Hornbeck Offshore Services, Inc. Q1 2008 Earnings Call Transcript

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Hornbeck Offshore Services, Inc. (NYSE:HOS) Q1 2008 Earnings Call May 1, 2008 10:00 AM ET


Ken Dennard - Managing Partner, DRG&E

Todd M. Hornbeck – President, Chairman, President, and Chief Executive Officer

James O. Harp Jr. – Executive Vice President and Chief Financial Officer


Judson E. Bailey - Jefferies & Company, Inc.

David C. Smith - JPMorgan

Pierre E. Conner – Capital One Southcoast, Inc.

Daniel Burke – Johnson Rice & Company LLC

Sonny Randhawa – Banc of America Securities


Welcome to the Hornbeck Offshore Services first quarter conference call. (Operator Instructions) Now, I would like to turn the conference over to Ken Dennard with DRG&E.

Ken Dennard

We appreciate your joining us for Hornbeck Offshore Conference Call to review first quarter 2008 results. We would also like to welcome our internet participants as they are listening to the call over the web.

Please note that information reported on this call speaks of only as of today, May 1, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. Additionally, during today’s conference, Todd and Jim will make certain projections about future financial performance, operations, and events that are not statements of historical facts and thus constitute forward-looking statements.

As noted in today’s press release, these forward-looking statements are subject to risks, uncertainties, and other factors that may cause the company’s actual future performance to materially differ from what today has been projected. In the company’s 2007 form 10-K and in today’s press release announcing earnings you can locate additional information about factors that could cause the results to materially differ from those projected in the forward-looking statements. Form 10-K and today’s press release are located under the investor relations SEC filings section on the website which is http://www.hornbeckoffshore.com and are also available through the SEC.

This earnings call also contains references to EBIDTA which is a non-GAAP financial measure, a reconciliation of this financial measure to the most directly comparable GAAP measure is provided in the press release issued by the company this morning. And now, I would like to turn the call over to Todd Hornbeck, Chairman, President, and CEO of Hornbeck Offshore.

Todd M. Hornbeck

Welcome to our first quarter 2008 earnings conference call. Joining me today is Mr. Jim Harp, our Executive Vice President and Chief Financial Officer. Our agendas for today’s call is to review our first quarter 2008 financial results, provide a brief overview of our current market conditions and update you on our new-build programs. After reviewing these matters, Jim and I will be available for questions.

Let’s begin with our OSV segment. Demand for new-generation equipment remained strong during the first quarter as reflected by our fleet wide average day rate just above $21,000 a day and utilization at 92%. Our new-gen fleet wide utilization for the quarter was positively impacted by an uptick in activity of our 200 and 220 class new-gen OSVs working in the spot market.

Our $2000 year-over-year increase in day rates was mainly the result of strong spot market conditions for all of our new-generation OSVs and incremental specialty service revenue earned during the first quarter of 2008. We continue to believe that the strong market conditions that we currently enjoy for our new-generation OSVs, particularly in the deep water and ultra deep-water regions will last over multiple years are supported by the following.

In March, as reported by the MMF, lease sales 206 and 224 attained record results, especially for deepwater and ultra deepwater leases. The $3.7 billion sum of high bids in lease sale 206 surpassed the previous strong sale in October 2007 and the all-time high set for high bids in 1983.

As was the case last October, deep water blocks proved more popular as the majority 54% of high bids were on deep water and ultra deep water blocks of 5000 feet or greater. The average total money exposed in the last two sales was over $5.5 billion, a clear indication of how heavily invested many of these companies are or want to be in the deepwater Gulf of Mexico.

Driven by high oil prices spending on drilling continues to increase according to certain industry analysts. Worldwide offshore drilling expenditures from 2008 through 2012 are forecasted to be $380 billion, a 60% increase over the past five-year spending levels. Most of the future spending is fueled by deepwater E&P activities that are expected to increase 40% by 2012, but shallow water drilling only increased 6%.

