Hornbeck Offshore Services, Inc. (NYSE:HOS) Q2 2017 Earnings Conference Call August 3, 2017 10:00 AM ET
Ken Dennard - IR
Todd Hornbeck - Chairman, President & CEO
Jim Harp - CFO
Turner Holm - Clarksons Platou
Coleman Sullivan - Wells Fargo
Andrew Carmichael - Simmons & Co.
Greetings and welcome to Hornbeck Offshore Services Second Quarter Earnings Conference Call.
At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Ken Dennard.
Thank you, Mr. Dennard. You may now begin.
Thank you, Rob. And good morning, everyone. We appreciate you joining us for Hornbeck Offshore’s conference call to review second quarter 2017 results and recent developments. We also welcome our Internet participants listening to the call over the web.
Please note that information reported on this call speaks only as of today, August 3, 2017 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
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. These forward-looking statements are subject to risks, uncertainties and other factors that may cause such future matters, including the company’s actual future performance to be materially different from that which is projected today.
You can locate additional information about the factors that could cause the company’s results to differ materially from those projected in the forward-looking statements in Hornbeck’s SEC filings and yesterday’s press release under the Investors section of the company’s website www.hornbeckoffshore.com or through the SEC website at sec.gov. This earnings call also contains references to EBITDA which is a non-GAAP financial measure. A reconciliation of these financial measures to the most directly comparable GAAP financial measure is provided in the press release issued by the company yesterday afternoon.
And finally, the company uses its website as a means of disclosing material, non-public information and for complying with disclosure obligations under the SEC’s Regulation FD. Such disclosures will be included on the company’s website under the heading, Investors. Accordingly, investors should monitor that portion of the company’s website in addition to following the company’s press releases, SEC filings, public conference calls and webcasts.
And now with that behind me, I'd like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd?
Thank you, Ken. Good morning and welcome to the Hornbeck Offshore second quarter 2017 conference call. With me today is Mr. Jim Harp, our Chief Financial Officer. After my brief comments, Jim will take you through the numbers in a little bit more detail.
I want to spend a few minutes today updating you on our recently announced new credit facility and what it means for the company. Also after discussing market conditions, I want to spend some time sharing our views on industry dynamics that our stockholders and other constituents need to keep in mind as we continue to work our way through this unprecedented period in our industry's history.
We were pleased to announce in June that the company negotiated a new six-year $300 million credit facility. The new facility provides the company significant, additional financial flexibility and was the first necessary step to address our long-term debt maturities.
Concurrently with the negotiation of the facility, we were able to reduce our first maturity in 2019 from $300 million to approximately $100 million and our 2020 maturity by $8 million.
We certainly have a lot of work to do to fix our remaining funded debt obligations. However, the recent credit facility is extremely helpful in broadening our options as we move through this exercise. Jim will provide you more detail on the features of the new facility during his presentation.
But the takeaway for you today should be that we have made progress and we believe we have created at least one more year of additional runway for the company in order to reset the company's debt capital structure, but we are still operating in a highly uncertain business environment.
Turning to market conditions for our new generation OSVs. Not much has really changed since our last call. We're seeing a bit of seasonal improvement in our utilization, which we expected, but the fundamentals on the demand side of the equation are about the same as they have been and our second quarter results reflect that reality.
There are about 20 deepwater drilling units working in the Gulf of Mexico on average, which is anemic. The number of jack-ups working today has increased to eight units as opposed to four units last quarter.
While this is interesting and positive, it is not impactful. We see little on the horizon to suggest that these levels will change much in the deepwater Gulf of Mexico this year or next year. We hope we're wrong and we'll be the first to admit error if we are. But right now, other than signs of a possible stabilization in the price of oil, we just don't see a catalyst for demand growth.
In our other core markets of Mexico and Brazil, the story is similar, although Mexico has seen some positive moves in the offshore space as foreign operators have reported drilling success there, making it a potential bright spot. We see very little happening that is positive in Brazil.
