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Executives

Ken Dennard - Managing Partner of Dennard Rupp Gray & Easterly

Todd Hornbeck - Chairman of the Board, President, Chief Executive Officer

James Harp - Chief Financial Officer, Executive Vice President

Analysts

James West - Barclays

David Smith - Johnson Rice

Jeffrey Spittel - Global Hunter Securities

John Donald - Howard Weil

Greg Lewis - Credit Suisse

Mark Brown - Citigroup

Jeff Tillery - Tudor, Pickering, Holt

Brad Bays - Trinity Capital Management

Trey Stolz - Iberia Capital Partners

Adam France - 1492 Capital

Hornbeck Offshore Services, Inc. (HOS) Q12013 Earnings Call May 2, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Hornbeck Offshore's first-quarter earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions, and instructions will be given at that time. Today's conference is being recorded May 2, 2013.

I would now like to turn the conference over to Ken Dennard. Please go ahead.

Ken Dennard

Thanks, Alicia. Good morning, everyone. We appreciate you joining us for Hornbeck Offshore's conference call to review first quarter 2013 results and recent developments. We also welcome the internet participants listening to the call over the web.

Please note that information reported on the call today speaks only as of today, May 2, 2013 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. During today's 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.

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. You can locate additional information about the factors that could cause the company's results to materially differ from those projected in the forward-looking statements in Hornbeck's SEC filings and in yesterday's press release under the Investor Relations section of the company's website, www.hornbeckoffshore.com, and through the SEC website at www.sec.gov.

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 yesterday. Thank you.

And filing, the company uses its website as a means of disclosing material nonpublic information and for complying with disclosure obligations under SEC regulation FD. Such disclosures will be included in the company's website under the heading investors/IR home. Accordingly, investors should monitor that portion of the company's website in addition to following the company's press releases, SEC filings, public conference calls and webcasts.

Now with that behind me, I would like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd?

Todd Hornbeck

Thank you, Kim. Good morning and welcome to our first quarter 2013 earnings conference call. With me this morning is Mr. Jim Harp, CFO. Today we are going to review our quarterly results and provide you an update on market conditions and our strategic initiatives. Jim, as usual, will take you through the numbers in greater detail after I finish the intro here.

As reported yesterday afternoon, the company had a very solid first quarter. Revenue growth came from all four corners of our business, but most notably our upstream high spec OSVs and our MPSV fleet both of which saw strong utilization and dayrate expansion. I am pleased to add that our downstream segment also contributed to the quarterly revenue growth finishing the quarter with fleetwide effective dayrates on par with the rates we have last seen in 2008.

A combination of strong revenues and stable operating expenses drove our operating margin to 32% which we believe is one of the best in the industry. Excluding a $24 million loss on early extinguishment of debt, our EBITDA was $70 million for the quarter while EPS came in at $0.59.

So across the board, a solid quarter for the company but as we have always said many times before, our business can be volatile and be easily affected by things outside our control. Mindful of that volatility, we remain focused on being students of the market so that we can seek to capture charter opportunities that position the company for long-term success, always looking for ways to control costs in a high-cost environment and of course to deliver safe and environmentally sound services to our customers.

Certainly the first quarter saw a continuation of the overall trend in the Gulf of Mexico market conditions that we have seen and have been sharing with you each quarter since the fall of 2011. Our bullish market view remains unchanged. We continue to see sustained strength for the deepwater Gulf of Mexico. If anything demand drivers are growing.

By our count there are 37 floaters working in the Gulf of Mexico today, up from 33 when we last reported. We expect further growth in domestic demand drivers this year to as many as 42 working units. It's possible that we could have more than 54 deepwater floaters in the Gulf of Mexico in 2014 and according to some industry analysts, this number could reach 65 by 2015.

Another important development that we are seeing in the Gulf of Mexico lately is the number of rigs, contract fixtures, by independent oil companies. The conventional wisdom in the immediate aftermath of Macondo was that the significant increase in risk profile and regulatory requirements, could tilt the Gulf of Mexico in favor of the major oil companies. Basically it has done that. But over the past month or so we have seen announcements for five deepwater floaters by independents indicating that this important pre-Macondo segment of the market is now prepared to invest again in deepwater Gulf of Mexico exploration activity, which adds to demand and provides customer diversity to service companies like Hornbeck.

All of these market conditions are reflected so far in the second quarter in which we are seeing a continuation of the high utilization and improved dayrates for our high spec OSVs. Utilization during the first quarter was about 99% for this equipment and average dayrates improved by about $1,900 per day. Today, utilization for high spec fleet remains in the high 90s. Leading-edge spot dayrates continue to be in the $38,000 to $45,000 range for our 240s to 265 class vessels, which is about $12 to $15 per deadweight ton.

Applying these per unit spot metrics to the HOSMAX 300 class vessels that we have under construction with deadweight capacities between 5,500 and 6,200 deadweight tons, that would imply, based on just linear math, a difference pricing point for spot charters in the range of $65,000 to $80,000 per day. We can also see term contracts for high spec OSVs going in $8 to $10 per deadweight ton range.

Another development we are seeing in the Gulf of Mexico is the slight strengthening of demand for our DP-1 vessels. We saw utilization improvement for this class of vessel in our fleet during the latter part of the first quarter reaching 90% for the month of March. The improve utilization we are seeing may provide an opportunity to increase dayrates as seasonal construction activity picks up. However, the DP-1 market is different from the high spec market and is subject to significant unevenness on contracting activity.

Despite the favorable long-term drivers we have in the Gulf of Mexico, it is important to keep in mind that we will likely experience some transitory periods in which supply and demand drivers are not synchronized. This is particularly true for periods in which new drilling rigs or units are arriving or vessels are being delivered from the shipyard.

For an example, in the third quarter we foresee the possibility of some timing differences as incremental new build OSVs are expected to be delivered into the market by our competitors and by us. The commissioning of newly arrived drilling units takes time and we could see a temporary period of mismatched supply and demand especially during hurricane season. That isn’t anything new. However, except that the scale of the transition will be larger given the number of drilling units coming into the market as discussed above and the number of vessels we expect to see coming into the market. Roughly 21 vessels between now and the end of the year including five of ours and also included in that number is the stretch programs that are going on that I will talk about a little bit later. Our stretch program plus some competitor stretch programs as well.

