 11 of that table. Which among other assumptions include an anticipated incremental full year run rate contribution from the Sea Mar vessels as well as all vessels recently delivered under or that will be delivered under our construction and conversion programs which are four MPSVs, 16 supply boats, three tank barges and four tugs as though all of those vessels were in the water as of January 1, 2008.
Based on these assumptions, we are projecting pro forma run rate EBITDA of roughly $406 million and pro forma EPS of $6.92 per share. This is not intended to represent forward earnings guidance with respect to any specific calendar year, but is rather indicative of what we believe to be the potential annual EBITDA and earnings generating capacity of our pro forma fleet assuming size adjusted cost for larger vessels consistent with our current cost structure.
If all such vessels were operational for the entire calendar year ‘08 which they will not be, the primary reason for the increase in the pro forma run rate EBITDA figure over last quarter is that we have marked-to-market our existing OSV fleet for their actual contracted day rates for the first nine months of the year which were higher than we assumed last quarter.
This run rate of 406 is roughly a one-to-one net debt to EBITDA ratio when we complete our new build program, well within our current bond rating. With that, I’ll turn it back to Todd for any further comments and to entertain questions.
Operator, we’ll now take questions.
(Operator instructions) Our first question is from the line of Judson Bailey with Jefferies & Co. Please go ahead
Judson Bailey – Jefferies & Company
Todd, on last call you gave us some spot rate information for your 240 foot class vessels. Would you mind giving us an update on spot market conditions for those two classes?
I think the 200 class, while we’re going into the winter in the first of next year, we will be around the $20,000 range and the 240 classes seem to be holding up a lot better at the $25,000 to $30,000 range.
Judson Bailey – Jefferies & Company
Okay. Is that kind of your expectation as you look forward in the next three to five months?
On average; I mean we may see some dip down into the high teens but I think that’s just real transitory very narrow, but the average should remain in the 20s.
Judson Bailey – Jefferies & Company
My follow-up is just with all the dramatic decline in commodity prices and as you’re marketing some of your new built vessels and looking for some term contracts, I’m just curious if you could give us some color on what your customers are saying. Have the conversations changed at all; maybe just provide some color there.
Of course with the drastic change in commodity prices and the financial markets, I would take some of our customers will pause; we have not seen that. All the customers that we’re working for of course who are leveraged more to the deep water as you know are still very bullish and the long-term projects that they have, they’re going forward on.
I would just assume we would start to see some of that particularly on the shale and maybe some, probably with delays in shipyards like with the rigs, we might see some delays to the right, but right now things seem to be pretty stable but we’re going to be cautious and we’re going to be very conservative going forward for the first part of ‘09 until we see what we have.
Thank you. Mark Brown with Pritchard Capital Partners; please go ahead with your question.
Mark Brown – Pritchard Capital Partners
Hi good morning. I just wanted to ask about the HOS Achiever. I don’t know if you can comment at all about what day rates you’re seeing out in the market for hurricane work in the Gulf of Mexico and even flotel work in Mexico. Are those the kinds of projects you would expect to put this MPSV on?
Sure, it can do all those types of jobs; hurricane relief work, subsidy, construction work, flotel work, subsea intervention type work and we’re looking at a tremendous amount of opportunities not only in the US Gulf of Mexico but all over the world; Brazil, Southeast Asia, West Africa, the North Sea, the Med and we’re seeing day rate opportunities in the spot market right now in the Gulf anywhere from $85,000 a day to $150,000 a day just dependent on what type of application the vessel would be deployed on.
I think with the recent hurricanes, what we didn’t see after Katrina and Rita, we saw a lot of equipment being utilized during the winter time. I think that we’re probably going to see that move to the right in the construction season on the repair and maintenance of hurricane relief work happened more starting in April and May of next year and be delayed to that time period, than what we saw during the last set of hurricanes several years ago. Just maybe the financial situations, the market or the commodity price could have that stepping out or just lessons learned from the last storm or a combination of all three of those, but I expect a pretty robust construction season next summer.
Mark Brown – Pritchard Capital Partners
Is it enough to reconsider the plans for the other three MPSV new builds? I think you had previously thought about leaning towards two of them going internationally, but given the amount of work in the Gulf, is there any potential for reconsidering that and also is there any sort of update on the status of the two unexercised MPSV new builds in US shipyards?
No status on the unexercised new builds right now at this date. The new builds that we have come in, we’re bidding all over the world. There seems to be a big backlog of repair in the Gulf of Mexico for hurricane relief or hurricane repair for next summer.
Where the vessels will transit, we’re going to take it on a case-by-case basis as we are bidding these projects. Of course we are comfortable in the spot market but we are considering some term opportunities particularly overseas and we’ll just update you quarterly.
We think the vessels are going to be in high demand and the market continues, and the subsea market to be very robust and growing and with the extra work that the hurricanes have created, it’s just going to soak up more capacity. We think that’s favorable to the long-term prospects for that type of equipment.
