Hornbeck Offshore Announces Second Quarter 2016 Results

Six Month Results

Revenue for the first six months of 2016 decreased 51.9% to $130.5 million compared to $271.1 million for the same period in 2015.  Operating loss was $(22.3) million, or (17.1)% of revenues, for the first six months of 2016 compared to operating income of $106.3 million, or 39.2% of revenues, for the prior-year period.  Net income for the first six months of 2016 decreased $83.2 million to a net loss of $(28.1) million, or $(0.78) per diluted share, compared to net income of $55.1 million, or $1.52 per diluted share, for the first six months of 2015.  EBITDA for the first six months of 2016 decreased 78.2% to $35.1 million compared to $161.1 million for the first six months of 2015.  The Company recorded a $33.1 million ($20.7 million after tax and $0.57 per diluted share) pre-tax gain on sale of assets during the first six months of 2015.  This gain resulted from the February 2015 sale of three 250EDF class OSVs previously chartered to the U.S. Navy.  Excluding the impact of such gain on sale of assets, operating income, net income, diluted EPS and EBITDA for the first six months of 2015 would have been $73.2 million, $34.4 million, $0.95 per share and $128.0 million, respectively.  The year-over-year decrease in vessel revenues primarily resulted from soft market conditions in the GoM, which led to the Company's decision to stack 39 OSVs on various dates from December 2014 through June 30, 2016.  For the six months ended June 30, 2016, the Company had an average of 37.8 vessels stacked compared to 13.5 vessels stacked in the prior-year period. The decrease in revenue was partially offset by $11.6 million in revenue earned from the full or partial-period contribution of six vessels that were placed in-service under the Company's fifth OSV newbuild program since December 2014. 

Recent Developments

Revolving Credit Facility Amendment.  On July 29, 2016, the Company amended its existing revolving credit facility as discussed below.  The amended facility provides continued access to a reduced level of standby liquidity for working capital and general corporate purposes, including acquisitions, newbuild and conversion programs and other capital expenditures.  The borrowing base was reduced from $300 million to $200 million.  The unused commitment fee was increased to 50 basis points for all pricing levels. The LIBOR spread for funded borrowings was increased by 25 basis points for all pricing levels, resulting in a new range of L+225 to L+325. The minimum collateral-to-loan value ratio under the amended facility was restored to its prior level of 200% of the borrowing base, which had been reduced to 150% of the borrowing base when the facility was amended and extended in February 2015.  Accordingly, the number of vessels pledged as collateral was increased from 10 OSVs valued in excess of $450 million to 12 OSVs valued in excess of $400 million.  None of the Company's remaining assets have been granted as security.  The amended credit facility reduces the minimum interest coverage ratio from 3.00x to 1.00x with step-ups to 1.25x in the third quarter of 2018 and 1.50x in the first quarter of 2019 and delays the step-down in the total debt-to-capitalization ratio from 55% to 50% by six quarters to the third quarter of 2018.  The Company has the option of making a one-time election to suspend the interest coverage ratio for a holiday period of no more than four quarters, ending no later than the fourth quarter of 2017, with a single permitted rescission.  If the Company elects to exercise the interest coverage holiday, then the borrowing base will be capped at $75 million during the period of the holiday and the LIBOR spreads for funded borrowings will be increased by an additional 50 basis points during and after the holiday. The Company's amended revolving credit facility also limits the Company's cash balance to $50 million at any time the facility is drawn, increases the minimum liquidity (cash and revolver availability) level required for prepayment of the Company's 2019 convertible senior notes, 2020 senior notes, and 2021 senior notes from $100 million to $150 million, and increases the minimum liquidity level required to permit a merger, formation or acquisition of a subsidiary or an investment (other than certain permitted investments) from $20 million to $100 million.  However, the foregoing is only a summary of some of the more significant amendments, is not necessarily complete, and is qualified by the full text of the First Amendment to the Second Amended and Restated Credit Agreement, which will be included as an exhibit to the Company's Current Report on Form 8-K related to this matter dated July 29, 2016, expected to be filed on or about August 4, 2016.  The Company was in compliance with all of the covenants of its existing revolving credit facility for the quarter ended June 30, 2016 and through the date of the First Amendment, and remains in compliance thereafter.  Such Amendment was effective July 29, 2016, but is generally applicable commencing with the quarter ending September 30, 2016.  As of June 30, 2016 and August 3, 2016, there were no amounts drawn under the Company's revolving credit facility.