The important thing to remember in all of this is that the transition is toward another step up in activity not a step down. Internationally, we are as announced last quarter preparing to redeploy four vessels upon completion of their contract with Petrobras this summer. We are currently offering those vessels for work in Brazil, other international markets and in the Gulf of Mexico. In addition, we were recently awarded a long-term extension for one of our 200 class vessels working in Mexico and expect to be awarded long-term contract renewals for two additional 200 class vessels in that market in the coming days.

All three of these vessels are expected to continue working for PEMEX and improve dayrates. We continue to see Mexico as a real opportunity for future deepwater expansion if the political process there can find a way for PEMEX to untap the rather considerable deepwater potential of that country.

Our MPSVs turned another strong quarter with 95% utilization. Our current backlog is 77% for the remainder of 2013 and strong indications that current contracts will be extended for additional periods. Effective dayrates four our MPSVs were up roughly $25,000 over the fourth quarter.

The HOS ACHIEVER, one of our T22 class MPSVs has been working on spot contract and flotel services for a major deepwater customer in the Gulf of Mexico and that charter was recent recently expanded. The HOS ACHIEVER is expected to undergo a scheduled drydocking this fall followed by a period of extensive outfitting for yet another flotel charter scheduled to commence in the early next year.

The HOS IRON HORSE, our other T22 vessel remains a long-term charter, which concludes about mid to late 2014. Bulk of our 370 class MPSVs were nearly fully utilized during the quarter.

By the time we report next quarter, we expect to have taken delivery of our first HOSMAX 300 class OSV. As we look at the timing and favorable pricing of our newbuild program we feel very good about the first mover advantage we captured and as explained earlier the market expansion. We expect to experience simultaneously with, or shortly following the deliveries of these vessels from the shipyards.

While others have and will certainly continue to announce construction of additional vessels, the fact of the matter is that the market conditions expected for 2014 and 2015 cannot be met with new vessel announcements. Given the relatively limited qualified yard availability and lead reconstruction times for up to two and half years to construct these vessels. We are currently seeking term opportunities for our HOSMAX vessels but regardless of whether they are working on short-term or long-term charters we are confident that market conditions will be favorable for these vessels for the foreseeable future.

As you may recall, last quarter we announced that in addition to building 20 HOSMAX OSVs, we plan to construct up to eight Jones Act qualified MPSVs and that the first two vessels would be based on the HOSMAX 310 design. We have now contracted those vessels with the shipyard and announced our intention yesterday to build two additional MPSVs based on the same design for our current commitment for four such vessels. We are in the final negotiations with shipyards for the latest two vessels and expect to execute definitive agreements in the near future.

As part of our strategy to diversify our newbuild program into Jones Act MPSVs, we have opted not to build any additional HOSMAX 320 vessels with one of our shipyards and have allowed the 22 newbuild options there to expire. Our next newbuild option exercise date with the other yard is now in August of this year for additional HOSMAX 310 OSVs. We will evaluate conditions over the next several months with regard to exercising additional options for OSVs while continuing to explore market opportunities for four more Jones Act MPSVs of various sizes and configurations. We are expecting a significant increase in domestic subsea construction and IRM related market demand for U.S. flag MPSVs, especially in the 2015 to 2017 timeframe.

Now moving over to our stretch program, our retrofit program. It is proceeding nicely and is beginning to bear some fruit. We were recently awarded three year charters for two of our vessels that we have been or are being upgraded from DP-1 to DP-2 class notations. Another of our upgraded DP-2 vessels has been awarded a short-term charter and will go to work immediately upon delivery from the shipyard. We continue to evaluate whether DP-1 vessels in our fleet are good candidates for either DP-2 conversion and/or more strategic disposition.

Before I turn the call over to Jim, I want to comment on a issue that we all heard a lot about during the quarter. The so-called bolt issue. For those of you who may be unfamiliar with the issue, the discovery of a effective bolt on one of the deepwater BOP's led to an industrywide requirement to inspect all BOP's and replace this component if it was present. This required considerable time and due to the long manufacturing lead times for the replacement bolts, it was potentially disruptive to ongoing operations.

First of all, kudos to those of you who astutely called attention to the issue because it demonstrates the need for caution as we sort through all of the news we continue to read about in deepwater drilling markets, not only in the Gulf of Mexico but worldwide. Despite the steady stream of good news especially the recent spat of lower tertiary discoveries in the Gulf of Mexico, we need to remain mindful of how complex this industry has become. Even a simple bolt can make a big difference to a major oil company.

That said, my observation is that for marine service companies forming part of the deepwater logistics change complexity itself may be a demand driver. More fundamentally, when you are hundreds of miles offshore, you can't fix a boat without boat. So as we hear about issues like the bolt problem, in addition to considering its broader negative implications to the energy industry, it is equally important to understand how the problem will get fixed and what companies are in best position to provide that service.

Now let me turn the call over to Jim.

James Harp

Thanks, Todd and good morning to everyone. We posted yet another strong quarter of financial results including all-time record high quarterly revenues for our company. As we continue to build momentum in the current upcycle in each of our two business segments, our successful execution of four major capital markets transactions aggregating nearly $1.4 billion during the last 18 months has expanded our liquidity, lowered our weighted average cost of capital and substantially enhanced our financial flexibility for the long-term.

Our blended average fixed cash coupon for fiscal 2013 is about 3.9% or 140 bps less than a year ago and we have extended the weighted average duration of our long-term funded debt by over five years with maturities now spanning between 2019 and 2021. Our equity offering in 2011 coupled with our three recent opportunistic debt refinancings in 2012 and 2013 have enabled us to strengthen our balance sheet at historically attractive bond pricing as we gear up for the next wave of growth as a company.

