Hornbeck Offshore Services Inc. (HOS)
Q4 2007 Earnings Call
February 21, 2008 10:00 am ET
Todd M. Hornbeck – Co-founder, Chairman, Chief Exec. Officer and President
Jim Harp – Chief Financial Officer, Principal Accounting Officer and Executive Vice-President
Pierre Conner – Capital One Southcoast, Inc
Robin Shoemaker – Bear, Stearns & Company
Daniel Burke – Johnson Rice & Company
Judson Bailey – Jefferies & Co.
Daniel Boyd – Goldman Sachs
Welcome to the Hornbeck Offshore Services fourth quarter 2007 conference call. (Operator Instructions) Now I'd like to turn the conference over to Mr. Ken Denard with DRG&E. Please go ahead sir.
Thank you and good morning everyone. We appreciate you joining us for Hornbeck Offshore's conference call to review fourth quarter 2007 results. We also would like to welcome our Internet participants that are listening to the call over the web.
Please note that information reported on this call speaks only as of today, February 21, 2008 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening.
During today's conference call Todd and Jim will make certain projections about future financial performance, operations, and events that are not statements of historical fact and thus constitute forward-looking statements. As noted in today's press release, these forward-looking statements are subject to risks, uncertainties and other factors that may cause the company’s actual future performance to be materially different from that which is projected today.
In our 2006, Form 10-K and today’s press release announcing earnings you can locate additional information about factors that could cause our results to materially differ from those projected in the forward-looking statements. Our Form 10-K and today's press release are located. On the Investor Relations/SEC filing section of the website and that’s www.HornbeckOffshore.com and available through the SEC.
This earnings call also contains references to EBITDA, which is a non-GAAP financial measure, a reconciliation of this financial measure to the most directly comparable GAAP financial measure is provided in the press release issued by the company this morning.
Now without further ado, I'd like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore.
Thank you, Ken. Good morning everyone. Welcome to our fourth quarter 2007 earnings conference call. Joining me today is Mr. Jim Harp our Executive Vice President and Chief Financial Officer.
Our agenda for today's call is to review our fourth quarter 2007 financial results, provide you with a brief overview of our current market conditions and update you with our new build programs. After reviewing these matters, Jim and I will be available for questions.
Before we review our two operating segments, I'd like to take a moment to reflect on the few highlights from this past year. We're quite pleased with our performance for 2007 as evidenced by the following:
Operationally, we're very proud of our 2007 safety record. Our total reportable incident rate for calendar 2007 of 0.15 was the lowest in our history and we also achieved our lowest annual loss time incident rate of 0.03 since 2007 when our LTIR was 0.0. These results were even more impressive considering that these achievements were completed in a year where the total personnel hours increase 21%.
Financially, the fourth quarter of 2007 marked the first time in our history that quarterly revenue exceeded $100 million primarily attributable to the full quarter contribution of vessels added to our fleet through acquisition and new build programs.
Our annual diluted EPS for the year was 30% higher than annual 2006; our OSV operating margins were 50% in 2007, up from 48% in 2006; and our OSV fleetwide effective day rates for 2007 increased 15% over our previous record highs reported in 2006.
We have also continued our track record of growth, positioning ourselves to possibly more than double our EBITDA-generating capacity within the next two years on the same capital structure. We are pleased that we were able to deploy roughly $300 million of cash positioned in several strategic acquisitions and extensions of our current growth initiatives since August of last year on the terms that are projected to be highly accretive.
More notable, the dry powder used for this growth was raised in two opportunistic financings in 2005 and 2006 on terms substantially more favorable than current market conditions would allow.
In August 2007 we acquired the Sea Mar Fleet and successfully integrated those vessels in our shoreside operations into our company. During the second half of 2007 we delivered two 60,000 barrel new build tank barges and retrofitted two lake class tugs and we managed nearly $1 billion of pending CapEx on active foreign and domestic new build projects including the recent acquisition of the Superior Achiever in January of 2008.
Now let's review our recent and current market conditions for the OSV segment. Demand for our new generation offshore supply vessels in the U.S. Gulf of Mexico remains strong. The fleetwide average day rate in the fourth quarter of 2007 for our OSVs remained above $22,000 per day which is on par with day rates reported for the third quarter. Our effective fleetwide day rate was $20,173 on utilization of 90.4% utilization which was slightly lower than the sequential quarter.
Utilization was down for our 200 and 220 class new generation OSVs working in the spot market due to drydockings and the normal seasonal slowdown in supply vessel activity during the quarter. Utilization was also down for one of our anchor handling tug supply vessels due to the conclusion of a time charter in late October and its mobilization back to the U.S. Gulf of Mexico for drydocking.
