Hornbeck Offshore Services, Inc. (NYSE:HOS)
Q32012 Earnings Call
November 1, 2012 10:00 am ET
Ken Dennard - DRG&L, IR
Todd Hornbeck - Chairman, President and Chief Executive Officer
James O. Harp Jr. - Chief Financial Officer, Executive Vice President
Todd Scholl – Clarkson Capital Markets
Gregory Lewis - Credit Suisse
Jon Donnell - Howard Weil
Rhett Carter - Tudor, Pickering, Holt
Trey Stolz - Iberia Capital Partners
Cole Sullivan - ISI Group
Joseph Gibney - Capital One Southcoast, Inc.
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hornbeck Offshore Services third 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, November 1, 2012. I would now like to turn the conference over to Mr. Ken Dennard with DRG&L. Please go ahead, sir.
Ken Dennard – DRG&L, IR
Thanks, Camille and good morning, everyone. We appreciate you joining us for the Hornbeck Offshore's conference call to review third 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 the call today speaks only as of today, November 1, 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 conference call, Todd and Jim will make certain projections about future financial performance, liquidity, operations and events that are not statements of historical fact and thus constitute forward-looking statements.
As noted in yesterday’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 from that which is projected today.
In Hornbeck’s 2011 Form 10-K, other SEC filings and in yesterday’s press release announcing third 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 yesterday’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 yesterday after marker.
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. Accordingly, investors should monitor that portion of the company’s website in addition to following the company’s press releases, SEC filings, public conference calls and webcasts.
Now with that behind me, I would like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd?
Good morning and thank you, Ken. Welcome to our third quarter 2012 investor conference call. This morning we will take you through our view of current market conditions and provide additional color on the third quarter results, which were announced yesterday afternoon for your convenience. We figured that since so many of you are probably dislocated due to the storm, you could use the extra time to review the press release in advance of this call.
After I do the intro, Jim will walk you through the numbers in greater detail. We had another strong quarter for our core high spec fleet in which the deepwater market conditions continue to show strength and further improvement. They are clear leading indicators for our buoyant deepwater and ultra deepwater market to continue throughout the remainder of this year and into 2013 and beyond.
First, deepwater demand drivers are expanding. 32 deepwater floaters are drilling today which exceeds the number of floaters drilling immediately prior to Macondo. Six additional units are positioned to begin drilling in the fourth quarter. We expect to see as many as 40 floaters in the Gulf of Mexico by the first quarter next year with about 38 of those actively drilling.
During the third quarter, 12 contracts for deepwater floaters were awarded in the Gulf of Mexico, which is as many contracts awarded as we saw in the first and second quarters combined. So the big picture for the deepwater and ultra deepwater is continued growth at a pace that exceeds the prevailing forecast from when we launched our most recent newbuild program a year ago. So the emerging deepwater market continues. We began to observe last November are being inflected in our company's strong leading-edge dayrate and utilization figures for are high-spec DP-2 vessels which comprises the majority of our fleet.
We saw utilization 94% during the third quarter for our large equipment with average dayrates of about 30,000. We continued to see leading edge rates in the 30,000 to 36,000 range for 240 and 265 foot class vessels and recently negotiated a long-term charter for 300 class vessel at 38,500 per day with multiyear renewal options and cost escalation protection which we have increasingly been able to obtain in our charters since the significant mariner wage adjustments that occurred in April of this year.
If we adjusted utilization for our high-spec OSV equipment to account for planned drydockings during the third quarter, utilization would have been at 97% or basically full practical utilization as you move from contract-to-contract and we have some slippage there, but basically a practical utilization for that fleet.
The story of our DP-1 equipment is different. These vessels, while considered new generation, because they were built as the first deepwater vessels around 1999 to 2000 era, are simply not being utilized on the deepwater projects in the post Macondo era. That fact together with the general softness on the shelf during the quarter, especially during August and September led to their poor utilizations, which bled into our fleet wide utilization figures for all of our new generation equipment.
As we pointed out to you last quarter, we made the decision to remobilize to the Gulf of Mexico, four DP-1 200 class OSVs from Brazil, so that we can retrofit and reintroduce them into the Gulf of Mexico market as high-spec vessels. The remobilization of these vessels coupled by softness of our remaining DP-1 equipment accounted for nearly all of the decline in the utilization of our new generation fleet compared to the prior quarter.
As we formally announced about a month ago, we finalized our plan to retrofit the four vessels remobilized from Brazil and two additional DP-1 vessels in to DP-2 240 class high-spec vessels which would give them greater capability to operate in the post Macondo, Gulf of Mexico, which is increasingly requiring high-spec DP-2 equipment both in deepwater and on the shelf. We have other DP-1 vessels in the fleet that we are considering as candidates for upgrading or alternatively of candidates to be sold.
Our analysis thus far leads us to believe that these vessels once upgraded would be capable of meeting the more stringent standards of regulators and clear customer preferences that are becoming more pronounced even in the non-deepwater regions. In the short run, activity on the shelf is harder to predict because of its transitory and well-to-well nature coupled with greater exposure to events like weather or permit delays. This leads to greater volatility than the generally sustainable activity patterns that we have seen in the deepwater arena.
