Jumping On The Hoss--Is Hornbeck Offshore Services A Buy?

| About: Hornbeck Offshore (HOS)

Hornbeck Offshore Services (NYSE:HOS) (another stock with a sure-to-please symbol) owns and operates US-flagged offshore supply vessels and multi-purpose support vessels for deep-well, deep water, and ultra deep water oil industry operations. Demand is a function of offshore drilling activity, which has been increasing and is expected to continue to do so, relative to the number of available vessels. Large discoveries of hydrocarbons have been made in deep water. These reserves compete favorably with onshore shale oil. Around eighty percent of offshore oil production comes from deep water wells, a segment in which Hornbeck is soundly positioned.

Hornbeck Offshore Services is headquartered in Covington, Louisiana with a support facility in Port Fourchon, Louisiana. Its geographic operating areas are the Gulf of Mexico and Latin America. Business areas are a) oilfield supply, b) oilfield specialty, c) military services, and d) port services.


In mid-September, 2013 Hornbeck owned and operated 58 vessels, most of which serve the energy business. It has 51 new-generation offshore supply vessels and expects to have 69 by the end of the first quarter of 2015. It has four multipurpose supply vessels and expects to have eight by year-end 2016. All four of its multipurpose supply vessels are in the Gulf of Mexico. It has thirty offshore supply vessels in the Gulf of Mexico, seven in Mexico, and nine elsewhere. It has five offshore supply vessels in military service.

Hornbeck is the second-largest operator of offshore supply vessels in the Gulf of Mexico after Edison Chouest, the largest private company. Hornbeck has a solid niche in the deep water (more than 3000 deadweight ton) platform supply vessel market segment, one with good demand and high utilization. Hornbeck's safety record is better than its industry peers.

The total Jones Act fleet is expected to quadruple from 18 to 72 vessels in the 300-class. The cost of building a Jones Act-compliant deep water platform supply vessel is $40-$50 million. Hornbeck reports each of its twenty Jones-Act-qualified 300-class new builds will cost right at $45 million.

Market Position

Contract dayrates for new platform supply vessels are about $40,000. Spot rates are usually much higher. Hornbeck's vessels are priced under a mix of contract and spot rates.

In Mexico, President Peña Nieto is pursuing reform to stimulate deep water drilling as production from the world's second-largest oil field, Cantarell, continues to decline. An estimated 60% of 49 billion prospective Mexican oil barrels are in deep water offshore. This provides another area of growth for Hornbeck.

The company has 21% of the Gulf of Mexico market and is third out of 340 companies in the fragmented worldwide market with 6% of the world's deadweight tons.

Stock Highlights

Other offshore supply vessel companies include Gulfmark Offshore (NYSE:GLF), Seacor Holdings (NYSE:CKH), and Tidewater (NYSE:TDW). All have similar market capitalizations, ranging from $1.1 billion for Gulfmark to $2.8 billion for Tidewater. Hornbeck's market capitalization is $1.7 billion.

Hornbeck has a more modest price-to-earnings ratio of 17, as does Tidewater, compared to 29 for Gulfmark and 49 for Seacor. Hornbeck's 2013 gross margin was 57% and its 2013 operating margin was 31%. Both are ahead of industry peers.

Of these four companies, Hornbeck has the lowest ratio of stock price to 52-week high and stock price to one-year target.

  1/17/2014 price, $/share 1-17price /one-year target percentage 1-17price/52-week percentage
Seacor Holdings 87.24 88% 88%
Gulfmark 44.15 82% 77%
Hornbeck 46.03 77% 66%
Tidewater 56.42 89% 82%

The mean analyst rating from Yahoo! Finance is strongest for Hornbeck. Yahoo! Finance ratings range from 1.0 for a strong buy to 5.0 for a sell.

Seacor Holdings 2.8
Gulfmark Offshore 2.1
Hornbeck Offshore Services 1.9
Tidewater 2.2

Hornbeck's stock price peaked in October, fell, and is now drifting back up.

The company is followed by nineteen analysts. Its top five institutional stockholders are Dimensional Fund Advisors, Vanguard Group, BlackRock Fund Advisors, Columbia Wanger Asset Management, and Fine Capital Partners. About 4.5% of the company's stock is owned by insiders; Todd Hornbeck's stake is the largest of the insiders.

Hornbeck Offshore Services is a company investors would do well to consider buying.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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