Hornbeck's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Executives

Ken Dennard – DRG&L, IR

Todd Hornbeck – Chairman, President and CEO

Jim Harp – Chief Financial Officer

Analysts

James West – Barclays Capital

Gregory Lewis – Credit Suisse

Michael Marino – Stephens Inc.

Jon Donnell – Howard Weil

Todd Scholl – Clarkson Capital Markets

David Anderson – J.P. Morgan

Trey Stolz – IBERIA Capital Market Partners

Hornbeck Offshore Services, Inc. (HOS) Q2 2012 Results Earnings Call August 2, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hornbeck Offshore Services Second Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, Thursday, August 2, 2012. I would now like to turn the conference over to Ken Dennard of DRG&L. Please go ahead.

Ken Dennard

Thanks, Alicia. Good morning, everyone. We appreciate you joining us for the Hornbeck Offshore conference call reviewing the second quarter 2012 results and recent developments. We also welcome our Internet participants listening to the call over the web.

Please note that the information reported on this call speaks only as of today, August 2, 2012 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 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.

As noted in today’s press release, 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 than that which is projected today.

In Hornbeck’s 2011 Form 10-K, other SEC filings and in today’s press release announcing second quarter 2012 earnings, 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.

Hornbeck’s Form 10-K, other SEC filings and today’s press release, are located under the Investor Relations section of the company’s website, which of course is www.hornbeckoffshore.com, or through the SEC website at www.sec.gov.

This earnings call also contains references to EBITDA, which is the 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.

Finally, the company uses its website as a means of disclosing material non-public information and for complying with disclosure obligations under SEC Regulation FD. Such disclosures will be included on the company’s website under the heading Investors/IR Home or accordingly, investors should monitor that portion of the company’s website in addition to following the company’s press release, SEC filings, public conference calls and webcasts.

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

Todd Hornbeck

Thank you, Ken. Good morning, everyone. And welcome to our second quarter 2012 investor conference call. Our plan this morning is to spend a few minutes discuss -- discussing the second quarter results and our outlook for the market and then provide you an update on our growth initiatives. Jim Harp, our CFO, will take you through the numbers in detail.

The second quarter results we announced this morning represent another solid quarter and the fourth quarter in a row in which we’ve seen improvement in the average dayrates for our core new generation OSV fleet.

Notwithstanding, the labor cost increases announced last quarter, we were able to increase our upstream operating margin to 29.2%, in line with our expectations and considerably better than what we’ve seen amongst others in the general market.

So, all in all, a good quarter and one in which we continued to experience overall improvement in market conditions, as we expected when we would when we announced the newbuild program last fall.

We believe the market will continue to improve as we see clear demand drivers coming into our primary operating regions of the U.S. Gulf of Mexico, Brazil and Mexico. In the Gulf of Mexico, the steady improvement will continue to be marked by periods of unevenness.

There are still bureaucratic implements -- impediments and delays associated with permitting in the Gulf of Mexico and as a consequence, our activity levels would be impacted from time to time.

About 65% of our new generation vessel days are contracted for the balance of the year, which gives us a healthy base of revenues, while at the same time, we have kept a sizable portion of our fleet in the spot market, so we can capitalize upon periods of market tightness.

Our spot strategy is driven by our market view that steady improvement with some volatility allows for pricing opportunities. We do not mind occasional short periods of under utilization given our confidence in the ability to price up over the long-term.

To highlight the market’s event flow, consider that in the second quarter we reported today, our new generation utilization rates was 88%, compared to 81% in the prior quarter and 84% in the quarter before that one. Currently, our company wide utilization rate is about 84%. However, almost none of the 4 point drop from the second quarter utilization levels of 88% is market related.

As we reported this morning, we have a heavy upstream drydock calendar during the third quarter, as well as about 120 days of commercial downtime that we expect to incur this quarter for the three of the four vessels we are currently mobilizing out of Brazil.

While we don’t quite know where we will finish the quarter -- the third quarter, what we do know is that 29 deepwater units are working in the Gulf of Mexico today, compared to 26 on our last call.

We expect additional units to commence work in the coming months given that three incremental units have arrived in the Gulf of Mexico since our last call and four additional units are scheduled to arrive before the -- before this year’s end.

As you may have heard last week, a contract for an additional two drill ships was announced with the expectation that these units will also be deployed to the Gulf of Mexico.

These rig counts once realized compare favorably to the 2008 peak of 34 marketed units with 30 working. These seven to nine incremental drilling units should eventually go to work. Their timing will depend upon permits and logistics.

However, when they do begin work those operations will positively impact the OSV market. Meanwhile, intra quarter fluctuation in demand is part of our landscape, but so -- it’s been steady improvement in demand drivers entering the market in the Gulf of Mexico.

This overall trend has supported our ability to price our vessels at attractive dayrates. Today’s leading edge dayrate for 240 class new generation equipment, which is like a PSV 3000, is in the $35,000 per day range in the Gulf of Mexico. Average dayrates for our new generation OSVs in the second quarter overall were up about $900 per day over the first quarter.

