The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our unaudited consolidated financial statements and notes to unaudited consolidated financial statements in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K as of and for the year endedDecember 31, 2019 . This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements. See "Forward Looking Statements" for additional discussion regarding risks associated with forward-looking statements. In this Quarterly Report on Form 10-Q, "company," "we," "us," "our" or like terms refer toHornbeck Offshore Services, Inc. and its subsidiaries, except as otherwise indicated. Please refer to Item 5-Other Information for a glossary of terms used throughout this Quarterly Report on Form 10-Q. In this Quarterly Report on Form 10-Q, we rely on and refer to information regarding our industry from theBOEM, EIA and IHS-Petrodata, Inc. These organizations are not affiliated with us and are not aware of and have not consented to being named in this Quarterly Report on Form 10-Q. We believe this information is reliable. In addition, in many cases we have made statements in this Quarterly Report on Form 10-Q regarding our industry and our position in the industry based on our experience in the industry and our own evaluation of market conditions.General During the first quarter of 2020, volatility in oil prices continued as WTI and Brent prices ranged from$15 to$70 per barrel. While we had expected generally improved market conditions to take hold during 2020, the outbreak and ensuing global pandemic related to COVID-19 silenced those expectations. A global decline in demand for oil resulting from COVID-19 economic closures combined with a temporary but significant increase in production and the related oil price war initiated bySaudi Arabia andRussia following the COVID-19 outbreak conspired to cause a collapse in oil prices duringApril 2020 that was unprecedented. While oil prices have recovered somewhat since then, there remains a significant overhang in supply and lingering weak demand on a global basis. The recent decrease in oil prices caused major, international and independent oil companies with deepwater operations to significantly reduce their offshore capital spending budgets for the worldwide exploration or production of oil and gas, prolonging the industry downturn that has prevailed since late 2014. Reduced spending by our customers combined with the already global oversupply of OSVs, including high-spec OSVs in our core markets, resulted in significant reductions in our dayrates and utilization. These factors ultimately resulted in our determination to seek bankruptcy protection onMay 19, 2020 . The principal question facing the offshore oilfield industry is the remaining duration of the current downturn in offshore activities. The lingering effects of the COVID-19 pandemic are expected to continue to depress demand and the timing of a global economic recovery is unclear. In addition, there can be no assurance regarding the production levels of oil and gas byRussia ,Saudi Arabia , and other oil producing countries and, therefore, the price of oil. OnMay 19, 2020 , we sought voluntary relief under chapter 11 of the United States Bankruptcy Code, or the Chapter 11 Cases in theU.S. Bankruptcy Court for the Southern District of Texas , Houston Division and filed a proposed joint prepackaged plan of reorganization, or the Plan. OnJune 19, 2020 , after a confirmation hearing, theBankruptcy Court entered a confirmation order approving the Plan. The Plan will become effective after the conditions to its effectiveness have been satisfied. The effect of the Plan is to de-lever our balance sheet through a conversion into equity or warrants or both of (i) a portion of the$350 million in first-lien term loans that mature inJune 2023 ; (ii)$121 million in second-lien term loans that mature inFebruary 2025 ; (iii)$224 million outstanding under our 2020 senior notes indenture, and; (iv)$450 million outstanding under our 2021 senior notes indenture. The holders of first-lien term loans will also receive their pro rata portion of the 17
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new second-lien term loans issued upon emergence as part of the Exit Financings. All pre-petition equity interests in the Company will be canceled, released, and extinguished on the effective date of the Plan, and will thereafter be of no further force or effect. See Note 2 of our consolidated financial statements included herein for further discussion. In late 2019, we observed leading indicators that signaled the potential for improved conditions -- including larger offshore capital budget announcements by our customers, a growth in the number of final investment decisions, or FIDs, made public by our customers for offshore projects, recently announced deepwater discoveries, a growing contract backlog announced by several drilling contractors and increased customer inquiries for our services, principally in theGreater GoM Operating Region . Most of these plans have not proceeded as anticipated in 2020. We now expect some to be cancelled altogether while others are being postponed. The duration of postponement is expected to be determined by the ability to operate during the COVID-19 pandemic and oil price recovery. We have experienced multiple charter cancellations and non-renewals. During the first quarter of 2020, we did not observe any significant change in the anticipated supply of high-specU.S. -flagged OSVs. In theU.S. GoM, two high-spec OSVs were delivered by industry participants into the domestic market so far this year. We expect two additional high-spec OSVs to be delivered by industry participants into domestic service during the remainder of 2020. There were three high-spec, Jones-Act qualified OSVs under construction by industry participants onJune 30, 2020 and as of that date there were no options to build additional high-spec Jones-Act qualified OSVs. We do not anticipate