Cantor Fitzgerald initiated coverage this past week on U.S.-flag operating companies Maritrans and Hornbeck Offshore Services with a STRONG BUY. The report follows only a month or so after Fortis initiated coverage on Hornbeck and Seacor with a BUY rating, demonstrating a growing interest among investors and analysts in this segment of the marine market. Seacor, of course, has now been bought. But the coverage in question is another step in Cantor Fitzgerald’s growing involvement with the marine industry. Having helped to bring both tanker and dry bulk companies to the public markets in the past year, it is only fitting that the group should turn some attention to the offshore industry.

Analyst Natasha Boyden notes in both reports that, due to 1990 Oil Pollution Act requirements that eventually require oil-carrying vessels to be double hulled, she expects approximately 33% of the U.S.-flag industry fleet to be retired between 2005 and 2007. Such requirements will be very bad news for companies that operate fleets of older vessels, but for companies that operate relatively young fleets to high standards, this means an opportunity to increase market share and utilization rates.

Considering high barriers to entry, attributable in large part to “rising steel prices, operational and technological barriers to entry, and the high cost of building new vessels under Jones Act requirements,” Ms. Boyden believes that the advantages thus gained by high quality operators will not be short-lived. Add to that the Energy Information Administration’s predicted U.S. petroleum product demand growth of 1.5% annually over the next 20 years, both Maritrans and Hornbeck could be looking at very favorable supply and demand dynamics.

Tug and tank barge company Maritrans (NYSE: TUG), with 15 vessels, boasts the industry’s largest fleet and represents approximately 20% of overall market capacity. With low costs, leverage to the spot market that Cantor expects to be strong and sustainable, and a debt-to-cap ratio of 39% and falling, the company has a lot going for it. As such, Ms. Boyden targets a P/E valuation of 18x, a significant appreciate from the 14.3x at which it has been trading, which leads to a price target of $24 compared to a share price of$18.09 at press time.

Hornbeck (NYSE: HOS), by contrast, operates a fleet of 24 new-generation offshore supply vessels (OSVs), which make up approximately 16% of the domestic new-generation fleet. The fleet is also exceptionally modern, with an average age of only four years compared to the entire U.S.-flagged fleet average age of 24 years. As Fortis analyst Dan Barrett also noted in his report, modern OSV vessels are not just important because they comply with regulations being phased in and have less maintenance needs, but they also have more capabilities than older vessels that typically make them significantly more efficient when they are employed and lead to higher utilization rates.

Nevertheless, Hornbeck has been trading at a significant discount to peers and as such, Ms. Boyden convincingly argues, represents a very good value. To achieve the Cantor’s $29 price target, she uses EV/EBITDA due to the capital intensive and cyclical nature of Hornbeck’s business. The analyst recommends a valuation of 10.5x as opposed to the 8.9x at which the company has recently been trading – the share price now stands at $24.51.

Fortis Reports on Offshore Sector,

Initiates Seacor and Hornbeck with BUY Rating

If you’ve ever wanted to know more about the offshore supply boat sector but didn’t know how to look, we highly recommend Fortis Bank’s newly issued reports, which give an overview of the sector and initiate coverage on Seacor Holdings and Hornbeck Offshore Services. Despite noting the sector’s history of being “plagued by over-capacity, low barriers to entry, and commoditized pricing,” analyst Dan Barrett is bullish on the short-term prospects for the sector, expecting to see a number of supply boat companies exceed consensus expectations over the next few quarters.

Mr. Barrett expects that supply will outstrip demand in the sector over the next 12-18 months, but is not shy about his belief that a rising tide will not lift all boats. He expects the market for new generation and deep-water capable boats to be quite strong, with utilization rates likely climbing from the 85-90% range to the mid 90s and day rates hitting record levels. Meanwhile, utilization rates for older boats with more limited capabilities will rise only along the margin.

In the Sector Note issued by Fortis, Mr. Barrett first discusses in detail the primary types of boats involved in the sector – Anchor Handling Towing Supply, Offshore Supply Vessels, Crew Boats and Standby/Rescue Vessels, among others – and the key global offshore basins – the Gulf of Mexico, the North Sea, West Africa, Asia – Pacific, the Middle East, Brazil, and the rest of Latin America. He gives an overview of the rate tendencies and contract types that prevail in the various vessel-types and regions that gives substance to his discussions of company strengths and weaknesses and supply/demand forecasts later in the report. Additionally, he notes that the Jones Act that protects the US market is, in the opinion of Fortis, not material to the industry due to the state of decline of oilfield activity in the Gulf of Mexico.

In the demand arena, Mr. Barrett identifies four key issues: the number of manned platforms/production facilities that need fuel, food, or drilling supplies (the floating vs. fixed factor is also important here), the number of active offshore drilling rigs, day rates for drilling rigs, and the level of offshore construction activity. Based on these, he anticipates a combined incremental increase in demand of 180 AHTS and OSVs in 2005 and 146 of these vessels in 2006. A t the same time, he expects delivery of only 155 AHTS and OSVs in 2005, which certainly indicates improving fundamentals, not even accounting for the scrapping variable.