Brazil is much the same story but without the market variability. Petrobras massive expansion continues to drive need for vessels there. Brazil is calling for an additional 136 supply vessels by sometime in 2013, which cannot be met by local capacity.

There are about 80 deepwater drilling units currently in Brazil, of which roughly 70 are working. We expect an additional three units to arrive in Brazil by the end of the year. Our challenge in Brazil is not to find work. Our challenge is to avoid the temptation to accept dayrates that appear attractive on their face but fail to take into account potential hidden costs.

Moreover, Petrobras’ contract terms are difficult to reconcile with standards prevailing in our other markets. We recently decided not to renew contracts for four of our PSV 1500 vessels, which is the 200 class vessel Super 200 with Petrobras precisely for these reasons.

We also declined to participate in the most recent Petrobras PSV 3000 tender, which included unreasonable contract penalties for matters outside of our ability to control, such as employing Brazilian seafarers, which are in extremely short supply.

We are impressed with Brazil as a market and we are committed to grow our presence there. However, we do not view it as a market that just defines growth without discipline. We will look for ways to work in Brazil that allow us to expand responsibly and garner returns that are in line with the risk we are required to take there.

The four PSV 1500 vessels that we had deployed there are Jones Act qualified and we are remobilizing them to the Gulf of Mexico. However, the first of those four vessels picked up a spot job in French Guiana on its way home and is still there.

These vessel repositioning voyages will adversely impact our overall upstream utilization for the third quarter. However, we believe the trade we made is a good one for the company when we look at the potential returns on those vessels in the Gulf of Mexico versus the opportunities they had in Brazil.

While it’s too soon to know what will happen in Mexico following the recent presidential elections there, we are very optimistic about a change in outlook that will more rapidly unlock Mexico’s deepwater potential. We believe that our number two market leading presence in Mexico will give us a decisive advantage there should more changes rapidly occur.

Our MPSVs also logged a solid quarter of performance. MPSV utilization was about 91% for the quarter, today all four MPSVs are contracted. One of those contracts will expire during the third quarter but we see additional projects in the pipeline. Currently, we have contracted 70% of our available MPSV vessel days for the balance of 2012 and 40% for 2013.

In addition a bright spot in our business mix comes from our downstream tank barge segment, driven by demand for the Eagle Ford shale. We outfitted three additional vessels with vapor recovery systems to allow them to work in the Trans Gulf crude oil trade.

While we suffered a small operating loss during the second quarter for the fleet due to 164 days of shipyard downtime required for these discretionary upgrades, now all three vessels have been chartered on long-term -- on a long-term basis at respectable dayrates in the $16,000 per day range beginning in the third quarter.

Utilization in that fleet stands just about 90% today, up from 75% in the second quarter. While ultimately this fleet market leverage will be derived from a broader economic recovery once that materializes, we are extremely pleased with our ability to capture market share here in the Gulf of Mexico to have some visibility into an emerging recovery for that segment.

Turning to our growth initiatives. In keeping with our overall bullish view of the market, we continue to seek ways to optimize our path to further growth. In addition to the 16 vessels we announced last year, we are actively pursuing additional opportunities to grow both through acquisitions and organically.

Generally speaking, acquisitions are almost always the more attractive way to go, all other things being equal, however pricing for assets or fleets continues to be a barrier.

After recent announcements by other companies of the cost of acquiring and constructing vessels, we are very pleased with the volume discounted unit pricing we were able to achieve for the HOS Max 300 class vessels we have under contract. This newbuild initiative continues to progress both on time and on budget.

As a reminder, we will take delivery of the first of these new vessels next June. We are currently evaluating the options we negotiated with the two construction yards to order up to 48 additional similar vessels.

Among other factors we are weighing those considerations against acquisitive growth. We are also exploring the possibility of upgrading some of our vessels in the -- in which we enjoy a low cost basis.

We have discussed on prior calls that we think our DP-1 Super 200 class OSVs are excellent candidates for upgrades to DP-2 240s or PSV 3000 class vessels, given their physical dimensions in our low invested cost basis.

Our objective is to own the best fleet at the lowest invested cost to capital. We won’t compromise on guarding this fundamental goal, which has been the cornerstone of our company’s success through good times and challenging times.

Before I turn the call over to Jim Harp to run through the numbers with you, I want to note that this week we saw the successful completion of our industry of a drill to deploy the capping stack unit that was developed by the Marine Well Containment Company.

This was an industry-wide effort, one in which we participated. The success of this drill is a strong indication of the extent in which our industry has bounced back from the events of 2010 and demonstrated its ingenuity, resilience and commitment to the deepwater Gulf of Mexico.

We remain committed to working with our customers to be part of this solution and a fixture in the deepwaters future that is developing in the Gulf of Mexico and our other core markets.

Jim, you want to take it over?

