Hornbeck Offshore Services (Louisiana) (HOS) Todd M. Hornbeck on Q4 2015 Results - Earnings Call Transcript

| About: Hornbeck Offshore (HOS)

Hornbeck Offshore Services, Inc. (Louisiana) (NYSE:HOS)

Q4 2015 Earnings Call

February 18, 2016 10:00 am ET

Executives

Kenneth Dennard - Managing Partner & IR Counsel, Dennard-Lascar Associates LLC

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Analysts

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Gregory Lewis - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Joseph D. Gibney - Capital One Securities, Inc.

William Thompson - Barclays Capital, Inc.

Daniel J. Burke - Johnson Rice & Co. LLC

Mark Brown - Global Hunter Securities, LLC

Operator

Greetings and Welcome to the Hornbeck Offshore Services Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you Mr. Dennard, you may begin.

Kenneth Dennard - Managing Partner & IR Counsel, Dennard-Lascar Associates LLC

Thanks, Matt. Good morning, everyone. We appreciate you joining us for Hornbeck Offshore's conference call to review fourth quarter 2015 results and recent developments. We also welcome our Internet participants listening to the call over the web.

Please note that information reported on this call speaks only as of today, February 18, 2016, and therefore, you're 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 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 factors that could cause the company's results to materially differ from those projected in the forward-looking statements in the Hornbeck's SEC filings and in yesterday's press release under the Investor section in the company's website, which is www.hornbeckoffshore.com or through the SEC website at www.sec.gov.

This earnings call also contains references to EBITDA and adjusted EBITDA, which are non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measure is provided in the press release issued by the company yesterday afternoon. And finally, the company uses its website as a means of disclosing material non-public information and for complying with disclosure obligations under SEC's Regulation FD. Such disclosures will be included on the company's website under the heading Investors. 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.

And now, with that behind us, I'd like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Thank you, Ken. Good morning and welcome to the Hornbeck Offshore fourth quarter 2015 conference call. With me today is Mr. Jim Harp, our Chief Financial Officer. After my brief comments, Jim will take you through the numbers in more detail.

Yesterday afternoon we announced our fourth quarter and full year 2015 results. The fourth quarter net loss reflected a continuation of the severe market slowdown that we have experienced along with the rest of the oil service industry on account of the collapse in oil prices that has persisted for about 15 months now. There's no way to sugarcoat this. We are in an extremely difficult period in our industry. For our company, the combined effect of depressed drilling activity by oil companies globally and the oversupply of vessels in our principal markets, i.e., the Gulf of Mexico, will make 2016, and quite possibly beyond, very trying.

Competition for each job that comes available in the Gulf of Mexico is intense. Some companies are agreeing to below cash break-even rates, placing themselves into a precarious position which can only accelerate their financial difficulties. While that may result in an improved market dynamic down the road, it makes it very difficult for disciplined companies like ourselves to win jobs on the basis of rates.

In Mexico and Brazil, there are equal, if not worse, forces at play. Brazil remains gripped in a national corruption crisis in which Petrobras is at the center of the storm. The country, and Petrobras in particular, is nearly paralyzed. The silver lining is a possible opening for other E&P players in the Brazilian pre-salt arena, which would be a welcome development.

In Mexico, while the country is transforming its energy economy, Pemex is beleaguered by a liquidity crisis that has forced it to rely on trade credit as a major source of working capital. So things are very, very bad.

We think that 2016 will be very different than 2015 from the point of view of how we focus our efforts, even though market conditions won't be any better and, quite possibly, worse. In 2015, we focused our efforts on shrinking our operating footprint as quickly and as aggressively as possible to mitigate any unnecessary cash burn. We also focused on cost cutting throughout the business. While we may have to stack some more vessels in 2016, we think the lion's share of stacking is behind us and we will continue to make every effort to eliminate costs that may become unnecessary and, perhaps more importantly, continue to find ways to permanently lower our cost structure.

As of today, we have stacked 33 of our new generation OSVs. Doing so saves us cash that would otherwise be spent on idle vessels waiting for jobs that won't materialize anytime soon. We finished the year with $260 million of cash on hand, up by $75 million at this time last year, even after funding $170 million in growth CapEx for our newbuild program.

Our $300 million revolver is available and undrawn. Our current operating footprint is one in which we will operate an average of 28 OSVs and seven MPSVs during 2016. By and large, our active fleet of OSVs will be comprised of some of the largest and most capable new generation supply vessels in the world, including 18 of our ultra high-spec HOSMAX OSVs.

