Hillside Advisors
July 07, 2016
Independent research & wealth management in convertible securities.

Hornbeck Offshore Services, A Way To Hedge The Downside?

Introduction

Hornbeck Offshore Services (NYSE-HOS) is a leading provider of marine transportation, subsea installation and accommodation support services to exploration and production, oilfield service, offshore construction and U.S. military customers...


July 5, 2016
10
Hornbeck Offshore Services, Inc. (HOS)
Dennis Dowden, CFA
ddowden@hillsideadvisors.com
Introduction
œÀ˜LiVŽ"vvŜÀi-iÀۈVií 9- ‡"-®ˆÃ>i>`ˆ˜}«ÀœÛˆ`iÀœv“>Àˆ˜iÌÀ>˜Ã«œÀÌ>̈œ˜]
ÃÕLÃi>ˆ˜ÃÌ>>̈œ˜>˜`>VVœ““œ`>̈œ˜ÃÕ««œÀÌÃiÀۈViÃ̜iÝ«œÀ>̈œ˜>˜`«À
œ`ÕV̈œ˜]
œˆwi`ÃiÀۈVi]œvvŜÀiVœ˜ÃÌÀÕV̈œ˜>˜`1°-°“ˆˆÌ>ÀÞVÕÃ̜“iÀð
Speculative Investment
HOS appears to be an interesting speculative way to participate in a continued
improvement in the energy sector but with a way to hedge the downside. All three tranches
œv̅iVœ“«>˜Þ½Ã«ÕLˆV`iLÌ>ÀiÌÀ>`ˆ˜}>Ì`ii«`ˆÃVœÕ˜ÌÃvÀœ“«>À°/…i£°x ̄Ãi˜ˆœÀ
Vœ˜ÛiÀ̈Li˜œÌiÃ`Õi-i«Ìi“LiÀÓ䣙>ÀiÌÀ>`ˆ˜}Ü>ÞœÕÌœv̅i“œ˜iÞ>Ìxn°ÓxvœÀ>
ވi`œvÕÃÌ՘`iÀÓä ̄°/…ixÇÉn ̄Ãi˜ˆœÀ˜œÌiÃ`ÕiƂ«ÀˆÓäÓä>À
iÌÀ>`ˆ˜}>ÌÈ{°Çx̜
ވi`£™°È ̄>˜`̅ix ̄Ãi˜ˆœÀ˜œÌiÃ`Õi>ÀV…ÓäÓ£>ÀiÌÀ>`ˆ˜}>ÌÈ£°x̜ވi`£Ç°{ ̄°
"-ˆÃ…ˆ}…ÞˆμՈ`܈̅ܓifÓxÈ“ˆˆœ˜œvV>Å>˜`>˜՘Ì>««i`fÎä䓈ˆœ˜VÀ
i`ˆÌ
v>VˆˆÌÞ°/…iVœ“«>˜Þ½ÃˆμՈ`ˆÌÞ>˜`ˆ˜ÌiÀ˜>Þ}i˜iÀ>Ìi`V>ÅyœÜŜՏ`Li“œÀi̅>˜
>“«i̜w˜>˜Viܓi>À}iœLˆ}>̈œ˜ÃœÛiÀ̅i˜iÝÌÌܜÞi>ÀÓœÃ̏ÞvÀœ“>˜i܇LՈ`
«Àœ}À>“̅>̈Ã܈˜`ˆ˜}`œÜ˜° iޜ˜`̅>Ì̅i˜iÝÌLˆ}œLˆ}>̈œ˜ŜՏ`Li܅i˜̅i
£°x ̄Ãi˜ˆœÀVœ˜ÛiÀ̈Li˜œÌiÓ>ÌÕÀiˆ˜-i«Ìi“LiÀÓ䣙°vi˜iÀ}އÃiV̜ÀiVœ˜œ“ˆV>˜`
market conditions continue to improve HOS’ debt securities could be big outperformers.
