FEATURE: Staking a Claim in GOM and Beyond

Tuesday, June 18, 2002
Todd Hornbeck, who has quickly yet judiciously built a sizeable marine company at Hornbeck Offshore Services, Inc. in just five years, shares with MarineNews the secrets of his success. by Greg Trauthwein Upon meeting with Todd Hornbeck, President and CEO of Hornbeck Offshore Services, Inc. at the literal epicenter of big oil dollars - the recent Offshore Technology Conference (OTC) in Houston - one is continuously struck with the contrasts of the man and mission. "Cutting edge, but very conservative and practical in our approach to business" is his description of the company. The son of a successful entrepreneur who survived the devastating oil downturn of the early to mid 1980s, Hornbeck has staked his claim in the very industry that he watched in the early 1980s indiscriminately lay waste to competitors, colleagues and friends alike. Though he grew up in the industry, Hornbeck comes without the baggage traditionally associated with such an ascension, most notably the clutching to business traditional business practices because "that's the way it's always been done." In just five years (the company's fifth year anniversary was June 5, 2002) Hornbeck has taken this company from a staff of 27 to 480 today, and charted a future of growth built upon not only his own unique vision and outlook, but upon the minds and hearts of each individual under his employ. Hornbeck is in the House If there is no other point that he could make, Todd Hornbeck emphasizes that he will never grow the company simply for growth's sake. In the marine business, particularly the offshore sector, notorious for its high highs and low lows, he is carefully constructing a company that has the opportunity to remain profitable and liquid through the ups and downs. Hornbeck Offshore was started in 1997 to focus on offshore supply vessels (OSV) for the deepwater Gulf of Mexico market. At the time, Hornbeck saw "a big void" to service the emerging deepwater market with superior vessels and support. "Deepwater is the only frontier left to find 'elephant' fields," he said. Simple, right? A young man with a dollar and a dream, industry experience and contacts to boot, starts or buys a company and goes about the business of making money the traditional way. Compelling, but incorrect, in this case. There is nothing standard about the way in which Hornbeck runs his business, or more accurately, the way in which he allows his business to be run. "We have a bottom up organization, in that information is fed up through the organization," Hornbeck said. "The key to getting the best (people and results) is to make your employees managers, and make them responsible for the companies success." Empowering employees with decision making responsibility, however, is not the only way in which Hornbeck has quickly crafted a successful organization, an organization which recently reported that quarterly revenues jumped 118 percent compared to last year's same quarter results. As with any other manufacturing process, standardization is a major factor in helping to drive down costs, as repeatability lends itself to savings over the long haul. The easiest manner that Hornbeck could have amassed his fleet of vessels would have been to approach several shipyards with performance parameters, allowing them to provide stock or modified designs to fulfill the need. While this would have been the most expedient, and perhaps the most cost effective, Hornbeck wanted no part of it. His first step was to assemble a top-notch in-house engineering team to create proprietary designs, to create a vessel which will fulfill the increased operational demands inherent in servicing rigs farther from shore. "From the outset of construction of our first New Breed design, our objective has been to build a fleet of vessels that are versatile enough to serve the broadest array of oilfield exploration, development and production support activities, including deepwater rig tendering, geophysical surveying, well stimulation, remotely operated vehicle and subsea construction and heavy equipment transportation," explained Carl Annessa, vice president and COO. "The idea is not to just build a bigger truck," Hornbeck said. While Hornbeck is adamant about the use of technology to empower vessels with the extra bells and whistles customers will need to maximize efficiencies in the deepwater environment, he is equally firm that the company only utilize proven products and systems, as demonstrated inside or out of the maritime realm. A Balanced Portfolio While Hornbeck Offshore was created with the primary purpose of taking advantage of the burgeoning deepwater offshore market needs, it is far from a one-dimensional organization that is prisoner to the whims of the cyclical offshore oil production market. To help "smooth the curves," Hornbeck astutely sought and bought into the tug and tank barge coastwise business - serving the U.S. Northeast and Puerto Rican markets - and currently commands a fleet of 16 barges and 13 oceangoing tugs. "It has been a very stable business for us, not as dynamic, of course, as the deepwater offshore, but stable," Hornbeck said. This unit has 170 employees in New York alone, largely the result of the acquisition of that end of the business from Amerada Hess, and the company, in fact is the number four player in the New York market, moving 50 to 60 million barrels per year in and around New York Harbor. The challenge, of course, in this business is the looming OPA 90 regulations which demand double hull tonnage by 2015. While Hornbeck acknowledges the need to rebuild the fleet, which will be scrapped by regulation, he is currently holding steady. "I don't think the market has shown the rate structure to support newbuild tonnage ... yet," he said. "We will look at the market long and hard in coming years," but we have the advantage that it is not our only business. Clearly, double skin is the way to go. The