significant growth in the supply of high-specU.S. -flagged OSVs beyond the currently anticipated level of 178 of such vessels by the end of 2020. We continue to monitor the overhang of the dormant supply of stackedU.S. -flagged high-spec OSVs. There are approximately 95 stacked domestic vessels and all of these vessels will require intermediate or special surveys in order to return to service. We believe that the cost to industry participants to reactivate high-spec OSVs, including survey costs, crewing costs, training costs and unanticipated events, will range between$2 million and$5 million per vessel, on average. During the first half of 2020, we have observed an additional 23 high-spec OSVs go into stack, including six of our own. During the first quarter of 2020, there was an average of 28.7 floating rigs working in theGreater GoM Operating Region . We believe that the number of active drilling units in theGreater GoM Operating Region will decline in 2020. As ofJune 30, 2020 , there were 26 rigs available and 20 were working. During the second half of 2020, we expect that the active floating rig count could drop to as low as 10 to 15. Unlike our OSVs, whose utilization is tied principally to drilling activities, demand for our MPSVs is also driven by other types of offshore activities. These vessels are used for a wide variety of oilfield applications that are not necessarily related to drilling. Because of the need to continuously inspect, repair and maintain offshore infrastructure, our MPSVs have, at times, partially counter-acted weakness in overall drilling activities. However, we have not yet seen a significant pick up in the expansion of offshore infrastructure, such as the installation of new floating and subsea infrastructure and field development that more meaningfully drive MPSV utilization. Project cancellations and delays have driven extremely weak utilization for our MPSVs during 2020. While peak activity normally occurs in late spring through early fall, we see little evidence that MPSV utilization will improve seasonally during 2020. SinceOctober 1, 2014 , we stacked OSVs and MPSVs on various dates. As ofMarch 31, 2020 , we had 36 OSVs and one MPSV stacked. As ofJune 30, 2020 , we had 44 OSVs and two MPSVs stacked and such stacked vessels represent 62% of our fleetwide vessel headcount, and 49% of our total OSV and MPSV deadweight tonnage. We reactivated one MPSV during the first quarter of 2020. We may consider stacking additional vessels or reactivating vessels as market conditions warrant. By stacking vessels, we have significantly reduced our on-going cash outlays and lowered our risk profile; however, we also have fewer revenue-producing units in service that can contribute to our results and produce cash flows to cover our fixed costs and commitments. While we may choose to stack additional vessels should market conditions warrant, 18
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our current expectation is to retain our active fleet in the market to accept contracts at the best available terms even if such contracts are below our breakeven cash cost of operations.Mexico andBrazil continue to comprise our two core international markets. In order to support customer requirements inMexico , and based on our long-term view thatMexico will continue to invest directly or allow foreign investment in its offshore energy sector, and increasingly in deepwater prospects, we elected to Mexican-flag five HOSMAX 300 class OSVs, three 280 class OSVs, two 240 class OSVs and one MPSV sinceJanuary 1, 2018 . At present, our Mexican-flagged fleet is comprised of ten high-spec OSVs, five low-spec OSVs and one MPSV, which is the second largest concentration of vessels we have committed to any single national market.Mexico has undergone significant transformation as a market for offshore energy over the last several years. IOCs appear to be proceeding with drilling plans inMexico despite current industry conditions. While we have experienced some cancellations from drilling customers inMexico , most of our customers appear to be proceeding with their plans. A significant factor affecting the health of the Mexican offshore market is the weakening financial condition ofPemex . While we are not currently working forPemex directly, like many contractors, we work for customers who are working forPemex . Offshore activity driven byPemex is likely to decline as they have recently announced a suspension of contracts and have disclosed a significant level of financial distress that is impacting its ability to pay offshore contractors, many of which are our customers. We are affected by slow- or non-payment by some of these customers that have significantPemex credit risk, thus, we may be unwilling to work for such customers due to their extensivePemex exposure. InBrazil , we presently own and operate one Brazilian-flagged high-spec OSV. We have flexibility under Brazilian law to import and flag into Brazilian registry an additional vessel of similar DWT. In 2019, ourVanuatu -flagged MPSV worked as a flotel inBrazil on anIOC project that ended in the first quarter of 2020.Brazil is the single largest deepwater market in the world. Recent measures to expand the role of IOCs in its "pre-salt" prospects are taking hold and we believe Brazilian activity in the offshore energy space will be a significant contributor to the overall recovery in global offshore E&P activities. Our Vessels All of our current vessels are qualified under the Jones Act to engage inU.S. coastwise trade, except for 19 foreign-flagged new generation OSVs and two foreign-flagged MPSVs. As ofMarch 31, 2020 , our 30 active new generation OSVs, seven active MPSVs and four managed OSVs were operating in domestic and international areas as noted in the following table: Operating Areas Domestic GoM (1) 22
Other
27 Foreign OtherLatin America 1Brazil 1Mexico 12 14 Total Vessels (3) 41
(1) Includes one owned vessel supporting the military.
