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Hornbeck Offshore Services, Inc. (NYSE:HOS)

Q4 2008 Earnings Call

February 19, 2009, 10:00 a.m. ET

Executives

Ken Dennard – Managing Partner, DRG&E

Todd Hornbeck – Chairman, President and CEO

Jim Harp – EVP and CFO

Analysts

James West – Barclays Capital

David Wilson – Howard Weil

Chris Glisten – Simmons & Company

Daniel Burke – Johnson Rice

Jud Bailey – Jefferies & Company

Dan Boyd – Goldman Sachs

Mark Brown – Pritchard Capital

Operator

Ladies and Gentlemen, thank you for standing by. Welcome to the Hornbeck Offshore Services' Fourth Quarter Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions). This conference is being recorded today February 19, 2009.

I would now like to turn the conference over to Mr. Ken Dennard of DRG&E. Please go ahead, sir.

Ken Dennard

Thank you, Metala, and good morning everyone. We appreciate you joining us for Hornbeck Offshore's conference call to review fourth quarter 2008 year end results. We will 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 February 19, 2009 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 call, 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 today's press release, 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.

From the company's 2007, Form 10-K and in today's press release announcing the earnings, you can locate additional information about factors that could cause results to materially differ from those projected in the forward-looking statements.

Form 10-K and today's press release are located under the investor relations/SEC filings section of the website. The website 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.

And one final administrative item, you will note in this morning press release that the company has renamed it's two business segments. The OSV and TTB segments are now refer to as the upstream and downstream segments respectively.

Now, I would like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd.

Todd Hornbeck

Thank you Ken and good morning everyone. Welcome to our fourth 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 fourth 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.

The fourth quarter earnings we announced today indicate that we completed 2008 within our EBITDA in EPS guidance ranges. This was no small feet giving the challenges we faced during the year. I am proud of the hard work and dedication shown by our team in 2008 which brought us through these challenging times allowing us to meet our targets. I am also extremely proud of the safety record we achieved in 2008 including our company wide total reportable incident rate up 0.19 for the year.

The economic recession will make 2009 another challenging year. Nevertheless we plan to continue our growth by strengthening our core deepwater franchise. Our focus will be; one, providing our customers excellent service with the finest vessels and cruise in the industry. Two, completing those vessels in our new build program that are scheduled for delivery this year. Three, controlling costs. And four, continuing to secure contract or vessels on the best economic terms possible.

With regard to our marketing strategy, we will deepen our international footprint this year. In Mexico, we have established an operating subsidiary, which will help us, both reduce costs and expand our services.

We currently have five vessels chartered in Mexico and manage an additional five. We have enjoyed an excellent operating history in Mexico, and our plans now include being part of the deepwater future, which is starting to materialize.

Likewise, in Brazil, our first charters there in 2008 were highly successful and we are pursuing several opportunities available on that market for new-gen equipment. Finally, our military franchise continues on a successful path and affords us greater diversity in our service offerings in customer base.

On ago there are few items that are think are significant to our company in the current climate before Jim takes you through the numbers and provides our outlook for 2009.

First, as I mentioned during our call in November, as of that time, we had already contracted 46% of our available new-gen OSV vessel days for all of 2009. As of today, our contract coverage for new-gen fleet days for all of 2009 has increased to 56%.

More importantly that contract coverage represents 63% of our projected 2009 revenue for new-gen fleet. What this data appears to be telling us, is that our leveraged to the deepwater oilfield is a strategy they can keep our vessels utilize when commodity prices are weakening such as now.

The complexity of sanction deepwater projects does not easily permit them to be discontinued in response to the short-term variations in oil prices. In addition, some deepwater operators appear to be willing to sanction further projects in the lead times necessary to bring projects online. Moreover, all vessels are not one trick ponies that depend exclusively on drilling budgets rather they are utilized in a broad range of oilfield applications many of which are unrelated to drilling budgets.

All of this is not to say that we will not be affected by the current demand driven decline in the commodity prices. However, we believe that our deepwater leverage will cause us to be less affected than other service companies that are exposed to the more volatile sectors of the oil patch. As can be expected, we're seeing day rates soften somewhat particularly in our 220 class while day rates for the higher class vessels are generally flat.

The second development that I want to note for you is that the HOS Achiever has recently been charted for an approximate term of six months provided with renewal options, to an integrated oil company for a major ultra deepwater project in the Gulf of Mexico.

The total revenue for this project is inline with our previously reported day rates of approximately $100,000 a day for this unique DP-3 asset. Our decision to mobilize the vessel to the Gulf of Mexico is paying off and we see additional follow-on opportunities for her in this region.

The HOS Iron Horse, which is the second DP-3 MPSV that will add to our fleet remains on schedule and should deliver in the fourth quarter.

