Hornbeck Offshore Services' (HOS) CEO Todd Hornbeck on Q2 2014 Results - Earnings Call Transcript

Aug. 2.14 | About: Hornbeck Offshore (HOS)

Hornbeck Offshore Services, Inc. (NYSE:HOS)

Q2 2014 Earnings Conference Call

August 01, 2014 10:00 AM ET

Executives

Ken Dennard - Managing Partner, Dennard-Lascar

Todd Hornbeck - Chairman of the Board, President and CEO

Jim Harp - CFO and EVP

Analyst

Jeff Spittel - Clarkson Capital Markets

Gregory Lewis - Credit Suisse

Daniel Burke - Johnson Rice

Jon Donnel - Howard Weil

J. B. Lowe - Cowen & Company

Brad Bays - Trinity Capital

Matthias Detjen - Morgan Stanley

George O'Leary - Tudor, Pickering, Holt & Company

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hornbeck Offshore Services' Second Quarter Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today July 31, 2014.

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

Ken Dennard

Thank you, Alan and good morning everyone. Welcome to the Hornbeck Offshore conference call to review second quarter 2014 results and recent developments. We also welcome our Internet participants listening over the Web. Please note that information reported on this call speaks only as of today July 31, 2014, 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 conference call, Todd and Jim will make certain projections about future financial performance, liquidity, operations and events that are not statements of historical facts 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 or future performance to materially differ from that is being projected today.

You can locate additional information about 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 yesterday's press release under the Investors section on the Company's Web site and that's www.hornbeckoffshore.com or through the SEC Web site at sec.gov.

This earnings call also contains references to EBITDA, which is a non-GAAP financial measure. A reconciliation of this financial to the most directly comparable GAAP financial measure is provided in the press release issued by the Company yesterday evening.

Finally, the Company uses its Web site as a mean to disclose the material and non-public information and for complying with disclosure obligations under SEC Regulation FD. Such disclosures will be included on the Company's Web site under the heading Investors. Accordingly, investors should monitor that portion of the Company’s Web site 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, Ken. Good morning and welcome to our second quarter 2014 earnings conference call. With me this morning is Mr. Jim Harp, our CFO. Today, we will review our second quarter results and update you on our market outlook. Jim will take you through the numbers in detail in a little bit. Our strong second quarter results demonstrate the advantages we enjoyed from a multi-class fleet offering in a diversified service mix as we navigate through a transition period in our core Gulf of Mexico deepwater drilling market.

While we saw a solid improvement across the entirety of our fleet in comparison to the first quarter, the MVP for the quarter was clearly our MPSVs fleet where we had a 100% utilization and average and effective day rates well in excess of a 100,000 per day across those four vessels. On the strength of that performance, we were able to post record revenues and EBITDA for the quarter. I want to stress that while we don’t believe the MPSV fleet performance is very one-time event, it won’t reoccur in the immediate near-term as long term charters we have currently or have recently secured for part of that will curtail our ability to capture the high spot day rates that made that performance possible.

We were very happy to see not only strong MPSV spot charters in the quarter but also to finish with solid term charters for one of those vessels as a result good positioning in the spot market often leads to well-priced term charters which is always our goal. In our core fleet of 56 new generation OSVs, we also saw across the board improvement in day rates and utilization over the first quarter. Utilization for our high spec OSVs rose to 86% during the quarter, up from 73% sequentially. Average day rates also improved to nearly 33,000 per day for high spec vessels, an improvement of our 600 per day over the prior quarter. We also saw improvement on our low spec vessels. Low spec utilization grew 7 percentage points to 86% and average day rates were up about 500 per day.

The ability to move utilization and average day rates in a positive direction for several consecutive quarters is a signal to the typical look, what we typically look to measure the strength of the cycle. While the sequential improvement over the first quarter is certainly a positive data point and a good start, we think it’s too early to say that we are out of the transition phase of this market. However, we firmly believe that we are transitioning to a sustained up-cycle. As we noted on our last call during the first quarter we had several vessels out of service preparing for term charters in Mexico and other international markets. Those vessels commenced their charters during the second quarter and that was a big part of the improved utilization.

We have seen a considerable amount of opportunity in the specialty market supporting field development and other projects in the Gulf of Mexico which also drove utilization improvement. What did not see during the quarter was much change in the deep water drilling market dynamic and that is why we view the market as still in transition. In fact the average number of active floating rigs in the Gulf of Mexico was basically flat for the first two quarters of this year at roughly 38 during at which time 12 high-spec new build OSVs entered the market.

We continue to expect an incremental 25 high-spec vessels to be delivered by year-end including six of our own, which may intensify the current transitioning supply demand and balance. Nevertheless since our last call four incremental deep water drilling units have commenced drilling operations, bringing the active deep water rig account today, it’s a 40 units. That is certainly moving in the right direction.