Likewise, our MPSVs, which now include four Jones Act qualified vessels, will be highly relevant to the ongoing commitment of our customers to inspect, prepare and maintain existing Gulf of Mexico subsea infrastructure as well as to finish sanction projects. While we can't predict utilization or day rates for OSVs or MPSVs at this point, what we can say is that our now right-sized complement of vessels will be very relevant to whatever market there is.

Our 2016 efforts, in contrast, will be focused on preparing ourselves for market reentry whenever that occurs. Job number one is to operate as we always have, dedicated to providing superior service with best-in-class vessels in a safe and environmentally sound manner, all consistent with our core values and our entrepreneurial spirit. That is who we are and that will never change.

But our focus is to position ourselves to be ready for reentry. Stacking vessels, while not desirable, is relatively easy. Bringing vessels out of stack into what will certainly be an altered playing field will be very challenging. There will be significant barriers to re-entry when the market improves. Chief among them will be cash availability for everyone in the industry. It costs money to bring a vessel back online. While stacking vessels temporarily defers maintenance cost, that obligation, which is regulatory in nature does not go away and must be met prior to reactivation.

Most vessels will require regulatory inspection and, in some cases, drydockings, the cost of which may be prohibitive for certain players. We believe that companies like ourselves that have maintained financial flexibility balance sheets and have retained available excess cash will be available to move first and most quickly. So cash availability will be a key to having a first to re-entry advantage.

Next will be the challenge of bringing competent crews back to work. As a spot market player, we have developed competencies in scaling highly qualified crews that we think is unique and advantageous. Other companies more accustomed to long-term contracting operations might be on a steeper learning curve.

Third is sound business infrastructure. By that I mean having the physical assets and operating and business systems that can support quick reactivation. Again, here we believe we have strong advantages that go well beyond our vessels.

In the Gulf of Mexico, our HOS Port facility provides us ample elbow room to get work done on our vessels that others might have to wait in line for. On a related note, last year, we acquired a drydock that is capable of drydocking our HOSMAX size vessels, which will make us less dependent upon local shipyards, some of which may not survive the downturn and others of which are proprietary and may not be commercially available.

Finally, we have boots on the ground, physical infrastructure and shore-side teams in our other core markets, Mexico and Brazil. We will not be reinventing the wheel in those regions, which likely will recover in tandem with the Gulf of Mexico.

So, in summary, through the downturn, we expect to operate the most relevant fleet of best-in-class, ultra high-spec OSVs and MPSVs. We believe this superior operating platform will provide us the right scale and sustainability to transition into a recovery whenever it occurs.

By way of update, we reported yesterday that we have deepened our commitment to the Jones Act MPSV market by entering into change orders for our final four HOSMAX MPSVs still under construction. Upon their extended deliveries in 2016 and 2017, these vessels will be the largest and most capable Jones Act-qualified MPSVs on the market. Two of the vessels are being expanded such that they will be the first ever 400 class Jones Act MPSVs. The expansion of these two vessels will push the deliveries and related milestones into 2017.

Our average invested cost in each of these two vessels of approximately $110 million demonstrates our ability to deliver into the divested market highly capable of Jones Act-qualified MPSVs at a globally competitive construction price point. We see the Gulf of Mexico, IRM and subsea construction support as a Jones Act market and expect that as qualified vessels continue to be delivered from U.S. shipyards, including our eight MPSVs, foreign-flagged vessels will be permanently displaced.

In addition, we are pleased to report that we recently delivered one of our HOSMAX 310 class vessels into Brazilian registry last month. Brazil is increasingly a Brazilian flag only market as foreign vessels are being blocked and eventually displaced. That is why we decided not to renew our last four remaining U.S. flag vessels for four-year charter extensions in Brazil a year ago, choosing instead to mobilize them back to the Gulf of Mexico and stack them.

We pulled out because we foresaw the trend and were concerned about the likelihood of blocking. We estimate that our decision to exit Brazil when we did saved us over $5 million. As the owner of the newest and largest ultra high-spec Brazilian flag OSV in the Brazilian market, our Brazilian subsidiary will be able to enjoy the benefits of strict Brazilian cabotage laws to strengthen our beachhead in Brazil for our company.

As we have said repeatedly, while Brazil is a very challenging market today, it is nevertheless one of the largest deepwater markets on the planet and we are committed to operating there over the long haul. The HOS BRASS RING, which went on charter shortly following her arrival in Brazil, demonstrates our commitment to that regional market.

