hornbeck_fall 2016 web

November9,2016

HORNBECK OFFSHORE SERVICES, INC. HOS/NYSE

Continuing Coverage: Hornbeck Offshore: Best House on a Bad Block

Investment Rating: Market Outperform

PRICE: $4.63 S&P500: 2,163.26 DJIA: 18,589.69 RUSSELL2000: 1,232.16 • Low oil prices reduce offshore drilling and cripples demand for service

companies • Ample liquidity provides cushion in uncertain operating conditions • Reduction in capital expenditure (CAPEX) drives positive cash flow • Effective fleet management supports positioning for market rebound • Our 12-‐month target price is $13.

Valuation*EPSP/ECFPSP/CFPS*Netofnon-recurringevents

2015A$1.872.3x

$5.860.7x

2016E$(1.77)

NM$3.351.3x

2017E$(1.91)

NM$1.742.5x

MarketCapitalization StockDataEquityMarketCap(MM): $159.68 52-WeekRange: $3.00-$13.29EnterpriseValue(MM): $1,014.51 12-MonthStockPerformance: -68.49%SharesOutstanding(MM): 36.37 DividendYield: NilEstimatedFloat(MM): 31.35 BookValuePerShare: $39.186-Mo.Avg.DailyVolume: 1,160,000 Beta: 1.94ShortRatio 7.14 EV/EBITDA 14.4x

Company Quick View:

If they can make it through the storm, they will have the newest fleet on the market. Hornbeck Offshore Services, Inc., provides marine support services to exploration and production, oilfield service, and offshore construction customers, primarily in the Gulf of Mexico. Its fleet of Jones Act flagged offshore support vessels (OSVs) and multi-‐purpose support vessels (MPSVs) engage in a number of deepwater services for clients, including exploration, development, production, and maintenance. Company Website: http://hornbeckoffshore.com

Analysts: Investment Research Manager: Daniel Tishler Megan Bogner Max Hayum Drew Eckstein Ryan Mayzell

The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.

Wall Street's Farm Team

BURK

ENRO

AD R

EPO

RTS

4/1/13 4:47 PM

Hornbeck Offshore Services, Inc. (HOS) BURKENROAD REPORTS (www.burkenroad.org) NOVEMBER 9, 2016

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Figure 1: Five-‐year Stock Price Performance

Source: Ycharts.com November 9, 2016

INVESTMENT SUMMARY

We give Hornbeck Offshore Services, Inc., a Market Outperform rating with a 12-‐month target price of $13, using the following information to reach our current projection. To arrive at this price target, we used a combination of the discounted cash flow (DCF) valuation method with a relative exit multiple of enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA).

Hornbeck will face the following short-‐term risks: oil price volatility, market saturation, increased regulatory environment, credit risk, and default risk. With its stable financial position, effective fleet optimization, and extensive management experience, Hornbeck should be able to outperform in an underperforming industry. Hornbeck currently has $225 million in cash and over $1.1 billion in total debt, all unsecured. The Company estimates its fleet's asset value at $2.1 billion. With a current market capitalization of $187 million and net debt slightly over $800 million, the equity markets appear to value Hornbeck's fleet at around $1 billion.

This $1 billion valuation is not only due to uncertainty about a sustained future oil market recovery, but it is also caused non-‐existent demand for vessels in the current market. However, assuming vessel demand sees some sustained improvement before debt maturities begin in 2019, the Company's stable financial position show that ability to weather the downtown. As relative stability returns to the market, it will become clear that Hornbeck has sufficient assets to cover liabilities and it will be able to take advantage of long-‐term growth opportunities.


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Table 1: Historical Burkenroad Ratings and Prices

Report Date Stock Price Rating 12 Month Target Price

March 18, 2015 $20.30 Market Outperform $26.00

March 28, 2014 $40.75 Market Perform $47.00 March 20, 2013 $44.99 Market Perform $47.00 April 2, 2012 $43.37 Market Perform $35.00 March 21, 2011 $30.99 Market Perform $35.00 April12, 2010 $20.89 Market Perform $24.95 April 6, 2009 $16.36 Market Outperform $28.34 April 4, 2008 $46.67 Market Outperform $56.77 March 30, 2007 $28.65 Market Outperform $39.13

Source: Past Burkenroad Reports

INVESTMENT THESIS

Our 12 month target price of $13.00 and Market Outperform rating is based on the continued downtrend in the oil and gas industry and future recovery prospects. Low oil prices reduce offshore drilling and cripples demand for service companies For Hornbeck Offshore Services, Inc., the number of income producing vessels in an active fleet (utilization rate) as well as market demand (day rate) are the primary drivers of revenue. Lack of new oil exploration and production (E&P) drastically reduced offshore services demand negatively impacting utilization rates. As of the third quarter 2016, significant over-‐supply of offshore service vessels (OSVs) has forced Hornbeck to stack, or remove from active service, over two-‐thirds of its fleet. This cash intensive process can reduce operating costs but eliminates a vessel's revenue capability and incurs moorage fees. Furthermore, the limited active rig projects consist of less profitable operations like subsea tiebacks. The outlook for the next year is uncertain. Stability in the short-‐term may result in some appreciation of share prices. However, growth appreciation requires E&P expansion. This will only gradually occur after oil price stabilization, not yet seen in the current market.


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Ample liquidity provides cushion in uncertain operating conditions Despite a 14% decrease in cash and cash equivalents in the first six months of 2016, Hornbeck still boasts roughly $225 million in cash and equivalents on its balance sheet. This cash on hand protects the Company from unforeseen expenses and allows them to continue operating in a low demand environment. The long term structure of Hornbeck’s debt gives some cushion to recover with the industry. Refinanced with favorable covenants in 2012 and 2013, Hornbeck has just over $1.125 billion in senior notes due in 2019, 2020, and 2021. While the Company had its credit revolver reduced in July 2016, it still has an undrawn $200 million to pull from if necessary. With a current asset to current liability ratio of 5.19, the Company expects its cash reserves to last at a minimum until the end of the 2017 guidance period without needing to access the revolver. Relative to many competitors, the long-‐term outlook for Hornbeck is cautiously optimistic. For the time being the Company has sufficient liquidity to endure depressed market conditions and position itself for eventual growth when market conditions recover.

Reduction in capital expenditure (CAPEX) drives positive cash flow

New vessel construction (newbuilds) require significant capital investments over long time horizons. To maintain growth during the first half of 2010, many companies entered into long and expensive contracts to accept new vessel deliveries. As demand slowed and vessels began to be stacked, companies had already committed to this CAPEX, regardless of need. As maintaining positive cash flows has become more important, these unnecessary and unavoidable expenditures are troubling. While Hornbeck is still committed to financing the remainder of its newbuild program, it appears to be in a better position than most competitors. After renegotiating delivery and financing dates on the remaining Multi-‐Purpose Support Vessel (MPSV) builds, Hornbeck expects OSV’s CAPEX to decline to $22 million in 2017 and to $43 million in 2018. Unlike many competitors, Hornbeck has maintained a positive operating cash flow and been able to fund CAPEX without assuming additional debt or issuing equity.

Effective fleet management supports positioning for market rebound

As companies attempt to weather unfavorable market conditions, positive operating cash flows are vital to financial viability. While oil field service companies have little control over total revenues, they are able to optimize operating cash flows. As demand decreases, companies are able to stack vessels, reducing supply as well as operating costs. However, stacking and subsequently unstacking a vessel is a significant sunk cost for the operator as fees and lost revenues are taken into consideration that must be timed correctly to be effective. Some operators may be able to operate at a loss for a certain time period while not being able to afford stacking fees.


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Because of its relatively stable financial position, Hornbeck was able to incur many of these costs before competitors. By third quarter 2016, the Company had stacked 48 of its vessels. With no plans to stack additional vessels, and new vessels coming online, the active fleet will include 14 large high-‐spec OSVs as well as eight MPSVs by 2017. Relative to competitors, Hornbeck operates the largest percentage of high-‐spec 300 Class vessels at 37% of its total fleet DWT. Figure 2 below shows the entire fleet class percentages including high cash flow generating MPSVs.

Source: Hornbeck Investor Presentation August 9, 2016

By operating only high-‐tonnage OSVs and high cash flow generating MPSVs, Hornbeck’s effective day rates and effective utilization rates remain high compared to the industry average. This provides sufficient cash flows to fund vessel recommissions as market conditions improve. Effective fleet management allows for short-‐term stability and positions the Company to access long-‐term growth opportunities.

VALUATION In order to arrive at our 12-‐month target price, our team valued Hornbeck intrinsically using a combination of a discounted cash flow (DCF) analysis and an exit multiple method. Our team based this multiple on both historical and industry data. This valuation resulted in a 12-‐month target price of $13 yielding a 196% total return within the next 12 months. DCF/Exit Multiple Method By using a combination of a DCF and exit multiple method to intrinsically value the Company, we were able to compensate for the lack of normalcy in the current offshore supply industry. Our valuation combined five years of forecasted cash flows with a terminal value derived using the enterprise value to earnings before interest, tax, depreciation, and amortization exit multiple. The EV/EBITDA multiple is most appropriate because it is capital-‐structure neutral. EBITDA gives a more accurate picture of a company’s operating conditions and profitability. While over-‐leverage is a concern industry-‐wide, Hornbeck’s sufficient liquidity and favorable long-‐term debt schedule better position the Company to meet debt service requirements than many competitors.

0%

10%

20%

30%

40%

200 Class 240 Class 280 Class MPSV 300 Class

Figure 2: Pro Forma 2018 Class per Fleet DWT


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Our five year DCF forecast indicated Hornbeck will be able to satisfy its obligations with a partial refinancing of its senior notes. We believe the combination of the DCF forecast and an EV/EBITDA exit multiple best accounts for current market conditions to yield the most accurate valuation. This required our team to assume both a cost of capital as well as EV/EBITDA multiple. We did not believe current market conditions would produce appropriate results. Instead, we decided to use 2011 figures that we assume will best resemble our forecasted market environment. In order to discount our cash flows we used a weighted average cost of capital(WACC) of 15.2%. We derived this WACC by taking the average 2011 WACC of our three most relevant peers. In addition, we used a EV/EBITDA multiple of 10.6x, which is similarly derived from industry peers. In order to test our assumptions, we ran a sensitive analysis, as seen in Figure 3.

Figure 3: Sensitivity Analysis

Price Per Share

Terminal EBITDA Multiple

9.6x

10.6x

11.6x

Discount

14.2% $11.81 $14.30 $16.79

Rate

15.2% $10.53

$12.91

$15.29 (WACC)

16.2%

$9.30 $11.59 $13.87

Source: Burkenroad Valuation Model

INDUSTRY ANALYSIS Marine Offshore Supply Vessel (OSV) companies provide a range of logistical services to offshore exploration and production (E&P) platforms. These unique companies provide support through the entire drilling and production process with some of the most technologically advanced deep and ultra-‐deep water vessels on the market.

Oil prices are the primary driver for drilling and production service demand across the globe. As energy markets slid in late 2015, falling oil prices severely thinned margins and exploration budgets. In addition to a slowdown in new exploration, many operating rigs became borderline unprofitable without a significant reduction in costs. Offshore service companies bear the brunt of these cost reductions in a fight for any remaining market share. This cycle creates an uncertain operating environment as companies attempt to balance fleet operation capacity with costs in a low demand environment.


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Offshore service companies seek to maximize utilization rates as well as daily charter rates, known as day rates. Average rates reflect the mean rate across the entire company fleet, operational or non-‐operational. The mean rates of only the active fleet, as determined by total operational Deadweight Tonnage (DWT), are the effective rates. Companies in the industry have more control over effective rates as they can remove or “stack” vessels from operation, albeit at significant sunk costs. Since 2007, market average day rates ranged from $6-‐$11 per DWT depending on specification. Vessels above 2,500 DWT are considered high-‐spec and those below 2,500 DWT are considered low-‐spec.