And with additional units undergoing in acceptance testing or in route to the Gulf of Mexico we see no reason to believe that we won’t see about 50 units in the Gulf of Mexico by year-end. As we have said previously, what we really can’t know was, what rate those units will come online and actively commence drilling operations that is something well beyond our ability to predict with any degree of quarterly precision and appears to be driven as much by regulatory factors, typical with post-Macondo delays.

The slow space of the build-up in the working rig count as opposed to units in (theatre) [ph] combined with the addition of new build OSVs to the market both our own and those of other market players is causing continued choppiness in the spot market conditions. We believe that when we settled into a 50 plus unit working environment, excess OSV capacity should quickly be absorbed as deepwater expiration activities require intense vessel usage.

Our best guess right now is that maybe more in an early 2015 event than late 2014. At the 50 plus level we expect the high-spec OSV market to be at equilibrium or slight under supply in line with market conditions we saw last year around this time. You may recall how those market conditions resulted in a very attractive spot day rates across our fleet.

We understood at the time that early 2013 market conditions where our short term phenomenon but they were indicative of the earnings power to be derive from our fleeting strategy which emphasis flexibility in order to take advantages of favor market conditions as they occur. We think for a couple of reasons that the market dynamics of 40 plus working rigs environment suggest its suitable cycle, first the current high-spec OSV build cycle will be complete or at least begin to abate. So supply of high-spec new generation vessels will stabilize.

Second and of considerable note is a market dynamic that we’ve been observing, but was very pronounced this last quarter which is considerable impact of deepwater production and development projects on spot vessel demand. There are about 13 major deepwater development projects planned to come online over the next few years in the Gulf of Mexico.

These projects are increasingly significant demand driver for our fleet. The challenge has been to understand their underlying planning cycles in order to make rationale predictions about future vessel requirements. These projects are large, complex and to a certain degree dynamic, but increasingly seem to require a large high-spec vessels.

Historically the need for this vessels and support of these projects has been more seasonal in nature, intensifying in the second and third quarters while tapering during the fourth and first quarters. Vessel needs for these projects are also more opportunistic which suits our spot strategy.

The larger point here is that we are seeing unprecedented growth, not only in deepwater drilling and 40 active deepwater rigs is by the way an unprecedented level in the Gulf of Mexico, but in the development projects that successful drilling campaigns inevitably spawn. We think that the absorption rate of vessels will be driven by both this factors operating in tandem. We certainly saw that in the second quarter and think this may become a trend that drives Gulf of Mexico market conditions moving forward.

So our long terms view of the Gulf of Mexico remains the same. The Gulf of Mexico is a premium deepwater basin and one of the most political stable regions of the world. Despite the high cost and regulatory complexity, stability, predictability and available infrastructure will continue to make it a preferred destination among the majors and independents for the deployment of the massive capital required for deepwater projects.

We see no objective evidence to suggest that 50 plus drilling units will not operate in the deepwater Gulf of Mexico in the foreseeable future. While some rigs will undoubtedly depart we do not subscribe to the view that new rigs necessarily render old generation units absolute. These older units will work perhaps at a lower day rate which in of itself can draw more customers into the drilling market. And as we mentioned on our last call when drilling rigs have left the Gulf of Mexico, they don’t seem to go very far. Mostly the Mexico and Trinidad still within our core geographic focus. We continue to see evidence of customer's exploratory success including the recent announcement of yet another major oil company discovery in the Norphlet play in the Gulf of Mexico. Given these factors, we like where we sit and will continue to play long ball by keeping a healthy portion of our fleet in a flexible position to take advantage of the market we see through the windshield. In the short term, we expect things to be remain a little bumpy but as we demonstrated this quarter, the diversity of our fleet complement and service offering provides us advantages that can result in a solid performance even during a transition market.

Over the longer horizon, we are encouraged by the BOEM’s recent approval of a plan that notwithstanding a decades old drilling band, would finally allow companies to at least begin assessing all resources of U.S. Atlantic Coast by conducting seismic surveys. We believe that someday the Atlantic Coast will become a new domestic offshore frontier drilling region that will create even more demand for Jones Act vessels which are likely to be serviced at least initially from the oilfield infrastructure in the Gulf of Mexico.

Turning to our other core markets. We saw a significant growth in Mexico during the quarter where we deployed seven vessels for charters supporting specialty and seismic operations there. These charters bring our current footprint in Mexico to 13, the vast majority of which are working on long-term contracts.

We continue to see other opportunities in Mexico that might drive additional growth there. As Mexico works through its process of energy reform, we will continue to look for additional ways to expand our market leading presence for new generation OSVs in Mexico and position ourselves for the long-term growth that should be the product of such reform. As we have noted previously, while we have reduced our presence in Brazil to four vessels, we remain committed to that market and our long-term believe is that Petrobras or other deepwater players in Brazil will find ways to improve or resolve the challenges confronted by service companies like ours in that market. We recently elected not to participate in the Petrobras PSV tender. Emblematic of Petrobras’s current challenges in the service company community, we are unaware of any U.S. flagged vessels that participated in that tender process.