Future Outlook

Based on the key assumptions outlined below and in the attached data tables, the following statements reflect management's current expectations regarding future operating results and certain events during the Company's guidance period as set forth on pages 12 and 13.  These statements are forward-looking and actual results may differ materially given the volatility inherent in the Company's industry.  Other than as expressly stated, these statements do not include the potential impact of any significant further decline in commodity prices for oil and natural gas; any additional future repositioning voyages; unexpected vessel repairs or shipyard delays; or future capital transactions, such as vessel acquisitions, modifications or divestitures, business combinations, possible additional share repurchases or financings that may be commenced after the date of this disclosure.  Additional cautionary information concerning forward-looking statements can be found on page 9 of this news release.

Forward Guidance

The Company's forward guidance for selected operating and financial data, outlined below and in the attached data tables, reflects the current state of depressed commodity prices and planned decreases in the capital spending budgets of its customers. 

Vessel Counts.  As of June 30, 2016, the Company's fleet consisted of 62 new generation OSVs and six MPSVs.  The forecasted vessel counts presented in this press release reflect the anticipated fiscal 2016 and 2018 MPSV newbuild deliveries discussed below.  With an average of 42.5 new generation OSVs projected to be stacked during fiscal 2016, the Company's active fleet for 2016 is expected to be comprised of an average of 19.4 new generation OSVs and 6.7 MPSVs.  With an assumed average of 48.0 new generation OSVs projected to be stacked during fiscal 2017, the Company's active fleet for 2017 is expected to be comprised of an average of 14.0 new generation OSVs and 8.0 MPSVs. 

Operating Expenses.  Aggregate cash operating expenses are projected to be in the range of $30.0 million to $35.0 million for the third quarter of 2016, and $135.0 million to $145.0 million for the full-year 2016.  Reflected in the cash opex guidance range above are the anticipated results of several cost containment measures initiated by the Company due to prevailing market conditions, including, among other actions, the stacking of 48 new generation OSVs, including eight 300 class OSVs, on various dates since October 1, 2014, as well as company-wide headcount reductions and across-the-board pay-cuts for shoreside and vessel personnel.  Since the end of the quarter, the Company has stacked one 300 class OSV and plans to stack three additional OSVs, including one 300 class OSV, during the third quarter of 2016 and may choose to stack additional vessels as market conditions warrant.  The cash operating expense estimate above is exclusive of any additional repositioning expenses the Company may incur in connection with the potential relocation of more of its vessels into international markets or back to the GoM, and any customer-required cost-of-sales related to future contract fixtures that are typically recovered through higher dayrates.

G&A Expenses.  G&A expenses are expected to be in the approximate range of $10.0 million to $12.0 million for the third quarter of 2016, and $40.0 million to $43.0 million for the full-year 2016.  

Other Financial Data.  Quarterly depreciation, amortization, net interest expense, cash income taxes, cash interest expense, weighted-average basic shares outstanding and weighted-average diluted shares outstanding for the third quarter of 2016 are projected to be $23.6 million, $4.2 million, $13.9 million, $0.5 million, $13.8 million, 36.3 million and 37.3 million, respectively.  Guidance for depreciation, amortization, net interest expense, cash income taxes and cash interest expense for the full fiscal years 2016 and 2017 is provided on page 13 of this press release.  The Company's annual effective tax rate is expected to be roughly 35.0% for fiscal 2016 and 34.5% for fiscal 2017.