On a related note, we recently commenced another charter in Guyana for a major customer that we expect will run for about a year or possibly longer. We're also pleased to report that we now have delivered all of our HOSMAX OSVs slated under our newbuild program number five. The only remaining vessels under that program are the four remaining MPSVs I just mentioned.

Of this $1.3 billion program, only $133 million or about 10% of the total program remains to be expended, of which, we expect to incur $86 million this year and the remaining $47 million in 2017. We expect to fund this amount with projected free cash flow from operations and cash currently on hand.

Before I turn the call over to Jim, I want to say another word about liquidity, which is really the key measure in a market such as this. First, liquidity really begins with operations. Our number one goal is to not burn cash through operations. While that may sound bleak, cash break-even is a win in this market. So, while we think we're right size, we will not hesitate to take further steps to stack vessels if we have to do so to save cash. It's an easy decision for us. That said we have an available and undrawn $300 million revolver supplementing our cash on hand.

In addition, all of our long-term funded debt, which doesn't mature until the end of this decade, is unsecured and maintenance covenant free. So, even if things will likely get worse, we still expect that we will be able to fund our fixed interest payments, maintenance CapEx and remaining growth CapEx even if all we do is break-even on an operational cash basis. The bottom line is that we expect that we will still be standing among the carnage whenever this market normalizes.

Finally, I want to thank all of our stakeholders, particularly those who have been with us for a very long time. Know that you are invested alongside a seasoned management team that itself owns and has recently invested a sizeable stake in this company. We are long-term owners first and managers second. We believe in this industry and we believe strongly in the company that we have built together.

With that, I'll turn it over to Jim.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Thanks, Todd, and good morning, everyone. Yesterday afternoon we reported our fourth quarter results and updated the forward-looking guidance information contained in the data tables to our press release to provide first quarter and annual guidance for 2016 and limited annual guidance for 2017 for various categories of financial and operational data. We will continue to update this information quarterly to reflect our latest market assumptions throughout 2016. Keep in mind, this information is based on the current market environment, which is always subject to change.

As we enter what is almost assuredly going to be the most challenging year in our company's history thus far, we are laser-focused on our strategic objectives of preserving our tangible and intangible assets and our economic upside. As we all know, this is a highly cyclical and volatile industry. The name of the game is to have the most relevant fleet offering in the right geographic markets with the financial flexibility and liquidity to weather the storm.

We're specifically geared toward making a bottom line profit EPS and not busting any loan covenants, while maintaining the physical condition of our hard assets, retaining our essential human capital, protecting our reputation for safe and high quality operation, and conserving our excess cash reserve.

The net loss we reported yesterday that we foreshadowed on our third quarter call, is only the third quarterly upstream loss in the 18-year history of the company, which is reflective of the strong headwinds we are currently facing in the offshore services market. In fact, as discussed last call, it's reasonable to assume, due to the seasonal effects of the winter months that our financial results for the first quarter of 2016 are not likely to improve from the fourth quarter levels and may even come in a little lower.

Our customers have continued to slash CapEx budget and to incur hefty fees to cancel floating rig contracts, while several other active units have been idled although still under contract. This reduction in demand has come as we and our competitors continue to deliver the final wave of OSV newbuilds to the market that were ordered in the 2011 and 2012 timeframe. The only good news is that no new tonnage has been ordered in over three years with no prospects for any additional newbuild orders in the foreseeable future.

Once these final vessels deliver, the marketed supply should begin to stabilize. With no clear catalyst for our customers to change their OSV demand profile any time soon, we continue to search for ways to cut cost across our entire enterprise by stacking vessels and looking for operating efficiencies offshore and shoreside. This led us to stack four more vessels that wrapped up long-term charters in Mexico in the first quarter, and we expect to stack one more 240 class OSV once she completes her charter in the coming days.

Through these increased stackings and recent cost-saving initiatives implemented in our fleet, we have achieved approximately $35 million in additional annualized cost savings since our last call, which brings our annual run rate total to around $160 million less than expected pre-downturn OpEx and G&A levels. Not included in this number is the roughly $11 million of cash maintenance CapEx cost that we deferred during 2015 and another $17 million we expect to defer in 2016 related to 21 of the 34 stacked vessels.

As Todd mentioned earlier, while these dry docking costs will have to be incurred before those vessels can return to service, we can delay that cash outlay until we have a much clearer picture on a market recovery. So, overall, I think we've done an admirable job of proactively containing our costs and preserving cash.

Now, let's review the details for the fourth quarter. As a quick reminder, the third quarter of 2015 included an $11 million, or $6.7 million after-tax, or $0.19 per diluted share gain related to the August 2015 sale of the final 250EDF class OSV to the U.S. Navy. All of the data referenced in my remarks this morning will exclude this gain from the sequential quarter financial results in order to present an apples-to-apples comparison of this quarter to last.