Our MPSVs are telling a slighter, better story. We're seeing a slight build in utilization through the summer months, but this is largely a function of season, not of fundamentals. It is important to remember however that MPSVs are not as tied to the drilling market as OSVs because they're used for planned and unplanned maintenance, inspection, installation, commissioning and decommissioning work. These vessels can operate independent of drilling vessels.
However successful drilling campaigns are ultimately what create work for these vessels too. So, the two are connected.
On the administrative enforcement front, we were disappointed by CBPs that's Customs and Border Patrol's recent decision to reverse course and not follow through on its revocation of Jones Act interpretations involving the use of foreign flagged MPSVs that CBP has repeatedly said are inconsistent with the statute.
CBP's refusal to act perpetuates uncertainty and will stifle additional investment in U.S. tonnage until this issue is finally resolved. The cloud of uncertainty may cause foreign vessel operators to think twice about deploying vessels to the Gulf of Mexico.
Most of those operators have left the Gulf of Mexico already be it for economic or legal reasons, but they remain a significant threat to the market given their ability to use foreign cruise and advantageous tax regimes to operate at much lower cost than U.S. vessels.
Over the last six months, there has been a lot of structural turnover in ownership and capitalization of companies in our space globally. In the United States two major players have sought Chapter 11 reorganization, one of which emerged just this week.
Globally it is a similar story. All companies are dealing with their capital structures as they must do and that work will go on for HOS and for others. However, balance sheets are not the ultimate problem in our industry. The problem we have is that there are too many owners and too many ships for any one company, irrespective of how good its balance sheet may be to take this industry -- to make this industry a solid business in a low commodity price environment.
Fixing balance sheets will not fix the overall supply of vessels bind for work. Some companies and some vessels just have to go away permanently for this ever to be a thriving industry again and by that, I mean one in which businesses can make a rational rate of return on invested capital. That is the ugly truth and that no one appears to be willing to confront at this stage.
In the Gulf of Mexico, we've seen modestly more voluntary stack in the vessels this past quarter, which is a positive sign directional. In fact, for the first time since the downturn began, there are more high spec, new generation vessels in stack than there are in operation, although slightly, 98 stack versus 96 active.
Some permanent fleet rationalization will occur naturally through economic or physical obsolescence. Some vessels that have gone into stack will never be on stack because their owners will lack liquidity to unstack them. That's good, but the lion's share of the challenge will be among the companies that have liquidity and refreshed balance sheets.
The temptation for these companies will be to trade precious liquidity for the illusion of utilization. Owners need be aware. The hidden and therefore true cost of unstacking a vessel has not worked -- that has not worked for more than two years can be significantly difficult to predict.
Unstacking such a vessel for a day rate in contract term that does not cover those costs, plus the cost of operating a vessel going forward makes no sense. Moreover, it restocks the market with additional supply that will cannibalize utilization elsewhere.
It is for these reasons that we will be extremely cautious about making a decision to unstack vessels. A cautionary tale is what we observed in the North Sea this summer. Tempted by the first increase in demand that they’ve seen in a few years, some North Sea owners pulled over 20 vessels out of stack.
The result, cash was burned unstack and cash was burned to operate and for what? Jobs at rates that were already unsustainably low, which only drove those rates down further, thus making the decision to unstack, unprofitable in the short run and in the long run and it isn't just a low day rate that is problematic.
We've said previously and reiterate again now that customers are using market conditions to shift operating risk, many of which are not insurable to vessel owners. We will continue to resist contracts that place our balance sheet at risk, while requiring us to assume the potential for our liability that almost no amount of day rate to justify, let alone one in which operating cost are not covered.
These are the realities in the marketplace today. In any event, the problem can't be fixed on the demand side of the equation alone. We as owners need to look very soberly at the real dynamic that is at work.