Hornbeck Offshore deepwater fleet - its self-dubbed "new breed" of Offshore Supply Vessel - is equally capable of adding the company's versatility. While designed for deepwater GOM operation, each is capable of working at locales around the globe. As an additional reference to the fleet of OSVs prowess on the job, each is named after a registered stud Clydesdale horse. Business (Not) as Usual Hornbeck has proven that breaking traditional molds can be profitable, given the proper structure and personnel. Though seemingly more costly, the creation of in-house designs was quintessential in creating a new company. "I've been in this industry my entire life, so I've seen a lot of the shortcomings, and we were readily able to identify problems and solve them." A short list of those problems, according to Hornbeck, includes station keeping, liquid mud circulation and pumping, segregation systems, fuel efficiency and safety systems. One of those problems, in his mind, was the acceptance of stock vessels for unique operational conditions. "We put aside a lot of old methodologies in going out to shipyards with a vessel to build." In creating its own design, the company transferred its personnel philosophy in becoming responsible to its customers, the oil companies, for the performance of its vessels and, ultimately, for their profitability. "Oil companies want repeatability and dependability ... they don't want surprises," Hornbeck said. "Supply boats are the umbilical cord to offshore exploration and production rigs. If a boat goes down due to a safety issue, for example, the oil company is risking maybe $350 to $400 thousand dollars ... per day." "We want to be considered the company of choice for the oil companies, because we are the safest, most reliable and offer the best operations/solutions," Hornbeck said. While it takes months to bid out the shipyard contract for its boats, Hornbeck believes the stringent nature and firm negotiating policy pays dividends, and minimizes the effects of building a unique design. "The business is traditionally driven by what the shipyards tell us they can build. With our method, this is not the case, and it allows us to put a lid on costs." Hornbeck has employed his method to drive his "young, energetic" company to success, sizing and seizing opportunities where others are perhaps shying from given the current tough economic client. Most recently, in mid-April, Hornbeck announced its plan for a new vessel construction program for its wholly-owned subsidiary Hornbeck Offshore Services, LLC, which entails the construction of eight additional OSVs, with the construction of four 240-ft. DP-2 Class vessels to commence soon at Leevac Industries. The first four vessels are expected to be delivered in 2003, and each will be funded by current cash and projected free cash flow from operations. "Our assessment of the visible demand for deepwater tonnage indicates a need for more equipment in mid to late 2003," said Hornbeck. "Since the majority of our existing equipment is, or soon will be, contracted long term, we believe now is the time for us to build more vessels with our proprietary design." Hornbeck Offshore Reports 1Q Results Hornbeck Offshore reported revenues for the quarter ended March 31, 2002 increased 118 percent to $22.7 million compared to $10.4 million for the same quarter in 2001. Operating income was $9.3 million or 41.0 percent of revenues for the first quarter of 2002, compared to $4 million or 38.5 percent of revenues for the same quarter in 2001. First quarter 2002 net income was $3.5 million compared to net income of $1.8 million for the first quarter 2001. The primary reason for the company's revenue growth for the first quarter 2002 over the prior year is the significant increase in size of the company's fleet since April 2001. Hornbeck's operating fleet grew from 18 vessels at the end of the first quarter 2001 to 39 vessels at the end of the first quarter 2002. The company took delivery of three newly builtdeepwater OSVs on April 27, 2001, November 6, 2001 and February 20, 2002, respectively; and it acquired nine ocean-going tugs and nine ocean-going tank barges from the Spentonbush/Red Star Group, affiliates of Amerada Hess Corporation, on May 31, 2001. Accordingly, the 240-ft class HOS Innovator, the 265-ft. class BJ Blue Ray and the Spentonbush/Red Star acquisition contributed to the company's revenue growth for all of the first quarter of 2002 and the 240-ft class HOS Dominator contributed to the company's revenue growth for approximately one month of the first quarter of 2002. On May 1, 2002, Hornbeck Offshore Services, LLC signed a definitive agreement with Leevac Industries, LLC, for the construction of the first four vessels of its recently announced eight-vessel newbuild program. The contract provides for the delivery of all four of the 240-ft. DP-2 class deepwater offshore supply vessels during the second half of 2003. Aggregate construction costs for the first four vessels, before allocation of construction period interest, are expected to be approximately $53 million. Hornbeck is currently seeking price bids from shipyards for the last four vessels. Hornbeck also recently contracted the 265-ft. class HOS Brimstone, currently scheduled for delivery in early June 2002, to an existing customers. Upon delivery, the vessel will immediately commence service under a one-year time charter, with two one-year renewal options, with a large international exploration and production company. Todd Hornbeck, President and CEO, stated, "While we designed our 240-ft. class and 265-ft. class vessels primarily for deepwater drilling applications, all of our last three delivered newbuilds have gone into specialty work. With the contract of the HOS Brimstone, we will now be able to demonstrate the special capabilities that, we believe, make our 265-ft. class design uniquely suited for ultra-deepwater drilling support."
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