May 4, 2006
Hornbeck tanker-to-MPSV conversion cost soars
Hornbeck Offshore Services, Inc. (NYSE: HOS) now expects its plan to convert two U.S.-flag sulfur carriers into 370 ft multipurpose platform supply vessels to cost around $110 million rather than the $65 million initially estimated when the project was announced a year ago.
The company has now contracted to complete the retrofit and conversion process on the East Coast and says the cost increase is due to design enhancements requested by customers and the higher than originally anticipated labor and material costs that are prevailing at U.S. shipyards, particularly since hurricanes Katrina and Rita. Since the inception of this program, the company has incurred approximately $13.4 million, with $1.5 million spent during the first quarter of 2006. Anticipated delivery of the two converted vessels is projected to be in mid-2007 and late-2007, respectively.
"While our capital investment in our two MPSVs is expected to increase about 70%," said Chairman, President and CEO Todd M. Hornbeck we anticipate that the vessels' improved functional capabilities will support much higher dayrates and better utilization than was first projected. This should allow us to achieve, or even exceed, our targeted return on invested capital parameters, despite the increased cost to bring these unique vessels to market."
The update on the conversion plan, along with updates on other OSV tug barge orders, came as part of Hornbeck's announcement of results for the first quarter ended March 31, 2006.
These reflected soaring dayrates in the OSV market and improved margins in the tug and tank barge sector.
First quarter revenues increased 61.2% to $61.1 million compared to $37.9 million for the first quarter of 2005. Operating income was $24.5 million, or 40.2% of revenues, for the first quarter of 2006 compared to $12.5 million, or 33.0% of revenues, for the prior-year quarter.
These results were driven by record dayrates in the U.S. Gulf of Mexico (GoM) for the company's offshore supply vessel (OSV) fleet and a 60.6% increase in the average barrel-carrying capacity of the Hornbeck Offshore tug and tank barge (TTB) fleet.
Operating income, as reported, includes a $1.2 million charge for stock-based compensation expense related to the impact of FAS 123R, which became effective January 1, 2006. Excluding this charge, operating income was $25.7 million, or 42.1% of revenues, for the first quarter of 2006.
EBITDA for the first quarter of 2006 was $32.0 million, which was a 73.0% increase over the first quarter 2005 EBITDA of $18.5 million and exceeded the high-end of the Company's first quarter 2006 guidance range of $28.0 million to $30.0 million. Excluding the impact of FAS 123R, adjusted EBITDA for the first quarter of 2006 was $33.2 million.
Net income for the first quarter of 2006 was $14.9 million, or $0.54 per diluted share, compared to $5.2 million, or $0.25 per diluted share in the year-ago quarter. Diluted EPS for the first quarter of 2006 was more than double the diluted EPS for first quarter of 2005, despite having an additional 6.4 million diluted shares outstanding in the first quarter of 2006. Included in net income for the first quarter of 2006 was approximately $3.1 million ($2.0 million after-tax, or $0.07 per diluted share) of interest income, up from $0.1 million in the first quarter of 2005.
Todd M. Hornbeck stated, "Our first quarter results reflect the continued expansion of dayrates in our OSV segment to historically high levels. We believe that demand for new generation vessels, driven by the increased offshore activity in the Gulf of Mexico, especially in deepwater regions, support a robust dayrate environment lasting through at least 2007. In addition, the combination of switching from contracts of affreightment (COAs) to time charters and the diversification of new double-hulled tank barges into upstream services, such as deepwater well- testing, has helped drive the substantial improvement in our operating margins in the TTB segment."
"Over the past eight years," said Hornbeck, "our proprietary vessels have brought new technology and capabilities to the oilfield. We have recently experienced demand for these vessels beyond traditional applications and are just beginning to tap the potential of the numerous service offerings that our equipment can provide outside of the oilfield. Our current expansion programs will provide the capacity necessary to service these markets and continue to enhance our design features."
Capital Expenditures Outlook
The company says it expects maintenance capital expenditures for the second quarter of 2006 to be approximately $5.8 million and maintenance capital expenditures for the full calendar years 2006 and 2007 to be approximately $19.3 million and $18.0 million, respectively.
In September 2005, Hornbeck Offshore announced its fourth new vessel construction program for its OSV business segment, which was to be comprised of an innovative high-end proprietary class of vessel that would add approximately 20,000 deadweight tons of capacity at an aggregate cost of $170.0 million (Phase 1).
However, in February 2006, the company decided to defer contracting these vessels until more favorable shipyard conditions materialize. While in-house design and engineering of this proprietary new class of vessels continues in earnest, the Hornbeck has removed any contribution from these vessels from its earnings guidance pending further notice.
In conjunction with the deferral of Phase 1, the company also announced, in February 2006, a second phase of its OSV newbuild program No. 4 that would add up to six 240 EDF class vessels to its proprietary OSV fleet, representing an incremental 17,000 deadweight tons of capacity at an aggregate cost of $120.0 million (Phase 2).
Today, the company announced that it has further expanded the scope of this newbuild program from six vessels to a total of nine proprietary OSVs, bringing the aggregate capacity of Phase 2 of this program to approximately 26,000 deadweight tons. These nine vessels will be comprised of a mix of proprietary 240 ED and 240 EDF class OSVs with projected delivery dates ranging from early 2008 through early 2009.
Hornbeck has now contracted for the construction of seven of the nine vessels and has an option with respect to the remaining two newbuilds. Based on such contracts and current estimates, the total cost of the nine new OSVs to be constructed under Phase 2 of this program is now expected to be approximately $185.0 million in the aggregate.
In September 2005, Hornbeck announced a second new vessel construction program for its TTB segment. This newbuild program is expected to add approximately 400,000 barrels of total barrel-carrying capacity of double-hulled barges and the related "power" units to the TTB fleet at a cost of approximately $105.0 million in the aggregate. As previously reported, three 60,000-barrel double-hulled barges, totaling 180,000 barrels of capacity, are under construction at a Gulf Coast shipyard.
The company has also recently agreed to acquire up to four 3,000 horsepower ocean-going tugs, pending due diligence. Once the acquisition and retrofit of these tugs is completed, the cost of this component of the overall project budget is expected to range from $20.0 million to $24.0 million. The precise number and specifications of the remaining 220,000 barrels of barge capacity and any additional tugs to be constructed or retrofitted under this program will be finalized as "certain internal milestones" are completed, including the negotiation of shipyard contracts.
All of the vessels to be constructed or retrofitted under the TTB Newbuild Program No.2 have projected delivery dates starting in early 2007 and ending in mid-2008.