The oversupply of vessels and the pressures that for some companies to make decisions that are unprofitable in the short term and in the long run. Hornbeck's objective is to ensure that our stockholders can participate not only in an industry, but in a value-creating business once again.
Before I turn the call over to Jim, I want to recognize one special employee that has announced her retirement from the company. Olivia Duplessis was our third employee hired. She joined the company when we first began and has been through us through thick and thin. We thank her for over 20 years of service and wish her luck and happiness in her retirement. Jim?
Thanks Todd. Good morning, everyone. Yesterday afternoon we reported our second quarter results and updated the forward-looking guidance information contained in the data tables through our press release to provide third quarter and annual guidance for 2017 and the limited annual guidance for 2018 for various categories of financial and operational data.
This guidance now reflects the impact of the third of the new first lien credit facility and debt repurchases we completed during the second quarter. We will update this information again next quarter to reflect our latest market assumptions for the balance of 2017. Keep in mind, this information is based on the current market environment, which is always subject to change.
I usually discuss our balance sheet at the end of my remarks, but wanted to start off this morning by giving a brief overview of the refinancing transactions we completed in June 2017, since they are most topical.
On June 15, 2017, we terminated our existing revolving credit facility and replaced it with a new $300 million first lien delay draw term loan credit facility. We concurrently arranged for a series of privately-negotiated repurchases of debt for cash, which together was an exchange of indebtedness under the new credit facility, resulted in the retirement of two thirds of our then outstanding 2019 convertible senior notes and a small portion of our 2020 senior notes. Such retirements were affected with a combination of existing cash and borrowings under the new credit facility.
In summary, we retired approximately $208 million of existing debt for roughly $149 million in mixed consideration, which generated a gross pretax gain of around $59 million for a blended 28% discount to face.
In accordance with applicable accounting guidance, $32 million of the gain was accounted for as a debt modification and deferred and $27 million of the gain was accounted for as the debt extinguishment and recognized on the P&L currently.
After offsetting these gains with original issue discount, deal cost and unamortized financing costs related to the various tranches of debt issued and/or debt retired, the $20.7 million net gain on the debt for debt exchange portion will be deferred and amortized as a reduction to interest expense over the life of the new credit facility, whereas the $15.5 million net gain on early extinguishment of debt related to the bond repurchases for cash was reported in our second quarter 2017 financial results.
Please refer to our press release yesterday, our press release announcing the closing of the new credit facility dated June 15 and the Form 8-K filed on June 16 for more detailed information on these transactions.
Now that out of the way, let's review the details for the second quarter. Our second quarter net loss was $20 million or $0.53 per diluted share. As a reminder, due to the net loss under GAAP, our diluted share count for purposes of calculating EPS is deemed to be equal to our basic share count of $36.8 million shares.
Our reported operating loss was $31 million in the current quarter, compared to an operating loss of $27 million in the first quarter of 2017. Included in both quarters were few special items that we called good guys and bad guys such as the $9.4 million redelivery fee and $3.8 million of additional bad debt reserves in the first quarter and $15.5 million gain on early extinguishment of debt in the second.
So, to remove this noise for comparability say, when you exclude these three items in the current and sequential quarters, as applicable, net loss and diluted EPS would have been $30 million and $0.82 per share respectively for the second quarter and $32 million and $0.87 per share respectively for the first quarter or an increase of $2 million and $0.05 per share over the sequential quarter respectively.
After adjusting for these same reconciling items, EBITDA for the second quarter was negative $3.3 million up $600,000 from the comparably calculated EBITDA for the first quarter of a negative $3.9 million.
For additional information regarding EBITDA as a non-GAAP financial measure, please refer to the data tables in yesterday's earnings release, including Note 10.
When discussing sequential revenue and dayrates, I will exclude the first quarter, $9.4 million redelivery fee in order to present a more apples-to-apples comparison of the second quarter to the first. Revenue for the second quarter of 2017 was $3 million or 8% higher than the sequential quarter, breaking down our revenue a little more granularly by vessel type, revenue generated by our OSVs was roughly $1 million or 2% higher than the sequential quarter, while revenue generated by ou rMPSVs was $2 million or 40% higher than the sequential quarter.