Nevertheless the size of the Brazilian deepwater market makes it one that we cannot simply ignore. For that very same reason however it is a market that requires patience and discipline. During the second quarter, we delivered two vessels of four charters in other international regions that are long-term in nature. We are also seeing several international opportunities of shorter term duration that we think are attractive and worthwhile pursuing as we wait for the deepwater Gulf of Mexico market conditions to strengthen. Our newbuild program is progressing satisfactorily. We have now placed in service nine of the 24 HOSMAX vessels under construction. We expect to deliver seven more of these vessels by the -- by year end, including the first HOSMAX 310 MPSV later this quarter which will be a Jones Act qualified subsea IRM vessel. The remaining four HOSMAX MPSVs are scheduled for delivery two each in 2015 and 2016.

Assuming we finish this year as expected, we will have 64 new generation OSVs in operation by the end of this year and 68 by the end of 2015. By the end of 2016, we expect to have a total of nine MPSVs in operation.

I want to take a moment and talk about our liquidity and our balance sheet which Jim will go over in detail in just a moment. From both a liquidity and a strength of balance sheet point of view, we are exactly on target where we thought we would be at this point in our growth program.

By the end of this year, we should have funded 88% of our overall newbuild cost and our net debt should crest at year-end somewhere in the circa $900 million range before we begin rebuilding our cash position through projected free cash flow from operation. As we deliver our remaining new vessels, our cash flow generating capacity is expected to expand significantly. Next year assuming the market cooperates, we should begin to see this dramatically manifest itself more clearly meaning while our rapidly growing cash position and the additional dry powder provided by our undrawn revolver give us the current and prospective ability to deploy capital on various high returning organic or acquisitive growth initiatives that we are currently pursuing. We believe that we are in an excellent position to exploit new market niches and strategic opportunities as they present themselves.

Before turning the call over to Jim, I also want to congratulate our operating team in Mexico for the good work done in bringing seven vessels online during one quarter. And our engineering and maintenance teams for readying those vessels for service to Mexico, that’s no small feat and we recognize the hard work and late nights that took to do this in a safe and sound manner.

In addition I would like to also congratulate our team for setting another historical low for employee attrition by achieving second quarter employee turnover rate of only 1.4% in a highly competitive environment for qualified mariners, which is one of the best indicators I can think of is evidenced that we are indeed fulfilling our mission to be the company of choice for our employees.

Now I’d like to turn the call over to Mr. Jim Harp.

Jim Harp

Thanks, Todd. And good morning, everyone. Yesterday, afternoon we reported our second quarter results and updated a few of our annual guidance figures. Our financial results for the second quarter were significantly better than the first quarter and roughly in line with our expectation. Record day rates from our MPSV fleet and improved spot market conditions for our high-spec OSV in GoM drove the sequential increase in our results.

During the second quarter we were able to capitalize on spot contract for an MPSV to provide specialty services in the Gulf of Mexico at attractive day rate this quarter demonstrates the volatility that can be experienced with the combination of our spots strategy and or high end specialized equipment.

While the strategy certainly paid off in our second quarter results it is always prudent to keep in mind that as the predominant spot provider of high-spec OSVs in the GoM we are equally susceptible to short term air pockets of market imbalance the other way if new build rates continue to experience delivery delays and offer long periods of acceptance testing. As Todd mentioned to be across the board day rate and utilization improvement we enjoy this quarter for each strata of our diverse fleet was certainly not because of a significant surge in exploratory drilling activity.

Our ability to improvise by finding alternative, specialty markets for our spot vessels while we are waiting for the expected deepwater rigs to fully arrive will vary from quarter-to-quarter until the up cycle begin to earn, until you might as well get used to it and accept the some level of volatility is a normal part of our investment pieces. As a quick remainder all of the data that I will be discussion this morning will solely from continuing operations in our upstream segment. All financial activity from our downstream segment which we saw last August is reflected in discontinued operations in our press release.

Now let’s review the details for the second quarter. Our second quarter diluted earnings per share of $0.85 was 174% higher than the sequential quarter. Second quarter EBITDA of $84.3 million was 55% higher than the sequential quarter. These increases were primarily due to the full or partial period contribution from vessels that were recently placed in service under our fifth OSV new build program as well as improved spot market conditions for our OSV fleet and certain of our MPSVs.

Adjusted EBITDA which is the starting point that we used to compute ratios for the financial covenants in our undrawn revolving credit agreement was $88.3 million for the second quarter of 2014, for additional information regarding EBITDA and adjusted EBITDA as non-GAAP financial measures please refer to the data tables in yesterday’s earnings release including note 7.