vVœ˜`ˆÌˆœ˜Ã`œ˜œÌ>œÜvœÀ̅iÀiw˜>˜Vˆ˜}œv̅iÃi˜ˆœÀVœ˜ÛiÀ̈Li˜œÌiÃܓiŽˆ˜`œv
ÀiÃÌÀÕVÌÕÀˆ˜}ܜՏ`ˆŽiÞ…>««i˜°œÜiÛiÀ]ˆv"-½ˆμՈ`ˆÌÞ…œ`ÃœÕÌ>ÃÜiiÝ«iVÌ]̅i
…œ`iÀÃœv̅iÌܜV>Ň«>ÞLœ˜`ÃܜՏ`«œÌi˜Ìˆ>ÞVœiVÌÕ«̜ÈÝÃi“ˆ‡>˜˜Õ>VœÕ«œ˜Ã
before any dislocations. Moreover, at current trading levels the marked to market amount
œv`iLÌœ˜"-½L>>˜ViÅiïÏiÃÃ̅>˜fÇä䓈ˆœ˜°/…ÕȘ>Ó䣙À
iÃÌÀÕVÌÕÀˆ˜}"-
ܜՏ`…>Ûi̜LiܜÀ̅iÃÃ̅>˜fÇä䓈ˆœ˜vœÀLœ˜`…œ`iÀÃ̜œÃi“œ˜iÞ}ˆÛi˜>
purchase at today’s trading levels. If buying the senior notes at such big discounts from par
is not enough downside protection, investors might consider shorting some stock against a
long position in the senior convertible notes or one of the cash pay senior notes, although
̅iիÈ`iÀˆÃŽœv`œˆ˜}ÜŜՏ`˜œÌLiÌ>Ži˜ˆ}…̏ް"-Ã̜VŽVœÃi`>Ìf™°ä™œ˜ՏÞ£°
Recent Results
HOS’ business has been under a good deal of pressure. For the three months ended March
Σ]Óä£È]ÀiÛi˜Õi>“œÕ˜Ìi`̜fÇÇ“ˆˆœ˜`œÜ˜vÀœ“fn{“ˆˆœ˜ÃiμÕi˜Ìˆ>Þ>˜``œÜ˜
vÀœ“f£Î{“ˆˆœ˜vÀœ“̅iwÀÃÌμÕ>ÀÌiÀœvÓä£x° vviV̈Ûi˜iÜ}i˜iÀ>̈œ˜"-6`>ÞÀ>ÌiÃ
ÜiÀifn]ÈÎx`œÜ˜fÓ]{™ÓÃiμÕi˜Ìˆ>Þ° / ƂvœÀ̅iwÀÃÌμÕ>ÀÌiÀÜ>Ãfә“ˆˆœ˜`œÜ˜
vÀœ“fÎÓ“ˆˆœ˜ÃiμÕi˜Ìˆ>Þ°
HOS
As of July 1, 2016
HOCS 1.5:
50
(Indifferent)
30
(Problematic
)
70
(Excellent)
1.5% 2019/09/01