Demand for rigs continue to exceed supply. Over the past 12 months, rig utilization has remained over 90% and indications that rig demand will remain strong even as estimated of 75 new floaters, 82 new jack-ups, and 13 refurbishments entered the markets from 2008 through 2012 including an estimated 53 new drill ships, semis, and jack-ups expected to arrive this year.

In the Gulf of Mexico, there are currently 41 semi-submersible rigs, next-generation jack-ups and drill ships exploring deepwater with some rig contract extending out over the next five years. There are also approximately 33 semi-submersible spars and TLPs currently in production or roughly 16 additional floating production facilities comprised of semi-submersible spars, TLPs, and FPSOs, and 17 additional floating drilling rigs that are expected to come online in the US Gulf of Mexico between now and the end of 2011.

Market trends are also favorable in the subsea, especially service markets where our MPSVs and many of our DP-2 OSVs are expected to operate. As mentioned last quarter, industry analysts forecasted expenditures through 2012 will include roughly $108.5 billion in the aggregate for floating production systems, drilling and completing subsea wells, flow lines and control lines, and subsea hardware and surface complete wells in deepwater worldwide.

Correspondingly, these deepwater projects include the installation of an estimated 1270 subsea trees, 300 templates and manifolds, 68 platforms, and roughly 8000 miles of pipelines. There is still a lot of repair work to be done on the shelf where according to MMS, the clean up of platform damage from 2005 hurricanes will last until 2013. Only half of the 800 wells affected by the storms that require P&A services and only a quarter of the 118 destroyed platforms that require remediation have been addressed.

The MMS recently announced a [get-up] policy in the area of platform removals. This is expected to accelerate the pace of the commissioning activity. Fuel development in the US Gulf of Mexico is forecasted by ODS-Petrodata to continue at a steady pace with an estimated 71 projects under construction and 151 projects in the design or under study phase.

Our updated internal estimates of OSV supply indicate that 187 US flag new-generation OSVs are currently in service of which we believe 142 are working in the US Gulf of Mexico with the remaining 45 in foreign markets or non-oilfield services. Not included in that figure are 52 announced OSVs that are currently planned or under construction at US shipyards with deliveries ranging from 2008 through 2011.

Once all currently announced domestic new-builds have been delivered by the end of 2011, and assuming that none of them leave for foreign or non-oilfield markets, which we fully expect some to do, we expect that the visible supply of 194 new-generation vessels in the Gulf of Mexico will still be below our current estimate of visible demand for new-generation OSVs in the GoM which is based on internal estimates compiled from a variety of industry sources. During the first quarter of 2008 four US flag new-generation OSVs were delivered into service in the US Gulf of Mexico and we estimate that eight new-build US flag OSVs will be delivered to the US on various dates in the second quarter with a total of 20 expected to be delivered for the full calendar year including five from Hornbeck Offshore.

We continue to selectively increase our international footprint with our recent entry into the Brazilian deepwater market with two of our domestic DP-2 240 class OSVs, one of which is about to be delivered from the shipyard. We now have 14 of our OSVs or about one-third of our current new-generation fleet working in foreign market including five in Trinidad, five in Mexico, two in Qatar, and now two in Brazil.

When you combine our vessels working in international waters with those performing specialty services such as well stimulation, ROV support, or military support, we currently have over half of our new-generation OSV fleet working in markets other than traditional oilfield supply in the Gulf of Mexico. The versatility of our multi-class fleet has allowed us to further expand our specialty service franchise which is less affected by the exploratory rig count.

We will continue to advance our strategy of assembling one of the most diverse and balanced US flag fleets capable of servicing virtually all facets of deepwater and ultra deepwater offshore activity from cradle to grave domestically and internationally with the delivery of our 4 MPSVs and 16 additional high-end DP-2 new-generation OSVs over the next two years. Since our last call in February, we have continued to add contract coverage for 2008 and beyond.

For the remainder of 2008, over 54% of our projected new-gen OSV vessel days have now been time chartered. We are also beginning to see more contract coverage into 2009 where we currently have almost 30% of our new-gen vessel days chartered. Of the 16 new-generation OSVs under our fourth OSV program, we have now been awarded initial contracts for nine of those OSVs for aggregate total of 40 vessel years for an average contract length of 4.5 years at an average day rate of over $30,000 a day.

