Value Investors Club / HORNBECK OFFSHORE SVCS INC (HOS)

Long HOS (Hornbeck Offshore Services)

What goes around comes around. Such is the nature of cyclical stocks, especially commodity-sensitive

ones. The recent precipitous drop in oil has brought HOS back to levels not seen since 2010. This idea was

presented in 2010 by Lukai after the moratorium on deep-water drilling took hold and the stock proceeded

to go up more than 3x over the following several years. Today the EV is back to the same levels

while HOS has a much larger fleet that is high quality with an average age of 7 years versus the industry

average of over 20 years. Granted oil is much lower but the stock is discounting the very low end of historical dayrates and utilization levels

Hornbeck has the largest Jones Act new generation OSV fleet in the Gulf of Mexico among the domestic

public company peer group which includes Gulfmark. Non-domestic peers include including Solstad, Deep Sea Supply, Siem Offshore, Groupe Bourbon. The current and pro-forma fleet are detailed below.

HOS Fleet Data

Q215e 2015e 2016e

New Gen OSVs active fleet 43 45 44

New Gen OSVs stacked fleet 18 15.8 18

Total OSVs 61 60.8 62

MPSVs 6 5.8 8.3

Total Upstream fleet 67 66.6 70.3

HOS has managed cycles well historically and is poised to do the same this time around

-HOS has historically commanded 2x day rates of peers over cycle as well as higher utilization, 87%

vs 67% peers. Newer age and higher quality fleet is typically first in and last out and able to retain

value better than the average fleet

-Since 2007, HOS low-spec day rates have averaged between $13,000 and $21,000 for their

current fleet of low-spec vessels

-Since 2007, HOS high-spec average day rates have averaged between $24,000 and $35,000 for

their HOSMAX fleet of high-spec vessels

-Management has stacked vessels early (18 currently stacked-7 200 class and 11 240 class) and aggressively

which will save $80mm annualized as stacked vessels typically cost $500/day versus $15k/day for

an active vessel

-Q2 call management identified another $10mm of cost savings that will bring down breakeven cash

flow level of the business

-During the 2011 downturn, HOS preserved cash to build the fleet up and increased the earnings

power of the company with great success. The same playbook is in motion. Some may argue in

favor of share buybacks and that may eventually happen but for now management is prudently managing

cash to keep the balance sheet strong and take advantage of potential consolidation opportunities

Valuation compelling and already discounting sharp down-cycle

-Current trading levels offer investors significant discounts to replacement cost, fair market value

and net tangible book value

-Hornbeck trades at half of tangible book value of its fleet of $39/share

-Recent revolver appraisals and recent & pending vessel sales support Fair Market Values

greater than original Gross Book Value

-Replacement cost estimated at over $40/share

-Since the 2004 IPO, the HOS price-to-book ratio has traded in broad range of 40% to 400% of net

book value and an average price-to-book ratio of 147%

FCF primed to expand as capx comes down

Base Case

2016e EBITDA $210 -assumes $13,500 effective rates for OSV’s @ 50% utilization

Maintenance capx ($33)

Cash interest ($50)

Cash Taxes ($3)

WC ($10) -guesstimate based on average of last 5 yrs

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

Est. FCF $114

per share $3.07

-Worst case scenario modeled uses absolute lows since 2004 in MPSV ($60k@ 82% utilization) and OSV

($21k @50% utilization) rates which results in an EBITDA level of approximately $100mm, pretty close to breakeven from a free cash flow perspective and assumes no further cost cutting opportunities which seems unlikely

-Trough EBITDA estimated by company at $178mm which is over $2.00/share of FCF and assumes all but

the 300 class and MPSV’s are stacked which translates into approximately 50% utilization. Excluding asset

sales which could very well happen, HOS can pay down 10% of debts annually into the future which accretes

directly to shareholders at a 12.5% yield at the current share price

Solid Liquidity

-Cash at q2 2015 $263mm,

$38mm (proceeds from sale of OSV in q3)

$1,078 of debt

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

$776mm net debt

-No debt comes due until 2019 at the earliest

-Undrawn $300mm revolver adds to flexibility

-Recently agreed to sell four 250EDF class OSVs that were chartered to the U.S. Navy for $152m,

$38m each)

-New build program is 90% done ($1.3b total cost) so capex will come down quickly to maintenance

levels starting in 2016 and position HOS well for the next upswing

Risks/Negatives

-Downturn more prolonged than even the most bearish outlooks which keeps valuation at low end of range.

This outcome will probably result in loss of time value in worst case

-Customers could face financial difficulty given the oil price

-Mitigating that risk somewhat is fact that HOS has a balanced mix of credit-worthy customers;

approximately 22% of expected 2015 revenue is from NOCs or the U.S. Government and 81% of expected

2015 revenue is from investment grade customers

-Returns on capital are subpar which should weigh on the multiple through the cycle

-Corporate governance gets decent grade as 7 of 9 directors are independent and outside directors comprise

audit and comp committees, however there is still a poison pill

Sources. Bloomberg, company filings

			2015	2016
Price:	16.30	EPS	1.35	.60
Shares Out. (in M):	36	P/E	11.8	26.0
Market Cap (in $M):	583	P/FCF	NA	5.0
Net Debt (in $M):	776	EBIT	0	0
TEV (in $M):	1,360	TEV/EBIT	0	0

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