HORNBECK OFFSHORE SERVICES INC /LA - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____ TO _____

COMMISSION FILE NUMBER 333-69826

HORNBECK OFFSHORE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 72-1375844
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)

414 NORTH CAUSEWAY BLVD
MANDEVILLE, LA 70448

(Address of Principal Executive Offices) (Zip Code)

(985) 727-2000

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The total number of shares of common stock, par value $.01 per share,
outstanding as of May 12, 2003 was 30,305,286.

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HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION..........................................................................................1
Item 1 - Financial Statements..................................................................................1
Item 2 - Management's Discussion And Analysis Of Financial Condition And Results
Of Operations......................................................................................8
General...............................................................................................8
Critical Accounting Policies..........................................................................9
Results Of Operations.................................................................................9
Three Months Ended March 31, 2003 Compared To Three Months Ended
March 31, 2002....................................................................................11
Liquidity And Capital Resources......................................................................12
Contractual Obligations And Commercial Commitments...................................................14
Inflation............................................................................................14
Forward Looking Statements...........................................................................14
Item 3 - Quantitative And Qualitative Disclosures About Market Risk...........................................15
Item 4 - Controls And Procedures..............................................................................15

PART II - OTHER INFORMATION............................................................................................17
Item 1 - Legal Proceedings....................................................................................17
Item 2 - Changes In Securities And Use Of Proceeds............................................................17
Item 3 - Defaults Upon Senior Securities......................................................................17
Item 4 - Submission Of Matters To A Vote Of Security Holders..................................................17
Item 5 - Other Information....................................................................................17
Recent Developments..................................................................................17
Item 6 - Exhibits And Reports On 8-K..........................................................................18

SIGNATURES.............................................................................................................20
CERTIFICATIONS.........................................................................................................21

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes are an integral part of these consolidated
financial statements.

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HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated
financial statements.

2

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated
financial statements.

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HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS AND SHARES IN THOUSANDS)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements do not include
certain information and footnote disclosures required by accounting principles
generally accepted in the United States. The interim financial statements and
notes are presented as permitted by instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments necessary for a
fair presentation of the interim financial statements have been included and
consist only of normal recurring items. The financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2002 of Hornbeck
Offshore Services, Inc. (together with its subsidiaries, the "Company"). The
results of operations for the three-month periods ended March 31, 2003 and 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. Certain amounts reported in prior periods have been
reclassified to conform to the 2003 presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity,"
under which a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002. SFAS
146 did not impact the financial statements for the three months ended March 31,
2003.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which clarifies the application of Accounting Research
Bulletin ("ARB") 51, "Consolidated Financial Statements," to certain entities
(called variable interest entities) in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The disclosure requirements
of this Interpretation are effective for all financial statements issued after
January 31, 2003. The consolidation requirements apply to all variable interest
entities created after January 31, 2003. In addition, public companies must
apply the consolidation requirements to variable interest entities that existed
prior to February 1, 2003 and remain in existence as of the beginning of annual
or interim periods beginning after June 15, 2003. FIN 46 does not have a
material impact on the consolidated financial statements.

3. LONG-TERM DEBT

On July 24, 2001, the Company issued $175,000 in principal amount of
10 5/8% Senior Notes (Senior Notes). The Company realized net proceeds of
approximately $165,000, a substantial portion of which was used to repay and
fully extinguish all of the then existing credit facilities. The Senior Notes
mature on August 1, 2008 and require semi-annual interest payments at an annual
rate of 10 5/8% on February 1 and August 1 of each year until maturity, with the
first payment due on February 1, 2002. The effective interest rate on the Senior
Notes is 11.18%. No principal payments are due until maturity. The Senior Notes
are unsecured senior obligations and rank equally in right of payment with other
existing and future senior indebtedness and senior in right of payment to any
subordinated indebtedness incurred by the Company in the future. The Senior
Notes are guaranteed by all of the Company's subsidiaries. The Company may, at
its option, redeem all or part of the Senior Notes from time to time at
specified redemption prices and subject to certain conditions required by the
Indenture. The Company is permitted under the terms of the indenture governing
the Senior Notes to incur additional indebtedness in the future, provided that
certain financial conditions set forth in the Indenture are satisfied by the
Company.