Now, let us review the details for the first quarter. As a result of our most recent bond refinancing, we reported a first-quarter loss on early extinguishment of debt of approximately $24.3 million pretax, $15.2 million after-tax, or $0.42 per diluted share. This loss relates to the portion of our 8.5% yield senior notes that were tendered during the first quarter. Excluding the impact of this loss, EBITDA and diluted EPS for the first quarter of 2013 would have been $70.1 million and $0.59 per share, respectively. Please note that an additional loss on early extinguishment of debt of $1.5 million pretax, $900,000 after-tax or $0.03 per diluted share will be reported during the second quarter of 2013. This nominal second quarter loss relates to the remaining portion of our 8% senior notes that will be redeemed post quarter end later this month.

After adjusting for the loss on early extinguishment of debt, our first quarter recurring EBITDA of roughly $70 million was more than $20 million or 40% higher than the comparable EBITDA for the year ago quarter and $15 million, or 27% higher than the sequential quarter largely due to higher effective dayrates for our MPSVs and high spec OSVs operating in the GoM. Our first quarter normalized EPS was $0.59 per diluted share, which was more than double the comparable $0.27 we posted for the year ago quarter and 90% higher sequentially on the same weighted average share count of roughly 36 million diluted shares.

Adjusted EBITDA which is the starting point that we use to compute ratios for the financial covenant and our undrawn revolving credit facility was $74.1 million for the first quarter of 2013. For additional regarding EBITDA and adjusted EBITDA as non-GAAP financial measures, please refer to the data tables in yesterday's earnings release including Note 10.

Moving into our segmented data, beginning with our upstream. Upstream revenue for the first quarter of 2013 was roughly $14 million higher than the sequential quarter primarily due to higher effective dayrates for our two MPSVs operating in the spot market and increased revenue from high spec OSVs operating in the GoM that will reprice at leading-edge spot dayrates during the quarter.

Our operating income grew by nearly 50% to roughly $44 million or 33% of revenues in the current quarter compared to approximately $30 million or 25% of revenues for the sequential quarter. Average new gen OSV dayrates for the first quarter of 2013 were approximately $25,000 which was about $1,100 higher than the fourth quarter of 2012. Utilization for our full fleet of 51 new gen OSVs for the first quarter of 2013 was 87% compared to 84% for the fourth quarter of 2012, which resulted in a roughly $1,600 increase in effective dayrates sequentially. The sequential increase in new gen OSV utilization was largely due to increased demand for the company's high spec OSVs which operated at 99% utilization and, to a lesser extent, fewer days out of service for regulatory drydocking.

During the quarter we elected to delay recertifying one high spec OSV until the second quarter thus increasing our expected downtime due to regulatory drydocking for next quarter to 234 days or roughly 5% of our available days for the new gen OSV for the second quarter. As Todd mentioned earlier, MPSV utilization was 95% for the first quarter of 2013 compared to 88% for the year ago quarter and 80% for the sequential quarter. The sequential increase in the utilization is due to 47 incremental days worked during the current quarter. As discussed on our last call, the fourth quarter of 2012 was negatively impacted by the regulatory drydocking of one of our MPSVs working on a term contract as well as another MPSV that had unanticipated cancellation of a charter while working in the spot market.

Moving into our downstream segment which represents about 10% of our consolidated revenues for the most recent quarter continues to show steady signs of improvement. Our first quarter 2013 results were positively impacted by improved market conditions in our core downstream markets of the Gulf of Mexico in the Northeastern seaboard. Our annualized EBITDA run rate for the downstream segment continues to increase based on leading edge dayrates that are now in line with levels that we have not experienced since 2008.

For example, while our first quarter annualized EBITDA run rate was $28 million, the month of March annualized run rate was $36 million. In addition, our downstream operating margin for the first quarter of 2013 was 24%, up from 3% for the year ago period and up from 19% sequentially. During the quarter we elected to utilize an underwater inspection in lieu of drydocking on one of our larger barges which reduced our expected downtime but roughly 40 days between the first and second quarters. With five of our nine barges scheduled for regulatory drydockings this year, downstream utilization is expected to be in the high 80s to low 90s for fiscal 2013. While the Eagle Ford and Bakken shale trends have favorably driven demand over the past year, we believe that downstream results should continue to improve even further when the U.S. economy rebounds and the timing of which is not predictable.

Moving into operating expenses. Upstream OpEx of $56 million for the first quarter was below our guidance range due to lower than expected maintenance and repair costs and fewer mariners in training riding in our fleet during the first quarter. While the number of trainees in the fleet was less than projected for the first quarter, we expect the incremental mariners in training cost to gradually ramp back up towards the second half of this year. Downstream OpEx of $7 million for the first quarter was also at the low end of our guidance range. Based on first quarter results and after truing up our estimates for the remainder of the year, aggregate cash OpEx for our upstream segment are now projected to be in the range of $246 million to $256 million for fiscal 2013 and for our downstream segment, aggregate cash OpEx are projected to remain in the range of $27 million to $29 million for 2013.

Included in our cash OpEx guidance is the previously mentioned incremental investment in human capital we need to recruit, train and crew our rapidly expanding fleet, commencing with the first 300 class newbuild delivery this June. In addition, our 2013 operating cost projections include roughly $4 million in cost for the likely demobilization of four vessels out of Brazil midyear, not counting the estimated 120 days of aggregate commercial downtime or 30 days each. Consistent with our cash OpEx guidance for prior periods, these estimated ranges are good faith estimates based on best available information as of today and are only intended to cover our currently anticipated geographic footprint, charter mix and industry market conditions.

Moving into overhead or general and administrative expenses. Our first quarter G&A expenses of just under $14 million were about 9% of revenues, compared to just over $12 million or about 9% of revenues for the fourth quarter of 2012. G&A costs for the first quarter were allocated 93% to the upstream fleet and 7% to the downstream fleet. The sequential increase in G&A expense was mainly attributable to higher shoreside incentive compensation expense among other costs. Our first quarter 2013 G&A to revenue margin was at the low end of our recent historical range of 9% to 11%. For calendar 2013, G&A expenses are expected to be in the range of $53 million to $55 million and also within our historical margin range.

