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Liquidity Warnings Send Hornbeck Offshore Services, Inc.'s Stock Plunging

By Matthew DiLallo – Feb 16, 2017 at 11:36AM

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The offshore services company reported weak fourth-quarter results and a concerning outlook for the future.

What happened

Shares of Hornbeck Offshore Services (HOS) sank deep into the red on Thursday morning, plunging more than 22% by 10:30 a.m. EST after reporting its fourth-quarter results.

So what

Hornbeck reported a net loss for the fourth-quarter of $19.2 million, or $0.53 per share, which was $0.08 per share wider than last quarter and $0.05 per share worse than analysts expected. Driving the decline was continued weakness in the offshore oil and gas market, which put pressure on vessel utilization and dayrates. In addition, general and administrative costs rose during the quarter due to an increase in incentive compensation expenses.

An offshore drilling rig with several supply vessels surrounding it.

Image source: Getty Images.

Even more concerning was the company's outlook. Hornbeck noted that it currently has 44 of its 62 offshore supply vessels idled due to lack of work. However, it expects to idle an average of 46 vessels in future quarters because it doesn't see any improvement in market activities. Those challenging market conditions led the company to issue a warning concerning its future liquidity needs. Hornbeck noted in its earnings release that while it expects to have the financial resources to operate through the end of next year,

The Company does not currently expect to have sufficient liquidity to repay its three tranches of funded unsecured debt outstanding that mature in fiscal years 2019, 2020 and 2021, respectively, as they come due, absent a refinancing or restructuring of such debt. Refinancing in the current climate is not likely to be achievable on terms that are in-line with the Company's historic cost of debt capital. The Company remains fully cognizant of the challenges currently facing the offshore oil and gas industry and continues to review its capital structure and assess its strategic options.

On the one hand, the company does have time to address this issue. However, the problem is that more time might not be the solution because the outlook for the industry remains bleak as there is a real risk that conditions could continue growing worse. For example, Diamond Offshore Drilling (DO) recently warned that it has "yet to see a floor in the declining demand of deepwater assets." Because of this, Diamond Offshore Drilling doesn't see a recovery in the offshore drilling market occurring until 2019 or 2020. While others are optimistic that a recovery could start to take shape as early as next year, there's a real possibility that Hornbeck's financial stress could deepen if conditions worsen.

Now what

Oil prices have improved and stabilized above $50 a barrel, but that's still not enough to ignite a recovery in the offshore drilling sector. Most offshore service companies believe crude needs to improve to more than $60 per barrel before producers start expanding their drilling budgets, which might not arrive for quite some time. Given that outlook, and Hornbeck's potential liquidity problems, this is a stock that investors are better off avoiding for the time being.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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