The consolidated revenue and EBITDA earned during the second quarter both mark the highest levels achieved in the company’s history not withstanding that we sold our downstream segment last August. Moving into a discussion of our income statement related items beginning with revenue, revenue for the second quarter of 2014 was 171 million or 25% higher than the sequential quarter this sequential revenue increase was primarily attributable to roughly $3900 per day increase in affective day rates earned by our 56 vessel new generation OSV and record average and affective day rates generated by our four MPSV one of which was performing specialty services in the spot market.

Our operating income was $57 million or 33% of revenues in the current quarter compared to approximately $25 million or 18% of revenues for the sequential quarter. Average new generation OSV day rates for the second quarter of 2014 were approximately 27,600 or about $1,300 higher than the first quarter of 2014. Utilization for our average fleet of 56 new gen OSVs for the second quarter of 2014 was 86% up from 75% for the first quarter 2014. MPSV utilization was 100% for the second quarter of 2014 up from 83% for the sequential quarter and in line with 99% for the year ago quarter.

MPSV average day rates of just over $130,000 were $4,000 higher than the sequential quarter and $41,000 than a year ago while MPSV effective day rates of $130,000 were roughly $26,000 higher than the sequential quarter and $42,000 than the year ago quarter.

As Todd mentioned we were able to take advantage of the versatility of our diversely fleet offering by pursuing various specialty charters under favorable market conditions for our high spec OSVs and MPSVs including one vessel that was providing flotel services in the Gulf of Mexico spot market at attractive day rates. However based on our current MPSV contract coverage and planned out of service time for one MPSV regulatory drydocking and expected commercial related downtime for another MPSV in the third quarter. These record results will not be repeatable over the second half of 2014. In addition you know since we only have four MPSVs at this time, utilization volatility due to downtime between spot jobs or term renewals can significantly impact effective day rates from quarter-to-quarter.

Given these factors plus the fact that we will be delivering a fifth smaller 310 class MPSV during the third quarter for partial contribution in the third and a full contribution in the fourth, that will change our fleet mix from current levels. Our fleet-wide effective or utilization adjusted day rate expectations for our MPSV for the second half of 2014 is as follows; During the third quarter we currently expect our effective day rate for a projected average 4.3 vessel MPSV fleet that’s with the 310 included, complement to be in the range of $95,000 to $100,000, that's effective day rate, so already utilization adjusted.

For the fourth quarter, we currently expect our effective day rate for a projected average five vessel MPSV fleet complement that’s with the full contribution with the 310 to be in the range of $80,000 to $95,000 depending on the spot market. To put these indicative day rate ranges into perspective had our current four vessel MPSV fleet complement operated at the midpoint of those levels of $90,000 per day during the second quarter of 2014, our EBITDA would have been in the range of $70 million rather than the actual 84 million we reported yesterday. So, please consider these pro forma reference figures as an indicative baseline when building quarterly MPSV expectations going forward at least through the third quarter of 2015 unless we guide you otherwise on future calls.

Moving into operating expenses, our OpEx of $71 million for the second quarter were in line with our guidance range. Our annual cash OpEx are now projected to be in the range of roughly $295 million to $305 million which is a $5 million decrease in the high end of our prior guidance range.

Included in our cash OpEx guidance is roughly 5.7 million of total out of pocket cost related to the conversion and repositioning of multiple vessels for international or specialty charter commitments. During the second quarter, we incurred 4.5 million of these non-recurring operating costs and expect to incur the remainder of 1.2 million during the third quarter.

Not included in these costs is the lost revenue related to approximately 175 days of aggregate commercial related downtime for the effective OSVs. As a reminder, we have provided you with updated full year and third quarter 2014 OpEx guidance in our press release issued yesterday afternoon. 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 only intended to cover our currently anticipated geographic footprint, charter mix and industry market conditions.

Moving into general and administrative or overhead expenses, our second quarter G&A expenses of 16 million or 9% of revenues which was in line with our recent historical range of 9% to 11% and were 1.5 million higher than the high end of our guidance range. We now expect our 2014 G&A expenses to be in the annual range of 59 million to 62 million, up $1 million for the year from our prior guidance but still expected to remain within our historical G&A margin range.

Moving into our balance sheet related items, I will now review those for the second quarter. Beginning with liquidity, our total cash and cash equivalents at quarter end was roughly $264 million which puts our net debt position as of June 30, 2014 at $804 million, up from $717 million at March 31, 2014.

As Todd mentioned earlier, we expect our net debt to crest to peak at around $900 million at December 31, 2014 before rapidly improving thereafter absent any additional growth CapEx deployment. Our $300 million revolving credit facility remains undrawn. We currently have a blended average fixed cash coupon of about 4.4% on roughly 1.1 billion of total outstanding base value of long-term unsecured debt.