For example, we saw a reduction in the average working jack-up fleet of about six MODUs and two platform rigs during the third quarter. However, we expect to see a slight increase in the number of MODUs and 8 additional platform rigs working in the fourth quarter on the shelf.
Long-term, our view for the shelf is positive in line with the Gulf of Mexico overall. Because of this generally positive outlook, coupled with strengthening standards that drive cost, we have taken a marked position on the shelf that requires price discipline. Because of that discipline, our DP-1 vessels are likely to be among the last to be contracted albeit at much stronger rates than the market and among the first to be let go with short-term conditions weaken.
But if we are expecting that market to continue to increase over the next year or so, we think its good positioning for that fleet. We experienced, just most recently as Hurricane Isaac approached during what was already a soft quarter. The hurricane delayed contracting decisions until after the passage of the storm and its minimal adverse impact on infrastructure created almost no demand for additional vessels.
To give you an idea of the amount of utilization volatility we have observed with these DP-1 assets. When we last spoke, seven of our DP-1 vessels were available in the Gulf of Mexico to work and were working at an average dayrate exceeding $18,000 per day. Intra-quarter, the number of DP-1 vessels working got as two. Today, seven of our DP-1 vessels are working at an average dayrate of about $14,000 a day.
So, with demand uneven as it's on the shelf, we will see utilization swings among this vessel class but we also see signals of strengthening. We have heard anecdotally information that contract coverage for jack-ups is growing in the Gulf of Mexico and some additional jack-up units may be reactivated both in the United States and Mexico. However, these reactivations and new contracts will not necessarily translate into increased demand overnight. So market conditions may continue to be choppy for that one little segment of our business.
There were three events during the quarter that were of an infrequent nature and which taken into the aggregate played a significant role in the drop in our financial results compared to last quarter.
The first event which we signaled to you the last call was the remobilization of four vessels to the Gulf of Mexico from Brazil. Those the 200 class that I just spoke about. That accounted for 116 out of service days. Upon their arrival here, we decided to drydock two of those vessels which increased the out of service time by an additional 103 days. However, all 209 of those demobe and drydock days were included in our commercial downtime guidance last quarter. We decided to take advantage of market softness for DP 1 vessels and accelerate their drydockings so that we did not have to sacrifice utilization of the time in the future when conditions may be more robust. Remember these vessels will be going in for stretch program but they won't be called by the yard until sometime the mid-next year.
Second, we announced in September, we had an upstream customer file Chapter 11 protection in mid-August and of which we recognize about $1million as bad debt expense. This is purely to say how things will play out in that case but we believe that our reserve is prudent.
The third unplanned yet infrequent event was the decision by a customer to prematurely cancel a planned 90 day charter for the HOS Achiever. That’s one of our 430 foot subsea construction vessels, DP-3 vessels. They canceled it due to their inability to secure a permit on a timely basis for the planed work scope. That work has been postponed and after 33 days of working at a negotiated standby rate that resulted in $2 million of lost revenue or $2 million less of what we thought we were going to make on the job, we were able to secure an additional 90 day job in Mexico for the Achiever in relatively short order. So while we missed an opportunity for about $2 million in revenue we were able to replace that work relatively quickly which is indicative of a strengthening market condition for vessels like the Achiever.
It's important to always keep in mind that the long lead time normally associated with projects for this type of vessel meaning the DP-3 or subsea construction vessels is different from working on the shelf or with regular MODUs. The ability to locate work quickly is indicative of customer demand for this vessel class which on previous call we said we thought that inflection point would happen somewhere around mid-2013 but we are seeing feeder bands much earlier on demand for those vessels which is a good sign for the next several quarters.
The larger point with respect to all of these events is that that they are generally nonrecurring in nature and do not detract from the overall market strength we are otherwise seeing, particularly in deepwater and ultra deepwater space. In Brazil and Mexico, our core international markets, we continue to be dedicated to finding ways to group prudently expand our footprint at reasonable attractive returns. We are particularly excited about the prospects for growth in Mexico, where we hope that following the recent presidential election in deepwater imperative there, we will see more activity in the coming years.
Brazil also represents a significant opportunity for us. Our eight vessel fleet represents a strong foothold in what is one of the most promising deepwater markets in the world today. We have made a significant commitment to Brazil and remain focused on finding ways to participate in that market in a meaningful way while ensuring that our financial hurdles are met. The four 200 class vessels we brought home simply did not meet our alternative market analysis and we determined that the best option was to bring them back to the United States for retrofit to DP-2 240 class vessels. As many of you have heard Brazil recently announced a new bidding round to open up additional oil and gas concessions which we hope will create opportunities for customers other than Petrobras.