The HOS Centerline is completed except for some final commissioning work and completion of regulatory inspection. Our plan is to introduce that vessel in to the market on a spot basis this quarter. As the E&P operators look for opportunities to economize and reduce their cost. The logic of using the HOS Centerline's enormous liquid and deck cargo capacities is becoming apparent to them.

The HOS Strongline, the second of our 370 class MPSVs is expected to deliver by year-end. To date, we have taken delivery of five of the sixteen vessels under our OSV newbuild program. The 11, OSV newbuilds remaining to be delivered are still on-track with same delivery schedule that we reported last quarter.

It is noteworthy that at this time all but one of the seven vessels being delivered this year under our OSV newbuild program have been committed to customer contracts.

Finally, while Jim will discuss our liquidity outlook with you in detail, I want to mention a couple of things. We spent a lot of time looking at liquidity and modeling variation assumptions.

At this time, we do not see anything down the road that gives us heartburn. In fact we are about $20 million ahead of where we though we would be right now from a liquidity standpoint. Nevertheless, we are taking advantage of this current climate to find ways to lower our cost and make our team more productive.

In closing, as we have sorted through all of the information that is being put out by major oil companies and industry analysts as well as data that we ourselves are observing in the marketplace, the major thing we see is a broad consensus that curtailed investments by oil companies today is going to result in a commodity supply shortage and price will increase as soon as demand begins to pickup.

This is not a question of whether oil price is an associated investment we will recover, but rather when that recovery will occur. We do not have a crystal ball, and we cannot answer that question. What we can say is that we believe that our new-gen deepwater assets are among the most likely to continue to work even through this down cycle and that we will be here with a larger fleets and a stronger company when the market exits this down cycle.

At this time, I would like to turn over the call to Jim to review our fourth quarter financial results.

Jim Harp

Good morning, everyone. As Todd mentioned, we had another solid quarter in spite of the challenges we faced in 2008, and we believe we are ready for whatever obstacles may lie ahead in 2009.

Recapping our earnings, our fourth quarter 2008 earnings per share were $1.31 per share, or 35% higher than the year ago quarter on a weighted average share count of roughly 26.8 million diluted shares.

Our fourth quarter EBITDA was $70.5 million after making adjustments to EBITDA required as a starting point to computing ratios used in the financial covenants and certain of certain of our credit agreements, adjusted EBITDA for the fourth quarter of 2008 was $73 million. In addition, we are pleased to report that actual EBITDA and diluted EPS results for the full fiscal year 2008 within the annual guidance range for those figures that we initiated a year and reaffirmed for each of our past three quarterly calls. 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, I will start with the upstream segment. Void by incremental contributions from recent new build vessel deliveries, as well as strong market conditions in the U.S. Gulf of Mexico and international markets our quarterly upstream segment revenue, EBITDA and net income hit all new all time highs in the fourth quarter of '08 exceeding the previous high set in the third quarter. Upstream revenue are just under $100 million for the fourth quarter topped last quarters revenue by over $11 million for another double-digit quarter-over-quarter percentage increase.

Fleet wide average day rates for our new generation OSV fleet in the fourth quarter exceeded $24,000 for the first time, while our OSV fleet was operating at full practical utilization of 96%. These day rates were about 2000 higher than the year ago quarter and about $500 higher than the sequential quarter.

Our new generation OSV fleet average day rates were favorably impacted by strong spot market day rates in both the GoM and international markets late last year. Our effective or utilization adjusted fleet wide OSV day rates were roughly $3300 over the fourth quarter of '07 and up about $550 sequentially.

As a reminder, I want to highlight again for you that based on our current operating costs structure and share count each $1,000 change up or down in our effective new generation average OSV day rates on our current fleet of 41 new-gen vessels should result in approximately $15 million change to our annualize revenue EBITDA and pre-tax net income.

These translate into a potential change in EPS of roughly $0.35 per share for each $1,000 change in effective new-gen OSV day rate. To be clear, this sensitivity analysis does not include the effective any operating leverage from our six conventional OSVs or any additional new-gen OSV or MPSV newbuilds that are scheduled to come online over the next couple of years.

Our conventional OSVs also contributed to our record OSV results or Upstream results as effective day rates for those six vessels of about $10,000 a day increased nearly $500 or 5% over last quarter those were fourth quarter rates.

As we discussed in our third quarter conference call, the market that these vessels has slowed considerably for seasonal and macro-economic regions during the later half of December and in early 2009 thus far. These vessels which we consider to be non-core assets had historically experienced much higher demand volatility.

In fact, in recognition of deteriorating market conditions on the shallow-shelf for conventional vessels we have elected to stack four of our six conventional vessels on various dates since late December and planed to stack fifth conventional OSV during this quarter.