Jim Harp

Yeah. Thanks, Todd, and good morning, everybody. We were able to continue our recent positive momentum in the second quarter that really began in the third quarter of 2011. We posted an 83% sequential increase in diluted earnings per share from operations. This is a stark contrast to the conditions we faced a year ago after reactivating 13 previously stacked new gen OSVs.

We are poised to once again take full advantage of the intrinsic operating leverage that we have always enjoyed with our upstream fleet during an up cycle. In addition to 16 new 300 class vessels that will be delivered over the next two years, we’ll further expand our earnings power.

Now, let’s review the details of the second quarter. As a result of our recent bond refinancing which lowered our record setting low coupon by 25 bps from six and eight to five and seven, eight and increased our gross debt, outstanding by $75 million.

We recorded a second quarter loss on early extinguishment of debt of approximately $900,000 pre-tax or $600,000 after-tax, or $0.02 per diluted share. This loss relates to the remaining portion of our 6.125% senior notes that were redeemed in late April, 2012, which completed the financing which began in March of 2012.

After adjusting for that loss on early extinguishment of debt, our second quarter recurring EBITDA was $56.4 million, that’s $56.4 million, was more than doubled the year ago quarter and up roughly 25% sequentially.

Our second quarter diluted EPS from operations was $0.35 per diluted share, compared to a $0.26 loss for the year-ago quarter. Our weighted average share count of roughly 36.1 million diluted shares was about 9 million higher than the second quarter of 2011, due to our November 2011 equity offering. These favorable EBITDA and EPS trends were largely driven by the ongoing recovery in the Upstream GoM market.

Adjusted EBITDA, which is the starting point that we use to compute ratios for the financial covenants in our revolving credit agreement was $59 million for the second quarter. For additional information regarding EBITDA and adjusted EBITDA as non-GAAP financial measures, please refer to the data tables in this morning’s earnings release including Note 11.

Moving into our segmented data, beginning with our Upstream segment. Upstream revenue for the second quarter of 2012 was roughly $13.8 million higher than the sequential quarter, primarily due to continued improving market conditions in the GoM.

Operating income was $35.5 million or 29% of revenues in the current quarter, compared to $28.3 million or 26% of revenues for the sequential quarter. Average new generation OSV dayrates for the second quarter of 2012 were approximately $23,300 or about $900 higher than the first quarter of 2012.

Utilization for our fleet of 51 new gen OSVs for the second quarter of 2012 was 88%, compared to 81% for the first quarter, which resulted in roughly a $2400 increase in effective dayrates sequentially.

Effective new generation OSV utilization for our active fleet, which excludes the impact of stacked vessels was 94% for the second quarter of 2012, compared to 86% for the year ago quarter and 89% for the sequential quarter or five points of sequential improvement.

Due in part to a heavy drop upstream drydock calendar and commercial downtime due to discretionary vessel repositioning out of Brazil, utilization for our 51 vessel OSV fleet for the third quarter is expected to be in the low to mid-80 percentile range, which is less than our second quarter results.

The improved Upstream market conditions are also reflected in our MPSV utilization. On the strength of two long-term contracts and recent spot market activity, MPSV utilization was 91% for the second quarter of 2012, compared to 12% for the year ago quarter and 88% for the sequential quarter.

Moving into our Downstream segment. That segment represents about 8% of our consolidated revenues for the most recent quarter and continues to be negatively impacted by a prolonged weakness in the overall economy.

In particular, our second quarter results were further impacted by 164 incremental days out of service for discretionary commercial capital expenditures for the three barges that Todd discussed and the regulatory drydocking of one barge during the second quarter 2012.

Downstream operating margins for the second half of 2012 are expected to remain in the single digits, with utilization in the mid-to-high 80s. However, we anticipate a slight uptick in dayrates as a result of the Eagle Ford movements during the second half of 2012. We believe that downstream results will only improve when the U.S. economy rebounds, the timing of which is not predictable.

Moving into operating expenses, on a segmented basis, cash OpEx for the second quarter of 2012 was roughly $56 million for the Upstream segment and $7 million for the Downstream segment.

For calendar 2012, aggregate cash operating expenses are projected to be in the range of $220 million to $225 million for our Upstream segment and $28 million to $30 million for our Downstream segment.

Our projected range of Upstream operating expenses is in line with the high end of the guidance range that we provided on May 3, on our last call in 2012. Included in this guidance range is now approximately $2 million of out-of-pocket expenses related to mobilizing six vessels from Brazil to the GoM, two of which we already mobilized back earlier this year.

Consistent with our OpEx guidance for prior periods, these estimated ranges are good faith estimates based on best available information as of today and are only intended to cover our currently anticipated geographic footprint and industry market conditions.

Moving into overhead, our second quarter G&A expenses of $12.1 million were 9.2% of revenues, compared to $11.1 million or 9.3% of revenues for the first quarter of 2012. G&A costs for the second quarter were allocated 93% to the Upstream fleet and 7% to the Downstream fleet.

The sequential increase in G&A expense of $1 million was mostly attributable to an increase in shore side incentive compensation expenses, which were formulaic driven, as well as a higher fleet recruiting and training costs. Our second quarter 2012 G&A to revenue margin was at the low end of our recent historical range of 9% to 11%.

