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Edited Transcript of HOS earnings conference call or presentation 1-Nov-18 2:00pm GMT

Q3 2018 Hornbeck Offshore Services Inc Earnings Call

COVINGTON Nov 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Hornbeck Offshore Services Inc earnings conference call or presentation Thursday, November 1, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James O. Harp

Hornbeck Offshore Services, Inc. - Executive VP & CFO

* Ken Dennard

Dennard Lascar Associates, LLC - Co-Founder, CEO and Managing Partner

* Todd M. Hornbeck

Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO

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Conference Call Participants

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* Brad Bays

* Turner Holm

Clarksons Platou Securities AS, Research Division - Director

* Unknown Analsyt

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Presentation

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Operator [1]

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Greetings and welcome to the Hornbeck Offshore Services Third Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ken Dennard, Investor Relations for Hornbeck Offshore Services. Thank you, Mr. Dennard, you may begin.

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Ken Dennard, Dennard Lascar Associates, LLC - Co-Founder, CEO and Managing Partner [2]

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Thanks, Doug and good morning, everyone. We appreciate you joining us for Hornbeck Offshore conference call to review third quarter 2018 results and recent developments. We'd also like to welcome our Internet participants listening to the call live over the Web.

Please note that the information reported on this call speaks only as of today, November 1, 2018, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

During today's conference call, Todd and Jim will make certain projections about future financial performance, liquidity, operations and events that are not statements of historical fact and thus constitute forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that may cause such future matters, including the Company's actual future performance, to be materially different from which that is projected today. You can locate additional information about factors that could cause the Company's results to materially differ from those projected in the forward-looking statements in Hornbeck's SEC filings and in yesterday's press release under the Investors Section of the company Website; www.hornbeckoffshore.com and through the SEC Website, at sec.gov.

This earnings release also contains references to EBITDA, which is a non-GAAP financial measure. A reconciliation of this financial measure to the most directly comparable GAAP financial measure is provided in the press release issued by the Company yesterday afternoon.

And finally, the company uses its Website by means of disclosing material, non-public information and for complying with disclosure obligations under SEC Regulation FD. Such disclosures will be included on the Company's Website under the heading, investors. Accordingly, investors should monitor that portion of the Company's website, in addition to following the Company's press releases, SEC filings, public conference calls and webcasts.

Now with that behind me, I'd like to turn the call over to Todd Hornbeck, Chairman, President and CEO of Hornbeck Offshore. Todd?

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [3]

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Thank you, Ken. We announced third quarter 2018 results yesterday afternoon which reflected soft conditions in the U.S. deepwater Gulf of Mexico that were counterbalanced by relatively healthy international specialty and non-oilfield related activities for our high-spec fleet. The benefits of our fleet diversity and adaptability to specialize operations were clearly on display during the quarter. Even while the average number of deepwater drilling units that worked in the Gulf of Mexico during the quarter fell by 3 rigs to just 18 in total which is the lowest domestic activity floating rig count since Macondo, we were able to hold revenues in fleet-wide average and effective day rates essentially flat for the sequential quarter. While that may appear to be treading water, what we observed is that activities outside of the Gulf of Mexico provided a solid base for our business which then begs the question, do we see a basis for recovery in the near-term that will allow us to build upon this base? The answer, we believe, is yes. By near-term, we mean within the next 12 months. By recovery we mean the ability to sustainably increase utilization at pricing across our broader operating region which includes the U.S. Gulf of Mexico, the Caribbean, Mexico, Brazil and the Northern Slope of South America. Regionally, the headcount of active drilling and related programs is growing. However, the majority of that activity has been outside of the U.S. Gulf of Mexico to date. Based on recent customer discussions and public announcements, we now have visibility to an incremental 10 to 12 floaters going to work regionally in the first half of 2019.