I will now review some of our key balance sheet related items for the first quarter. Starting with liquidity, our total cash and cash equivalents at quarter-end was roughly $714 million, which puts our net debt position as of March 31, 2013 at $600 million from up from $444 million a year ago. Our $300 million revolving credit facility remains undrawn. As I mentioned earlier, we currently have a blended average fixed cash coupon of about 3.9% on $1.4 billion of total outstanding face value of long-term, unsecured debt. Due to the change in timing of certain interest payment dates associated with our high yield bond refinancing in March 2013, our cash debt service for fiscal 2013 is expected to be $53.5 million including a small portion of projected cash interest expense related to a potential revolver draw in the fourth quarter of 2013.

For fiscal year 2014, we expect to incur a run rate of cash debt service in the amount of $51.3 million. In other words despite adding $200 million of funded debt, we only increased our fixed annual cash interest expense by $2.5 million. Our projected 2013 run rate of gross interest expense for GAAP reporting purposes, before capitalized construction period interest, is about $80 million, which includes about $11 million of non-cash imputed OID on our one and five-eighths convertible notes and $9 million of non-cash imputed OID on our 1.5% convertible senior notes as required by GAAP.

You will remember that we issued our 1.5% convertible notes last August to fund the planned retirement of our one and five-eighths convertible notes at that first possible call date of later this year in November. Based on our projected average construction work in progress balance for fiscal 2013 related to our OSV newbuild program, we expect to capitalize approximately $32 million of interest expense to the balance sheet this year. We also project to earn approximately $1.7 million in interest income on our average invested cash balance resulting in a projected net interest expense for the year of about $46 million.

Our effective tax rate for GAAP income statement purposes was roughly 37% for the quarter, which is the midpoint of our guidance range. We expect to pay about $2.7 million in cash taxes for the full-year 2013 and are projecting our annual GAAP tax rate to be roughly 37% for the full-year 2013 and 2014.

Wrapping up with our OSV newbuild program, as Todd mentioned earlier, in our press release yesterday we announced our intention to build two additional MPSVs in lieu of the 320 class OSVs we reported on February 6. We are currently negotiating final terms for the construction of these vessels which are expected to cost about the same as the first two approximately $85 million per vessel, before capitalized construction period interest. We expect these two new MPSVs to be delivered on various dates in 2016. Based on our current plans to build up to eight Jones Act MPSVs, including the four already announced we have decided to let 22 remaining OSV newbuild options for additional 320 class OSVs to expire, while maintaining the validity of our 22 remaining OSV newbuild options for additional 310 class OSVs and have extended the exercise date for the next such options until August 2013.

Including the two additional MPSVs we announced yesterday, our fifth OSV newbuild program now consists of 20 HOSMAX class OSVs and four HOSMAX class MPSVs. The aggregate cost of this program, excluding construction period interest is now expected to be approximately $1.25 billion of which $506.3 million, $285 million, $144 million and $31 million is expected to be incurred in 2013, 2014, 2015 and 2016, respectively. From the inception of this program through March 31, 2013 we have already incurred $357 million, or 29% of total projected expected project costs, including $83 million that was spent during the first quarter 2013.

Moving into our maintenance and other CapEx activity. For an update on our historical and projected regulatory drydocking activity, as well as expected cash outlays for maintenance and other CapEx I would refer you to the data tables on page 12 of 15 included in our release yesterday afternoon. However, I would like to point out that we are scheduled to have a much heavier OSV drydock calendar during the second quarter of 2013 with a projected incremental 176 days out of service compared to the first quarter just ended. Our plans to upgrade and stretch six of our Super 200 class DP-1/2 OSVs into 240 class DP-2 OSVs continues on time and on budget. The first two vessels arrived at the shipyard in December 2012 and the second two vessels entered the shipyard at the end of April 2013. The current schedule projects re-deliveries of two vessels in May, two vessels in August and two vessels in December of 2013.

Wrapping up with liquidity. Together with cash on hand and available capacity under our currently undrawn 300 million revolving credit facility and based on the key assumptions outlined in our earnings release, we expect to generate sufficient cash flow from operations to cover all of our growth CapEx related to our 24 vessel HOSMAX newbuild program, our six vessel 200 class OSV retrofit program, the planned retirement of $250 million of one and five-eighths convertible notes in November 2013 and all of our annually recurring cash debt service, maintenance CapEx, other CapEx and cash income taxes for the remainder of fiscal 2013 and for the full duration of our various growth initiatives which are currently scheduled to be completed in 2016.

With that, I will turn it back to Todd for any further comments or to entertain questions.

Todd Hornbeck

All right. I think the our schedule comments are concluded and I would like to open up it for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of James West with Barclays. Please go ahead.

James West - Barclays

Congratulations on a solid quarter and for being really exceptionally well-positioned in what is clearly the fastest growing deepwater market in the world today. The question I had, or one burning question on my mind at this point is, as we think about your newbuild deliveries and they are coming quickly, you have got a spot market that is above a term market right now but you do have a big capital program. How are you guys thinking about these newbuilds? Whether you want to enter into a large number of long-term contracts? Long-term for the Gulf of Mexico contracts? Or do you want to have more spot market exposure with the newbuilds?

Todd Hornbeck

Well, it is always the balance of it when you are running a fleet of your whole full fleet profile. So can't really separate the newbuilds from the current fleet. We are very interested in long-term contracts. We are bidding as we told you in the last couple of quarters, long-term contracts for the 300s. As you can see, the spot market today is basically there is nothing available today and it is at full practical utilization. It has been like that for some time now.

We see that market continued to tighten. But just to get a long-term contract, we wanted to be a fair return on invested capital and something what we can bring to the shareholders that’s a good trade. These vessels, as you know, is another step change for our clients. And any time you go through a step change, we went from DP-1 to DP-2, we went from 240s to 260s to 280s, those step changes take some time to get through in the market because the cost are quite different.

The value is there but it takes some time. Like our 370s, it took some time on the 370s for them to get fully engaged in the market because the capital costs changes the deadweight ton per cost of boat plus the overall capital cost of the individual vessel is a step change in the headline dayrate. But when you equate it back to cost per ton in value, that’s the process that we are going through now.

