Ken Dennard - Investor Relations, DRG&E
Todd M. Hornbeck - Chairman, President, and Chief Executive Officer
James O. Harp - Executive Vice President and Chief Financial Officer
Judson E. Bailey - Jefferies & Company, Inc.
Chris Glisten - Simmons & Company
Mark W. Brown - Pritchard Capital Partners
Hornbeck Offshore Services, Inc. (HOS) Q1 2009 Earnings Call April 30, 2009 10:00 AM ET
Ladies and Gentlemen, thank you for standing by. And welcome to the Hornbeck Offshore Services' First Quarter Earnings Conference Call. At this time all participant are in a listen-only mode. Later we'll conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder this is call is being recorded today Thursday April 30, 2009.
And now I would like to turn the conference over to Mr. Ken Dennard with DRG&E. Please go ahead.
Thank you, Patty and good morning everyone. We appreciate you joining us for Hornbeck Offshore's conference call to review the first quarter 2009 results. We'd also like to welcome our Internet participants listening to the call over the web.
Please note that information reported on this call speaks only as of today April 30, 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 certain future matters including the company's actual future performance to be materially different from which that is projected today.
In the 2008 10-K and in today's press release announcing the earnings, you can locate additional information about factors that could cause the results to materially differ from those projected in the forward-looking statements.
Hornbeck's Form 10-K and today's press release are located under the Investor Relations/SEC filings section of the website, and that website address is www.hornbeckoffshore.com, and are also available through the SEC's 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.
Also as a reminder, last quarter the company has renamed its' two business segments, the OSV and TTB segments are now refer to as 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 M. Hornbeck
Thank you, Ken and good morning everyone. Welcome to our first quarter 2009 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 first quarter 2009 financial results, provide a brief overview of our current market conditions and update you on our new built programs. After reviewing these matters, Jim and I would be available for questions.
When we last met, I laid out for you the areas upon which our team is focusing on during 2009; securing quality contracts for our assets, completion of our newbuild schedule for delivery this year, excellence in service delivery and cost control. The results that we've announced today indicate progress by our team on all of these priorities.
Overall, the first quarter of 2009 was solid in a market that has continued to soften due to the prevailing economic conditions. Nevertheless, the long-term fundamentals at play in our core new generation upstream business continues to be sound. We maintained an average new generation utilization in the mid to low 90% range during the quarter and an average new generation day rates of about $23,000 per day.
Results such as these, indicate our deepwater focus, mitigates the impact of a declining market that hit shallow water regions more quickly and dramatically. While it is natural to ask whether day rates and utilization will hold at current levels, the better question to ask is whether in this or any market our assets are in a better position to compete for the best available jobs.
We believe the answer is yes; in fact our forward contract coverage for our new generation OSVs is 51% of days available for the last three quarters of 2009, which represents roughly 60% of our projected new generation OSV revenues for the remainder of this year.
In addition, we already have 27% of our new generation OSV vessel days representing 36% of our projected revenue for such vessels contracted for fiscal 2010. We fully expect to further grow this backlog and our actively pursuing multi-year contracts in the Gulf of Mexico, Latin America and with the military.
We are continuing to see a number of good opportunities in Mexico and Brazil at attractive rates, which we have pursued as part of our strategic plan to further our commitment in those markets, which have significant deepwater prospects.
Although good quality contracts for our premium assets are available, as can be expected, customers are seeking ways to reduce their cost and are putting pressure on our rates. This is especially evident in our 200 and 220 class vessels, where we expect to see the most volatility up and down on rates. For example, we recently mobilized three vessels back to the Gulf of Mexico from Trinidad that rolled off contracts at the end of the quarter at day rates that were fixed, while in Trinidad, just a few months ago at substantially higher day rates than are available in the Gulf of Mexico for such vessels today.
In this kind of a transitory environment, we may consider sacrificing utilization rather than compromising on our commitment to secure quality contracts for assets.
Another area focus showing progress in our vessel -- is in our vessel construction program. During the quarter, we placed in service under long-term contracts three of the seven newbuild OSVs that have scheduled for delivery this year. The remaining four vessels are on track to join our operating fleet later this year.
We also delivered and placed in to service the HOS Centerline our first HOS 370 class MPSV. This remarkable vessel represents a major step in our commitments offering marine solutions to our customers that are -- that's unlike anything else available in the market place today.
The Centerline's first job illustrates this point very well. The vessel arrived on location at a deepwater rig during heavy seas in a challenging weather condition. Unlike, other vessels also on locations that we required to periodically stand down for weather, the HOS Centerline engaged in continuous dynamic position operations for several days.