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Effective December 31, 2001, the Company entered into a new senior secured
revolving line of credit for $50,000. Pursuant to the terms of the revolver, the
Company's borrowings under this facility will initially be limited to $25,000
unless the Company obtains the lender's concurrence to borrow in excess of
$25,000. Pursuant to the indenture governing the Senior Notes, unless the
Company meets a specified consolidated interest coverage ratio test, the level
of permitted borrowings under this facility initially will be limited to $25,000
plus 15% of the increase in the Company's consolidated net tangible assets over
the consolidated net tangible assets as of March 31, 2001 determined on a pro
forma basis to reflect the Spentonbush/Red Star Group acquisition. Unused
commitment fees are payable quarterly at the annual rate of three-eighths of one
percent on the revolving line of credit. The terms of the revolver call for it
to expire on December 31, 2004. As of March 31, 2003, the Company had drawn $7.4
million under the revolver to fund the acquisition of a tank barge, and had
$17.6 million of additional credit immediately available under the revolver.

The agreement governing the revolver and the indenture under which the
Senior Notes were issued impose operating and financial restrictions on the
Company. Such restrictions affect, and in many cases limit or prohibit, among
other things, the Company's ability to incur additional indebtedness, make
capital expenditures, redeem equity, create liens, sell assets and make
dividends or other payments.

Interest expense excludes capitalized interest related to new construction
of offshore supply vessels of $0.9 million in the first quarter of 2003 and $1.0
million in the first quarter of 2002.

4. STOCK OPTION PLANS

SFAS No. 123, "Accounting for Stock-Based Compensation," established
financial accounting and reporting standards for stock-based compensation plans.
The Company's plan includes all arrangements by which employees and directors
receive shares of stock or other equity instruments of the Company, or the
Company incurs liabilities to employees or directors in amounts based on the
price of the stock. SFAS No. 123 defines a fair-value-based method of accounting
for stock-based compensation. However, SFAS No. 123 also allows an entity to
continue to measure stock-based compensation cost using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). Entities electing to retain the accounting prescribed in APB No. 25
must make pro forma disclosures of net income assuming dilution as if the
fair-value-based method of accounting defined in SFAS No. 123 had been applied.
The Company retained the provisions of APB No. 25 for expense recognition
purposes. Under APB No. 25, when the exercise price of the Company's stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense in recognized.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- An Amendment of FAS 123." This
pronouncement provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. Under the fair value based method, compensation cost for stock
options is measured when options are issued. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent and frequent
disclosures in financial statements for the effects of stock-based compensation.

The transition guidance and annual disclosure provisions of SFAS 148 were
effective for fiscal years ending after December 15, 2002. As of December 31,
2002, the Company adopted SFAS 148 through continued application of the
intrinsic value method of accounting under APB 25, and enhanced financial
statement disclosures for the effect on net income had the fair value provisions
of SFAS 148 been applied.

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Had compensation cost for the Company's stock options been determined based
on the fair value at the grant date consistent with the method under SFAS No.
123, the Company's income available to common stockholders for the quarters
ended March 31, 2003 and 2002 would have been as indicated below:

5. COMMITMENTS AND CONTINGENCIES

In April 2002, the Company's Board of Directors approved the third newbuild
program for the Company to build eight deepwater offshore supply vessels. On May
1, 2002, following a competitive bidding process, a definitive agreement was
signed with LEEVAC Industries, LLC for the construction of the first four
vessels of this program, each of which has been designed as a 240' ED-class
vessel. LEEVAC Industries, LLC is affiliated with one of the Company's directors
who is also the former Chairman of the Board and former Chief Executive Officer
of the Company. The Company received a favorable fairness opinion from an
independent appraiser with respect to the terms of the contract. The contract
provides for the delivery of all four vessels during 2003. Aggregate
construction costs for the first four vessels, before allocation of construction
period interest, are expected to be approximately $53.0 million, including $18.4
million that was incurred with respect to such vessels during 2002. On March 17,
2003, the Company took delivery of the first of these vessels, the HOS
Bluewater. As of March 31, 2003, the amount expected to be expended to complete
construction of the three remaining vessels was approximately $21.8 million,
which becomes due at various dates during 2003. The Company is obligated under
the terms of the foregoing contract to remit funds to the shipyards based on
vessel construction milestones, the timing of which are subject to change during
vessel construction. Construction bids from shipyards for the last four vessels
of this new build program are currently being evaluated. Demand for deepwater
offshore supply vessels in the Gulf of Mexico and foreign markets will be a key
determinant of when the four additional OSVs will be constructed.