Price (Bond) = 58.25
Stock = $9.09
YTM = 19.99%
Premium = 245.0%
HOCS-Overall = 48
HOCS-Growth = 47
HOCS-Safety = 49
Overall
Growth
Safety
{n
47
49
July 5, 2016
11
Liquidity and Capital Structure
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“ˆˆœ˜>˜`>˜՘Ì>««i`fÎä䓈ˆœ˜ÃiVÕÀi`ÀiۜÛˆ˜}VÀi`ˆÌ>}Àii“i˜Ì°/…iVÀi`ˆÌ>}Àii“i˜ÌˆÃÃiVÕÀi`
LÞ>«œÀ̈œ˜œv"-½yiiÌ܈̅>LœœŽÛ>Õiœvf{x䓈ˆœ˜°“«œÀÌ>˜ÌÞ
]"-…>Øœ`iLÌ“>ÌÕÀˆÌˆiÃ
՘̈-i«Ìi“LiÀÓ䣙܅i˜̅i£°x ̄Vœ˜ÛiÀ̈Li˜œÌiÓ>ÌÕÀi°˜ œÛi“LiÀ]Ó䣣]"-i“L>ÀŽi`œ˜>
f£]ÎÎx“ˆˆœ˜Ó{ÛiÃÃi˜iÜLՈ`«Àœ}À>“°"ÛiÀ™ä ̄œv̅i«Àœ}À>“ˆÃVœ“«iÌi°-œ“if£ä{“ˆˆœ˜œv
spending remains for the program but all of it can be paid from HOS’ large cash position. Indeed, HOS’
V>ÅœÕ̏>Þ«ˆVÌÕÀiV…>˜}iÃÈ}˜ˆwV>˜ÌÞˆ˜Óä£Ç°>˜>}i“i˜ÌvœÀiV>ÃÌÃ̅>ÌV>«ˆÌ>ëi˜`ˆ˜}ˆ˜Óä£Ç
܈>“œÕ˜Ì̜fxȰΓˆˆœ˜­ˆ˜VÕ`ˆ˜}fÎx“ˆˆœ˜œv}ÀœÜ̅V>«ˆÌ>ëi˜`ˆ˜}®Vœ“«>Ài`܈̅>Óä£È
vœÀiV>ÃÌi`V>«ˆÌ>ëi˜`ˆ˜}«Àœ}À>“œvf£Ó࣓ˆˆœ˜­ˆ˜VÕ`ˆ˜}f™n°Î“ˆˆœ˜œv}ÀœÜ̅V>«ˆÌ>ëi˜`ˆ˜}®°
"˜>Þ{]“>˜>}i“i˜Ìˆ˜"-½wÀÃÌμÕ>ÀÌiÀÀi«œÀÌ̜Å>Ài…œ`iÀÃÃÌ>Ìi`̅>ÌV>Åœ˜…>˜`>˜`ˆ˜ÌiÀ˜>Þ
}i˜iÀ>Ìi`V>ÅyœÜܜՏ`LiÃÕvwVˆi˜Ì̜VœÛiÀ>}ÀœÜ̅V>«ˆÌ>iÝ«i˜`ˆÌÕÀiÃvœÀ̅iÀi“>ˆ˜ˆ˜}ÛiÃÃiÃ
̜Li`iˆÛiÀi`>ÃÜi>Ü̅iÀV>«ˆÌ>iÝ«i˜`ˆÌÕÀiÃ>˜`>˜˜Õ>V>Å`iLÌÃiÀۈVi>˜`ˆ˜Vœ“iÌ>ÝiÃ܈̅œÕÌ
having to use its’ currently untapped revolver.