(2) Includes one owned and four managed vessels supporting the military
(3) Excluded from this table are 36 new generation OSVs and one MPSV that were
stacked as of
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Critical Accounting Estimates This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. In other circumstances, we are required to make estimates, judgments and assumptions that we believe are reasonable based on available information. We base our estimates and judgments on historical experience and various other factors that we believe are reasonable based upon the information available. Actual results may differ from these estimates under different assumptions and conditions. We continually assess the carrying value of our vessels as discussed below. Carrying Value of Vessels. We depreciate each of our OSVs and MPSVs over estimated useful lives of 25 years. Salvage value for our new generation marine equipment is estimated to be 25% of the originally recorded cost for these asset types. In assigning depreciable lives to these assets, we have considered the effects of both physical deterioration largely caused by wear and tear due to operating use and other economic and regulatory factors that could impact commercial viability. To date, our experience confirms that these policies are reasonable, although there may be events or changes in circumstances in the future that indicate that recovery of the carrying amount of our vessels might not be possible. We presently review the carrying values of our vessels for impairment using the following asset groups: OSVs and MPSVs. We believe that these two vessel groups are appropriate because our vessels are highly mobile among disparate geographies and are directed centrally from our headquarters. Our OSVs share multiple forms of direct and indirect common costs and are marketed on a portfolio basis as an integrated (multi-vessel) marine solution to our customers primarily supporting drilling and exploration activities in various deepwater and ultra-deepwater markets worldwide to our customers. We manage, market, operate and maintain our vessels in a unified manner because we are performing the same services to the same client group across the same geographic regions - i.e., primarily the transportation of the same fungible types of cargo. We believe that our unified approach to operating the vessels within each group is among the most important factors and strategic advantages that drive our customers to utilize our vessels, irrespective of the type or size of vessel that the customer requires on a given engagement. Therefore, management has concluded that the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities is at the OSV and MPSV groupings. When analyzing asset groups for impairment, we consider both historical and projected operating cash flows, operating income, and EBITDA based on current operating environment and future conditions that we can reasonably anticipate, such as inflation or prospective wage costs. These projections are based on, but not limited to, job location, current and historical market dayrates included in recent sales proposals, utilization and contract coverage; along with anticipated market drivers, such as drilling rig movements, results of offshore lease sales and discussions with our customers regarding their ongoing drilling plans. If events or changes in circumstances as set forth above were to indicate that the asset group's carrying amount may not be recoverable over the vessels' useful lives for such groups, we would then be required to estimate the future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition. If the sum of the expected future undiscounted cash flows was determined to be less than the carrying amount of either vessel group, we would be required to reduce the carrying amount to fair value. Examples of events or changes in circumstances that could indicate that the recoverability of the carrying amount of our asset groups should be assessed might include a significant change in regulations such as OPA 90, a significant decrease in the market value of the asset group and current period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the asset group. 20
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During the three months endedMarch 31, 2020 , we observed indicators of impairment related to our vessels. This was due to the rapid decline in the price of oil, which resulted from COVID-19 closures combined with a significant increase in production and the oil price war initiated bySaudi Arabia andRussia . In accordance with GAAP, we calculated the undiscounted cash flows using a probability weighted forecast for each of our asset groups over their respective remaining useful lives. Included in the cash flow projections were assumptions related to the current mix of active and stacked vessels, the estimated timing of stacked vessels returning to active status along with projected dayrates, operating expenses and direct overhead expenses related to each of the groupings. We view vessel stackings as a temporary status and a prudent business strategy. Stacking vessels does not imply that we have ceased marketing such vessels, nor is it an indicator that we never intend to reactivate such vessels when market conditions improve. In fact, we have unstacked vessels in recent quarters and will continue to do so as warranted. The total of the undiscounted cash flows was greater than the net book values of each of our asset groups. Therefore, we concluded that we did not have an impairment of our long-lived assets as ofMarch 31, 2020 , and in such analysis, we noted a significant cushion for each of our asset groups as a result of the long remaining useful lives of our vessels. In the development of the undiscounted cash flows, in addition to the previously discussed considerations outlined above and in light of current market conditions, we estimate the length of time it will take for the market to absorb our stacked vessels such that we can return those vessels to active status. Any significant revisions to this estimate would have the greatest impact in the development of the undiscounted cash flows. However, as part of our most recent analysis, we determined that if we extended the downturn (and, thus, the unstacking of vessels) by two years from the most recent estimate, this would reduce our undiscounted cash flows by less than 10%, still providing us with substantial excess undiscounted cash flow coverage of the assets' net book values given the length of remaining useful lives for the assets. See Note 6 of our consolidated financial statements included herein for further discussion. We will continue to closely monitor market conditions and potential impairment indicators as long as this market downturn persists. Our other significant accounting policies and estimates are discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 to our consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 21
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Results of Operations The tables below set forth the average dayrates, utilization rates and effective dayrates for our owned new generation OSVs and the average number and size of vessels owned during the periods indicated. These vessels generate a substantial portion of our revenues and operating profit. Excluded from the OSV information below are the results of operations for our MPSVs, our shore-based port facility and vessel management services, including the four non-owned vessels managed for theU.S. Navy . We do not provide average or effective dayrates for our MPSVs. MPSV dayrates are impacted by highly variable customer-required cost-of-sales associated with ancillary equipment and services, such as ROVs, accommodation units and cranes, which are typically recovered through higher dayrates charged to the customer. Due to the fact that each of our MPSVs have a workload capacity and significantly higher income generating potential than each of the Company's new generation OSVs, the utilization and dayrate levels of our MPSVs can have a very large impact on our results of operations. For this reason, our consolidated operating results, on a period-to-period basis, are disproportionately impacted by the level of dayrates and utilization achieved by our seven active MPSVs. Three Months Ended March 31, 2020 2019 Offshore Supply Vessels: Average number of new generation OSVs (1) 66.0 66.0
Average number of active new generation OSVs (2) 31.8 29.7 Average new generation OSV fleet capacity (DWT) 238,644 238,845 Average new generation OSV capacity (DWT)
3,616 3,619
Average new generation OSV utilization rate (3) 28.0 % 32.5 % Effective new generation OSV utilization rate (4) 58.0 % 72.1 % Average new generation OSV dayrate (5)
$ 18,203 $ 18,156 Effective dayrate (6)$ 5,097 $ 5,901
(1) We owned 66 new generation OSVs as of
data are eight MPSVs owned and operated by the Company and four non-owned
vessels managed for theU.S. Navy . (2) In response to weak market conditions, we elected to stack certain of our new generation OSVs on various dates sinceOctober 2014 . Active new
generation OSVs represent vessels that are immediately available for service
during each respective period. (3) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues. (4) Effective utilization rate is based on a denominator comprised only of vessel-days available for service by the active fleet, which excludes the impact of stacked vessel days.