Until costs per barrel of oil increases, the industry will continue with minimal exploration, development, and production activity. Oil prices have traded in the range of $35 to $55 per barrel over the last year, most recently in the $43 per barrel range. With little confidence in the possibility of production cuts, oil prices are likely to trade in the $45 to $50 per barrel range over the next 12 months. Any improvement over $50 per barrel is not likely. Excessive supply and free-‐fall prices have created a drastic oversupply for Offshore Support Vessels (OSVs). As average day rates fall industry wide, maximizing high-‐spec capacity is the only real strategy to increase effective rates and remain competitive in the near future.

Core Geographic Areas

Hornbeck’s fleet of OSVs and Multi-‐Purpose Supply Vessels (MPSVs) service a global market operating primarily in the Gulf of Mexico. Hornbeck’s vessels are capable of operating in both domestic and international waters, with 85% of vessels Jones Act compliant for intra-‐U.S. coastal trade. With the industry struggling, the Company is primarily focused on sustaining operational viability in the domestic market, but is aware of long-‐term opportunity abroad. Hornbeck hopes to best adapt to depressed market conditions by maximizing its use of recently delivered high-‐spec OSVs.

Gulf of Mexico In the Gulf of Mexico (GoM), Hornbeck has delivered one high-‐spec OSVs this year with two MPSVs to deliver in 2018. The Gulf of Mexico is the primary deepwater market in the world. As new rig counts remain depressed in late 2016, the GoM OSV industry has experienced a steep reduction in demand. Fleet stacking remains prevalent as operators attempt to outlast competitors in anticipation of rising prices. However, as supply and demand fundamentals return to the market, operating conditions in the market are expected to improve.

Mexico Hornbeck’s primary customer in Mexico is the state-‐owned oil company, Petróleos Mexicanos (PEMEX). Changes in Mexico’s national energy policy have created opportunities for Hornbeck in a previously restricted market. The Mexican legislature elected to end PEMEX’s several decade old monopoly on production and service. As a result, the Mexican government can now grant exploration contracts to private energy firms. The first of these is expected in December of 2016. Increased competition is expected to boost exploration and production efforts in the region in turn driving demand for offshore service providers.


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However, current conditions in the Mexico market are similar to the GoM. The extent, structure, and timing of the energy reforms remains uncertain in light of weak market conditions. The low oil price environment has forced large PEMEX budget cuts, reducing service demand. Because PEMEX still represents the vast majority of available contacts, Hornbeck has stacked six of its Mexican-‐flagged vessels. However, Hornbeck considers Mexico a long-‐term market for its services and when oil prices rise again, exploration and production efforts will rise as well. As conditions improve, foreign firms that are not currently active in the Mexico region will be expected to expand operations and development in the region. Brazil In Brazil, Petrobras, the semi-‐public corporation, dominates the market. It recently announced a reduction in exploration and production activities offshore in Brazil. This plan will inevitably have an adverse effect on the demand for high-‐spec OSVs, the largest revenue producer for Hornbeck. Petrobras’ $30 billion reduction in investment in Brazil will hamper growth opportunities in the region. While significantly impacted by the decline in oil prices, a massive corruption scandal has shaken the company affecting confidence in the entire market. Petrobras is nonetheless a key player in the global petroleum industry, controlling 34% of deepwater production worldwide. Government influence in ownership has also influenced a shift toward an all Brazilian vessel fleet. This will limit new opportunities in the region, unless specialized services are needed from high-‐spec OSVs or MPSVs.

Customers The offshore service provider industry is highly competitive with low customer loyalty. The limited number of contracts go to the companies able to provide the most advanced technology, highest safety ratings, and lowest prices. Low exploration and production activity in the Gulf has decreased demand for Offshore Supply Vessels. High barriers to enter marine oil services as well as exploration and production industries lead to a competitive bidding process for offshore vessels. Competitors Domestic competition is limited to large marine transport companies due to the large capital barrier to entry. While some international competitors benefit from lower operating costs, Jones Act regulations prevent them from operating in Hornbeck's primary market, the Gulf of Mexico. The larger competitors in the offshore service industry are Edison Chouest and Tidewater.

Edison Chouest operates a fleet of over 200 vessels, supporting the majority of U.S offshore operations with a fleet of new generation offshore service and supply vessels. Edison Chouest is a much larger marine transport solution provider than Hornbeck and is the largest operator in the Gulf of Mexico. The private company is growing to meet global demand with recent placements in South America and Africa.


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Tidewater also has over 200 active vessels and a large global operation. Tidewater generates 60% of its revenue from drilling-‐related support and the remaining 40% of revenue comes from assisting in construction projects. In mid-‐March 2016, liquidity requirements forced Tidewater to borrow an additional $600 million. Tidewater has maxed-‐out its revolving credit facility and has currently breached its covenants and are in discussion with the principal lenders and noteholders. If note and principal holders recall their debate, Tidewater will likely become illiquid and file for Chapter 11 bankruptcy. Future Outlook

Predicting the level and timing of an oil price recovery is difficult. It is reasonable to assume that oil prices will eventually rise and that a profitable OSV industry will exist. In the short-‐term the industry must address oversupply in the market. Refusal among some competitors to stack vessels creates a race to the bottom in terms of pricing. In failing to act in their own long-‐term interest, competitors are further driving down industry day rates to generate any possible cash flow. This strategy is not sustainable. In the near future, merger and acquisition activity will increase as weaker companies' insufficient debt coverage will force asset liquidations. In the long-‐term, the industry must acknowledge the lagging connection between price changes and vessel demand. The real driver of demand is E&P activity and rig counts not oil prices. As Table 2 illustrates, active rig count in Latin America has drastically declined over the last three years, leading to weak demand for oilfield service companies. These projects are capital intensive, have extended time-‐horizons, and long construction periods. Customers will not commit to further E&P until uncertainty and price volatility decrease for a sustained period. The industry must reconcile an expected long-‐term recovery with short-‐term uncertainty before producers resume meaningful production necessitating vessel support.

Table 2: Active Rig Count in Latin America

Source: Baker Hughes Inc. October 2016


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Consequently, depressed day rates have caused marine transport and oil service companies to halt new vessel construction. Tidewater has breached covenants and faces illiquidity if it is unable to negotiate new agreements with principal and note holders. GulfMark Offshore also faces financial trouble and may not be able to meet its covenants if cash flows are not restored in the near future. SEACOR has recognized GulfMark may not survive through the next five years and has proposed a prepackaged reorganization of GulfMark. In an attempt to maximize utilization of hi-‐spec tonnage, more stable companies will attempt to acquire newer vessels from distressed competitors. Merger and acquisition activity will increase as cash balances inevitably decline industry wide. ABOUT HORNBECK

Hornbeck Offshore Services, Inc., is a leading provider of marine transportation services to exploration and production, oilfield service, offshore construction, and military customers. Its fifth newbuild program has delivered 22 of its 24 vessels, including 20 OSVs and 3 MPSVs with two MPSVs to be delivered in 2018. The program will expand its fleet to 62 offshore supply vessels (OSVs) and ten multi-‐purpose support vessels (MPSVs). Its majority U.S. flagged and Jones Act compliant fleet operates primarily in the Gulf of Mexico, but has begun to expand into international markets. Operating one of the youngest and most technologically advanced fleets in the industry, Hornbeck is able to provide its customers with a diverse and specialized range of services without sacrificing quality or safety.

Founded by Larry Hornbeck in 1980, the original Hornbeck Offshore Services, Inc., (HOSS) was taken public only a year later. The new company experienced steady growth, eventually merging with Tidewater in 1996. The Hornbeck family retained rights to the Company name and logo, with current Chairman and Chief Executive Officer (CEO) Todd Hornbeck reestablishing Hornbeck Offshore Services, Inc., in 1997 and taking the Company public in 2004. Headquartered in Covington, Louisiana, Hornbeck operates multiple offices in the U.S., Mexico, and Brazil with port facilities located in Port Fourchon, Louisiana.

Products and Services Hornbeck provides a fleet of offshore vessels to meet the evolving needs of the deepwater and ultra-‐deepwater energy industry in the U.S. and abroad. The ships provide a range of logistical services to support offshore installations through their entire exploration and production (E&P) process. Hornbeck has some of the newest and safest fleets on the market. Upon completion of its fifth new build program, the Company will own and operate 62 OSVs and ten MPSVs.


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Strategy Based on macroeconomic trends, Hornbeck’s investment thesis foresees that in the long term, oil and natural gas will continue to be the predominant fuel source in an energy-‐driven economy. As oil companies increase exploration efforts, they will eventually drill deeper and deeper offshore wells. As more complex drilling environments emerge, new generation OSVs and MPSVs will be able to service this growing demand.  Due to the nature of short-‐term contracts in the industry, customer loyalty remains low. Based on anticipated market conditions, Hornbeck attempts to maintain an appropriate mix between long-‐term and short-‐term contracts. Long-‐term contracts can provide steady cash flow and increase utilization rates, while short-‐term spot contracts allow the Company to take advantage of increasing day rates during favorable market cycles. Hornbeck has always viewed vessel development and technological advancement as a priority. With the completion of its fifth OSV new build program, Hornbeck will be able to supply versatile vessels to meet specialized demand. As drilling operations become more complex, producers are taking fleet modernization and safety records into high consideration when considering contracts. Hornbeck operates one of the youngest and safest fleets on the market. In addition, certain vessels’ advanced operating capabilities have assisted customers in obtaining drilling permits in otherwise hazardous conditions. Intense domestic competition has forced Hornbeck to seek opportunity abroad, in both Mexico and Brazil. While short-‐term outlooks are not desirable abroad, Hornbeck views both Mexico and Brazil as strategic long-‐term opportunities. As Mexico undergoes energy policy reforms, the Company anticipates more deepwater auctions. This will allow the Company to take advantage of increased demand as market conditions improve. In addition, Brazil has shown positive signs of untapped deepwater reserves that will become accessible as market conditions improve. Due to low vessel demand and reduced day rates, many vessels in the industry remain stacked. Reduced cash flows and senior debt maturing has put many marine oil service companies at risk of illiquidity. Hornbeck still holds the full $200 million in revolving credit but will have $1.125 billion in senior notes due between 2019 and 2021. Hornbeck has sufficient liquidity to operate in the next few years. However, in order to refinance as debt begins to mature, the Company must see some improvement in market conditions or face default.


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Customers Hornbeck Offshore Services, Inc., has five major types of customers: integrated oil companies, oilfield service companies, the U.S government, independent E&P companies, and national oil companies. Table 3 illustrates the percentage of estimated revenue by customer type and Table 4 shows revenue by customer credit rating. The majority of the Company's customers have at least an A rating. The stronger the customer credit rating the more reliable the revenue stream. Customers may fluctuate year to year based on levels of production, exploration, demand, as well as other external factors. As energy investment has contracted since 2015, Hornbeck’s revenue streams have become less diversified with two customers accounting for 30% of revenue. Still, the Company services many large companies such as BP, Exxon Mobil, Shell, and many more.

Table 3: Upstream Revenue by Customer Type Customer Type Revenue

Integrated Oil Companies 46% Oilfield Service Companies 24% U.S. Government 18% Independent E&P Companies 11% National Oil Companies 1%


Table 4: Upstream Revenue by Credit Rating Credit Rating Revenue AAA 18% AA 31% A 8% BBB 26% <BB or NR 17%



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Latest Developments

Through the construction of new vessels, modernization of its current fleet, and acquisition opportunities, Hornbeck has traditionally focused on long-‐term investment-‐oriented growth. However, the recent downtown in offshore production has severely impacted the offshore services industry. With output and exploration declining, vessel operators have seen a significant decrease in day rates. Due to the reduced demand, Hornbeck, as of third quarter 2016, has removed from operation or “stacked” on average 45 of its OSVs to reduce operating costs. The Company has stacked an additional vessel since the end of the third quarter, and it expects to stack another vessel in the fourth quarter. While this stacking represents 71% of fleet vessel count, the Company is still operating 54% of its total tonnage. Still, Hornbeck is attempting to seize what little opportunity remains in the down market.

