U.S. Markets closed

Edited Transcript of HOS earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 Hornbeck Offshore Services Inc Earnings Call

COVINGTON Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Hornbeck Offshore Services Inc earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James O. Harp

Hornbeck Offshore Services, Inc. - Executive VP & CFO

* Todd M. Hornbeck

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

================================================================================

Conference Call Participants

================================================================================

* Ken Dennard

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Hornbeck Offshore Services Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ken Dennard. Thank you, sir. You may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, operator, and good morning, everyone. We appreciate you joining us for Hornbeck Offshore's conference call to review third quarter 2019 results and recent developments. We also welcome our Internet participants listening to the call live over the web.

Please note that information reported on this call speaks only as of today, October 31, 2019, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

During today's 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 -- from that which is projected today. You can locate additional information about the 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 yesterday's press release under the Investors section of the company's website, which is www.hornbeckoffshore.com or through the SEC website at www sec.gov.

This earnings call 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 as a means of disclosing material non-public information and for complying with disclosure obligations under SEC's 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 webcast.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Ken. Good morning, and welcome to our third quarter 2019 conference call. Joining me today is Mr. Jim Harp, our Chief Financial Officer.

Our third quarter results were disappointing. Market conditions for our vessels remained soft, principally in the U.S. Gulf of Mexico. We had expected that in the third quarter, the positive sentiment that we had observed previously would have translated into improved utilization and day rates but for some of that work was pushed to the right. While we are still seeing signs of improving demand fundamentals for offshore exploration, production and development activities globally and in our core markets and believe that there are positive indicators for future improvement, we simply have not seen them turn into improved financial performance yet.

There was an average of just over 20 deepwater drilling units actively working during the quarter, which is the best number we've seen since the middle of last year. In the Greater Gulf of Mexico region, that number was just over 26 drilling units actively working during the quarter, which was also an improvement. So the slope of this recovery is very gradual but its attitude is very stubborn. Part of this reality is that there are vessel operators that value market share more than we value improved long-term sustainable rates. That is their prerogative. We frankly don't see the long-term business rationale from such an approach. The challenge is that we are playing a game that does not have a shot clock, and so we are unable to predict with any certainty when the long-term opportunities will reach us or the short-term thinking will catch up with them. The brightest spot for us has been in our non-oilfield government business. Mexico and Brazil are also each showing promise and we remain committed to their deepwater futures. We still believe that the markets for our vessels will recover and that we are seeing early signs of recovery but are reticent to predict when that will translate into actual business improvement for us with sustainable utilization and day rates.

Certainly, our expectations for an inflection point in 2019 have been dimmed. Nevertheless, our strategy is to remain disciplined with our fleet of HOSMAX vessels in order to negotiate day rates and contract terms more in line with the value proposition that our unique fleet provides. Our fleet of HOSMAX OSVs is the largest fleet of vessels greater than 6,000 deadweight tons in the world. Whenever recovery truly arrives, this fleet will be among the most attractive on the planet to our customers given its size and capabilities.

On the Jones Act front, we believe it is significant that last week, for the third time in 10 years, CPP issued a notice of revocation of improper letter rulings that have authorized foreign vessels to engage in Jones Act trade on the OCS. These letters are the subject of ongoing litigation in federal court. We would view the revocation proceedings to its conclusion as a significant win for our industry and for HOS, in particular, given the rulings in question deal with the types of operations performed by U.S.-flagged MPSVs.

CPP and the Department of Homeland Security, whose acting Secretary notably signed the revocation order, has sent a strong message that it intends operations on the OCS to be Jones Act-compliant. There's a comment period and, as financial stakeholders in HOS, we would encourage you to submit comments in favor of the revocations.

Also, we were recently awarded approximately $18 million in damages related to our claims in our arbitration proceeding against a shipyard, which will be offset roughly $2 million awarded to the shipyard for its counterclaims. A limited appeal rights are available for the parties.