(5) Average new generation OSV dayrates represent average revenue per day, which
includes charter hire, crewing services, and net brokerage revenues, based
on the number of days during the period that the OSVs generated revenues.
(6) Effective dayrate represents the average dayrate multiplied by the average
utilization rate. 22
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Summarized financial information for the three months endedMarch 31, 2020 and 2019, respectively, is shown below in the following table (in thousands, except percentage changes): Three Months Ended March 31, Increase (Decrease) $ % 2020 2019 Change Change Revenues: Vessel revenues Domestic$ 28,379 $ 27,128 $ 1,251 4.6 % Foreign 14,773 18,124 (3,351 ) (18.5 ) % 43,152 45,252 (2,100 ) (4.6 ) % Non-vessel revenues 9,658 8,784 874 9.9 % 52,810 54,036 (1,226 ) (2.3 ) % Operating expenses 41,308 40,394 914 2.3 % Depreciation and amortization 29,115 28,382 733 2.6 % General and administrative expenses 31,160 11,967 19,193 >100.0 % 101,583 80,743 20,840 25.8 % Gain on sale of assets - 26 (26 ) (100.0 ) % Operating loss (48,773 ) (26,681 ) (22,092 ) 82.8 % Loss on early extinguishment of debt, net (4,236 ) (71 ) (4,165 ) >100.0 % Interest expense (20,750 ) (19,726 ) (1,024 ) 5.2 % Interest income 646 1,114 (468 ) (42.0 ) % Income tax benefit (14,972 ) (8,831 ) (6,141 ) 69.5 % Net loss$ (58,205 ) $ (36,620 ) $ (21,585 ) 58.9 % Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Revenues. Revenues for the three months endedMarch 31, 2020 decreased by$1.2 million , or 2.3%, to$52.8 million compared to the same period in 2019. Our weighted-average active operating fleet for the three months endedMarch 31, 2020 and 2019 was 38.6 and 35.5 vessels, respectively. For the three months endedMarch 31, 2020 , we had an average of 35.4 vessels stacked compared to an average of 38.5 vessels stacked in the prior-year period. Vessel revenues decreased$2.1 million , or 4.6%, to$43.2 million for the three months endedMarch 31, 2020 compared to$45.3 million for the same period in 2019. The decrease in vessel revenues primarily resulted from soft market conditions for our OSVs partially offset by improved market conditions for our MPSVs. Revenues from our MPSV fleet increased$2.4 million , or 23.5%, for the three months endedMarch 31, 2020 compared to the prior-year period. Average new generation OSV dayrates were$18,203 for the first three months of 2020 compared to$18,156 for the same period in 2019. Our new generation OSV utilization was 28.0% for the first three months of 2020 compared to 32.5% for the same period in 2019. Our new generation OSVs incurred 158 days of aggregate downtime for regulatory drydockings and were stacked for an aggregate of 3,111 days during the first three months of 2020. Excluding stacked vessel days, our new generation OSV effective utilization was 58.0% and 72.1% during the three months endedMarch 31, 2020 and 2019, respectively. Domestic vessel revenues increased$1.3 million from the year-ago period primarily due to revenue earned from one MPSV operating domestically during the three months endedMarch 31, 2020 compared to such vessel being stacked in the prior-year period. Foreign vessel revenues decreased$3.4 million . The decrease in foreign revenues is attributable to an average of 3.8 fewer vessels working in foreign locations during the current-year period. Foreign vessel revenues for the first three months of 2020 comprised 34.2% of our total vessel revenues compared to 40.1% for the year-ago period. 23
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Non-vessel revenues increased$0.9 million , or 9.9%, from the prior-year period. This increase is primarily attributable to higher revenues earned from vessel management services during the three months endedMarch 31, 2020 compared to the year-ago period. Operating Expenses. Operating expenses were$41.3 million , an increase of$0.9 million , or 2.3%, for the three months endedMarch 31, 2020 compared to$40.4 million for the same period in 2019. Operating expenses were higher due to an increased number of active vessels in our fleet during the three months endedMarch 31, 2020 . Depreciation and Amortization. Depreciation and amortization expense of$29.1 million was$0.7 million , or 2.6%, higher for the three months endedMarch 31, 2020 compared to the same period in 2019. Amortization expense increased$1.2 million , which was driven higher mainly by costs associated with the initial special surveys for vessels that were placed in service under the Company's fifth OSV newbuild program. General and Administrative Expense. G&A expense of$31.2 million was$19.2 million higher during the three months endedMarch 31, 2020 compared to the same period in 2019. The increase in G&A expense was primarily attributable to professional fees related to our on-going balance sheet restructuring, higher short-term incentive compensation expense and an increase in bad debt reserves. Operating Loss. Operating loss increased by$22.1 million to an operating loss of$48.8 million during the three months endedMarch 31, 2020 compared to the same period in 2019 for the reasons discussed above. Operating loss as a percentage of revenues was 92.4% for the three months endedMarch 31, 2020 compared to 49.4% for