I think what we are seeing in the lower tertiary in the ultra deepwater and the distances is the volumes are absolutely there for the 300 class and larger vessels. So that just takes time to bleed into the system. But we are very, very comfortable in the spot market in the near term. But absolutely are focused on terming out a good portion of the fleet.

James West - Barclays

Okay, that’s helpful. Then just one follow-up for me. On these lower tertiary wells, where you have obviously seen a large number of success. This was announced recently and more that are, I understand, is on the way here. How many vessels do you need to spud one of these the lower tertiary wells? It seems like it almost a step change from just a regular deepwater well.

Todd Hornbeck

Its all over the map. I can tell you it is really, and when you talk about lower tertiary, you are really talking about some fields that are pretty far distances from the shore base. Not only are you talking about the complexity of the wells, not just from the spuding aspect because that’s not where the real complexity comes in. It comes into how deep the wells are and the pressure. These are very, very high pressure wells. Over 30,000 foot TD and in some instances 180 to 200 miles offshore. You just need much larger volumes. Our customers want the biggest bore size they can handle on the rigs. So when they eventually be able to produce the wells, they have got as much flow rate as they can. We are seeing.

I will just give you an example. First quarter, we saw the biggest mud move we have ever seen on a drilling operation. It was 1.2 million barrels on one well. So that gives you some scope and some size of what we are dealing with. Every well will be a little different but when you start equating that back in the numbers of vessels, you can say three or five or six vessels but what size are those vessels? Are those 370s, 300s, 240s, 265s? I think it is trending more to the 300s and its going to be three to four for spuding 300s just to spud one of these lower tertiary wells.

Operator

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

David Smith - Johnson Rice

Very impressive revenue from the MPSVs. I wanted to make sure I understood the pricing improvement during the quarter. Was that primarily on the flotel work? Or does it also include?

Todd Hornbeck

We really, I would love to be able to separate all those prices for you but because it is such a narrow market for us and we only have four vessels trading in it, you can see how it can get really competitive. But it came from all four vessels except for the one that is on long-term contract, the other T22. But the other ones, we all had step ups in revenue opportunity on every vessel on the other three.

David Smith - Johnson Rice

So nothing definitely specific to the quarter where we can think about this may be being a higher base line to think about going forward?

Todd Hornbeck

I think it is going to be a step up. We did have some on spot opportunity early in the quarter that would be a little noisy or a little to the upside of what you are indicating but we are seeing that trend up opportunities for higher spot work continue. We are getting inquiries all the time that the pricing is there for when they need those vessels for a 20 or 30 day job and then they can go back to their normal work, like on a sublet or a sublet for a specific operation. So we are seeing a lot of inquiries for the vessels to be subletted to do specific two or three week or up to 30 day jobs that you would see that revenue rise but we are getting a lot of inquiries for that.

David Smith - Johnson Rice

Okay, thank you and the follow-up question. Just regarding the potential future MPSV newbuilds. Should we think about those as also being 2016 deliveries or beyond?

Todd Hornbeck

The new ones?

David Smith - Johnson Rice

Beyond the four that you are looking at now.

Todd Hornbeck

Beyond the four. Yes, 2016 deliveries for those. We are in the middle of, as you can imagine, engineering and everything else. So it is very hard to pin that down but 2016 sounds like a good date.

Operator

Thank you. Our next question comes from the line of Jeffrey Spittel with Global Hunter Securities. Please go ahead.

Jeffrey Spittel - Global Hunter Securities

Maybe if you I follow-up a little bit on David's line of questioning on the MPSVs. Was there any extended well testing work done during the quarter and if so did that have any meaningful impact?

Todd Hornbeck

Yes, there was. There continues to be, not on those vessels, but on the other of our assets we are doing well testing as well. But, yes, there was one of the MPSVs but that wasn’t the main driver for the increase. It happened over three vessels.

Jeffrey Spittel - Global Hunter Securities

Got it. Okay. I appreciate it. Then asking for a behind the scenes. With a well like Shenandoah and results that you see during the quarter does that precipitate a response of single well like that from the customers where the phone starts ringing a little bit more? Do they get a little bit more nervous about availability? Or we are reading maybe a little too much into it. That one well is not necessarily going to engender a response.

Todd Hornbeck

Yes, I think that with the wonderful communication that we have today in the world and sound bytes. Everybody gets excited on the financial side of the house but on the operating side of the house, it doesn’t quite happen that way. Everyone is excited about the play in the Gulf of Mexico that these are world-class fields that can compete with any fields on the planet. The Gulf of Mexico is not the Dead Sea. It is one of the most vibrant places to operate. The quality of the reserves are there. So I think it just reinforces the commitment of other oil companies and other investments coming into the Gulf of Mexico to play this trend, not only lower tertiary but other Miocene plays. There is two or three different plays out in deepwater now that are proving to be not only very substantial but prolific and you are starting to see it show up in the lease sales. But just from that announcement, it is not going to cause, what you are alluding to as hoarding or people picking up additional equipment just because of that announcement. But what it will cause is people that have the same type of geology in the same type of leases to start going out and securing like drill ships or some of these semisubmersibles on a global basis for the Gulf of Mexico and builds their confidence to put more capital expenditure in the Gulf of Mexico.

Operator

Thank you. Our next question comes from the line of John Donald with Howard Weil. Please go ahead.

John Donald - Howard Weil

Had a follow-up question regarding the timing of the newbuild deliveries of the MPSV. With the 2016 delivery date, I wondered if you could just give more details on that? Is that just more of a technical requirement on your side? Or is it more of the shipyards just that is as soon as they can get them delivered to you?

Todd Hornbeck

Yes, that’s as soon as. The first two MPSVs will come in 2015. The second will come in early 2016. Any additional ones, if you had to contract them today it would be around the 2016 time period depending on when you contract them. They are different sizes and different complexity. The build in MPSVs is just not one-size-fits-all. We happen to be building for the identical sister. So we have some economies of scale there. But it is not driven by, we are trying to say, delivered to us 2016. We do not want in 2015. That’s not the case at all. In fact, if you were just starting today to do your engineering, you would be lucky today, if you are signing to get it in 2016. It would probably be 2017.