Moving into our balance sheet related items, I will now review some of the key balance sheet items for the second quarter. Beginning with liquidity, our total cash and cash equivalents at quarter end was approximately $392 million, which puts our net debt position as of June 30, 2012 at only $461 million, down from $628 million a year ago.

The only debt instrument that we have with a variable interest rate structure is our $300 million revolving credit facility, which remains undrawn. We have a blended average fixed cash coupon of about 5.3% on $875 million of total outstanding face value of long-term, unsecured debt.

Due to the change in timing of certain interest payment dates associated with our recent bond refinancing in March 2012, our cash debt service for fiscal 2012 is only expected to be $42.2 million. However, commencing in fiscal 2013, we expect to incur a full-year run rate of cash debt service in the amount of $47.6 million, compared to $43.9 million run rate prior to our March bond refinancing.

Our annual run rate of gross interest expense for GAAP reporting purposes, before capitalized construction period interest is about $64 million, which includes about $13 million of non-cash imputed original issue discount on our one and five eighths convertible notes.

The earliest that any of our outstanding debt facilities would be payable is November 2013, which is the first possible put-call date for our convertible senior notes. Based on our projected average construction work in progress balance, for fiscal 2012, related to our 300 class OSV newbuild program, we expect to capitalize approximately $11 million of interest expense to the balance sheet this year.

We also project to earn approximately $2 million in interest income on our average invest to cash balance for the year, resulting in a projected net interest expense for the year of about $51 million on our financials.

Our effective tax rate for GAAP income statement purposes was roughly 38% for the quarter, in line with our guidance range. We expect to pay about only $1.6 million in cash taxes for the full year 2012 and are projecting an annual GAAP tax rate in the range of 36% to 38%, depending on the actual level of our 2012 pre-tax net income.

Moving into maintenance and other capital activity, during the second quarter of 2012, we drydocked four new gen OSVs for total project cost of $5.5 million, of which $2 million was spent in the second quarter 2012 and $3.5 million is expected to be incurred during the third quarter of 2012. This represented roughly 117 days out of service for OSV drydockings during the second quarter.

During the third quarter, we have a heavy Upstream drydock calendar with 10 new generation OSVs and one MPSV that will be drydocked at a total project cost of $12.1 million, of which $7 million is expected to be incurred during the third quarter and $5.1 million is expected to be incurred during the fourth quarter.

These third quarter Upstream drydockings are budgeted for about 276 days of downtime for the third quarter or 159 incremental days of downtime higher than the second quarter. Third quarter drydock activity represents approximately 35% of our 2012 expected Upstream total days out of service.

For the fourth quarter of 2012, we expect to incur roughly 16% of our planned drydocking days for the year, or 109 aggregate days out of service for our upstream fleet covering four OSVs.

For our downstream fleet, our second quarter drydockings included two barges and two tugs for total project cost of approximately $3.3 million, of which $2 million was spent during the second quarter and $1.3 million is expected to be incurred during the third quarter. During the third quarter, we don’t have any planned drydockings for the Downstream fleet and we only have one tug to drydock in the fourth quarter.

In summary, our maintenance CapEx, which primarily includes the recurring and regulatory costs that we just reviewed, are projected to be around $58 million for the full-year 2012 and about $18 million of which is expected to be incurred during the third quarter.

In fiscal years 2013 and 2014, based on our currently contemplated fleet complement of active vessels in each of our business segments, our annually recurring maintenance CapEx, inclusive of deferred drydocking charges is projected to be somewhere in the $45 million to $55 million range. All of these figures are recapped in our press release.

The aggregate cost of our fifth OSV newbuild program, excluding construction period interest is expected to be approximately $720 million, unchanged since we first announced this program in November of 2011, of which we expect to spend roughly $229 million in 2012, $361 million in 2013 and $88 million in 2014.

From the commencement of this program through June 30, 2012, we have already incurred about $120 million or 17% of the total program costs, including $41 million that was spent during the second quarter of 2012.

Wrapping up with forward guidance, based on early headline news this morning, in response to our earnings announcement, we’d like to address a couple of issues. First, it has been reported that we missed street estimates based on higher costs. In fact, our margins have actually expanded because our revenues continue to grow faster than costs, just as we expected.

In addition, we reaffirmed the high end of our cash OpEx guidance range, notwithstanding the $2 million of incremental demobilization costs for the four boats out of Brazil which we announced today. As well as reaffirming our prior G&A guidance range this morning, which should indicate that we are not calling for any new incremental costs than we have already announced on our last call.

Secondly, there seems to be a fair amount of analysts that are still having modeling variances with respect to below the EBITDA line items such as depreciation, amortization, net interest expense and in some cases taxes.

As a reminder, we provide robust forward-looking items each quarter in our 14 page earnings announcement which serves as a template for host of categories of various financial and operational data. I specifically call your attention to the narrative forward guidance on pages four through eight of 14 and tabular guidance on page 12 of 14 in the PDF version that DRG&L e-mails out to our proprietary distribution list.