In the U.S. Gulf of Mexico, we believe that improved regional demand drivers will be back stocked with a tightened supply of available active high-spec vessels. Three factors are at play on the domestic supply side. First, the number of stacked high-spec OSV's has remained constant at around 90 vessels. Next, several high-spec vessels have left the U.S. Gulf of Mexico either permanently or for multiyear charters. Finally, for the first time in several years, a major oil company recently forward contracted 7 high-spec OSV's on a long-term basis. Effectively taking those high-spec vessels out of the available domestic pool of what we thought were -- at unrealistically low day rates for term charters. While we would be pleased to charter vessels on a long-term basis, we don't see a good reason to do so at this point in the cycle at below breakeven day rates.

So we believe we are positioned precisely where we wanted to be at this point in the cycle with the largest available fleet of the largest and most capable vessels in the hemisphere. Growth and tendering activity and backlog announced by rig contractors will drive the need for vessels whenever those announcements translate into drilling activity. Against this backdrop, there also seems to be a fresh interest in deep water exploration by independents. Many of whom have raised capital attracted by the lower breakeven cost structure now prevailing for deepwater projects.

We are mindful that a dollar spent in today's offshore oilfield goes further than it did in 2014. So, as we watch for capital budgets announcements over the next couple of months, we think it is important to mark-to-market those budgets with an understanding that more activity can be produced on a budget that is nominally lower in dollar value than what we might have seen in prior years and that the lions share of that spend will be for the services of the drilling contractors.

For the first time in a long time, we have been, we have seen, meaningful growth in our own sequential backlog of contracted OSV and MPSV vessel days. While we are still a long way away from a full recovery, we think that all of the signals are there for a mid-2019 inflection point in that we can finally see a light flickering at the end of the tunnel. Having said that, I do believe that the next couple of quarters will remain seasonally muted as we discussed on our last call.

Of course, there are all kinds of caveats to this change in our near-term outlook and you should read about them in our disclosure documents. As you may be aware, in March we terminated the shipyard contracts for the construction of the last 2 MPSV's that we plan to deliver under our fifth OSV new-build program. We announced yesterday that we are revising the timeframe of our expected completion of these vessels into 2020. We have not yet contracted with a completion yard which is contingent on first finalizing the surety company, that's the company that provided the performance bonds, in a matter in which we can proceed.

We have had productive conversations with them recently but we don't realistically believe that the vessels can be completed in 2019 and so for that reason we're pushing our forward guidance for their deliveries back a year to 2020. Once we have a better sense of the exact timing, we will revisit the delivery dates and provide you with additional guidance. The same goes for our projected timing of the remaining cash outlays related to those vessels which we have conservatively guided to be incurred by the end of fiscal 2019. As you could imagine, we do not take lightly the decision to terminate the contracts with the original yard. However, we did so only after concluding that the yard was in default and after attempting to work with the yard in order to find a path forward for both parties that made sense. Last month the yard initiated litigation against us which we intend to vigorously defend whereas we believe the claims that they have made are without merit.

While we're disappointed by the delay, the proper completion of these vessels, which will be the 2 most sophisticated Jones Act qualified MPSV's in U.S. registry is simply too important for us to risk continued construction of vessels at a shipyard that would not meet the contractual standards. As a reminder, there is a total of $61 million remaining to be funded by us under this program. We expect that cost overruns resulting from the termination of the original contract will be satisfied by the performance bonds under which we have already made claims. We will provide further updates on this program as they develop.

Before I turn the call over to Jim, I want to spend a moment discussing our ongoing efforts to address our long-term debt about which there has been a lot of speculation, much of which is unfounded. Approximately $100 million of our 2019 convertible notes mature in September 2019. We have announced previously, and reiterate now, that we expect to have sufficient liquidity to address this maturity when due. It is important to note that unlike other companies in our space that have undergone restructurings in and out of court, we are neither in default nor in imminent risk of default and continue to believe that we have sufficient liquidity to meet all of our financial obligations through at least March 31, 2020. We also believe that our ultra high-spec fleet of vessels, which are highly relevant to the markets that we serve, provide us with an intrinsic optionality as the market improves and are therefore fundamentally part of the solution to address the maturities in 2020 and 2021.