In the normal course of business, the Company becomes involved in various
claims and legal proceedings in which monetary damages are sought. It is
management's opinion that the Company's liability, if any, under such claims or
proceedings would not materially affect its financial position or results of
operations.

6. SEGMENT INFORMATION

The Company provides marine transportation services through two business
segments. The Company operates newly constructed deepwater offshore supply
vessels primarily in the Gulf of Mexico through its offshore supply vessel
segment. The offshore supply vessels principally support offshore drilling and
production operations in the deepwater regions of the Gulf of Mexico, and in
Trinidad and Tobago, by transporting cargo to offshore drilling rigs and
production facilities and providing support for specialty services. The tug and
tank barge segment operates ocean-going tugs and tank barges in the northeastern
United States and in Puerto Rico. The ocean-going tugs and tank barges provide
coastwise transportation of refined and bunker grade petroleum products from one
port to another. The following table shows reportable segment information
prepared on the same basis as the Company's consolidated financial statements.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following management's discussion and analysis should be read together
with our unaudited consolidated financial statements and notes to unaudited
consolidated financial statements and our Annual Report on Form 10-K for the
year ended December 31, 2002. In this Form 10-Q, "company," "we," "us" and "our"
refer to Hornbeck Offshore Services, Inc. and its subsidiaries, except as
otherwise indicated.

GENERAL

We own and operate deepwater offshore supply vessels, or OSVs, in the Gulf
of Mexico and in Trinidad and Tobago, and ocean-going tugs and tank barges in
the northeastern United States, primarily New York Harbor, and in Puerto Rico.
We charter our OSVs on a dayrate basis, under which the customer pays us a
specified dollar amount for each day during the term of the contract, pursuant
to either fixed time charters or spot market charters.

All of our OSVs operate under time charters, including three that are
chartered under contracts with expiration dates ranging from April 2004 through
August 2006. Our long-term contracts for our OSVs are consistent with those used
in the industry and are either fixed for a term of months or years or are tied
to the duration of a long-term contract for a drilling rig for which the vessel
provides services. These contracts generally contain, among others, provisions
governing insurance, reciprocal indemnifications, performance requirements and,
in certain instances, dayrate escalation terms and renewal options.

While OSVs service existing oil and gas production platforms, as well as
exploration and development activities, incremental OSV demand depends primarily
upon the level of drilling activity, which can be influenced by a number of
factors, including oil and natural gas prices and drilling budgets of
exploration and production companies. As a result, utilization and dayrates have
historically been tied to oil and natural gas prices and drilling activity,
although the greater investment of time and expense associated with deepwater
production and the consequent long-term nature of deepwater OSV contracts have
diminished the significance of this relationship.

Although oil and natural gas prices were very high throughout most of 2002
and in 2003, most oil and gas producers have chosen, to date, not to increase
their drilling activity, apparently due to several concerns, including the war
in Iraq, the sustainability of high commodity prices after the winter heating
season and the unstable United States economy. Our deepwater OSV niche continued
to experience a decrease in activity since the beginning of the year. The
average deepwater drilling rig count in the Gulf of Mexico for the first quarter
of 2003 was 30 rigs compared to 41 a year ago. Currently, the deepwater drilling
rig count stands at 29, down from 34 in December 2002. However, we expect that
eight new floating production-storage units will be installed in the Gulf of
Mexico this year, each requiring the service of multiple deepwater supply
vessels.

Generally, we operate an ocean-going tug and tank barge together as a "tow"
to transport petroleum products between U.S. ports and along the coast of Puerto
Rico. We operate our tugs and tank barges under fixed time charters, spot market
charters, contracts of affreightment and consecutive voyage contracts.

The primary drivers of demand for our tug and tank barge services are the
strength of the United States economy, changes in weather patterns and
population growth that affect consumption of heating oil and gasoline. The tug
and tank barge market, in general, is marked by steady demand over time. We have
experienced seasonal weather-related improvements in our operating results for
our tug and tank barge segment during the latter part of the fourth quarter of
2002 and through the first quarter of 2003. The recent extremely cold weather --
normal for this time of year in the northeastern United States -- temporarily
increased demand for heating oil and, therefore, the utilization of our tug and
tank barge services above first quarter 2002 levels. Now that the spike in
demand caused by the winter season is over, the higher dayrates and utilization
rates that resulted from the increased winter-related activity will likely be
negatively impacted by the soft United States economy. However, we believe that
lower

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consumer demand may be counteracted, in part, by the fact that post-winter
heating oil and gasoline inventories, which are running low, will need to be
replenished. These circumstances are in contrast to a year ago when post-winter
stocks were high after the mild winter. Once the uncertainty surrounding
domestic economic conditions and world events subsides, we believe that demand
for refined petroleum products and crude oil will return to normal levels and
will thereafter remain steady or gradually increase over the long-term.

