Oil Services & Drilling: Tough Conditions in the GOM Vessel Mkt
Sector Rating: 2-Neutral
􀂃 Second quarter results for Hornbeck Offshore and to a lesser extent GulfMark Offshore are likely to reveal very
tough operating conditions in the Gulf of Mexico shallow water. This is not surprising to us given the record low
jackup rig count and commentary from 1Q conference calls; however, the shares of Hornbeck have significantly
underperformed in recent days as details about market conditions have made their way to investors. The
weakness in the market currently will likely lead to earnings revisions lower. We are cutting our estimates for
both companies today. In our view this is mostly reflected in both companies' stocks and long-term investors
should use this weakness to take positions.
􀂃 Conditions in the Gulf of Mexico shallow water and deep shelf markets deteriorated further in June as vessel
operators continued to further undercut each other on pricing to maintain utilization. There is a lot of "finger
pointing" going on in the Gulf currently, suggesting a pretty choppy environment.
􀂃 We believe the deepwater market remains resilient, with high utilization for deepwater assets and stable
dayrates. We expect this to continue.
􀂃 Most vessel operators are now stacking vessels and laying off crews which should help to balance the market
going forward. We believe 3Q will mark the low point for the domestic vessel market and we expect conditions
to stabilize over the next few months.
􀂃 The vessel acquisition market is improving for buyers and we expect Tidewater and perhaps other wellcapitalized
companies to take advantage of lower vessel prices.
􀂃 In addition, the global vessel order book, which once stood at over 700 vessels, is likely much lower now -- we
believe as many as 150 vessels may have been removed from the order book which is a positive sign for the
worldwide vessel business going forward, in our view.
􀂃 Hornbeck has significantly underperformed the group in the last two weeks and we view this underperformance
as an opportunity and would accumulate shares on the weakness. The shares have underperformed the OSX
by over 1200 basis points in the last two weeks and the S&P 500 by 2400 basis points. We would be
particularly aggressive if the shares were to fall to $18-$19 as this commentary and lower estimates are
absorbed by the market. We believe Hornbeck's 2009 earnings and EBITDA guidance may be revised lower.
􀂃 GulfMark has faired better in recent trading due, in our view, to its broader geographic positioning. The North
Sea has improved modestly as the summer construction season is now underway and GulfMark's North Sea
results should also benefit from the recent weakening of the dollar versus the pound and the NOK. We believe
Southeast Asia remains a good market for GulfMark.