Accordingly, absent a compelling reason otherwise, we believe that we have the benefit of time to see how the pending recovery, that I just described, materializes. We remain steadfastly committed to finding a path that reconciles our contractual obligations to debt holders with our fiduciary obligations to the company. We will continue our efforts to maintain the company's long-term success and to achieve our strategic growth objectives in a recovered market.

We will keep you apprised of any related developments when they are appropriate. With that let me turn the call over to Jim to walk you through the numbers in a little bit more detail.

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James O. Harp, Hornbeck Offshore Services, Inc. - Executive VP & CFO [4]

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Thanks, Todd and good morning everyone. Yesterday afternoon we reported our third quarter results and updated the forward-looking guidance information contained in the data tables to our press release to provide fourth quarter and updated annual guidance for 2018 and limited annual guidance for 2019 for various categories of financial and operational data. Keep in mind this information is based on the current market environment which is always subject to change. Our third quarter net loss was $31 million, or $0.83 per diluted share compared to a reported net loss of $25 million or $0.67 per diluted share in the second quarter.

Our reported operating loss was $22 million in the current quarter compared to an operating loss of $16 million in the second quarter of 2018. Included in our third quarter 2018 results is a $2.2 million increase in G&A expense due to a mark-to-market adjustment required by GAAP on cash-settled awards to reflect the increase in the company's stock price during the 3 months ended September 30, 2018 which will likely continue to produce quarterly noise in our future earnings as we discussed at length on our last call and as I will expound upon again in a moment. Excluding the impact of this item; net loss, diluted EPS and operation loss would have been $29 million, $0.78 per share and $20 million respectively.

On our last call, I mentioned that we expected forward EBITDA levels to directionally trend downward from the second quarters mark during the remainder of 2018, the second half, and into the first quarter of 2019. So not unsurprisingly, EBITDA for the third quarter was $5 million down $6 million or 55% from the second quarter EBITDA of $11 million. Excluding the impact of the additional mark-to-market stock based compensation expense, third quarter EBITDA would have been $7 million or a 34% drop sequentially on flat revenue. While we still believe the next 2 quarters will be below that of the second quarter of 2018, that would be the fourth quarter and the first quarter, although perhaps higher than the third quarter, to echo what Todd said earlier, we now expect our EBITDA to directionally start trending upward beginning in mid-2019 based on greater visibility into the supply and demand dynamics in our core operating regions.

Since our stock-based compensation expense can cause such volatile swings up and down in our EBITDA, I wanted to point out that we also provide adjusted EBITDA, another non-GAAP financial measure in our quarterly earnings releases. Adjusted EBITDA is an alternate and we feel under the circumstances may be even a better indicator of our comparably calculated cash flows with less quarterly noise because it adds back all, not just the increase or the change between quarters, but all of our stock-based compensation expense as well as some modest interest income and on occasion certain other non-recurring expenses or income as applicable for each of the measurement periods.

Adjusted EBITDA for the third quarter was $10 million, down $4 million or 29% from second quarter adjusted EBITDA of $14 million. For additional information regarding EBITDA and adjusted EBITDA as non-GAAP financial measures, please refer to the data tables in yesterday's earnings release, including Note 10. We have not in the recent past given actual dollar value EBITDA or adjusted EBITDA guidance and do not intend to do so in the future.

Revenue for the third quarter of 2018 was $58 million, in line with the sequential quarter. Breaking down our revenue a little more granularly by vessel type, revenue generated by our OSV's was roughly $31 million, while revenue generated by our MPSV's was roughly $19 million, both of which were in line with the sequential quarter.

Average new generation OSV day rates for the third quarter of 2018 were approximately $19,500 or about $100.00 lower than the sequential quarter. Utilization for our new generation OSV's for the third quarter of 2018 was 26%, down from 27% sequentially, while utilization for our MPSV's for the third quarter of 2018 was 51%, down from 57% sequentially.