CRITICAL ACCOUNTING POLICIES

This Management's Discussion and Analysis of Financial Condition and
Results of Operations discusses our unaudited consolidated financial statements
included in this Form 10-Q. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles. In other circumstances, we are required to make estimates, judgments
and assumptions that we believe are reasonable based upon information available.
We base our estimates and judgments on historical experience and various other
factors that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions and conditions. Our
significant accounting policies are discussed in Note 2 to our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002. There were no significant changes to our critical
accounting policies as reported in our Form 10-K during the three months ended
March 31, 2003.

RESULTS OF OPERATIONS

The table below sets forth, by segment, the average dayrates and
utilization rates for our vessels and the average number of vessels owned during
the periods indicated. These offshore supply vessels and tugs and tank barges
generate substantially all of our revenues and operating profit.

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(1) Utilization rates are average rates based on a 365-day year. Vessels are
considered utilized when they are generating revenues.

(2) Average dayrates represent average revenue per day, which includes charter
hire and brokerage revenue, based on the number of days during the period
that the offshore supply vessels generated revenue.

(3) Average dayrates represent average revenue per day, including time
charters, brokerage revenue, revenues generated on a per-barrel-transported
basis, demurrage, shipdocking and fuel surcharge revenue, based on the
number of days during the period that the tank barges generated revenue.
For purposes of brokerage arrangements, this calculation excludes that
portion of revenue that is equal to the cost of in-chartering third party
equipment paid by customers.

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(4) These averages give effect to our sale of the Energy 5502 on January 28,
2003, and our acquisition of the Energy 8001 on February 28, 2003. As of
March 31, 2003, our tank barge fleet was comprised of 16 vessels.

Following is a reconciliation of EBITDA, which is a non-GAAP financial
measurement, to net income for each of our business segments, and in the
aggregate, for the three months ended March 31, 2003 and 2002, respectively.

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(1) Earnings before interest expense, provision for income taxes, depreciation
and amortization ("EBITDA") is an important financial performance measure
that is used by ratings agencies, our lenders and most of our investors,
particularly those who invest in our Senior Notes, as well as investment
banks that issue high yield debt research on our company. In addition,
EBITDA is used in the financial ratios and covenants included in the credit
agreement governing our revolving line of credit and the indenture
governing our Senior Notes. This table reflects the calculation of EBITDA
for each of our business segments, and in the aggregate. EBITDA is
presented as it is commonly used by certain investors to analyze and
compare operating performance and to determine a company's ability to
service or incur debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flow or other income or cash flow data or
as a measure of a company's profitability or liquidity and is not a measure
calculated in accordance with accounting principles generally accepted in
the United States. EBITDA is not necessarily comparable with similarly
titled measures reported by other companies. In determining our EBITDA,
other income or expense is excluded, except for equity in income from
investments.

(2) Represents other operating income and expenses, including gains or losses
on disposition of assets.

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THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Revenues. Revenues were $27.3 million for the three months ended March 31,
2003, compared to $22.7 million for the same period in 2002, an increase of $4.6
million or 20.3%. The increase in revenues is the result of the increase in the
size of our OSV fleet by five vessels since February 2002 and the addition of
one double-hulled tank barge in February 2003. The additional revenues generated
by the six new vessels accounted for a $4.9 million increase in revenues which
was offset by a $0.3 million decrease in revenue related to our vessels that
were in service during each of the three months ended March 31, 2003 and 2002,
including the Energy 5502, which was only in service for one month during 2003.