The offshore service provider industry is in a constant struggle to remain solvent. Unsure of sustained oil output cuts and with many companies engaged in long-‐term new build obligations, maintaining cash balances has become vital. Hornbeck's cash balance of $225 million and its access to a $200 million revolver allows the Company to fund operations in the near future. However with $1.125 billion in senior debt outstanding due 2019 through 2021, Hornbeck will need to see some improvement in market conditions in order to refinance.

PEER ANALYSIS Hornbeck Offshore Services, Inc., operates primarily in the Gulf of Mexico with a focus in oil services. The Company's peer group is the marine transport industry inside the sub-‐industry of oil field services in the North American region. There are hundreds of offshore oil field service companies but only ten large offshore supply vessel (OSV) operators in the Gulf. Since the majority of the Company's OSVs operate in the Gulf, we will consider all large OSV operators as peers. The four largest publicly traded OSV operators in the Gulf are Hornbeck Offshore, Tidewater Offshore, SEACOR Holdings, and GulfMark Offshore. Key peer ratios are shown in Table 5 below.

Table 5: Peer Ratios

Company MarketCap P/E P/BV EV/EBITDA Debt/Equity DividendYield ROEHornbeckOffshore 187.5M N/A 0.14 8.05 0.75 0 -0.057Tidewater 125.2M N/A 0.06 50.52 0.92 0.1893 -0.1SEACORHoldings 1.03B N/A 0.87 10.98 79.14 0 -7.53GulfMark 51M N/A 0.1 -1.85 0.85 0 -33

Source: Morningstar September 30, 2016


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Due to falling oil prices, each company has struggled to meet debt service requirements. Day rates for specialized vessels have dropped dramatically and reduced revenues. To respond, many maritime companies have reduced staff, stacked boats, and lowered general and administrative expenses. However, these cost reductions are insufficient for some competitors due to maturing debt coverage as seen in Table 6.

Table 6: Debt

Company Cash Balance Outstanding Debt Key Maturity

Hornbeck Offshore $225.5 million $1.08 billion Late 2019 Tidewater Offshore $674.9 million $2.04 billion End 2017 SEACOR Holdings $471.2 million $1.01 billion 2017

GulfMark $9.8 million $473 million 2019

Source: Seekingalpha.com November 9, 2016

Tidewater Offshore (TDW/NYSE) Creator of the first Offshore Support Vessel in 1966, Tidewater has the largest fleet in the industry. Tidewater is a much more diversified marine transport company, with over 90% of its fleet working internationally across 60 countries. Approximately 60% of revenue is from drilling related activities and 40% is from construction and support activities. Fearing a credit downgrade, Tidewater drew its entire credit line, $600 million, to preserve liquidity during the industry downturn. Despite Tidewater’s previous attempt to stay liquid, the company has breached covenants required by Tidewaters debt facilities and will need to renegotiate with debt holders or face bankruptcy. Currently, the company is in discussion with the banks and note holders to obtain waivers for these covenants. SEACOR Holdings (CKH/NYSE) SEACOR provides marine transport equipment primarily servicing U.S international energy and agricultural markets. With 183 offshore marine service vessels, 1,444 inland river service vessels, and over 40 harbor and short sea transport vessels, SEACOR is subject to less volatility from offshore drilling activity. In fact, SEACOR has one of the more advantageous positions in the industry and may be able to buy out some of its distressed competitors. Currently, SEACOR is in talks with GulfMark regarding a possible consolidation. GulfMark GulfMark is one of Hornbeck's smallest peers with 68 vessels worldwide. The majority of GulfMark's revenue is generated in the North Sea, with the minority coming from the Americas. GulfMark's main objective is maintaining liquidity. With a large amount of senior notes maturing SEACOR has already stepped in with an offer to help GulfMark reorganize. A GulfMark/SEACOR merger may lead to further merger and acquisition activity within the marine transport industry.


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MANAGEMENT PERFORMANCE AND BACKGROUND Hornbeck Offshore Services, Inc.'s, board of directors consists of nine members. Two of these members are insiders, including the Company’s Chief Executive Officer (CEO) and the Board Chairman, Todd Hornbeck. Led by Director Bernie W. Stewart, the Company's Compensation Committee is comprised of three other members: Kevin O. Meyers, John T. Rynd, and Nicholas L. Swyka. The Compensation Committee is responsible for determining the appropriate compensation for Hornbeck's key executives based on Hornbeck's performance in comparison to other companies of similar size and industry. Also, Hornbeck's executive compensation policies are based on agreements made with certain executives.

These agreements include provisions for contractually stated base salaries plus cash incentives based on the Company reaching certain financial results. These financial results pertain to earnings before interest, taxes, depreciation, and amortization targets; operating margin targets; and operating safety targets. Return on invested capital (ROIC) is also a metric that the committee finds useful in comparing Hornbeck Offshore Services, Inc., to its competitors. ROIC is a useful tool in understanding how efficiently a company uses its capital in order to generate profit (see Table 7).

Table 7: Return on Invested Capital (ROIC)

Company 2012 2013 2014 2015 2016 Hornbeck 2.05% 3.33% 4.15% 3.85% 3.17% Tidewater 2.74% 4.70% 4.18% (1.1%) (2.6%)

SEACOR Holdings 2.28% 0.82% 2.42% 4.87% (1.0%) GulfMark Offshore 5.55% 3.24% 6.04% 5.78% (14.1%)

Peer Average 3.16% 3.02% 4.20% 3.36% (3.6%)

Source: Bloomberg September 21, 2016


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Executive Compensation

Hornbeck's executives receive compensation in the following ways:

• Base Salary payment to compensate the executives for day to day services. As a result of weak market conditions, effective January 1, 2015, certain executive officers voluntarily reduced their base salaries by 10-‐15%.

• Cash incentive compensation and bonuses are based on four components: (i) EBITDA, (ii) operating margin, (iii) total recordable incident rate (or TRIR) and (iv) the discretion of the Compensation Committee. For the non-‐discretionary components of the compensation and bonuses, achieving the "threshold" of performance earns an executive 50% of base salary multiplied by a percentage weight, achieving the performance "target" earns the executive 100% of the base salary multiplied by a percentage weight, and achieving the maximum performance metric earns the executive 200% of the base salary multiplied by a percentage weight.

• Equity incentive compensation awards have been targeted at or above the seventy-‐fifth percentile of the Industry Peer Group. The compensation committee uses its discretion in determining the amount and type of equity compensation that executives receive. The Compensation Committee considers factors such as individual responsibilities, competitive market data, stock price performance, and individual and Company performance.

During the previous five years, the compensation awarded to executives has consisted, on average, of 72% stock awards, 16% salaries, 15% non-‐equity incentives, 5% option awards, and 2% bonuses. In fact, Hornbeck has not issued any executive bonuses or option awards since 2011. Due to the structure of executive compensation, maintaining the fiscal health of the company is always a priority of the management team. Figure 4 illustrates executive compensation over a five-‐year period.


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Figure 4: Executive Compensation

Source: Bloomberg September 21, 2016

Hornbeck's Compensation Committee has been given the task of regulating the amount of compensation both executives and other staff members receive. The earnings before Interest depreciation, taxation, amortization (EBITDA) target for 2015 was $305 million. The Company reported EBITDA of $253.6 million, which was off target by 17%. This performance exceeded the threshold vesting metric for this compensation component. The Company’s operating margin of 24.5% was fourth overall out of 12 in comparison with the Company's OSV Peer Group. The Compensation Committee also emphasizes the importance of safety with executive compensation metrics. Recordable incident rate of 0.29 was also better than the target metric. This performance entitled each of the executive officers to receive cash incentive compensation. Taking into account macroeconomic conditions, even though the executives had outperformed certain performance thresholds, the committee elected to not award any of the discretional portion of executive compensation. This, in turn, led to incentive compensation payout of 75% of base salaries in 2015.

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2011 2012 2013 2014 2015

Millions of D

ollars

Bonuses Given to Execuqves Stock Awards

Opqon Awards Non-‐Equity Incenqve

Salary


18

Todd M. Hornbeck CEO, President, Chairman, Cofounder ( 47) Following the footsteps of his father, Larry Hornbeck, the creator of the original Hornbeck Offshore Services, Inc., Todd Hornbeck founded Hornbeck Offshore Services, Inc., in 1997. Before founding Hornbeck Offshore Services, Inc., Mr. Hornbeck worked beside his father at the original company in areas such as strategy and development. When the original Hornbeck merged with Tidewater, Mr. Todd Hornbeck began to develop a business plan for a marine transportation company specializing in servicing the relatively new deepwater oil industry.

Tidewater's Chief Executive Officer (CEO) disagreed with this new direction, so Mr. Hornbeck left Tidewater in favor of pursuing his vision of a company serving a deepwater offshore oil customer base. With the creation of the modern day Hornbeck Offshore Services, Inc., Mr. Todd Hornbeck became CEO, and in 2005 he was elected as Chairman.

Carl G. Annessa Executive Vice President , COO (59) After assuming the roles of Executive Vice President and Chief Operating Officer in February of 2005, Carl Annessa vacated his position as Vice President of Operations, which he had held at Hornbeck Offshore Services, Inc., since 1997. Mr. Annessa's new responsibilities as COO include the overseeing of fleet operations as well as new vessel construction programs. Prior to working at Hornbeck, Mr. Annessa spent 17 years working for Tidewater Inc. in various technical and operational management positions. During his stint at Tidewater Inc. Mr. Annessa managed various large fleets in the Arabian Gulf and the Caribbean and West African markets. In addition, he oversaw the building of several of Tidewater's vessels.

James O. Harp, Jr. Executive Vice President and CFO (55) James Harp, Jr. became Executive Vice President in February 2005. Before becoming Executive Vice President, Mr. Harp served as Vice President and Chief Financial Officer. Mr. Harp’s past experience as Vice President in the energy group of RBC Dominion Securities Corporation, and as Vice President in the energy group of Jefferies & Company, Inc., gives Mr. Harp a great deal of management experience in the energy sector. During his investment banking career, Mr. Harp built an extensive record working with marine-‐related oil service companies. Prior to his investment banking career, he held various positions of increasing responsibility in the tax department of Arthur Andersen LLP. Mr. Harp also co-‐founded a privately held seismic brokerage company called SEISCO, Inc., where he also served as Treasurer and Director. Mr. Harp is also an inactive certified public accountant in Louisiana.


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Samuel A. Giberga Executive Vice President, General Counsel and CCO (54) Samuel Giberga joined the Hornbeck team in 2004 as Hornbeck Offshore Services, Inc.'s, General Counsel. In addition to being appointed Executive Vice President, he became Hornbeck Offshore Services, Inc.'s, Chief Compliance Officer in June of 2011. Before working for Hornbeck, Mr. Giberga served as a partner in two law firms including the New Orleans-‐based law firm of Correro, Fishman, Haygood, Phelps, Walmsley & Casteix from February 2000 to December 2003, and Rice, Fowler, Kingsmill, Vance & Flint, LLP from March 1996 to February 2000, where he served as partner. Mr. Giberga, also has connections to the marine industry as co-‐founder of Maritime Claims Americas, LLC, a group which manages a network of offices for marine protection and indemnity associations throughout Latin America.

John S. Cook Executive Vice President, CCO and CIO (47) John Cook became Executive Vice President and Chief Commercial Officer in February 2013. In addition to this position, Mr. Cook serves as Chief Information Officer, a position he has filled since 2002. Prior to working for Hornbeck Offshore Services, Inc., Mr. Cook was employed as a consultant for Arthur Andersen LLP from January 1992 to May 2002. Eventually becoming a Senior Manager for Arthur Anderson, Mr. Cook assisted numerous marine and energy service companies in many business process and information technology projects.

SHAREHOLDER ANALYSIS As of November 1, 2016, Hornbeck Offshore Services, Inc., has 36.3 million diluted shares outstanding, with an average daily volume of 1.10 million shares. Hornbeck has generated a (60.06%) year-‐to-‐date total return. This figure will remain volatile in the immediate future as the market reacts to current operating conditions. The Company’s shares are owned by insider executives, institutional investors, and mutual funds.