Adjusting for stacked vessel days, the effective utilization on our active fleet of new-gen OSV's was 65% compared to 76% sequentially. Our effective or utilization adjusted OSV day rates were approximately $5100.00 or about $200.00 lower than the sequential quarter. Even though our effective OSV day rates were lower than the sequential quarter, our average number of OSV's increased from 63.9% to 66% due to the full quarter contribution from the 4 active high-spec OSV's purchased from Aries Marine during the second quarter of 2018, leading to OSV revenue remaining in line with the sequential quarter.

Geographically, our foreign revenue was just over $13 million or 22% of our total revenue for the third quarter of 2018 compared to roughly $6 million or 10% of our total revenue for the second quarter of 2018, which represents an increase of a 117% in our non-U. S. revenue sequentially. This 12 percentage point increase in foreign revenue is primarily attributable to an average of 3.5 incremental vessels working abroad during the third quarter of 2018.

Operating expenses of $38 million for the third quarter were up $3 million or 9% from the sequential quarter and were just above the midpoint of our guidance range. Inclusive of the partial year contribution of the 4-vessel acquisition that we closed in May, aggregate cash operating expenses for the full calendar year 2018 are now projected to be in the range of $147 million to $152 million.

At this time each year, we typically reduce our full year annual guidance range from $10 million spread to a $5 million spread in order to harmonize it with our $5 million guidance range for the fourth quarter. Our operating expenses in each fiscal period can vary based on geographic footprint, active vessel count and charter mix. For example, specialty jobs such as flotel work have a different OpEx than a standard OSV mud boat.

In each of our quarterly earnings releases, we update our forward guidance as these factors and our operations change. In a market like we are in today, changes are constant and the variable factors are many. So, our historical quarterly OpEx is not always a good indicator or predictive run rate for future quarters.

Reflected in the projected cash OpEx for fiscal 2018 are the continuing effects of several cost containment measures we initiated over the last 4 years, including among other actions, the stacking of new generation OSV's and MPSV's on various dates since October 1, 2014, as well as company-wide headcount reductions and across the board pay cuts for shore side and vessel personnel.

As a reminder, we have provided you with updated full year and fourth quarter 2018 OpEx guidance in our press release issued yesterday afternoon. Consistent with our cash OpEx guidance for prior periods, these estimated ranges are good faith estimates based on best available information as of today and are only intended to cover our currently anticipated active fleet complement, geographic footprint, charter mix and industry market conditions. While our updated guidance is predicated on an assumed average stacked fleet of just under 41 OSV's for the full year fiscal 2018, we may consider stacking or reactivating additional vessels as market conditions warrant.

Our third quarter general and administrative or G&A expense of $15 million was up $3 million or 25% compared to $12 million for the sequential quarter. This sequential increase in G&A expense was primarily due to a $2.2 million mark-to-market adjustment on outstanding cash-settled awards during the third quarter of 2018. Excluding this adjustment which we foreshadowed may occur last quarter, G&A expense for the third quarter of 2018 would have been at the midpoint of our guidance range.

As we discussed in detail last call, GAAP requires that the expense for all cash settled awards be trued up for changes in the stock price during the current quarter from the previous quarter's level together with a cumulative catch up to adjust life-to-date expense for each grant to the current stock price. As of September 30, 2018, the ten-day trailing average stock price was $4.79 per share compared to a ten-day trailing average stock price at the end of June 2018 of $3.49 per share.

Last quarter we added a new footnote to our press release which we updated yesterday that generally describes how our cash-settled units are mark-to-market on a quarterly basis.

For the fourth quarter of 2018, G&A expense is expected to be in the range of $12.5 million to $14.5 million inclusive of roughly $2 million of quarterly stock-based compensation expense valued at our ten-day trailing average stock price at the end of September 2018 of $4.79 per share.

For full year calendar 2018, G&A expenses are expected to be in the range of $53 million to $55 million inclusive of roughly $10.9 million of annual stock-based compensation expense, also valued at our ten-day trailing average stock price at the end of September 2018 of $4.79 per share.