Capital Expenditures Outlook

Update on OSV Newbuild Program #5.  The Company also announced today that it has reached an agreement with the shipyard to postpone the delivery of the final two MPSVs to be delivered under this program to the first and second quarters of 2018 without any additional cost to the Company.  In addition, the payment terms for the remainder of the contract were adjusted to shift $43.3 million of construction milestone draws from the remainder of 2016 and 2017 into 2018.  The Company's fifth OSV newbuild program consists of four 300 class OSVs, five 310 class OSVs, ten 320 class OSVs, three 310 class MPSVs and two 400 class MPSVs.  As of August 3, 2016, the Company has placed 20 vessels in-service under this program.  The four remaining vessels under this 24-vessel domestic newbuild program are currently expected to be delivered in accordance with the table below:

The Company owns 62 new generation OSVs, including two newbuilds delivered in the first quarter of 2016.  These vessel deliveries result in an average new generation OSV fleet complement of 61.9 and 62.0 vessels for the fiscal years 2016 and 2017, of which 42.5 and 48.0 vessels are projected to be stacked, respectively.  Based on the above schedule of projected vessel in-service dates, the Company expects to own and operate eight, eight and ten MPSVs as of December 31, 2016, 2017 and 2018, respectively.  These vessel additions result in a projected average MPSV fleet complement of 6.7, 8.0, 9.4 and 10.0 vessels for the fiscal years 2016, 2017, 2018 and 2019, respectively.  The aggregate cost of the Company's fifth OSV newbuild program, excluding construction period interest, is expected to be approximately $1,335.0 million, of which $67.7 million, $22.3 million and $43.3 million are expected to be incurred in the full fiscal years 2016, 2017 and 2018, respectively.  From the inception of this program through June 30, 2016, the Company has incurred $1,256.2 million, or 94.1%, of total expected project costs, including $25.0 million that was spent during the second quarter of 2016.  The Company expects to incur newbuild project costs of $9.2 million during the third quarter of 2016.

Update on Maintenance Capital Expenditures.  Please refer to the attached data table on page 12 of this press release for a summary, by period and by vessel type, of historical and projected data for drydock downtime (in days) and maintenance capital expenditures for each of the quarterly and/or annual periods presented for the fiscal years 2015, 2016 and 2017.  Maintenance capital expenditures, which are recurring in nature, primarily include regulatory drydocking charges incurred for the recertification of vessels and other vessel capital improvements that extend or maintain a vessel's economic useful life.  The Company expects that its maintenance capital expenditures for its fleet of vessels will be approximately $10.8 million and $7.7 million for the full fiscal years 2016 and 2017, respectively. These cash outlays are expected to be incurred over approximately 211 and 120 days of aggregate commercial downtime in 2016 and 2017, respectively, during which the vessels will not earn revenue. 

Update on Other Capital Expenditures.  Please refer to the attached data tables on page 12 of this press release for a summary, by period, of historical and projected data for other capital expenditures, for each of the quarterly and/or annual periods presented for the fiscal years 2015, 2016 and 2017.  Other capital expenditures, which are generally non-recurring, are comprised of the following: (i) commercial-related vessel improvements, such as the addition of cranes, ROVs, helidecks, living quarters and other specialized vessel equipment, or the modification of vessel capacities or capabilities, such as DP upgrades and mid-body extensions, which costs are typically included in and offset, in whole or in part, by higher dayrates charged to customers, and the speculative relocation of vessels from one geographic market to another; and (ii) non-vessel related capital expenditures, including costs related to the Company's shore-based facilities, leasehold improvements and other corporate expenditures, such as information technology or office furniture and equipment.  The Company expects miscellaneous incremental commercial-related vessel improvements and non-vessel capital expenditures to be approximately $16.0 million and $1.0 million, respectively, for the full fiscal years 2016 and 2017, respectively.  These cash outlays are expected to be incurred over approximately 248 days of aggregate commercial downtime in 2016, during which the vessels will not earn revenue.   

