Will Hornbeck Offshore Stock Break Through $4.00 Level?

Summary

• I discuss the fundamental situation for OSV companies in the Gulf of Mexico region.
• Fundamentals remain challenging.
• Any upside above $4.00 will likely be short-lived in absence of positive fundamental changes.

I’ve been following Hornbeck Offshore (HOS) for quite some time now. This offshore support vessel (OSV) provider is focused on serving the U.S. Gulf of Mexico and is fighting an uphill survival battle. Unlike its peers GulfMark Offshore (GLF) and Tidewater (TDW), Hornbeck Offshore did not file for bankruptcy and continues negotiations with its creditors in order to extend maturities of debt.

So far, these negotiations did not include equitization of debt, so there’s a big chance that the common equity will survive going forward. I’ve already written about the company this year (here and here), so I won’t repeat basic facts and won’t rehash Q4 results. Instead, we’ll look into the future as all offshore drillers have already provided their quarterly results and fleet status reports, so we can assess the situation in the U.S. Gulf of Mexico and Hornbeck’s chances to improve its position.

Let’s look at the U.S. Gulf of Mexico floater market as we head into the end of the first quarter. Infield Rigs shows that 25 floaters are currently working in the U.S. Gulf of Mexico. We’ll assess the situation company by company since I believe that most readers are quite familiar with offshore drilling companies and it will help them see the big picture for the offshore support vessel industry, which provides services to drillers.

The biggest player in the Gulf right now is Transocean (RIG), which has drillships Deepwater Poseidon, Deepwater Pontus, Deepwater Conqueror, Deepwater Proteus, Deepwater Thalassa, Deepwater Asgard, Deepwater Invictus, Discoverer inspiration and Petrobras 10000 working there.

Deepwater Asgard was recently awarded a three-well contract plus a one-well option and is expected to work until at least June 2018. Petrobras 10000 is working until July 2018 and then heads to Brazil to work for Petrobras (PBR) until August 2019.

Ensco (ESV) has two semi-subs, Ensco 8503 and Ensco 8505, working in the region. However, the contracts don’t last long: Ensco 8503 is currently set to work until July 2018 while Ensco 8505 will work until May 2018. Contracts for both rigs have recently been reported in Ensco’s fleet status report.

Maersk (OTCPK:AMKBY) is represented by one rig, drillship Maersk Viking, which is on a contract with Exxon Mobil (XOM) until April 2018.

Noble Corp. (NE) has two drillships (Noble Don Taylor and Noble Globetrotter I) and one semi-sub Noble Paul Romano working in the Gulf. Drillships are on longer-term contracts while Noble Paul Romano is set to finish work in early April 2018.

All four Diamond Offshore’s (DO) drillships (Ocean BlackHawk, Ocean BlackHornet, Ocean BlackLion and Ocean BlackRhino) are working until 2019–2020.

Pacific Drilling (OTCPK:PACDQ) is currently represented by one rig in the region, Pacific Sharav, which is on a long-term contract.

Rowan (RDC) has one working drillship in the Gulf, Rowan Resolute, which is set to finish work in June 2018. Other three Rowan drillships are in warm-stacked mode waiting for jobs in the Gulf and elsewhere.

Seadrill Partners (SDLP) has three active rigs in the Gulf of Mexico: two drillships (West Auriga and West Vela) and one semi-sub (West Capricorn). All are on long-term contracts with BP (BP).

Last, Seadrill (SDRL) has drillship West Neptune working for LLOG until July 2018 with options up to November 2018.

Now that we’ve seen all potential clients of Hornbeck Offshore and OSV industry as a whole, let’s assess the market. The recent earnings season has brought “green shoots” in the contract activity but it was not a breakthrough. As we can see in the list of drillers working in the Gulf of Mexico, several rigs are either finishing work in 2018 with no follow-on work or, as is the case of Petrobras 10000, are leaving the region. Given the fact that there’ll be 200+ modern OSVs in the Gulf as per Hornbeck’s own expectations and keeping in mind that one rig needs 2-4 OSVs, it’s easy to arrive at the conclusion that the Gulf is hugely oversupplied by OSVs.

In my opinion, we need to see more rigs contracted in the Gulf of Mexico before we can safely speak about the sustainable uptick in activity in the region. I’d expect more contract activity closer to the end of 2018 – beginning of 2019, but whether it will materially help the OSV industry remains to be seen.

It’s important to note that the recovery must be significant for OSV providers to have a chance of getting any improvement from rock-bottom day rates. Without this upside, the only potential positive catalyst for Hornbeck Offshore remains a successful outcome in the current negotiations with the company’s creditors.

The breakout of the $4.00 level looks very tempting for a momentum technical play. Unfortunately, it is not supported by fundamentals, at least at present time. Any short-term rally which may develop should Hornbeck’s shares break through the $4.00 resistance level will likely be short-lived unless there’s a material increase in working rigs in the Gulf of Mexico.

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Analyst’s Disclosure: I am/we are long RIG. 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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