In order to give you an idea of how much increases or decreases in our stock price could affect the stock-based compensation component of our G&A expense for the fourth quarter of 2018 based on the number of unvested grants currently outstanding, each $1 movement in our 10-day trailing average stock price at the end of December 2018, above or below $4.79 per share, would increase or decrease our G&A expense by roughly $2.2 million from our current fourth quarter guidance levels.

To update the illustration we walked through last quarter to show how this variable supplement to our baseline G&A guidance works, if our ten-day trailing average stock price at the end of December 2018 were to equal our closing stock price yesterday of $3.15, the adjustment to our stock-based compensation expense and total G&A expense guidance for the fourth quarter of 2018 would actually be a reduction of $3.6 million or a $5.8 million swing from the third quarter adjustment.

To recap this pro forma fourth quarter adjustment is equal to the assumed $1.64 drop in the sequential quarterly stock price from $4.79 to $3.15 multiplied by the per dollar amount I just mentioned of $2.2 million resulting in a net credit of $1.6 million of total stock-based compensation expense in the fourth quarter. In other words, our current guidance of $2 million, less the $3.6 million adjustment would yield the $1.6 million net credit.

To be clear, our latest G&A guidance for the fourth quarter and full calendar year 2018 is predicated on the baseline assumption of no further increase or decrease in our stock price from the third quarter level of $4.79. Therefore, given that our stock price, future stock price, is almost guaranteed to vary from $4.79 per share, analysts and investors will need to adjust their assumptions for our baseline G&A accordingly using the above formula and our actual ten-day trailing stock price at the end of December 2018. We will update these supplemental metrics quarterly as part of our new guidance template.

I will now review some of our other key balance sheet related items for the third quarter. As Todd mentioned previously, we have updated our guidance regarding the delivery of the final 2 MPSV's and our fifth OSV newbuild program. As previously reported, during the first quarter of 2018, we notified the shipyard that we were terminating the construction contracts for the last 2 vessels under our nearly completed 24 vessel newbuild program.

As of the date of termination, those 2 remaining vessels were projected to be delivered in the second and third quarters of 2019 respectively. Due to the amount of uncertainty surrounding the timing and location of future construction activities for guidance purposes, we are pushing the delivery days back one year and are now projecting these vessels to be delivered in the second and third quarters of 2020 respectively. We have also conservatively projected to incur 97% of the remaining cash outlays associated with this program during fiscal 2019.

The aggregate cost of our fifth OSV newbuild program is expected remain on budget at approximately $1.3 billion, of which $2 million and $59 million are expected to be incurred during the remainder of fiscal 2018 and in fiscal 2019 respectively. The timing of incurrence of these final construction draws is subject to change based on the ultimate delivery dates of the vessels which are yet to be determined. From the inception of this program through September 2018, we have already incurred roughly 95% of the total expected project costs including roughly $900,000 that was spent during the third quarter of 2018 with $61 million left to go.

For an update on our historical and projected regulatory drydocking activity, as well as expected cash outlays for maintenance and other CapEx, I will refer you to the data tables on Page 12 of 15 of our earnings release yesterday afternoon. On September 30, 2018, our total liquidity was $245 million comprised of $108 million in cash and $137 million of availability under our first-lien credit facility, which represents a decrease of $1 million from the end of the second quarter.

Our net debt position based on the carrying value of our senior unsecured notes and the first-lien credit facility was $976 million as of September 30, 2018, up from $974 million sequentially. Excluding the deferred gain from the carrying value of our first-lien credit facility, net debt would be $959 million.

All of our funded debt is long-term except for the $100 million of 2019 convertible notes due on September 1st of 2018, which went current on our balance sheet this quarter. We currently have a blended average fixed cash coupon of about 5% on $917 million of total outstanding face value of publicly-traded unsecured debt, resulting in an annual run rate of cash debt service for our unsecured bonds in the amount of roughly $46 million.