A Rising Tide May Not Lift All Boats

Mr. Barrett, however, does not believe that this improving market will bring egalitarian benefit to all, but rather result in definite winners and losers. He looks for companies with a strong balance sheet, geographic diversity and, most importantly, large numbers and percentages of next generation and deep-water capable vessels in their fleets. As support for this stance, he points to the difference in utilization rates between Hornbeck’s largely new generation, deep-water capable Gulf of Mexico fleet and Trico Marine’s older less capable fleet in the same area from 1999 to 2004. Hornbeck’s vessels enjoyed utilization rates that were on average 34% higher than Trico’s and commanded dayrates that were more than $5,000 higher. Further emphasizing this statement is the report’s assertion that “each new boat built should win work at the expense of an older boat.” While these differences to vary based on location and particular employment, the overall message is pronounced.

So who will bear the brunt of the market upturn? Fortis Bank initiated coverage with a BUY rating on both Seacor Holdings and Hornbeck Offshore Services. Target prices are set at $71.00 for Seacor and $33.00 for Hornbeck, as against closing prices of $59.30 and $23.98, respectively, on February 16. Dan Barrett explained that Seacor merits its rating by being a leading supply boat company that is also growing its aviation and barge businesses while Hornbeck demonstrates superior margins, growth and returns. Nevertheless, both companies are currently valued well below the peer average. Mr. Barrett’s price target for both companies is based on 11.5x EV/EBITDA, still an 11% discount to drilling peers.

If you’ve ever wanted to know more about the offshore supply boat sector but didn’t know how to look, we highly recommend Fortis Bank’s newly issued reports, which give an overview of the sector and initiate coverage on Seacor Holdings and Hornbeck Offshore Services. Despite noting the sector’s history of being “plagued by over-capacity, low barriers to entry, and commoditized pricing,” analyst Dan Barrett is bullish on the short-term prospects for the sector, expecting to see a number of supply boat companies exceed consensus expectations over the next few quarters.

Mr. Barrett expects that supply will outstrip demand in the sector over the next 12-18 months, but is not shy about his belief that a rising tide will not lift all boats. He expects the market for new generation and deep-water capable boats to be quite strong, with utilization rates likely climbing from the 85-90% range to the mid 90s and day rates hitting record levels. Meanwhile, utilization rates for older boats with more limited capabilities will rise only along the margin.

In the Sector Note issued by Fortis, Mr. Barrett first discusses in detail the primary types of boats involved in the sector – Anchor Handling Towing Supply, Offshore Supply Vessels, Crew Boats and Standby/Rescue Vessels, among others – and the key global offshore basins – the Gulf of Mexico, the North Sea, West Africa, Asia – Pacific, the Middle East, Brazil, and the rest of Latin America. He gives an overview of the rate tendencies and contract types that prevail in the various vessel-types and regions that gives substance to his discussions of company strengths and weaknesses and supply/demand forecasts later in the report. Additionally, he notes that the Jones Act that protects the US market is, in the opinion of Fortis, not material to the industry due to the state of decline of oilfield activity in the Gulf of Mexico.

In the demand arena, Mr. Barrett identifies four key issues: the number of manned platforms/production facilities that need fuel, food, or drilling supplies (the floating vs. fixed factor is also important here), the number of active offshore drilling rigs, day rates for drilling rigs, and the level of offshore construction activity. Based on these, he anticipates a combined incremental increase in demand of 180 AHTS and OSVs in 2005 and 146 of these vessels in 2006. A t the same time, he expects delivery of only 155 AHTS and OSVs in 2005, which certainly indicates improving fundamentals, not even accounting for the scrapping variable.

Mr. Barrett, however, does not believe that this improving market will bring egalitarian benefit to all, but rather result in definite winners and losers. He looks for companies with a strong balance sheet, geographic diversity and, most importantly, large numbers and percentages of next generation and deep-water capable vessels in their fleets. As support for this stance, he points to the difference in utilization rates between Hornbeck’s largely new generation, deep-water capable Gulf of Mexico fleet and Trico Marine’s older less capable fleet in the same area from 1999 to 2004. Hornbeck’s vessels enjoyed utilization rates that were on average 34% higher than Trico’s and commanded dayrates that were more than $5,000 higher. Further emphasizing this statement is the report’s assertion that “each new boat built should win work at the expense of an older boat.” While these differences to vary based on location and particular employment, the overall message is pronounced.

So who will bear the brunt of the market upturn? Fortis Bank initiated coverage with a BUY rating on both Seacor Holdings and Hornbeck Offshore Services. Target prices are set at $71.00 for Seacor and $33.00 for Hornbeck, as against closing prices of $59.30 and $23.98, respectively, on February 16. Dan Barrett explained that Seacor merits its rating by being a leading supply boat company that is also growing its aviation and barge businesses while Hornbeck demonstrates superior margins, growth and returns. Nevertheless, both companies are currently valued well below the peer average. Mr. Barrett’s price target for both companies is based on 11.5x EV/EBITDA, still an 11% discount to drilling peers.