Revenues from our OSV segment totaled $13.2 million for the three months
ended March 31, 2003, compared to $9.8 million for the same period in 2002, an
increase of $3.4 million or 34.7%. The net increase in segment revenue is due to
the addition of five deepwater OSVs since February 2002. Our OSV utilization
rate was 89.7% for the three months ended March 31, 2003, which was lower than
the 95.9% we achieved in the same period of 2002. Utilization rates were 6.2%
lower for the three months ended March 31, 2003 primarily due to more vessels
working in the spot market than a year ago, and the impact of one OSV out of
service for a drydocking and discretionary modifications to position the vessel
for international service.. Spot market contracts are more susceptible to
fluctuations in utilization and day rates, particularly in soft market
conditions, which we are currently experiencing. Our OSV average dayrates were
at $12,397 for the three months ended March 31, 2003 compared to $12,012 for the
same period of 2002, an increase of $385 or 3.2%. Average dayrates for the three
months ended March 31, 2003 were up slightly compared to the same period in 2002
due to the delivery, since February 2002, of larger vessels that command higher
dayrates.

Revenues from our tug and tank barge segment totaled $14.2 million for the
three months ended March 31, 2003 compared to $13.0 million for the same period
in 2002, an increase of $1.2 million or 9.2%. The increase in revenue resulted
primarily from variations in weather and operating conditions. Winter weather
patterns experienced in early 2002 were unseasonably warm compared to the first
quarter of 2003, which had climate conditions typically expected during that
period. Revenues for the three months ended March 31, 2003 included $1.2 million
derived from in-chartering third-party equipment compared to $1.4 million for
the same period in 2002. Our utilization rate decreased to 83.4% for the three
months ended March 31, 2003 compared to 86.9% for the same period in 2002. The
decrease in utilization was primarily the result of having more vessels
drydocked during the first quarter of 2003 compared to the first quarter of
2002. Our average dayrate increased to $11,442 for the three months ended March
31, 2003 compared to $9,500 for the same period of 2002, an increase of $1,942
or 20.4%. The significant increase in dayrates was primarily related to the
resumption of normal weather patterns in early 2003 and two months less of
bareboat charter revenue from the Energy 5502, which we sold on January 28,
2003. It is typical for bareboat charter revenue to be substantially below our
fleet average dayrate.

Operating Expense. Our operating expense, including depreciation and
amortization, increased to $14.1 million for the three months ended March 31,
2003 compared to $10.6 million for the same period in 2002, an increase of $3.5
million or 33.0%. The increase in operating expense resulted primarily from the
addition to our fleet of five deepwater OSVs since February 2002 and the
addition of one double-hulled tank barge in February 2003.

Operating expense for our offshore supply vessel segment increased to $5.9
million for the three months ended March 31, 2003 compared to $3.7 million for
the same period in 2002, an increase of $2.2 million or 59.5%. This increase was
primarily related to the hos Dominator, which was in service for substantially
more days during the three months ended March 31, 2003 compared to the same
period of 2002, and the HOS Brimstone, HOS Stormridge, HOS Sandstorm, and HOS
Bluewater, which were not in service during the first three months of 2002.
Daily operating costs per vessel for the three months ended March 31, 2003
increased over the same period in 2002, primarily due to the higher costs of
operating larger vessels, including increased manning requirements.

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Operating expense for our tug and tank barge segment increased to $8.2
million for the three months ended March 31, 2003 compared to $6.9 million for
the same period in 2002, an increase of $1.3 million or 18.8%. Operating expense
for the three months ended March 31, 2003 and 2002, respectively, included $0.8
million and $1.1 million, for the cost of in-chartering third-party equipment.
Daily operating costs per vessel, excluding in-chartering expenses, for the
three months ended March 31, 2003 increased over the same period of 2002 due
primarily to the acquisition of a double-hulled tank barge in February 2003.

General and Administrative Expense. Our general and administrative expenses
of $2.9 million for the three months ended March 31, 2003 remained fairly
constant with the $2.8 million reported for the same period in 2002. We expect
these costs to increase for the remainder of 2003 to accommodate our continued
growth and increased reporting obligations under federal securities laws and the
new corporate governance legislation and regulations initiated last year,
primarily related to the Sarbanes-Oxley Act.

Interest Expense. Interest expense was $4.2 million for the three months
ended March 31, 2003 compared to $3.9 million for the same period in 2002, an
increase of $0.3 million or 7.7%. Capitalization of interest costs relating to
new construction of OSVs was approximately $0.9 million for the three months
ended March 31, 2003 compared to $1.0 million for the same period in 2002.