For fiscal year 2014, we expect to incur an additional run rate of cash debt service company-wide in the amount of just under $51 million a year.

Our projected 2014 gross interest expense for financial reporting purposes before capitalized construction period interest is about $64 million which includes roughly $9 million of non-cash imputed original issue discount or OID on our 1.5% convertible senior notes. Based on our projected average construction work in progress balance for fiscal 2014 related to our fifth OSV newbuild program we expect to capitalize approximately $30 million of interest expense to the balance sheet this year. We also project to earn approximately $1 million in interest income on our average invest to cash balance resulting in a projected net interest expense for the year of around $33 million.

Our effective tax rate on a consolidated basis for GAAP income statement purposes was about 38% for the quarter roughly in-line with guidance. We expect to pay about 4.4 million in cash taxes for the full year of 2014 and are projecting our annual GAAP tax rate to be in the range of 36% to 38% for fiscal 2014.

To recap our OSV newbuild program number 5. Our current newbuild program is comprise of 19 HOS Max OSV and 5 HOS Max MPSV and remains substantially on time and on budget. We recently placed in service two additional HOS Max OSV. HOS Black Foot and HOS Captain in July 2014. These vessels are currently operating in the Gulf of Mexico spot market we expect to take delivery of three additional newbuild vessels during the remainder of the third quarter 2014 including the HOS value, our first HOS Max 310 MPSV.

The aggregate cost of this program is excluding construction period inputs remains at $1.25 billion of which approximately 384 million, 124 million and 26 million are expected to be incurred in fiscal years 2014, 2015 and 2016 respectively. From the inception of this program through June 30, 2014 we have incurred roughly 910 million or about 73% of total expected project cost including roughly 87 million that was spent during the second quarter of 2014. We expect to incur approximately 111 million of costs related to this project during the third quarter 2014.

Moving in to maintenance and other CapEx activity, for an update of our historical and projected regulatory drydocking activity, as well as expected cash outlays for maintenance and other CapEx, I will refer you to the data tables on Page 12 and 15 of our press yesterday afternoon.

Please note that the second quarter drydockings along with the 12 OSV and 1 MPSV drydockings that occurred during the first quarter represent roughly 562 days of downtime for the first half of the year or roughly 85% of our 2014 projected days out of service. By contrast we only expect to incur 95 days of downtime for the entire second half of 2014. Having our drydock related downtime fully and loaded during the first half of 2014 will allow us to be ready to capitalize on an increasing floating rate account in the GoM over the remainder of 2014 and into 2015.

Wrapping up with future liquidity together with cash on hand we expect to generate sufficient cash flow from operations to cover all of our growth capital expenditures for the remaining 15 HOS Max vessels under construction all commercial related CapEx in all of our annually recurring cash debt service, maintenance CapEx and cash income taxes through the completion of the newbuild program without ever having to use our currently undrawn revolving credit facility.

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

Todd Hornbeck

Thank you, Jim. Operator, we’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Jeff Spittel with Clarkson Capital Markets. And Jeff your line is open please go ahead.

Jeff Spittel - Clarkson Capital Markets

Maybe, if we could touch on your comments about some of the near-term bumpiness. Obviously we got some new rigs coming into the market. In your estimation I guess, are spot rates likely to stay relatively steady on the leading edge in the OSV market? And if there's going to be bumpiness is that going to manifest itself a little bit more on the utilization side?

Todd Hornbeck

Yes. That’s where it would manifest itself is on the utilization side, I think the day rates are not -- are stabilized, that’s our view we’re not -- we don’t see much movement in that. But it would manifest itself in utilization, albeit that our utilization is still pretty good right now, which I think through the end of the quarter, it could -- there could be some fluctuations with new votes coming in. And the delay of some of these rigs coming online is just the acceptance testing is taking a much longer than anybody anticipated, plus we will be, we’re in the midst of hurricane season now so some of the construction project which will start to curtail as well.

Jeff Spittel - Clarkson Capital Markets

And obviously you have had a lot of success with this MPSV program and you have got newbuilds delivering. As you assess the market and look out once you get done with this log of newbuilds being delivered, what are your thoughts about what the right size is for that program ultimately given that there seems to be a pretty broad range applications for these vessels?

Todd Hornbeck

You mean the right size the number of units?

Jeff Spittel - Clarkson Capital Markets

Yes.

Todd Hornbeck

Right now when we finish the program, we will have nine and we have got some things on the drawing boards right now. There is still some appetite I believe for some additional units but we don’t want to really disclose what size we are looking at right now. You are right it’s very broad range of services out there as this infrastructure gets laid not just IRM vessels.

Operator

We will take our next question from Gregory Lewis with Credit Suisse.