The supply vessel market, we continue to observe signs that the fundamentals of our OSVs working as supply vessels particularly in deepwater and ultra-deepwater regions has a sustainable multi-year upside. Recent news announcements and trends that support our optimistic outlook include the following:
According to ODS-Petrodata, demand for the ultra-deepwater rigs greater than 3,000 foot of water depth -- this is a strong driver for new generation DP-2 OSV activity -- is expected to exceed available supply from 2008 to the end of 2011 at which time there will be over 172 rigs capable of drilling at these depths compared to about 88 rigs currently. New build contracts continue to be awarded and several rigs with deepwater capability are scheduled for delivery including 58 worldwide in 2008.
There's also strong demand for deepwater rigs. E&P companies continue to lock up additional new build deepwater drilling rigs in the Gulf of Mexico as noted by the recent announcements for long-term contracts for two new build drill ships and a three-year contract commencing in 2010 for an existing drill ship with a day rate of over $500,000 a day and a three-year extension of another drill ship.
There are currently 42 semi-submersible drilling rigs, next generation jack-ups and drill ships exploring the deepwater U.S. Gulf of Mexico with some contracts extending out over the next five years. There are also close to 30 semi-submersibles, spars and TLP's currently in production with roughly 20 additional floating production facilities comprised of semi-submersibles, spars, TLPs and FPSOs and 17 additional drilling rigs that are expected to come on line in the U.S. Gulf of Mexico between now and the end of 2011.
We also continue to monitor the demand in the sub-sea market for our two HOS 370 class DP-2 multi-purpose supply vessels currently under construction and the two T-22 class DP-3 multi-purpose supply vessels contracted for construction, as well as existing DP-2 vessels in our fleet capable of supporting sub-sea work.
Industry analysts forecast the capital expenditures through 2012 will include $28 billion for floating production systems, $38 billion on drilling and completion of sub-sea wells, $32 billion for flow lines and control lines and $10.5 billion for sub-sea hardware and surface completed wells, all in deepwater provinces. The corresponding deepwater projects include the installation of 1,270 sub-sea trees, 300 templates and manifolds, 68 platforms and roughly 8,000 miles of pipeline.
Field development in the U.S. Gulf of Mexico is forecasted – and this is ODS Petrodata information -- to continue at a steady pace with 71 projects under construction and 151 projects in design phase or under study; that's just in the U.S. Gulf of Mexico.
Vessel supply. Our updated internal estimates of OSV supply indicate that 183 U.S. flag new-gen vessels are currently in service, of which we believe 141 are working in the U.S. Gulf of Mexico with the remaining 42 working in foreign markets or non-oil field services. Not included in that figure are 48 announced OSVs that are currently planned or under construction at U.S. shipyards with delivery dates ranging from 2008 through 2011.
Once all currently announced domestic new builds have been delivered by the end of 2011, and assuming that none of them leave for foreign or non-oil field markets which we fully expect some to leave out of that number, we project that the visible supply of 189 new generation vessels in the U.S. part of the Gulf, will still be below our current estimate of visible demand for new generation vessels in the GoM based on internal estimates compiled from a variety of industry sources.
During the fourth quarter of 2007, four U.S. flag new generation OSVs were delivered into service in the U.S. Gulf of Mexico. We estimate that five new builds will be delivered to the U.S. GoM on various dates in the first quarter of 2008, and roughly about 22 delivering in the full calendar year this year.
We continue to have half of our new generation OSV fleet working in international waters or performing specialty services such as well stimulation, ROV support or military support. Of particular note, four of the ten super 200 class OSVs that we acquired from Sea Mar have contracts outside the U.S. Gulf of Mexico with two in [Gurter] and two in Mexico. The vessels in Mexico are outfitted for well stimulation service and were recently joined by the HOS Saylor which further increased our diversification into well stim services in international markets.
The versatility of our multi-class fleet of vessels has allowed us to further expand our specialty services franchise which is less affected by the exploratory rig count. We continue to advance our strategy of assembling one of the most diverse U.S. flag fleets capable of servicing virtually all facets of deepwater and ultra-deepwater offshore activity from cradle to grave, with a pending delivery of four MPSVs and 16 additional high-end DP-2 new generation vessels.
Move over to our contract coverage now. During the fourth quarter and in early 2008 we placed time charter contracts that have increased our 2008 annual contract coverage from 25% in early November now to 52% for the OSV fleet. Since the third quarter call, two well stimulation boats were awarded extensions in Mexico, three OSVs were awarded extensions in Trinidad and we placed another 200 class OSV into Mexico for a three-year contract. Of the 16 new generation OSVs currently under construction, seven have been awarded contracts for a total of 28 years. This is an average of four years a piece at an average day rate of over $30,500 a day.
