Net income for the third quarter of 2005 was $9.4 million, or $0.44 per diluted share, which nearly tripled net income for the third quarter of 2004 of $3.3 million, or $0.15 per diluted share. This increase in quarterly net income includes an after-tax gain on the disposition of assets of $0.5 million, or $0.02 per diluted share, resulting from the sales of one of the OPA 90 single-hulled tank barges that the Company retired from service in December 2004, the Energy 9501, and one lower horsepower offshore tug, the North Service.
Significantly higher dayrates and utilization in the OSV segment primarily contributed to a 63.5% increase in EBITDA to $25.0 million over the third quarter of 2004. The Company's third quarter 2005 EBITDA results were at the high end of the updated guidance range of $23 to $25 million, which was increased on September 26, 2005 from an initial quarterly guidance range of $22 to $24 million. Please refer to the attached table for a definition and reconciliation of EBITDA to its most directly comparable GAAP financial measure.
Todd Hornbeck, the Company's Chairman, President and CEO, stated, "The demand for our new generation equipment, which was already high before the hurricane season due to increased drilling and production activity in the deepwater and deep shelf segments of our market, has increased further since Hurricanes Katrina and Rita. These recent hurricanes that devastated the Gulf Coast region had a significant impact on offshore drilling and production facilities and resulted in offshore inspection, repair and construction activity that we believe may last two years or more. The substantial increase since 2001 in deepwater and ultra-deepwater production and subsea installations set the stage for the significant damage to offshore infrastructure in the U.S. Gulf of Mexico (GoM). Notwithstanding the extensive oilfield damage that was caused in the path of the two storms, market indications continue to support our bullish outlook for a protracted up-cycle in the GoM, with multi-year term contracts being fixed for existing rigs and rigs currently under construction for service into 2010. Currently, four of our vessels are working exclusively on hurricane-related ROV support activity.
"We believe that we are now entering another phase of step-change innovation in our industry. These two back-to-back Category 5 hurricanes, which were historically unprecedented in the GoM oilfield, have revealed how crucial a reliable domestic oil and gas supply-chain really is to our nation. Future deepwater rigs and offshore production units will have to be engineered and new equipment developed to withstand wind forces and wave action now better understood from the new meteorological data supplied by Hurricanes Katrina and Rita. As with the advent of the deepwater market in the mid- 1990's, new designs and engineering will likely require new, more versatile offshore service vessels to complement our existing multi-class fleet of OSVs to service the demand drivers of the future, which further underscores the rationale behind our recently announced MPSV conversion and proprietary OSV newbuild programs.
"Since the end of the third quarter, our fleetwide average OSV dayrates have exceeded $15,000, which is up about $1,000 per day from the level we reported just prior to the launch of our recent debt and equity roadshow. Leading-edge rates are averaging well above that level with spot rates for our 200 class vessels starting at $17,000 per day. We remain well positioned to participate in any further rate increases over current levels with roughly 20% and 65% of our available vessel days for the remainder of 2005 and calendar 2006 still uncontracted," Mr. Hornbeck continued.
"Our tug and tank barge fleet continued to provide stable cash flows during the third quarter, despite having 43 less vessel service days than expected on our last call due to accelerated 2006 drydockings that were undertaken in September to position certain of our vessels for high margin winter season time charters. With the October delivery of our third double- hulled tank barge newbuild, the Energy 11104, and the final two barges of our first tank barge newbuild program scheduled to be delivered and placed in service later this quarter, we continue to move toward a new EBITDA run-rate of roughly 50% higher than historical levels for this division. Our tug and tank barge segment, with a full year contribution from our first double-hulled newbuild program, is expected to provide the operating cash flow necessary to cover 100% of our estimated company-wide debt-service and deferred drydocking charges for calendar 2006," added Mr. Hornbeck.
OSV Segment. Revenues from the OSV segment were $31.3 million for the third quarter of 2005, an increase of 55.0% from $20.2 million for the same period in 2004. The net increase in segment revenues is due to the quarter- over-quarter increase in average dayrates and utilization, primarily related to a substantial improvement in OSV market conditions in the U.S. Gulf of Mexico, as well as the addition of two vessels in early 2005. The Company's OSV utilization rate was 98.7% for the three months ended September 30, 2005, compared to 93.2% achieved for the same period of 2004. The average OSV dayrate for the third quarter of 2005 improved 35.1%, or $3,542 per day, to $13,638 compared to $10,096 for the same period of 2004. The Company's effective, or utilization adjusted, dayrate increased 43.1% from the prior- year quarter. These market-driven improvements resulted in operating income nearly doubling that of the prior-year quarter, illustrating the operating leverage for this segment.