If you’re not on that list, please call Ken Dennard and ask to get on it. For your convenience, we even post Excel spreadsheets on our website each quarter containing all three pages of the data tables included in our press release.

I highly encourage those of you who maintain your own financial models in our company to use this detailed information that we provide to true up your models each quarter, especially for the granular below the EBITDA line items which we give on both an annual full year and a forward quarterly basis.

In fact, this quarter, since you now have first half actuals and quarterly guidance for the third quarter of 2012, you can even solve for implied fourth quarter guidance. These are the type of line items that I know that most people don’t typically model. And so we provide them as a matter of convenience for our investors and analysts.

Accordingly, I hope this reminder will help avoid some of the noise that contributed to some of the apparent confusion this morning. In closing, we expect to generate sufficient cash flow from operations to cover all of our cash debt service, annually recurring maintenance capital expenditures and cash income taxes which are expected to be in the $100 million to $110 million range in the aggregate for fiscal 2012.

In addition, based on the forward guidance and key assumptions outlined in our press release this morning, our current contract coverage and our current cash position of roughly $392 million, our committed 16 vessel newbuild program is fully funded.

And we do not anticipate a need to draw on our revolving credit facility during the three-year construction period for those vessels ending in 2014 or beyond, absent any further future growth opportunities that may arise. As Todd mentioned, such as possible future acquisitions or the exercise of some or all of our 48 shipyard auctions.

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

Todd Hornbeck

Thank you, Jim. As you can see, through the quarter, as we predicted last year, each quarter the market continues to get better. We are very excited about the Gulf of Mexico and its prospects but also, Mexico proper.

It looks like there is a lot of demand starting to come out of Mexico. And we look forward to putting more additional or more assets deployed to that market.

As we said, Brazil, it will be a big, big market but we still have to be very, very aware of cost there. And some of the new contract terms that Petrobras has recently come out with their new tenders, gives us some degree of pause.

We are there for the long-term. We think that will write itself over time. But right now, because we do have alternatives in other markets that are not as high risk, we’re going to take advantage of those markets -- or those opportunities, I might say.

With that, I’ll turn it over to answer questions.

Questions-and-Answers Session

Operator

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

James West – Barclays Capital

Good morning, Todd. Good morning, Jim.

Todd Hornbeck

Good morning.

Jim Harp

Good morning.

Todd Hornbeck

How are you doing this morning?

James West – Barclays Capital

Okay. Thanks. Hey, Todd, when you bring your vessels back or when you receive the vessels back from Brazil, where will your Gulf of Mexico vessel count stand at that point? And then how does that compare to the post-Macondo, I guess, more or less permatorium low for your vessel count in the Gulf? I’m trying to get to a sense of how much bigger is your Gulf fleet now than what it was at the bottom?

Todd Hornbeck

We’re probably -- we were still delivering boats during the Macondo era. So we will probably just be four or five less than -- since the Macondo situation. We had deployed eight 240s to Brazil. We already had the four Super 200s in Brazil during Macondo.

So, that would give four less and then another deployment to Mexico into the west coast. So, I would say anywhere four to six. I don’t have it right off the cuff, in my hands, but we’re basically back to pre-Macondo levels after we deploy them back, the Super 200s.

And those are candidate vessels as we’ve been talking about to stretch and turn them into PSV 3000s or 240 DP-2 vessels. The leading-edge dayrate for those vessels today is anywhere from $16,000 to $18,000 a day. And we see a lot of demand.

We haven’t seen very much utilization hit on those type of vessels, even on the DP-1 scenario that they’re in today.

Jim Harp

James, just looking at a preliminary flash, we’ll true this up on our flip book and in our Q. But I think that with the mobilization back of these four boats from Brazil, I think our GOM supply boat headcount will go to around 25, plus the four MPSVs. And then, that is not counting the five military boats on the two U.S. coastlines.

So, Brazil will go down to eight, Mexico is in the seven or eight range. And of course, Middle East is two and one of the four boats, as we mentioned on the call, is actually in French Guiana. And it may eventually come back to the U.S. or it may be able to remain there, we’ll see.

James West – Barclays Capital

Sure. Okay. That’s very helpful. Thanks. And then on the utilization side for your OSVs, I understand heavy drydocks in 3Q and some mobilizations in 3Q and into 4Q. But as we look out into early ‘13, given the overall level of demand in the market, particularly the Gulf of Mexico but around the world at this point. Any reason why you shouldn’t get back to, kind of, low 90s type of utilization where you’ve been historically?

Todd Hornbeck

Absolutely. In fact, during the last quarter, if you took out the drydockings and things of that nature, we were in the 90s.

Jim Harp

We were at 95%.

Todd Hornbeck

Our utilization has not been impacted by the market. It’s more been impacted by vessel movements, drydockings, things of that nature, like repositioning from Brazil. So, the market utilization, when we say is going to come in fits and starts and ebbs and flows as it relates to permits. In June and July, we had, kind of, a flat permitting, with 10 permits each month.