There are several major oil companies operating in Brazil which have contracting practices that are more in line with our risk parameters and whom we are actively bidding. Utilization for the MPSVs fleet stood at 91% for the third quarter. There is a little noise in that number because the Achiever spot job cancellation carried with it a lower standby rate that reflected vessel utilization, albeit at a lower rate. If we counted the 33 days on standby rate related to that event as downtime, our MPSV utilization would have been at 82% for the third quarter. Nevertheless today all four of our MPSVs are presently contracted for 85% for the remainder of the year. So we are happy with what we have seen this year in terms of utilization for these vessels and hope to have opportunities to improve dayrates going forward.
Our 300 class HOS Max OSV newbuild program is proceeding well, on time and on budget. As we announced during the quarter we exercised options for additional four vessels bringing the total number of vessels under construction to 20. We are currently evaluating additional options that are not exercisable until February 2013. As I noted earlier, we also announced a program to retrofit six of our DP-1 200 class vessels in to DP-2 240 class vessels. Those vessels will be converted and redelivered in their new high-spec configuration two at a time in May, August and December of 2013. We are extremely excited about this program as it will enable us to meet the growing demand for high-spec vessels in the Gulf of Mexico at attractive economics for us and our customers.
As we look into the future, we are not only building the largest and most sophisticated state-of-the-art vessels that our customers will require but we are also investing in the much-needed human capital that it will take to operate this equipment. As we have announced previously we are undertaking the process of recruiting, hiring and training roughly 500 qualified mariners that we will need to crew our newbuild fleet over the next two years. We have developed a strategic plan to address the chronic undersupply of labor in our industry and have approximately 100 of those mariners in training, riding our fleet today adding incremental run rate cost of approximately $3 million per quarter which is reflected in our cash OpEx guidance for fiscal 2012.
Due to our recent investment in vapor recovery systems to ready three of our double hull barges for trans-Gulf's service related to the Eagleford shale play. Our downstream fleet certainly seems like it's finally turned the corner this past quarter after four year of protracted downturn. Our annualized EBITDA will run rate credited 20 million this quarter and we believe is headed to the high to mid 20s for next fiscal year.
Lastly before I turn the call over to Jim, I would like to give a big shout out to our employees and or customers and vendors and investors and friends in the mid-Atlantic Great Lakes in the northeastern U.S. who have been impacted by the Superstorm Sandy this past week, many of whom may be listening. Having lived in Hurricane Alley here in the Gulf for all of our lives, we are especially mindful of what you are going through right now and our thoughts and prayers are with you. We are certainly grateful that all of vessels and crew that are working in affected regions were able to stay out of the harms way. We only sustained relatively minor damage to our Brooklyn port facility, which is roughly five to six feet of water due to the storm surge.
At this time, I would like to turn the call over to Jim to expand on the financial results.
James Harp Jr.
Thanks, Todd and a good morning to everyone. Our third quarter diluted EPS from operations was $0.20 per diluted share, compared to a $0.03 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 third quarter of 2011 due to our November 2011 equity offering. Our EBITDA was $48.1 million for the third quarter of 2012 compared to $35 million for the year ago quarter. Adjusted EBITDA which is the starting point that we use to compute ratios for the financial covenants in our revolving credit agreement was $52.4 million for the core third quarter. These year-over-year EPF and EBITDA trends were largely due to much stronger market demand for our high spec upstream vessels.
As we reported yesterday afternoon, our third quarter sequential results were unfavorably impacted by a few known drivers as well as some unexpected circumstances. During the third quarter, as expected, we operated with a heavy drydock calendar, experienced downtime related to the remobilization of four vessels back to the Gulf of Mexico from Brazil and reported by operating expenses for incremental mariners associated with the ongoing newbuild program. Although that last category was already in our guidance, it was a sequential change from the second to the third quarter in terms of magnitude.
However, we also witnessed an unexpected and a mid quarter decline in demand for our 200 class DP 1 vessels due to the lower active rig count on the shelf, the uneven pace of shallow water permitting and commercial downtime related to Hurricane Isaac. We also have customer surprise us with a rare early cancellation of a spot charter for one of our MPSVs due to their inability to get a permit for the project we were supporting, which resulted in lost revenue and the inability to charter the vessel to other interested parties for about 33 days.
Although, as Todd mentioned we did get a reduced standby rate for that time. For additional information regarding EBITDA and adjusted EBITDA as non-GAAP financial measures please refer to the data tables in yesterday afternoon's earnings release including Note 11.
Moving into our segmented data starting with our upstream. The upstream revenue for the third quarter of 2012 was roughly $6.6 million lower than the sequential quarter primarily due to the expected downtime mentioned above and the choppy market conditions in the GOM for our DP-1 200 class vessels. Operating income was $24.5 million or 21% of revenues in the current quarter compared to $35.5 million or 29% of revenues for the sequential quarter. Average new generation OSV dayrates for the third quarter of 2012 were approximately $24,000, or about $650 higher than the second quarter of 2012. Utilization for our full fleet of 51 new gen OSVs for the third quarter of 2012 was 80%, compared to 88% for the second quarter, which resulted in roughly a $1500 decrease in effective dayrates sequentially. The sequential decline in new generation OSV utilization was largely due to softer than anticipated spot market conditions on the shelf mentioned above for our DP-1 200 class vessels particularly during and after Hurricane Isaac. As a reminder, on our last conference call, we guided to utilization of to the low to mid-80s and we came in at 80. So that by and large is the variance for the quarter and the reason for the lower drop is what I have been discussing. Effective new generation OSV utilization for our active fleet, which excludes the impact of stacked vessels was 83% for the third quarter of 2012 compared to 86% for the year ago quarter and 94% for the sequential quarter. Although, as Todd mentioned earlier, our core high-spec fleet operated at 94% utilization or 97% effective utilization. So that’s really the story here.