The one conventional vessel that we do not planed to stack to immediately stack is already committed to a customer contract that expires in late 2009.

Upstream segment operating margins were 53% for the fourth quarter compared to 58% for the sequential quarter and 45% for the year-ago period. The sequential margin decrease was due to the $6.4 million gain on sale of four conventional vessels that we recorded in the third quarter.

Excluding this gain our Upstream operating margins were 51% for the third quarter of '08 and therefore we actually had a 2% margin increase quarter sequentially. The year-over-year increase in Upstream operating margin was primarily due to the higher effective OSV day rates and a full quarter contribution from the HOS Achiever, our first MPSV that was placed in service in October 2008.

Moving in to the Downstream segment that segment revenue for the fourth quarter of 2008 was flat sequentially and down approximately 27% from the year ago quarter. The decrease in revenues was partially offset by the full quarter contribution from three double-hulled tank barge newbuilds, which replaced in service on various dates during the latter-half of 2007 and the first quarter of 2008.

Soft market conditions related to weak demand for petroleum product continue to negatively impact this business segment especially the single-hulled equipment.

Consumer demand for petroleum based products has been and continues to be adversely affected by the uncertainty in the global economy.

In consideration of these ongoing weak market conditions, we continue to have six single-hulled tank barges and one lower horsepower tug stacked in addition one of our larger single-hulled barges that Energy 11102 reached its OPA 90 retirement date on December 31, 2008 and was therefore removed from active service. We have an additional single-hulled tank barge the Energy 11101 which will reach its OPA 90 retirement date in the first half of 2009 and will therefore also be retired.

Our double-hulled tank barge average day rates for the fourth quarter of '08 were 20,157 which was about $2,500 and $2,800 lower than the sequential and year-ago quarters respectively. Our double-hulled tank barge utilization for the fourth quarter was around 76% compared to our recent run rate in the high 80s low 90s.

As we reported last quarter, this decrease in utilization was mainly driven by shift in contract mix from time charters to COAs and incremental dry-dock days during the fourth quarter for four of the nine double-hulled tank barges. So very heavy dry-docking calendar for double-hulled barges in the fourth quarter. We have no such dry-docking schedule for 2009.

Our single-hulled for -- double-hulled barges, our single single-hulled tank barge average day rates were about 16,480 for this quarter and increase of 4% over the 15,810 we posted for the fourth quarter of '07. Our single-hulled tank barge utilization was 47% for the quarter ended December '08 compared to 89% for the same period in '07 due to the soft market conditions I discussed earlier, which resulted in our decision to not only stack the single-hulled vessels, the six single-hulled vessels in the one tug on various dates since April 2008. But in fact we plan to stack one additional tank barge in several more tugs this year.

Moving in operating costs on segmented basis cash OpEx for the fourth quarter of 2008 was $28.5 million for the Upstream segment and $11.7 million for the Downstream segment.

We expect cash, operating expenses per vessel-day in fiscal 2009 to not materially increase over fiscal 2008 levels, or same-store sales, if you will. This is excluding some contract-related costs that will recoverable, both through higher day rates and other revenue.

In terms of G&A, or overhead as a percentage of revenue, our fourth quarter G&A expenses of $10.4 million, or 8.5% of revenues which is slightly lower than our 2008 guidance range and the historical 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 expense related to restricted stock unit awards granted to shore-based employees in the past.

G&A cost for the quarter were allocated 85% to the upstream segment and 15% to the downstream fleet. For 2009, we expect G&A to remain in the range of 9% to 10% of revenues.

Moving into our balance sheet, I will now review some of our key balance sheet items for the fourth quarter. Notwithstanding the state of the financial markets, which we continue to monitor very closely, we remain highly confident in our current financial position and the strength of our balance sheet, and the short and long-term viability of our business model.

We believe that our cash on hand, projected operating cash flow and existing revolver capacity will be more than sufficient to operate the company, complete our remaining new build programs and meet all of our commitments.

As of December 31, 2008, we had total cash and cash equivalents of about $20 million. Our total debt was $675 million and our book equity was $695 million. Our total debt at year end was comprised of three charges of low-rate, long-term obligations including a $125 million balance drawn on our $250 million senior secured revolver due September 20 of 2011, $300 million of 608 senior unsecured notes due November 20, 2014, and $250 million of 1 5/8 convertible senior unsecured notes due in 2026. None of our debt instruments mature any sooner than late 2011, and the earliest put-call protection on our convertible notes is October 2013.

Subsequent to year end, as expected we've drawn an additional $25 million on our revolver to fund major milestone payments under our MPSV program. The total amount outstanding under that credit facility as of today is $150 million. We have also posted approximately $900,000 in un-drawn letters of credit resulting in approximately $99 million of remaining borrowing capacity under our revolver today.