We expect that to ramp up nicely. And with the additional drilling units coming in the Gulf of Mexico, we just think we are going to be fully deployed. And it is just positioning now and getting the vessels back, getting them crude and getting them online.

Operator

Thank you. The next question is from the line of Gregory Lewis with Credit Suisse. Please go ahead.

Gregory Lewis – Credit Suisse

Yeah. Thank you and good morning.

Todd Hornbeck

Morning.

Jim Harp

Morning.

Gregory Lewis – Credit Suisse

I just wanted to touch on the three upgrades of the tug and tank barges. Clearly, the market and the ability to move crude out of -- from the Eagle Ford is picking up. I mean, at this point, the tug and tank barge business has always been interesting for you guys, the potential sale of it.

I mean, at this point, given the strength in the market, is that something that’s still being considered or is it, sort of, hey, we’re getting good cash flow from this piece of our business and we just want to keep it?

Todd Hornbeck

We’ve endured a pretty low ebb since 2008, where the economy really fell off. And we’ve gone through the fire over the last three years. The market is now starting to turn. We’ve got roughly 90% utilization. Dayrates are, as you can see, improving. Cash flows going to -- you’re going to see a marked difference by the balance of this year and next year in that business where cash flows have returned and they are healthy. But we’re going to maintain our optionality. If you’ve got an offer, bring it.

Gregory Lewis – Credit Suisse

Okay. Perfect. And then just -- and just, sort of, looking at the remaining vessels in Brazil, it looks like there is about nine vessels in Brazil. Are any of those rolling off contract, sort of, in the next two quarters and can we see, potentially, any of those boats being repositioned out?

Todd Hornbeck

Yeah. We have one Super 200 left. It’s going to be finishing up per contract in August. That’s of the four that we said we are pulling out that we did not renew with Petrobras. And our expectation right now will be to demob her to the Gulf of Mexico but we are looking at a lot of options and other areas to deploy her.

It could be in Brazil with independent oil companies. It could be in other regions just like we did French Guiana on the way back with one of 200s. But the remaining eight most likely will be there for the next couple of years.

Jim Harp

The other eight are on what were -- when they began, three and four year charters, respectively. So, the next time the first tranche of four rolls is over a year from now and then the other one, more like two years from now. So other than the four, we announced today, there is no near-term migration back of vessels out of the eight that will remain in Brazil for at least the next one to three years. And each of those respectively have three and four year renewal options.

Todd Hornbeck

Yeah. Just to let you know, in the middle of 2013, we have the opportunity to negotiate with Petrobras’ another two-year extension or bring them back in the middle of 2013. That is three of the eight. So there will be some opportunities as the deep water Gulf continues to increase to have opportunities midyear to call that shot, whether we stay or whether we come back.

Operator

Thank you. The next question is from the line of Michael Marino with Stephens, Inc. Please go ahead.

Michael Marino – Stephens Inc.

Thanks. Good morning, guys.

Todd Hornbeck

Good morning.

Jim Harp

Morning.

Michael Marino – Stephens Inc.

Question on the newbuild program and the decision regarding -- or the potential decision on the options. What’s kind of driving you guys, looking at that decision maybe as early as September? Is there something in the rates that you guys are seeing right now and you want to lock up more shipyards space? Is it something the shipyard needs you to do by a certain date or…?

Todd Hornbeck

Well, we’ve got a couple of things happening. We do have our negotiated options that have timing on them that we have to -- we don’t have to option all 48. We can do it one at a time. And those options will start in the third quarter.

We also have the market drivers that we are all looking at. We think it is going to be very, very healthy with all the new generation rigs coming in. And we are weighing that against acquisitive growth. The opportunity to build versus -- I mean buy versus build.

And right now, we’ve seen some transactions in the market. And those transactions, at the prices they went in and other shipyard announcements that were recently done, we are looking at our cost and the value proposition drives us to saying, hey, we’ve got a pretty good deal to continue to build.

We think the market will expand over the next several years. Remember, if we option one of those vessels, it’s going to be two, 2.5 years before we actually see it. So we’re looking at the market of 2015 if we option any vessels today. We’re not looking at the market today.

Michael Marino – Stephens Inc.

Do you need to lock some of the initial ones up on contract before you would get further on spec?

Todd Hornbeck

No.

Michael Marino – Stephens Inc.

Okay.

Todd Hornbeck

We are in final stages with several customers locking up the first vessels anyway. So we are very comfortable with the market. I mean, we told everyone this when we first announced it. The newbuild program in the fourth quarter of last year that the market was going to have to season and rates would have to come up.

And we weren’t trying to go out and prematurely lock up equipment before the market matured. We have seen all the demand drivers that are coming in. And if you see the dayrates from the fourth quarter of last year to now, you can see that waiting, it was -- is and will continue to be the right decision.

We don’t deliver the first vessel until next year. There is almost 10 more demand drivers, rigs coming in by the time we deliver the first vessel next year.