If the recent softness in the DP-1 200 class market continues through end-of-the-year, which is certainly possible, we would expect utilization of our 51 vessel OSV fleet for the fourth quarter of 2012 to remain in the low-80s which is in-line with our third quarter results as well as where we are today. On the strength of two long-term contracts and recent spot market activity, MPSV utilization was 91% for the third quarter of 2012 compared to 76% for the year ago quarter and 91% for the sequential quarter. With the drydocking of one of our MPSVs on a term contract in October and a few idle days between projects for our spot MPSVs, we expect utilization for our MPSV fleet of four vessels to be in the mid-80s to low 90s for the fourth quarter roughly in line with third quarter levels after adjusting for the Achiever's 33 days of de facto commercial downtime.
Moving into our downstream segment. Our downstream segment which represents about 10% of our consolidated revenues for the most recent quarter continues to be affected by the prolonged weakness in the overall U.S. economy. However, our third quarter results were positively impacted by fewer days out of service for regulatory drydocking activity and discretionary commercial capital expenditures readying three barges with vapor recovery systems for charters that commenced in the third quarter. As I mentioned earlier on the strength of the recent service related to the Eagleford shale trend, we seem to have finally got our annualized EBITDA run rate back above the $20 million level after four long years in the $15 million range. Downstream operating margins for the fourth quarter of 2012 are expected to remain in the low to mid teens with utilization in the high 80s to low 90s. We believe that downstream results will continue to improve further when the U.S. economy rebounds and the timing of which is not predictable.
Moving onto operating expenses. On a segmented basis, cash OpEx for the third quarter 2012 was roughly $60 million for the upstream segment and $7 million for the downstream segment. For full calendar 2012, aggregate cash operating expenses for upstream segment are projected to be in the range of $223 million the $226 million, which implies guidance of $55 million to $58 million for the fourth quarter, or slightly down from the third quarter and for our downstream segment, aggregate cash operating expenses are projected to be in the range of $28 million to $29 million, in line with our prior guidance or $6.5 million to $7.5 million for the fourth quarter.
Our projected range of upstream operating expenses is in-line with the high-end of the guidance range that we last provided on August 2. Included in this guidance range is approximately $2 million of out-of-pocket expenses related to mobilizing all of our vessels, the four vessels from Brazil to the GOM. Also included in our cash OpEx guidance are the mariner wage increases that went into effect in April 2012, as well as our incremental investment in human capital we need to recruit, train and crew our expanded fleet, commencing with the first 300 class newbuild deliveries next June.
For example, as Todd mentioned earlier, we currently have about 100 incremental mariners in training riding in the fleet, the cost of which is already baked into our cash OpEx guidance. Consistent with our cash OpEx guidance for prior periods, these estimated ranges are good faith estimates based on best available information as of today and are only intended to cover our currently anticipated geographic footprint, charter mix and industry market conditions.
Moving into general and administrative expenses or our overhead. Our third quarter G&A expenses of 12.9 million were 10.1% of revenues, compared to $12.1 million or 9.2% of revenues for the second quarter of 2012. G&A costs for the third quarter were allocated 93% to the upstream fleet and 7% to the downstream fleet. The sequential increase in G&A expense was wholly attributable to an increase in our bad debt reserve, primarily related to the recent bankruptcy filing by an upstream customer. Our third quarter 2012 G&A to revenue margin was at the midpoint of our recent historical range of 9% to 11% of revenues. Our calendar 2012, full-year 2012 G&A expenses are expected to be in the range of $48 million to $50 million in line with prior guidance which implies fourth quarter guidance $12 million of $14 million consistent with the prior quarter.
Moving into our balance sheet related items, I will now review a few of those items for the third quarter. Beginning with liquidity, our total cash and cash equivalents at quarter end was roughly $634 million, which puts our net debt position as of September 30, 2012 at only $450 million, down from $636 million a year ago. The only debt instrument 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 4.3% on $1.2 billion 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 and our convertible senior notes offering in August 2012, our cash debt service for fiscal 2012 is only expected to be $43.2 million. However, commencing in fiscal 2013, we expect to incur a full-year run rate of cash debt service in the amount of $52.3 million compared $43.9 million prior to our two most recent bond deals in 2012.