Now, let's turn to our tug and tank barge operation. There was an overall softening in the black oil business in the northeast during the fourth quarter 2007 driven by high inventory levels that resulted from the high price of crude oil. We mitigated the northeast demand decline by chartering two of our larger double-hull tank barges to a major oil company for a six-month assignment that started January of this year and that is in the U.S. Gulf of Mexico. Our tug and tank barge fleetwide average day rates have been in the $17,000 to $18,000 range with operating margins in the high 20’s to low 30’s during 2007.
We are currently supporting an E&P company on a well test project. This project, which is expected to commence over the next few weeks, will involve one of our 60,000 barrel class barges as well as two owned or in-charter tugs and our conventional anchor handler. In addition, we expect to employ two of our OSVs and two in-chartered crew boats on this project. Total daily spread cost to the customer during the project's peak activity are expected to be in the range of about $114,000 per day.
As we anticipated, expected extensions and renewal options have increased 2008 contract coverage for the tank barge segment to 41% up from 22% in early November. Since our last call, four tank barges went to work on new term contracts while two received extensions of their existing contracts. We are forecasting tank barge day rates to remain steady in the $16,000 to $18,000 over the next two years as we approach the next major OPA 90 retirement milestones in 2009.
I'll now give you a quick update on a few of our active growth initiatives. The MPSV program first. In late December we entered into a letter of intent with Superior Offshore International to acquire the Superior Achiever. This is a T-22 class DP-3 New generation multi-purpose support vessel currently under construction at a foreign ship yard with an anticipated fourth quarter 2008 delivery. With the closing of this acquisition in January 2008 our MPSV new build program now includes four vessels: two 370 class DP-2 class vessels currently under conversion and two new built T-22 class vessels currently under construction. The four MPSV’s are expected to be delivered on various dates from the later half of 2008 through late 2009.
As a result of our recent expansion of this program we’ve increased our internal estimates of total costs for this construction program to approximately $450 million which is also noteworthy that we were able to charter the Superior Achiever to Superior Offshore for a five year contract at a day rate of $100,000 a day which will commence October 1st of this year.
Now, to OSV new build Program 4. In November 2007 we expanded our current offshore supply vessel new build program by contracting for the construction of two additional proprietary 240 ED class OSVs with a U.S. east coast shipyard. This is the same U.S. shipyard that is currently building four identical sister vessels. The two new vessels are anticipated to be delivered in 2010. With these incremental new builds, our fourth OSV new build program now consist of vessel construction contracts with three domestic shipyards to build 16 DP-2 vessels comprised of six 240 ED class OSVs, nine proprietary 250 EDF class OSVs and one 285 class new generation OSV. These vessels are expected to be delivered on various dates from 2008 to 2010 at an estimated cost of $393 million in the aggregate. I'd also like to mention that we expect to take delivery of the first vessel under this program, the HOS Polestar, in the next few weeks.
Now, to the tug and tank barge new build program 2. In November 2007 the 60,000 barrel double haul tank barge, the Energy 6507, was delivered from the shipyard and placed in service on a one-year time charter with a large petroleum products trader that plans to use her in trade routes in the U.S. Gulf of Mexico and northeastern U.S. An accompanying 3,620 horsepower ocean-going tug, the Huron Service, was also delivered from the shipyard in November following a retrofit. We expect to deliver a third and final 60,000 barrel tank barge and two remaining retrofitted tugs during the first half of 2008. The aggregate project costs for this program are expected to be $77 million.
At this time I'd like to turn the call over to Jim to review our fourth quarter financial results.
Good morning, everyone. As reported this morning, we had another great quarter and yet another record year of financial results having achieved a construction work-in-progress adjusted return on invested capital of 17.3% for calendar 2007. This was roughly in line with a comparable 17.9% we posted in 2006, but on a larger capital base. In addition, according to published research from one investment bank we currently enjoy one of the lowest weighted average costs of capital, or WACs, in the oilfield service industry which we now calculate to be between 4.8% and 6.7% for HOS depending on whether we use our data or an industry-related data of our peers.
As Todd mentioned, we have been very patient and disciplined in finding the right opportunities to strategically deploy our dry powder on assets that advance our business model and best position us to continue our track record of delivering strong financial results and EVA for our shareholders.
This morning we issued forward-looking annual guidance for 2008 and our updated pro forma run rate illustration to reflect the future potential impact of recently acquired vessels and vessels to be delivered under our ongoing new build programs.
In addition, we are very pleased to announce that we were able to successfully expand our revolver despite the volatility in today's credit market and credit environment especially given the favorable terms that we enjoy under this facility which was negotiated in a different market in September 2006. We are very grateful to our lenders for their strong support of our company as we will well over-subscribed in connection with the recent upsizing of our borrowing base.