Our fourth quarter loss was $2.7 million, or $0.07 per diluted share. Please note that due to the net loss, under GAAP our diluted share count for purposes of calculating EPS is deemed to be equal to our basic share count. Our reported operating income was $5 million or 5% of revenues in the current quarter compared to $22 million or 19% of revenues in the third quarter of 2015. While the significant drop in our operating margin was certainly disappointing, it was still within our expectation that we would maintain a positive result.

However, given the level of uncertainty regarding the amplitude and duration of this unprecedented down-cycle, it remains to be seen whether we can continue our 18-year streak of never having produced a negative operating margin.

On a more favorable note, we recently updated our analysis of whether a triggering event has occurred that would require an asset impairment analysis and concluded that there were no such events in 2015. We also concluded that the modest amount of goodwill on our books, only $1.7 million, is not impaired. We firmly believe that the fair values of all of our asset groups exceed their carrying values and we do not expect to have any impairment charges in the foreseeable future.

In order for the fair values of any of our assets to be below their respective carrying values, current and projected effective day rates would have to be significantly below the lowest levels experienced in our company's history. In addition, those market conditions would have to be sustained for the entire remainder of the economic useful lives of each vessel class, which is highly unlikely given the young age and the low original cost basis of our fleet of state-of-the-art new generation vessels.

Fourth quarter EBITDA was $32 million or 35% lower than the comparable sequential quarter EBITDA. This decrease was primarily due to continued softness in the Gulf of Mexico for our HOSMAX OSVs and MPSVs. Adjusted EBITDA, which is the defined starting point that we use to compute ratios for the financial covenants and our undrawn revolving credit facility, was $35 million for the fourth quarter of 2015. 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 10.

Revenue for the fourth quarter of 2015 was $89 million, or 24% lower than the sequential quarter. This sequential revenue decrease was primarily attributable to the transition of two of our MPSVs from long-term contracts at attractive day rates to the current spot market and lower utilization in day rates for our high-spec OSVs and MPSVs operating in the Gulf of Mexico. These decreases led to our decision to stack seven additional OSVs during the quarter. Average new generation OSV day rates for the fourth quarter of 2015 were approximately $24,000 or about $1,700 lower than the sequential quarter.

Utilization for our new generation OSVs for the fourth quarter of 2015 was 46% compared to 50% sequentially. But adjusting for stacked vessel days, the effective utilization on our active fleet of new gen OSVs was 84% compared to 72% sequentially. The 12-point sequential increase in utilization of our marketed fleet to the mid 80%s is a good indicator that our stacking strategy is working as planned.

Operating expenses of $45 million for the fourth quarter were $5 million below the low end of our guidance range. For the full calendar year 2016, aggregate cash operating expenses are projected to be in the range of $170 million to $185 million. We project cash OpEx for 2016 to decrease from prior-year levels primarily due to an average of over 33 vessels expected to be stacked during 2016, company-wide head count and wage reductions and across-the-board pay cuts for shoreside and vessel personnel, notwithstanding an average year-over-year increase in our active HOSMAX fleet count of approximately three vessels.

As a reminder, we have provided you with updated full-year and first quarter 2016 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 are only intended to cover our currently anticipated active fleet complement, geographic footprint, charter mix and industry market conditions. While our updated guidance is predicated on an assumed stacked fleet of 34 vessels for fiscal 2016, we will consider stacking additional vessels if market conditions warrant.

Our fourth quarter G&A expenses of $11 million were 12% of revenues, which was in line with our recent historical range and that of our domestic OSV peers and below the low-end of our guidance range. For calendar 2016, G&A expenses are expected to be in the range of $47 million to $52 million. Going forward, given the continued downward pressure on revenues as we proceed through this down-cycle, I think it's more important to focus on the absolute cost guidance we provide rather than rely on historical margin ratios derived from normalized market conditions.

I'll now review some of our key balance sheet related items for the fourth quarter. Our total cash and cash equivalents at quarter-end were roughly $260 million, which put our net debt position as of year-end 2015 at $810 million, up from $778 million sequentially. We also have an undrawn $300 million revolving credit facility that we amended and extended in February 2015, a year ago, with much more favorable loan covenants that doesn't mature until the year 2020.

