Hornbeck Book Value Update

Apparently I should have waited one day to post my Hornbeck Offshore Services thesis. Yesterday their 2014 10-K was released in addition to an announcement on the sale of four ships to the US Navy. You can read the details of the sale here. The announcement says they sold three ships with an option for the fourth (and a potential fifth), but the 10-K says they sold four so I assume the option was exercised. This sale gives us some great information on what their full fleet may be worth.

The four ships were built around 2009 and have a capacity of 2,900 deadweight tons (dwt). Not including the newbuild #5 ships, the rest of the fleet (48 ships) has an average capacity of 3,281 dwt and was built in 2005. So the OSVs sold to the US Navy are a little smaller, but newer, than the average non-newbuild ship. The four were sold for $38M apiece. When complete in 2016, the newbuild #5 program will have produced 19 OSVs and 5 MPSVs for a total cost of $1.26B.

Let’s assume those newbuild ships roll off the line and lose 25% of their value–so they’re now worth $945M. If the 48 other ships are worth an average of $38M  that’s 48 ships * $38M = $1,824M. Adding the $945M from the newbuilds is $2,769M – $736M net debt = $2B market cap vs today’s market cap of $742M.  If those 48 ships are only worth $25M each instead of $38M, the pro forma market cap comes to $1.4B–still almost double what it is today. Now, consider the below quotes:

“In order for the fair values of any of our assets to be below their respective carrying values, current and projected effective dayrates would have to be significantly below the lowest levels experienced in our Company’s history. In addition, those market conditions would have to be sustained for the remaining economic useful lives of each vessel class, which is also unlikely.” (2014 10-K)

“The residual values of our hi-spec fleet of ships are being driven by rising replacement cost and are therefore generally appreciating in value. Book depreciation is not a reliable indicator of true economic fair market value.” (4Q14 conference call)

Suffice to say, I think HOS has a lot of downside protection via their assets. Their full year results looked great as well (numbers in thousands):

$285,371 EBITDA

– $50,548 cash interest paid

– $5,679 cash taxes paid

– $67,300 maintenance capex

– $41,000 other capex

= $120,844 cash to shareholders

/ 36,692 shares

= $3.29/share of cash vs the current stock price of $20.59

As of this writing, Wiedower Capital owns shares in HOS. This is subject to change.

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