Hornbeck Offshore Services: Exerting Energy in All the Right Places

By Joseph Keefe

HOS Moves to the Head of the Class with a carefully laid out master plan.

By the end of next year, Hornbeck Offshore Services will have delivered 18 of the largest and most capable offshore supply vessels in the world. Concurrent with all of that, as many as 40 new drillships will also be delivered by others, many of which are expected to mobilize to Hornbeck Offshore’s core markets. Matching supply with the anticipated demand is at the core of CEO Todd Hornbeck’s short term business plan. That’s it. There are, of course, other key components of that vision, but it is the simplicity of the base premise that makes industry stakeholders sit up and take notice.
Long term, the five year outlook is not much different. With even more vessels to deliver and more deepwater demand drivers on the way, Hornbeck Offshore is quietly positioning itself – and its considerable assets – in the right place, at the right time. That’s it. Todd Hornbeck adds, “We want to make sure we have the preferred, high specification equipment with high quality service delivery - to support where our clients have ventured today and where they are expected to continue tomorrow.” And, with that in mind, Hornbeck Offshore has set out on a course that will be difficult to follow and, if they have gauged the market correctly, still harder still to beat. Only time will tell.     

Risky Business
If the risks of operating in the offshore markets could be eliminated there would be a lot more competition and it would be much more difficult to differentiate one service provider from another. However, today’s energy producers and service providers are seeing increased risks with expanded service offerings, unprecedented regulatory requirements, and the frontier for offshore exploration and production has been further extended. Doing business in this offshore sector has never been easy. It’s about to get much harder.  
The Hornbeck approach to managing risk has been anything but revolutionary.  Instead, it is rooted first in promoting awareness of the wide variety of risks that the job entails and then creating a culture that encourages everyone to do their ‘homework.’ Todd Hornbeck calls it measuring twice and cutting only once. He insists, “We practice it every morning in our daily operations meeting of our global management team and extend it to the men and women aboard our vessels by emphasizing responsibilities such as job safety analysis and stop work authority. Risk assessments are conducted before we bid a job, before we start a job and before we perform a task.”
At the heart of Hornbeck’s risk management program is something they call Enterprise Risk Management. Established to provide a cross functional committee of senior managers, the program is continuing to mature – and, according to Hornbeck’s CEO – pay dividends.

Building: At Home, with Purpose
Hornbeck Offshore is building now and into the foreseeable future. And, interestingly enough – unlike many competitors – they are primarily doing that at home in U.S shipyards. Because the U.S. Gulf of Mexico, for all its post-Macondo woes and regulatory constraints, remains one of the most attractive deepwater markets in the world, Hornbeck invests in assets that immediately provide the option of participating in that market.
Todd Hornbeck told MarPro in April, “We have selected U.S. shipyards with established track records of consistently delivering high quality assets on schedule.  We also have been able to obtain pricing that is competitive on a worldwide basis. We are not averse to building in foreign shipyards, as evidenced by the HOS Iron Horse and HOS Achiever, the two largest vessels in our fleet. However, building domestically provides us access to the U.S. Gulf of Mexico deepwater market and greater leverage from a risk management perspective.”
All of that comes with a price tag; one that many industry stakeholders say is too much. Not so, says Todd Hornbeck. “We believe the quality and cost basis of the vessels, combined with the competence our U.S. officers, allow us to compete anywhere in the world.” Hornbeck puts his firm’s money where his mouth is. The offshore service provider’s domestic backlog is impressive, and guaranteed to put a smile on any shipyard executive’s face. That’s because if Hornbeck is right – that is, by leveraging series-built quality vessels in volume – then the rest of the market might just follow.
Hornbeck’s domestic building strategy, distilled to its lowest common denominator, equates to large-scale newbuild orders, resulting in lower per-unit pricing, allowing for Jones Act “optionality” in the Gulf of Mexico. And, it was important to HOS that the vessel deliveries occur in 2013‐2015, when nearly 60 newly constructed floating rigs are expected to enter the market. The table below amply shows the HOS commitment to not just growth, but quality growth in the U.S. theatre. Beyond this, Hornbeck has 44 options for vessels at these yards.
As for the nascent, slow-moving trend for some operators to build and/or acquire LNG/Dual-Fuel powered supply vessels, Hornbeck does not share their passion – at least not yet. He explains, “As a niche market, only a few customers in our core markets have expressed interest in this solution. Their interest appears to be more driven by developing an alternative market for LNG than operational requirements. We have however evaluated LNG/Dual-Fuel alternatives and actually participated in a tender last year. Based on our experience, it is clear there is a significant cost premium to construct and operate these vessels but we have not seen a corresponding premium in the day rates. Accordingly, we believe the route we have chosen is in the best interests of our customers, employees and investors.”