"-ˆÃ…ˆ}…ÞiÛiÀ>}i`̜Ã>Þ̅ii>ÃÌ°ƂÌ̅ii˜`œv̅iwÀÃÌμÕ>ÀÌiÀi˜`i`>À
V…Σ]̜Ì>`iLÌ
>“œÕ˜Ìi`̜f£°äÇLˆˆœ˜­iÝVÕ`ˆ˜}œÀˆ}ˆ˜>ˆÃÃÕi`ˆÃVœÕ˜Ìî°iÛiÀ>}i>Ói>ÃÕÀ
i`LÞ̜Ì>`iLÌ̜
/ ƂŜՏ`>««Àœ>V…}Ài>ÌiÀ̅>˜£äÝLÞ̅ii˜`œvÓä£È°œÀiœÛiÀ]>Ãœv̅iVœÃiœvLÕȘiÃÃՏÞ£]
Óä£È]"-½iμՈÌÞ“>ÀŽiÌV>«ˆÌ>ˆâ>̈œ˜ˆÃfÎә“ˆˆœ˜°"-½Vœ““œ˜…>Ã`À
œ««i`nÎ ̄œÛiÀ̅ÀiiÞi>Àð
/…ÕÃ̜Ì>`iLÌ̜i˜ÌiÀ«ÀˆÃiÛ>ÕiˆÃ}Ài>ÌiÀ̅>˜ÇÈ ̄]>˜`̅>Ì“ˆ}…ÌLi՘`iÀÃÌ>Ìi`°
HOS’ capital structure is straightforward with three tranches of senior unsecured public debt. The tranches
ˆ˜VÕ`i̅i£°x ̄Vœ˜ÛiÀ̈Li˜œÌiÃ`Õi-i«Ìi“LiÀÓ䣙>“œÕ˜Ìˆ˜}̜fÓxÇ°£“ˆˆœ˜­˜œÌˆ˜VÕ`ˆ˜}œÀˆ}ˆ˜>
ˆÃÃÕi`ˆÃVœÕ˜Ìœv{Ó°™“ˆˆœ˜®Æ̅ix ̄Ãi˜ˆœÀ˜œÌiÃœvÓäÓ£>“œÕ˜Ìˆ˜}̜f{{x°Ó“ˆˆœ˜LivœÀ
if{°n“ˆˆœ˜
" >˜`̅ixÇÉn ̄Ãi˜ˆœÀ˜œÌiÃœvÓäÓä>“œÕ˜Ìˆ˜}̜fÎÇ£°Î“ˆˆœ˜LivœÀ
ifΰÇ“ˆˆœ˜œv" °
Business Description
Hornbeck Offshore is a leading provider of marine transportation, subsea installation and accommodation
ÃÕ««œÀÌÃiÀۈViÃ̜iÝ«œÀ>̈œ˜>˜`«Àœ`ÕV̈œ˜]œˆwi`ÃiÀۈVi]œvvŜÀiVœ˜ÃÌÀÕV̈œ˜>˜`1°-°“ˆˆÌ>ÀÞ
VÕÃ̜“iÀð"-œÜ˜Ã>˜`œ«iÀ>ÌiÃœ˜iœv̅iޜ՘}iÃÌ>˜`>À}iÃÌyiiÌÃœv1°-°‡y>}}i`˜iÜ}i˜iÀ>̈œ˜
"-6>˜`*-6ð˜>ÌiÓ䣣̅iVœ“«>˜ÞVœ““i˜Vi`>˜"-6˜iÜLՈ`«À
œ}À>“ˆ˜VÕ`ˆ˜}̅i
Vœ˜ÃÌÀÕV̈œ˜œv*-6ð"-½˜iÜ}i˜iÀ>̈œ˜yiïØœÜVœ“«ÀˆÃi`œvÈÓ"-6Ã>˜`ÈÝ*-6ð1«œ˜
Vœ“«ïœ˜œv̅i˜iÜLՈ`«Àœ}À>“ˆ˜Óä£Ç̅iyiiÌ܈Vœ“«ÀˆÃiÈÓ"-6Ã>˜`Ìi˜*-6ð/…iÛiÃÃiÃ
ÃÕ««œÀÌ̅i`ii«‡Üi]`ii«‡Ü>ÌiÀ>˜`ՏÌÀ>‡`ii«‡Ü>ÌiÀ>V̈ۈ̈iÃœv̅iœv
vŜÀiœˆ>˜`}>Ș`ÕÃÌÀÞ
ˆ˜VÕ`ˆ˜}œˆ>˜`}>ÃiÝ«œÀ>̈œ˜]wi``iÛiœ«“i˜Ì«Àœ`ÕV̈œ˜]Vœ˜ÃÌÀÕV̈œ˜]ˆ˜ÃÌ>>̈œ˜],]Üi‡
stimulation and other oil recovery activities.