To put this in perspective, the total value of these awards for forward multiyear contracts awarded us for the nine vessels I just mentioned or still under construction is over $440 million worth of revenue. That is a pretty good indication of where our customers are seeing the new-gen OSV supply equation over the next five years.

Now, let’s turn to our tug and tank barge operation. Our TTB fleet wide average day rate has been in the $17,000 to $19,000 range and we have been able to maintain operating margins in the mid 20s since 2006. However, while our TTB day rates actually grew sequentially and year over year, we have recently experienced an overall softening in the Northeastern US transportation market which we believe has resulted from high inventory levels, high crude oil prices, and a warmer than normal winter in the Northeastern United States.

TTB contract coverage for the remainder of 2008 currently stands at 34%. We are currently forecasting average TTB day rates to remain in the $16,000 to $18,000 range for the remainder of this year as we approach the next major OPA 90 retirement milestones in 2009. Fleet wide TTB utilization is now expected to be in the low 70s to mid 80-range percentile for the remainder of the calendar 2008 due to soft market conditions in this segment as I just mentioned.

Now, I will give you a quick update on a few of our active growth initiatives. Our MPSV program continues with four vessels, two 370 DP class MPSVs currently under construction and two new-build T-22 class MPSVs under construction. The four MPSVs are expected to be delivered on various dates from the latter half of 2008 through late 2009. Our internal estimate of total cost for this construction program remains approximately $450 million. Our first T-22 class MPSV, the Superior Achiever, is expected to be delivered during the fourth quarter of 2008.

As you may be aware, Superior Offshore has recently filed for bankruptcy protection. We previously announced that we had charted the Superior Achiever to Superior Offshore in connection with our acquisition of that vessel from Superior in January 2008. At that time, we received financial security from Superior Offshore that we believe adequately protects our interests.

In addition, our contract allows us the flexibility to market the vessels to other interested parties which we are doing so. The Superior Achiever delivery schedule remains on track, and spot and multiyear charter opportunities are abundant for this technology-advanced DP-3 vessels due out later this year. Our fourth OSV new-build program consists of vessel construction contracts with three domestic shipyards to build 16 DP-2 vessels comprised of six proprietary 240 ED class OSVs, nine proprietary 250 ED class OSVs, and one 285 class new-generation OSV.

These vessels are expected to be delivered on various dates from 2008 through 2010 at an estimated cost of $393 million. As I mentioned earlier, the HOS Polestar, the first of the 240 ED class vessel under this construction program, is expected to commence its first charter in early May for our customer in Brazil. In addition, the first of the 250 ED F-class vessels, the HOS Mystique has delivered early to undergo conversion for ROV support services under a multiyear charter commencing in the third quarter of this year.

Now that each of the two shipyards building our proprietary 240 ED and 250 ED F-class OSVs has delivered a vessel, we expect to take serial deliveries of OSVs about one per quarter except in those circumstances or instances such as HOS Mystique where customers request certain vessel modifications or capability enhancements while still in the shipyard.

Tug and Tank Barge new-build program #2, in March, we took delivery of the third and final 60,000 barrel double hulled tank barge constructed under this program when the Energy 6508 was placed in service along with a third retrofitted tug, the Superior Service. This new-build program is set to wrap up in mid June with the anticipated delivery of the fourth and final tug, Erie Service. The aggregate final project cost for this program is expected to come in at roughly $77 million.

At this time, I would like to turn the call over to Jim for review of our quarter financial results.

James O. Harp Jr.

As reported this morning, we had another strong quarter in our new-generation OSV segment and have a lot of exciting developments underway as we strategically position our growing fleet to maximize our long-term returns.

Before I begin our first quarter financial review, I would like to remind everyone that unless otherwise noted, the OSV day rates and utilization information that we will refer to in this call only reflects the operating data for the 35 new-generation OSVs in our fleet and does not include our ten conventional vessels which we consider to be non core assets.