Jim Harp

The other thing to add is, we calibrated a number of vessels that we went hard on when we had launched this program at 16, not arbitrarily but because it happened to be the exact number of vessels that the market could produce physically at the end of 2014.

So we went hard on the boats that could get delivered by the end of 2014. As we move now into the 48 options as they roll out in lettered maturities of their expirations dates, if you will, you basically start running through the analysis. The next wave would be boats delivering in 2015.

And then, say, for the next eight and then the next eight would be boats delivering in 2016 and so on. So as Todd said, when we are making these calls, it’s clearly not about what is happening right now as much as it is our continued visibility on the supply-demand equation for those years in question, 2015, 2016, 2017.

Clearly between now and the end of 2014, there is almost zero chance for a new boat to enter the market because it takes 26 to 36 months to build a boat. So these are -- we built in the optionality and we’re going to take all the time on the shot clock to make that final decision. And we will post you later. But clearly we’re giving you, today, some sense of color and tone but the formal decision will be made forthcoming.

Operator

Thank you. The next question is from the line of Jon Donnell with Howard Weil. Please go ahead.

Jon Donnell – Howard Weil

Good morning, guys.

Todd Hornbeck

Morning.

Jim Harp

Morning.

Jon Donnell – Howard Weil

My first question is kind of a follow-up on that, the newbuild s and your expansion plans here. As we think about, kind of, the decision between exercising these options or maybe doing some other activities like the stretch of the 200 class vessels.

How do you think about that trade off there and does the exercise of one preclude you from doing the other at this point? And I guess that, kind of, comes down to how willing you are to dip into that revolver, now given that you wouldn’t have to touch it kind of with the current newbuild outlook.

Todd Hornbeck

Definitely, when we make the decision to do either or both, give you an update on how we plan to finance it and what our plans are. We are in the -- close to that right now. But remember, stretching the DP-1 Super 200s is a way that we can get into put them into a different class.

Even though, the HOS Max 300s are the leading-edge ultra-deepwater, largest PSVs in the world that are being built for these mega rigs that are coming out. There is a big swathe of opportunity for the PSV 3000s. And we think by stretching versus building new on those vessels, we can be at a very low cost basis and be extremely competitive on a cost per ton basis.

And we are evaluating, do you build PSV 3000s brand new or do you stretch what you have and have the same equivalency. And right now, it’s -- the math will drive you to stretching our existing calls. So we think that we’ll be extremely competitive, if we can get that program underway.

Jon Donnell – Howard Weil

Okay. And then in terms of the timing around the first option exercise, if you were to let those first ones go without exercising them, would that have any impact on the remaining 47?

Todd Hornbeck

Yeah. Yes.

Jon Donnell – Howard Weil

Okay. Okay. And then regarding the 200s coming back from Brazil to the Gulf of Mexico, is that going to have any impact on the currently stacked newbuild s you have in the Gulf of Mexico, whether in terms of the -- so there’s no, like, incremental mariner requirements there of switching out the fleets or anything like that?

Todd Hornbeck

No. Typically, we’ve kept all of our officers on those vessels and engineers as they have worked in Brazil for the last two years. So we’re really dealing with ratings or deck hands and riggers, so really not a marked impact.

We carrying like you said, we’ve been getting ready for the newbuild program. We’re telling you that this year or next year, we are absorbing a lot of cost in our balance sheet and we’re giving you that quarterly.

We’re carrying somewhere around 100 mariners in our fleet right now, training. So they will easily go on these vessels as they come in and we’ll be able to come. We will probably pull between now and the end of the year pull the last two 220s out of stack and have them ready to go. We’re drydocking them and getting them ready for the market.

So it looks like, as the market increases and demand increases, it will easily be absorbed into the market. Plus I saw this morning we have our first bowling ball headed toward the Gulf of Mexico, which may create some demand as well.

Operator

Thank you. The next question is from the line of Todd Scholl with Clarkson Capital Markets. Please go ahead.

Todd Scholl – Clarkson Capital Markets

Good morning, Jim. Good morning, Todd.

Todd Hornbeck

Good morning.

Jim Harp

Good morning.

Todd Scholl – Clarkson Capital Markets

Hey, I just had a couple of real quick ones. One, can you guys talk about competitor pricing? I think in the prior quarter you guys kind of mentioned that, some of your competitors were still, kind of, pricing below where leading-edge dayrates are. Has that improved at all during the second quarter and kind of in this early third quarter?

Todd Hornbeck

I think it has particularly in the Gulf of Mexico. Costs are going up. And it usually takes us a quarter or two for people to realize what their actual true landed costs are and then they start focusing on dayrate. We’re usually ahead of that curve. And we’re starting to see the dayrates of our competitors come up, plus there’s not very much availability.

To be honest with you, we’ve had a -- because the market we saw expanding. We’ve kept more of a spot strategy. And we have some of the only spot equipment left in the Gulf of Mexico. There is going be some ebbing and flowing in and out from time to time. But on the big tonnage, we’ve got the lion share of it available to the market.