the same period in 2019. Loss on Early Extinguishment of Debt, Net. During the three months endedMarch 31, 2020 , we repaid$50.0 million of the$100.0 million outstanding under our senior credit facility. As a result, we recorded a$4.2 million loss on extinguishment of debt ($3.3 million or$0.09 per diluted share after-tax) due to the write-off of deferred issuance costs and a redemption premium. During the three months endedMarch 31, 2019 , we exchanged$142.6 million in face value of 2020 senior notes for$121.2 million of second-lien term loans and we exchanged$21.0 million in face value of our 2019 convertible senior notes for$19.9 million of first-lien term loans. In accordance with applicable accounting guidance, these debt-for-debt exchanges were accounted for as debt modifications, requiring that we defer the gains on such exchanges and record a loss on early extinguishment of debt of$3.7 million related to deal costs for the exchanges. Interest Expense. Interest expense of$20.8 million was$1.0 million higher than the same period in 2019 due to incremental interest expense associated with the issuance of additional first-lien and the second-lien term loans during the first quarter of 2019 and interest expense associated with the senior credit facility that was funded during the second quarter of 2019. Interest Income. Interest income was$0.6 million during the three months endedMarch 31, 2020 , which was$0.5 million lower than the same period in 2019. Our average cash balance decreased to$150.5 million for the three months endedMarch 31, 2020 compared to$199.9 million for the same period in 2019. The average interest rate earned on our invested cash balances was 1.7% and 2.3% during the three months endedMarch 31, 2020 and 2019, respectively. The decrease in average cash balance was primarily due to cash outflows associated with the repayment of$50.0 million under our senior credit facility. Income Tax Benefit. Our effective tax benefit rate was 20.5% and 19.4% for the three months endedMarch 31, 2020 and 2019, respectively. Our income tax benefit primarily consisted of deferred taxes and our income tax rate differs from the federal statutory rate primarily due to the establishment of valuation allowances for state net operating losses and foreign and other tax credit carryforwards, but also due to expected state tax liabilities and items not deductible for federal income tax purposes. Net Loss. Net loss increased by$21.6 million for a reported net loss of$58.2 million for the three months endedMarch 31, 2020 compared to a net loss of$36.6 million for the same period during 2019. This unfavorable variance in net loss was primarily driven by increased general and administrative expenses during the three months endedMarch 31, 2020 . 24
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Liquidity and Capital Resources
Despite volatility in commodity prices, we remain confident in the long-term viability of our business model upon improvement in market conditions. Since the fall of 2014, our liquidity has been indirectly impacted by low oil and natural gas prices, which together with oil and natural gas being produced in greater volumes onshore, has unfavorably impacted the extent of offshore exploration and development activities, resulting in lower than normal cash flow from operations. The COVID-19 pandemic is expected to continue to depress demand and the timing of a global economic recovery is unclear. In addition, oil prices have been negatively impacted by the recent oil price war initiated byRussia andSaudi Arabia . As ofMarch 31, 2020 , we had total cash and cash equivalents of$59.0 million and restricted cash of$14.5 million . Our capital requirements have historically been financed with cash flows from operations, proceeds from issuances of our debt and common equity securities, borrowings under our revolving and term loan agreements and cash received from the sale of assets. We require capital to fund on-going operations, remaining obligations under our expanded fifth OSV newbuild program, vessel recertifications, discretionary capital expenditures and debt service and may require capital to fund potential future vessel construction, retrofit or conversion projects, acquisitions or the retirement of debt. In early 2020, we experienced multiple events of defaults under the existing 2020 senior notes and 2021 senior notes, which included non-payment of principal and interest on the 2020 senior notes, nonpayment of interest on the 2021 senior notes and related cross-defaults. Cross-defaults were also triggered under our existing senior credit agreement, first lien term loan agreement and second lien term loan agreement. We, together with the administrative agents and certain of the lenders under our existing senior credit agreement, first lien term loan agreement and second lien term loan agreement, and certain holders of the Company's 2020 senior notes and 2021 senior notes entered into separate forbearance agreements, which were subsequently extended toMay 19, 2020 , pursuant to which such lenders and noteholders agreed to forbear from exercising certain of their rights and remedies with respect to certain defaults by us. Despite our extensive efforts to negotiate and launch, onFebruary 14, 