HOSMAX 310 MPSV: Cornerstone of a newbuild strategy
The primary impetus for HOS’ newest classification of vessel came directly from the successful extension of the drilling frontier – deeper wells in deeper water in more remote locations, and forecasted growing demand for larger and more capable vessels.  Among other things, Todd Hornbeck specifically wanted 6,000 tons of deadweight and at least 20,000 barrels of liquid mud capacity. He explains, “We wanted the additional berthing required by the specialty markets. We believe we got what we and our clients are looking for in our HOSMAX vessels and the deliveries continue to track on-time and within budget.”
The HOSMAX 310 MPSVs are the first two vessels of Hornbeck’s new class of U.S.-flagged, Jones Act-qualified Multi-Purpose Support Vessels. Based upon the HOSMAX 310 design (and retaining those cargo capabilities) but with modifications and enhancements to specifically serve the subsea construction and inspection, maintenance and repair market.  Most notably, the vessels will be outfitted with 250 ton knuckle boom cranes with active heave compensation and 3,700 meters of wire, helidecks, ROV docking stations and moonpools.
Expanded beam (to provide additional capacity and enhanced stability), increased deck load ratings and a 50 percent increase in berthing to enhance mission capabilities all combine to make this class of vessel especially desirable. Finally, a third bow thruster has been added to provide enhanced station-keeping and redundancy. Todd Hornbeck sums up the 310 MPSV by declaring, “These capabilities coupled with the vessels’ regulatory pedigree and Jones Act status will make them truly multi-purpose and provide unmatched versatility to our clients, especially in the deepwater U.S. Gulf of Mexico.”

Financials: Crunching the Numbers
97 percent of HOS’ 2012 Operating Income came from the upstream (OSV) side of the equation, while just 3 percent came from the downstream (tugs and barges) side. That’s not surprising, given the split of vessel allotment and the differential in day rates. Looking ahead, Todd Hornbeck told MarPro, “Based on our demand projections and our current growth initiatives, we should experience a greater contribution from our upstream assets. However, we are experiencing a strengthening of the market for our downstream assets and continue to perform specialty work in the upstream market with our tugs and ocean-going barges. Our core markets continue to be the U.S. GoM, Brazil and Mexico.” Hornbeck sees opportunities in other markets, but he cautions, “our potential entry into other markets will be measured and balanced.” And, the key drivers for these markets are many and complicated.

Key Assumptions/Drivers for the HOS Business Plan
•    Advances in technology leading to large deepwater hydrocarbons discovery.
•    Global Deepwater capex spending expected to double over 2011-2015.
•    35% of total deepwater capex over 2011-2015 to come from drilling/well completion.
•    90% of floating rig demand from 2011 to 2015 is expected to be deepwater.
•    60% of demand is expected to be in water depths greater than 5,000 feet.
•    90 floater newbuilds expected to be augmented by as many as 38 options.
•    86 high-spec newbuild jack-ups ordered, with options for additional 31 jack-ups.
•    Active deepwater drilling rigs in the GoM have increased due to improved permitting.
•    Actively drilling rigs increased to 36 at the end of January 2013, up from 23 a year ago.
•    37 new generation OSVs left GoM since Macondo; which was 21% of then-active fleet.
•    HOS estimates 300% increase in worldwide subsea capex over the next five years.