Finally, we continue to have constructive dialogue under our nondisclosure agreements with the professional advisers to the ad hoc group that reportedly represents holders of roughly 80% of our aggregated outstanding 2020 and 2021 senior notes. We have explored solutions with the representatives of these noteholders that involve repayment or refinancing for our near-term maturities and expect that we will continue to do so. We are well aware of the challenges to accomplish that objective with respect to our upcoming 2020 and 2021 maturities.

As noted on our last call, our practice is to share information concerning the company and, in particular, regarding these efforts through appropriate channels such as our press releases, conference calls or security filings. That is the manner in which we communicate with the investing public. We caution against anyone relying upon speculative information that may be published in media outlets that do not use company-provided information that has been appropriately disclosed as its source.

While the company remains optimistic regarding its ability to come to mutual agreeable terms with the noteholders, there can be no assurance that any of the contemplated transactions will ultimately come to fruition.

With that said, let me turn the call over to Jim to take you through the numbers in greater detail.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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 2019 and limited annual guidance for 2020 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.

Before moving into our review of the third quarter results, I wanted to briefly mention that we recently repaid the remaining $26 million in face value of our outstanding 1.5% convertible senior notes at par on their September 1 maturity date with cash on hand.

Our third quarter net loss was $41 million or $1.09 per diluted share compared to a reported net loss of $32 million or $0.84 per diluted share in the second quarter. Our reported operating loss was $30 million in the current quarter compared to an operating loss of $25 million in the second quarter of 2019.

EBITDA for the third quarter was just under a negative $2 million, down $5.5 million from a positive second quarter EBITDA of $3.6 million. While we were disappointed with the results for the third quarter of 2019, based on activity levels for our fleet since the end of the third quarter, we expect EBITDA to trend up from this quarter's levels during the fourth quarter of 2019. In fact, our effective day rates for the month of October have increased for both our OSVs and our MPSVs from third quarter levels. However, we are in the spot market with very little contract coverage. So anything can happen in the next 60 days, positively or negatively. Given the historically low levels of EBITDA we are currently producing, it remains prudent to note that short periods of spot contract awards or downtime between spot jobs, especially for our MPSVs, can skew or swing our quarterly EBITDA meaningfully either up or down.

As we mentioned on our last quarter's call, we calculate that for our active fleet of 31 new generation OSVs, each $1,000 increase in effective or utilization-adjusted day rates can yield approximately $11 million of incremental annual EBITDA. And for our fleet of 8 MPSVs, each $5,000 increase in effective day rates can yield approximately $15 million of incremental annual EBITDA.

For additional information regarding EBITDA as a non-GAAP financial measure, 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 guidance and do not intend to do so in the future.

Revenue for the third quarter of 2019 was $53 million or 7% lower than the sequential quarter. Average new generation OSV day rates for the third quarter of 2019 were approximately $19,800 or about $1,600 higher than the sequential quarter. Utilization for our new generation OSVs for the third quarter of 2019 was 23%, down from 32% sequentially while utilization for our MPSVs for the third quarter of 2019 was 39%, up from 37% sequentially. Adjusting for stacked vessel days, the effective utilization of our active fleet of new gen OSVs was 50%, down from 70% sequentially, whereas the effective utilization of our active MPSV fleet was 52% for the third quarter of 2019. Our effective or utilization-adjusted OSV day rates were roughly $4,600 or $1,250 lower than the sequential quarter.

Geographically, our foreign revenue was just under $19 million or 35% of our total revenue for the third quarter of 2019 compared to roughly $21 million or 36% of our total revenue for the second quarter of 2019.

Operating expenses were $41 million for the third quarter, in line with the sequential quarter and were at the low end of our guidance range. Aggregate cash operating expenses for the full calendar year 2019 are projected to be in the range of $162 million to $167 million. Our operating expenses in each fiscal period can vary based on charter mix, specialty jobs such as flotel work versus a standard OSV mud run, for example; geographic footprint; and active vessel count.

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 a predictive run rate for future quarters. Reflected in the projected cash OpEx for the full year of 2019 are the continuing effects of several cost containment measures we initiated over the last 5 years including, among other actions, the stacking of new generation OSVs and MPSVs on various states since October 1, 2014, as well as the company-wide head count reductions and across-the-board pay cuts for shoreside and vessel personnel.