We currently have a blended average fixed cash coupon of about 4.4% on roughly $1.1 billion of total outstanding face value of publicly traded long-term unsecure debt that matures in three tranches in the years 2019, 2020 and 2021, respectively. For fiscal year 2016, we expect to incur an annual run rate of cash debt service in the amount of roughly $50 million. We expect to pay about $4 million in cash taxes for the full year 2016 and are projecting our annual GAAP tax rate to be approximately 30% for fiscal 2016.

For detailed guidance and a granular breakdown of our GAAP interest expense as well as our projected cash interest and taxes by quarter and annually, please see our guidance tables on page 13 of our earnings release yesterday, which are also available in Excel format in the Investors section of our website.

As Todd mentioned earlier and included in our press release yesterday, we announced upgrades to the four remaining MPSVs under construction at two shipyards as part of our ongoing newbuild program. The aggregate cost of these four conversions will be approximately $70 million and will extend the deliveries by an aggregate of 730 additional vessel days.

Our current newbuild program is comprised of 19 HOSMAX OSVs and 5 HOSMAX MPSVs and remains substantially on budget. As of today, we have placed 20 of the 24 HOSMAX vessels in service and expect to take delivery of the two additional newbuild MPSVs during 2016 and two during 2017

.

The aggregate cost of this program is now expected to be approximately $1.3 billion, of which approximately $86 million and $47 million are expected to be incurred in fiscal years 2016 and 2017 respectively. From the inception of this program through December 31, 2015, we have incurred roughly $1.22 billion or about 90% of total expected project cost, including roughly $32 million that was spent during the fourth quarter 2015. We expect to incur newbuild project cost of $37 million during the first quarter of 2016.

For an update on 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 to 15 of our release yesterday afternoon.

Together with cash on hand, we expect to generate sufficient cash flow from operations, even should transitory net losses continue for one or more quarters to cover all of our growth capital expenditures for the remaining four HOSMAX vessels under construction, all commercial-related capital expenditures and all of our annually recurring cash debt service, maintenance capital expenditures and cash income taxes through the completion of the newbuild program and foreseeably beyond, as well as discretionary share repurchases from time to time without ever having to use our currently undrawn revolving credit facility.

As Todd mentioned earlier, our top executive officers have recently invested over $3.5 million personally, buying nearly 200,000 shares of Hornbeck's stock since this downturn began in mid-2014, adding to our already meaningful stake in the company, which is now over 5% acquired since 1997.

Few, if any, other oilfield service management teams can match that level of skin in the game, which we believe is the ultimate expression of our alignment with shareholders and our optimism that we will not only be successful in surviving this downturn, but will once again thrive as we inevitably exit this cycle very well positioned.

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

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

All right. Operator, I think we can open it up for questions now.

Question-and-Answer Session

Operator

All right. Thank you. Our first question is from Robin Shoemaker from KeyBanc Capital Market. Please go ahead.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Thank you. So, Todd, I wonder if you could share what you see as the market opportunity for the 400 class MPSVs that warrants that change in the original plan. And just where is the market niche that those will serve? And is it – anyway – if you could just describe that that would be helpful.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

It will be in the deepwater Gulf of Mexico. And as we step out into this market and we're doing a lot of jobs, as you know, in the specialty market now. We don't talk a lot about the strategy, as you know, on other calls, but we have several large MPSVs in the market today, two 430-foot vessels DP3 that are doing a wide range of subsea – not only subsea construction work, but also well intervention work as well and flow-back work as well.

So, this infrastructure that – not just the existing infrastructure in the Gulf of Mexico, but already the sanctioned infrastructure that we'll be going in over the next several years, we felt it was prudent at this time to differentiate those – two of those vessels in really more liquid capability from a standpoint of chemicals and also deck space and extra crane capacity for some redundancy on the vessels. We also increased their berthing capacity to accommodate some of these much larger work packages that would be installed on the vessels from time to time as we move from different job to different job.

So, we get another added benefit. These plans, as you can imagine, have been in the place for quite some time, the engineering. But the little bit of added benefit that we'll get is that it will extend the vessels out into 2017 to where we think we'll bridge to a better market anyway. We're not paying the yards. As you see a lot of vessels around the world are being extended in the yards and having to pay the yards a fee for that. So, we won't be burning any cash in that regard that we won't get a benefit from.