This overall sequential revenue increase was primarily attributable to higher average day rates for our MPSV fleet. Our second quarter MPSV average day rates reversed a sequential three quarter trend of new all-time low average dayrates.
Average new generation OSV dayrates for the second quarter of 2017 were approximately 17,200 or about $2,000 lower than the sequential quarter. As reported on our last call, this was partly due to our repricing of a long-term contract on one of our 300 class vessels, which completed its charter and entered the spot market during the first quarter.
As of today, we have three other long-term OSV term charters that will roll off this year; two this quarter and one at the beginning of the third -- fourth quarter. Utilization for our new generation OSVs for the second quarter of 2017 was 22% up from 20% sequentially while utilization for our MPSVs for the second quarter of 2017 was 22% down from 23% sequentially.
Adjusting for stack vessel days, the effective utilization on our active fleet of new-gen OSVs was 67% compared to 68% sequentially. Our effective or utilization adjusted OSV day rates were in line with the sequential quarter.
Geographically, our domestic, foreign revenue mix for the second quarter of 2017 was 85.15 compared to 93.7 for the year ago quarter. Foreign revenue was up 40% year-over-year and 16% sequentially.
This shift to a higher mix of foreign revenue is indicative of the recent pickup in activity we've seen in Latin America -- in Mexico and Latin America, compared to the relatively anemic U.S. Gulf of Mexico in the past year.
Operating expenses of $31 million for the second quarter were about $1 million higher than the low end of our guidance range and were up $3.5 million or 13% from the sequential quarter. For the full calendar year 2017, aggregate cash operating expenses are now projected to be in the range $120 million to $130 million.
We project cash OpEx for fiscal 2017 to be down from prior year levels, primarily due to the continuing effect of several cost containment measures we initiated during 2015 and 2016 including among other actions, the stacking of new generation OSVs and MPSVs on various dates from October 1, 2014 through June 30, 2017, as well as companywide headcount reductions and across-the-Board pay cuts for shoreside and vessel personnel.
As a reminder, we have provided you with updated full year and third quarter 2017 OpEx guidance in our press release issued yesterday afternoon. Consistent with our cash OpEx guidance for prior periods, these estimated ranges are good faith estimates based on best available information as of today and are only intended to cover our currently anticipated active fleet complement, geographic footprint, charter mix and industry market conditions.
While our updated guidance is predicated on an assumed average stack fleet of 43.4 OSVs and 0.8 MPSVs for fiscal 2017, we may consider stacking or reactivating additional vessels as market conditions warrant.
Our second quarter G&A expense of $9.4 million was down $4.8 million or 34% compared to $14.2 million for the sequential quarter and was $1.1 million below the low end of our quarterly guidance range. This sequential decrease in G&A expense was primarily due to $3.8 million of additional bad debt reserves in the first quarter of 2017 related to a formal customer's bankruptcy proceedings.
For calendar 2017, G&A expenses are expected to be in the range of $45 million to $48 million. This full year G&A range includes the $3.8 million of additional bad debt reserve that was recorded during the first quarter of 2017.
I'll now review some of our other key balance sheet related items for the second quarter. The aggregate cost of our fifth OSV new build program is expected to remain on budget at approximately $1.3 billion of which $6 million, $11 million and $51 million are expected to be incurred during the third quarter of 2017, fiscal 2017 and fiscal 2018 respectively.
From the inception of this program through June 30, 2017, we have incurred roughly 95% of the total expected project cost including roughly $2 million that was spent during the second quarter of 2017 with only $68 million left to go.
For update on our historical and projected regulatory drydocking activity as well as expected cash outlays for maintenance and other CapEx, I would refer you to the data tables on Page 13 of 16 of our release yesterday afternoon.