We are currently paying a blended average cash coupon of about 3.5% on our $700 million of total debt which resulted in annual run-rate of cash interest expense of roughly $25 million. This really represents our total debt service because we don’t have any scheduled principal payments under any of our debt facility.

Our aggregate growth CapEx budget for our two active programs is currently at around $925 million of which we have already paid roughly $657 million or 71% through December 2008. The remaining construction costs related to our MPSV program and our fourth OSV newbuild program of approximately $268 million are expected to be paid over the next couple of years was about $227 million of that figure to be incurred in 2009 and $41 million in 2010.

These costs will be funded primarily by cash on hand, projected free cash flow from operations for 2009 and 2010 and additional potential revolver draws. The extent and timing of further draws on our revolving credit facility will depend upon actual cash flows generated from operations and several other factors such as the potential sale of non-core assets, shipyard schedules and the timing of remaining 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 somewhere between $150 million to $175 million in mid-to-late 2009. That peak draw is down by about $20 million to $25 over what we reported last quarter.

In other words, we only expect to incur not more than about $25 million more than where we are today. Assuming relatively stable market conditions and no further assets sales, we currently project that by the end of 2010 we would have repaid our revolving credit facility in full, and rebuilt our cash position to somewhere between $50 million and $75 million.

Moving into our dry-dock activity, for the full year 2009 according to our current maintenance CapEx plan, we plan to dry-dock 13 new generation OSVs and two conventional OSVs covering about 382 days out-of-service.

During the first quarter, we expect to dry-dock six new generation OSVs and one conventional OSV at a total project costs of $7.8 million of which we anticipate spending $4.7 million in the first quarter. These six OSV dry-docking represent roughly a 150 days of downtime in the first quarter, which represents about 40% of our 2009 projected days out-of-service. However, due to our contracting strategy, which is designed to balance spot in term fixtures in order to maximize our effective day rates depending on market conditions we're guiding to the 90% range for utilization in this segment for fiscal '09.

Our total projected dry-docking costs for 2009 for the Upstream fleet are estimated to be about $16.2 million. We have a relatively light dry-dock calendar for our Downstream fleet and only plan to dry-dock one single-hulled barge and six tugs in calendar of 2009.

During the first quarter of '09, we plan to dry-dock two tugs at a total cost of $1 million for all of fiscal 2009, we projected total dry-dock cost of about $5.5 million for the Downstream fleet.

We expect the annually recurring maintenance capital expenditure budget inclusive of regulatory dry-docking for our growing fleet of vessels for both segments. We will step-up from our projected 2009 aggregate level of about $30 million to somewhere in the range of $40 million to $50 million per year over the next couple of years beyond 2009.

Now to APB 14-1, as we have noted in our press release this morning, we plan to adopt a new accounting rule in 2009 APB 14-1 that will materially impact the GAAP treatment the generally accepted accounting principle treatment of our convertible senior notes but will not affect the economic substance to those bonds in anyway.

In the simplest terms APB 14-1 requires us to essentially record hypothetical interest expense at a non-convertible bond rate of 7% and 8% instead of our actual cash coupon rate of 158. Why seven and eight that was approximately where our straight rate six and eight senior notes are non-convertible senior notes we are trading at the time of our convertible bond deal in October 2006. And it was therefore use as a reference figure.

The spread between these two rates reflect incremental non-cash interest expense. The offset of this incremental interest expense is roughly $75 million of original issued discount or OID at the time of inception that will be recorded and amortize through interest expense over the seven year first call period on those bonds.

This rule will result in an increase this non-cash interest expense with a corresponding decrease and book debt in the form of OID and increase in book equity and an increase in our deferred tax liability. Note that this rule was effective for periods after January 1, 2009 for all such convertible bond issuers not just Hornbeck therefore the APB 14-1 adjustments are not included in our fourth quarter 2008 results.

However, we will be required to retrospectively adjust all prior periods presented in future filings for this new rule. In our press release this morning, we included a detailed recap of prior period adjustments, so that you can update your financial models in anticipation of our 2009 and future filing.

You will note that this incremental, non-cash interest expense will impact our historical diluted EPS by $0.03, $0.13 and $0.05 for the year ended December 31, 2006, 2007 and 2008, respectively. The fluctuation between years is primarily driven by the level of capitalized interest recorded each year due to our construction programs.

Lastly, please note that the 2009 forward earnings guidance and the pro forma run rate information that we have provided in our press release this morning already includes this incremental non-cash interest expense.

Moving to our forward guidance, but before I do review that, I would like to highlight a few key assumptions included in these figures. First, let's review our projected fleet complements by vessel type for 2009.

Because of the incremental contributions from our 2008 and 2009 new vessel deliveries under our ongoing fourth OSV newbuild program, we project to have an average new-generation OSV operating fleet count of 42.9 vessels for the full fiscal year 2009, compared to an average of 36.4 such vessels for the full year 2008, a year-over-year increase of 6.5 vessels, or roughly 18%.