Also, if we just delivered those vessels into the 2016 market, we think utilization could be hampered pretty severely. So, this actually gives us two benefits and a prudent expenditure to a much better, more capable vessel for a much wider scope of services. So, that's really what's driving it. You can anticipate that we have a lot of plans for those vessels, but going into that too strategically on this call in this market probably wouldn't be advantageous for us right now.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Right, right. Appreciate the explanation. You mentioned the very competitive pricing below break-even in some cases. Are you already seeing signs of financial distress in some of the – some of your competitors who are pursuing that course? Is there already an indication that they will no longer pursue that strategy or are we still fully into that very aggressive below cash break-even type of bidding today?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Very good question. I think right now it's a little sloppy. We do have, in our view, some spot-on competitors that have some liquidity problems. And so you're right in where – your direction that you're going is that eventually those vessels should be stacked. A lot of those fleets or the vessels in those fleets are not going to be very competitive in the marketplace because of their size anyway.

So, we think that more vessels will eventually go to stack as a result of not only just the size of the vessels they're trying to maintain in the market but also the liquidity problems that some of these companies are having. I think it's more acute right now in other little pockets of the world, in the Gulf of Mexico, even though we think it's coming pretty quickly in the Gulf. So, hopefully, our expectation, we hope by mid-year, we should have a rebalancing of the supply/demand equation. Anybody that's delivered a new boat today, probably, if it's not contract, it should probably just go on and go to stack.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Right. Okay. Thank you, Todd.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

All right. Thank you.

Operator

Our next question comes from Gregory Lewis from Credit Suisse. Please go ahead.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Yes. Thank you and good morning.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Good morning.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Todd or Jim, you mentioned the focus on liquidity. Clearly, cash is king in this market. So just going back to Robin's question regarding the upgrades of those four MPSVs. How difficult of a decision was it to increase the CapEx on those vessels? It seems like a potentially aggressive move just given the uncertainty in the market.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yeah, you're correct. That doesn't go lightly. Obviously, we see something that made us – push us in that decision tree. Those decisions, as you know, are not made likely at all. And from the strategic nature of it, rather not go into what we see out in the future. It is positioning us for some opportunities and some work.

And the other flip side of the coin is delivering those vessels early into the market and just burning the cash from operations, you get there one way or the other. But that CapEx decision is not something that was just happenstance. We've been working on a specific strategic initiative for quite some time.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Okay, great. And then, Jim, just a two-part question. It looked like non-commercial maintenance CapEx was up beyond the Q4 guidance. And then as I look at 2016, the forward guidance, I realize that the 2016 was a preliminary estimate, but it just seems like other CapEx is on the rise. And I'm just trying to figure out if there's room to flex that down throughout the year or is there some other sort of underlying things that are happening on the maintenance side, which is why we saw it up in Q4 and why it looks like it's going to be up higher in 2016?

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Yeah, fundamentally the biggest mover on the maintenance CapEx side is that we will be dry docking 16 vessels instead of 10, as we had forecasted on our last quarter call. And that's driven by operational and other factors that warranted and made sense to go ahead and dry dock some boats when they were already going to be addressed for some other purpose.

As far as other CapEx, the way to think about that is really like growth CapEx, but you're not adding a new boat. Meaning, it's much more revenue producing. It's not a CapEx related to maintain an existing vessels' existing capabilities; in every case, it's adding capacities or capabilities to existing vessels, which is why we created the category of commercial-related CapEx because it's the kind of thing that we only do when we have an opportunity to monetize it through the payback through a higher day rate related to its new contractual profile.

So in a way, that's, if you will, a more modest amount of continued incremental revenue producing and/or utilization enhancing investments to tweak the current fleet offering to give it the maximum optionality as possible. And in most cases, it's very discreetly related often time to a specific contract. And so while that number may have swollen, in a way, it's a good thing. I realize and we all agree as we just stressed heavily in our script and the last focus of yours and Robin's question, we're keenly focused on cash and preserving it. So you can be rest assured that when we do part with it, it was well considered for the quid pro quo, for the payback, was we deemed warranted the expenditure of that in a strategic manner. Because in the end, ultimately what drives our strategy, as we said many times, is just to maintain the most relevant fleet in the marketplace.

And so often times the relevancy of those assets, which the beauty of our HOSMAX class, given their overall size and configuration as a starting point, as a platform, 6,200 deadweight ton, if you will, blank sheet of paper, it can be easily tweaked and modified and things added to it that allow it to do a lot of things on the margin.

So basically we're trying to stratify a very diverse fleet offering from the base of a very strong foundation of a large market share of ultra high-spec vessels. And that will manifest itself from time to time in growth-related – or I should say, commercial-related CapEx.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Hey, perfect. Thanks. Hey, guys, thanks for the time.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question is from Joe Gibney from Capital One. Please go ahead.

Joseph D. Gibney - Capital One Securities, Inc.

