Oil & Gas: Hornbeck Offshore’s FRISK® Score Reveals Refinancing Risk
The offshore oil & gas market remains widely depressed. American operator Hornbeck Offshore Services, Inc. has fallen to a FRISK® score of “1,” which indicates severe financial distress and immediate need for monitoring.
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The FRISK® score uses a scale that ranges from “1” (riskiest)-to-“10” (least risky). Hornbeck Offshore's FRISK® score is currently trending at the lowest-possible FRISK® score of “1.”
Unlike the FRISK® score, the Z”-Score continues to miss the risk here. Over the last few quarters, the Z”-Score demonstrates “neutral” financial health despite that Hornbeck Offshore’s capital structure is unsustainable:
Threading the Needle
Hornbeck Offshore's operating performance remains weak given that offshore oil & gas activity is still tepid. Average day rates and total contracted utilization on various types of offshore rigs have been depressed for three years now, according to IHSmarkit data. While management expects a modest inflection in supply and demand this year, the prospect of a significant recovery in offshore drilling still appears to be about two years away.
In April, Moody’s Investors Service stated in a note that “refinancing risk remains elevated in the absence of a meaningful recovery in the offshore drilling market.” For context, the company held about $175 million in cash and short-term investments as of Q1 2019. The company's term loans contain a $25 million maintenance covenant, so true cash is around $150 million. Meanwhile, its trailing 12-month free cash flow deficit was more than $100 million, not leaving much flexibility.
An even larger problem is the maturity of its 2020 senior debt. The company is working to push out this maturity by exchanging it for higher-yielding debt. Although in the Q4 2018 conference call, management stated that a portion of debtholders may attempt to force the company into bankruptcy: “we believe that there is a fraction among them who's [sic] objective is not to be repaid but rather to coerce the company into a highly dilutive restructuring.”
Through a debt exchange, management reduced the face value of its 5.875% senior notes due 2020 from $366.9 million to $224.3 million. The $142.6 million was refinanced into the 2025 term loan, which bears a much higher interest rate of 9.5%. The remaining balance of the notes still needs to be negotiated. So while Hornbeck Offshore is buying more time, its annual cash interest burden continues to grind higher.
Altogether, management is working hard to avoid a restructuring but the company’s net debt hit a record high of $1.02 billion last quarter. Unless both offshore activity and day rates demonstrate a meaningful upswing over the next year, its refinancing transactions will continue to be challenging and bankruptcy could become a reality.
With offshore drilling still weak, equipment service providers like Hornbeck Offshore struggle. Despite fellow oil giant Weatherford International plc’s massive scale, it has announced plans to file for Chapter 11 bankruptcy protection on or before July 15 (CreditRiskMonitor warned of the company’s bankruptcy risk in December 2018).
Hornbeck Offshore has more than $2.7 billion in assets but is only marginally avoiding a bankruptcy restructuring of its own. A broader market recovery will be required for Hornbeck Offshore to avoid Weatherford's fate, though the near term outlook remains bleak.
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