Hornbeck Offshore Services, Inc. (NYSE: HOS) announced results for the third quarter ended September 30, 2009.
Third quarter 2009 revenues decreased 17.4% to $90.1 million compared to $109.1 million for the third quarter of 2008. Operating income was $27.1 million, or 30.1% of revenues, for the third quarter of 2009 compared to $52.6 million, or 48.2% of revenues, for the prior-year quarter. Net income for the third quarter of 2009 was $13.8 million, or $0.51 per diluted share, compared to $33.3 million, or $1.23 per diluted share for the year-ago quarter. EBITDA for the third quarter of 2009 was $43.6 million compared to third quarter 2008 EBITDA of $65.5 million. The decrease in revenues, operating income and EBITDA was primarily due to a year-over-year decline in fleetwide average dayrates and utilization for the company's Upstream segment. Included in third quarter 2009 results was a $0.1 million ($0.1 million after-tax, or $0.00 per diluted share) gain on the August 2009 sale of three conventional OSVs for net cash proceeds of $6.1 million compared to a $6.4 million ($4.1 million after-tax, or $0.15 per diluted share) gain on the August 2008 sale of three conventional OSVs. For additional information regarding EBITDA as a non-GAAP financial measure, please see Note 10 to the accompanying data tables.
Upstream Segment. Revenues from the Upstream segment were $73.7 million for the third quarter of 2009, a decrease of $14.3 million, or 16.3%, from $88.0 million for the same period in 2008. The vessels placed in service since the third quarter of 2008 under the company's ongoing newbuild and conversion programs accounted for a $27.5 million increase in Upstream revenues. These incremental revenues were offset by a $35.6 million decrease in revenue from lower effective dayrates for the company's new generation offshore supply vessels ("OSVs") that were in service during each of the quarters ended September 30, 2009 and 2008 and a $6.2 million decrease in revenue from the company's non-core conventional OSVs that were in service during the quarter ended September 30, 2008, but which were either stacked or sold on various dates since then. Soft OSV market conditions in the U.S. Gulf of Mexico ("GoM"), particularly on the shallow Continental Shelf and in the deepwater transition zone, contributed to Upstream operating income decreasing 53.6% to $23.8 million, or 32.3% of revenues, for the third quarter of 2009 from $51.3 million, or 58.3% of revenues, for the third quarter of 2008. Excluding gains recorded on asset sales from both the current and prior-year quarterly results, operating income in the current quarter would have decreased to $23.9 million, or 46.8%, from $44.9 million in the third quarter of 2008. The weak demand for 200 class new generation OSVs led to the company's decision to stack seven such OSVs on various dates during the second and third quarters of 2009 and to stack an eighth vessel in October 2009. Average new generation OSV dayrates for the third quarter of 2009 declined to $20,915 compared to $23,884 for the same period in 2008. New generation OSV utilization was 71.9% for the third quarter of 2009 compared to 96.1% for the same period in 2008. Effective new generation OSV utilization, which excludes the impact of stacked vessels, was 83.2% for the three months ended September 30, 2009.
Downstream Segment. Revenues from the Downstream segment of $16.4 million for the third quarter of 2009 decreased by $4.6 million, or 21.9%, compared to $21.0 million for the same period in 2008. Downstream revenues were unfavorably impacted by continued lower demand for the company's ocean-going tug and tank barge (TTB) equipment, which was primarily driven by soft market conditions that resulted in the stacking of all of its single-hulled tank barges on various dates since the second quarter of 2008. This decrease was partially offset by a $5.4 million contract cancellation payment recognized during the third quarter. The company's double-hulled tank barge average dayrates were $28,503 for the third quarter of 2009 compared to $22,642 for the same period in 2008. Excluding the contract cancellation fee revenue, double-hulled tank barge average dayrates would have been $18,852, which is roughly $3,790, or 16.7%, lower than the prior-year quarter. Utilization for the double-hulled tank barge fleet was 67.6% for the third quarter of 2009 compared to 80.2% for the same period in 2008. The decrease in the company's double-hulled tank barge utilization was the result of the continued decline in market demand for double-hulled equipment, particularly black-oil barges, driven by the current economic slowdown. This adverse effect of soft demand for this type of equipment has been further exacerbated by incremental double-hulled tank barge newbuild deliveries in the industry that occurred during the first nine months of 2009.
General and Administrative ("G&A"). G&A expenses of $6.9 million for the third quarter of 2009 were 7.7% of revenues compared to $8.7 million, or 8.0% of revenues, for the third quarter of 2008. Due to proactive cost-cutting measures and despite lower revenues, third quarter G&A expense margin was below the company's 2009 annual guidance range of 9% to 10% of revenues. The company allocated 83% of its third quarter G&A expenses to the Upstream segment and 17% to the Downstream segment.