We also have a floating cash coupon of about 8.81% on a $163 million of total outstanding face value of privately-placed secured debt resulting in an annual run rate of cash debt service for our secured debt in the amount of just over $14 million or a total of $60 million for both tranches based on our current rate and currently outstanding balance, both of which will vary over time.

Cash interest on our first-lien credit facility is variable based on a current spread to LIBOR of 650 bps. This LIBOR spread is next scheduled to increase to 700 bps on June 15, 2019. The LIBOR rate applicable to the 30-day tranche we currently have outstanding under that facility is 2.31%.

For detailed guidance and a granular breakdown of our GAAP interest expense as well as our projected cash interest and taxes by quarter and annually, please see our guidance tables on Page 13 of our earnings release yesterday, which are also available in excel format in the investors' section of our Website.

We project that even with the currently depressed operating levels, cash generated from operations together with cash on hand and availability under our first-lien credit facility should be sufficient to fund our operations and commitments through at least March 31, 2020. However, absent the combination of a significant improvement in market conditions such that cash flow from operations were to increase materially from projected levels coupled with a refinancing and/or further management of our funded debt obligations, we do not currently expect to have sufficient liquidity to repay the full amount of our 5 and 7A senior notes and our 5% senior notes as they mature in fiscal years 2020 and 2021 respectively.

We remained fully cognizant of the challenges currently facing the offshore oil and gas industry and continue to review our capital structure and assess our strategic options. We may from time to time depending on market conditions and other factors repurchase or acquire additional interest in our outstanding indebtedness whether or not such indebtedness trades above or below its face amount for cash and/or in exchange for other securities, term loans or other consideration in each case and in an open market REIT purchases and/or privately negotiated transactions or otherwise.

With that, I'll turn it back to Todd for any further comments or to entertain questions.

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [5]

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All right. Thank you, Jim. Operator, I think we are available now and happy to take questions from the callers.

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Questions and Answers

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Operator [1]

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Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Turner Holm with Clarksons.

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Turner Holm, Clarksons Platou Securities AS, Research Division - Director [2]

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Yes. Well, happy to see that numbers turned out a little bit better than what we might have thought back in August. Todd, I wanted to touch on the international markets since they seem to be what's driving a lot of the change in tone in the near-term optimism from your side. Are you seeing pricing in those markets for the high-spec vessels that would be accretive to what you could earn in the U.S. side of the rope?

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [3]

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We look at it as one market now; I mean we're in all those markets between Mexico and the Caribbean, all the way to Brazil. So, we see a big influx of 10 to 12 floaters by mid-year. We should be able to participate in a good portion of that, which will change the supply dynamic in the Gulf. I'm still -- I'm getting more and more bullish every day on the Gulf of Mexico as well. It may be lagging just a little bit, but signs are looking good the tone is absolutely changing and forward pricing is tightening and rising, so yes.

To answer your question in short, right now we're seeing outside of the U.S., margin -- margins are better. You have to mark-to-market operating cost, you have to equip -- or put the operating cost equivalent to the Gulf of Mexico and it looks like the margins are better. But I think that that's going to translate right back into the Gulf of Mexico and I think we're going to get some pricing pressure back here.

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Turner Holm, Clarksons Platou Securities AS, Research Division - Director [4]

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Yes. It's good to hear. And moving back to...

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [5]

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I mean not pressured now.

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Turner Holm, Clarksons Platou Securities AS, Research Division - Director [6]

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Sure. Yes, I get it. And then moving back to the Gulf of Mexico, we've been hearing about some tightness in some of the smaller and midsize vessel, segments. Is that something you're seeing as well and do you anticipate that you might have the opportunity to reactivate some of the 240's as we move into 2019?

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [7]

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I don't see that right now. I mean look, they're coming from negative cash positions or below cash breakeven. So, we don't participate in that part of the market right now in any meaningful way, but I do see it tightening there. Hopefully, rates will get up for one day that it justifies for them to look at higher specked equipment meaning some of our stacked 240 fleet or higher. But at this time, the rates don't justify for anybody to pull anything out of stack.