Our MPSV program is currently expected to deliver an average operating fleet compliment of approximately 2.1 of those high-end vessels for the full year 2009, versus only one quarter contribution for one such vessel for 2008.

As I have said earlier, we only have one conventional OSV included in our projected revenues for all of '09 compare to our 2008 actual results which reflected in average conventional fleet count of 8.2 conventional OSVs.

Our active tugs and tank barge fleet for 2009 will be comprised of all nine of our double-hulled barges and an average of only about 3 of our single single-hulled largest operating for the full year versus last year where we had an average active operating fleet of our double-hulled barges plus about 8.4 single-hulled barges working for all of fiscal '08. Secondly, while our projected fleet wide average OSV day rate guidance for 2009 is still expected to be roughly in line with our 2008 guidance range of 20,000 to 22,000 a day we will give there a little differently. In 2009, we have two general trends that are roughly offsetting each other.

Our leading hedge 2009 spot rates for our 200 and 220 class new generation vessels are expected to decrease year-over-year by a good debt. But this unfavorable revenue variance were un-contracted days but this unfavorable revenue variance is being counter balanced with higher average contracted day rates for our larger new build vessels as they have projected to come online.

Third as I mentioned earlier, we are projecting cash OpEx for vessel data to be basically flat but we will experience an absolute increase in our year-over-year vessel OpEx mainly due to higher cost associated with newly delivered vessel and specialty contracts.

Lastly, all of the amounts included in our 2009 guidance and pro forma run-rate guidance reflect the adoption of APB 14-1 which increases our non-cash interest expense in '09 by approximately $4.8 million or $0.11 per diluted share.

Our annual 2009 guidance as reported this morning we expect total EBITDA for 2009 to range between $230 million and $250 million which is up from our gain on sale and adjusted EBITDA for 2008 of roughly $230 million.

Our Downstream segment is projected to contribute 2009 EBITDA in the range of 10% to 13% of the mid-point of our company-wide 2009 guidance range, which is roughly inline to slightly down from our 2008 Downstream EBITDA of $33 million.

We expect diluted EPS for full year 2009 to range between $3.39 and $3.86 for GAAP as reported purposes. However, after adding back to recently or actually to be adopted APB 14-1 non-cash OID interest expense, adjusted EPS for fiscal '09 is expected to range between $3.50 and $3.97. These latter of two figures are more directly comparable to our 2008 diluted EPS as reported of $4.13 after adjusting for the $0.20 gain on sale.

Pro forma run-rate guidance for EBITDA was -- the pro forma run-rate EBITDA illustration included in the tables of our press release this morning, reflect the assumptions outlined in footnote 11 of that table which among other assumptions includes vessels recently delivered under and or that are currently under construction and conversion one of our active newbuild programs which are four MPSVs and 16 OSVs as those such vessels were in the water as of January 1, 2009.

Based on these assumptions, we are projecting pro forma run-rate EBITDA of between $327 million to $401 million and pro forma adjusted EPS in the range of $4.93 per share to $6.66 per share. This is not intended to represent forward earnings guidance with respect to any specific calendar year, but it 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 2009 which they will not be.

The primary reason for the significant difference between the low-case and the high-case pro forma run-rate EBITDA and adjusted EPS figures is that for the low-case, we have marked-to-market our currently un-contracted OSV fleet for our projected 2009 spot day rate debt by vessel supplier which is lower than was assumed in 2008 and we've reflected the impact of the recent stacking of five conventional OSVs for 2009.

For adjusted EPS purposes both the high and low-cases reflect the impact of the incremental non-cash interest expense related to APB 14-1. So, there is no other way basically the high-case correlates more towards a commercial operating environment more like 2008 and the low-case correlates to a commercial operating environment more like what we expect to have in 2009. Of course when all the boats are in the water by the end of 2010, the market will be whatever it will be for calendar 2011, but these illustrations are intended to give you some reference, of points of reference.

With that, I will turn it back over to Todd.

Todd Hornbeck

Thank you, everyone, I hope you got all that information down and took copies, notes. It's been a good 2008, and just to give you a little update. We are half way through the first quarter now of 2009. Today in our fleet we are about on the new-gen fleet about 95% utilization. Quarter-to-date we are about 92%, but we've had some -- that's including several dry-docking we've been doing in the first quarter. So, still the utilization is still very high within the new-gen fleet as we are halfway through the first quarter.

Operator, I will open it up for questions now.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of James West with Barclays Capital. Please go ahead.

James West – Barclays Capital

Hey, good morning, guys.

Todd Hornbeck

Good morning, James.