We received firm commitments from our existing bank group plus three additional banks in the aggregate amount of $334 million and decided to go ahead and increase our $100 million borrowing base which is currently undrawn to the full extent of the available credit limit under our existing [accordion] of $250 million. We completed these arrangements yesterday and welcome two new lenders to our existing bank group which is now comprised of six domestic lenders and three foreign lenders.
Now moving on to our fourth quarter financial review, as a reminder unless otherwise noted, the OSV day rates and utilization information that we will refer to in this call only reflects the operating data for the 35 new generation OSVs in our fleet and does not include our ten conventional vessels which we consider to be non-core assets. Our fourth quarter earnings per share was $0.97 per share or 56% higher than the year-ago quarter on a weighted average share count of roughly 26.7 million diluted shares and our fourth quarter EBITDA was $51.5 million for an annualized run rate of $206 million. We exceeded the high end of our guidance ranges for the quarter by roughly $1 million for EBITDA and $0.01 for EPS.
After making adjustments to EBITDA for FAS 123 R, non-cash stock-based compensation expense and interest income required to compute ratios used in the financial covenants of our credit agreements with various lenders and bond investors, adjusted EBITDA for the fourth quarter of 2007 was $55.9 million for an annualized run rate of roughly $224 million. For additional information regarding EBITDA and adjusted EBITDA as non-GAAP financial measures, please refer to note 9 to the data tables in this morning's earnings release.
Moving into the segmented data for the OSV division, our average OSV day rates for the fourth quarter of 2007 were about $3,000 higher than the year-ago quarter and down slightly sequentially. Fourth quarter day rates were favorably impacted by one of our 200 class OSVs working in the specialty service market at a rate of $72,000 a day for roughly two months. This contract, or one like it, may or may not be renewed but is not currently expected to extend into 2008.
Utilization for the fourth quarter was roughly 90% compared with 95% for the third quarter of '07 and 85% for the prior year quarter. With average day rates at around $22,300 for the fourth quarter of '07, our effective or utilization -adjusted fleetwide OSV day rates were up roughly $3,700 over the fourth quarter of 2006. As Todd mentioned, we finished the year 2007 with a record high annual effective new gen OSV day rate above $20,000.
As a reminder, based on our current operating cost structure and share count, each $1,000 change in our effective new gen average OSV day rate on our current fleet of 35 new gen vessels should result in a $12.8 million change to our annualized revenue, EBITDA and pre-tax net income. This translates into a potential change in EPS of roughly $0.30 per year for each $1,000 change in effective new gen OSV day rates. OSV operating margins were 45% for the fourth quarter compared to 43% a year ago and 54% sequentially.
Moving into the tug and tank barge segment, the quarterly revenue increases for this segment were primarily driven by the incremental revenue contribution from vessels delivered under our second TTB new build program during the third and fourth quarters of 2007 and market-driven day rate improvement for recent renewal rates for certain of our double-hulled tank barge equipment that rolled off of long-term contracts during the fourth quarter of 2007 at rates that were fixed during 2005 while the vessels were still under construction. TTB day rates averaged $18,455 for the fourth quarter of '07 compared to $16,799 in the prior year quarter, an increase of approximately $1,700.
Our operating income for the fourth quarter of 2007 was up 15.7% to $8.1 million or 28% of revenues compared to the year-ago quarter of operating income of $7 million or 27% of revenues excluding a $1.9 million gain on sale of one of our ocean-going tugs in October 2006.
Moving into OpEx, on a segmented basis our cash OpEx for the fourth quarter of 2007 was $27.5 million and $13.1 million for the OSV and TTB segments respectively. Excluding the recently acquired Sea Mar fleet and 2007 new build deliveries, OSV OpEx and TTB OpEx were up 24% and 15% respectively over the year-ago quarter primarily as a result of market driven wage increases for OSV mariners in early '07 and FAS 123 R stock-based compensation related to restricted stock unit awards granted to mariners.
As we reported in our previous conference call, we expected year-over-year OpEx to increase by around 20% on a same-store sales approach. However, our company-wide OpEx for vessels that were in service for a full year, that were in service at 12/31/06, only increased 17% year over year. Looking forward, we only expect our 2008 cash OpEx on a per vessel day basis to increase between 5% and 10% over comparable 2007 levels.
Moving into G&A, as a percentage of revenue, our fourth quarter G&A expenses of $9 million were roughly 9% of revenue which is below the low end of our 2007 guidance range of 10% to 12% of revenues and the year-ago G&A margin of 10.3%. Our G&A for calendar 2007 increased in absolute terms by about 16% over 2006 levels inclusive of an expected increase in FAS 123 R expense which was lower than the 20% G&A increase that we had projected and guided to.
