Hornbeck Offshore Services: Too Many Problems Will Drag The Stock Further Down – Seeking Alpha

Hornbeck Offshore (NYSE:HOS) shares tanked following the company's recent quarterly report. The numbers themselves were not surprising given the horrible market environment - the company reported a net loss of $0.53 per share on revenues of $41.9 million.

To get a quick picture of how bad things are, revenues declined by 52.8% since the fourth quarter of 2015 and by 19.3% since the third quarter of 2016. As a result of poor market conditions, the company had to stack 25 more vessels.

As I stated above, the results themselves are not a surprise at all. Perhaps, seeing actual numbers was a pain for Hornbeck Offshore investors, and this partially caused the post-earnings sell-off.

Also, the stock was elevated after the post-OPEC deal rally, although the deal changed nothing yet for the offshore drilling industry as was highlighted many times during this earnings season (read here, here and here).

However, the most important factor for any company is the outlook, and the outlook presented by Hornbeck Offshore management was just horrific.

Here's what Hornbeck Offshore had to say:

"We project that even with the current depressed operating levels, cash generated from operations, together with cash on hand, should be sufficient to fund our operations and commitments at least through to our current guidance period ending December 31, 2018.

However, absent improved market conditions, we do not currently expect to have sufficient liquidity to repay our three tranches of funded unsecured debt outstanding that mature in fiscal years 2019, 2020 and 2021, respectively, as they come due, unless such debt is refinanced or restructured.

Refinancing in the current climate may not be achievable on terms that are in line with our historic cost of debt capital. We are fully aware of the challenges of current market conditions are presenting to all offshore oil and gas industry and continue to actively review our capital structure and assess our strategic options, as we consider plans to ensure the long-term viability of Hornbeck Offshore".

In the previous report, the company warned investors that it was going to assess strategic options, but the language was softer. Now Hornbeck Offshore presented the big picture to investors - the company will have no money to pay debt in 2019 and will have to restructure its debt.

I would like to highlight that it does not even matter for Hornbeck Offshore if the industry rebounds by 2019 or not. The rationale for this statement is that Hornbeck Offshore management believes that it will be necessary to address the capital structure long before 2019. As always, concessions from lenders mean big concessions from shareholders.

Judging by Hornbeck Offshore comments, the company will try to push maturities as far as possible as it does not see any recovery coming soon:

"Earlier in this cycle, the industry mantra was lower for longer. The message we have recently been hearing from our customers, almost uniformly, is that they now see oil prices as lower forever. They no longer view this as a U-shape recovery, but an L-shaped recovery, or so we're told []

Our customers are telling us, they're not going to FID or sanction projects in deepwater. I mean, this is what they're telling us, $40 a barrel. They're going to have to justify $40 a barrel, not $50, but $40".

Here's what we see from this and what the market has so far failed to appreciate in both OSV and OSD stocks.

No matter what the current oil price is, the breakeven bar for projects is set low because oil producers don't want to be trapped in capital-intensive endeavors if oil goes below $50.

Once again, I remind that it does not matter now if they are right or wrong in their evaluation, because they will act upon their views and this means little demand for OSD and OSV industries.

The year 2017 is going to be bad for the industry and for Hornbeck Offshore. The company will likely see its revolving credit line go from $200 million to $75 million as it plans to elect interest coverage holiday at some point during this year.

There is no cash crunch as the company had $217 million at the end of 2016, but this number will trend down as the year progresses.

The deal with creditors won't be easy to reach as highlighted by the problems of Hornbeck Offshore's peer, Tidewater (NYSE:TDW).

Tidewater's shareholders are already on the verge of a wipeout. The situation for Hornbeck Offshore shareholders is better, as the company did not ran into any covenant and does not depend on lenders' good will.

Anyway, proactive attempts to deal with debt mean nothing good for shareholders unless the company can suddenly gain access to capital markets.

At the end of 2016 - beginning of 2017, a group of offshore drillers, namely Transocean (NYSE:RIG), Rowan (NYSE:RDC), Noble Corp. (NYSE:NE), Ensco (NYSE:ESV) and Atwood Oceanics (NYSE:ATW) were able to raise money through debt and equity.

The window of opportunity was opened by the OPEC/non-OPEC deal, but I believe that it has already shut down as no tangible evidence of any improvements on the offshore drilling front materialized after the deal.

Also, players with financial problems like Seadrill (NYSE:SDRL) or Ocean Rig (NASDAQ:ORIG) were not able to raise money during this fortunate period. Yes, Seadrill is in restructuring negotiations right now, but even its founder is not willing to inject money via equity. So, for weaker industry players like Hornbeck Offshore or Tidewater the market was never really opened.

All in all, Hornbeck Offshore still has time to review its strategic options and I expect that the company will not hurry.

Any negotiations with creditors will take long as evidenced by Tidewater and Seadrill restructuring negotiations. Given the uncertainty, the stock will be highly volatile and present trading opportunities on both long and short sides.

However, the general direction will be to the downside as the OSV industry is the last one in the supply chain to benefit from rising oil prices, and current oil prices are not sufficient enough to bail out the OSD industry, the client of the OSV industry.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in HOS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Hornbeck Offshore Services: Too Many Problems Will Drag The Stock Further Down - Seeking Alpha