20

Institutional Investors Hornbeck currently has 146 institutional investors holding 36.63 million shares. Because of high levels of short selling among institutional investors, these shares are equivalent to a 100.82% ownership. The total value of these institutional holdings is $187 million. Table 8 lists Hornbeck’s top-‐ten institutional shareholders.

Table 8: Top-‐Ten Institutional Shareholders

Institution Shares Held % Out Fine Capitol Partners, L.P. 3,363,497 9.29% FMR, LLC 3,217,170 8.89% Vanguard Group, Inc. (The) 2,846,745 7.87% Dimensional Fund Advisors 2,669,732 7.38% BlackRock Fund Advisors 2,328,793 6.44% Mackenzie Financial Corporation 2,236,861 6.18% Anchor Bolt Capitol, LP 2,158,778 5.97% Raging Capital Management, LLC 1,191,349 3.29% Renaissance Technologies, LLC 939,500 2.59% l.g Investment Management, Ltd. 875,500 2.42%

Source: Yahoo Finance September 30, 2016

According to NASDAQ, 58 of these institutional holders have increased their stake in Hornbeck this year, 61 holders have decreased their position, and 27 have held the stock. An alarming statistic is that only ten shareholders have bought new positions, equal to 207,328 shares. Noticeably, a total of 17 investors have sold 889,436 shares, compared to only ten investors increasing positions by 207,328 shares. The percentage change in institutional shares held over the past year was (9.07%) with net shares purchased of (3,636,900). This shows that some investors are worried about the future outlook of Hornbeck and they are looking to protect themselves from any financial risk. The top-‐five institutional shareholders own roughly 40% of Hornbeck’s outstanding shares. These institutions are Fine Capital Partners, FMR, Vanguard Group, Dimensional Fund Advisors, and BlackRock Fund Advisors. Fine Capital Partners owns the largest stake in Hornbeck, sitting at 9.18% with 3.36 million shares outstanding. Fine Capital Partners has 4.7% of its Fund 13 portfolio tied up in Hornbeck.

Insider Investors

The top-‐ten insider investors of Hornbeck are all members of the executive team. Todd Hornbeck, Hornbeck’s Chief Executive Officer, owns 980,440 shares which is equivalent to a nearly 3.0% stake in the Company. In the last year, Mr. Todd Hornbeck has increased his share position in the Company, which suggests that he is optimistic about the future of Hornbeck.


21

Nearly 17.0% percent, or 6.12 million shares, of the Company are owned by insiders at Hornbeck. In the last 12 months, insiders have bought 613,838 shares in the Company, while selling 109,693 shares. However, there have only been eight trades made in the last three months. Table 9 identifies Hornbeck’s top-‐ten insider investors and the number of shares they own.

Table 9: Top-‐Ten Insider Investors

Name Shares Held Date Reported Todd Hornbeck 980,440 February 18, 2016 Larry Hornbeck 219,665 July 2, 2016 James Harp Jr. 337,967 February 18, 2016 Carl Annessa 298,123 February 18, 2016 John Cook 193,903 February 18, 2016 Samuel Giberga 190,267 February 18, 2016 Timothy McCarthy 100,905 February 18, 2016 Bruce Hunt 92,913 July 1, 2016 Patricia Melcher 69,666 July 1, 2016 Steven Krablin 54,947 July 1, 2016

Source: Yahoo Finance September 30, 2016


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RISK ANALYSIS AND INVESTMENT CAVEATS

As oil prices and market expectations continue to decline well into 2016, reductions in exploration and production have significantly reduced demand for Hornbeck Offshore Services, Inc. In this fragile market, even minor risk factors can have serious effects on company stability and performance. As companies industry-‐wide struggle to fund operating and debt service requirements, any unexpected expenditure or event that negatively affects operations could prevent companies from meeting obligations.

Regulatory Risks

The Company is subject to complex laws and regulations enforced by a range of competing federal, state, foreign, and private organizations. Complying with constantly evolving operational and safety standards can require significant expenditure to purchase equipment, increase staffing, and raise training standards. Any violation of these regulations can result in severe civil penalties and remedial obligations. Environmental regulations can impose strict liability for oil spills and pollution regardless of regulatory compliance or negligence. As producers shift liabilities onto service providers, OSV operators put their entire balance sheet at risk to realize any revenues. The regulators could hold the Company responsible for cleanup and containment costs, damages to third parties, tort liability, and civil and criminal penalties. These liabilities can quickly multiply with, for example, BP estimating the total costs related to the 2010 Deepwater Horizon spill at over $61 billion. In addition, any regulatory risks that affect customer operations exclusively will also affect the Company. Changes to these laws or regulations have the potential to impact operating performance and subsequently reduce or eliminate profitability.

In addition to safety and environmental laws, most of the Company’s operations are governed under the Jones Act. The law imposes certain ownership and build requirements on vessels engaged in the U.S. coastwise trade. Any vessel that transports “merchandise” between points in U.S. governed waterways must be owned by a U.S. citizen and be built in the U.S. The act is both a commercial and national defense statue. In conjunction with the Merchant Marine Act of 1936, the U.S. government ensures the operational capacity of the U.S. maritime industry and has the ability to requisition or purchase vessels in case of a national emergency. The Company would receive compensation for the fair market value of the vessels but not for lost revenue.

However, most Jones Act risks are economic. While the Company ensures compliance with citizenship requirements, any violation could result in loss of endorsement status for vessels preventing participation in coastal trade, which cannot easily be reversed. U.S. domestic transportation heavily relies on the trade protections afforded by the Jones Act. Foreign companies can only operate in U.S. coastal waters if granted specific waivers or if the Secretary of Homeland Security temporarily suspends coastwise trading restrictions. Strict enforcement of these laws allows the U.S. marine transportation industry to maintain high operating and safety standard without being undercut by foreign labor. While some interest groups are seeking to repeal Jones Act regulations, the law still has broad political support in the U.S. However, any change in the law that increases foreign competition could adversely


23

affect the Company’s operations. Operational Risks

Deepwater oil production is an inherently dangerous industry. The Company’s vessels encounter a variety of operating risks daily that can disrupt business and result in substantial losses. The Company is committed to high operating and safety standards in order to prevent mechanical failure as well as collisions which can injure crews, damage assets, and result in loss of future income. In addition, Hornbeck vessels constantly carry hazardous materials, which amplify the consequences from general maritime accidents. No matter the amount spent on risk management or accident prevention, there is always a possibility for an unpreventable catastrophic maritime disaster. This could expose Hornbeck to significant liabilities.

Adverse weather and sea conditions are a recurring risk factor that can sideline operations. The Company primarily operates in the Gulf of Mexico and in turn, hurricanes and other weather related events can severely impact oil production. Significant damage to the Company’s or customer’s assets could halt operations for a significant time period. Hornbeck has maintained an impressive safety record during hurricanes, reporting no vessel and little revenue losses, even during Hurricane Katrina. With the increase in offshore traffic preceding a bad storm in the Gulf of Mexico, these periods sometimes result in increased revenue.

Especially in the current volatile energy market, any event that results in vessel damage, employee injury, or environmental destruction is potentially catastrophic. The Company has a significant amount of insurance coverage to meet potential expenditures related to operational risks. However, should Company or industry risks increase, the Company may not be able to afford a subsequent rise in premiums.

Financial Risks Hornbeck, along with the entire industry, has experienced financial difficulties in 2016. Low oil prices have choked exploration and production, reducing the need for oil service vessels. Cash flows for the Company are neutral and negative. Currently, the Company has a positive operating cash flow. However, despite being able to cover operational expenses, real earnings are negative, and it is unsure how long the Company can operate at this loss.

Global credit rating agency Standard & Poor lowered Hornbeck’s rating from B+ to CCC+. The Company currently is highly levered with an unsecured debt rating of B+. Liquidity risk is low at the moment, but if the Company fails to meet its financial obligations that may change. The Company may use the existing $225 million in cash on the balance sheet or their $200 million on its revolving credit facility to pay obligations. If cash on the balance sheet is depleted and the Company is unable to find new creditors, Hornbeck runs the risk of not being able to fund daily operations. In the event of continued depressed market conditions, if Hornbeck is unable to locate new creditors, the Company would be forced to cease operations. Rising interest rates may make it harder for Hornbeck to pay back existing debt.


24

In addition, the mismanagement of the Company’s long-‐term and short-‐term contract portfolio can severely alter cash flows. Short-‐term contracts benefit from increased day rates in favorable market cycles, but have less predictable cash flows. Longer-‐term contracts increase utilization rates and provide steady cash flows. These contracts are usually maintained to meet debt service requirements. However, long-‐term contracts are increasingly rare as service demand decreases. If Hornbeck cannot obtain the necessary long-‐term contracts, they may not be able to guarantee sufficient cash flows to prevent default.

Expansion/Exchange Risks

Although the current state of the market is not conducive to immediate expansion, especially with over half of Hornbeck's fleet being stacked, several opportunities have emerged opening up the possibility for Hornbeck to expand in the future in both the Mexican and Brazilian deep-‐water energy industry. Recent constitutional and legislative changes in Mexico are expected to open up the market to companies with more modern technology previously not available to Mexico. More importantly, these reforms have opened up oil and natural gas blocks off the coast of Mexico to foreign investment. In fact, Mexico is expected to host their first deep water auction in 2016. This access to Mexico's energy industry presents great opportunities for Hornbeck in the future.

In Brazil, the market has traditionally been controlled by Petrobras, its state-‐owned national oil company. Because of recent developments with both the Company and the industry as a whole, Petrobras has been forced to cut back spending. This slowed expansion might lead to opportunities in Brazil for other major oil companies, such as Hornbeck's customers.

Expansion comes with many risks. Hornbeck's potential foreign operations could be affected by things like the unanticipated effect of tax laws, immigration laws, or any other unexpected costs associated with following foreign laws. In addition, as with most multinational operations, the political stability of a country can have a great effect on the Company's profitability.

However, despite some foreign business, most of the Company's operations are in the Gulf region. This means most of its expenses are subject to the U.S. dollar. Due to Jones Act regulations the crew, as well as the vessel, must be U.S. flagged to work in the Gulf. This means that the crews are paid in U.S. currency and are not subject to exchange risk. In addition, most contracts with foreign customers in and outside the Gulf are settled in U.S. dollars limiting exchange rate risk on the revenue side. Hornbeck is able to utilize long term contracts for its Multi-‐Purpose Supply Vessel (MPSVs) to aid in the exploratory work. The OSVs tend to be used on a short term basis and are thus priced every day. The new MPSVs Hornbeck is completing will allow them to possibly gain more consistent revenue stream from their long-‐term contracts.


25

FINANCIAL PERFORMANCE AND PROJECTIONS We predict a 12-‐month price target of $13 for Hornbeck Offshore Services, Inc. Our team made a variety of assumptions about Hornbeck, the global outlook, and the industry as a whole to derive this price. Our model is based on a price times volume analysis of Hornbeck's vessels. Using a revenue per ton x utilization rate, we were able to come up with a prediction for our revenues. We were able to calculate our final price target using industry EV/EBITDA multiples.

The marine oil field services industry as a whole is very distressed due to low oil prices and, thus, reduced exploration and production activity. A sharp reduction in day rates have caused many operators to stack vessels and access their revolving credit. With talks of consolidation within the industry, the key players may shift before oil prices return to a profitable level. If Hornbeck is to weather the storm, it will have the newest fleet on the market. All major offshore service vessel (OSV) providers have halted new build programs to preserve capital during this downturn. Operating Activities Our team used a price times quantity model to forecast revenues. We isolated revenues by revenue per ton then multiplied this by active utilization rates. This model used the number of active boats, day rates, overall tonnage, vessel size, oil prices, multi purpose supply vessels (MPSVs), and OSVs. Utilization rates and day rates are based on the number of operating rigs, which is largely based on oil prices. Due to the lag between a rise in oil prices and rig activity, it takes anywhere from six months to 18 months for inactive rigs to become operable again. Investing Activities Cost associated with the fifth OSV new build program will be complete upon the delivery of the remaining newly constructed vessels in 2018. The Company has no plans to borrow additional funds to construct new vessels. The Company has already incurred most of the costs of the new build program, with only $68 million remaining, and Hornbeck has enough cash to pay-‐off this balance. We do not expect any growth capital expenditures (CAPEX) in the near future and only forecast maintenance CAPEX, which accounts for investment to maintain the vessels as they age. Hornbeck will incur annual maintenance costs that will grow at a 3% rate.