Interest Income. Interest income was $0.1 million for the three months
ended March 31, 2003 compared to $0.2 million for the same period in 2002, a
decrease of $0.1 million or 50.0%. Average cash balances were $17.5 million and
$47.9 million for the quarters ended March 31, 2003 and 2002, respectively,
which substantially contributed to the decrease in interest income during the
three months ended March 31, 2003.

Income Tax Expense. Our effective tax rate for each of the three months
ended March 31, 2003 and 2002 was 38.0%. Our income tax expense primarily
consists of deferred taxes due to our federal net operating loss carryforwards.
Our income tax rate is higher than the federal statutory rate due primarily to
expected state and foreign tax liabilities and items not deductible for federal
income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

We require capital to fund ongoing operations, the construction of new
vessels, acquisitions and debt service. We have historically financed our
capital requirements with cash flow from operations, issuances of equity and
debt securities, and borrowings under our credit facilities.

Net cash provided by operating activities was $3.6 million for the three
months ended March 31, 2003 compared to $1.0 million for the same period in
2002. Changes in cash flow from operating activities are principally the result
of the timing of our construction draws paid for new vessel construction and
interest paid on our $175 million 10 5/8% Senior Notes due 2008.

Net cash used in investing activities was $20.4 million for the three
months ended March 31, 2003 compared to $11.8 million for the same period in
2002. Net cash used in investing activities for each period primarily included
the cost of new vessel construction. Investing activities for the first quarter
of 2003 included $1.65 million of cash proceeds from the sale of the Energy
5502. This sale resulted in a gain of approximately $0.7 million.

Net cash provided by financing activities was $7.4 million for the three
months ended March 31, 2003, primarily relating to proceeds from borrowings
under our revolving line of credit. For the three months ended March 31, 2002,
net cash provided by financing activities of $0.1 million primarily resulted
from the proceeds from common stock issued.

We have a three-year senior secured revolving line of credit with three
banks for $50.0 million. Pursuant to the terms of the revolver, our borrowings
under this facility are initially limited to $25.0 million unless we have
obtained the lender's concurrence to borrow in excess of $25.0 million and are
in compliance with the terms of the indenture governing our Senior Notes with
respect to the incurrence of additional indebtedness. Pursuant to the indenture
governing the Senior Notes, unless we meet a

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specified consolidated interest coverage ratio test, the level of permitted
borrowings under this facility initially will be limited to $25,000 plus 15% of
the increase in our consolidated net tangible assets over the consolidated net
tangible assets as of March 31, 2001 determined on a pro forma basis to reflect
the Spentonbush/Red Star Group acquisition. Borrowings under the revolver accrue
interest, at our option, at either (i) the prime rate announced by Citibank,
N.A. in New York, plus a margin of 0% to 1%, or (ii) the London Interbank
Offered Rate, plus a margin of 1.75% to 3.0%. We are also required to pay a
commitment fee on available but unused amounts ranging from 0.25% to 0.375%. The
interest rate margin and commitment fee are based on our leverage ratio, as
defined in the agreement governing the revolver. We can use the amounts we draw
under the revolver for working capital purposes and, in certain instances, for
acquisitions and vessel construction. The revolver is collateralized by four of
our offshore supply vessels and four of our ocean-going tugs with an aggregate
orderly liquidation value of approximately $75.0 million. The terms of the
revolver call for it to expire on December 31, 2004; however, we believe that it
will be renewed at that time. As of March 31, 2003, we had drawn $7.4 million on
our revolver to fund our acquisition of an 80,000-barrel double-hulled tank
barge, and had $17.6 million of additional credit immediately available under
the revolver.

As of March 31, 2003, we had outstanding debt of $172.4 million, net of
original issue discount, under our Senior Notes. Interest on the Senior Notes is
payable semiannually each February 1 and August 1. The Senior Notes do not
require scheduled payments of principal prior to their stated maturity on August
1, 2008. Pursuant to the indenture under which the Senior Notes are issued,
however, we are required to make offers to purchase the Senior Notes upon the
occurrence of specified events, such as certain asset sales or a change in
control.

The agreement governing the revolver and the indenture under which the
Senior Notes were issued impose 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 make dividends or other payments.