There seems to be confusion over the average and effective day rate data that we reported this morning related to our 35 new-gen OSVs versus our ten conventional vessels. To be clear, we do not ever co-mingle those figures into a blended 45-boat average for any reporting purpose, so please be careful not to ever mix and match those figures related to these very disparate classes of vessels.

Moving onto our financial results, our first quarter earnings per share were $0.86 per share or 28% higher than the year ago quarter on a weighted average share count of roughly 26.9 million diluted shares and our first quarter EBIDTA was $49.2 million.

After making adjustments to EBIDTA for FAS 123R stock-based compensation expense and interest income required to compute ratios used in the financial covenants of our credit agreements with various lenders and bond investors, adjusted EBIDTA for the first quarter of ’08 was $53.1 million. For additional information regarding EBIDTA and adjusted EBIDTA as non-GAAP financial measures, please refer to Note 9 to the data tables in this morning’s earnings release.

Moving into our segmented data, starting with the OSV segment, our average new-generation OSV day rates for the first quarter of ’08 were about $2000 higher than the year ago quarter and down slightly sequentially. This sequential decrease was largely the result of one of our 200 class OSVs working 46 fewer days while performing specialty services at a day rate of $72,000.

Utilization for the first quarter was roughly 92% compared to 90% in the fourth quarter of 2007 and roughly in line with the prior quarter. With average day rates at around $21,000 per day for the first quarter of ’08, our effective or utilization adjusted fleet-wide OSV day rates were also roughly $2000 over the first quarter of ’07.

As a reminder, based on our current operating cost structure and share count, each $1000 change in our effective new-generation average OSV day rate on our current fleet of 35 new-gen vessels should result in a $12.8 million change to our annualized revenue, EBIDTA, and pre-tax net income. This translates into a potential change in EPS of roughly $0.30 per year for each $1000 change in our effective new-gen OSV day rate.

To be clear, this sensitivity analysis does not include the effect of any operating leverage from our ten conventional vessels. Our OSV segment operating margins were 43% for the first quarter compared to 45% for both the year ago and sequential periods.

Moving into the tug and tank barge segment, the quarterly revenue increases for our TTB segment were primarily driven by the incremental revenue contribution from vessels delivered under our second TTB new-build program during the latter half of 2007 and the first quarter of ’08 as well as some of our TTB equipment being dedicated to performing well test services in the GoM.

TTB day rates averaged $19,059 for the first quarter of ’08 compared to $17,680 in the prior quarter, an increase of approximately $1400. TTB operating margins were 26% for the first quarter compared to 28% sequentially and 30% in the year ago quarter.

Our TTB operating margins during the first quarter of ’08 were unfavorably impacted by current market conditions in the Northeast and the accelerated dry-docking of three tank barges during the first quarter of 2008. Under our accounting policy, for vessels dry-docked in advance of their regulatory requirement, any unamortized deferred dry-docking costs are expensed in the period the vessel has dry-docked.

Moving into operating expense, on a segmented basis, cash OpEx for the first quarter of ’08 was $25.8 million for the OSV segment and $14 million for the TTB segment. We expect our 2008 cash OpEx on a per vessel day basis to increase between 5% and 10% over comparable 2007 levels due in part to an increase in FAS 123R compensation expense.

As 2008 marks the third consecutive year that we have granted restricted stock units to mariners, we expect incremental FAS 123R expense to contribute to our OpEx per day trending higher year over year. However, we have found that our unique strategy of using this element of compensation for mariners has enhanced our recruitment and retention of high quality technical personnel in a competitive labor market.

Moving into G&A costs, as a percentage of revenue, our first quarter G&A expenses of $8.6 million or roughly 9% of revenue which is at the low end of our 2008 guidance range of 9% to 10% of revenues and two points below our year ago G&A margin of 11%. Our G&A for the first quarter of 2008 increased in absolute dollars by about 16%.