James West – Barclays Capital

Todd, you mentioned Brazil earlier, and you guys have been successful in getting into that market last year. I think we've all seen the huge budget announcement they made recently. We know about the rigs that they have tender for, we know that the helicopters, what's the outlook on the supply vessel side, I guess your outlook for tenders, bid, process and awards going forward and how many incremental vessels they might need?

Todd Hornbeck

Well, there is a lot going on in Brazil as you know. And with this recent change in commodity prices and the financial markets, I don't know whether plans will be delayed a little bit, or they will remix how they are going to contract, but there are several contracts for vessels out there right now that we are bidding on.

We are in current negotiations in Brazil. We anticipate maybe four, five more contracts to be lead this year, maybe a possible of external vessels of around 9, 10 additional vessels going into that market.

As you know Petrobras is looking at a big newbuild program for OSVs. That remains to be seen if they are actually going to contract OSVs to be built in that market. As everyone knows, construction costs in Brazil are extremely high.

We have seen construction cost of our due diligence in the market roughly to 30% to 35% higher than what we are building in the US. With that type of build cost, it remains to be seen whether Petrobras is going to go through with the build programs in Brazil and just contract in the open market.

So all of that's going to be weighted through this year, but big market, exciting. But as we always say, we enter markets very cautiously and under the right program contractually and financially before we enter. So we are excited about the market, but we will be cautious as we enter.

James West – Barclays Capital

Okay, that’s helpful, and then just one last question for me if we look at in Mexico that looks like bright spot for 2009. What are your thoughts about incremental vessels going into Mexico?

Todd Hornbeck

Well, we all heard the problem within the reduced production rates in Mexico. They are important to that economy to get the production rates up. We are seeing new rates being been into Mexico and four additional rigs going in now that would translates to some incremental vessels to be charted. Usually on the chartering side, they are looking for new generation equipment but not the real high expect new generation equipment. So the 200 and 220 class type vessels, they are also very active in getting started in doing their deepwater program.

We all know that they have contracted up to four deepwater rigs, two of which are newbuild. They are going to try to do about 20 wells over the next or four years in deepwater and we anticipate be in a big part of that program. They have not left those contracts yet, but they will be coming in the future. I suspect a lot of that will be pushed probably into late 2009 or first 2010 before we see those first contracts come on the open market.

Operator

Thank you. Our next question comes from the line David Wilson with Howard Weil. Please go ahead.

David Wilson – Howard Weil

Good morning, guys.

Todd Hornbeck

Good morning.

David Wilson – Howard Weil

A couple of quick questions on the MPSVs. Any negotiation is going on as far as contracts for the Strongline in the Iron Horse right now? Then also I notice there was a slight increase around 10% of the third quarter to the fourth quarter as far as the total cost for that program. I was just wondering to get the color and reason for that?

Todd Hornbeck

Okay. The first answer to your question is, yes, we are in dialogue for contracts on the Centerline that's the first step or the 370 that arrives here in the next couple of weeks. As you know the Achiever is on charter that's the one we bought from Superior last year and delivered at the end of last year's, she is now on term charter in the Gulf of Mexico deepwater.

And the Centerline, we are talking with various customers in the deepwater and in specialty markets for that vessel, but a lot of interest in that vessel go directly to work. Jim do you want to talk about the differences in the 20?

Jim Harp

Sure. I would say that figure is kind of comprised of probably three different general categories roughly, third of that will be somewhere would be true up on our foreign currency exchange, calculations on the boats being built in Holland, we are actually dead-on in terms of the project in euros, but we do had some foreign currency fluctuation there.

Further, of course as you well know it had some delays. And so in each instance when there is delay we have mariners or personnel on Board that are being capitalized to the vessels as it's being ready to service.

In fact truing up or accruing. Those would otherwise will be operating cost if the boats have been delivered, capitalized to the vessel. So there is any time delay there is delay, there is a corresponding incremental accrual for that time of soft cost, if you will, to get allocated to the vessel.

And then I would say the third general bucket is certainly with the respect to the Centerline, as you know we had it down in the Gulf Coast and was being ready for commissioning in final service and there were some additional costs related to that process. So those will be the general three categories.

David Wilson – Howard Weil

Okay. But again, Todd on the Strongline, Iron Horse as far as your contract negotiations for those being delivered at the end of this year, do you think going on to that front?

Todd Hornbeck

Yes, when we are looking at these deepwater projects not only in the Gulf of Mexico, especially these installation projects, they are all around the world. Of course those are at very long lead times, what we have seen as you probably have seen in the lot of the equipment building area whether it's rigs or spars or TLPs or supply vessels, these things have been shifting to the right, so we are bidding and looking at contracts, specific contracts in the installation and subsea market that will be coming in '010 or the end of '09, in '010 that wouldn't start until that timeframe.