As a reminder, we have provided you with updated full year and fourth quarter 2019 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 35.3 OSVs and 2.1 MPSVs for the full year of fiscal 2019, we may consider stacking or reactivating additional vessels as market conditions warrant.

Our third quarter general and administrative, or G&A, expense of just over $13 million was in line with the sequential quarter. G&A expense for the third quarter of 2019 was slightly above the midpoint of our guidance range. Our -- for calendar 2019, G&A expenses are expected to be in the range of $50 million to $52 million.

I will now review some of our other key balance sheet-related items for the third quarter. 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 the termination, these 2 remaining vessels were projected to be delivered in the second and third quarters of 2019, respectively. In February of 2019, we changed our forward guidance for the delivery dates of those 2 vessels to be in the second and third quarters of 2020, respectively. Due to the continued uncertainty of the timing and location of future construction activities, we are now updating our delivery date guidance related to these vessels to be the second and third quarters of 2021, respectively. For guidance purposes, we have tentatively projected to incur roughly 40% of the remaining cash outlays associated with this program during the second half of 2020.

More specifically, the aggregate cost of our fifth OSV newbuild program is expected to remain on budget at approximately $1.3 billion, of which $2 million, $23 million and $36 million are expected to be incurred during fiscal 2019, fiscal 2020 and fiscal 2021, respectively. The timing of the 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 30, 2019, we have incurred roughly 96% of the total expected project cost with circa $59 million left upon.

For an update on our historical and projected regulatory dry docking activity as well as expected cash outlays for maintenance and other CapEx, I would refer you to the data tables on Page 11 of 14 of our earnings release yesterday afternoon.

As of September 30, 2019, the company had an unrestricted cash balance of $136 million, which represents a sequential decrease of $6 million. As of September 30, 2019, an additional $56 million was presented as restricted cash on the balance sheet. Our net debt position, calculated using our unrestricted cash balance, and based on the carrying value and face value of our senior unsecured notes, first lien term loans, second lien term loans and senior credit facility, was approximately $1.1 billion as of September 30, 2019, flat with the sequential quarter.

As of September 30, 2019, all of our funded debt was long term, except for $224 million of 2020 senior notes due on April 1, 2020, which went current on our balance sheet in the second quarter of 2019. We currently have a blended average fixed cash coupon of about 5.9% on $796 million of total outstanding face value of secured and unsecured debt resulting in an annual run rate of cash debt service for our fixed rate debt in the amount of roughly $47 million. We also have a floating cash coupon of 8.4% on $450 million of total outstanding face value of first lien secured loans and the senior credit facility, resulting in an annual run rate of cash debt service for our floating rate debt in the amount of $38 million based on our current rates, which will vary over time.

Cash interest on our first lien term loans and senior credit facility is variable based on a floating rate LIBOR plus a fixed spread of 700 basis points and 500 basis points, respectively. The LIBOR rates applicable to the 30-day tranches we currently have outstanding under those 2 facilities are 1.8% and 2%, respectively. The LIBOR spread on our first lien term loans is next scheduled to increase to 725 basis points on June 15, 2020.

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 12 of our earnings release yesterday, which are also available in Excel format in the Investors section of our website.

We currently project that even with the currently depressed operating levels, cash generated from operations, together with cash on hand, 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 currently projected levels, coupled with the refinancing and/or further management of our funded debt obligations, we do not currently expect to have sufficient liquidity to repay the remaining amount of our 5 7/8% senior notes and the full amount of our 5% senior notes as they mature in fiscal years 2020 and 2021, respectively.

We remain fully cognizant of the challenges currently facing the offshore oil and gas industry, and we 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 our 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 in open market 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

All right. Thank you, Jim. I think, operator, we can open it up to questions now.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) Gentlemen, it appears we have no questions at this time. I would now like to turn the floor back over to you for additional comments.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

All right. I'd like to thank everyone for joining us and look forward to talking with you in the new year for the fourth quarter conference call. That will be February 13, 2020. Thank you, and everyone, have a safe holiday.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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