Hornbeck Offshore Worth Accumulating on Corrections
- By Subia Khan
Hornbeck Offshore Services (HOS) and its subsidiaries provide marine transportation, subsea installation and accommodation support services to exploration and production, oilfield service, offshore construction and U.S. military customers. The company operates offshore supply vessels (OSVs) and multi-purpose support vessels (MPSVs). Further, it provides logistics support and specialty services to the offshore oil and gas exploration and production industry in the U.S. Gulf of Mexico, Latin America and internationally. Hornbeck Offshore currently has 62 new generation OSVs and six MPSVs in their operating fleet.
Warning! GuruFocus has detected 2 Warning Sign with HOS. Click here to check it out.
The intrinsic value of HOS
Upstream outlook
According to the Energy Information Administration, worldwide consumption of oil and gas will rise from around 80 million barrels per day in 2016 to around 100 million barrels per day by 2020. The decline in current production needs to be replenished to meet the forecasted consumption levels. This would drive the drilling industry. Large discoveries of hydrocarbons in deepwater regions further act as a driver for the drilling industry. Also, since deepwater wells are at a greater distance from the shore of the Gulf of Mexico and Brazil, with transit time ranging from six to 24 hours, companies like Hornbeck Offshore would be well positioned to meet the logistically demanding projects.
Aggressive stacking strategy
Hornbeck has been aggressively involved in the stacking of its new generation OSVs. As of Sept. 30, the company has already stacked 75% of its fleet. This is primarily to withstand the unstable economic condition and volatility in the oil and gas industry. Stacking will help reduce operating expenses from between $500 to $1,500 per day per vessel and improve their EBITDA margin. At the same time, it will defer cash outlays for vessel dry dockings until markets recover. Moreover, the company currently aims to capture the market share by working on downsizing their fleet, which would help them to materialize their existing fleet and also meet the challenge of re-entry.
Market diversification and blue-chip customers
What I like about Hornbeck is the company's urge to meet the need of its customers. This is reflected in the company's aim to develop cutting-edge technologies for the fleet and hiring people who would meet the goal of being the industry's company of choice.
The company also has a well-diversified market strategy to cater to different sections of the industry. The company is geographically present in five markets with a majority of its presence in the Gulf of Mexico. Hornbeck also operates in four different service lines with a primary focus on oilfield supply, followed by oilfield specialty and military service contracts.
For fiscal 2016, the company estimates 64% of its revenue is from integrated U.S. oil companies. Therefore, I believe contracts with blue-chip companies and the U.S government would provide stability and have a positive impact on the company's revenue generation.
Financials and liquidity
From a financial perspective, the company has been generating gross and operating margins better than industry peers. Considering tight market conditions and volatile oil prices, I believe Hornbeck has been successful in creating margins better than its peers.
Investors need not worry about the company's high debt of $1.08 billion. The company has sufficient liquidity to meet its short-term obligations. The net book value of Hornbeck is 3.1 times its debt, which provides ample asset buffer for debt holders.
As of Sept. 30, Hornbeck had total liquidity of $425 million. This comprises $225 million of cash and cash equivalents and $200 million of an undrawn revolving credit facility. With no debt maturity until 2019, the company has sufficient liquidity to meet its capital expenditure requirements in fiscal 2017.
Conclusion
With one of the youngest fleets in operation, the company has a leading presence in its core markets. With improving oil prices, Hornbeck will have the confidence to increase its capital expenditures, ultimately leading to more contracts for drillers.
Thus, I believe Hornbeck will be back on track if OEPC continues to cut its production and oil prices rise further. In my view, investors can consider accumulating this stock in small portions on any correction in the broad markets.
Disclosure: No position in the stock discussed.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with HOS. Click here to check it out.
The intrinsic value of HOS