As of March 31, 2003, we had cash of approximately $12.8 million and
working capital of approximately $17.9 million. During the three months ended
March 31, 2003, we expended $12.9 million for new vessel construction, before
allocation of construction period interest. As of March 31, 2003, we were
committed under vessel construction contracts to complete construction of three
offshore supply vessels, which are part of our current eight-vessel newbuild
program. We are currently evaluating construction bids from shipyards for the
last four vessels of this program, in addition to market demand for such vessels
in the deepwater Gulf of Mexico and foreign markets. Aggregate construction
costs for the first four vessels, before allocation of construction period
interest, are expected to be approximately $53.0 million, including $18.4
million that was incurred with respect to such vessels during 2002. On March 17,
2003, we took delivery of the first of these vessels, the HOS Bluewater. As of
March 31, 2003, the amount expected to be expended to complete construction of
the remaining three vessels was approximately $21.8 million, which becomes due
at various dates during 2003. During the three months ended March 31, 2003, we
expended approximately $2.0 million for drydocking-related expenses for vessels,
of which $1.2 million was accounted for as deferred charges and $0.8 million for
other vessel capital improvements. Under our accounting policy, we generally
capitalize drydocking expenditures related to vessel recertification to deferred
charges and amortize the amount over 30 or 60 months.

As of December 31, 2002, we had federal net operating loss carryforwards of
approximately $21.5 million available through 2018 to offset future taxable
income. In addition, we expect to generate federal tax benefits due to our use
of accelerated tax depreciation with respect to new vessels. Our use of these
net operating losses and additional tax benefits may be limited due to U.S. tax
laws. Based on the age and composition of our current fleet, however, we expect
to pay a lower than normal amount of federal income taxes over the next five
years.

We believe that cash on hand and cash generated from operations will
provide sufficient funds to complete construction of the three offshore supply
vessels currently under construction of our newbuild program discussed above,
and to satisfy debt service and working capital requirements. However, we have
made, and may make additional, short-term draws on our revolver from time to
time during peak demands on our cash that occur as a result of scheduled capital
expenditure commitments. Any excess liquidity will be available to finance our
strategy, which includes expanding our fleet through the

13

construction or acquisition of additional, or the retrofit of existing, offshore
supply vessels, tugs and tank barges as needed to take advantage of the demand
for such vessels. Depending on the market demand for offshore supply vessels,
tugs and tank barges and consolidation opportunities that may arise, we may
require additional debt or equity financing, including with respect to the last
four vessels of our current newbuild program.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table sets forth an aggregation of our contractual
obligations and commercial commitments as of March 31, 2003, in thousands of
dollars.

- ----------

(1) Includes original issue discount of $2,605.

(2) In March 2003, we signed a non-binding letter of intent to enter into a
five-year lease, with two five-year renewal options, with respect to a
location for our new corporate headquarters in nearby Covington, Louisiana.
We plan to relocate to that facility during the third quarter of 2003. The
cost to lease this new facility is also not included in this table.

(3) The timing of the incurrence of these costs is subject to change among
periods based on the achievement of shipyard milestones, but the amounts
are not expected to change materially in the aggregate.

INFLATION

To date, general inflationary trends have not had a material effect on our
operating revenues or expenses.

FORWARD LOOKING STATEMENTS

We make forward-looking statements in this Form 10-Q, including certain
information set forth in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We have based these
forward-looking statements on our current views and assumptions about future
events and our future financial performance. You can generally identify
forward-looking statements by the appearance in such a statement of words like
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend,"
"may," "plan," "potential," "predict," "project," "should," or "will" or other
comparable words or the negative of these words. When you consider our
forward-looking statements, you should keep in mind the risk factors we describe
and other cautionary statements we make in this Form 10-Q.

Among the risks, uncertainties and assumptions to which these
forward-looking statements may be subject are:

o changes in international economic and political conditions, and in
particular in oil and natural gas prices;

14

o our ability to manage costs effectively;

o our ability to finance our operations and construct new vessels on
acceptable terms;

o our ability to complete vessels under construction without
significant delays or cost overruns;

o the effects of competition;

o our ability to successfully integrate acquisitions;

o our ability to charter our vessels on acceptable terms;

o our ability to access the debt and equity markets to fund our
capital requirements, which may depend on general market conditions
and our financial condition at the time; and

o our success at managing these and other risks.

Our forward-looking statements are only predictions based on expectations
that we believe are reasonable. Actual events or results may differ materially
from those described in any forward-looking statement. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. To the extent these
risks, uncertainties and assumptions give rise to events that vary from our
expectations, the forward-looking events discussed in this Form 10-Q may not
occur.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not entered into any derivative financial instrument transactions
to manage or reduce market risk or for speculative purposes.