John Donald - Howard Weil

Okay, so then as we think about the remaining options that you have to the extent that you take the additional MPSVs but then also for the OSVs. It seems like those were had the ability to bring them out maybe one per quarter. Do you still have the same slots available or if you go with these options.

Todd Hornbeck

Yes, we do have those spots available in of the yards. As we announced to you today, we are changing our product line right now. What we see from the demand side and what our customers are going to need, we are changing up our product mix a little bit to the MPSVs and that is what is important to us. So we have moved a little bit and kept our optionality to be able to further expand the supply boat sector. One of the reasons we kept the 310 design over the 320 design because I know I am going this question and I might as well address it, is the way 310 diesel electric design and the accommodations on the 310 allows us to convert that vessel in a more efficient way to the MPSV market in the future. So we can take our 310 designs, our current 310 design after we deliver them as OSVs and if we need to expand on future MPSV or IRM type of conversions we can do that easily with that vessel. Much more than we could with the 320. So that was kind of our decision making process in keeping one vessel over the other.

Operator

Thank you. Our next question comes from the line of Greg Lewis with Credit Suisse. Please go ahead.

Greg Lewis - Credit Suisse

Thanks and good morning, Todd, you touched on it briefly. Clearly Hornbeck is stretching a couple of vessels. Some of your competitors are stretching a couple of vessels. Now these are pulling vessels out of world shallow water DP-1 market. As all these vessels migrate in to DP-2, you mentioned that you were starting to see tightness in the DP-1 market. Should we may be expect an outsize step up in DP-1 vessels simply because there is just not enough vessels in that market now due to work?

Todd Hornbeck

Yes, I think you will see a step up in that market. We have already seen it. We have already seen not only utilization firm up but we have also seen dayrates to increase. When we look out over the horizon through the market because, remember the shelf market is a seasonal market, during hurricane season in the third quarter or late second quarter, we should start to see some volatility there from drilling. It is a very short-term market. You don’t see a lot of jack up drilling rigs with five and six year contracts. So we also see our customers demanding, even on the shelf, higher quality DP capability plots. So I am not saying that when we stretch these vessels to 240s they are all going to deepwater. There is a very sound reason why our customers are going to use them on the shelf as well. Particularly, and our gear is much larger, more capable shelf drilling rigs get there that can drill deeper zones at a faster pace that will drive them to DP-2 240s. With the pickup of opportunities in other markets like the North coast of South America between Columbia and French Guiana and Suriname and Trinidad and the pickup in Mexico, that will put a lot of demand on the DP-2 240s as well.

Greg Lewis - Credit Suisse

Okay, great. Then just one follow-up regarding the four vessels that are in Brazil. I guess you mentioned that may it is going to be a 30 day moment if they move out of Brazil. Can you give us any guidance on when those vessels are potentially rolling off contracts? When we think about that?

Todd Hornbeck

Yes, we have three in the July time period and one in August. We have got some drydockings on three of the boats that we are going to immediately either come back out of Brazil to another market and drydock the vessels and then redeploy them. But we are currently bidding those vessels outside of the Gulf of Mexico today.

Greg Lewis - Credit Suisse

Okay, so when we think about that, is that 30 days downtime inclusive of mold, drydock and back on the market as we think about that number?

Todd Hornbeck

I would say every bit of 45 to 60 days.

James Harp

The 30 is not intended to cover up classic drydocking. That would be over in the drydocking budget. All the downtime would be covered in our guidance. The drydocks will be in the drydocks bucket and the mold and downtime just related to remobilizing is in the 30 day estimate.

Operator

Thank you. Our next question comes from the line of Mark Brown with Citigroup. Please go ahead.

Mark Brown - Citigroup

Hi, Todd and Jim. Great quarter. I just wanted to ask a quick question on the lead times for constructing new US 300 class vessels. You mentioned that there is limited availability of qualified yards able to construct that kind of vessels. Wondering approximately how many shipyards are currently can build that kind of vessel and approximately how many of those vessels could be built any given year?

Todd Hornbeck

That’s a good question there. I think that ebbs and flows with the yards. It is probably five to six yard that can do that on a repeatable basis with not only quality but on time, on budget, all those things. I know a lot of yards will attempt or try to attempt. That doest mean that it is, there is a lot of vagrancies in the shipyards building community, domestically and internationally. So, I would say five to six. If you were going to start a new construction program today, on a greenfield start to get your contract done, you are looking at every bit of 28 months to 30 months to get your first vessel, dependent on what yard you are at and dependent their current backlog. So I think it is two and half to three process and there is a lot of risk there, as you know, to do a one offer, one or two vessels, in the yard. That’s why our scale than our size in the yards that we are building is very, very important in our infrastructure of our naval architecture team and our maintenance team and our company in the yards is very, very important, particularly in the domestic market.

Mark Brown - Citigroup

All right, thank you. Other question, just trying a different topic. In Brazil, it seemed like the early part of this second quarter that Petrobras finally approved some contracts and I was wondering if you felt that was, in any way, a positive sign for that market and if that might incentivize you to potentially consider keeping some of the vessels in Brazil there rather than bringing them back to the Gulf?

Todd Hornbeck

No, I think it is a very good sign. Those contracts are probably three or four, if not maybe longer six-month late. So they are way behind the curve. I think it was 23 vessels that were approved to go forward. But that was bid a year ago. So a lot of noise in Brazil right now. As you know there is a huge logistics problems with the shore bases and infrastructure shoreside. So even though the vessels are going on charter, there is still a big bottleneck, shoreside and I think hopefully that that writes itself over the next couple years with some other infrastructure that is going in. We are not, by any shape, form or fashion, given up on Brazil. We think it is a viable long-term market. It has just got some complexities over the next year or so that we think as we deliver our 300s that adds a much better value proposition at the end of the day for a market like that, particularly with the constraining factor shoreside. So as we move out the 240 or would they call PSV 3000 class which is the predominant vessel in Mexico today for their support needs, we think that dynamic could change in the future.