Our 2012 run rate of gross interest expense for GAAP reporting purposes, before capitalized construction period interest is about $69 million, which includes about $13 million of non-cash imputed original issue discount or OID on our one and five-eighths convertible senior notes and $2.9 million of non-cash imputed OID on our 1.5% convertible senior 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 one and five-eighths convertible senior notes, which we expect to redeem that time.
Based on our projected average construction work in progress balance for fiscal 2012 related to our OSV newbuild program, we expect to capitalize approximately $11 million of interest expense to the balance sheet this year for the full-year. We also project to earn approximately $2 million in interest income on a projected average invested cash balance resulting in a projected net interest expense for the year of about $56.2 million which implies fourth quarter guidance of $14.7 million, up slightly from the third quarter of 2012 results but consistent with our September 4, guidance for this line item.
Our effective tax rate for GAAP income statement purposes was roughly 39% for the quarter. We expect to pay about $1.8 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 pretax net income.
Moving into maintenance and other capital activity. During the third quarter of 2012, we drydocked seven new gen OSVs for a total project cost of $9.1 million of which $3.9 million was spent in the third quarter of 2012 and $5.2 million is expected to be incurred during the fourth quarter of 2012. This represented roughly 228 days out of service for OSV drydockings during the third quarter.
During the fourth quarter we have four new gen OSVs and one MPSV that will be drydocked at a total project cost $7 million, of which $6 million is expected to be incurred in 2012 and $1 million is expected to be incurred during the first quarter of 2013. These fourth quarter upstream drydockings are budgeted for about 104 days and 30 days of downtime with zero revenue for the OSVs and MPSVs, respectively. The days represent the final 19% of our 2012 expected upstream total days out of service. For our downstream fleet, all drydocking activity is wrapped up earlier this year. We had no regulatory drydocking during the third quarter and we don’t expect any during 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 $57 million for the full-year 2012, about $16 million of which is expected to be incurred during the fourth 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 but exclusive of the OSV stretch programs, the 200 class retrofit program, is projected to be somewhere in the $45 million to $55 million range.
During the third quarter, we exercised the first four of the 48 newbuild options, two at each shipyard for HOS Max vessels under our fifth OSV newbuild program. These vessels with deliveries in the fourth quarter of 2014 and first quarter 2015, bring our OSV newbuild program to a total of 20 vessels. With this commitment to build additional vessels the exercise dates on the remaining 44 options, 22 at each shipyard were each pushed back 60 days, with the next exercise date now in February 2013. This will allow us to see a few more cards from the market before making a decision to continue exercising additional options which is what we currently expect to do.
The aggregate cost of these four options is approximately $180 million, or $45 million per vessel, before construction period interest. This increases our total OSV newbuild program budget, excluding construction period interest to approximately $900 million of which we expect to spend roughly $240 million in 2012, $428 million in 2013, $184 million in 2014 and $7 million in 2015. From the commencement of this program through September 30, 2012 we have incurred about $187 million or 21% of the total program costs, including $67 million that was spent during the third quarter of 2012.
In September 2012, we decided to move forward with our plans to upgrade and stretch six of our super 200 class DP-1 OSVs, converting them into 240 class DP-2 OSVs. The total project cost for this program is expected to be approximately $50 million in aggregate or $8.3 million each. We expect to incur approximately 762 vessel days of aggregate commercial downtime for the six vessels, our 120 vessel days each beginning at the end of this quarter and continuing through. The details of this guidance are included in our press release yesterday afternoon.
Bollinger shipyards will utilized two of its shipyards and operate on concurrent path to minimize downtime for this project. The vessels will enter the shipyards in pairs beginning of the end of this year with redeliveries as 240 class vessels scheduled for each all May, August and December of 2013, two each.
Moving into liquidity. Together with the cash on hand and available capacity under our currently revolving $300 million revolving credit facility and based on the key assumptions outlined in our earnings release, we expect to generate sufficient cash flow from operations to cover all of our growth capital expenditures for the first 20 HOS Max vessels under construction, all of the capital costs related to our new six vessel 200 class OSV retrofit program, the planned retirement of our one and five-eights convertible notes in November 2013 and all of our annually recurring cash debt service, maintenance capital expenditures and cash income taxes for the remainder of fiscal 2012 and for the full duration of the currently committed HOS Max newbuild program, which spans through the first quarter of 2015.
Wrapping up with forward guidance. Rather than recap all of our forward guidance again now, I would simply remind you and refer you to the rather robust guidance that we provide each quarter in our 15 page earnings announcement as well as the transcript from this call, which serves as a template for a of categories of various financial and operational data. I highly encourage those of you who maintain your own financial models on our company to use this detailed information that we provide to true up your models each quarter, especially for the granular, below the EBITDA which we give on both on annual full year and forward quarterly basis.
In closing, as I mentioned on our last call, there still seems to be a handful of analysts that are having modeling variances with respect to cash OpEx, G&A and below the EBITDA line items such as depreciation, amortization and net interest expense. For example, this quarter some analysts did not update their estimates to reflect the updated GAAP interest expense guidance we issued on September 4, resulting from our 1.5% convertible bond offering which closed in August. Overall, depending on whether the DP-1 200 class shelf market remains soft or recovers, we would expect our financial results for the fourth quarter to be roughly in line with or slightly better than the third quarter.