From the customers' perspective, this translated into an uninterrupted drilling operation that continue to -- dictated by the rig and not the weather or sea state that often limit vessel cargo operations.
In a drilling environment in which freight cost can exceed over a million dollars per day for the customer uninterrupted vessel services creates significant customer value. I want to personally congratulate everyone on the Hornbeck team that works so hard to make the HOS 370 vision a reality.
We are extremely proud of this accomplishment. The innovations embodied in the HOS 370 are now proving their value in the marketplace. The HOS Centerline has now joined the HOS Achiever in our MPSV fleet working in the Gulf of Mexico. These vessels are the first two classes of MPSVs. We expect to take delivery of their respected sister vessels during the fourth quarter of this year.
Before I turn the call over to Jim to take you through the numbers and further detail, I want to stress that we remain very focused on cost control and improving our business processes, so as to achieve better operating efficiencies.
In addition, on a regular basis, we review our liquidity and believe that we have sufficient cash on hand and available revolver capacity to meet all of our operating cash needs and growth commitments.
At this time, I'd look turn the call over to Jim to review our first quarter financial results.
James O. Harp
Thanks, Todd. Good morning everyone. As Todd mentioned, we had another solid quarter in spite of the economic challenges we continue to face and we believe that we are ready for whatever obstacles that may lie ahead.
Our first quarter 2009, diluted earnings per share were $1.01 per share or 20% higher than the year ago quarter on a weighted average share count of roughly 26.8 million diluted share. Our first quarter EBITDA was $60.3 million. Adjusted EBITDA which is the starting point of the pro forma adjustments that we use to compute ratios for the financial covenants of our revolving credit agreement was $63.1 million for the first quarter of '09.
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 segment and data, starting with the upstream, upstream revenue grew 34% over the year ago quarter on the strength of our effective day rates increasing by $2100.
Our new gen OSV average day rates, which were around 23,000 were favorably impacted by our average fleet growth by 5.6 vessels, all of which were larger in size than our previous average and long -- and strong spot market day rates for four vessels working internationally during the first quarter of '09.
However, we did experience a $2,000 sequential decrease in effective day rates primarily for the two reasons we discussed on our last call. First, as expected, our utilization declined from 96% to 93%, nearly all of these 3 points drop is explained by our having 91 incremental days out of service for schedule drydock activity on our new gen OSVs.
The second reason is that the spot market day rates in the GoM had trended lower, particularly for our 200 and 220 class vessels, which we reported on our last call as well.
Upstream segment operating margins were 49% for the first quarter compared to 53% for the sequential period and 43% for the year ago period. The sequential margin decrease was due to a decline in our effective OSV day rates. The year-over-year increase in upstream operating margin was primarily due to the favorable impact of a full quarter contribution of the HOS Achiever in the first quarter of '09, which was placed in service since the end of last year -- the first quarter of '08.
Moving into our downstream, soft market conditions persist for our downstream segment, until recently, the macro economic demand drivers have had the most effect on our single-hulled equipment. However, the severity and length of the current economic downturn has increasingly impacted the demand for our double-hulled tonnage, particularly our black-oil equipment, the demand for which is also being adversely effected by low natural gas prices.
Downstream segment revenue for the first quarter of '09 was lower by approximately 10% sequentially and 37% compared to the prior year quarter. In response to this weak demand for our TTB equipment, six single-hulled tank barges and three older lower-horsepower tugs remains stack as of March 31, and we have since then stacked one additional single single-hulled tank barge and one additional older tug since the end of the quarter.
Our active -- therefore, our active downstream fleet is now comprised of our nine double-hulled barges and a few single-hulled barges supported by an approximate one-to-one tug to barge ratio.
As a result of continued uncertainty in this segment, this morning, we lowered and widened our 2009 guidance range for this segment. Our downstream business is now projected to contribute 2009 EBITDA in the range of 6 to 10 % of the midpoint of our company-wide 2009 guidance range.
One final note on the downstream business, we recorded a small gain during the quarter for the sale of our smallest tug, the Stapleton Service, which resulted a net cash proceeds of just over 900 grands. We continue to market our -- for sales our remaining single-hulled tank barges and all the older lower horsepower tugs.
Moving into operating cost, on a segmented basis, our cash OpEx for the first quarter of '09 was $29 million with the upstream segment and $11.6 million for the downstream segment. As Todd mentioned, we are keenly focused on cost containment at all levels within our organization.