/…iVœ“«>˜Þ…>Ã…ˆÃ̜ÀˆV>Þœ«iÀ>Ìi`ˆ˜̅iՏvœvi݈VœLṎ˜À
iVi˜ÌÞi>ÀÃ…>ÃÀiVi˜ÌÞ“>`i>
“œÛiˆ˜Ìœi݈Vœ>˜` À>∏°7…ˆi>œv̅iVœ“«>˜Þ½ÃÛiÃÃiÃ>ÀiV>«>Liœvœ«iÀ>̈˜}ˆ˜`œ“iÃ̈V>˜`
ˆ˜ÌiÀ˜>̈œ˜>Ü>ÌiÀÃܓinx ̄>ÀiμÕ>ˆwi`՘`iÀ̅iœ˜iÃƂVÌ­ÃiiLiœÜ®°
/…iœ˜iÃƂVÌÜ>Ãi˜>VÌi`ˆ˜£™Óä>˜`Ài}Տ>ÌiÓ>ÀˆÌˆ“iVœ““iÀViLiÌÜii˜1°-° ˆÌˆið/…i>VÌÀiμՈÀiÃ
̅>Ì}œœ`Ã>˜`«>ÃÃi˜}iÀÃÌÀ>˜Ã«œÀÌi`LÞÜ>ÌiÀLiÌÜii˜1°-°«œÀÌÃLi`œ˜iˆ˜1°-‡“>`iň«Ã]œÜ˜i`LÞ
U.S. citizens and crewed by U.S. citizens.
July 5, 2016
12
July 5, 2016
13
Credit Waterfall
Financial Summary
July 5, 2016
14
Disclaimer
ˆÃˆ`iƂ`ۈÜÀà ˆÃ>w˜>˜Vˆ>«ÕLˆÃ…iÀ]«ÕLˆÃ…ˆ˜}ˆ˜vœÀ“>̈œ˜>LœÕÌ“>ÀŽiÌÃ]ˆ˜`ÕÃÌÀˆiÃ]ÃiV̜ÀÃ>˜`ˆ˜ÛiÃ̓i˜ÌȘ܅ˆV…ˆÌ
believes subscribers may be interested. The information in this letter is not intended to be personalized recommendations to buy,
hold or sell investments. Hillside is not permitted to offer personalized trading or investment advice to subscribers. The information,
ÃÌ>Ìi“i˜ÌÃ]ۈiÜÃ>˜`œ«ˆ˜ˆœ˜Ãˆ˜VÕ`i`ˆ˜̅ˆÃ«ÕLˆV>̈œ˜>ÀiL>Ãi`œ˜ÜÕÀViíLœÌ…ˆ˜ÌiÀ˜>>˜`iÝÌiÀ˜>ÜÕÀViîVœ˜Ãˆ`iÀi`̜
LiÀiˆ>Li]LÕ̘œÀi«ÀiÃi˜Ì>̈œ˜œÀÜ>ÀÀ>˜ÌÞ]iÝ«ÀiÃÃœÀˆ“«ˆi`]ˆÃ“>`i>Ã̜̅iˆÀ>VVÕÀ>VÞ]Vœ“«iÌi˜iÃÃœÀVœÀÀiV̘iÃð-ÕV…
ˆ˜vœÀ“>̈œ˜]ÃÌ>Ìi“i˜ÌÃ]ۈiÜÃ>˜`œ«ˆ˜ˆœ˜Ã>ÀiiÝ«ÀiÃÃi`>Ãœv̅i`>Ìiœv«ÕLˆV>̈œ˜]>ÀiÃÕLiVÌ̜V…>˜}i܈̅œÕÌvÕÀ̅iÀ˜œÌˆVi
and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.