Tug and Tank Barge Segment. Tug and tank barge segment revenues for the third quarter of 2005 were up 18.9% over the same period in 2004 to $15.1 million compared to the prior-year quarter. Utilization in the tug and tank barge segment increased to 83.9% from 76.0% for the third quarter of 2004, primarily due to a change in contract mix from contracts of affreightment (COA) to time charters and less drydocking and repair activity. Average dayrates rose to $12,809 compared to $11,151 during the same period of 2004. The increase in average dayrates was primarily related to the OPA 90-related tightening of the tank barge market in the northeastern United States and an increase in the Company's average mix of double-hulled barge capacity. Operating income decreased by $0.3 million to $1.2 million and operating margins decreased from 12.1% a year ago to 7.8% this quarter due to expected increases in allocated corporate G&A costs and higher depreciation and amortization expenses based on the changing fleet mix. However, operating margins in this segment are expected to increase in 2006, with further dayrate expansion once all five of the double-hulled barges constructed under the first tank barge newbuild program are in service for a full year.
G&A. G&A costs for the third quarter of 2005 were up $2.2 million over the same period in 2004 to $5.7 million and up $1.0 million sequentially. G&A increases resulted from higher personnel and health insurance costs and rising costs associated with corporate governance initiatives, such as compliance with the Sarbanes-Oxley Act. G&A costs for calendar 2005 are still expected to be roughly 11% of revenues, which is consistent with prior guidance.
Nine Month Results
Revenues for the first nine months of 2005 increased 32.7% to $125.4 million compared to $94.5 million for the same period in 2004. Operating income was $43.1 million, or 34.4% of revenues, for the nine months of 2005 compared to $25.7 million, or 27.2% of revenues, for the same period in 2004. Net income for the first nine months of 2005 nearly tripled to $22.4 million, or $1.05 per diluted share, compared to net income of $7.6 million, or $0.39 per diluted share, for the first nine months of 2004. The Company's results for the current nine months were positively impacted by strong market conditions in the OSV segment along with the incremental contributions from acquired vessels and newly constructed vessels delivered since September 2004. The Company's net income for the first nine months of 2005 included a $1.7 million ($1.1 million after tax or $0.05 per share) loss on early extinguishment of debt related to the January 2005 redemption of the non- tendered 10.625% senior notes that were still outstanding as of December 31, 2004.
Based on the key assumptions outlined below and in the attached data tables, the following statements reflect management's current expectations regarding future earnings. These statements are forward-looking and actual results may differ materially. Other than as expressly stated, these statements do not include the potential impact of any future capital transactions, such as business combinations, divestitures, financings, unannounced newbuilds or vessel acquisitions that may be commenced or completed after the date of this news release.
Fourth Quarter 2005 Guidance. The Company expects EBITDA for the fourth quarter of 2005 to range between $28.0 million and $30.0 million. Please refer to the attached data table for a definition and reconciliation of forward EBITDA guidance to its most directly comparable GAAP financial measure. The Company expects diluted earnings per share, or EPS, for the fourth quarter of 2005 to range between $0.41 and $0.46.
Updated Calendar 2005 Guidance. Recognizing its actual results for the first nine months of 2005 and the favorable outlook for the balance of the year, the Company now expects total EBITDA for the full year 2005 to range between $93.0 million and $95.0 million and diluted EPS is now expected to range between $1.51 and $1.56, excluding the aforementioned $0.05 per share loss on early extinguishment of debt incurred during the first quarter of 2005.
Updated Calendar 2006 Guidance. The Company now expects total EBITDA for the full year 2006 to range between $115.0 million and $120.0 million and diluted EPS is now expected to range between $1.69 and $1.81.
Effect of Recent Public Equity Offering. On October 5, 2005, the Company issued 6.1 million of additional new shares of common stock in an underwritten public equity offering. This offering and a private placement of debt that closed on October 4, 2005 resulted in aggregate gross proceeds to the Company of $290.1 million. The upwardly revised EPS guidance ranges for each of the periods presented above reflect higher expected net income from improving OSV market conditions offset, in part, by the increase in total weighted-average number of shares of common stock outstanding after the recent common stock offering. The above guidance ranges do not reflect incremental vessel-related net income associated with the deployment of capital raised, as the primary use of proceeds from the public equity offering is for the construction or conversion of vessels that are not expected to contribute operating results until after 2006. The construction period for such vessels is expected to extend through mid-2008. Based on current projections of operating cash flow during the roughly 2.5 year construction period, the Company believes that, without drawing on its $100.0 million revolving credit facility or issuing additional long-term capital, it could use up to $150.0 million of its current cash position for potential acquisitions it may identify in the future that would be immediately accretive to net income and still maintain a minimum cash balance of $25.0 million. The Company remains committed to its growth strategy of making opportunistic acquisitions that meet its strategic and financial investment criteria. However, the timing of such acquisitions are not predictable or solely within the Company's control.
Key Assumptions. The above guidance reflects management's belief that current favorable OSV market conditions will continue through the remainder of 2005 and all of 2006. Fleetwide average OSV dayrates are expected to remain at or above $15,000 and fleetwide average utilization is expected to remain in the mid-90% range throughout the 2005 and 2006 guidance periods.