Liquidity Outlook

As of June 30, 2016, the Company had a cash balance of $224.5 million and an undrawn $300.0 million revolving credit facility.  On July 29, 2016, the Company amended the terms of its existing revolving credit facility.  Among the amended terms, the borrowing base was reduced from $300 million to $200 million.  The Company projects that, even with the current depressed operating levels, cash generated from operations together with cash on hand should be sufficient to fund its operations and commitments at least through the end of its current guidance period without drawing on its revolving credit facility.  The Company has three tranches of funded unsecured debt outstanding that mature in fiscal years 2019, 2020 and 2021, respectively.  The Company anticipates addressing each of these tranches of debt well in advance of their respective maturities, either by refinancing or otherwise retiring such debt.  While the Company has an authorized share repurchase program, it will continue to prioritize its usage of cash appropriate to the current market cycle and its longer term commitments. 

Conference Call

The Company will hold a conference call to discuss its second quarter 2016 financial results and recent developments at 10:00 a.m. Eastern (9:00 a.m. Central) tomorrow, August 4, 2016. To participate in the call, dial (412) 902-0030 and ask for the Hornbeck Offshore call at least 10 minutes prior to the start time. To access it live over the Internet, please log onto the web at http://www.hornbeckoffshore.com, on the "Investors" homepage of the Company's website at least fifteen minutes early to register, download and install any necessary audio software.  Please call the Company's investor relations firm, Dennard-Lascar, at (713) 529-6600 to be added to its e-mail distribution list for future Hornbeck Offshore news releases. An archived version of the web cast will be available shortly after the call for a period of 60 days on the "Investors" homepage of the Company's website. Additionally, a telephonic replay will be available through August 11, 2016, and may be accessed by calling (201) 612-7415 and using the pass code 13640302#.

Attached Data Tables

The Company has posted an electronic version of the following four pages of data tables, which are downloadable in Microsoft Excel™ format, on the "Investors" homepage of the Hornbeck Offshore website for the convenience of analysts and investors.

In addition, the Company uses its website as a means of disclosing material non-public information and for complying with disclosure obligations under SEC Regulation FD. Such disclosures will be included on the Company's website under the heading "Investors." Accordingly, investors should monitor that portion of the Company's website, in addition to following the Company's press releases, SEC filings, public conference calls and webcasts.

Hornbeck Offshore Services, Inc. is a leading provider of technologically advanced, new generation offshore service vessels primarily in the Gulf of Mexico and Latin America. Hornbeck Offshore currently owns a fleet of 68 vessels primarily serving the energy industry and has four additional ultra high-spec Upstream vessels under construction for delivery through 2018.