On June 30, 2017, our total liquidity was $329 million comprised of $125 million in cash and $204 million of availability under the new credit facility, which represent a $44 million or 16% increase from the end of last quarter.
Our cash balance decreased roughly $84 million from $209 million on March 31, 2017, resulting from continued operating cash burn, ongoing maintenance CapEx, growth CapEx, cash interest, debt extinguishments and out-of-pocket deal costs related to the issuance of our new credit facility and the extinguishment of our old credit facility.
Our net debt position based on the carrying value of our senior unsecured notes and first lien credit facility was $888 million as of June 30, 2017, up slightly from $878 million sequentially. Excluding the deferred gain, the $20.7 million deferred gain from carrying value of our new credit facility, net debt would be $868 million.
We currently have a blended average fixed cash coupon of about 5% on $917 million of total outstanding face value of publicly traded long-term unsecured debt resulting in an annual run rate of cash debt service for our unsecured bonds in the amount of roughly $46 million.
We also have a floating cash coupon of about 7.23% on $96 million of total outstanding face value of privately-placed long-term secured debt resulting in a current annualized run rate of cash debt service for our secured debt in the amount of roughly $7 million based on our current LIBOR base rate and currently outstanding principal balance, both of which of course will vary over time.
Cash interest on our new first lien credit facility is variable based on a 600 Bps spread to LIBOR for the first year of the facility, which is currently 1.23%. Our LIBOR spread for that facility steps up to 650 Bps for the second year.
As mentioned in our press release when we announced the deal, we focused our efforts on lowering the interest rate in and limiting the call protection to the first two years of the six-year term. The new credit facility may be prepaid at 102% of the principal amount repaid in year one, 101% of the principal amount repaid in your two, and at par thereafter.
Should industry market conditions improve sufficiently by year three, we may seek to refinance the new credit facility on more favorable terms at such time. For detailed guidance and a granular breakdown of our GAAP interest expense as well as our projected cash interest and taxes by quarter and annually, please see our guidance tables on Page 14 of our earnings release yesterday, which are also available in Excel format in the investors section of our website.
While not without risk, we project that even with the currently depressed operating levels cash generated from operations together with cash on hand and availability under the new credit facility should be sufficient to fund our operations and commitments at least through December 31, 2019.
However, absent a significant improvement in market conditions such that cash flow from operations which will increase materially from projected levels and/or further management of our funded debt obligations, we do not currently expect to have sufficient liquidity to repay the full amount of our 5.78 Senior Notes or 5% Senior Notes as they mature in fiscal years 2020 and 2021 respectively.
We remain fully cognizant of the challenges currently facing the offshore oil and gas industry and continue to review our capital structure and assess our strategic options. We may from time to time depending on market conditions and other factors repurchase or acquire additional interest in our outstanding indebtedness whether or not such indebtedness trades above or below its face amount for cash and/or an exchange for other securities, term loans or other consideration in each case in open market purchases and/or privately negotiated transactions or otherwise.
With that, I'll turn it back to Todd for any further comments or to entertain questions.
All right. Thank you, Jim. Yes operator, we can open it up for questions now.
Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question is from the line of Turner Holm with Clarksons Platou. Please proceed with your question.
Hey. Good morning, gentlemen.
Jim, I just wanted to touch on the liquidity you made in your prepared remarks and in the press release about having sufficient available liquidity to fund all your obligations through the end of 2019.
Does that assume that there's any further changes in the capital structure and then I guess second part of that question, would you also be assuming there that you elect to pick on the new secured facility?
That statement does not assume any further changes to our capital structure and it does not assume any PIK. Although we clearly have the financial flexibility to avail ourselves of the PIK feature. So, I guess intrinsically it is part of the statement because it's a broad statement.
But I would say in general at this moment, it's not in our forecast.
Okay. All right. Fair enough. And then I guess turning to the MPSVs you saw some rate improvements it sounds like in the quarter. I guess Todd what if anything would you attribute that to? Is it a mix issue? Is it seasonal or is there some kind of underlying changes in cut?