Thanks. Good morning. Jim, just a quick question from a modeling standpoint on non-vessel revenue. Pursuant to your ongoing O&M contract, just trying to understand if your fourth quarter run rate is it a reasonable proxy to be thinking about going forward.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Yes. Basically, when we started that O&M contract, we gave general guidance as to what the annually recurring level of EBITDA would be. And that number will be stable and over time has the possibility to go up. But modeling-wise, to hold it flat for the whole 10 years is a reasonable modeling assumption.

Joseph D. Gibney - Capital One Securities, Inc.

Okay. And then last one for me. Could you just clarify sort of your fleet count from a Latin America standpoint? So where do we stand in Mexico now? Is it going to be seven vessels? And then you referenced to one now in Brazil with the HOSMAX newbuild moving into the market. Just trying to understand are all these vessels also spot or is there some semblance of term covered, as it were, in this market which is challenging. I get it. But just trying to understand the mix there a little bit would be helpful.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

I'll speak to the head count first and I'll defer the contractual nature to Todd. Headcount-wise, you're right, seven vessels in Mexico, the one in Brazil, one in Guyana, which we just announced this morning and that would be our national deployment.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yeah. They're both – we have both contracts term and spot. We don't want to get into parsing those out.

Joseph D. Gibney - Capital One Securities, Inc.

Okay. Fair enough. I appreciated it, guys.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yeah.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Thank you.

Operator

Our next question is from William Thompson from Barclays. Please go ahead.

William Thompson - Barclays Capital, Inc.

Hey. Good morning, Todd and Jim.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Good morning.

William Thompson - Barclays Capital, Inc.

Just doing the math for the reported OSV utilization and day rates, it implies that MPSV revenue fell pretty propitiously from fourth quarter levels. How much of that can we attribute to the winter seasonal low for MPSVs and it looks like – I think there's 50 commercial down days?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yeah. We foreshadowed that on our last call, said the fourth quarter was going to be very, very – fourth and first quarter for MPSVs are the two quarters that those assets typically have the lowest utilization. We had one of the vessels that came up a long-term charter that went to drydock and some repair and maintenance on her, that didn't operate during the quarter. She won't be back out for some little conversion that we're doing until April, but will be ready for the construction season.

We're starting to see right now a lot of inquiries on all of the MPSVs for operating during the spring and summer months. So, that activity is starting to pick up like it usually does this time this season. All the inquiries coming in for the upcoming construction and maintenance and repair season for the deepwater Gulf of Mexico. So, over the next 90 days, we'll see that utilization really pick up – anticipating that it will really pick up. We've already had some increased utilization in the first quarter.

William Thompson - Barclays Capital, Inc.

And then, are you seeing any of your peers stack MPSVs or have you seen any of the foreign-flagged MPSVs leave the Gulf of Mexico?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yeah. We're seeing some that we think will be stacked. Yeah, some foreign-flagged MPSVs outside of the market have been stacked. The ones that remain here remain on a really spotty basis, most of them not getting any utilization. With our Jones Act week coming in, we'll think that will probably force some to either leave the Gulf of Mexico or going to a stack mode.

William Thompson - Barclays Capital, Inc.

And just one last one quick for me. The 84% effective utilization is pretty solid in this environment. You've previously talked about how the competitive pricing market is, but that your anticipation, your hope was to get the 300 class OSV cash operating cost more competitive with the 200 class. Where do you stand on that and kind of what – you talked about wage reductions across the board, what further leverage do you have to be more competitive on the 300 class cash front?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yeah. We've taken our cost down overall from operating about 25% from the previous quarter, and that will start in earnest starting around the end of January, February 1, throughout the balance of the year and on. So, we've got – we've taken the cost down to be very, very competitive with the 300 class fleet. Utilization is going to be sloppy during the first quarter. We had a little bit of (46:37) activity toward the end of the year. But we anticipate utilization to pick back up again during the spring and summer months as construction season also soaks up some of that tonnage for other purposes and uses other than exploratory or development drilling.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Just to clarify, Todd misspoke. We've gotten our 300 class daily cash OpEx down competitive with 240 class.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Yes.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

We've now gotten our 300 cash OpEx down to basically what our 240s used to work for.

William Thompson - Barclays Capital, Inc.

Thank you.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

So, good progress on cost containment front. We think that will start to show some positive – some more positive signs than what we have probably in the second and third quarters.

Operator

Thank you. Our next question comes from Daniel Burke from Johnson Rice. Please go ahead.

Daniel J. Burke - Johnson Rice & Co. LLC

Good morning, guys.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Good morning.