So, we’re starting to see it better. In other markets, it’s probably more of a lag. You probably saw recently the tender from Petrobras and we were kind of surprised that the pricing on the PSV 3000. We think it was woefully low compared to the exposure of the new contract from Petrobras. And we think the exposure there and the risk there that those dayrates were way too low for us to participate.

Todd Scholl – Clarkson Capital Markets

Okay. And just one other question is, in the past you guys have mentioned that you have a couple of stacked boats in the GoM that you would probably put back to work if it wasn’t for a crewing factor. You guys have also commented about a lot of the training that you are doing in terms of your own mariners.

My question is, is that the training that you are doing, are those for mariners that are ultimately destined for your newbuild program or would they potentially be able to go to work on the stacked vessels you have in the Gulf. And eventually lead, maybe you guys reactivating those vessels?

Todd Hornbeck

We are reactivating the vessels.

Todd Scholl – Clarkson Capital Markets

Okay.

Todd Hornbeck

I think we have been very clear that they will be out before the end of the year back into the fleet. I don’t want to call the shot exactly what date. We are going through coast guard and regulatory and drydocking to get them back. They’ve been stacked for three years. So, we want to go through all the systems and the DP systems and all the mechanical systems before we put them back to the market.

We are doing a lot of training. Primarily, the training that we’re doing will take over the current fleet that we have. And our mariners that have been with us for some time that are operating some of our larger tonnage will bump up. And they are out actually doing further training to bump up to the larger HOS Max 300 class vessels.

So, it’s a little bit of both. We’ll bring in some qualified mariners. So that will take over the new fleet but the majority of them will take over the existing fleet that we’re operating. We are only talking right now about 16 vessels. So it’s a bump up system.

Operator

Thank you. The next question is from the line of David Anderson with J.P. Morgan. Please go ahead.

David Anderson – J.P. Morgan

Thanks. Todd, you were talking about the contract terms in Brazil not been to your liking. I was wondering first, if you could expand a little bit in terms of what some of those provisions are in those contracts that make them different than what you see in the Gulf of Mexico?

And I guess the second question I had is, you have the several vessels rolling off in Brazil in mid next year. What has to happen or what has to change to keep them there? Because it sounds like on the one hand you say you’re committed to Brazil but we’re watching a bunch of vessels leave the market. So I’m trying to understand what your thinking is keeps them in there.

Todd Hornbeck

Well, it’s not -- keep that particular vessel. I mean, there’s going to be -- have to be a lot of changes in Brazil and as they increase their capacity on the rig demand drivers, they are going to need top quality operators and equipment.

And right now, some of the new contract terms that we saw in the last bid, there were very large penalties included in those contracts for rule, what they call rule 72, local content rules that if you can’t statutorily meet those local content rules on the mariners. Then Petrobras would have the right to penalize you through your dayrate very, very substantially.

And they can cap it to the total contract value of 30% of your contract. And right now, with what we see, the Navy that is producing the local content mariners and the licenses, they are not adequately providing enough mariners in country, Brazilian mariners to service all of the ships that are coming.

We’re seeing another demand for another 135 ships in that market, not including the drill ships, not including the semi-submersibles that are going to require Brazilian licensed mariners that are provided by the Navy in the local unions, that they cannot meet the demand. But yet if you don’t have those mariners, you get penalized. And you get penalized very substantially on your revenues.

So, we are going to wait until that settles out. I think cooler heads will prevail over time, because they have a big project -- a long-term plan that they have got to do a lot of drilling. And they need the top quality equipment. And I think that will have to modulate and when it does, we will be ready to put additional vessels in, maybe some of the HOS Max 300s in that market to meet that demand. But that’s going to have to modulate some and we’ll have to let that work through its own process.

David Anderson – J.P. Morgan

Beyond that, what about the dayrates and kind of the length of the terms in there? Is that, kind of, in line with what you’re looking for?

Todd Hornbeck

I don’t understand your question.

David Anderson – J.P. Morgan

Well, in terms of the dayrates that Brazil is looking to bid up your vessels in. And in terms of the contract’s length, how does those compare to the Gulf of Mexico? Does that mean your economic hurdles?

Todd Hornbeck

The operating costs in Brazil are 2x of what it is in the Gulf of Mexico. So, you can’t just take our contract dayrate on a PSV 3000 for instance, that I told you leading market edge rates are at 35 and say that that is the same equivalent earnings power in Brazil. It’s apples and oranges because it’s 2x, not counting the penalties and all of the new risk profile that they put in the contracts down there. So, I mean we -- it’s markedly different.

So, we like the long-term contract aspect of it and people will get competitive on long-term. But for the earnings power that the new risk of the contracts have, we’ll just -- we would rather take a wait and see attitude. Brazil is going to be there a long time, throughout my career and probably throughout many people’s career. So we have got time to let that settle out.

Operator

Thank you. The next question is from the line of Trey Stolz with IBERIA Capital Market Partners. Please go ahead.