Operator

Thank you. Our next question comes from the line of Jeff Tillery with Tudor, Pickering, Holt. Please go ahead.

Jeff Tillery - Tudor, Pickering, Holt

Todd, I just wanted to get a little background in terms of fundamentals in the business are great. What you are highlighting for the third quarter, does nothing change in the quarter or is it just closer now that you want to make sure everyone is speaking about some potential risk out in the third quarter?

Todd Hornbeck

No, nothing changed. Our markets are improving a lot better than any of us, I think. Even the analyst community, ourselves never thought it would with the additional announcements. But in the third quarter, you do have some things that are moving around. You have got, within our company, we have got vessels turning over. We have got new vessels coming into the market. We have got possibly vessels coming out of another market into this market. As these new demand drivers come on, it is not like they show up and they just go to work. There is expected testing not only from the customer but from BOEMRE and BSEE and they have got to go through the sims. So the process to come on charter is a laborious process and it takes sometimes several months and we just want to be cautionary that we see that more acutely in the third quarter than we do in other quarters. So we might as well bring your attention to it just in case there is a mismatch. We are hoping there is not. But we just see that’s where the noise is. But, overall, the fourth quarter, the first quarter next year, in all, looks very robust. So, for us, we don’t operate the company quarter-to-quarter. We operate it through a cycle and through markets. This is a little bit of noise that we may see.

James Harp

In addition to the cautionary language we have given about the third quarter, as Todd just discussed, just to reiterate some of the stuff that’s already in our press release of yesterday related even to the second quarter. You do have a much area to draw that calendar about 176 extra days, just at of our average effective dayrate that is probably just under $4 million step down from first quarter run rate and then you are going to, we basically have got it to a reaffirmation of our old OpEx per quarter guidance for the first, second, third and fourth. We obviously had a great first quarter. We would hope to maintain that bias toward beating our estimates but we have to allow for the fact that we could come back up to just our guidance. That would be a step up in OpEx from first to second. So just in general, you guys know us. We certainly are very bullish but we all like to point out the known areas where there needs to be some caution and as we all, it is exciting to see there kind of inflection points and naturally the balances between extrapolating off of and then taking it to the hoop versus as we march through '13 which was always a transition year to upcycle that really is '14 and beyond down. We are just pointing out things that we want to make sure people get trued up in their model. Then we can go from there.

Jeff Tillery - Tudor, Pickering, Holt

Perfect. That’s great color. Then the last question I had, just a quick one on the downstream business. Very good dayrates in the first quarter. Your guidance for the rest of the year is a little bit below that. Is that conservatism or just some things rolling off or that you see we may see realized rates a little bit lower than they were in the first quarter?

Todd Hornbeck

No, its more heavier drydock calendar through the balance of the year. Five out of nine are due this year. We get a little bit in the first quarter. So you have got a much heavier drydock calendar which will temper that. The fact that while we have had the nice step changes in leading edge dayrates, many of the fixtures can span, well you can look at our contract cover percentage. All of those are locked and loaded. So your ability to continue making step changes that can impact nest quarter is limited when you have a certain contract cover just recently rolled. So we certainly don’t think we are going to be renewing any contracted day rates less than where we are at today. Its more so the mix of all the guidance and just maybe general conservatism.

Operator

Thank you. Our next question comes from the line of Brad Bays with Trinity Capital Management. Please go ahead.

Brad Bays - Trinity Capital Management

Todd, you used a measurement metric, cost of deadweight ton on several occasions during the call to compare different sized boats in your fleet. I am not completely familiar with this measurement. Could you add a little detail to what that number is and perhaps maybe a little color on how it is going to relate to your pricing in the spot and term markets going forward?

Todd Hornbeck

Well, thank you. I am glad you asked that question. I think it is a very important metric in our industry that’s not used very widely. We started using cost per deadweight ton under our new construction program. Showing the market that we are getting good value and how we are buying and constructing vessels, based on how much cost it is per ton of steel or per ton to put these vessels together. That also equates on the backside of your equation once you own the equipment to your returns. How much are you able to charter vessels for per ton of what you pay for and over time that should bear out and be equivalent to what type of returns you are going to see for that specific type of equipment. Our industry, as we have made a transition from the shelf boats that were basically all the same and the commodity vessel to the deepwater there is lots of different varieties of vessels in deepwater. We talk about 240s, DP-1, DP-2, 265s, 280s, 300s and within those categories of sizes there may be three or four different designs within those categories. But how does the investor or the analyst or most of oil company or the customer value that? They have to value that on what is the ton they are paying for how much product they can carry to the well site. So when we gave you what our spot leading-edge dayrates are for 240s to 265s and we are saying that’s anywhere from $38,000 to $45,000 at dayrate, then it would equates to deadweight ton, we are looking at the differences between the 240s and 265s. If you just do linear math, a 240 is basically a 3,000 deadweight ton vessel. Now that they can range from 2,500 deadweight tons all the way to 3,200 or 3,400 deadweight tons. But when you put the deadweight ton calculation to it, that’s your range of your dayrate. When you look at the new vessels that we are building because they are unique and they are the largest in the world and it is another big step change focused on lower tertiary and the ultra deepwater, you are going to have a huge step change in dayrate and what does that look like if you just took the linear math of what we are dealing with, with our current fleet and applied it to the new fleet that’s coming, it would tell you the spot leading-edge dayrates that they were here today would be between $65,000 and $80,000 a day because their deadweights are that much larger. These vessels are 5,500 deadweight tons. We have three different categories of 300s that we are building, 5,500, 6,000 or 6,100 and 6,200. So its going to range in that. We think the term market is going to be between $8 and $10 a ton. Now what's going to happen because operating cost aren’t linear in these fleets. You will see in the term markets that a long-term three-year, four year, five-year fixtures that on 240s and 265s maybe at the $10 to $11 range on long-term contracts or the much smaller deadweight in the 300s will be toward the lower end of the range like $8 to $9. The reason is because our customers get a lot more economies of scale with the much larger vessel and value but the cost of operating isn’t linear. So we actually get a better value to our customer because we are able to cap the operating cost and it is not much higher than a 265 than it is on a 300 but they get double the size of vessel. So we were able to push that back to value and still get the returns to our shareholders and put the cost per ton back down from the $10 to $11 back down to the $8. We think that has a tremendous value over time to our customers because of the sheer volumes that they are using in deepwater today with the liquids like we talked about earlier in the call that are just going asymptotic on delivering liquid products to these well sites So we think would be able to deliver a real high value not just service but envelope of capacity at a very economical cost per ton getting delivered with getting returns to our shareholders at the same time. That’s a pretty hard metric to do in this business.