Alright thank you. Bo McKenzie with Lafayette Capital.
Bo McKenzie – Lafayette Capital
Just Todd if you could refresh us when the circumstances as we headed into what was it early 2007 where there was some concerns about a fall-off in the Gulf. As far as I can recall there’s been a fairly severe contraction in the number of shelf vessels and you guys have taken a couple more off here just recently, but we had some pressure on the higher end of the shale, on the lower end of the deep water vessels out there; how has the market changed in terms of supply and demand on the shelf end on the 200 end of the deep water vessel market?
We’ve seen transitory changes during those market periods particularly toward the end of the year. When it comes to wintertime, typically the shale projects slow down quite a bit and the repair and construction slows down, so that usually will affect the 180’s and some of the 200 class type vessels.
We’re seeing a lot of demand for those vessels currently just finishing up projects and also we have a lot of demand overseas. We’ve had a number of bids that are out all over the world for vessels not only in the higher horsepower or the higher 240s and 265s but also the 200 class as well.
It’s hard to say, it’s a year-by-year thing, but as when we’ve seen some lower utilization, it’s come back even stronger. As you pointed out in 2007, just the first quarter seemed like it was pretty slow but as the construction season picked up, that demand increased pretty dramatically and I expect the same thing this year.
Bo McKenzie – Lafayette Capital
Then kind of following on that, in 2007 we were seeing kind of the wind down on the big surge in the work post-Katrina and Rita; how would you characterize the visibility of incremental work left over from Ike and Gustav going into 2009 and how that may or may not buoy the market somewhat?
Well, I think there’s a much more measured approach this time than there was after Hurricane Katrina and Rita. If you can go back to that time and remember the commodity price after the storms reached an historic high of $70 a barrel and everyone went completely excited about the oil price at $70 a barrel. So the construction season was vibrant even through the winter months.
I think this is a much more measured approach this time. The surveying that’s going on for seeing what the damage has been and then a real plan to get that production back online or to remove some of the rigs that have been damaged that can’t come back online is going to be stepped out till the summer, but I think it’s been create a lot of activity for equipment. We’re seeing just on our own equipment we probably have two or three vessels still today with either divers on them or ROVs on them doing hurricane recovery work.
(Operator instructions) The next question is from the line of Daniel Burke with Johnson Rice.
Daniel Burke – Johnson Rice & Company
Jim, with the on-time delivery of the Achiever, I guess the full $8 million escrow account is available to you?
We had already collected it, so we’re in possession of the cash. It’s sitting there as really a backstop to whatever we do not contract for with other customers as that contract provides for.
As we go through the first 180 days of that initial term of their contract, we will then subtract whatever we earn from other customers from that and the balance of that plus anything else they may owe us would then come out of the eight and then if there was something above the eight, we would then go against the estate which it has resolved all of its financial debt and is sitting there with a fair amount of cash. We certainly are not fearful that there’s a collection issue there in any way, shape or form.
Daniel Burke – Johnson Rice & Company
I see and then Todd, switching gears and addressing the outlook for Tug Tank as it remained a part of your business for longer here, looking ahead to next year, I would assemble your feel on the double-hull side of that business is that the market likely won’t be much weaker than what we have seen given the outright escalation in commodity prices this year. So that part of the business I assume you feel pretty good about going into next year?
Yes, I think it’s not going to produce what it has historically. That whole tank barge market because commodity prices went to 150 and we have the weakness in the economy and the gasoline driving, consumption is down for the first time in 20 years this past year, is, but I think it’s bottomed and it’s stabilized where it is today. I don’t think it’s going to get any worse.
We’ve done a lot of proactive measures of stacking barges and equipment to reduce our costs; we are looking very strongly at our costs and the double-hull barges are working at a high rate of employment. We were talking about utilization and their day rates on the double-hulls are holding up.
So just with that we will have a pretty good amount of cash flow from that business. It will sustain itself. It will make a profit and just a little bit of changes in that business because the market is basically at equilibrium, can change the day rate environment very, very quickly.
If we do have a very cold winter this winter, that is a catalyst that can change the day rates dramatically, very quickly. If we go into next summer with a higher driving season than we had this past summer, that is another catalyst that can change the market very quickly.
Once barges are stacked in this industry, very, very difficult to unstack them and to bring them back to markets. So a lot of the single-hull tonnage that we have and our competitors have stacked would be hard to come back to market so it would put pressure on the day rates upward with the vessels that are working.
I’d like to add that; the other catalyst that we will all as an industry experience in calendar ‘09 is another wave of over OPA 90 retirements and so I want to take this opportunity to remind everyone that we do have two barges, the 111-01 and the 11-02 that will go out of service as a result of OPA 90. This of course is all baked into our numbers and I hope it is into yours as well.