Gregory Lewis - Credit Suisse

Thank you. Good morning. Todd, could you talk a little bit more about the field development work in terms of, I mean clearly it helped out in the second quarter, I guess one of the things that I am trying to sort of gauge is we kind of know where PSV rates are. Is it safe to assume that field development work is at a higher rate? And in terms of thinking about the margin for those types of projects, can you sort of give us any kind of guidance on that?

Todd Hornbeck

Well, the field development work traditionally happens during the summer time, the second and third quarter as we know. It’s just the better weather environment for our customers, so as these projects, whether they are refurbishing equipment or doing repair and maintenance of existing fields or even installing new fields and new equipment, that’s the hot seat and it can vary all over the map depending on what type of spreads we're putting on the vessels.

So, margins that’s -- dependent on what size and what we are doing can vary from what we currently get in the PSV business now to a 150% of that. So, it’s really a spaghetti bowl that’s the question that I don’t think anybody can answer directly. I am not trying to be evasive to you but it’s just that much of a mix bag. Clearly, the advantage that we have is the type of fleet that we have that we can service a broad range, from the MPSVs to the new 300 HOSMAX vessels all the way down to the 240s and the DP1 vessels.

That market utilizes all that equipment, so we can put service packages together that we think are very compelling for the end user and they just have to go to one-stop-shop with Hornbeck Offshore Services.

Gregory Lewis - Credit Suisse

And then you mentioned some of the vessels mobilizing out of the U.S. Gulf into Mexico, I mean I am assuming that had something to do with what was going on with Oceanografia. In terms of those vessels, I guess two questions on that. Do you see the potential for to move more equipment down to Mexico and the boats that did move down are those more on short term mark or more sort of that one plus year term work?

Todd Hornbeck

Well, let’s be very clear the vessels that went down had nothing to do with Oceanografia situation. We have been negotiating those contracts well before that manifested itself. We have not seen really any impact since that situation had occurred and I think PMAX is reorganizing itself to try to deal with that particular situation. And we should see some, in the future some incremental demand coming particularly from that situation. We just haven’t seen it develop yet. Overall, I think we are going to see more demand coming in Mexico just getting prepared for the new PMAX and the new situation that’s on the horizon with foreign investment coming into the market. That would be over the next several years but as you know the seven vessels that we have there preparing for what their currents needs or future needs are going to be doing the seismic survey to try to figure out what PMAX is going to do in the future for the lease sale.

Gregory Lewis - Credit Suisse

Okay and should we expect those vessel over the -- in terms of duration?

Todd Hornbeck

They are a year basically with options that can be, we anticipate that program to expand and PMAX to expand that program but we'll see how the first campaign goes and that will be a year from now, they will be reassessing whether they keep that fleet there or not.

Operator

Mr. Daniel Burke with Johnson Rice, please go ahead with your question.

Daniel Burke - Johnson Rice

Good morning guys. Maybe a couple on the MPSV side, I have thought I heard you all referenced some commercial related downtime on MPSV in Q3. Can you talk about what upgrades or modifications you are making?

Todd Hornbeck

Well, we are modifying some of the reference systems on the DP System. We are also adding some extra accommodations to the vessel, it’s about 10 -- for us we think it’s about 10 or 15 days out of service to get ready for the long term contract that will start immediately when we finish that program. And then on the Iron Horse which is the sister vessel, the 430 foot DP-3 vessel she comes in for a regulatory drydocking on April 3. So that should be -- on the August of 3, I am sorry, August the 3 which go through about September 10th to the 15th. So that’s the utilization hit there.

Daniel Burke - Johnson Rice

Is the rate on the achiever extension broadly similar to what you've enjoyed the first half of this year?

Todd Hornbeck

No. As we disclosed that’s why the earnings power will be a little different, the first half of the year she was basically in the spot market and now we’re transitioning to a term charter so it will different. We don’t disclose those individually because we only have 4 MPSVs, so I think if you read the transcript in our press releases you should be able to be able to model what we think you should for over the next several quarters.

Daniel Burke - Johnson Rice

Yes. I’d agree. Thank you. Is the Bayou committed to, does the Bayou have a committed first job yet?

Todd Hornbeck

We are working on several jobs for the Bayou right now. She delivers in the middle of September and there is pretty strong appetite for that vessel. I guess, if I mean we’re in hurricane season if we had hurricane it get really, really strong but yes there’s a lot of things we’re looking at for the vessel.

Daniel Burke - Johnson Rice

Okay. Great. Maybe one last one. On the 300 side, at this point you’ve got a pretty decent population of those vessels I know operating first half of the year into the summer on the spot side of the market. I guess just looking for first again; reaffirmation that you continue to see rates there, north of $40,000 a day. And then would be curious for any color on the extent to which those 300s have been involved. I know you alluded to it earlier but the 300s might be involved in specialty work versus more traditional supply work?

