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On Hornbeck Offshore Energy

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January 17, 2007 – Comments (0)

Last week was a tough one for Louisiana-based Hornbeck Offshore Company. This is a company that runs a fleet of offshore supply vessels (OSVs) that service energy companies in and around the Gulf of Mexico. The company also operates tugs in and around New York City.

I had the pleasure of meeting HOS CEO Todd Hornbeck about 10 months. This was when energy prices and stocks were rising rapidly. His quote at the time was (I think): "Business is booming. How can you *not* be making record profits right now."

Well, it appears as though that boom cycle has ended. The company annouced last week that it was lowering its earnings guidance from $0.72-$0.77 to $0.61-$0.63. That's a substantial change, and it caused the stock to get dropped 25% in a day.

Before I get into talking about where the stock is today, here's a link to the writeup I did on the company last May (about the time I rated it in CAPS): http://boards.fool.com/Message.asp?mid=24061001

Note: It's on the Hidden Gems discussion boards, so you have to be a subscriber to access it. If you don't have access, here's the short-short version:

1. Small cap energy services company.

2. Profits as drilling activity increases in the GoM, particularly in the deepwater.

3. Company owns and operates the most technologically advanced fleet of OSVs.

4. Tug/tanker segment generates enough income (non-cylical) to pay all interest expenses. Thus, bust cycles do not affect the company's long-term viability.

5. Valuation in May was higher than I was willing to pay.

Now the stock is about 30% lower. And I'm intersted.

If you've read my reasoning behind buying WTI or noticed that I've been rating lots of energy services firms and energy companies outperform recently, then you know that I believe energy prices will continue to rise long-term. This will spur greater drilling activity, particularly in places such as the deepwater that are not economical to drill when prices stay low. HOS is in a particularly good place to profit from these more complex drilling activities.

So what happened in the fourth quarter?

Well, it looks like utilization went down. While contract rates remained steady (probably because they were determined during hotter times), fewer boats are out there making the rounds. Some of this, according to the company, is attributable to docking problems. I think, however, that some companies are also slowing their drilling plans to see where energy prices settle out.

Thus, HOS also anticipates lowering 2007 guidance by as much as 20%.

So, the question is, will this stock go lower? Or is this an interesting time to buy?

Unfortunately, I don't know. This is an extremely capital intensive business, and it's unclear to me whether or not the investments they've made to expand capacity will pay off in the coming demand environment. While I believe industry demand will continue to rise, this company's growth in capital expenditures worries me. Moreover, while the fleet is the most technologically advanced, these boats seem to be eating up a lot of capital -- and that may not stop.

I'm going to keep my eyes on this in CAPS and keep looking at the CAPEX issues, but I likely will not be buying this stock with my own money.

FWIW and Fool on,

Tim

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