Hornbeck First Quarter 2015 Update

Hornbeck Offshore Services (HOS, $22.72) released its first quarter 2015 results this week and, suffice to say, I like everything I see. An important aspect of my original thesis was that Hornbeck is able to scale down quickly and easily during downturns. Looking back on history is always tough, but it seemed management handled the last downturn very well. Now that we’re a couple quarters into this downturn I’m happy to say the business is looking well equipped to survive this one as well.

As of quarter end, Hornbeck has stacked 18 vessels which affects the company in numerous ways. First, their daily operating expenses are decreased. It costs roughly $500 per day to take a vessel out of service vs the $15,000 or so it takes to have one active. Drydocking expenses and maintenance capex are also delayed (not eliminated) while a ship is stacked. The ability to drastically cut expenses almost immediately during a downturn and then gradually ramp those expenses back up as oil recovers is a wonderful thing.

In addition to decreasing opex, HOS has implemented headcount reductions and pay cuts. One more small effect I didn’t consider that management mentioned is their performance-based restricted stock units (RSUs) expiring worthless. It’s tough for RSUs that are partially based on stock price to vest in these conditions. Altogether, management estimates their cost reductions have decreased expenses by about $80M on an annualized basis.

The price of oil peaked in the second quarter of 2014 and basically free-fell until January (it’s stabilized some as of late). Let’s see how HOS has performed relative to their peers from that great second quarter of 2014 vs this recent not-great first quarter of 2015. Note: Each company breaks out their segments a little different, but the below is what we have to work with. Hornbeck’s third main competitor, Tidewater (TDW), hasn’t released earnings for the most recent quarter so they’re excluded.

hos peer group

As you can see, Hornbeck has fallen much less in the two key metrics of utilization and dayrates. GulfMark historically has the best utilization of the peer group, but Hornbeck’s dayrates more than make up for it. Sequentially, Hornbeck’s dayrates only decreased 3.3% vs GulfMark at -14.7% and Seacor at -10.9%.

HOS management routinely talks about having the youngest and most high-spec fleet in the Gulf of Mexico. They claim that these two facts provides them higher dayrates and less impact from downturns. Well the proof is in the pudding as they say and it seems their dayrates are holding for now. Todd Hornbeck touched on this during the 1Q15 conference call: “We have the real high-end equipment, so we’re typically first in, last out. And you’ll probably see across the spectrum some more stacking of some lower-end equipment.”

Todd also reiterated on the call that the value of their ships have not been hurt from the price of oil: “To replace this equipment in the shipyards actually would cost more money than what we’ve spent on the equipment. So asset values traditionally on the high-end high-spec assets have retained their residual values through the down markets.”

The second quarter release also contained updated guidance for 2015 and 2016. While they’re guiding to more stacking in the future, the decreased costs more than make up for it. Amazingly, my bottom line numbers for the next few years have either held steady or actually improved with the updated guidance. Just one more data point to support how well their business model can scale up and down.

I have no idea how long this downturn will last but as long as HOS survives (which they will) I’m very confident in their future prospects. They are the best operator in the Gulf and will thus benefit the most from a rebound.

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

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3 thoughts on “Hornbeck First Quarter 2015 Update

  1. HOS has gone from cheap, to very cheap, to ludicrously cheap. Has your assessment changed at all since this writeup? Now trading at 0.17x book. Still plenty of liquidity with $260 mn cash on the balance sheet and the $300 revolver undrawn. Obviously the main risk is that the oil price downturn drags on for years rather than quarters. I was a little surprised about the upgrade to their build program revealed this week – given other potential uses of cash (buybacks?). Would love to hear any thoughts.

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    • My thoughts haven’t changed much and I still own it. When I originally invested I expected the oil situation to get worse before it got better, but it’s shocked me how much Hornbeck’s stock follows lockstep with oil. If anything, I’m starting to feel more confident that oil may start returning to normalcy by the end of this year. On the upgrade front, I’ve been out of town for two weeks so I still haven’t reviewed everything, but I was surprised to see that as well. It’s tempting to want buybacks at these levels, but I’d honestly prefer they just keep a lot of cash sitting around for the foreseeable future.

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  2. Thanks for the update Travis. I do agree with you that its probably best they keep cash sitting around rather than do a buyback. It gives them a lot of optionality when things finally turn. Buybacks in commodity exposed businesses are risky as you never know how long the down cycle can last.

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