Depreciation and Amortization. Depreciation and amortization expense was $16.5 million for the third quarter of 2009, or $3.7 million higher than the third quarter of 2008. This increase was due to the incremental depreciation related to the full- or partial-quarter contribution from seven OSVs and two MPSVs that were placed in service since the third quarter of 2008, partially offset by the reduction in depreciation and amortization following the sale of seven conventional OSVs on various dates during 2008 and 2009. Depreciation and amortization expense is expected to continue to increase from current levels as the vessels remaining under the company's current newbuild and conversion programs are placed in service and when these and any other recently acquired and newly constructed vessels undergo their initial 30-month and 60-month recertifications.
Interest Expense. Interest expense increased $4.2 million during the three months ended September 30, 2009 compared to the same period in 2008. The increase in interest expense is primarily attributable to a decrease in capitalized interest costs and additional interest costs related to the company's new $250.0 million of 8.000% senior notes due 2017 issued in August 2009.
Nine Month Results
Revenues for the first nine months of 2009 decreased 4.3% to $297.6 million compared to $311.1 million for the same period in 2008. Operating income was $77.5 million, or 26.0% of revenues, for the first nine months of 2009 compared to $130.3 million, or 41.9% of revenues, for the prior-year period. Net income for the first nine months of 2009 decreased 49.4% to $41.1 million, or $1.52 per diluted share, compared to $81.2 million, or $3.00 per diluted share for the first nine months of 2008. Excluding the second quarter 2009 Downstream non-cash impairment charges of $26.7 million, or $0.62 per diluted share, operating income, operating margin, net income and diluted EPS for the first nine months of 2009 were $104.2 million, 35.0%, $58.0 million and $2.15 per share, respectively. The decrease in revenues compared to the prior-year period is due to a market-driven decline in effective dayrates for vessels that were operating during both the nine months ended September 30, 2008 and 2009, partially offset by the incremental contribution of vessels added to the company's fleet since the third quarter of 2008. The company has been able to mitigate the impact of lower revenues by cutting or deferring costs resulting in year-over-year operating expense savings of $21.2 million. These cost savings have been generated principally by stacking vessels and other measures, including selling certain non-core assets. During the first nine months of 2009, the company recorded a gain of $0.3 million ($0.2 million after-tax or $0.01 per share) on the sale of one older, lower horsepower tug and three conventional OSVs. The company's net income for the first nine months of 2008 included an $8.4 million ($5.4 million after-tax or $0.20 per share) gain on the sale of four conventional OSVs.
Based on the key assumptions outlined below and in the attached data tables, the following statements reflect management's current expectations regarding future earnings and certain events. These statements are forward-looking and actual results may differ materially. Other than as expressly stated, these statements do not include the potential impact of any future capital transactions, such as vessel acquisitions, divestitures, unexpected vessel repairs and shipyard delays, business combinations, financings and unannounced newbuild programs that may be commenced after the date of this disclosure. For additional information concerning forward-looking statements, please see the note at the end of this news release.
Revolving Credit Facility. On November 4, 2009, the company amended and extended its existing revolving credit facility, which will maintain its $250.0 million borrowing base, but now includes an accordion feature that allows, under certain conditions, for the expansion of the senior secured facility up to an aggregate of $350.0 million. The amended facility, among other changes that enhance the company's financial flexibility, also extends the maturity from September 2011 to March 2013. With the amended facility, the company has the option of borrowing at a variable rate of interest equal to either (i) LIBOR or (ii) the greater of the Prime Rate, the Federal Funds Effective Rate plus 1/2 of 1% or one-month LIBOR plus 1%; plus in each case an applicable margin. The applicable margin for each base rate is determined by a new pricing grid, which is based on the company's leverage ratio, as defined in the credit agreement governing the amended revolving credit facility. Unused commitment fees are payable quarterly at the new annual rate of 50.0 basis points of the unused portion of the borrowing base of the amended facility. The company also swapped the vessels pledged as collateral under the amended facility so as to reduce the total number of such vessels to 19 new generation OSVs. None of the company's Downstream vessels are now pledged under the facility. As of September 30, 2009, there were no amounts drawn under of the company's revolving credit facility and $0.9 million posted in letters of credit, which resulted in $249.1 million of credit immediately available under such facility. The amended facility is available for working capital and general corporate purposes, including acquisitions, additional newbuild and conversion programs and other capital expenditures.