Our quarterly year-over-year G&A increases were primarily driven by higher personnel costs in part due to higher head count and greater FAS 123R stock-based compensation expense related to restricted stock unit awards granted to shore-based employees. G&A costs for the quarter were allocated 60% to the OSV fleet and 40% to the TTB fleet. For the balance of 2008, we expect G&A to remain in the 9% to 10% range.

Moving into the balance sheet, I will now review some of our key balance sheet related items for the first quarter. On March 31, our cash position was about $51 million, our total debt was $550 million, and our book equity was $590 million. The reduction in our cash balance since year-end is primarily related to the recent acquisitions of Superior Achiever and the Rowan shore base adjacent to HOS Port and cash consideration paid for our ongoing growth capital expenditures.

We are currently paying a blended average cash coupon of about 4.1% on our $550 million of total debt comprised of our 6-1/8 senior unsecured notes due 2014 and 1-5/8 convertible senior notes due 2026. As of April 30, yesterday, our cash position was approximately $33 million and our revolver was still undrawn. Based on expected shipyard milestones to be paid this week, however, we will draw $22 million today on our recently expanded $250 million revolver.

Our pricing grid on funded drive under our facility ranges from 50 to 150 basis points over LIBOR. Based on our current leverage ratio as defined under the credit agreement, we will be borrowing at LIBOR plus 75 bps today or a floating rate of roughly 3.6%. The extent and timing of further revolver draws are primarily dependent upon shipyard schedules and the achievement of construction milestones. Depending on a host of variables and modeling assumptions including weather and/or wind, we sell certain non-core assets, we are now projecting a peak aggregate construction draw schedule of somewhere around $175 million to occur in late ’08 or early ’09.

However, any such draw is projected to be repaid in full some time during 2010. We then project to rebuild our cash position to approximately $130 million by the end of our current new-build construction cycle in mid 2010 with an undrawn revolver. Our growth CapEx project excluding the recent Sea Mar fleet acquisition is currently at around $920 million of which we have already paid roughly $455 million through March 2008. The remaining $465 million is expected to be paid over the next few years with about $275 million of that figure to be incurred in the remainder of 2008. These costs will be funded primarily by cash on hand, projected free cash flow from operations, and revolver draws.

Moving into dry-docking activity, for the full year 2008, according to our current maintenance CapEx plan, we plan to dry dock nine new-generation OSVs covering about 264 days of downtime. During the first quarter, we dry-docked four OSVS representing roughly 97 days of downtime at a cost of $3 million.

During the second quarter, we expect to dry dock three OSVs representing roughly 90 days of downtime. However, due to our spot contracting strategy with a portion of our fleet, which is designed to maximize our effective day rates, we are still guiding to the 90% range for utilization in this segment for calendar ’08.

Our total projected dry-docking cost for 2008 are now estimated to be around $8.5 million. Note that this amount only reflects the dry-docking cost for nine of the 18 OSVs to be dry-docked in 2008. The other nine vessels to be dry docked in ’08 are newly acquired Sea Mar vessels whose dry-dock cost under our accounting methodology were included in our purchase price allocation. These costs are currently running through vessel capital improvements in the maintenance CapEx table of our press release.

In our tug and tank barge fleet, we plan to dry dock ten barges and four tugs in calendar 2008. During the first quarter of ’08, we had 54 barge days out of service at a total cost of $1.1 million. During the second quarter of 2008, we expect to dry dock one barge for a total of 65 barge days out of service. For calendar 2008, we now project a total dry-dock cost of around $9.2 million for the TTB fleet.

Wrapping up with our forward guidance, as a reminder, all of the forward-looking guidance figures including full-year contribution from our August 2007 acquisition of the Sea Mar fleet and recent TTB new-build deliveries as well as the partial-year contribution from projected 2008 deliveries from our ongoing CapEx projects.

Our annual 2008 guidance, this morning, we reaffirmed our EBIDTA guidance for the full year 2008 of $220 to $240 million, and our diluted EPS guidance of $3.68 to $4.16. As you consider our annual guidance figures, you should bear in mind that while we do not consider the conventional OSV fleet that we acquired from Sea Mar to be core assets of our company and therefore do not give specific guidance on those vessels, the results of their operations do impact our numbers in a modest way.