No. It's just seasonal. We're not -- we anticipated we have some uptick this summer. In fact, we had earlier in the year thought it was going to be more robust than what it is, but it's just seasonal. So, the market conditions still remain pretty anemic.
But those vessels can do so many different things that they tend to catch a lot of specialty type work. So typically, that work is done during the nine months of the year, which would be the summer months.
Okay. All right. Very good. I appreciate it guys. Thanks for taking my call.
Our next question comes from the line of Coleman Sullivan with Wells Fargo. Please proceed with your question.
Good morning. A follow-up on MPSV, it looks like you guys took the stack count projection down by two, is that -- can you walk through what the outlook is there? It looks like there were some seasonal uptick in the second quarter, mostly rates and obviously some utilization.
How do you see the work shaping up for the rest of the year and next year?
Well, like we've said, it's just seasonal -- all of this is spot work. There is no long-term contract, visible contracting that's going forward. So, what I do think though as the market -- this down market continues to unfold, what we will see and I don't know when whether it's going to be by the end of this year or maybe possibly next year.
Sometime in the future, we have seen and we said this on previous calls, that a lot of the -- a lot of the repair and maintenance and any extra expenditures that don't have to be done are being pushed to the right.
So, at some point, we would think we will start to see some activity just from wear and tear on equipment in deepwater particularly on the infrastructure that needs to be maintained that's being pushed to the right.
I think that's stacking up and as soon as those lines are -- that gets acute, we'll probably see a lot more activity. I can't say whether that's -- when that's going to be in the future. So, it's very, very hard to tell.
Okay. Thanks for that. And I would guess that the slight uptick in the OpEx guidance for the rest of this year is to include the MPSVs that are no longer stacked, is that the right way to think about it?
Yeah, that's just more, when you put them back to work, you've got -- included in dayrate a lot of cost of sales and things rigors and crane operators and things of that nature that are typically -- that will spin in that type of money while we're sitting at the top, fictionally and things of that nature.
All right. Thanks, I’ll turn it back.
Our next question is from the line of Andrew Carmichael with Simmons. Please proceed with your question.
Good morning, gentlemen.
I was wondering if you could give us any updated thoughts on opportunity set at Mexico? You touched on discovery in your prepared remarks but has that recent discoveries somewhat validated at least initially from the potential regarding opportunities that could be emerging there and also if you could just kind of talk about your current fleet positioning in the area?
Mexico, remains to be seen how it develops. There's a lot of excitement as you know in Mexico, a couple of big discoveries that have been announced in relatively shallow water. Mexico as a country changing their stance to letting IOCs in and doing partnerships or even leases, it's got a lot of momentum right now.
There remains to be seen how productive it's going to be in the future because there's still a lot of confusion, a lot of operating problems in Mexico, not only with supply chain, but with just how the regulations are going to be enforced and how they're going to manage the regulations.
This is all new whole cost type legal regulations and operating regulation. So, it's still influx. Let's see how -- we're going to be very, very cautious on how it moves forward, but we have a full -- we have our Mexican entity down there. We've been operating down there since 2003. Most of our management team has been there for the last 25 years.
So, we have a lot of experience in Mexico working with Pemex and look forward to working with the IOCs as they come down. We think we have a lot to offer them with our franchise down there. So, it's take it a quarter at a time. There's been some announcements, but I don't think we'll see real activity start back up in the Mexico until probably middle of next year, based on what you've seen so far.
Thank you. That concludes our Q&A session. I'll turn the floor back to management for closing comments.
I want to thank everyone for joining us. We look forward to talking with you on our next third quarter conference call, that will be November 2. So, thank you for -- thank you for joining and safe travels.
Thank you. Ladies and gentlemen, thank you for your participation and this does conclude today's teleconference. You may disconnect your lines and have a wonderful day.