One of them will go out effective the end of this calendar year, 1/1/09, so at the end of December ‘08; the other in the mid ‘09. So those two go away, we’ve got some stacked barges. So we’ve wintered down our active fleet but as Todd said, we have done so with an eye towards streamlining our cost structure and maximizing effective day rates.
I would like to observe that if our current guidance range of $30 million to $35 million for this year and as Todd said, we don’t expect it to get worse than not. Certainly it can be better than that. It’s been as high as $60 million in the past and we do have a niche in the upstream segment that we can continue to be active in. At even $30 million to $35 million, it’s still covering our Companywide debt service one time and even with a peak draw on our revolver mid next year. So, those are all important things to remind ourselves of.
And going into another thing as Jim told you in his section today, we had a heavy drydocking period this year for that fleet. Next year we really don’t have any drydockings planned.
If the market really comes back and we bring some vessels out of stacked, we will have to do some drydocking or some unstacking of shipyard costs, but for all intensive purposes, it’s going to be a very low drydocking year and that fleet every two years experienced very high drydocking activity. So we are in pretty good position to do well with that fleet next year.
Daniel Burke – Johnson Rice & Company
Thanks for all the cover. If I could squeeze one more on the end Jim, if you happen have it, I would be curious, do have an available day contract? You gave us 2009. Some of your OSV contracts have decent duration. Do you have the similar figure for 2010?
Not at my fingertips and you know we did give you, though I hope you saw in the press release today, some check figures on the average fleet complement for the year and even a quarterly lapsing schedule as to deliveries of our new builds and Todd mentioned 60 something percent contract cover the first quarter of ‘09 and 46% for the whole calendar year, but in terms of giving you kind of a tenor of all of our collective term contracts, now.
Okay thank you and Paul McKenzie; please go ahead with your follow-up question.
Bo McKenzie – Lafayette Capital
At various times in the past you guys have put up some really attractive numbers on the barges, doing some production tests. With the Centerline coming on I guess imminently, are there still incremental opportunities out there on the barge business to continue to do production tests that you’re going to identify? Would they be more tied to the shallow water, to deepwater? I guess I’m trying to figure is how the Centerline fits in and maybe cannibalizes some of those opportunities or is that opportunity set expanding?
It’s expanding. We’ve already contracted one of our barges long-term into that market that one of the clients we will use the barge. It will start first quarter of next year not only for deepwater well testing but also their transportation needs in the Gulf and that’s just with one particular client, but we see that happening more frequently as a lot of this production in these production facilities are put into the Gulf of Mexico.
So, the MPSV will absolutely be able to participate in those type of well flowback opportunities. What we’ve seen through these last storms I can say there’s barges now being used to transport oil in from shale production platforms right now. We didn’t see that much after Katrina and Rita. We’re probably seeing more barging being done right now than we have since then.
I can’t give you the whole scope of the market but trying to get some of these pipelines fixed and repaired with the commodity prices still at $65 a barrel, it’s economic for them to pick up smaller barges but real close shelf activity to bring in that commodity.
Bo McKenzie – Lafayette Capital
And then along those lines, when you guys did the Chevron jack thing back in 2006 maybe, that would have actually been a good rate for a deepwater drilling rig back then. When you look out at the opportunity set again both on the barges, that was a big spread back then, but on the barges and on the Centerline, I don’t expect you guys to put up another 240 again, but it would be nice, but how do you see the economics working out on some of those projects out there in terms of what the day rate opportunities are?
Well it’s going to be a case-by-case basis, but as we know when we’re on a project like that is taking place, the day rate is not the driver on whether the project is going to happen or not. It is the opportunity on the really high day rate comes comparatively of what’s available in the marketplace.
I think those opportunities are still out there. We will capture some those. Whether it’s a well test or whether it’s a subsea opportunity or whether it is hurricane construction relief or any of those type of opportunities, the day rate opportunities can grow pretty dramatically depending on the risk profiles that we’re dealing with, so don’t count it out.
Remember that on the MPSVs, we have modeled around $80,000 a day, effective day rate which is five times payout. We are talking about numbers way in excess of that. Even at the lower end of the day rates, it’s still a great return for the shareholders of the company.
Thank you. Management there are no further questions at this time. Please continue with any closing comments.
I’d like to thank everyone for joining us on the call. I know it has been an exciting last 90 days for everyone and we’re probably all pretty tired, but we do look forward in this business continuing to grow and have a lot of exciting things happening in our industry despite what may be happening on the news every night. The oil industry is still very vibrant and growing at a very rapid pace. Thank you.
All right, thank you sir. Ladies and gentlemen, this concludes the Hornbeck Offshore Services third quarter conference call.
If you’d like to listen to a replay of today’s conference, please dial 303-590-3000 and put the access code 11121187. Again, dial 303-590-3000 and input the access code 11121187.ACT would like to thank you very much for your participation today and you may now disconnect. Have a very pleasant rest of your day.
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