2020 , an out-of-court debt-for-debt exchange transaction to address our outstanding 2020 senior notes and 2021 senior notes and such events of default, after the advent of the COVID-19 pandemic and the oil price war inMarch 2020 , it became evident that an in-court process would be necessary to maximize value for us and our post-emergence stakeholders while positioning us for long-term success. As a result of the commencement of the Chapter 11 Cases onMay 19, 2020 , we have been operating as a debtor-in-possession pursuant to the authority granted under the Bankruptcy Code. OnJune 19, 2020 , after a confirmation hearing, theBankruptcy Court entered a confirmation order approving the Plan. As a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court . For additional information, see Note 2 to consolidated financial statements. In connection with the filing of the Plan, onMay 22, 2020 , we entered into the DIP Credit Agreement, pursuant to which, certain lenders thereunder agreed to provide us with loans in an aggregate principal amount not to exceed$75 million that, among other things, was used to repay in full the$50 million in loans outstanding under our senior credit agreement, and to finance our ongoing general corporate needs during the course of the Chapter 11 Cases. As ofJune 30, 2020 , we had total cash and cash equivalents of$89.6 million and restricted cash of$0.2 million . The maturity date of the DIP Credit Agreement is six months following the effective date of the DIP Credit Agreement. The DIP Credit Agreement contains customary events of default, including events related to the Chapter 11 Cases, the occurrence of which could result in the acceleration of our obligation to repay the 25
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outstanding indebtedness under the DIP Credit Agreement. Our obligations under the DIP Credit Agreement are secured by a first priority security interest in, and lien on, substantially all of our present and after-acquired property (whether tangible, intangible, real, personal or mixed) and has been guaranteed by our material subsidiaries. We have received fully committed subscriptions pursuant to the equity Rights Offering contemplated under the Plan with respect to shares of our new common stock, including under the Backstop Commitment Agreement. It is contemplated that the Rights Offering of$100 million will be closed on the effective date of the Plan. The Plan also provides for us to enter into certain Exit Financings upon emergence from the Chapter 11 Cases consisting of a first-lien senior secured term loan credit facility and a second-lien senior secured term loan credit facility, each in an aggregate principal amount to be determined. Cash Flows Operating Activities. We rely primarily on cash flows from operations to provide working capital for current and future operations. Net cash used in operating activities was$45.7 million for the three months endedMarch 31, 2020 compared to net cash used in operating activities of$26.1 million for the same period in 2019. Operating cash flows for the first three months of 2020 continue to be unfavorably affected by weak market conditions for our vessels operating worldwide. Investing Activities. Net cash used in investing activities was$1.6 million for the three months endedMarch 31, 2020 compared to$0.6 million for the same period in 2019. Cash used during the first three months of 2020 and 2019 consisted primarily of capital improvements for active vessels operating in our fleet. Financing Activities. Net cash used in financing activities was$51.6 million for the three months endedMarch 31, 2020 compared to$23.7 million for the same period in 2019. Net cash used in financing activities for the three months endedMarch 31, 2020 resulted from the partial repayment of our senior credit facility. Net cash used in financing activities for the three months endedMarch 31, 2019 resulted from the repurchase of a portion of our 2019 convertible senior notes partially offset by net proceeds from the first-lien term loans. Contractual Obligations Debt As ofMarch 31, 2020 , we had the following outstanding debt (in thousands, except effective interest rate): Effective
Cash Interest
Total Debt (4) Interest Rate Payment Payment Dates 5.875% senior notes due 2020, net of$ 224,276 6.08 %$ 6,589 April 1 and deferred financing costs of$37 (1) October 1 5.000% senior notes due 2021, net of 449,039 5.21 % 11,250 March 1 and deferred financing costs of$961 (1) September 1 First-lien term loans due 2023, plus 356,280 8.88 % 2,679 Variable deferred gain of$12,158 , net of Monthly original issue discount of$2,859 and deferred financing costs of$3,019 (2) Second-lien term loans due 2025, 139,128 9.50 % 2,879 January 31, including deferred gain of$17,893 April 30, July 31, and October 31 Senior credit facility, net of deferred 47,414 8.17 % 283 Variable financing costs of$2,586 (3) Monthly$ 1,216,137
(1) The senior notes do not require any payments of principal prior to their
stated maturity dates, but pursuant to the indentures under which the 2020
and 2021 senior notes were issued, we would be required to make offers to
purchase such senior notes upon the occurrence of specified events, such as
certain asset sales or a change in control.