We have always said that the conventional OSV market is much different from the new-generation market and is marked by higher volatility as we saw this morning. For example, I want to clarify something about this morning’s reports regarding the effective day rates in our press release for the conventional vessels, the nominal average day rates, that would be the rate that our customers pay for the vessel when the vessels are working, for our 10 conventional OSVs for the first quarter of ’08 were just over $9500 a day or slightly higher than the fourth quarter of ’07, but the utilization for these non-core vessels dropped sequentially from 67% to 52% driving our effective or utilization-adjusted day rates to approximately $4900 or $1400 less than the fourth quarter of ’07.

So, nominal day rates are roughly flat at $9500, but due to the utilization drop from 67% to 52%, the effective day rates dropped from $6000 something to $4900. This sequential decrease in effective day rates for our conventional vessels represented a marginal first quarter impact of roughly $1.3 million in EBIDTA and $0.03s per diluted share.

However, effective day rates for this type of vessel have already rebounded on the strength of 83% utilization for the month of April 2008, the month just ended, averaging 2600 higher than the first quarter 2008 effective day rate levels with post-quarter end or April nominal average day rates still in the $8000 to $9000 range.

While I don’t want to get bogged down explaining quarterly debt variances related to these non-strategic assets that comprise a relatively small percentage of our business, suffice it to say that they will occur from time to time and you should expect our EBIDTA and EPS to be impacted accordingly.

The pro forma run rate EBIDTA illustration included in the tables of our press release this morning reflect the assumptions outlined in foot note 10 to such table which among other assumptions includes an anticipated incremental full-year run rate contribution from the recently acquired Sea Mar vessels as well as our vessels recently delivered under and/or that are currently under construction or conversion in one of our active new-build programs which are four MPSVs, 16 OSVs, three tank barges, and four tugs as though such vessels were in the water as of January 1, 2008.

Based on these assumptions, we are still projecting pro forma run rate EBIDTA of $373 million and pro forma diluted EPS of 6026 cents per share. This is not intended to represent forward earnings guidance with respect to any specific calendar year, but is rather indicative of what we believe to be the potential annual EBIDTA and earnings generating capacity of our pro forma fleets assuming size-adjusted costs for our larger vessels consistent with our current cost structures if all such vessels were operational for the entire calendar year ’08, which they are not, but which is more than double our record results for calendar year 2007.

With that, I will return it back to Todd for any further comments or to entertain questions.

Todd M. Hornbeck

We are seeing a very strong market worldwide for new-generation equipment, and we have a very active construction program going on and things are looking really, really good domestically and internationally for that type of equipment.

With that, I will open it up for questions.

Question-And-Answer Session


(Operator Instructions) Your first question comes from Judd Bailey with Jeffries - Company. Please go ahead.

Judson E. Bailey - Jefferies & Company, Inc.

Jim thanks for clarification on the conventional fleet. You gave pretty good guidance today on what those rates have done in April. Could you give us the same data point for maybe what your new-generation fleet has done so far?

James O. Harp Jr.

No, not on the new-gen fleet. I don’t have it at my fingertips and I don’t want to just guess. I can tell you this. It is very strong, the market has picked up. From quarter to quarter, I think we have given you a ending edge day rates for the whole fleet and I can tell you spot rates now from the 200 class vessels is over $20,000 a day up to the 265 class vessels is over $40,000 a day.

Judson E. Bailey - Jefferies & Company, Inc.

Just tell me if I am wrong, during the winter, were the 200 footers getting in the mid teens, call it 15 to 16, and is that correct?

James O. Harp Jr.

Yes sir, that’s about right.

Judson E. Bailey - Jefferies & Company, Inc.

When I look at Brazil, clearly that’s going to be a hot market for the foreseeable future. Would you want to take a stab at quantifying how many vessels you think would be coming out of the Gulf of Mexico to accommodate what we’re seeing in Brazil right now?

