Earlier this week, Hornbeck Offshore Services (NYSE:HOS) announced the divestment of its downstream segment fleet of tugs and tank barges to Genesis Marine, LLC, an affiliate of Genesis Energy LP (NYSE:GEL). In exchange for $230 million, Genesis receives all nine of Hornbeck's ocean-going tugs as well as its nine double-hulled tank barges. Shareholders of both companies should be excited about the transaction as it will enable both companies to compete more effectively in their core business segments.
Hornbeck's core business focuses on providing offshore supply vessel (OSV) services to exploration and production companies throughout the Gulf of Mexico and off the coasts of Brazil and Mexico. In late 2011, the company announced the implementation of a $720 million shipbuilding program that would provide the company with 16 new OSVs with the option to build an additional 16. The program was announced on November 8, 2011, and the stock has increased 68% in value from $33.74 to $56.80 in the interim. By comparison the Dow has only increased 29%.
Delivery of the first vessels began this year and coincides with the completion of ~145 floating and high-spec jack-up drilling rigs this year and next. The new-builds lower the company's average vessel age and give additional tech capabilities (dynamic positioning systems, faster off-loading, more efficient engines, etc.). They also have the added benefit of having been constructed in U.S. shipyards which, as I have discussed before, allows them to be U.S.-flagged and operate under the Jones Act in both domestic and international trade.
Hornbeck announced that the proceeds would be used for general corporate purposes and a statement by Chairman and CEO Todd M. Hornbeck implied that the funds would go to further the company's new-build program. Considering the market for tank barges is incredibly tight with utilization rates in the 80-90% range last year, Hornbeck is selling a non-core asset at an abnormally high price and putting that money right back to work by focusing on its core business where demand is nearly as high. Shareholders should applaud the move by Hornbeck to divest itself of its downstream tugs and tank barges as the results should allow the company to grow earnings by using less debt or dilution to bring online additional assets in its core OSV segment.
Genesis Energy Shareholders should also be excited about the transaction as it will increase the midstream service provider's tug fleet by more than 30% and its tank barge fleet by nearly 20%. Given current utilization rates, the company will have no trouble putting the vessels to work. Integrating them into the larger Genesis Energy fleet will give the company added flexibility for serving customers through additional capacity. It will also lower downtime issues as downtime can be spread across a higher number of vessels.
Overall, look for the transaction to have a greater positive effect on Hornbeck's EPS as the company has nearly half the market cap of Genesis and the marine services segment of Genesis Energy is a small one. Considering the market has lopped nearly a dollar off each of the company's share prices since Monday, I would be hesitant to invest at current valuations; however, it is clear that Hornbeck's management has a steady hand at the tiller and intends to deliver superb returns for shareholders in the coming years.