Consequently, we expect to manage cost, cash operating expenses per vessel day for fiscal 2009 to remain in line with fiscal 2008 levels.
Moving on to overhead, our first quarter G&A expenses of 8.8 million were 8% of revenues, which is below our 2009 guidance range and the historical industry average of our peers of 9 to 10% of revenues.
G&A cost for the quarter were allocated roughly 80-20 between the upstream and downstream fleets. For 2009, we expect G&A to remain in the range of 9 to 10% of revenues.
We'll now review some of our key balance sheet items, related items for the first quarter. We continue to closely monitor the financial markets and we remain confident in our current financial position, 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 sufficient to address our operating cash needs, complete our remaining newbuild programs and meet all of our other commitments.
As of March 31, 2009, we had total cash and cash equivalents of about $21 million, our total debt was 646 million and our book equity was 765 million. Note that our total book debt and equity balances have been adjusted to reflect our recent abduction of APB 14-1, which resulted in a decrease to book debt in the form of OID or original issue discount and an increase in book equity.
For those of you, who may have missed it earlier this week, Moody's investor service issued a rating action on our company on Tuesday. We are pleased to report that Moody's not only reaffirmed our Ba3 Corporate Family rating and the Ba3 issue rating on our senior unsecured notes. But more importantly, changed our outlook from negative to stable.
Our S&P senior unsecured bond rating remains unchanged at double-'B'-minus, also with a stable outlook.
The balance on our revolving credit facility was 150 million at quarter end. Since that time, we have drawn an additional 10 million. With the total amount outstanding under our credit facility of 160 million, we have approximately 90 million of remaining borrowing capacity under our revolver as of today, plus our $20 million cash position.
We are currently paying a blended average cash coupon of about 3.5% on our 710 million face value of our total debt, which results in an annual run rate of cash interest expense of only 25 million for the entire company.
Our overall growth CapEx budget for our two active programs remains at around 925 million in line with our guidance last quarter, of which we have already paid 731 million or roughly 80% through March 2009. The remaining construction cost related to our MPSV program and our fourth OSV newbuild program of approximately 194 million is expected to be paid over the next two years with about 158 million of that figure to be incurred during the remainder of 2009 and 36 million in calendar 2010.
While we have not increased the aggregate CapEx budgets for these projects since our last call, the extend 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 asset, shipyards schedules and the timing of construction milestones.
Last quarter, we reported that the high point of our aggregate construction cycle was expected to result at a peak draw under our revolving credit facility in mid to late 2009 of somewhere between 150 and $175 million. While that may still be achievable in recognition of continued weak market conditions in our downstream segment, normal fluctuations and working capital and a recent $5.5 million shift in the expected timing of 2010 shipyard milestone payments into 2009, it is possible that we may need to draw above the high end of that guidance range we discussed on our last call.
However, in any event based on our current market assumptions and no further asset sales, we still project that by the end of 2010, we will have repaid our revolving credit facility in full with an expected cash position of approximately $20 million.
Moving into our drydock activity, for the full year 2009, we plan to drydock 13 new generation OSVs and two conventional OSVs covering about 388 days out-of-service.
During the first, quarter we drydock 6 new generation OSVs and one conventional OSVs for a total project cost of $7.8 million, of which $3.3 million was spent in the first quarter and $4.5 million is expected to be incurred during the second quarter.
During the second quarter, we expect to drydock three additional new generation OSVs at a total project cost of 3.4 million, of which we anticipate spending 1.6 million in the second quarter. The projected second quarter drydockings along with the 6 OSV drydockings that occurred during the first quarter represent roughly 253 days of downtime for the first half of the year or about 65% of our 2009 projected days out of service.
Our total projected drydocking cost for 2009 are estimated to be around 16.1 million for the upstream fleet, 11.2 million of which will be incurred during the first half of the year. For our downstream fleet, assuming no further stacking of vessels, we plan to drydock only one single-hulled barge and five tugs in calendar 2009.
During the first quarter of '09, we drydock two tugs at an estimated total project cost of $1 million. We do not plan to drydock any TTB vessels during the second quarter.
For fiscal 2009, we projected total drydock cost of around 4.5 million for the downstream fleet. Note that within -- note that with the growth of our upstream fleet, we expect annual maintenance CapEx including our deferred drydocking charges to trend higher from the current range of 33 million in '09 to somewhere in the range of 40 to 50 million over the next couple of years beyond 2009.