So, we're trying to slate those vessels in position, those vessels for contract opportunities either domestically or foreign for all those huge installations that will be going in around the world.

Operator

Thank you. Our next question comes from the line of Chris Glisten with Simmons & Company. Please go ahead.

Chris Glisten – Simmons & Company

Yeah, thanks. Good morning.

Todd Hornbeck

Good morning

Chris Glisten – Simmons & Company

Quick questions on looking at the spot market, and specifically the 20220 vessels do you have been more specific in terms of what you are kind of looking at for a year-over-year decrease for spot rates say at the end of 2009 versus where we are now?

Todd Hornbeck

As you know we had some pretty high rates for those types of vessels in 2008, but currently our average pricing, we have about 22 of those vessels in our fleet is still around the $18,000/$19,000 range for the average and that's bleed off from last year.

And as they roll, that will come in. We think it's going to be mid to high-teens, it is where will be with that fleet by the mid year or if things don't change by the end of the year. But we still have some bleed off contracts that will last through midyear this year and in some into the third quarter.

So we will keep that average day rate up in the high teens. But the leading will be mid=-teens.

Chris Glisten – Simmons & Company

Okay. And then switching to the larger new-gen boats, with and estimated increase in average contract day rates, how does that relate to and what we expect in terms of I think estimates are for about 30 boats coming on in 2009. As we go forward, do you see kind of further pricing pressures as you try and gain more contracts are you going to keep it on spot, we are going to see an actual decline there, just wondering if you could give some color there.

Todd Hornbeck

Well, the larger vessels as you know in our fleet are primarily contracted, we may have a few roll off contracts to go to new contracts. But by and large our 240s and 265s and larger contracts are set.

So it's going to be strictly dependent on the project whether it's a long-tern ultra deepwater project, or whether we are going to another market that's going dictate what type of pricing pressure we get.

We entered just the spot market for 15 to 20-day vessel charter there sure will be some pricing fluctuations there. But we are seeing higher the higher quality type equipment or the higher more sophisticated equipment or larger equipment holding the rates pretty well.

Operator

Thank you. Our next question comes from the line of Daniel Burke with Johnson Rice. Please go ahead.

Daniel Burke – Johnson Rice

Good morning, guys.

Todd Hornbeck

Good morning.

Daniel Burke – Johnson Rice

Todd, you gave us majority of the American markets you mentioned you think are international footprint, what you guys thinking on gutter core markets outside of the America. How do they factor in?

Todd Hornbeck

Well, it's going to remain to be seen in gutter, that market traditionally has had equipment that has not been high spec, we have two Super 200s there right now. And with this fluctuation in commodity prices and maybe availability of equipment in that area, we will see if they stay.

I don't see much growth in that market right now for us as we have seen the North Sea markets falling off pretty good, and so there is some high spec equipment there that maybe more competitive than we can be.

Daniel Burke – Johnson Rice

Okay, fair enough. And then Jim, just one or two shorter ones for you just for modeling purposes for me. Can you show utilization on the conventional OSVs for the fourth quarter and then also address what the amount was on the escrow account on the achiever and in the year?

Jim Harp

The first question to clarify what you are asking for, what was the utilization on the conventional boats for the fourth quarter, or what is expected to be this quarter for the one that's working?

Daniel Burke – Johnson Rice

For the fourth quarter, you've given the day rate. I know it's pretty non-core. I was curious if you had a utilization on.

Jim Harp

Hold on, one second.

Todd Hornbeck

It was around 88%. The nominal day rate was 11, 3 at 88% utilization. for effective day rate of 9900.

Daniel Burke – Johnson Rice

Thank you.

Jim Harp

Vessels.

Daniel Burke – Johnson Rice

Okay. In the gross side do you have that available or you making that available?

Todd Hornbeck

I don’t know. If we know what's you are talking, we had our --

Jim Harp

$8 million we already drew and that’s we're still holding. But the way it works is you work through the -- we can file our final claim to bankruptcy quarter court until the contract in March 31.

Daniel Burke – Johnson Rice

I see, okay, so.

Jim Harp

We will be reporting a fairly robust coverage on that in our 10-K which will be filed on or before March 1. But the charter she is now has nothing to do with the existing charter. This is a new charter that she is on currently today.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Jud Bailey with Jefferies & Company. Please go ahead.

Jud Bailey – Jefferies & Company

Thank you. Good morning. Jim I wanted to clarify your comments earlier on the guidance. Did you say the low-end somewhat represents a case you think may materialize in the high-end is somewhat similar to the conditions that we saw in 2008?

Jim Harp

No, the high-end.

Jud Bailey – Jefferies & Company

I am sorry, the high-end would be similar what you saw in 2008 but the low-end is something that you based on what you are seeing today is maybe represented of what you think may materialize?