26

Financing Activities Due to poor market conditions, Hornbeck will not need to secure additional financing capital in the near future. The stock price is currently at an all-‐time low and management is not confident about the return of its stock price over the next year, as oil prices remain low and market conditions are not expected to recover quickly. As of the current period, no additional shares of the Company have been repurchased by management and we do not forecast that management will repurchase shares in the near future. The three senior notes that Hornbeck has outstanding are extremely crucial to the survival of the Company. The 2019 convertible senior notes, 2020 senior notes, and 2021 senior notes have a combined face value of $1.125 billion. As the maturity date nears, Hornbeck must develop a plan to repay or refinance this debt. The Company also has a $300 million credit facility, which is expandable up to $500 million, but it remains undrawn to date. The intended use of the credit facility is for potential future construction or acquisition of assets that will generate income, however, Hornbeck has no plans to build new boats and would only acquire new assets from distressed companies for cents on the dollar.

SITE VISIT On Friday, October 28, 2016, our Burkenroad Reports group met with Hornbeck Offshore Services, Inc., executive management in Covington, Louisiana at the Company’s headquarters. We met with James Harp Jr., the Chief Financial Officer (CFO), and Potter Adams, the Director of Corporate Finance, who are both solely responsible for all of the financial analysis at the Company. The two provided details about the Company and the competitive landscape. In great depth, Mr. Harp discussed the outlook for the industry with the uncertainty of Tidewater’s future, and also ran through how the merger of SEACOR and GulfMark will affect Hornbeck.

Mr. Harp stated that he does not care if Hornbeck has to charge lower dayrates and operate at a negative revenue for the meantime. Its competitors do not have enough cash on hand to operate at a loss for a substantial period of time. If Hornbeck can have success in driving its competitors to stack their boats, it will be able to capitalize on the market and get new work. With industry conditions expected to get worse through the first half of 2017, Hornbeck will need to keep operating expenses down and weather the storm. If Hornbeck is able to stay in business long enough to see offshore drilling return, it will be one of the best equipped companies to handle the demand. Mr. Harp was very optimistic about Hornbeck’s position in the industry despite the downturn it has taken. He also added that the active rig count drives demand and dictates how many contracts exploration and production (E&P) companies are seeking. Lastly, for the first time in the oil and gas industry, there is no catalyst to build new ships. This leaves Hornbeck with the newest generation of offshore support vessels (OSVs) on the market.


27

Site visit photo

INDEPENDENT OUTSIDE RESEARCH

To learn more about Hornbeck Offshore Services, Inc., and oilfield service companies, our group connected with two professional research analysts.

Both conversations began with a discussion about the current climate of the oilfield services industry. Clearly, it is distressed, with oil and gas prices nearly half of what they were a few years ago. One analyst stated that lower spec vessels can’t compete anymore and, given the downturn in the industry, the OSVs have been sitting idle for a few years. Currently, Hornbeck has many of its vessels stacked, which temporarily decreases operating and maintenance expenses. However, when the oil and gas industry returns there is a huge cost to get back on line.

Companies like Tidewater are at rock bottom. However, another analyst stated that Hornbeck is “the best house on a bad block.” Hornbeck has the most up-‐to-‐date fleet amongst its peer group and has cut expenses to the bare minimum at this point. With oil prices hanging in the $50 per barrel range for the near term, Hornbeck will have to utilize its fleet as efficiently as possible to generate better earnings. For Hornbeck to continue to better its financial situation, it must consider acquiring assets in the industry. Hornbeck has a lot of cash on hand and it could take out some of its competitors by acquiring more assets at a discount from other distressed companies. The best returns are made by buying distressed entities in liquidation, so if Hornbeck can use its capital wisely, it can reap the benefits of a smart acquisition. However, for a company like Tidewater on the brink of bankruptcy, Hornbeck should only consider acquiring additional assets for cents on the dollar. According to our source, Hornbeck, with or without new acquisitions, has the necessary resources to get through this downturn, as they boast one of the most concentrated, high-‐spec fleets in the Gulf of Mexico.


28

An analyst also stated that Hornbeck should look into moving assets outside of the Gulf of Mexico, and into regions like Brazil, Mexico and Central America. This would remove excess supply away from the Gulf and create more competition for new contracts in the region. Additionally, Hornbeck should look to the U.S. government to change regulations so that over time, the Jones Act protects U.S. flagged MPSVs, as for OSVs. This would allow for the higher spec vessels to be utilized for most projects, while the OSVs remained docked.

Both research analysts seemed optimistic about the future outlook for Hornbeck in 2017, so long as oil prices continue to move in an upward direction and if Hornbeck can be contracted for new services in the Gulf of Mexico and other regions in which it operates.


29

ANOTHER WAY TO LOOK AT IT

ALTMAN Z-‐SCORE The Altman Z-‐Score is an easy way to calculate a company’s likelihood of bankruptcy and credit risk. It is calculated using five financial ratios from a company’s 10k report. Altman, a professor at New York University’s Stern School of Business, published the formula in 1968. The five ratio measures used to calculate the Z-‐score are: (A) working capital to total assets, (B) retained earnings to total assets, (C) earnings before interest and tax (EBIT) to total assets, (D) market value of equity to total liabilities, and (E) net sales to total assets. The equation used to calculate the Altman Z-‐Score takes into account the measures previously listed and is weighted as such: 1.2A + 1.4B + 3.3C + 0.6D + 1.0E. A Z-‐Score between 1.8 and 3 means there is moderate risk of bankruptcy, and a score above 3 means a firm does not face any significant financial risk at the time. Potential investors can use this score to analyze the safety of their investments.

According to Table 10, Hornbeck Offshore Services, Inc., has scored below the 1.80 threshold over the previous six years, most recently scoring a 0.66. This means Hornbeck is currently considered a distressed company and it would be risky for an investor to take a position in the Company. The Company’s Z-‐Score is nearly half of the score from two years ago, which can be attributed to depressed oil prices, a decreasing EBIT, and a decreasing market capitalization. With the uncertainty of the oil industry, Hornbeck should expect its Z-‐Score to remain below 1.80. Hornbeck is in a similar position relative to its industry competitors, as other offshore service companies are suffering from the same poor industry conditions.

Table 10: Altman Z-‐Score

Year 2011 2012 2013 2014 2015 2016 HOS Z Score 1.19 1.17 1.51 1.15 0.85 .66 Zone Distress Distress Distress Distress Distress Distress


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PETER LYNCH EARNINGS MULTIPLE VALUATION Peter Lynch, the “best mutual fund manager ever,” created a powerful charting tool that made his reasoning for investments much simpler. His tool identified if a stock was overpriced by comparing its stock price line to its earnings line. He aligned $1 in earnings to a $15 stock price, so the earnings line represents actual earnings per share (EPS) multiplied by a price to earnings (P/E) ratio of 15. When the price line is well below the earnings line, the stock is a buy. When the price line is above the earnings line, Peter Lynch would sell the stock. The 15 times P/E ratio was Peter Lynch’s main criterion for buying a stock. At the current price of $4.20 trading at 9.5037X earnings, Peter Lynch would hold-‐off on purchasing this stock or he would sell the stock. Based on Hornbeck’s earnings over the last 12 months, the stock price would be viewed as overpriced (see Figure 5).

Figure 5: Peter Lynch Earnings Multiple Valuation

Source: Bloomberg November 5, 2016

Price Per Share

Trailing 12M EPS


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WWBD? What Would Ben (Graham) Do? The Ben Graham analysis is a method for picking stocks using a value-‐oriented approach. Graham believed that some stock values were not fairly represented by the stock market. As described in his book, Security Analysis, Ben Graham’s method involves many hurdles that the stock must surpass in order to be considered a good value stock. However, we only use eight of his hurdles in our analysis. The first four hurdles help uncover stocks trading at a discount to their intrinsic value based several important operating metrics. The second four hurdles measure risk by considering stability in earnings and financial leverage. According to this eight-‐hurdle analysis, Hornbeck Offshore Services, Inc., would be a potential pick for Graham because it passes six of the eight hurdles. Hornbeck passes hurdle one which states that the company must have an earnings to price yield of 2X the yield on a ten-‐year Treasury. Hornbeck’s price to earnings ratio of 4.4 falls below the designated threshold of half of the stocks highest price to earnings ratio in the past five years, so it also passes hurdle two. However, with no dividend, Hornbeck fails to pass hurdle three which states that the stock must have a dividend yield of half of the yield of the current ten-‐year Treasury bond. Hornbeck does, however, pass hurdle four because its stock price of $4.39 is less than 1.5 times the book value of the stock. Hornbeck also passes hurdle five which stipulates that the total debt must be less than the book value of stockholder’s equity. In addition, Hornbeck passes hurdle six because its current ratio of 6.02 is greater than the Ben Graham requirement of 2. Finally, Hornbeck passes hurdle seven with its compounded annual growth rate above the required 7%. Hornbeck does not pass hurdle eight because its earnings growth lacks the necessary stability (see Figure 6).

Figure 6: Ben Graham


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Earningspershare(ttm) 0.62$ Price: 4.39$EarningstoPriceYield 14%10YearTreasury(2X) 4.14%

P/Eratioasof 12/31/11 (363.2)P/Eratioasof 12/31/12 14.0P/Eratioasof 12/31/13 9.8P/Eratioasof 12/31/14 9.2P/Eratioasof 12/31/15 4.4

CurrentP/ERatio 4.4

Dividendspershare(ttm) -$ Price: 4.39$DividendYield N/A Nil

1/2Yieldon10YearTreasury 1.04%

StockPrice $4.39 4.39$BookValuepershareasof 9/30/16 39.22$

150%ofbookValuepershareasof 9/30/16 58.83$

Interest-bearingdebtasof 9/30/16 -$Bookvalueasof 9/30/16 1,425,200$

Currentassetsasof 9/30/16 284,038$Currentliabilitiesasof 9/30/16 47,170$

Currentratioasof 9/30/16 6.02

EPSforyearended 12/31/15 1.84$EPSforyearended 12/31/14 2.41$EPSforyearended 12/31/13 4.38$EPSforyearended 12/31/12 2.63$EPSforyearended 12/31/11 (0.09)$

EPSforyearended 12/31/15 1.84$ 24%EPSforyearended 12/31/14 2.41$ -45%EPSforyearended 12/31/13 4.38$ 66%EPSforyearended 12/31/12 2.63$ -3027%EPSforyearended 12/31/11 (0.09)$

Stockpricedataasof

HORNBECKOFFSHORESERVICESINC.(HOS)BenGrahamAnalysis

Hurdle#1:AnEarningstoPriceYieldof2XtheYieldon10YearTreasury

yesHurdle#2:AP/ERatioDownto1/2oftheStocksHighestin5Yrs

Hurdle#7:EarningsGrowthof7%orHigheroverpast5years

YesHurdle#8:StabilityinGrowthofEarnings

November9,2016

yes

No

Hurdle#3:ADividendYieldof1/2theYieldon10YearTreasury

NoHurdle#4:AStockPricelessthan1.5BV

YesHurdle#5:TotalDebtlessthanBookValue

YesHurdle#6:CurrentRatioofTwoorMore

Yes

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(21,51

0)

(14,44

5)

(20,71

9)

(57,45

4)

(17,37

2)

(17,26

3)

(17,14

0)

(19,92

5)

(71,70

0)