James O. Harp Jr.

It’s hard to quantify, Judd, at this point; there is a lot of activity from not only Brazil but also Southeast Asia, West African markets, all over the globe, Mexico. things have really heated up. There are a lot of demand drivers coming this year. A couple of years ago, when all the new constructions started, it’s now starting to hit. So we’re seeing bid opportunities all over the world including Brazil. Of course, the recent announcements in Brazil have been very attractive, but a lot of that won’t come online for several years on the recent announcements down in Brazil, but I would think coming out of the Gulf, we’re going to see quite a bit of equipment moving all over the globe as the rigs move as well.


Your next question comes from David Smith - JPMorgan.

David C. Smith - JPMorgan

I wanted to know if you could give us some color on the MPSV demand that you’re seeing right now, particularly for the [inaudible] vessels.

James O. Harp Jr.

Pretty strong. We’re getting inquiries daily. We’re having a lot of dialogue. We’re starting now to bid out those vessels we’ve held those waiting for the market and not bidding out too early during the construction period, now that we are getting ready to start delivering some of that equipment. The international vessels probably bidding a little bit more on term contracts.

The domestic MPSVs, we’re a lot more comfortable in the spot market which I would suspect we would probably end up with about 50-50; two of those in the spot market and two in the term market or long-term contracted market, and that would be by design. We just see a lot of opportunities with everything that is happening in the Gulf from decommissioning to all of the subsea infrastructure and flow-back opportunities as well.

David C. Smith - JPMorgan

f I look at the difference between the contracts that you have this quarter versus last quarter on your vessels under construction, it looks like you have increased vessel years by 12 on only 2 new boats; so am I right that you are signing some contracts of at least 6 years’ duration?

James O. Harp Jr.

I am glad somebody out there can do math. You are doing pretty well. You hit the mark.

David C. Smith - JPMorgan

And if so, what does the day rate structure look like between a 3-year versus a 6-year contract.

James O. Harp Jr.

Pretty good, that’s why we’re signing up contracts. We basically in our history have been primarily a spot player because spot contracts have yielded a lot better returns, but we’re starting to see the term contracts we’re signing are as good as the spot contracts; so that’s why we’re terming them up on real good rates of return.

David C. Smith - JPMorgan

And finally, are there any cost recovery provisions in these longer-term contracts?

James O. Harp Jr.

Yes sir.


Your next question comes from Pierre Conner - Capital One Southcoast, Inc.

Pierre E. Conner – Capital One Southcoast, Inc.

You did caution us a bit on the tug and tank barge segment utilization and yet reiterated your full year guidance. I wondered if sequentially was there any components that gave you a little more confidence or is it just a factor that you got an up range in that guidance that we’re still within it.

James O. Harp Jr.

Well! I think that’s why we moved to a yearly guidance instead of a quarterly guidance because these shoulder months or seasonality can play a big role from quarter to quarter. The tank barge market is soft today, but it can turn very, very quickly. It’s really anticipated on what the driving season is going to be in the New York area in the Northeastern United States which will see another card during the summer; so right now, we are going to call for softer than expected. Just based on the commodity prices that we see at the gas pump. but it remains to be seen. We said that last year and it was a good driving season, so we will see what happens at the pump and how it affects the actual flow of gasoline products.

Pierre E. Conner – Capital One Southcoast, Inc.

I know this is net, but a clarification on the new-gen average rate given that taking out the one-specialty job, can you tell us sequentially what the underlying average rate bid. If you take that out, was that really all of the difference sequentially on the day right now?

James O. Harp Jr.

Pretty much, and we foreshadowed it on our last call. I went back to look and see exactly how fine a point we put on it and wasn’t that crystal clear, but we definitely foreshadowed that the runoff of that $72,000 a day would clearly be less in the first quarter than the fourth, and thus for that reason alone, that would be reason for a multi-hundred dollar reduction in overall rates in that it was a pretty good chunk although not all of the rate degradation. It wasn’t because of a deterioration in market conditions – if anything, as Todd said, they feel like they are picking up, not the opposite.