With that, I will turn it back to Todd for any further comments or to entertain questions.
I think at this time, I would like to open it for questions.
(Operator Instructions) Our first question is from the line of Todd Scholl with Clarkson Capital. Please go ahead.
Todd Scholl - Clarkson Capital Markets
I just had a couple of quick questions. The first one is, it seems like after having pretty strong dayrate momentum in the first few months of this year for your high-spec new gen fleet in the Gulf, it seems like momentum has stalled there somewhat for dayrate. Is that function of the weaker permitting that we have seen or is the weaker permitting more impacting the lower end vessels on the shelf, the DP-1 vessels you have talk about?
Then as a second question, you have started to see some significant progress in your downstream business. I am just curious with the recovery there, have you had more interest in potential buyers of that business? Or is there at least more discussions being had because the value that you place on it versus the value that a potential buyer would have on it is now closer?
I am going to answer your first question. The pace of permitting or the softness is all coming the DP-1 equipment on the shelf and the DP-2 equipment are high-spec equipment. I don’t think you can really say that dayrates have stalled. They are in the mid-30s which is higher than any time in history, even the last peak in 2008. What has happened which you don’t see reflected in dayrates is all contract work that is going on, the contract work that’s making the earnings power growth in the future off of the relatively same dayrates in the mid-30s or 30 to 36 would be cost protection on crew wages, better indemnity terms and things of that nature.
So, all of that is reflected on the top line dayrate that you see quarter-to-quarter, which is happening as well in this tight market. So, we are seeing better utilization since the first quarter, second quarter and in the third quarter. We have continued the rate increases on the high spec equipment. The only thing that’s in flux is the DP-1 equipment on the shelf.
Hopefully if all the indications are that the shelf demand drivers will continue to grow, if that happens, I think that will tighten up and should stabilize. I cannot tell you whether that is going to be the fourth quarter, the first quarter of next year. So we will just, I will defer what I am seeing as the other analysts are reporting and all analysis is that the shelf is going to increase in activity.
Todd Scholl - Clarkson Capital Markets
I was just going to say, there definitely does appear to be a pick up in demand on the shelf but if permitting doesn’t get better, is that potentially, structurally something that could challenge that market rebound in anyway even if there maybe theoretical demand based on what we think that the operators have? But is there, maybe, an actual demand, restricted due to a lack of permitting, permits getting processed?
It's hard to make that correlation right now you. As we were coming out of the post Macondo era when there was no permitting and we were tracking that very, very closely and everyone had a great detail to attention to it, it was a measurement in which had a lot of meaning. Right now, it's hard to map the amount of permits with actively the drilling units because there may be more permits being issued before the rigs are actually able to go to work.
Right now, with 34, 36 rigs on the shelf, most of them are working. It is hard to correlate September and August permitting with actual drilling applications. So we are still trying to figure that noise out but we do know that the Hurricane Isaac had some impact on delays. Permitting still overall for an annual basis is a measurement but trying to get it granular to the month is still pretty hard for us, particularly on the shelf. So, I need a little bit more time to understand that, as this market continues to grow and how that impacts it. So I will defer that question to a later date.
Getting back to your question on the barge business. It seems like that business has turned. A lot of the shale play has created a lot of new demand drivers. We are seeing more and more demand drivers coming in that business. Hopefully, the intermodal transportation market will start to pick up as this economy picks up in future years and will tighten it.
There is a lot of interest in the barge business. There is always dialogue in our because there is very few players in the business. So we are always seeing dialogue and I would just hope that the earnings that we are able to produce now makes it a better conversation. Let's just leave it at that.
Thank you. Our next question is from the line of Gregory Lewis with Credit Suisse. Please go ahead.
Gregory Lewis - Credit Suisse
Todd, it sounds like there is some chatter that the Mexican operators are looking to, maybe, acquire some tonnage. Have you been approached about potentially selling any of your DP-1 vessels in to Mexico and for private operators?
No, I have not been approached.
Gregory Lewis - Credit Suisse
Is that something that you would be willing to think about in selling some of those vessels into another market?
It really depends on a number of factors. We are in that market in a meaningful way. We are one of largest participants in that market. We are definitely mindful of creating additional competition. So it will be on a case-by-case basis. I am not saying that we wouldn’t but it would have to be the right terms and conditions and it would have to be the right of strategic positioning for us but what we have said is that we are more interested in the high-spec equipment.
So if it was DP-1 equipment at the right price, comparatively to what we think we can earn as a return on that equipment in that market then that would be the consideration. If we think our returns are really good with that equipment in that market it might not be the right answer. It maybe the right answer in the U.S. Gulf market. It may not be the right answer in the Mexican market. I can't give you a clear answer on that. I have got to be a politician.