Forward-Looking Statements

This Press Release contains "forward-looking statements," as contemplated by the Private Securities Litigation Reform Act of 1995, in which the Company discusses factors it believes may affect its performance in the future. Forward-looking statements are all statements other than historical facts, such as statements regarding assumptions, expectations, beliefs and projections about future events or conditions. You can generally identify forward-looking statements by the appearance in such a statement of words like "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "intend," "may," "might," "plan," "potential," "predict," "project," "remain," "should," "will," or other comparable words or the negative of such words. The accuracy of the Company's assumptions, expectations, beliefs and projections depends on events or conditions that change over time and are thus susceptible to change based on actual experience, new developments and known and unknown risks. The Company gives no assurance that the forward-looking statements will prove to be correct and does not undertake any duty to update them. The Company's actual future results might differ from the forward-looking statements made in this Press Release for a variety of reasons, including sustained or further declines in oil and natural gas prices; a sustained weakening of demand for the Company's services; unplanned customer suspensions, cancellations, rate reductions or non-renewals of vessel charters, vessel management contracts or failures to finalize commitments to charter or manage vessels; sustained or further reductions in capital spending budgets by customers; the inability to accurately predict vessel utilization levels and dayrates; fewer than anticipated deepwater and ultra-deepwater drilling units operating in the GoM or other regions where the Company operates; the effect of inconsistency by the United States government in the pace of issuing drilling permits and plan approvals in the GoM or other drilling regions; the Company's inability to successfully complete the remainder of its current vessel newbuild program on-time and on-budget, which involves the construction and integration of highly complex vessels and systems; the inability to successfully market the vessels that the Company owns, is constructing or might acquire; the government's cancellation or non-renewal of the management, operations and maintenance ("O&M") contracts for vessels; an oil spill or other significant event in the United States or another offshore drilling region that could have a broad impact on deepwater and other offshore energy exploration and production activities, such as the suspension of activities or significant regulatory responses; the imposition of laws or regulations that result in reduced exploration and production activities or that increase the Company's operating costs or operating requirements; environmental litigation that impacts customer plans or projects; disputes with customers; bureaucratic, administrative or operating barriers that delay vessels in foreign markets from going on-hire or result in contractual penalties or deductions imposed by foreign customers; industry risks; the impact stemming from the reduction of Petrobras' announced plans for or administrative barriers to exploration and production activities in Brazil; recent disruption in Mexican offshore activities; age or other restrictions imposed on our vessels by customers; unanticipated difficulty in effectively competing in or operating in international markets; less than anticipated subsea infrastructure and field development demand in the GoM and other markets affecting our MPSVs; sustained vessel over capacity in the markets in which the Company competes; economic and geopolitical risks; weather-related risks; upon a return to improved operating conditions, the shortage of or the inability to attract and retain qualified personnel, when needed, including vessel personnel for active vessels or vessels the Company may reactivate; any success in unionizing the Company's U.S. fleet personnel; regulatory risks; the repeal or administrative weakening of the Jones Act or changes in the interpretation of the Jones Act related to the U.S. citizenship qualification; drydocking delays and cost overruns and related risks; vessel accidents, pollution incidents, or other events resulting in lost revenue, fines, penalties or other expenses that are unrecoverable from insurance policies or other third parties; unexpected litigation and insurance expenses; or fluctuations in foreign currency valuations compared to the U.S. dollar and risks associated with expanded foreign operations, such as non-compliance with or the unanticipated effect of tax laws, customs laws, immigration laws, or other legislation that result in higher than anticipated tax rates or other costs; the inability to repatriate foreign-sourced earnings and profits; or the inability of the Company to refinance or otherwise retire funded debt obligations that come due in 2019, 2020 and 2021. In addition, the Company's future results may be impacted by adverse economic conditions, such as inflation, deflation, or lack of liquidity in the capital markets, that may negatively affect it or parties with whom it does business resulting in their non-payment or inability to perform obligations owed to the Company, such as the failure of customers to fulfill their contractual obligations or the failure by individual banks to provide funding under the Company's credit agreement, if required.  Further, the Company can give no assurance regarding when and to what extent it will effect share repurchases.  Should one or more of the foregoing risks or uncertainties materialize in a way that negatively impacts the Company, or should the Company's underlying assumptions prove incorrect, the Company's actual results may vary materially from those anticipated in its forward-looking statements, and its business, financial condition and results of operations could be materially and adversely affected and, if sufficiently severe, could result in noncompliance with certain covenants of the Company's recently amended and currently undrawn revolving credit facility. Additional factors that you should consider are set forth in detail in the "Risk Factors" section of the Company's most recent Annual Report on Form 10-K as well as other filings the Company has made and will make with the Securities and Exchange Commission which, after their filing, can be found on the Company's website www.hornbeckoffshore.com.

Regulation G Reconciliation

This Press Release also contains references to the non-GAAP financial measures of earnings, or net income, before interest, income taxes, depreciation and amortization, or EBITDA, and Adjusted EBITDA. The Company views EBITDA and Adjusted EBITDA primarily as liquidity measures and, therefore, believes that the GAAP financial measure most directly comparable to such measure is cash flows provided by operating activities. Reconciliations of EBITDA and Adjusted EBITDA to cash flows provided by operating activities are provided in the table below. Management's opinion regarding the usefulness of EBITDA to investors and a description of the ways in which management uses such measure can be found in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, as well as in Note 10 to the attached data tables.

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