The above guidance also reflects the fact that 2005 is a transition year for the Hornbeck tug and tank barge fleet. The first half of 2005 was impacted by the temporary loss of tank barge capacity due to the timing of OPA 90 retirements and newbuild delivery dates, the extra cost burden related to a lower tug-barge ratio in early 2005, as well as the previously reported delays in delivery schedules for the first two newbuilds of the Company's five barge newbuild program. The net effect of the decrease in capacity due to such OPA 90-related retirements and the incremental contribution from the newbuild capacity is expected to result in EBITDA from the tug and tank barge segment of approximately 25% of the mid-point of the company-wide 2005 guidance range of $93.0 million to $95.0 million. Guidance for 2006 assumes a full-year contribution from all five new double-hulled barges, which is expected to result in EBITDA from the tug and tank barge segment of approximately 30% of the mid-point of the updated company-wide 2006 guidance range of $115.0 million to $120.0 million.
The Company expects year-over-year increases of approximately 10% in its aggregate operating and G&A expenses for both 2005 and 2006 commensurate with prevailing oilfield service industry trends and higher costs related to corporate governance. G&A is assumed to remain at approximately 11% of revenue for both 2005 and 2006. However, the above guidance assumes that improvements in revenue will allow the Company to maintain or improve operating and net income margins for each of the next two years.
Capital Expenditure Outlook
Based on the key assumptions outlined below and in the attached data tables, the following statements reflect management's current expectations regarding future capital expenditures. These statements are forward-looking and actual results may differ materially. Other than as expressly stated, these statements do not include the potential impact of any future capital transactions, such as business combinations, divestitures, financings, unannounced newbuilds or vessel acquisitions that may be commenced or completed after the date of this news release.
Update on Maintenance Capital Expenditures. The Company expects maintenance capital expenditures for the fourth quarter of 2005 to be approximately $3.4 million. The Company expects maintenance capital expenditures for the full calendar year 2005 to be approximately $14.2 million. The Company expects maintenance capital expenditures for the full calendar year 2006 to range between $18.5 million and $23.0 million. Please refer to the attached data table for a summary, by period, of historical and projected data for each of the following three major categories of maintenance capital expenditures: (i) deferred drydocking charges; (ii) other vessel capital improvements; (iii) non-vessel related capital improvements.
Update on TTB Newbuild Program #1. On November 6, 2003, the Company announced the commencement of its first tug and tank barge newbuild program ("TTB Newbuild Program #1"), which is expected to be completed during the fourth quarter of 2005. That program ultimately included the construction of five double-hulled tank barges with total carrying-capacity of 600,000 barrels and the purchase and retrofit of four 6,000 horsepower ocean-going tugs. As noted above, the Company took delivery of its third double-hulled newbuild tank barge in October 2005 and expects to take shipyard deliveries of the remaining two double-hulled tank barges under this newbuild program by the end of 2005. The Company recently purchased the second two 6,000 horsepower offshore tugs under this program, renamed the Eagle Service and Patriot Service, and are currently retrofitting such vessels for service in the northeastern U.S. These two offshore tugs are also expected to be placed in service by the end of 2005. The aggregate total cost of the Company's first tug and tank barge newbuild program is expected to be on-budget at roughly $121.0 million.
Update on MPSV Conversion Program. On May 5, 2005, the Company announced a conversion program to retrofit two coastwise sulfur tankers into U.S.- flagged, new generation 370-foot multi-purpose supply vessels, or MPSVs ("MPSV Conversion Program"). The total project cost to acquire and convert the two vessels is currently estimated to be $65.0 million in the aggregate. The Company has ordered certain vessel components and critical path machinery, which will ultimately be furnished to the shipyard for the conversion, and is evaluating prospective domestic shipyards. However, it has not yet contractually committed to a shipyard for this conversion program. The Company now anticipates delivery of the converted vessels during the first half of 2007.
Update on OSV Newbuild Program #4. On September 26, 2005, the Company announced the commencement of its fourth new vessel construction program for its OSV business segment ("OSV Newbuild Program #4"). Based on the latest internal estimates, the incremental cost of this expansion program is expected to be approximately $170.0 million in the aggregate. The precise number of vessels to be constructed and their specifications will be finalized as certain milestones are completed, including the negotiation of shipyard contracts. The Company currently plans to build OSVs with approximately 20,000 deadweight tons of capacity. The Company anticipates delivery of these newly constructed vessels beginning in mid-2007 and extending through mid- 2008.
Update on TTB Newbuild Program #2. On September 26, 2005, the Company also announced the commencement of its second new vessel construction program for its tug and tank barge business segment ("TTB Newbuild Program #2"). The Company is currently seeking bids from domestic shipyards for this program. Based on the latest internal estimates, the incremental cost of this expansion program is currently expected to be approximately $105.0 million in the aggregate, which is slightly higher than previously announced. The precise number of vessels to be constructed and their specifications will be finalized as certain milestones are completed, including the negotiation of shipyard contracts. The Company currently plans to build double-hulled tank barges with approximately 400,000 barrels of carrying capacity plus related offshore tugs. The Company anticipates delivery of these newly constructed vessels during calendar 2007.
Please refer to the attached data tables for a summary, by period, of historical and projected data for each of the pending growth initiatives outlined above. All of the above capital cost and delivery date estimates for pending growth initiatives are based on the latest available information and are subject to change. The Company plans to refine these estimates as soon as firm shipyard contracts are executed, which will likely occur within the next few months. All of the figures set forth above represent expected cash outlays and do not include capitalized construction period interest
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