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.
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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.
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Hornbeck Offshore Services (HOS)

According to Baron Rothschild, the key to making money is to “buy when there’s blood in the streets.” This quote, and more importantly the concept of contrarian investing, has been immortalized by Warren Buffett and many investors following him. Well right now, there’s a whole lot of blood in the streets of the oil industry and Hornbeck Offshore Services (HOS, $19.58) is the best combination of downside protection and long-term upside I’ve seen.

Business overview
Hornbeck manages offshore vessels (OSVs) that supply drilling rigs. 75% of their revenue is domestic (primarily Gulf of Mexico) with the rest mostly in Mexico and Brazil. The beautiful thing about operating supply vessels in the Gulf of Mexico (GoM) is the Jones Act which creates a significant barrier to entry. Essentially, vessels that transport merchandise and passengers in US waters must be owned and managed by US citizens and the vessels must have been built in the US. Foreign vessels can’t just show up and start taking work away from Hornbeck and the other operators. This has obviously created an oligopoly in the GoM and Hornbeck is either the #1 or #2 vessel operator in the Gulf depending on how you measure.
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