Our calendar and quarterly year-over-year G&A increases were primarily driven by higher personnel costs, greater FAS 123 R stock-based compensation expense related to restricted stock units granted to shore-based employees and increased costs for our incentive compensation plan. G&A costs for the quarter were allocated to the OSV fleet and TTB fleet on a 60/40 basis respectively.
Looking forward, we expect G&A to remain in the 9% to 10% range for 2008 as we begin to experience cost savings and synergies with respect to managing a larger fleet with a substantial number of new vessels being added over the next couple of years through recent acquisitions and pending new build programs.
Moving into the balance sheet, I will now review some of our key balance sheet related items for the fourth quarter. On December 31st, our cash position was about $174 million, our total debt was $550 million and our booked equity was $562 million. We are currently paying a blended average cash coupon, a fixed blended average cash coupon, of about 4.1% on our $550 million of total unsecured debt comprised of our 6 1/8% senior unsecured notes and our 1 5/8% convertible senior notes.
While our revolver is currently undrawn, our pricing grid on funded draws under that facility ranges from 50 to 150 bips over LIBOR, 50 to 150 over. Based on our current leverage ratio as defined under that credit agreement, we would currently borrow at LIBOR plus 75 bips. The reduction in our cash balance from the third quarter is primarily related to cash consideration paid for our ongoing growth CapEx. As of January 31, 2008, our cash position was approximately $75 million. The decrease since year end resulted primarily from our recent acquisitions of the Superior Achiever and the Rowan shore base adjacent to HOS Port in Port Fourchon in late January.
We are currently earning about 3.5% in money market interest rates on our invested cash. Our growth CapEx budget is currently at $1.1 billion of which we have already paid roughly $495 million. The remaining $605 million is expected to be paid over the next several years with $457 million of that figure to be incurred in calendar 2008. These costs would be funded primarily by cash on hand, projected free cash flow from operations and revolver draws.
The extent and timing of our revolver draws are primarily dependent upon shipyard schedules and the achievement of construction milestones depending on a host of variables and modeling assumptions including whether and/or when we sell certain non-core assets. We are now projecting a potential revolver draw sometime in the second quarter of 2008 with the peak of our aggregate construction draw schedule of somewhere between $150 million to $200 million expected to occur in late 2008 while maintaining a targeted minimum cash balance at all times of $20 million.
However, any such revolver draw is projected to be repaid in full sometime during 2010. We then project to rebuild our cash position to approximately $140 million by the end of the aggregate construction cycle in mid-2010.
In terms of our drydock activity for calendar 2008 for the full year according to our current maintenance CapEx plan, we plan to drydock 13 new generation OSVs covering about 264 days of down time. During the first quarter, we expect to drydock four OSVs representing roughly 103 days of down time. As such, we anticipate full practical utilization for our OSV fleet to be around 97% for the first quarter '08 and 98% for calendar ’08.
However, due to our spot contracting strategy on a portion of our fleet which is designed to maximize our effective day rates, we are guiding to the 90% range for utilization for this segment for the first quarter and full year 2008. Our 2008 total projected drydocking costs are around $9.4 million. Note that this amount only reflects the drydocking costs for nine of the 13 OSVs to be drydocked in 2008.
The other four vessels to be drydocked in 2008 are newly acquired Sea Mar vessels whose drydock costs under our accounting methodology were included in our purchase price allocation. These costs are running through other vessel capital improvements in the maintenance CapEx table in our press release.
In our TTB fleet, we plan to drydock 10 barges and four tugs in calendar 2008. During the first quarter of 2008, we expect to have 24 barge days out of service at a total cost of $500,000. For calendar 2008, we projected total drydock costs of around $10 million for the TTB fleet.
In terms of forward guidance, this morning in our press release we initiated annual earnings guidance for 2008. As a reminder, all of the forward-looking guidance figures include a full year contribution from our August 2007 acquisition of the Sea Mar fleet and recent tug and tank barge new build deliveries as well as a partial year contribution from projected 2008 deliveries from our ongoing CapEx projects.
As noted on our third quarter conference call, we have only presented annual guidance for 2008 and are no longer providing quarterly earnings guidance. We did, however, for modeling convenience, provide first quarter quarterly guidance, with respect to certain income statement items below the EBITDA line: depreciation, amortization and interest expense net. We will update annual 2008 guidance on a quarterly basis.
Annual 2008 guidance, we expect EBITDA for the full year '08 to range between $220 million and $240 million and diluted earnings per share are now expected to range between $3.68 and $4.16.
