Can Hornbeck Offshore Meet Its 2009 Obligations?

• The Company: Hornbeck Offshore, provides offshore supply vessels to the energy industry.
• The Filing: FORM 10-Q filed with the SEC on November 11, 2008.
• The Finding: Hornbeck Offshore does not believe that short-term fluctuations in energy prices will affect the long-range investment plans of major oil companies, and remains upbeat on long-term prospects for day rate pricing of its offshore supply vessels. The Company is dependent, however, on cash flow generated from existing supply vessels to meet contractual obligations on new builds under construction.

The Upshot: Chairman and Chief Executive Officer Todd Hornbeck told analysts on the third-quarter 2008 earnings call that a growing world population, developing economies in China, India, Latin America, and the Far East, and projected long-term overall economic growth– despite existing global events— will result in net increases in demand for hydrocarbons.

The consensus is that by the year 2030 the world will require 678 quadrillion BTU’s per year compared to about 445 quadrillion today. Today about 275 quadrillion BTU’s are derived from oil and gas. By the year 2030 that number will climb to 385 quadrillion BTU’s, a 40 percent increase, added Hornbeck.

Average new generation offshore supply vessel (OSV) day rates for the third quarter ended September 30 improved to $23,884 compared to $22,605 for the same period in 2007, favorably impacted by continued market strength in its Gulf markets. In addition, spot rates for the high-end 240-foot class vessels seem to be holding up in the $25,000 to $30,000 range. New generation OSV utilization increased 90 basis points year-on-year to 96.1 percent for the third quarter.

The company heads into 2009 with strong contract coverage. Overall, 64 percent of available vessel days are already contracted for the full calendar year. In addition, as Hornbeck Offshore is principally a deepwater player, management believes the company will be impacted less by the general economic challenges ahead than other service companies that may be exposed to more volatile shelf-based project portfolios.

In its current operating fleet, 19 of the 38 new generation OSVs are chartered under long-term contracts with expiration dates ranging from March 2009 through June 2012, principally in the Gulf of Mexico. In addition, of the 16 new generation OSVs yet to be delivered under the company’s fourth OSV new build program, seven of these OSVs have already been committed to multi-year contracts (while still under construction).

The 16 new generation OSVs should be placed in service on various dates over the next two years. Estimated cost to complete the OSV program is approximately $230 million.

Management currently projects the high point of its aggregate construction draw schedule to result in a peak draw under its $250 million revolving credit facility of approximately $175 million, sometime in mid-2009. Assuming a maximum draw of $175 million and relatively stable market conditions, the company anticipates being able to repay the revolving credit facility in full and replenish depleted cash position to somewhere in the range of approximately $100 million to $150 million by the end of 2010 (up from a current $21 million at September 30).

The Question: Utilization rates at Hornbeck Offshore could decline in 2009, due to drydocking of OSVs for re-certification and discretionary vessel enhancements. Given uncertainty in forward exploration activity by oil companies, might the foregoing events lead to lost revenue and a potential credit crunch at Hornbeck Offshore in second-half 2009?