One final note on APB 14-1, as we reported in our last call, we adopted a new accounting rule APB 14-1 on January 1, 2009, which has materially impacted the GAAP treatment of our convertible senior notes but we'll not effect their economic substance. Their cash coupon remains at 158%.
This new rule requires us to record incremental non-cash interest expense computed as the difference between a non-convertible bond rate of 7 1/8 at the date of issue and our actual cash coupon of 1 5/8.
The offset of this incremental interest expense is roughly 75 million of imputed OID at inception, which is being record and amortized through interest expense over the 7-year of first call period.
This rule resulted in a retrospective and prospective increase to non-cash interest expense with a corresponding decrease in book debt in the form of OID, and an increase in book equity, and an increase in our deferred tax liability. This rule requires retrospective application and therefore the APB 14-1 adjustments are included in our sequential and year ago quarterly results.
You will note that APB 14-1 net of capitalized interest impacted each of our fourth quarter '08, our first quarter '08 and our first quarter '09, diluted EPS amounts by $0.02.
Lastly, please note that the 2009 forward earnings guidance and pro forma run rate information that we provided in our press release this morning includes these incremental non-cash interest expense amounts. At some point, we plan to post full reconciliation of the effects of this new rule on our accounting on our website.
I will now review our annual 2009 forward-looking guidance. This morning, we reaffirmed our annual EBITDA guidance for the full year 2009 of 230 to $250 million and our diluted EPS guidance of $3.39 to $3.86. Excluding the recently adopted APB 14-1, non-cash OID interest expense adjusted EPS for fiscal 2009 is expected to range between $3.50 and $3.97.
The pro forma run rate EBITDA illustration included in the tables of our press release this morning reflects the low and high case assumptions outlined in footnote 11 to that table, which among other assumptions includes a full-year run rate contribution from our two growth initiatives, which are comprised of foreign MSPV and 16 OSV newbuilds as though such vessels were in service, as our January 1, '09 and January 1, '08 respectively.
Based on these assumptions, we are projecting pro forma run rate EBITDA of between 327 million and 401 million and corresponding pro forma adjusted EPS in the range of $4.93 per share to $6.66 per share.
With that I'll turn it back to Todd for any further comments or to entertain comments.
Todd M. Hornbeck
Thank you, Jim. Now, I'll turn it over for questions now. Thank you.
Thank you. Ladies and gentlemen, at this time we will conduct a question-and-answer session. (Operator Instructions). Our first question comes from the line of Judson Bailey from Jefferies & Company. Please go ahead.
Judson Bailey - Jefferies & Company, Inc.
: Thanks. Good morning. Todd, you mentioned that the rate weakness you're seeing for your 200 and your 220s, I believe on the last call, you thought maybe we would see rates on that type of equipment in the mid-teens, could you update us maybe on your thoughts or what you're seeing for that type of vessel in the Gulf of Mexico now?
Yes. Today, our average if we took our 21200 class average, we're in the mid-teens. So, that's 15 to $16,000 a day and that's where we are today. Now, I just want to give you an update because I usually update you from what our current leading edge rate sheet looks like today or utilization.
Currently today, we have 4 OSVs and drydock, and we have five OSVs that are off today. With three of those OSVs that are off have pending jobs that are already committed.
So, that would leave us about two floating in the market. And we're seeing a lot of inquiries in activity as construction season will start now. And we anticipate that even though we'll have softness in the 200 rates that the utilization which should start to come back.
Most to-date right now we're around 85% because we've had such so many vessels and drydock, and that should start to increase. But this is like I said it's a transitory market, the lower-end is a little sloppy because of the gas market, but we expect that construction season will start soaking up some tonnage.
Judson Bailey - Jefferies & Company, Inc.
Okay. And my follow-up is like you mentioned you're seeing a seasonal increase now and that you brought some vessels back from Canada, are there other vessels out there, not necessarily yours, but other vessels working internationally, that may have to come back to the Gulf of Mexico and could that have a material impact on the summer season?
No, I don't think so. I think that was a very unique situation that transpired there. And I expect more vessels to lead the Gulf of Mexico. We have as we've told you; we are bidding jobs, a lot of jobs outside of the Gulf, that are multi-year long-term jobs, either we will win those contracts or I think if whatever vessels win, the contracts will come from the Gulf of Mexico.
So, I think we'll have a number of vessels throughout the year. I would expect a minimum of ten vessels to lead the Gulf.
Thank you. (Operator Instructions) Our next question comes from the line of Chris Glisten from Simmons & Company. Please go ahead.