As a top five operator of OSV’s in global markets, the HOS market share only encompasses six percent of a deep and far flung set of market players. The highly competitive market is also becoming increasingly demanding in terms of regulatory oversight. Because of it, Hornbeck sees consolidation opportunities. Hence, growth for HOS might not just be a function of newbuildings. “With the advances in technology, the tight labor market, and the infrastructure costs required to meet the expanding demands of our clients and regulators, it will be increasingly more difficult for the small owner / operator.  The assurance and training programs that are part of the overall ‘flight to quality’ require some economy of scale and the ability to attract and retain professional labor that is in very high demand.”

Safety: the Critical Success Factor
Despite a substantial (and growing) increase in employee headcount, the HOS industry-leading safety record boasts an enviable recordable incident rating (RIR) of 0.35 or better since 2005 and safety performance consistently better than the IADC and OMSA industry peer benchmarks. It is a high standard but also one which will be difficult to maintain as work volume increases, especially given the dearth of qualified personnel that continues to be an industry-wide problem. Nevertheless, Todd Hornbeck insists that there is no secret sauce.
“Quite simply, safety is one of our critical success factors. We have a growing fleet of the most advanced, high-specification equipment in the world but our most important asset is our people. Our biggest challenge is to continue to attract, develop and retain the people required to facilitate and support our growth. Our executive team does not miss an opportunity to discuss with the masters aboard our vessels or our shoreside senior managers the importance of efficiently and effectively determining whether our applicants and new hires share our core values and can support our culture.  If they cannot, we must not settle for anything less than our high standards or we simply delay finding the ‘right’ people while putting what we have built at risk.”
Like the HOS boatbuilding strategy, Hornbeck once again puts his money where his mouth is. He adds, “We are making the financial investment – roughly $25 million per year in training and onboard trainees in addition to our normal crews.  However, the key is for our senior managers and vessel masters to be guardians of the culture and the reputation we have collectively established.

The Flight to Quality: Credit Worthy too
Todd Hornbeck likes to talk about what he characterizes as top tier, ‘credit worthy’ clients. In reality, he’s talking about the ‘flight to quality’ amongst oil producers here in the U.S. Gulf; a movement that is slowly but surely gathering steam. That’s because, as the regulatory noose tightens – witness the Bureau of Safety and Environmental Enforcement (BSEE) mandated unannounced offshore exercises announced last month – the clients now want their service providers to employ the latest in equipment, best safety practices and anything else that sheds a better light on their operations.
As for Hornbeck, he insists, “We believe our customer base is a reflection of the high specification assets and quality service delivery that are key components of our strategy. Due to the level of investment and risk associated with deepwater and ultra-deepwater exploration and production, the clients in these markets are ‘top tier’ and value the quality of our assets and our services. The flight to quality’ and other trends in the deepwater / ultra-deepwater markets are the key drivers of our newbuild strategy and we expect the trends to continue well into the foreseeable future.” Unspoken in all of that is the hope that the best equipment, safety record and personnel will yield a higher day rate for operators who can benchmark their quality.  To that end, advent of the long awaited ‘two-tier’ charter market may finally be upon us.
The U.S. Gulf of Mexico is clearly showing the flight to quality. Hornbeck expects that this benchmark will spread to their other key markets; in particular, Brazil. That level of quality requires a significant investment of resources. He explains, “At the end of the day, we believe there will be fewer companies capable of consistently meeting the ever‐increasing standards of our clients and the regulators of our industry, who in some cases have exacerbated the shortage of available human capital. Furthermore, costs continue to escalate so at this stage most service companies are simply trying to preserve their margins.” Not so with Hornbeck Offshore Services.
Full speed ahead with arguably the most aggressive capex program in the business, the confident, well-informed HOS management team is moving the company firmly forward; with caution, an uncompromising nod to safety and a weather eye on the horizon for what will come next. Sounds like the right people to be driving the boat.

 

(As published in the 2Q edition of Maritime Professional - www.maritimeprofessional.com)


 

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