Readers should do their own research before trading in any investments referenced herein. Investing in convertible bonds and related
ÃiVÕÀˆÌˆiÃ]ÃÕV…>ÃÃ̜VŽÃ]Lœ˜`Ã>˜`œ«Ìˆœ˜Ã]ˆÃëiVՏ>̈Ûi>˜`“>ÞV>ÀÀÞ>…ˆ}…`i}À
iiœvÀˆÃŽ°,i>`iÀÓ>ÞÃÕÃÌ>ˆ˜È}˜ˆwV>˜ÌœÃÃiÃ
in these securities.
Advisors to Hillside serve as investment advisers to clients, including limited partnerships and other pooled investment vehicles. The
>vwˆ>ÌiÓ>Þ}ˆÛi>`ۈVi>˜`Ì>Ži>V̈œ˜܈̅ÀiëiVÌ̜̅iˆÀVˆi˜ÌÃ̅>Ì`ˆvviÀÃvÀœ“̅iˆ˜vœÀ“>̈œ˜]ÃÌ>Ìi“i˜ÌÃ]ۈiÜÃ>˜`œ«ˆ˜ˆœ˜Ã
ˆ˜VÕ`i`ˆ˜̅ˆÃ«ÕLˆV>̈œ˜° œÌ…ˆ˜}…iÀiˆ˜œÀˆ˜̅iÃÕLÃVÀˆ«Ìˆœ˜>}Àii“i˜ÌÅ>ˆ“ˆÌœÀÀiÃÌÀˆVÌ̅iÀˆ}…Ìœv>vwˆ>ÌiÃœvˆÃˆ`i̜
perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein or in any subse
‡
μÕi˜Ì>}Àii“i˜ÌLiÌÜii˜ˆÃˆ`i>˜`ÃÕLÃVÀˆLiÀÃœÀœÌ…iÀÀi>`iÀÃÅ>ˆ“ˆÌœÀÀiÃÌÀˆVÌ>`ۈÜÀÃ̜œÀ>vwˆ>ÌiÃœvˆÃˆ`ivÀœ“LÕވ˜}]
Ãiˆ˜}œÀÌÀ>`ˆ˜}ÃiVÕÀˆÌˆiÃœÀœÌ…iÀˆ˜ÛiÃ̓i˜ÌÃvœÀ̅iˆÀœÜ˜>VVœÕ˜ÌÃœÀvœÀ̅i>VVœÕ˜ÌÃœv̅iˆÀVˆi˜ÌðƂ`ۈÜÀÃ̜œÀ>vwˆ>ÌiÃœv
Hillside may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publica
‡
̈œ˜°ˆÃˆ`iÅ>…>Ûi˜œœLˆ}>̈œ˜̜ÀiVœ““i˜`ÃiVÕÀˆÌˆiÃœÀˆ˜ÛiÃ̓i˜ÌȘ̅ˆÃ«ÕLˆV>̈œ˜>ÃÀiÃՏÌœvˆÌÃ>vwˆ>Ìiýˆ˜ÛiÃ̓i˜Ì
activities for their own accounts or for the accounts of their clients. If you have received this communication in error, please notify us
ˆ““i`ˆ>ÌiÞLÞiiVÌÀœ˜ˆV“>ˆœÀÌii«…œ˜i°/…ˆÃ`ˆÃV>ˆ“iÀ>««ˆiÃ̜>ÛiÀȜ˜ÃœvÞLÀˆ`6ˆ}œÀ]ˆÃˆ`i˜ÌÀ> >Þ1«`>ÌiÃ]>˜`/…i
Week That Was in Converts.
œ«ÞÀˆ}…ÌÓä£ÈˆÃˆ`iƂ`ۈÜÀÃ
ˆÃˆ`iƂ`ۈÜÀÃ]ÞLÀˆ`6ˆ}œÀ]Ƃ,*]>˜`1}ÞÓä>ÀiÃiÀۈVi“>ÀŽÃœvˆÃˆ`iƂ`ۈÜÀà °" -ˆÃ>ÌÀ>`i“>ÀŽœvˆÃˆ`iƂ`ۈÜÀÃ
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