Todd Hornbeck

About 50-50 the 300 in the specialty market, as you know we’re taking one of our 300 that what was not slated for RM work and have moved her and converted her to an iron vessel that’s the one coming in September. So it’s about 50-50 and yes, I can validate that we’re still in the $40,000 range for the new vessels coming out so it’s as planned, we wish the market and the rigs would have been absorbed in the market a little sooner, that’s hard to control when you’re dealing with new generation, new construction on the rigs that are coming from literally half way around the world and trying to peg a quarter or two than having to do the acceptance testing once they get here but I can tell you there’s a lot of them in acceptance testing now and a lot of them in route and soon as they get online we’ll see those. We’ll see the full impact of what we’ve been talking about with this market. So we’re very comfortable we don’t think there is the market conditions have changed of course I need to agree, it's just get everything assimilated and online.

Operator

Next we go to Mr. Jon Donnel with Howard Weil. Please go ahead with your question.

Jon Donnel - Howard Weil

Obviously, we saw the flotel impacts here with the MPSVs in the quarter and certainly at your Analysts Day, you guys were highlighting those go-forward as well. I just wanted to clarify whether the guidance you gave for the effective dayrates for the MPSVs going forward was contemplating any of that work or whether that would be additional upside to those numbers?

Jim Harp

No. We purposely gave those numbers so that you wouldn’t assume any further upside to them because we’ve moved from the spot market to a term market which locks in the rates so they are relatively predictable, but for some portion of spot exposure which is why we give a range.

Jon Donnel - Howard Weil

Okay. But there is not a presumption or is there any presumption there that there will be term flotel work embedded in those?

Jim Harp

Yes.

Jon Donnel - Howard Weil

Okay. I appreciate the clarification there. And then in terms of the OSV, your spot market exposure there and I think we saw some benefits of that clearly in the quarter as well. Are you seeing any competitors who are maybe getting more aggressive in keeping some of their fleet in the spot market including some of the new high-spec deliveries here? Or in the Gulf of Mexico is that still essentially all Hornbeck in the spot as we think of it going forward here?

Todd Hornbeck

There is probably a little bit more floating in the spot market today than there has been but that’s just indicative of the deliveries, but traditionally and we still have probably the majority spot position in the market and when I say majority well above 50%.

Jon Donnel - Howard Weil

Okay. Fair enough. And then finally just on Brazil, it sounds like longer-term is still a market you are interested in. Is there any thought that the vessels you have down there may remain in market at the end of their contract or is the plan still to bring those back to the Gulf of Mexico or at least this direction?

Todd Hornbeck

Our plan right now as we sit today is to keep them in that market and try to negotiate [indiscernible] to the renewals. So our plan is that they won’t -- will not transition back out in the market.

Operator

And now Mr. J. B. Lowe with Cowen & Company, please go ahead.

J. B. Lowe - Cowen & Company

Good morning guys. I just had a couple of quick questions. First, are you or any of your competitors, do you see or do you have any willingness to continue to move vessels out of the Gulf during this period of transitory softness? I know you guys have moved from the Mexico recently but are you looking to go outside the market or do you see any of yours competitors moving outside the market?

Todd Hornbeck

Yes and yes, we are actively bidding international contracts right now, some of them in short term durations, some of them a little bit longer. But yes, we are actively looking at the opportunity and laying the alternative analysis of staying, whether doing some of the shorter term projects we are looking at, are great not only day rates but a great hedge as this market transitions into the full 50 plus rigs that we see coming.

J. B. Lowe - Cowen & Company

Okay, great. And my other question just was on the MPSV drydocking schedule, I see that you used to have a couple that were going to go in the drydock in 2015 but that’s no longer the case. Can you just give us some color on that?

Todd Hornbeck

I will have to look at it. I think we drydock one early for a contract and the Iron Horse we moved up to this year after her term charter and we are going to go ahead and drydock her now instead because we see a pretty robust market coming forward for 2015, so we want to go ahead and get her in the queue.

Operator

And next we will go to Brad Bays with Trinity Capital.

Brad Bays - Trinity Capital

Just a real quick question, looking forward how does the MPSVs that you guys have set to deliver in 2015 compared to the ones currently in your fleet and how should we view those on a forward basis?

Todd Hornbeck

That’s a good question and something that we will have to adjust, everyone will have to adjust to as we are bringing those MPSVs on. We have five that are coming online that are based off our 310 program that would be U.S. Jones Act-qualified basically IRM in subsea construction like construction vessels. To meet our hurdle rates on a long-term effective basis, we are looking at those day rates somewhere in the mid-70 range that would be indicative to their capital outlay costing of construction, quite different than the four MPSVs we have today which are in excess of $100 million apiece. So, once we bring all nine in, there will be a rebalancing of the average of the day rates. So, that’s a good question that people should be aware of as we are bringing these vessels online.