Jim Harp

Well, I said was when you look at the footnote of 11, it drives to particulate that the revenue portion of the pro forma illustration is fundamentally based on '08 market for the high case, and the revenue for the low illustration is based on 2009 expected day rate environment.

Now, that's not guidance for any particular calendar purpose, it just a pro forma illustration. But to clarify the point is, yeah, the illustration is grounded in a '08 day rate environment and that's the high end. The low case is grounded and expected '09 day rate environment.

Jud Bailey – Jefferies & Company

Okay.

Todd Hornbeck

I think that there is a lot of other variables. Now in both cases, we essentially used the current and most conservative cost structure in both instances so that those that's given so the main things has been varied there is ultimately what market conditions that you are in.

Jud Bailey – Jefferies & Company

Okay. And my next question is on the Achiever the six-month contract, is that new or did that start in November, or is that new contact.

Todd Hornbeck

Is started in February.

Jud Bailey – Jefferies & Company

Started in February? Okay, its six months from February, okay. That’s all I have.

Todd Hornbeck

With options.

Operator

Thank you. Our next question comes from the line of Dan Boyd with Goldman Sachs. Please go ahead.

Dan Boyd – Goldman Sachs

Hi, thanks. Yeah, the question on your cost guidance for basically flat operating expect from per vessel day, but as you mentioned some of the vessel that you brining in actually have a higher per day vessel cost. So what level of underlying deflation are you embedding in those assumptions, if any?

Todd Hornbeck

Not a deflation what we are doing is holding the line on cost and so if I would take our fleet and break it down in to buckets and you took a fleet compliment that is all of the vessels that operated for all of '08 and all of '09 base fleet.

You would find that it’s flat like 1.1% increase, it is just flat. The reference to the higher operating costs for larger vessels of course as our fleet complement changes the average – the D&A of our average blended fleet gets larger than obviously in nominal terms our average OpEx goes up commensurately but on the same-store sales concept that doesn’t play in.

The reference to contracts related costs again have to do with the mobilization to get in position for specialty long-term contracts, they could do with higher personnel complements for a specific specialty service contract for multiyear charter, but the point is that those are not analogous to if you will cost inflations.

They are more directly related to specific contracts, which carry with them a much higher day rates and we've factored in when we did the day rates. The main message there was to try to convey that if you talk about just general oilfield inflationary trends, we're seeing its flat, same-store sales.

Dan Boyd – Goldman Sachs

Got you, so then if we think about that on the same-store sales basis, what you actually report could show per day vessel operating cost going higher, but that's more due to a mix and what vessels you actually have working.

Todd Hornbeck

That is correct. I wanted to convey that both of those themes to get the point cross. When you see nominal creep up in OpEx is not because we are raising labor wages or this or that where that will have to do with the later.

Operator

Thank you and your last question comes from the line of Mark Brown with Pritchard Capital. Please go ahead.

Mark Brown – Pritchard Capital

Hi, in your guidance do have any, MPSV assumptions that you can share with us in terms of day rates utilization or class, I know you referenced a 100,000 a day for the Achiever, but in terms of your run rate pro forma guidance.

Todd Hornbeck

Our guidance is the same as it's always been since we initiated for the last couple of years.

Mark Brown – Pritchard Capital

Okay, okay. And I was wondering just what percent of our OSV fleets is working in non-drilling applications, and do you expect any seasonal pick up in construction, or are you seeing a pretty good backlog of hurricane related work?

Todd Hornbeck

Well, probably around 20% of our vessels are working in non-oilfield related are not oilfield-related, but specialty for non-oilfield related. On the hurricane it remains to be seen on the hurricane repair work the commodity price coming down so shortly from last year.

We had a huge delay in doing that work as a result of the lessons learned from Katrina and Rita, and we are anticipating that this construction season be a little bit more robust than we have seen in previous years.

But overlay the commodity price, I don't know exactly how to gauge that right now. We are in hopes that it will be robust. And some of that may be driven by regulatory bodies like the MMS requiring work to be done that might otherwise be postponed. So it's a $64 million question right now.

Operator

Thank you. And at this time, I would like to turn the call back over to Mr. Hornbeck. Please continue.

Todd Hornbeck

I would like to thank everyone for joining us for our fourth quarter conference call. And we look forward to talking to you in 90 days. Thank you.

Operator

Ladies and gentlemen this does concludes the Hornbeck Offshore Services fourth quarter conference call. This conference will be available for replay after 12 PM Eastern Standard Time today through February 26th at midnight. You may access the replay system at anytime by dialing 303-590-3000 and entering the access code 11125949#.

Thank you for your participation. And at this time, you may now disconnect.

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Source: Hornbeck Offshore Services, Inc. Q4 2008 Earnings Call Transcript
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