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.
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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