Jim Harp

When you begin, you get to see a little bit of that as we gave you the guidance for the fourth quarter because that has a full contribution from one of the five but as Todd is alluding to as we have rolled them in, the next two and then the next two basically we will continue to give you kind of a revised outlook as we migrate those in. But as Todd just said if we are in the mid-70s and hopefully through the spot cycle may be higher, it will become a blended average of the four older original plus the five new that are all smaller and will get to kind of a new normal for an average day rate for that group of nine eventually. It’s definitely a mix issue.

Operator

Now we will go to Matthias Detjen with Morgan Stanley.

Matthias Detjen - Morgan Stanley

Good morning gentlemen. So, I have a question about the construction cost of your vessels, so in one of your presentations you showed that the deadweight construction cost is fairly competitive in comparison to your competitors. My first question about those was, are those also international build vessels or is that only for U.S. build vessels?

Todd Hornbeck

Both domestic and international.

Matthias Detjen - Morgan Stanley

Okay and then the follow-up was like, so what are the other cost of running U.S. build tonnage and U.S. flagged tonnage and how does that compare to other vessels internationally? Can you compete on the running cost? Are they substantially higher or on par? Could you maybe give us some color there?

Todd Hornbeck

When we transition out to international markets depending on what the type of job, if we go to Brazil, we have to live underneath the Brazilian (private cash) [ph] laws and the manning requirements there which two-thirds of our crew members are Brazilian. When we go to Mexico it’s the same thing and most international markets are that way.

So, typically just the officer crew in our company, the master and the chief engineer will stay on as the U.S. mariners and those are pretty competitive rates for this type of tonnage internationally anyway. And then the ratings, the rest of the crew will be indigenous crew, or local content crew which is all competitive in that market. So, it will adjust as we move around the globe.

Matthias Detjen - Morgan Stanley

Okay, that’s interesting. And so one more question about the MPSVs, to what extent is the work split between drilling support and production support work and is that any different from regular PSVs?

Todd Hornbeck

It’s mainly on the construction side of the equation and the construction and production, hook ups and commissionings or IRM, the maintenance and repair current infrastructure, so not typically on the expiration side.

Operator

And now we go to George O'Leary with Tudor, Pickering, Holt & Company.

George O'Leary - Tudor, Pickering, Holt & Company

It feels like the demand outlook in the Gulf of Mexico in terms of the cadence of floaters entering the market slowed just a little bit quarter-on-quarter. Should we think about the potential for kind of underlining rates increase for PSV is very biased toward 2015?

Todd Hornbeck

Yes. It’s really indicative of, it has nothing to do with, if I can understand your question I can barely hear you but, the floaters as they come online the demand will surge and that will be indicative of the pricing of the PSVs. We also have some other demand drivers as well not only just international markets in PSV that would lead. We also have the construction in subsea market and the project market that’s soak demand as well. And then borrowing any unforeseen instances like a hurricane or something like that could soak up demand. So our position has been to hold out and wait until the market fully develops. We absolutely believe we’re in a increasing market and it’s just time, is just waiting for the market to fully develop itself. And in the interim we'll do a lot of spot work, either internationally or specialty work to wait until that fully develops. But what we see right now, and what we’ve told you is that, we see this 50 rigs being here by year end. A portion of those will be in an acceptance testing, probably it won’t be online but as they come online will be in the 50 plus market, 50 drilling units plus market and we think that’s where, whenever that happens is where we see equilibrium. Now you can tell me when exactly precisely that date is going to be and I can put it down in my book.

George O'Leary - Tudor, Pickering, Holt & Company

If only.

Todd Hornbeck

Yes. You’re the analyst.

George O'Leary - Tudor, Pickering, Holt & Company

On the organic opportunities front, you guys talked about moving into using your free cash flow to kind of grow organically and mentioned that there were some market niche opportunities out there. Is there any more color you could provide on sort of the nature of those opportunities that you are pursuing?

Todd Hornbeck

All of them. We’re pursuing all of them. You know that’s a tough question to answer. We’ve got a lot in strategic to our company. But I can tell you we do look at all the opportunities that you see that transactional that are public that you see, we probably looked at for whatever reason we’ve passed on or just the pricing got too high for us. But we’re in the business and we get, we look at all the deal for.

I want to thank everybody for participating in our call. And we look forward to seeing you on our next call or talking to you on our next call that will be on October 30. And look forward to the third quarter. Thank you very much. Have a good rest of your summer.

Operator

Ladies and gentlemen this concludes the Hornbeck Offshore Services second quarter earnings conference. You may now disconnect. Thank you again.

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Hornbeck Offshore (NYSE:HOS): Q2 EPS of $0.85 beats by $0.36. Revenue of $171M (+25.2% Y/Y) beats by $21.9M.