Brad Bays - Trinity Capital Management

Yes, so as a basis, just to compare, using the statement, not all 300s are created equal so you can break it down to this metric and make across not only your company but across industry comparison from the boat standpoint.

Todd Hornbeck

Exactly right. Not all boats are created equal. Whether you are talking about 240s or 260s or 300s I think the clients and the investment community really need to start looking at what kind of value are we actually delivering, not only in what we paid per ton but what we can charge per ton and how much tons we actually have in any different size of vessel. Its not just the size. It is easy to put on the spreadsheet 240, 300 and all of that. But there is very different dynamics going within those size ranges of those classes as we call them. And that’s where the real analytics come into play.

Operator

Thank you. Our next question comes from the line of Trey Stolz with Iberia Capital. Please go ahead.

Trey Stolz - Iberia Capital Partners

Thanks, guys for letting the call run long. I had a couple of quick questions here. If you go back to the OpEx figure on 1Q and you talked about the mariners or not hiring the mariners. Should we read anything into that in labor availability or any potential issues down the road or anything you can fill in for us on that process?

Todd Hornbeck

No, not at all. In fact we came out of the gate in 2011 when we announced the 300 program and put in late 2011 and 2012 training program that we got way ahead of the curve. So actually we were able to temper that off a little bit because we feel like we are in good position to be able to crew our vessels but we got way ahead of it early. Got our training up on the curve and so we were able to get the benefit of that not continuing that same trajectory. Now we may have, as we keep delivering vessels in to the market, that that may spike up again in the next couple of quarters as we see what we are actually going to need for the 300s on customer demand not regulatory demands. There is a difference. Some of our customers are still in flux about what they want to see on the vessels from a crewing standpoint. Not all customers are created equal. I can tell you that. Working for some customers you may have four or five more headcount on the vessels than another customer and that really is going to drive where the balance in the concentration of our fleet is going to reside on the actual headcount and training that we are going to need. So it is in flux.

Trey Stolz - Iberia Capital Partners

Got you. Anything else on OpEx? Is there nothing deferred to count on coming back in latter part of the year?

Todd Hornbeck

No, not in the least since you are asking the question. Not likely push something that we know is going to fall later in the year and that’s really how we beat it, It’s a permanent difference. That’s why we took the full $7 million, if you will, beat to scoop on our guidance. I don’t expect it to boomerang back on us later in the year.

James Harp

We are protected somewhat in our announcement on cost to you for the future. Remember a year ago we were hit with a huge cost increase in one day. Wages is the major component for us on cost. So if the mariner wages move profoundly it can happen very, very quickly. We are prepared for that. What we have given you is guidance. As it does it realize we will get the benefit of that through the course of the year. We are hoping we can hold cost where they are but as this market heats up with all the demand drivers coming in, we have to be prepared to meet the market.

Operator

Thank you. Our last question comes from the line of Adam France with 1492 Capital. Please go ahead.

Adam France - 1492 Capital

Hi, Good morning, guys. Thank you for squeezing me in here. I was just comparing the CapEx for the newbuild program in your fourth quarter press release versus what you have got here. It looks like about $80 million more. What are you all doing that you weren’t going to do three months ago, I guess?

James Harp

Are you looking at growth CapEx?

Adam France - 1492 Capital

Yes, Jim, I am looking at it. There was $1.16 billion to $1.24 billion?

James Harp

What you are looking at is the difference between, last quarter we guided you to two MPSVs at $85 million each and two 320 class OSVs $45 million each. So now we are saying we are not going to do that. We are going to build two extra MPSVs at $85 million each. So it’s a difference between the $170 million minus the $90 million.

Adam France - 1492 Capital

Got you.

James Harp

We swapped out.

Adam France - 1492 Capital

Go ahead, sir. Sorry to interrupt.

James Harp

We basically swapped out what was in the budget, what was in the last quarter was $90 million. We pulled that out and put $170 million in. So its up and incremental, call it $80 million or whatever it is.

Adam France - 1492 Capital

Right. Jim, when you move, what's the difference in building between a 310 and a 320?

James Harp

Basically, as you see from our guidance, we just give you an average of $45 million for the 20 and $85 million for the four but if we got in the (inaudible) and went boat by boat, they all could have varying degrees of cost and what not. But it is just a round figure that we give you as guidance and that is what they roughly average to. But basically I am not saying they vary widely but they might vary very marginally. In general, there really isn’t any. That’s the result of the competitive RFP process we ran back in the summer in early fall of '11 when we eventually awarded the two contracts to the two respective yards that we are building 12 boats at now in one case and 10 in the other. The comparable of the boats that they are building to one another. The new launch is between a 310 class and a 320 class. As Todd alluded to you earlier, one is diesel electric, one is not. There is different size specs but they are comparable enough to be considered a class but all design classes, if you will, specific types of designs, as what Todd just mentioned a minute ago, is every boat is not a boat is not a boat. When you look at the detailed spec sheets you will find some qualitative differences in terms of the specs but in general they carry roughly the same amount of deadweight ton cargo et cetera.

Operator

Thank you. I would not like to turn the conference back to management for any final remarks.

Todd Hornbeck

I want to thank everyone for joining the call today and appreciate your support in our company and look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. If you would like to listen to a replay of today's conference, please dial 303-590-3030 and enter the access code of 4614855 followed by the pound sign. Thank you for your participation. You may now disconnect.

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