The pro forma 2008 run rate EBITDA illustration included in the tables of our press release this morning reflects the assumptions outlined in footnote 11 to such table which among other assumptions, now includes an anticipated incremental full year run rate contribution from the recently acquired Sea Mar vessels as well as all vessels recently delivered under and/or that are currently under construction or conversion in one of our three active new build programs as well as 2008 cost structure levels.
The vessels that are pro forma'd in are four MPSVs, 16 OSVs, three tank barges and four tugs as well as the 20 Sea Mar vessels as though all of these vessels were in the water as of January 1, 2008. Based on these assumptions, we are now reporting 2008 pro forma run rate EBITDA of $373 million and pro forma diluted EPS of $6.26 per share.
This is not intended to represent forward earnings guidance with respect to any specific fiscal or calendar year, but is rather indicative of what we believe to be the potential annual EBITDA and earnings generating capacity of our pro forma fleet if all such vessels were operational for the entire calendar year 2008, which they are not.
With that, I’ll turn it back to Todd for any further comments and to entertain questions.
Thank you, Jim. As you can see from our performance this morning on 2007 and what we've given you currently, we are still in an exciting part of the market with a lot of upside we believe in market conditions.
So with that I'll open it up for questions.
(Operator Instructions) Our first question is from the line of Robin Shoemaker with Bear Stearns.
Robin Sheomaker – Bear Stearns
Good overview. Just going back to your projection of visible supply, 189 vessels. I believe you've mentioned visible demand of over 200. Is that still your projection?
It could be. That's if all demand drivers are on time and working at 100% which we tend to be a little bit more conservative in our numbers. Things can change. Those demand drivers come on between now and 2011. So, we're a little bit more conservative but if you change the multipliers, boat to rig that we use very slightly which in a very, very tight market can swell as a result of oil companies not wanting to be caught without tonnage and also if you have any natural phenomena like a hurricane or something of that nature that also can drive that multiplier higher. So we're a little on the conservative side but it can swell as we've seen in the past to those type of multipliers.
Robin Shoemaker – Bear Stearns
Is that multiplier 2 to 1?
No, sir. It's not. We parse it out in a much more granular detail than that. We look at the production side, the exploration side of the business and what those multipliers have historically been. We look at construction projects that are coming on line and what they are going to soak up, specialty. So we have a flavor of about five or six different categories that we look at and review the multipliers.
Now we try to apply a lot of science to it but the market, as crazy as it's been over the last couple of years, it's hard to track. We've been more conservative than we have been able to hit the multipliers right on the target.
Robin Shoemaker – Bear Stearns
I wanted to ask also about the costs of the new build program. You mentioned $450 million is now the estimated cost of the high end vessels. So what was the previous estimate of that construction cost of those vessels? I think you revised it upward, right?
Yes. We did. We had some additional cost on our conversion programs here in the U.S. and we also added some more features to some of the vessels as well between extra accommodations and different types of cranes and things of that nature that would make them a lot more achievable.
Of course the Achiever that we purchased is in that number, which I think we reported to you on the contract side is $120 million for the vessel but we do have some protection if that vessel goes up to about $128 million. So it's going to be between $120 million and $128 million depending on the final outfitting.
Robin Shoemaker – Bear Stearns
And then just my last question is your cost estimate for '08, the cash OpEx per vessel, up 5%. Of course, I just wanted to understand a little bit. It was up substantially more in '07 and I understand there was a catch up process that occurred in the first part of '07 for mariners' wages and so forth. Now the 5%, is that tied to existing labor contracts or agreements that give you confidence that the 5% is the right number for '08?
It’s 5% to 10%. That's a hard question to answer. We think we have a pretty good plan to get that range of 5% to 10%. Mariner wages have been catching up after the hurricanes, particularly in 2006 is when it started in a big move. Of course it continued in 2007. Labor, skilled labor, and labor in the United States and around the world for these high-end vessels continues to be a problem not only for us but the whole entire industry. I think the rig industry may be experiencing the same thing along with oil companies and we're in a position where we're doing high dollars in training and getting their licenses but it's a process and it's going to take several years to work out of. We think we've got a good plan with our restricted stock program and what we budgeted so if that changes we'll be back to update you but we're pretty comfortable right now.
Our next question is from the line of Pierre Conner with Capital One Southcoast Inc. Please go ahead.
Pierre Conner – Capital One Southcoast Inc.
Todd, could you tell us a little bit more about the contract on the Superior Achiever? Would you expect it to be fully utilized? Is it a fixed contract?
I think that Superior made some public announcements and made an 8-K to their contract of the Superior Achiever and I'll let you look that up but the contract, of course, is for a five-year period with some six-month rolling options in it as well.