Pierre E. Conner – Capital One Southcoast, Inc.

I may not be qualified to do all the math, but the way you are talking was for 46 days, you get pretty close to that number that have.


Our next question comes from Daniel Burke - Johnson Rice.

Daniel Burke – Johnson Rice & Company LLC

I actually have two on the tank barge side of the market. I think you mentioned a well test job that would be going on, I know it wasn’t as high profile or high value some of the ones done in the past, but is that extending into the second quarter or did that wrap up in Q1?

James O. Harp Jr.

Right now, it is. We’ve been on a standby with that well test job since we spoke last; it was supposed to start maybe about 30 days ago and it has been postponed, but we have been on a standby rate, it will be starting this next week and we will be wrapping that up this quarter.

Daniel Burke – Johnson Rice & Company LLC

Jim, since you did a good job of identifying the variance of the conventional shelf vessels, you mentioned the impact of accelerated dry dock expense in the tug tank segment. Can you quantify what that amount was that flowed through the income statement?

James O. Harp Jr.

Yes. It was around $300,000 to $400,000, and you would see that in our last call. We gave you the quarterized depreciation net interest. The net interest which of course is the net of interest income and interest expense, that was part of it just due to the deferral or delay of cash draws under construction has a counter-intuitive effect of having higher GAAP interest expense because there has not been a construction draw that doesn’t attract interest away from the P&L to the balance sheet, but it means we had the cash a little longer so we had more interest income, so they tend to wash, but they were definitely due to a step out on some construction draws that were anticipated during the first quarter, our net interest expense figure, as well as the amortization figure quarter over quarter versus expectations is really the balance of the additional amount of variance there.

Daniel Burke – Johnson Rice & Company LLC

So the $300,000 to $400,000 you quoted initially.

James O. Harp Jr.

Just for the amortization. And then I think the net interest I think it’s in the same zip code, 500 or 600 or something like that. 400.


Your last question comes from Sonny Randhawa with Bank of America.

Sonny Randhawa – Banc of America Securities

But did you gave the effective day rate for the conventional vessels; you got a cost number for that so that we can break that out as well?

James O. Harp Jr.

No. We don’t give that OpEx per vessels per day by class. So, I would probably encourage you to use whatever OpEx per day you use on other of our peers that have more substantial 180 fleets. We have some other publicly traded companies that you may follow that have fleets of that size. You would assume that we have comparable OpEx per day for them, but I will defer on given that granular information on that side.

Sonny Randhawa – Banc of America Securities

Then from the standpoint of you, typically said it was EPS creative but not materially.

James O. Harp Jr.

That’s right. For the year, we still expect that to be the case. Clearly, the first quarter wasn’t.

Sonny Randhawa – Banc of America Securities

Okay. So, for the first quarter, it wasn’t.

James O. Harp Jr.

Based on the rebound in April and what we hope will be something along those lines for the remainder of the year, we certainly feel confident that Todd’s prior comment that these vessels would be at least EPS neutral will still hold.

Sonny Randhawa – Banc of America Securities

I can assume it’s a little bit about 4.9 per day.

James O. Harp Jr.

Yes. You got depreciation and amortization too.

Sonny Randhawa – Banc of America Securities

You seem to be building a little bit of a backlog considering that most of markets with backlog are more international, what do you see in terms of your geographic mix in the next couple of years?

Todd M. Hornbeck

The Gulf has always been a very, very dynamic place. We have a large position in the Gulf and do quite a bit of services here, so I don’t think we will be giving up our position in actively moving overseas. We do a pretty good comparative analysis on returns on contracts overseas versus what we can get here in the Gulf, but if I just had to do a guesstimate, I would think it would settle out somewhere around 50-50.

James O. Harp Jr.

I would add a good chunk of those 40 years are in the Gulf, not just internationally.


That does complete our question-and-answer session.

Todd M. Hornbeck

I would like to thank everyone for joining us on our call and I look forward to talking to you next quarter. Thank you very much.

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