Accounting for Convertible Senior Notes. In accordance with the required change in method of accounting for convertible debt instruments issued by the Financial Accounting Standards Board (FASB), effective January 1, 2009, the company recorded incremental non-cash original issue discount ("OID") interest expense, net of capitalized interest, of $1.2 million for the third quarter of 2009, or $0.03 per diluted share, and expects to record an incremental $4.8 million of such interest for the full-year 2009, or $0.11 per diluted share. In addition, this new accounting treatment requires retrospective application to the company's historical financial results, including long-term debt and stockholders' equity. For the prior-year three-month and nine-month periods ended September 30, 2008, incremental non-cash OID interest expense, net of capitalized interest, was $0.3 million, or $0.01 per diluted share, and $1.4 million, or $0.03 per diluted share, respectively, for each such period.
Sale of Non-Core Assets. In October 2009, the company completed the sale of five single-hulled tank barges. The Energy 6503, Energy 6505, Energy 7001, Energy 7002 and Energy 8701 were sold to a private buyer for use outside of the United States. These vessels were sold for aggregate net cash proceeds of $3.1 million, which represented a pre-tax gain on sale of assets of approximately $0.7 million, or $0.02 per diluted share.
Revised Annual 2009 Guidance. In recognition of its actual results for the first nine months of 2009 and its revised outlook on prevailing market conditions for the remainder of the 2009 guidance period, the company now expects total EBITDA for the full-year 2009 to range between $185.0 million and $200.0 million and expects full-year diluted EPS for fiscal 2009 to range between $1.63 and $1.97. EPS guidance was also lowered to reflect the impact of additional interest expense associated with the company's recent senior note offering and the amendment of its revolving credit facility. Excluding the special non-cash Downstream impairment charges recorded during the second quarter of 2009 and incremental non-cash OID interest expense, adjusted EPS for fiscal 2009 is expected to range between $2.36 and $2.70.
Key Assumptions. The company's forward earnings guidance, outlined above and in the attached data tables, assumes that current Upstream and Downstream market conditions remain constant. Fleetwide average new generation OSV dayrates are anticipated to remain in the $19,000 to $21,000 range. With the recent stacking of eight 200 class new generation OSVs since May 2009 and expected incremental days out-of-service for shipyard modifications and the mobilization of two vessels for long-term charters in Latin America, the company expects its fleetwide new generation OSV utilization to remain in the low-70% range for the fourth quarter of 2009.
The company's full-year 2009 Upstream guidance includes a partial-year contribution from additional vessels to be delivered under its MPSV program and its fourth OSV newbuild program in accordance with the estimated newbuild delivery expectations discussed below. None of the company's remaining three conventional OSVs, all of which are now stacked, are expected to contribute any operating results for the remainder of the fiscal 2009 guidance period. The 2009 Downstream guidance reflects an operating fleet comprised solely of nine double-hulled tank barges and nine ocean-going tugs for the remainder of the 2009 guidance period. The company's Downstream segment is projected to contribute 2009 EBITDA in the range of 8% to 10% of the mid-point of the revised company-wide fiscal 2009 guidance range.
Due to recent cost cutting measures, the company expects that cash operating expenses per vessel-day in fiscal 2009 for its active fleet will be less than fiscal 2008 levels, excluding contract-related costs recoverable through higher dayrates or other revenue. The company is also mitigating the adverse impact of revenue decreases on its operating margins by stacking underutilized vessels, which should result in significant additional operating cost savings and lower the company's operating risk profile. G&A expenses are expected to be in the range of 8% to 10% of revenues for the remainder of the 2009 guidance period. The projected annual stock-based compensation expense, depreciation, amortization and net interest expense that underpin the company's diluted EPS guidance for the full-year 2009 are included in the attached data tables. Projected quarterly stock-based compensation expense, depreciation, amortization and net interest expense for the quarter ending December 31, 2009 are expected to be $2.3 million, $12.5 million, $4.5 million and $9.7 million, respectively. The company's annual effective tax rate is expected to be 36.9% for fiscal 2009.
Capital Expenditures Outlook
Update on Maintenance Capital Expenditures. Please refer to the attached data table for a summary, by period, of historical and projected data for each of the following three major categories of maintenance capital expenditures: (i) deferred drydocking charges; (ii) other vessel capital improvements and (iii) non-vessel related capital expenditures. The company expects total maintenance capital expenditures for the full-year 2009 to be approximately $38.2 million, only $28.6 million of which is considered annually recurring. Over the next couple of years beyond 2009, the company expects that its annually recurring maintenance capital expenditure budget, inclusive of regulatory drydockings, for its growing fleet of vessels will range between $35.0 million and $45.0 million per year.