We do have a situation in which we can move Superior to our second T-22 and readjust the deck tiers if we decide to put that vessel out to another client. We're currently bidding. There's a lot of activity on the MPSVs right now, as you can imagine, with construction season coming about and with all of what we've announced of the sub-sea construction that's going to happen around the world and those vessels are in very high demand. I can tell you we probably have no less than 20 bids going out on those vessels. So we're just going to organize it where we think is the best for Hornbeck and operationally and financially and we will update you as those develop.
Pierre Conner - Capital One Southcoast, Inc.
Just to get a little more clarity on what the rates are doing sequentially here in the Gulf. Given the full quarter impact of the Sea Mar vessels, I thought that the rates were very high. In other words, I was expecting that the fourth quarter might have had a little dilutive effect. Can you tell us what happened in the core Hornbeck, new-gen, OSV fleet excluding the Sea Mar vessels sequentially?
I think what we are seeing overall in the market is the higher end vessels, the Douglas Pihl
-2 class vessels like what we have under construction, I think you are seeing that rate spread differential between the new-gen vessels, the 200 class vessels, widen. I think those rates are widening.
We gave you some indication of that. As you know, all of the new construction vessels that we're building now, we told you we contracted seven of them and of those seven contracts, those average day rates are over $30,000 a day. So you can see the difference of what we're building and the original Hornbeck fleet has quite a bit of DP-2 capable vessels in it that command those higher day rates. So we're seeing that widening out of little bit more.
Pierre Conner - Capital One Southcoast, Inc.
That is helpful. Two more quick ones. I know it's non-core, Jim, but just if you could give us some metrics on the convention side in terms of utilization and rates or costs there just for modeling purposes.
Could you rephrase the question? Are you talking about on the conventional fleet? It's probably inline with what I think some others have reported in the last conference calls. That's going to be very, very volatile and I wouldn't hang my hat on it; we’re running at basically a neutral EPS to the company so it’s not dilutive to our EPS but those ranges because when we talk about those we are talking about 166 foot vessels all the way to 220s that are non-DP and older vessels that have been stretched can range anywhere from $7,500 to $11,000 a day. Utilization is about what the others have reported between the 60%, 65% utilization, 70% utilization range.
Pierre Conner - Capital One Southcoast, Inc.
That’s actually just we need. So you're beginning a well test, I think, for a customer in the Gulf of Mexico assuming, obviously. Is that in your guidance, Jim?
Yes. It's in our guidance and this is not an ultra-deepwater well test so it's commanding a little bit different spread of equipment. As you can see we're going to have basically about seven pieces of equipment on that one well test. A little bit different in nature.
Pierre Conner - Capital One Southcoast, Inc.
That's helpful. Gentlemen, I'm going to turn it back and let some other guys go through but I appreciate the information.
Our next question is from the line of Jud Bailey - Jefferies & Company.
Jud Bailey – Jefferies & Company
Todd, on your 200 footers and the 220 as we start the year here can you give us a sense of what you are seeing in the market as far as day rate trends and what you expect as we go into spring? Do you expect a very small uptick or a tightening market as we enter the construction season?
Well, I hope so. Last year when we were sitting on this conference call we had oil that went below $40 a barrel and we had a lot of uncertainty in the market and we were very conservative, particularly on the 200 and 220 class which typically have a little bit of choppiness in the fourth quarter and really December and January in the market in the Gulf. That's typical but we're seeing a lot of demand for them all of a sudden. That's exactly what happened last year after this conference call. Not a week after the conference call, we just saw the market turn and go gangbusters. And we're seeing that a little bit earlier this year so we are very optimistic.
To give you an example, we're fully utilized today. Everything that can work is working and we have a lot more customers asking for equipment than we have to offer. So that's a very positive sign. It's all over the page. Some of it is spot, one week to 60 days, some of it is long-term international contracts that we're bidding so it's all over the page but I think the note to take back is there's a tremendous amount of bidding activity happening and we're fully utilized. So put those two dynamics together and I think we're in line for a pretty robust season.
Jud Bailey - Jefferies & Company
My second question is you had what looks like a nice specialty job on one of your 200 footers in the fourth quarter. I know it's difficult to predict those types of things but can you give us a sense of maybe what your strategy is for this year? Are there more opportunities like that with more vessels or is that really going to be really a one-off deal?
No, because of our fleet breadth having 200s all the way to the new MPSVs that are coming to market, we have a very wide swath of capable vessels. In this market as we're building out the deepwater and sub-sea infrastructure, they demand at certain parts of the time of the market depending on what they are doing some very specialized equipment for a very narrow window and that allows you to capture those type of day rates.
We fully expect those opportunities to go forward in the market for the next several years. Whether we're going to get them on a conventional 200 class vessel or our first DP-2 class vessel or the MPSV 370s that we are going to be delivering to market this year, we're just looking at those very discreetly. But our plan right now is to at least have a good portion of the equipment, what we consider in the spot market to capture those opportunities, particularly with the market that's at full utilization anyway.