We are subject to interest rate risk on our long-term fixed interest rate
Senior Notes. In general, the fair market value of debt with a fixed interest
rate will increase as interest rates fall. Conversely, the fair market value of
debt will decrease as interest rates rise. The Senior Notes accrue interest at
the rate of 10 5/8% per annum and mature on August 1, 2008. There are no
scheduled principal payments under the Senior Notes prior to the maturity date.
Our revolver has a variable interest rate and, therefore, is not subject to
interest rate risk.

Our operations are primarily conducted between U.S. ports, including along
the coast of Puerto Rico, and historically we have not been exposed to foreign
currency fluctuation. However, as we expand our operations to international
markets, we may become exposed to certain risks typically associated with
foreign currency fluctuation. We currently have fixed time charters for two of
our offshore supply vessels for service in Trinidad and Tobago. Although such
contracts are denominated and will be paid in U.S. Dollars, value added tax
("VAT") payments are paid in Trinidad dollars which creates an exchange risk
related to currency fluctuations. To date, we have not hedged against any
foreign currency rate fluctuations associated with foreign currency VAT payments
arising in the normal course of business. We continually monitor the currency
exchange risks associated with conducting international operations. To date,
gains or losses associated with such fluctuations have not been material.

ITEM 4 - CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures, as defined at Exchange
Act Rules 13a-14 and 15d-14, are effective to ensure that information required
to be disclosed by us in reports that we file or submit under the Securities

15

Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.

We also maintain a system of internal accounting controls that are designed
to provide reasonable assurance that our books and records accurately reflect
our transactions and that our policies and procedures are followed. There have
been no significant changes in our internal controls or in other factors that
could significantly affect such controls since our most recent evaluation of
these controls, including any corrective actions with regard to significant
deficiencies or material weaknesses in our internal controls.

16

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings, although we
may from time to time be subject to various legal proceedings and claims that
arise in the ordinary course of business.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5 - OTHER INFORMATION

RECENT DEVELOPMENTS

Bareboat of Newly Constructed Crewboat. On April 30, 2003, Hornbeck entered
into a bareboat lease of a newly constructed 165-ft. crewboat, the HOS Hotshot.
The vessel immediately commenced service under a spot time charter within the
"pool fleet" of a major oil company to support its deepwater operations in the
Gulf of Mexico.

17

ITEM 6 - EXHIBITS AND REPORTS ON 8-K

(a) EXHIBITS:

Exhibit
Number Description
------ -----------

3.1 Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on
December 13, 1997 (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).

3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware on December 1, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).

3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware on October 23, 2000 (incorporated by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).

3.4 Certificate of Correction to Certificate of Amendment of the
Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on
November 14, 2000 (incorporated by reference to Exhibit 3.4 of
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).

3.5 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of Delaware on May 29, 2002 (incorporated by reference to
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 filed July 22, 2001, Registration No. 333-96833).

3.6 Second Restated Bylaws of the Company adopted October 4, 2000
(incorporated by reference to Exhibit 3.5 of the Company's
Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).

3.7 Amendment to Second Restated Bylaws of the Company adopted May
28, 2002 (incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-1 filed July 22,
2001, Registration No. 333-96833).

4.1 Indenture dated as of July 24, 2001 between Wells Fargo Bank
Minnesota, National Association (as Trustee) and the Company,
including table of contents and cross-reference sheet
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).

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* Filed herewith.

(b) Reports on Form 8-K.

On May 8, 2003, we furnished a report on Form 8-K announcing that we had
issued a press release that reported the results of our operations for the three
months ended March 31, 2003.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.

Hornbeck Offshore Services, Inc.

Date: May 15, 2003 By: /s/ JAMES O. HARP, JR.
------------------------------------
James O. Harp, Jr.
Vice President and
Chief Financial Officer

20

CERTIFICATIONS

I, Todd M. Hornbeck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hornbeck Offshore
Services, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003 By: /s/ TODD M. HORNBECK
-----------------------------------------
Todd M. Hornbeck,
President and Chief Executive Officer
(Principal Executive Officer)

21

I, James O. Harp, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hornbeck Offshore
Services, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003 By: /s/ JAMES O. HARP, JR.
-----------------------------------
James O. Harp, Jr.,
Vice President and
Chief Financial Officer
(Principal Financial Officer)

22

EXHIBIT INDEX

* Filed herewith.