It's just rates still have to come up quite a bit and we have to start seeing some term contracts for that to happen. For us to pull something out of stack for a spot requirement will be very, very difficult for us and I think for anybody who spend that type of capital for something short-term.

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Operator [8]

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Our next question comes from the line of Michael Urban with Seaport Global.

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Unknown Analsyt, [9]

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This is [Alan] calling in for Mike. I just had one quick question. With the activity picking up in Mexico, where do you expect your vessel count to be in 2019?

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [10]

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Well, right now we're just foreshadowing the vessel count that we currently have. The HOSMAX 300, all the high-spec vessels in the MPSV is fully employed. And as we get into these 10 to 12 rigs going to work and maybe even more that we don't see today than we can really take a hard look on whether we want to increase that vessel count. But as we sit today, we're going to be cautious going into this market. I don't think it bodes well for anybody to start pulling out equipment for an anticipated market.

I think the North Sea players learned that last year where they got excited about a market, pulled too much equipment out and killed the market and none of them made any money. So, we still need to - industry still needed to get back to cash breakeven or above and the industry is not there yet. So, I would just anticipate our fleet remaining the same and trying to expand on the due day rate expansion before anything else and keep costs low.

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Unknown Analsyt, [11]

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And one quick -- one more question. Do you see or hear from your customers any sign of caution with the new administration in Mexico, with the new contract, with the new bidding activity?

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [12]

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It's all over the board. Yes, there's some -- you always have to be cautious as something like that is developing and you have a change in leadership. But I do think that Mexico has a potential to really increase its reserve and an opportunity with the commodity price basically stabilizing where it is today and with an upward trend in the future.

It just seems like the dynamics are put together where at least the programs that have been announced will continue on. It's hard to see any further expansion at this point until the new administration gets in and we see how they rack. But I do think that the current players that are there and the current activity that's been announced should be -- I feel comfortable that that will continue.

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Operator [13]

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: Our next question comes from the line of Brad Bays with Trinity Capital Management.

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Brad Bays, [14]

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Todd, this question is for you, and I really just wanted to circle back to a comment you made early in your comments. So, can you add some color around the comment on your competitors signing long-term contracts below cost at this point in the cycle when things look like they're starting to kind of turn for the better? And perhaps comment, maybe add a little comment and some color on what's your definition of below cost is and how that may be compared to your competitors?

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [15]

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Well, that's a good question. In our industry, it's been just common practice that people report their daily operating cost, and the boat business traditionally is people talking about their cruise and at the boat level what the cost are. When we look at breakeven, and a lot of people called that breakeven, that's not breakeven cost, that's breakeven OpEx, but I'll look at breakevens that you have to not only add the daily operating cost of the cruise and the maintenance and the repair of the vessel but also a drydocking amortization because that is through cash earned, G&A allocation and also an interest or debt service allocation as well to get to a true breakeven cost analysis for even attempting to look at anything long-term.

And so, we have seen, I mentioned in my comments that we saw some competitors take some long-term contracts and a lot of times they advertise a people advertise that's breakeven. But we can't make the numbers work at the way we look at breakeven with adding all those other true cash cost that the company has that has to be put on each vessel in a readable stance.

So, we haven't seen the long-term contracts above what we call our breakeven cost. We think it's getting there and the market is tight. New contracts going out or the leading edge spot rates are in the low-20s to mid-20s. And I think it needs to - that needs to translate into the term market really before you can get to any cash, true cash breakeven.

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Operator [16]

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There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

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Todd M. Hornbeck, Hornbeck Offshore Services, Inc. - Co-Founder, Chairman, President & CEO [17]

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All right. I want to thank everybody for joining our call. Our next call or the fourth quarter conference call will be February 14, 2019, and we look forward to talking to you then. And happy holidays and everybody be safe during the holidays. Thank you very much.

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Operator [18]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.