James O. Harp, Jr. - Chief Financial Officer & Executive Vice President

Good morning.

Daniel J. Burke - Johnson Rice & Co. LLC

Given the specialized nature of some of the Hornbeck MPSVs, are there still term opportunities out there, Todd, or is this going to be a market where, even in the summer season, you'll be subsisting from sort of spot job to spot job?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

There is no doubt in a down market that the customer base loves to be able to pick and drop equipment as they need it. When you get into very high risky operations or high risk profile operations, that's not as easy. In a market like we're in today, where there's available tonnage on the marketplace, it comes down to the best operator and price.

So, are there term opportunities out there? Yes and no. It just depends on how you want to contract and what you think some of the future benefits might be from doing that. So, it's really all over the map. I think there will be some term opportunities for our type of equipment. I don't think that's going to be for the broader market.

Daniel J. Burke - Johnson Rice & Co. LLC

Okay. That's helpful. And then, one small one, on the 400s, what's going to be the mud-carrying capacity of those vessels after the stretch?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

It's not really driven by that. That's not why they're being stretched. So, it'll be the same as before they were stretched. We're not adding any more mud capacity. It's all high-end chemical capacity.

Daniel J. Burke - Johnson Rice & Co. LLC

Okay. All right. That's helpful. Thank you, guys.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

All right.

Operator

Our next question is from Mark Brown from Seaport Global Securities. Please go ahead.

Mark Brown - Global Hunter Securities, LLC

Hi, gentlemen. Just wanted to ask about the comments around the re-entry, barriers to entry, when the market does come back and if you had any numbers around how much it would probably cost on average for you to put a vessel from stack back to work, and how that would compare to your competitors and whether the HOS Port facility would advantage you in that regard?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

Good question. Glad you asked it and that we spent some time on the call accentuating that point. We've maintained our vessels very, very well. The way we stack our vessels, they're under a maintenance program. So, I don't know that we're going to have as a bigger problem trying to get them back into the marketplace. And you are correct, with HOS Port, we can bring it to our own facility and do a lot of the topside work on our own facility before we reenter them into the market.

But you have to understand that when – if this market popped up tomorrow, it would be a different answer than if it pops up two years from now. The vessels that are currently in stack, if this downturn last another two years, which I'm not calling the shot that it is, but I'm just saying if it had, which some people are calling for commodity prices to stabilize pretty far out into the future or drilling activity to resume pretty far out into the future. Most likely, most of the COIs will be lapse, and that's certificate of – operating certificate – certificates of inspection and drydockings will be required of those vessels to go back into service.

On a DP2 240 that's high-spec, you could be looking at $1 million re-entry fee per copy, if not closer to $2 million; between $1 million and $2 million. So, I would average it across the spectrum of about $1.5 million. So, that creates its own barrier to entry and, particularly, when you start to look at the financial shape of a lot of the companies with very, very limited cash today, what does that look like two years from now?

So, I think we're in a very competitive position there that we're in a pole position to be able to bring vessels out very quickly in first mover and get back into the market. As you know, we did buy our own drydock. I'm not saying that we're going to operate that drydock. We're talking with several vendors of ours that we've had long-term relationships with and long-term business with from a drydocking standpoint and shipyard standpoint to maybe help us manage the dock. But we can officially go – efficiently go into our own drydock if there was a surge on bringing equipment back out in the market. As you know, the first thing it fills up is the shipyard. So, we think we've got a competitive edge there as well. Yeah.

Mark Brown - Global Hunter Securities, LLC

Well, thank you. And then just as a follow-up, for the market in the Gulf as a whole are your competitors also stacking at a similar percentage of their fleet compared to the 33 that you've already stacked? And is the focus of your competitors on the lower-end of their fleet, the 200 class or even 240 class as well?

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

I think so. I think, right now, there's probably more going into stack as this thing continues to be down and the drilling activity comes off. Everyone knows about the cancelation of certain rigs in the Gulf of Mexico and what the shelf looks like with only about six rigs running. That will over time force more vessels into back mode that's currently operating there. But I think, by and large, stacking has been a focal point the last quarter of a lot of competitors that typically would try to ride out the bottom of the cycle.

Mark Brown - Global Hunter Securities, LLC

Thank you.

Operator

If there are no further questions, I'd like to turn it back over to management for any closing remarks.

Todd M. Hornbeck - Chairman, President & Chief Executive Officer

All right. Thank you, everyone, for joining the call. I really appreciate your time and attention in following the company. We look forward to talking to you on our first quarterly conference call. That will be May 5. And we look forward to seeing you then. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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