Update on MPSV Program. The company's MPSV program consists of the conversion of two U.S.-flagged coastwise sulfur tankers at domestic shipyards into 370 class DP-2 new generation MPSVs and the construction of two T-22 class DP-3 new generation MPSV newbuilds in foreign shipyards. The first two vessels under this program, the T-22 class DP-3 MPSV, HOS Achiever, and the converted DP-2 MPSV, HOS Centerline, were placed in service in October 2008 and late March 2009, respectively. The second newbuild MPSV under this program, the HOS Iron Horse, is expected to be placed in service during the fourth quarter of 2009. The HOS Strongline, the second converted DP-2 MPSV, is expected to be delivered from the shipyard during the fourth quarter of 2009 and, after a period of commissioning and final certification, is expected to be placed in service during the first quarter 2010. With these expected in-service dates, the company will own and operate an average MPSV fleet complement of 1.9 vessels for the fiscal year 2009. Based on internal estimates, the aggregate cost of this program is expected to be approximately $480.0 million. From the inception of this program through September 30, 2009, the company has incurred $470.8 million, or 98.1%, of total anticipated project costs, including $33.1 million incurred during the third quarter of 2009.
The HOS Centerline, the company's first 370 class MPSV, continues to operate in offshore supply and industrial service on a spot basis in the GoM. This vessel required 10 days of downtime during the third quarter and is expected to incur 40 days of downtime during the fourth quarter to complete final documentation activities related to additional certifications. The HOS Centerline has now received class notations under Subchapter L (offshore supply vessel), Subchapter I (industrial vessel), Subchapter D (tank vessel) and Subchapter O (bulk dangerous cargo vessel) of applicable laws, becoming the first vessel to achieve all four notations in U.S. history, and more importantly, the only vessel with this type of flexibility and capability in the world. The HOS Strongline, the sister vessel to the HOS Centerline, is expected to receive these same notations.
Update on OSV Newbuild Program #4. The company's fourth OSV newbuild program consists of vessel construction contracts with three domestic shipyards to build six 240 ED class OSVs, nine 250 EDF class OSVs and one 290 class OSV, respectively. Eleven of these 16 new generation DP-2 OSVs have been awarded customer contracts prior to their shipyard delivery. Eleven OSVs have been added to the company's Upstream fleet under this program on various dates since May 2008, including two vessels that were placed in service in October 2009. The HOS Eagleview, the fifth 250 EDF class OSV delivered under this program, commenced operations under a multi-year charter performing military support services and the HOS Silver Arrow, the fifth 240 ED class OSV delivered under this program, was placed in service to the GoM spot market. The HOS Sweet Water, the sixth 240 ED class OSV delivered under this program, is expected to be placed in service to the GoM spot market in December 2009.
Based on the above schedule of projected vessel in-service dates, the company expects to own and operate 47 and 51 new generation OSVs as of December 31, 2009 and 2010, respectively. These vessel additions result in a projected average new generation OSV fleet complement of 43.2 and 49.8 vessels for the fiscal years 2009 and 2010, respectively. Inclusive of the vessel deliveries referred to above, the aggregate cost of the company's fourth OSV newbuild program is expected to be approximately $445.0 million. From the inception of this program through September 30, 2009, the company has incurred $382.3 million, or 85.9%, of total expected project costs, including $24.7 million incurred during the third quarter of 2009.
Please refer to the attached data tables for a summary, by period, of historical and projected data for each of the contracted growth initiatives outlined above. All of the above capital costs and delivery date estimates for contracted growth initiatives are based on the latest available information and are subject to change. All of the figures set forth above represent expected cash outlays and do not include the allocation of construction period interest.
Update on Liquidity. The company believes that its current working capital, available capacity under its recently amended revolving credit facility and projected cash flows from operations for the fiscal years 2009 and 2010 will be sufficient to meet its anticipated operating needs, debt service and the total remaining cash requirements under its MPSV and OSV newbuild programs of approximately $71.9 million. These construction payments are expected to be incurred over the next 12 months ($37.8 million in the remainder of 2009 and $34.1 million in 2010), as outlined in greater detail in the attached data tables. As of September 30, 2009, the company had $61.9 million of cash and cash equivalents. During the third quarter, the company closed on a private placement of $250.0 million of 8.000% senior notes due 2017. Of the $237.3 million estimated net proceeds from the offering, the company used $200.0 million to repay the then-outstanding balance under its revolving credit facility. As of November 5, 2009, the company's $250.0 million revolving credit facility remains undrawn.