(2) The interest rate on the first-lien term loan is variable based on a base
rate at the Company's election. The amount reflected in this table is the
monthly amount payable based on the 30-day LIBOR interest rate that was
elected and in effect on
currently 7.00%.
(3) The interest rate on the senior credit facility is variable based on 30-day
LIBOR interest rate plus a 5.00% margin. The amount reflected in this table
is the monthly amount payable based on the 30-day LIBOR interest rate that
was in effect on
(4) See Item 2 - General regarding the proposed impact of the Chapter 11 Cases
on the Company's long-term debt including current maturities. 26
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The credit agreements governing our senior credit facility, first-lien term loans and second-lien term loans and the indentures governing our 2020 and 2021 senior notes impose certain operating and financial restrictions on us. Such restrictions affect, and in many cases limit or prohibit, among other things, our ability to incur additional indebtedness, make capital expenditures, redeem equity, create liens, sell assets and pay dividends or make other restricted payments. For the three months endedMarch 31, 2020 , we were in compliance with all applicable financial covenants other than ourMarch 2, 2020 nonpayment of interest on the 2021 senior notes, certain reporting obligations and related cross-defaults. Capital Expenditures and Related Commitments During the first quarter of 2018, we notified the shipyard that was constructing the remaining two vessels in our fifth OSV newbuild program that we were terminating the construction contracts for such vessels. See additional discussion in Note 9 of our consolidated financial statements included herein for further discussion. As of the date of the contract terminations, these two remaining vessels, both of which are domestic 400 class MPSVs, were projected to be delivered in the second and third quarters of 2019, respectively. These projected delivery dates were subsequently amended, for guidance purposes, to be the second and third quarters of 2020; and then later extended to be the second and third quarters of 2021. Due to the continued uncertainty of the timing and location of future construction activities, we have updated our forward guidance for the delivery dates related to these vessels to be the second and third quarters of 2022, respectively. The cost of this nearly completed 24-vessel newbuild program, before construction period interest, is expected to be approximately$1,335.0 million , of which$22.9 million and$34.6 million are currently expected to be incurred in fiscal 2021 and fiscal 2022, respectively. We have not revised our estimate of the cost to complete the vessels to reflect the disputed claims asserted by the shipyard. In addition, we have not included any potential costs to complete the vessels in excess of the original contract price that may not be covered by surety bonds due to the sureties' denial of claims or for any other reasons. The timing of remaining construction draws remains subject to change commensurate with any potential further delays in the delivery dates of such vessels. From the inception of this program throughMarch 31, 2020 , we have incurred construction costs of approximately$1,277.5 million , or 95.7%, of total expected project costs. 27
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Maintenance and Other Capital Expenditures The following table summarizes the costs incurred, prior to the allocation of construction period interest, for the purposes set forth below for the three months endedMarch 31, 2020 and 2019, respectively (in millions): Three Months Ended March 31, 2020 2019 Actual Actual Maintenance and Other Capital Expenditures: Maintenance Capital Expenditures Deferred drydocking charges$ 6.9 $
9.3
Other vessel capital improvements (1) 0.4
0.3
7.3
9.6
Other Capital Expenditures Commercial-related vessel improvements (2) 1.1
0.2
Miscellaneous non-vessel additions (3) - 0.1 1.1 0.3 Total$ 8.4 $ 9.9
(1) Other vessel capital improvements include costs for discretionary vessel
enhancements, which are typically incurred during a planned drydocking event
to meet customer specifications.
(2) Commercial-related vessel improvements include items, such as cranes, ROVs,
helidecks, living quarters, and other specialized vessel equipment, which
costs are typically included in and offset, in whole or in part, by higher
dayrates charged to customers. (3) Non-vessel capital expenditures are primarily related to information technology and shoreside support initiatives. 28
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Forward Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements," as contemplated by the Private Securities Litigation Reform Act of 1995, in which the Company discusses factors it believes may affect its performance in the future. Forward-looking statements are all statements other than historical facts, such as statements regarding assumptions, expectations, beliefs and projections about future events or conditions. You can generally identify forward-looking statements by the appearance in such a statement of words like "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "intend," "may," "might," "plan," "potential," "predict," "project," "remain," "should," "will," "would," or other comparable words or the negative of such words. The accuracy of the Company's assumptions, expectations, beliefs and projections depends on events or conditions that change over time and are thus susceptible to change based on actual experience, new developments and known and unknown risks. The Company gives no assurance that the forward-looking statements will prove to be correct and does not undertake any duty to update them. The Company's actual future results might differ from the forward-looking statements made in this Quarterly Report on Form 10-Q for a variety of reasons, including our ability to obtain theBankruptcy Court's approval with respect to post-confirmation motions or other requests made to theBankruptcy Court in the Chapter 11 Cases; any delays in consummation of the Chapter 11 Cases; risks that our assumptions and analyses in the Plan are incorrect; our ability to comply with the covenants under our DIP Credit Agreement; the effects of the Chapter 11 Cases on our business and the interests of various constituents; the actions and decisions of creditors, regulators and other third parties that have an interest in the Chapter 11 Cases; restrictions imposed on us by theBankruptcy Court ; impacts from changes