1,52

5

377

386

401

360

1,52

4

425

411

415

410

1,66

1

Interestexpen

se

Otherincome(expen

se),ne

tIncomebe

foreincometaxes

Incometaxexpe

nse

(47,35

2)

(92)

100,39

8

36,320

(30,73

3)

501

140,27

4

52,367

(39,49

6)

(11,06

4)

(11,00

4)

(12,82

0)

(11,12

7)

(46,01

5)

(11,12

7)

(11,12

7)

(11,12

7)

(11,12

7)

(44,50

8)

1,00

5

504

(48)

1,59

2

2,04

8

106,57

8

(10,96

3)

(32,17

6)

(25,27

2)

(31,48

6)

(99,89

7)

(28,07

5)

(27,97

9)

(27,85

2)

(30,64

2)

(114

,547

)

39,757

(3,449

)

(11,59

0)

(8,769

)

(11,65

0)

(35,45

8)

(10,38

8)

(10,35

2)

(10,30

5)

(11,33

7)

(42,38

3)

Incomefrom

con

tinu

ingop

erations

Incomefrom

discontinue

dop

erations,netoftax

Netincome

Earningspershare:

Basicearningspersharefrom

con

tinu

ingop

erations

Basicearningspersharefrom

discontinue

dop

erations

Non

-recurringitem

sBa

sicearningspercom

mon

share

Dilutedearningspersharefrom

con

tinu

ingop

erations

Dilutedearningspersharefrom

discontinue

dop

erations

Non

-recurringitem

sDilutedearningspercom

mon

share

Weightedaveragesharesofcom

mon

stock:

Basic

Diluted

SELECT

EDCOMMONSIZEAMOUNTS(%

ofo

peratingreven

ue)

Ope

ratingexpen

ses

Gen

eraland

adm

inistrativeexpe

nses

Totalope

ratingcosts

Ope

ratingincome

64,078

47

,315

11

1,39

3$

1.79

$ 1.

31$ (0

.45)

$

3.55

$ 1.

79$ 1.

29$ (0

.44)

$

3.52

$ 35,895

36

,548

43

.65%

9.75

%69

.07%

31.21%

87,907

618

88

,525

$

2.43

$ 0.

02$ 2.

45$ 2.

40$ 0.

01$ 2.

41$ 36,172

36

,692

46

.71%

8.55

%73

.44%

26.69%

66,821

(7,514

)

(20,58

6)

(16,50

3)

(19,83

6)

(64,43

9)

(17,68

7)

(17,62

7)

(17,54

7)

(19,30

4)

(72,16

5)

66,821

$

(7,514

)$

(20,58

6)$

(16,50

3)$

(19,83

6)$

(64,43

9)$

(17,68

7)$

(17,62

7)$

(17,54

7)$

(19,30

4)$

(72,16

5)$

1.87

$

(0.21)

$

(0.57)

$

(0.46)

$

(0.54)

$

(1.77)

$

(0.48)

$

(0.47)

$

(0.46)

$

(0.50)

$

(1.91)

$

1.87

$

(0.21)

$

(0.57)

$

(0.46)

$

(0.54)

$

(1.77)

$

(0.48)

$

(0.47)

$

(0.46)

$

(0.50)

$

(1.91)

$

1.84

$

(0.21)

$

(0.57)

$

(0.46)

$

(0.54)

$

(1.77)

$

(0.48)

$

(0.47)

$

(0.46)

$

(0.50)

$

(1.91)

$

1.84

$

(0.21)

$

(0.57)

$

(0.46)

$

(0.54)

$

(1.77)

$

(0.48)

$

(0.47)

$

(0.46)

$

(0.50)

$

(1.91)

$

35,755

36,085

36,191

36,338

36,403

36,320

36,860

37,342

37,813

38,274

37,725

36,302

36,085

36,191

36,338

36,403

36,320

36,860

37,342

37,813

38,274

37,725

46.06%

52.63%

63.96%

56.57%

56.57%

56.97%

54.97%

52.97%

50.97%

48.97%

52.11%

10.14%

11.29%

23.06%

17.39%

17.54%

16.72%

18.23%

18.64%

19.20%

21.94%

19.40%

79.10%

100.96

%14

0.08

%12

7.97

%14

0.24

%12

4.58

%12

8.02

%12

8.48

%12

9.13

%13

8.69

%13

0.78

%30

.15%

-1.02%

-40.08

%-27.82

%-40.24

%-24.56

%-28.02

%-28.48

%-29.13

%-38.69

%-30.78

%Incometaxexpe

nse

Incometaxexpe

nse/Incomebe

foreincometaxes

Netincome

YEAR-TO

-YEA

RCH

ANGES

Revenu

esOpe

ratingexpen

ses

Gen

eraland

adm

inistrativeexpe

nses

Ope

ratingincome

Interestincome

Interestexpen

se

Incomebe

foreincometaxes

Netincome

6.63

%36

.18%

20.32%

18.3%

5.6%

18.3%

45.4%

16.1%

-18.2%

79.0%

200.9%

8.25

%37

.33%

13.95%

15.8%

23.9%

1.5%

-1.0%

-56.8%

-35.1%

39.7%

-20.5%

8.35

%-4.49%

-21.59

%-16.89

%-22.62

%-15.16

%-16.76

%-17.08

%-17.51

%-22.02

%-18.19

%37

.30%

31.46%

36.02%

34.70%

37.00%

35.49%

37.00%

37.00%

37.00%

37.00%

37.00%

14.04%

-9.78%

-38.35

%-31.78

%-38.52

%-27.55

%-28.53

%-29.08

%-29.82

%-37.49

%-30.98

%

-25.0%

-42.9%

-60.7%

-55.3%

-42.0%

-50.9%

-19.3%

12.9%

13.3%

0.0%

-0.4%

-26.1%

-34.2%

-40.3%

-46.5%

-35.8%

-39.2%

-15.7%

-6.5%

2.1%

-13.4%

-8.9%

-11.0%

-27.1%

-5.2%

-25.9%

-19.0%

-19.0%

30.3%

-8.7%

25.1%

25.1%

15.6%

-15.3%

-101

.2%

-154

.7%

-144

.0%

-562

.3%

-140

.0%

2127

.2%

-19.7%

18.7%

-3.8%

24.8%

40.4%

76.2%

-1.8%

5.2%

-33.0%

-0.1%

12.6%

6.4%

3.5%

14.0%

9.0%

28.5%

7.8%

10.9%

32.0%

15.9%

16.5%

0.6%

1.1%

-13.2%

0.0%

-3.3%

-24.0%

-119

.1%

-206

.2%

-207

.2%

585.5%

-193

.7%

156.1%

-13.0%

10.2%

-2.7%

14.7%

-24.5%

-121

.0%

-207

.1%

-214

.4%

642.7%

-196

.4%

135.4%

-14.4%

6.3%

-2.7%

12.0%

Hornb


OS)

BURK

ENRO

AD REP

ORT

S (w

ww.burkenroa

d.org)

Nov

embe

r 9, 201

6

34

HORN

BECK

OFFSH

ORE

SER

VICE

SINC.(H

OS)

Annu

aland

QuarterlyBalanceShe

ets

Inth

ousand

sAsof

Assets

Curren

tassets:

Cashand

casheq

uivalents

Accoun

tsre

ceivable,netofallowance

31-Dec-13A

439,29

1$

93,512

31-Dec-14A

185,12

3$13

0,96

9

31-Dec-15A

31-M

arA

30-Ju

nA

30-Sep

A31

-DecE

31-Dec-16E

31-M

arE

30-Ju

nE

30-Sep

E31

-DecE

31-Dec-17E

259,80

1$

255,84

1$

224,52

5$

225,46

1$

265,99

9$

265,99

9$

257,38

5$

259,87

5$

256,95

4$

256,76

3$

256,76

3$

91,202

65

,991

50

,502

44

,506

48

,045

48

,045

59

,123

57

,178

54

,895

48

,045

48

,045

2016

E20

17E

Deferred

taxassets,net

Curren

tassetsfromdisc

ontin

uedop

erations

72,470

1,57

8

45,531

47

0

Othercurrentassets

Totalcurrentassets

Prop

erty,plantand

equ

ipmen

t,ne

t

13,779

62

0,63

0 2,

125,37

4

20,049

38

2,14

2 2,

459,48

6

13,033

16

,180

15

,222

14

,071

14

,071

14

,071

14

,071

14

,071

14

,071

14

,071

14

,071

36

4,03

6

338,01

2

290,24

9

284,03

8

328,11

5

328,11

5

330,57

9

331,12

4

325,92

1

318,87

9

318,87

9

2,57

4,66

1

2,59

6,30

3

2,61

5,24

3

2,59

8,24

4

2,57

5,40

6

2,57

5,40

6

2,56

6,69

9

2,55

7,77

6

2,54

8,63

8

2,53

9,28

4

2,53

9,28

4

Deferred

charges,net

Otherassets

Longte

rmassetsfromdisc

ontin

uedop

erations

Totalassets

Curren

tliabilities:

Accoun

tspayable

74,075

13

,442

75

9 2,83

4,28

0$

52,930

$

68,953

11

,870

2,92

2,45

1$

42,404

$

35,273

29

,503

25

,265

20

,778

22

,216

22

,216

18

,737

14

,988

11

,240

7,49

1

7,49

1

10,446

10

,364

10

,475

10

,363

10

,363

10

,363

10

,363

10

,363

10

,363

10

,363

10

,363

2,98

4,41

6$

2,97

4,18

2$

2,94

1,23

2$

2,91

3,42

3$

2,93

6,09

9$

2,93

6,09

9$

2,92

6,37

7$

2,91

4,25

2$

2,89

6,16

1$

2,87

6,01

7$

2,87

6,01

7$

35,916

$

29,122

$

21,190

$

13,185

$

24,523

$

24,523

$

27,743

$

29,617

$

28,022

$

26,363

$

26,363

$

Accrue

dinterest

Accrue

dpayrolland

ben

efits

Deferred

revenu

eCu

rren

tliabilitiesfromdisc

ontin

uedop

erations

Otheraccrued

liabilitie

s

14,890

13

,451

8,78

6

117

11

,497

14,890

14

,830

1,56

1

1

9,35

9

14,795

13

,550

14

,792

13

,531

13

,531

13

,531

13

,531

13

,531

13

,531

13

,531

13

,531

11

,222

8,48

2

5,66

0

8,20

4

6,73

9

6,73

9

7,62

4

8,13

9

7,70

1

7,24

5

7,24

5

5,73

4

899

17,878

21

,321

14

,301

12

,250

9,65

1

9,65

1

10,918

11

,656

11

,028

10

,375

10

,375

To

talcurrentliabilitie

s10

1,67

1

83,045

85,545

73,374

55,943

47,170

54,444

54,444

59,816

62,943

60,282

57,515

57,515

Long-termdeb

t,ne

tofo

riginalissuediscou

nt

Deferred

taxliabilities,net

Long-termliabilitie

sfromdisc

ontin

uedop

erations

Otherliabilitie

sTo

talliabilities

Shareh

olde

rs'equ

ity:

Common

stock,$.01parv

alue

Additio

nalpaid-incapita

lRe

tained

earnings

Accumulated

othercom

preh

ensiv

eincome

Totalstockho

lders'eq

uity

Totalliabilitiesa

ndstockholde

rs'equ

ity

1,06

4,09

2

368,41

6

4,67

3 1,

538,85

2

361

72

4,37

9

571,48

3

(795

) 1,29

5,42

8

2,83

4,28

0$

1,07

3,47

2

392,49

2

1,56

0

1,11

7 1,

551,68

6

356

73

6,29

4

635,01

7

(902

) 1,37

0,76

5

2,92

2,45

1$

1,07

0,28

1

1,07

3,57

1

1,07

6,91

5

1,08

0,28

4

1,08

0,28

4

1,08

0,28

4

1,08

0,28

4

1,08

0,28

4

1,08

0,28

4

1,08

0,28

4

1,08

0,28

4

381,61

9

378,78

2

366,88

7

359,27

3

392,32

6

392,32

6

392,34

1

392,13

7

391,67

7

391,02

6

391,02

6

808

1,21

2

1,38

1

1,49

6

1,49

6

1,49

6

1,49

6

1,49

6

1,49

6

1,49

6

1,49

6

1,53

8,25

3

1,52

6,93

9

1,50

1,12

6

1,48

8,22

3

1,52

8,55

0

1,52

8,55

0

1,53

3,93

7

1,53

6,86

0

1,53

3,73

9

1,53

0,32

1

1,53

0,32

1

360

36

2

363

36

4

364

36

4

364

36

4

364

36

4

364

74

8,04

1

746,47

2

749,40

3

751,90

7

754,09

3

754,09

3

756,67

1

759,24

9

761,82

7

764,40

5

764,40

5

701,83

8

694,32

4

673,73

8

657,23

5

637,39

9

637,39

9

619,71

1

602,08

5

584,53

8

565,23

4

565,23

4

(4,076

)

6,08

5

16,602

15

,694

15

,694

15

,694

15

,694

15

,694

15

,694

15

,694

15

,694

1,44

6,16

3

1,44

7,24

3

1,44

0,10

6

1,42

5,20

0

1,40

7,54

9

1,40

7,54

9

1,39

2,44

0

1,37

7,39

1

1,36

2,42

3

1,34

5,69

6

1,34

5,69

6

2,98

4,41

6$

2,97

4,18

2$

2,94

1,23

2$

2,91

3,42

3$

2,93

6,09

9$

2,93

6,09

9$

2,92

6,37

7$

2,91

4,25

2$

2,89

6,16

1$

2,87

6,01

7$

2,87

6,01

7$

SELECT

EDCOMMONSIZEAM

OUNTS(asa

%ofo

peratin

grevenu

e)Accoun

tsre

ceivable,netofallowance

17.06%

20.63%

19.16%

85.90%

94.09%

85.71%

93.30%

20.54%

95.37%

94.33%

93.30%

93.30%

20.63%

Prop

erty,plantand

equ

ipmen

t,ne

tDe

ferred

charges,net

387.74

%13

.51%

387.45

%10

.86%

540.82

%33

79.72%

4872

.55%

5003

.65%

5001

.34%

1101

.00%

4140

.50%

4219

.56%

4331

.74%

4931

.19%

1090

.11%

7.41

%38

.41%

47.07%

40.01%

43.14%

9.50

%30

.23%

24.73%

19.10%

14.55%

3.22

%Accoun

tspayable

Accrue

dpayrolland

ben

efits

Otheraccrued

liabilitie

sSELECT

EDCOMMONSIZEAM

OUNTS(asa

%oftotalassets)

Totalcurrentassets

Prop

erty,plantand

equ

ipmen

t,ne

t

9.66

%2.45

%2.10

%

21.90%

74.99%

6.68

%2.34

%1.47

%

13.08%

84.16%

7.54

%37

.91%

39.48%

25.39%

47.62%

10.48%

44.75%

48.86%

47.63%

51.20%

11.32%

2.36

%11

.04%

10.55%

15.80%

13.09%

3.26

%12

.30%

13.43%

13.09%

14.07%

3.11

%3.76

%27

.75%

26.64%

23.59%

18.74%

4.13

%17

.61%

19.23%

18.74%

20.15%

4.45

%

12.20%

11.36%

9.87

%9.75

%11

.18%

11.18%

11.30%

11.36%

11.25%

11.09%

11.09%

86.27%

87.29%

88.92%

89.18%

87.72%

87.72%

87.71%

87.77%

88.00%

88.29%

88.29%

Deferred

charges,net

2.61

%2.36

%1.18

%0.99

%0.86

%0.71

%0.76

%0.76

%0.64

%0.51

%0.39

%0.26

%0.26

%To

talcurrentliabilitie

s3.59

%2.84

%2.87

%2.47

%1.90

%1.62

%1.85

%1.85

%2.04

%2.16

%2.08

%2.00

%2.00

%Long-termdeb

t,ne

tofo

riginalissuediscou

nt

Deferred

taxliabilities,net

37.54%

13.00%

36.73%

13.43%

35.86%

36.10%

36.61%

37.08%

36.79%

36.79%

36.92%

37.07%

37.30%

37.56%

37.56%

12.79%

12.74%

12.47%

12.33%

13.36%

13.36%

13.41%

13.46%

13.52%

13.60%

13.60%

Totalliabilities

Totalstockho

lders'eq

uity

54.29%

45.71%

53.10%

46.90%

51.54%

51.34%

51.04%

51.08%

52.06%

52.06%

52.42%

52.74%

52.96%

53.21%

53.21%

48.46%

48.66%

48.96%

48.92%

47.94%

47.94%

47.58%

47.26%

47.04%

46.79%

46.79%

Hornb


OS)

BURK

ENRO

AD REP

ORT

S (w

ww.burkenroa

d.org)

Nov

embe

r 9, 201

6

35

HORN

BECK

OFFSH

ORE

SER

VICESIN

C.(H

OS)

Ann

ualand

QuarterlyStatemen

tsofC

ashFlow

sIntho

usands

Forthepe

riod

end

edCashFlowFromOpe

ration

s:Netincomefrom

con

tinu

ingop

erations

Adjustm

ents:

Dep

reciation

Amortization

Stock-basedcompe

nsationexpe

nse

Provisionforbadde

bts

Deferredtaxexpe

nse

Amortization

ofd

eferredfin

ancingcosts

Gainon

saleofassets

2013

A 64,078

$ 55

,332

30

,630

11,888

38

3

32,320

16

,826

(1,587

)

2014

A 87,907

$ 71

,301

44

,149

10,324

28

2

50,440

8,15

4

(822

)

2015

A31

-MarA

30-Jun

A30

-Sep

A31

-DecE

2016

E31

-MarE

30-Jun

E30

-Sep

E31

-DecE

2017

E

66,821

$

(7,514

)$

(20,58

6)$

(16,50

3)$

(19,83

6)$

(64,43

9)$

(17,68

7)$

(17,62

7)$

(17,54

7)$

(19,30

4)$

(72,16

5)$

82,566

22

,173

22

,658

23

,467

27

,504

95

,802

27

,707

27

,923

28

,138

28

,354

11

2,12

3

26,463

6,27

9

5,81

6

4,58

0

6,54

8

23,223

6,27

9

6,54

8

6,54

8

6,54

8

25,924

10,293

1,17

2

3,04

4

2,34

1

2,18

6

8,74

3

2,57

8

2,57

8

2,57

8

2,57

8

10,312

(816

)

(103

)

957

(1,573

)

918

19

9

1,10

5

1,08

1

1,04

9

918

4,15

3

34,086

(1,821

)

(11,69

2)

(7,584

)

33,053

11

,956

15

(204

)

(460

)

(651

)

(1,301

)

9,67

5

2,64

7

2,71

2

2,77

2

8,13

1

(44,06

0)

45

(81)

(36)

2016

E20

17E

Lossonearlyextinguishmen

tofdeb

tCh

angesinope

ratingassetsandliabilities:

Accou

ntsreceivable

Otherreceivablesand

currentassets

Deferreddrydockingcharges

Accou

ntspayable

Accrued

liabilitiesand

otherliabilities

25,776

9,79

3

8,95

6

(35,87

5)

1,07

3

(12,62

6)

(38,50

0)

(8,393

)

(43,60

9)

(4,146

)

(13,98

1)

39,743

31

,458

11

,399

7,46

4

(4,457

)

45,864

(12,18

3)

864

1,23

4

5,93

2

(4,153

)

8,47

2

(2,794

)

1,25

4

2,13

1

591

(13,26

7)

(1,207

)

(1,110

)

(897

)

(7,986

)

(11,20

0)

(2,800

)

(2,800

)

(2,800

)

(2,800

)

(11,20

0)

(10,48

6)

(3,369

)

(4,352

)

(685

)

11,338

2,93

2

3,22

0

1,87

4

(1,595

)

(1,658

)

1,84

1

6,44

8

(6,468

)

(8,349

)

294

(4,064

)

(18,58

7)

2,15

2

1,25

3

(1,066

)

(1,108

)

1,23

0

Accrued

interest

Netcashprovided

byop

eratingactivities

Cashflow

sfrom

investingactivities:

100

20

7,06

7

163,10

6

(95)

(1,245

)

1,24

2

(1,261

)

(1,264

)

215,84

3

39,253

2,99

3

14,465

45,204

101,91

5

10,386

21,491

16,080

18,809

66,765

Costsincurred

forne

wbu

ildprogram

s(465

,165

)

(343

,989

)

(190

,070

)

(33,66

0)

(29,30

5)

(10,23

3)

(2,518

)

(75,71

6)

(17,00

0)

(17,00

0)

(17,00

0)

(17,00

0)

(68,00

1)

Netproceed

sfrom

saleofassets

Vesselcapitalexpen

ditures

Non

-vesselcapitalexpen

ditures

Netcashused

ininvestingactivities

Cashflow

sfrom

financingactivities:

16,021

(73,59

3)

(3,893

)(526

,630

)

7,17

8

(55,08

9)

(9,615

)(401

,515

)

152,00

0

420

86

50

6

(86,79

2)

(10,34

8)

(6,210

)

(2,148

)

(2,148

)

(20,85

4)

(2,000

)

(2,000

)

(2,000

)

(2,000

)

(8,000

)

(16,48

7)

(266

)

(9)

(139

)

(414

)

(141

,349

)

(43,85

4)

(35,52

4)

(12,43

4)

(4,666

)

(96,47

8)

(19,00

0)

(19,00

0)

(19,00

0)

(19,00

0)

(76,00

1)

TaxBe

nefit(Sho

rtfall)from

Share-Based

paymen

tsProceedsfrom

issuanceofsen

iorno

tes,net

4,50

1

450,00

0

292

Rede

mptionPrem

iumontheRe

tiremen

tofDeb

tRe

purchaseofcom

mon

stock

(17,65

8)

(25,00

0)

Repaym

entofsen

iorno

tes

Deferredfin

ancingcosts

(500

,000

)

(7,807

)

(2,089

)

(1,102

)

(1,102

)

Netcashproceedsfrom

sharesissued

Netcashused

infinancingactivities

Effectofe

xchangeratechangesoncash

Netcashprovided

bydiscon

tinu

edope

ration

sNetincrease(d

ecrease)incash

Cashand

casheq

uivalentsatbeginningofp

eriod

Cashand

casheq

uivalentsatend

ofp

eriod

Supp

lemen

talcashflo

winform

ation:

9,62

0

(61,34

4)

(537

)24

4,05

7

(137

,387

)

576,67

8

439,29

1

5,04

4

(19,66

4)

(107

)

4,01

2(254

,168

)

439,29

1

185,12

3

3,11

2

727

5

73

2

1,02

3

-

727

(1,097

)

-

(370

)

-

-

-

-

-

(839

)

641

48

8

2

1,13

1

74,678

(3,960

)

(31,31

6)

936

40,538

6,19

8

(8,614

)

2,49

0

(2,921

)

(192

)

(9,236

)

185,12

3

259,80

1

255,84

1

224,52

5

225,46

1

259,80

1

265,99

9

257,38

5

259,87

5

256,95

4

265,99

9

259,80

1

255,84

1

224,52

5

225,46

1

265,99

9

265,99

9

257,38

5

259,87

5

256,95

4

256,76

3

256,76

3

Ope

ratingcashflo

wpershare

excludingchangesinworkingcapital

Ope

ratingcashflo

wpershare

includ

ingchangesinworkingcapital

6.12

$

5.77

$

4.90

$

4.51

$

5.86

$

1.30

$

0.28

$

0.42

$

1.35

$

3.35

$

0.22

$

0.54

$

0.45

$

0.52

$

1.74

$

6.04

$

1.09

$

0.08

$

0.40

$

1.24

$

2.81

$

0.28

$

0.58

$

0.43

$

0.49

$

1.77

$

Hornb


OS)