Gregory Lewis - Credit Suisse
Okay, great. Then just a real quickly on the MPSVs. It sounds like the guidance was mid-80s to maybe 90%. In terms of thinking about and where the dayrates are for those assets or at least the assets operating in the spotmarket, should we expect those also to be flattish quarter-over-quarter or is there potential?
I would be conservative and be flattish quarter-over-quarter.
Our next question is from Jon Donnell with Howard Weil. Go ahead.
Jon Donnell - Howard Weil
Had a couple of questions on the contract you signed for the 300 class vessel. It’s a bit of a departure for you guys to get a little longer-term and stay out of the spotmarket little bit on that first one. Can we get a little more details on, maybe, who the customer is? Where that will be working and if there is potential for any additional longer-term contracts for the other vessels as they get delivered as well?
We don’t give that type of granularity just because of the competitive nature of it. I am sure you can understand. It’s a lot (inaudible) than its bigger, the rig market but we run, just like any fleet and we run a fleeting strategy and all of our equipment is not in the spotmarket. We have a lot of long-term contract and we have a balance that we look at.
Delivering 20 300 class foot vessels, we want to have some on term and some on spot and that we wanted to give you all a market. We wanted to give that to the market to let you all know there is demand out there for that equipment. We see a lot of demand for it as it's delivered. We are going to term up some and we are going to have some on the spot.
What you really have to focus on as we are looking at these rates is there is a lot of things that go into those rates. That equipment can range widely from 36 to 45 depending on the type of contract, what's the cost of the contract is because remember on a lot of these contracts, there is different risk profiles and different crew complements and different requirements that can drive the actual operating cost up and down.
When we see us sign a long-term deal that means that it meets our hurdle rates and it's a pretty good deal for the company. That means it’s a pretty good contract terms. We just do not sign a long-term contract.
Jon Donnell - Howard Weil
Okay, and then regarding the stacked vessels that you still have in the Gulf of Mexico. I know the demand clearly has trailed off a bit here during the quarter. Is that the 100% the reason why those are still not working or do you have the crew capabilities to get those up and running should the demand pickup?
Great question. They remain in stack because of what you just saw last quarter, with weakness in that DP-1 class. What we been able to do is take those vessels and drydock, them and warmstack them and that’s our ready reserved fleet. We have 100 mariners riding and training on the higher spec equipment right now that we have already identified the crews. So when we get a demand need for those vessels we can deploy them in less than a week.
They are ready on a hot status in Port Fourchon, ready to go right now. We don’t have to go to through the drydocking like we did the first of the year, identify the crews and bring them on and on board them and do all the training. That’s already done and baked in.
So we have the quickest upside potential with that fleet than any one probably in the market but we want to be conservative and not just put it out to the market in an undisciplined way because we want to support the rate structure. We think it is very important that as this market continues to grow and tighten, that we support that rate structure because what we have seen in some of our competitors is they have just gone to the hard deck, at cash breakeven and that’s not where we are going to play the game.
That’s just not prudent for us and our investors and the risk that it requires to operate this equipment. So if we believe that there is a future market that is tightening we are in position.
Thank you. Our next question is from the line of Rhett Carter with Tudor, Pickering and Holt. Please go ahead.
Rhett Carter - Tudor, Pickering, Holt
Just thinking about progression in the 2013. I am on the cost side. Are you expecting 2013 to be a much flatter year on the drydock schedule? Then as far as, I am accounting for the labor ramp, it seems like you guys are getting way out in front of that in terms of having your 100 mariners already under training. So is the right way to think about that more of a gradual progression as we go forward rather than a step up?
I would say so. You asked two different questions there. One, the drydocking load. As you get a lot larger fleet it is about 50% of fleet is drydock per year. You are going to have intensity on quarters where we may accelerate some drydockings or we may have a heavy drydock quarter within a year that could skew because we want to bring them in early for marketing reasons or for commercial reasons. So that’s where you are going to get the intensity level. But it is about, as you get the fleet this size, it's about 50% per year, normally.
If you think about the drydocking on the labor side, since we had the big step up in April. And we are training and riding those mariners and they are part of our DNA now. They are part of our cost OpEx in the fleet that we have giving you. I should be more gradual. We have gone through great lengths in our contract and worked very diligently to try to get cost protection. We have been very successful in doing so on any long-term contracts that we are signing.
So that if that intensity, like it picked up in April last year, where we had a huge step up that we would be able to pass that cost on and protect our margin erosion or spot fleet, you can get it through the dayrate expansion. So, I would think it would be more gradual. I would agree with that.
Thank you. Our next question is from the line of Trey Stolz with Iberia Capital Partners. Please go ahead.
Trey Stolz - Iberia Capital Partners
Just to kind of follow on, on the OpEx question. You are talking 100 extra mariners right now being additional $3 million per quarter. Are we getting them to an additional $12 million per quarter run rate if you add 400 more like you are talking about, you say gradually?
One thing. We only have so many beds to ride people. So to have 400 additional mariners in the fleet is not really, we don’t have that capability. It is not possible. So we don’t need 500 at one timer. Remember, one vessel or two vessels deliver every 45 days. Once I start delivering in June of next year. So it will be gradual pickup as vessels come on.