Chris Glisten - Simmons & Company
Thanks. Good morning.
Good morning. How're you doing this morning?
Chris Glisten - Simmons & Company
Doing well. Thank you. My first question is can you guys provide us some kind of color and maybe an update as to your perceptions of the opportunities sets, you see in Brazil and Mexico and the timeframe over which that might unfold at this point?
Well, I think its been pretty publicized through Pemex and Petrobras, their intentions of growing their output of production over the next several years. And you see Pemex is picking a number of rigs to increase their production and drilling activity. Their capital budget is probably larger than anyone else today, for 2009 and 2010,
So, that will -- as the rig activity increases there, we'll see board activity increase, which those vessels will come from the Gulf, we fully expect. And in Brazil, they're calling for not only all the deepwater activity, but a big, big ramp-up over the next couple of years, and we're starting to see that now.
There is several tenders that are public knowledge, that are on the street, that all the companies around are bidding. We are one and those vessels will come from foreign markets to Brazil, including Gulf of Mexico, North Sea, and other areas around the world.
Chris Glisten - Simmons & Company
Okay. And then looking at kind of as you expand your contract coverage for both the rest of this year and 2010, do you have -- I guess an internal goal as to spot versus contract of 50-50, is that still kind of the case or are you leaning more towards longer-term contracts at this point?
Well, we started leaning toward longer-term contracts at last year, the middle of last year or even sooner than that, and I think with the type of assets that we have that are high quality assets in this transitory market, we are going to look for the best quality contract and we really believe in the fundamentals.
So, we will not just take long-term contracts to build backlog if we need to, we will -- we'll look at stand in the spot market and waiting till the market comes back because we think earnings power long-term is fair and not really go for long-term contracts at low day rates. We don't believe that's going to be sustainable in the market. The market will comeback in a relatively soon time, maybe within the year.
(Operator Instructions). Our next question comes from the line of Mark Brown from Pritchard Capital. Please go ahead.
Mark Brown - Pritchard Capital Partners
Hey, Todd and Jim. Just wanted to check if you had any details in terms of the Petrobras tender, either timing of when we should expect to hear something out of that or the kind of equipment that that they're looking for?
Well, I think you're going to hear results from Petrobras tenders from now, and there are several tenders that they are trying to get out and you know the tenders can be very difficult with the type of tax laws and the different types of complexities to go into Brazil just like any country hat you enter into a market.
The type of equipment is across the board from our 200 class to our MPSV class and everything in between. Brazil is going to be a big consumer of vessels of all classes and they have made public announcements that they need somewhere in the -- over the next several of years around a 100 vessels into the market. The question remains to be same whether the vessels will be built in Brazil or be brought in from the world market.
We tend to believe that because of the high cost to build equipment in Brazil that the natural progression will be to charter the equipments from the world market and bring into Brazil.
Mark Brown - Pritchard Capital Partners
All right. And on the HOS Centerline, I just wanted to ask if you can talk a little bit about what kinds of opportunities you're looking for? You've mentioned in the past, well flowback, construction, pipeline remediation sort of demonstrating the capabilities initially in terms of what it can do, maybe you could talk about what your next step is for the Centerline?
Well, we've always said that we want this vessel in the spot market in the Gulf of Mexico to be able to do of the widest array of SWOT -- of opportunities that it can perform.
And we have completed our first job in ultra deepwater liquid fluids transfer, one of largest liquid fluids transfers ever done by an OSV in the world. We are now on our second job doing the similar application, which would even be a larger fluids job and its proving up its value in that realm.
We are absolutely talking to opportunities in all of those areas construction, well flowback, pipeline remediation, hurricane remediation and the vessel is being negotiated on all approach right now. But we want to try to do in the first six months of this operation as many different opportunities as we can before we lock-in on upon a long-term opportunity.
And its to be in -- international markets have their eye on the vessel as well. So, we're building the resume of the vessel, proving up the technology, proving up what we set out to do three years ago, which was very innovative, there is nothing else like it in the market and the world, and so far, so good. And we'll give you a progress report 90 days.
Thank you. And I'm sure that we have no further questions at this time. I will hand back to management for any closing remarks.
I want o thanks everyone for joining our conference call. As you can see, we had a very, very good quarter. I think our business model is proving itself in these down markets, while there will be some transitory markets and some slowdown, particularly in the gas market, I think you'll see our type of assets will still produce pretty good returns in margins for our investors. Thank you very much.
And ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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