Jud Bailey – Jefferies & Company
On the Achiever, and I guess all your long-term contracts you've announced here, do you have some sort of cost escalation provision in those that you can pass through some of your higher costs as the years go on?
Thank you. Our next question is from the line of David Smith with JP Morgan. Please go ahead.
David Smith – JP Morgan
We saw a strong fourth quarter rate average of $22,300 and maybe $21,400 if we exclude the specialty work. You contracted seven new builds for term at over $30,000 a day and it sounds like you have over half of your '08 availability contracted. But we're getting guidance for '08 OSV rates at $19,000 to $21,000. So I'm wondering if this guidance is a function of maybe the recent contract coverage or if you guys are just being conservative?
A little of both. We like to be a little conservative because the lower end we have 22 vessels that are trading in the 200 class range and those tend to have a lot more volatility than the rest of the fleet. Bear in mind the seven vessels that we announced that have long-term contracts in the $30,000 range, that doesn't really come online until 2009 so that's not counted in this year.
So as we move out to 2009, you should see that move up but with our existing fleet this year I think we've got a good plan down right now. If the market steps out further than what our plan is today, I think we're in a very good position to capitalize on the upside of the rates.
David Smith – JP Morgan
You mentioned you had 20 bids out on the MPSVs and I'm wondering if you could characterize discussions you're having around that availability. Maybe if you're seeing a difference between the sulfur tanker conversions, if there is uncertainty on the delivery date versus maybe the Merway project, which you probably see little risk to the delivery?
Well, the demand for all four vessels has been equally the same. The position that we're in with the T-22 class vessels and DP-3 vessels is we can now look at placing those vessels more on an international scale than a domestic scale. We've always wanted our 370s to work in the Gulf of Mexico market because we feel that having the Jones Act protection for those vessels and Jones Act provision for those vessels will be a very dynamic vessel for this market. I guess we're real comfortable with those vessels being more of a spot nature in the Gulf. The T-22s we've seen these 20 bids come in for the last year or so and now that we have two of the T-22s, we're more comfortable putting them in the long-term arena which would probably be three to five year contracts internationally.
David Smith – J.P. Morgan
And on the Achiever, I like the way you phrased that, reassessing the deck tiers on Superior. Do you have a deadline date for which you can do that?
I believe we did negotiate something by the time it delivers but I think we'll probably have that resolved far before she delivers from the shipyard in June.
David Smith – J.P. Morgan
I appreciate that.
Our next question is from the line of Daniel Burke with Johnson Rice & Company.
Daniel Burke – Johnson Rice & Company
Appreciate the clarity on the contract coverage on the new build OSV. Todd, I was just wondering, is there any one or two contracts that should be highlighted there? I was curious, the 285 footer, for example, is it markedly out of line with the $30,000 type average or is that really the type of figure where all the vessels are sort of lumped?
They are basically all pretty tight. Bear in mind the 285 was a vessel that we bought under construction with the Sea Mar fleet and it's still under construction; that already had a four year charter. So when you take that into account, they are basically all pretty tight pricing.
Daniel Burke – Johnson Rice & Company
Jim, I was hoping to get a clarification to your clarification on how you calculate your pro forma EPS. That is again, on these OSVs, with regard to the 16, my understanding is, then, you'd be programming those at day rate averages in line with your current fleetwide average and guidance of around $20,000 a day. Is that correct?
Yes. Except the 20 is a composite figure so I would say more accurately we are modeling them at a conservative day rate assumption that is in the mid-20s which we believe to based on what Todd just told you these 250 EDFs are going for. Clearly what's in the pro forma run rate is less than even what we've recently contracted them for because when we set these pro forma run rate decks, we set them at a conservative day rate in the mid-20s commensurate with a five times deal economics. And so we believe clearly it is very achievable if not conservative.
Daniel Burke – Johnson Rice & Company
I think that's fair. The contract sounds pretty attractive. Thanks, guys.
Todd, we've run up against the top of the hour and I know everybody's got to jump on other calls so if you could just close out. Anybody who is still left in the queue, feel free to call offline to get your questions answered. We're sorry we're running out of time. Todd, final closing comments.
I want to thank everyone for joining the call. As you can see, we've moved the company into positioning for some pretty dynamic growth in a dynamic industry that's still growing and stepping out over the next three or four years with all the demand drivers coming. I think Hornbeck Offshore is well positioned with our CapEx program, as we said in our call, to maybe double our EBITDA over the next couple of years as this comes on. So we look forward to talking to you next quarter and updating you on what we do in the next 90 days. Thank you.