You will see that 100 in the first quarter probably start to increase as we get closer to the delivery date in June but the people that will be coming, on boarding that may swell 150 or 180 people in the fleet riding would be the people that are training to relieve the people for the fourth or fifth vessel that is being delivered. Not the first vessels.
So it will be a gradual swell where we are going to have a much better updated analysis for you in the first quarter of next year. It won't take you by surprise. We will update you but it will increase but it won't to the magnitude you are talking about. I don’t see it more than 150 to 180 people at any peak time riding in the fleet.
James Harp Jr.
The phenomena you need to focus on is, the good news is, it is like short-term pain for long-term gain. As you build this base of mariners you do not obviously start as you release vessels from the newbuild deliveries in June of next year and so on. Every time a boat delivers, the cash OpEex or at least the mariner pool, for that vessel is already, so to speak, in the bloodstream. You have already got it baked in.
So when it earns the dayrate its going to a significantly incremental EBITDA contribution because you essentially already were carrying the OpEx on a good portion of this crew complement and that this crew will move over and man that vessel but of course now its got a dayrate coming that will not only cover the cost but obviously make the profit.
And as Todd is alluding to, you are backfilling so that you have this kind of layer of mariners and then they will build throughout the three-year newbuild cycle. So in time, that number will hit a peak and then begin dwindling and our profitability will go back up because our EBITDA, the dayrates will be coming online.
Trey Stolz - Iberia Capital Partners
Got you. Then looking at the MPSVs, the Iron Horse in drydock and correct me if I am wrong, did you all say 30 days down there on the MPSVs for 4Q?
Yes. 30 days for the fourth quarter, which is just one boat out of four.
Trey Stolz - Iberia Capital Partners
The Iron Horse, so that vessels should be vessel should be coming out of drydock imminently? Is that how I should interpret that?
Yes, it is already out. It is already back on the job as of yesterday.
Trey Stolz - Iberia Capital Partners
All right. So, mid-80% to low-90% guidance, is that a net of the drydocking?
No, it was 85%, we have got it contracted, as that’s a contract cover. That other 15% is the 30 days of downtime and some allowance for the fact that you could have commercial downtime between jobs. But I would think it is going to be at least in the mid-80s and of course if we pick, somehow able to backfill the spot time between jobs then it could be a little bit better. So that’s why I said mid-80s, maybe low 90s but that those are your parameters.
Thank you. Our next question is from the line of Cole Sullivan with ISI Group. Please go ahead.
Cole Sullivan - ISI Group
Thanks for the extra details on the MPSVs this quarterly and outlook for 4Q. Just had a question. I guess the Iron Horse, was that drydock start in 3Q as expected, at least on the last guidance?
I don’t think so. No. I think it started off this quarter.
Cole Sullivan - ISI Group
Okay, and then you guys touched on drydocking next year for the OSVs. What does that look like on the MPSV side?
We have one out of four, we think. We will update you in February with a full grid, but off the top of my head, I believe it is just one.
Thank you. Our final question is from the line Joe Gibney with Capital One. Please go ahead.
Joseph Gibney - Capital One Southcoast, Inc.
Todd, just had a big picture question on decision-making around the newbuild options you have in February. You referenced seeing how cards play out in the market over the next couple of months having a little bit extra time to decide what to do. I a just curious what specifically the cards would be that would influence your decision to be more or less aggressive around those newbuild options? Is it permitting? Is it just rhetoric around incremental fleet announcements in the GOM? Just how the DP-1 market shakes out. Just curious to get your perspective there.
I don’t think it has anything to do with the DP-1 market or the lowers just the ultra deepwater supply demand equation and what we are seeing in other core markets. Remember, the option fleet or the fleet that we are building we were able to contract at we believe are very competitive prices worldwide. So even though they will enjoy U.S. flag and Jones Act status we don’t anticipate that all of them will stay in the U.S.
We intend to service our other core markets with them as they expand and we see the need growing in those markets. So we are going to see a lot of cards between now and February. The reason we negotiated so many options is that’s where we see the market could go. We are very bullish on the market in the ultra deepwater market worldwide, with a healthy base being in the U.S. Gulf of Mexico.
So our expectation is that we plan to build those vessels. We want to have the latitude to be able to call that shot in February and then 60 days after that. So if anything changes which in this business it you can happen on a dime. We can have policy change. We can have any number of events that could cause us to pause and that’s okay. That’s why we negotiated the options the way we are to fan them out. We will make call shot in February.
That does conclude the question-and-answer session for today. I would now like to turn the call back over to management for closing remarks.
I just want to thank everyone for joining us on this call. Our next, fourth quarter conference call is going to be on February 7 and look forward to speaking to you then and everyone have a happy and safe holiday season.
Ladies and gentlemen, this concludes the Hornbeck Offshore Services third quarter earnings conference call. If you would like to listen to a replay of today’s conference, please dial 1-303-590-3030 with the access code of 4570809. ACT would like to thank you for your participation. You may now disconnect.
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