BURK

ENRO

AD REP

ORT

S (w

ww.burkenroa

d.org)

Nov

embe

r 9, 201

6

36

HORN

BECK

OFFSH

ORE

SER

VICE

SINC.(H

OS)

Ratio

s

Prod

uctiv

ityRatios

Receivablesturno

ver

2013A

5.57

2014A

5.66

2015A

31-M

arA

30-Ju

nA

30-Sep

A31-DecE

2016E

31-M

arE

30-Ju

nE

30-Sep

E31-DecE

2017E

4.29

0.98

0.92

1.09

1.11

3.36

1.16

1.04

1.05

1.00

4.85

2017E

2016E

Workingcapita

lturno

ver

1.21

1.55

1.65

0.28

0.22

0.22

0.20

0.85

0.23

0.22

0.22

0.20

0.87

Netfixedassetturno

ver

0.38

0.36

0.21

0.03

0.02

0.02

0.02

0.09

0.02

0.02

0.02

0.02

0.09

Totalassettu

rnover

0.20

0.22

0.16

0.03

0.02

0.02

0.02

0.08

0.02

0.02

0.02

0.02

0.08

#ofdaysS

alesinA/R

6275

7077

8679

8675

8686

8686

75#ofdaysc

ash-basedexpe

nsesinpayables

9769

89108

8081

9989

92104

104

111

96

Liqu

idity

measures

Curren

tratio

6.10

4.60

4.26

4.61

5.19

6.02

6.03

6.03

5.53

5.26

5.41

5.54

5.54

Quickra

tio5.24

3.81

4.10

4.39

4.92

5.72

5.77

5.77

5.29

5.04

5.17

5.30

5.30

Cashra

tio5.24

3.81

4.10

4.39

4.92

5.72

5.77

5.77

5.29

5.04

5.17

5.30

5.30

Cashflow

from

ope

ratio

nsra

tio2.04

1.96

2.52

0.53

0.05

0.31

0.83

1.87

0.17

0.34

0.27

0.33

1.16

Workingcapita

l518,959

299,097

278,491

264,638

234,306

236,868

273,671

273,671

270,763

268,181

265,639

261,363

261,363

FinancialRisk

(Leverage)Ratios

Totaldeb

t/eq

uityra

tio1.19

1.13

1.06

1.06

1.04

1.04

1.09

1.09

1.10

1.12

1.13

1.14

1.14

Debt/equ

ityra

tio(e

xcludingdeferredtaxes)

0.90

0.85

0.80

0.79

0.79

0.79

0.81

0.81

0.82

0.83

0.84

0.85

0.85

TotalLTde

bt/equ

ityra

tio1.11

1.07

1.00

1.00

1.00

1.01

1.05

1.05

1.06

1.07

1.08

1.09

1.09

LTdeb

t/eq

uity(e

xcludingdeferredtaxes)

0.83

0.79

0.74

0.74

0.75

0.76

0.77

0.77

0.78

0.79

0.79

0.80

0.80

Interestcoverageratio

(Earnings=

EBIT)

3.12

5.56

3.70

0.01

-1.92

-0.97

-1.83

-1.17

-1.52

-1.51

-1.50

-1.75

-1.57

Interestcoverageratio

(Earnings=

EBI)

2.35

3.86

2.69

0.32

-0.87

-0.29

-0.78

-0.40

-0.59

-0.58

-0.58

-0.73

-0.62

Totaldeb

tratio

0.54

0.53

0.52

0.51

0.51

0.51

0.52

0.52

0.52

0.53

0.53

0.53

0.53

Debtra

tio(e

xcud

ingde

ferred

taxes)

0.47

0.46

0.44

0.44

0.44

0.44

0.45

0.45

0.45

0.45

0.46

0.46

0.46

Profita

bility/Va

luationMeasures

Grossp

rofitm

argin

56.35%

53.29%

53.94%

47.37%

36.04%

43.43%

43.43%

43.03%

45.03%

47.03%

49.03%

51.03%

47.89%

Ope

ratin

gprofitmargin

31.21%

26.69%

30.15%

-1.02%

-40.08

%-27.82

%-40.24

%-24.56

%-28.02

%-28.48

%-29.13

%-38.69

%-30.78

%Re

turnonassets

4.08%

3.08%

2.26%

-0.25%

-0.70%

-0.56%

-0.68%

-2.18%

-0.60%

-0.60%

-0.60%

-0.67%

-2.48%

Returnoneq

uity

9.05%

6.64%

4.74%

-0.52%

-1.43%

-1.15%

-1.40%

-4.52%

-1.26%

-1.27%

-1.28%

-1.43%

-5.24%

Earningsbeforeinterestand

taxesm

argin

20.32%

13.95%

14.04%

-9.78%

-38.35

%-31.78

%-38.52

%-27.55

%-28.53

%-29.08

%-29.82

%-37.49

%-30.98

%EB

ITDA

margin

42.64%

45.13%

53.59%

37.17%

13.60%

30.03%

26.59%

27.85%

27.49%

29.07%

30.53%

29.88%

29.20%

EBITDA

/Assets

8.55%

9.95%

8.64%

0.96%

0.25%

0.53%

0.47%

2.20%

0.58%

0.60%

0.62%

0.53%

2.34%

THIS PAGE LEFT INTENTIONALLY BLANK

BURKENROAD REPORTS RATING SYSTEM

MARKET OUTPERFORM: This rating indicates that we believe forces are in place that would enable this company's stock to produce returns in excess of the stock market averages over the next 12 months.

MARKET PERFORM: This rating indicates that we believe the investment returns from this company's stock will be in line with those produced by the stock market averages over the next 12 months.

MARKET UNDERPERFORM: This rating indicates that while this investment may have positive attributes, we believe an investment in this company will produce subpar returns over the next 12 months. BURKENROAD REPORTS CALCULATIONS

CPFS is calculated using operating cash flows excluding working capital changes.

All amounts are as of the date of the report as reported by Bloomberg or Yahoo Finance unless otherwise noted. Betas are collected from Bloomberg.

Enterprise value is based on the equity market cap as of the report date, adjusted for long‐term debt, cash, & short‐term investments reported on the most recent quarterly report date.

12‐month Stock Performance is calculated using an ending price as of the report date. The stock performance includes the 12‐month dividend yield.

2016‐2017 COVERAGE UNIVERSE

Amerisafe Inc. (AMSF) MidSouth Bancorp Inc. (MSL)

Bristow Group Inc. (BRS) Newpark Resources Inc. (NR)

CalIon Petroleum Company (CPE) PetroQuest Energy Inc. (PQ)

Cal‐Maine Foods Inc. (CALM) Pool Corporation (POOL)

Computer Programs and Systems, Inc. (CPSI) Powell Industries Inc. (POWL)

Conn's Inc. (CONN) RPC Incorporated (RES)

Crown Crafts Inc. (CRWS) Ruth’s Hospitality Group Inc. (RUTH)

Denbury Resources Inc. (DNR) Sanderson Farms Inc. (SAFM)

EastGroup Properties Inc. (EGP) SEACOR Holdings Inc. (CKH)

Era Group Inc. (ERA) Sharps Compliance Inc. (SMED)

Evolution Petroleum Corp. (EPM) Spark Energy Inc. (SPKE)

Globalstar (GSAT) Stone Energy Corp. (SGY)

Gulf Island Fabrication Inc. (GIFI) Sunoco LP (SUN)

Hibbett Sports (HIBB) Superior Uniform Group Inc. (SGC)

Hornbeck Offshore Services Inc. (HOS) Team Incorporated (TISI)

IBERIABANK Corp. (IBKC) The First Bancshares (FBMS)

Investar Holding Corporation (ISTR) Tidewater Inc. (TDW)

ION Geophysical Corp. (IO) U.S. Physical Therapy, Inc. (USPH)

LHC Group, Inc. (LHCG) Vaalco Energy Inc. (EGY)

Marine Products Corp. (MPX) Willbros Group Inc. (WG)

PETER RICCHIUTI Director of Research Founder of Burkenroad Reports [email protected] ANTHONY WOOD Senior Director of Accounting [email protected]

AUTHOR HUGHLEY STEELE HULL KATHLEEN MCCABE J.P. NAVARRO Associate Directors of Research

BURKENROAD REPORTS Tulane University New Orleans, LA 70118‐5669 (504) 862‐8489 (504) 865‐5430 Fax

To receive complete reports on any of the companies we follow, contact:Peter Ricchiuti, Founder & Director of Research

Tulane UniversityFreeman School of BusinessBURKENROAD REPORTS

Phone: (504) 862-8489Fax: (504) 865-5430

E-mail: [email protected] visit our web site at www.BURKENROAD.org

Printed on Recycled Paper

Named in honor of William B. Burkenroad Jr., an alumnus and a longtime supporter of Tulane’s business school, and funded through contributions from his family and friends, BURKENROAD REPORTS is a nationally recognized program, publishing objective, investment research reports on public companies in our region. Students at Tulane University’s Freeman School of Business prepare these reports.Alumni of the BURKENROAD REPORTS program are employed at a number of highly respected financial institutions including:ABN AMRO Bank · Aegis Value Fund · Invesco/AIM Capital Management · Alpha Omega Capital Partners · American General Investment Management · Ameriprise Financial · Atlas Capital · Banc of America Securities · Bank of Montreal · Bancomer · Barclays Capital · Barings PLC · Bearing Point · Bessemer Trust · Black Gold Capital· Bloomberg · Brookfield Asset Management · Brown Brothers Harriman Capital · Blackrock Financial Management · Boston Consulting Group · Buckingham Research · California Board of Regents · Cambridge Associates· Canaccord Genuity · Cantor Fitzgerald · Chaffe & Associates · Citadel Investment Group · Citibank · Citigroup Private Bank · City National Bank · Cornerstone Resources · Credit Suisse · D. A. Davidson & Co. · Deutsche Banc · Duquesne Capital Management · Equitas Capital Advisors· Factset Research · Financial Models · First Albany · Fiduciary Trust · Fitch Investors Services · Forex Trading · Franklin Templeton · Friedman Billings Ramsay · Fulcrum Global Partners · Gintel Asset Management · Global Hunter Securities · Goldman Sachs · Grosever Funds · Gruntal & Co. · Guggenheim Securities , LLC · Hancock Investment Services · Healthcare Markets Group · Capital One Southcoast · Howard Weil Labouisse Friedrichs · IBERIABANK Capital Markets · J.P. Morgan Securities · Janney Montgomery Scott · Jefferies & Co. · Johnson Rice & Co. · KBC Financial · KDI Capital Partners · Key Investments · Keystone Investments · Legacy Capital · Liberty Mutual · Lowenhaupt Global Advisors · Mackay Shields · Manulife/John Hancock Investments · Marsh & McLennan · Mercer Partners · Merrill Lynch · Miramar Asset Management · Moodys Investor Services · Morgan Keegan · Morgan Stanley · New York Stock Exchange · Perkins Wolf McDonnell · Piper Jaffray & Co. · Professional Advisory Services · Quarterdeck Investment Services · RBC · Raymond James · Restoration Capital · Rice Voelker, LLC · Royal Bank of Scotland· Sandler O'Neill & Partners · Sanford Bernstein & Co. · Scotia Capital · Scottrade · Second City Trading LLC · Sequent Energy · Sidoti & Co · Simmons & Co. · Southwest Securities · Stephens & Co. · Sterne Agee · Stewart Capital LLC · Stifel Nicolaus · Sun-Trust Capital Markets · Susquehanna Investment Group · Thomas Weisel Partners · TD Waterhouse Securities · Texas Employee Retirement System · Texas Teachers Retirement System · ThirtyNorth Investments · Thornburg Investment Management · Tivoli Partners · Tudor Pickering & Co. · Tulane University Endowment Fund · Turner Investment Partners · UBS · Value Line Investments · Vaughan Nelson Investment Management · Wells Fargo Capital Management · Whitney National Bank · William Blair & Co. · Zephyr Management

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