in oil and natural gas prices in theU.S. and worldwide; continued weakness in demand and/or pricing for the Company's services; unplanned customer suspensions, cancellations, rate reductions or non-renewals of vessel charters, or vessel management contracts, or failures to finalize commitments to charter or manage vessels; continued weakness in capital spending by customers on offshore exploration and development; the inability to accurately predict vessel utilization levels and dayrates; sustained weakness in the number of deepwater and ultra-deepwater drilling units operating in the GoM or other regions where the Company operates; the impact on the foregoing as a result of the COVID-19 pandemic and the recent oil price war initiated byRussia andSaudi Arabia ; the Company's inability to successfully complete the final two vessels of its current vessel newbuild program on-budget, including any failure or refusal by the issuer of performance bonds to honor the bond contract or to cover cost overruns that may result at a completion shipyard; the inability to successfully market the vessels that the Company owns, is constructing or might acquire; any cancellation or non-renewal by the government of the management, operations and maintenance contracts for non-owned vessels; an oil spill or other significant event inthe United States or another offshore drilling region that could have a broad impact on deepwater and other offshore energy exploration and production activities, such as the suspension of activities or significant regulatory responses; the imposition of laws or regulations that result in reduced exploration and production activities or that increase the Company's operating costs or operating requirements; environmental litigation that impacts customer plans or projects; disputes with customers; bureaucratic, administrative operating or court-imposed barriers that prevent or delay vessels in foreign markets from going or remaining on-hire; administrative, judicial or political barriers to exploration and production activities inMexico ,Brazil or other foreign locations; disruption in the timing and/or extent of Mexican offshore activities or changes in law or governmental policy inMexico that restricts or slows the pace of further development of its offshore oilfields; changes in law or governmental policy or judicial action inMexico affecting the Company's Mexican registration of vessels; administrative or other legal changes in Mexican cabotage laws; other legal or administrative changes inMexico that adversely impact planned or expected offshore energy development; unanticipated difficulty in effectively competing in or operating in international markets; less than anticipated subsea infrastructure and field development demand in theGreater GoM Operating Region and other markets affecting the Company's MPSVs; sustained vessel over capacity for existing demand levels in the markets in which the Company competes; economic and 29
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geopolitical risks; weather-related risks; upon a return to improved operating conditions, the shortage of or the inability to attract and retain qualified personnel, when needed, including vessel personnel for active vessels or vessels the Company may reactivate or acquire; any success by others in unionizing any of the Company'sU.S. fleet personnel; regulatory risks; the repeal or administrative weakening of the Jones Act or adverse changes in the interpretation of the Jones Act; drydocking delays and cost overruns and related risks; vessel accidents, pollution incidents or other events resulting in lost revenue, fines, penalties or other expenses that are unrecoverable from insurance policies or other third parties; unexpected litigation and insurance expenses; other industry risks; fluctuations in foreign currency valuations compared to theU.S. dollar and risks associated with expanded foreign operations, such as non-compliance with or the unanticipated effect of tax laws, customs laws, immigration laws, or other legislation that result in higher than anticipated tax rates or other costs; the inability to repatriate foreign sourced earnings and profits; the extent of the pending loss or material limitation of the Company's tax net operating loss carryforwards and other tax attributes due to a change in control, as defined in Section 382 of the Internal Revenue Code; our ability to successfully conclude negotiations of the new first-lien and second-lien exit credit facilities to be entered into in connection with consummation of the Plan; the potential for any impairment charges that could arise in the future and that would reduce the Company's consolidated net tangible assets which, in turn, would further limit the Company's ability to grant certain liens, make certain investments, and incur certain debt permitted under the Company's senior notes indentures and term loan agreements; or the impact of "fresh-start" accounting, which will be applicable to the Company upon consummation of the Plan. In addition, the Company's future results may be impacted by adverse economic conditions, such as inflation, deflation, lack of liquidity in the capital markets or an increase in interest rates, that may negatively affect it or parties with whom it does business resulting in their non-payment or inability to perform obligations if and when required. Should one or more of the foregoing risks or uncertainties materialize in a way that negatively impacts the Company, or should the Company's underlying assumptions prove incorrect, the Company's actual results may vary materially from those anticipated in its forward-looking statements, and its business, financial condition and results of operations could be materially and adversely affected and, if sufficiently severe, could result in noncompliance with certain covenants of the Company's existing indebtedness. Additional factors that you should consider are set forth in detail in the "Risk Factors" section of the Company's most recent Annual Report on Form 10-K as well as other filings the Company has made and will make with theSecurities and Exchange Commission which, after their filing, can be found on the Company's website, www.hornbeckoffshore.com. The Company makes references to certain industry-related terms in this Quarterly Report on Form 10-Q. A glossary and definitions of such terms can be found in "Part II- Item 5-Other Information" on page 35. Item 3-Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information under this Item. 30
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