Vantage Drilling International

OTC:VTDRF

Earnings Call Transcript

[Operator]

Welcome to the Vantage Drilling International 2021 Fourth Quarter and Full Year Earnings Call. As a reminder, today's conference is being recorded. I will now turn the call over to Douglas Stewart, CFO, General Counsel. Please go ahead.

[Douglas Stewart, executive]

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International Fourth Quarter 2021 Earnings Conference Call. On the call today is also Ihab Toma, our CEO. This morning, we released our earnings announcement for the quarter and year ended December 31, 2021. The earnings release is available on our website at vantagedrilling.com. Please also note that any comments we make today about our expectations of future events and projections are forward-looking statements pursuant to the Private Securities Litigation Reform Act. We have based forward-looking statements on management's current expectations and assumptions and not on historical facts. Examples of these statements include, but are not limited to, our expectations regarding future results, including expectations regarding our liquidity position, future costs and expenses related to upgrades and reactivation work as well as contract preparation costs and expenses and receiving payments for certain of such costs under our share purchase agreement with ADES Arabia.

Forward-looking statements in today's call are subject to a number of risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from the projections made in today's conference call. We refer you to our earnings release and SEC filings available on our website. Vantage does not undertake the updating of any such statement or risk factor that could cause actual results to differ materially from our expectations. We have prerecorded our prepared remarks and are participating on the call remotely to manage the question-and-answer session segment of the call. In the event there are issues with sound quality or of a similar nature, please accept our apologies in advance, and thank you for your understanding.

Now let me turn over the call to our CEO, Mr. Ihab Toma.

[Ihab Toma, executive]

Thank you, Douglas. Good morning and good afternoon, everyone. Reflecting back on last year, we can say that 2021 was good for us and represented a year of recovery after the black swan events of 2020, which were extremely difficult for Vantage, the industry and the entire world. Also, the industry seems to have passed an inflection point now and market supply of rigs is reaching a tight balance with demand in both the deepwater and shallow water segments of the market.

The fourth quarter of 2021 proved to be an exciting quarter for Vantage with all our rigs either on contract or going through contract preparation and having entered into 2 strategic agreements with ADES. As you would expect, we plan to take you through the deal economics during this call.

During the fourth quarter, Vantage added an additional 394 rig backlog days totaling $68 million. With this additional backlog, our total backlog at the end of 2021 reached approximately $398 million, of which $191 million is held for sale pursuant to the added sale transaction. It is interesting to highlight that our backlog at the start of 2021 was valued at around $96 million. Therefore, 2021 has seen the largest increase in backlog in a calendar year since 2012.

The fourth quarter also marked a very busy period for everyone at Vantage, with new contracts starting up and upgrade and maintenance projects kicking off. Nevertheless, I'm proud to say that everyone remains laser focused on accomplishing Vantage to see corporate goals during this busy period.

As usual, I'm going to frame my prepared remarks against our 3 corporate goals. As a reminder, these goals are: one, maintaining our stellar safety and operational performance; two, putting all of our rigs back to work; and three, reducing costs and preserving cash.

Starting with goal #1, our focus has not changed. It has always been and continues to be that our people and people on our rigs remain healthy and safe as well as protecting the environment where we operate, while delivering safe and seamless operations to our clients with the least possible interruptions.

Starting with safety. Our attention remains on continuously training, coaching, and mentoring our crews in our Perfect Day Leadership program in order to always deliver incident-free perfect days.

In 2021, our otherwise reasonable safety performance of 0.24 total recordable incident rate was undermined by the previously mentioned fatality of one of our subcontractors in March of 2021, onboard one of our rigs. Despite this tragic event a year ago now, we are staying the course and we'll continue with our quest for zero incident workplace.

Moving to health. Our focus continues to be minimizing the number of COVID-19 cases reaching our rigs. We are taking the recommended relevant precautions in line with our international health and medical advisers' guidelines, and we have worked closely with our customers in promoting a fully vaccinated workforce offshore. These measures have allowed our rigs to keep operating uninterrupted by COVID-19 during the fourth quarter of 2021.

On the environmental side, we have set up an internal sustainability committee, and we continue to record and monitor our environmental footprint with a view to develop our ESG strategies, goals and actionable improvements that are rightsized for our company.

Operationally, the overall fleet revenue efficiency for the fourth quarter was 98.1% with the jack-up fleet delivering 98.7% and the deepwater segment achieving 95.2%. This shows consistent solid performance despite rig startups and global supply chain challenges.

Finally, by year-end 2021, Vantage achieved global ISO 9001, ISO 14001, and ISO 45001 certification. We are one of only few drilling contractors worldwide to have full global certification to these 3 ISO standards.

Again, the life, safety and health of our people as well as protecting the environment where we operate is our most important responsibility as a company. We will stay the course aiming for a zero-incident workplace and the Vantage truly delivering our vision of a perfect day every day.

Turning to our goal number two, of putting all of our rigs back to work. And here, I have to say that our focus is shifting to increasing day rates. Now that all of our rigs are back to work and that the tide seems to have turned for the offshore drilling industry. As usual, I'm going to update you on our contracting activities and on our fleet status in regards to both owned and managed rigs.

As mentioned previously, we increased our backlog by $68 million during the quarter, of which $24 million was added to Vantage's owned rigs. The Tungsten Explorer added $18 million for work in Egypt with Petrobel, while the Soehanah was awarded a contract by Medco Thailand, which added approximately $6 million to the backlog.

As mentioned earlier, 2021 has seen the largest increase in backlog in a calendar year since 2012, and it was also during 2021, that we have added multiple new clients such as Harbour Energy, Repsol, Trident Energy, KUFPEC, Qatari North Oil Company and Amilcar Petroleum Operations in Tunisia, otherwise known as APO, which is a joint venture between Shell and the Tunisian state-owned oil company ETAP.

Starting with our shallow water rigs, I will now go in more details on our fleet rig by rig. Beginning with the Sapphire Driller, the rig finished its campaign for Trident Equatorial Guinea in early December, and has mobilized to Dubai for major maintenance, upgrades and contract preparation project before moving to Qatar to commence a 3-year contract with North Oil Company, which is expected to commence in April.

The Aquamarine Driller continued to operate for CPOC in Malaysia during the fourth quarter and has now concluded its operation there during the first quarter of 2022 and has also mobilized to Dubai for major maintenance, upgrade, and contract preparation project.

The commencement of its 3-year contract in Qatar for North Oil Company is expected to start shortly after the Sapphire Driller commences its contract. With regard to the Emerald Driller, the rig continues to work in Qatar under [indiscernible] from Total Energy to North Oil Company there.

I would like to highlight that these 3 rigs are now owned by the Emerald Driller Company, which will be sold to others upon the acceptance of the last rig by North Oil Company in Qatar. Regarding the Topaz Driller, the rig concluded its 10-month campaign for any Montenegro early first quarter 2022 and mobilized to Tunisia to commence work for APO. We are currently in discussions with multiple customers for follow-on work in the region and in other locations. The fact that this rig is not committed yet in what is becoming a very tight market provides us with a clear opportunity for an upward push in future contract day rates.

Turning to the Soehanah. The rig finished with Premier Oil, a Harbour Energy company in Indonesia and started its campaign with KUFPEC there during the fourth quarter of 2021. This KUFPEC campaign was concluded in the first quarter of this year, following which the rig finalized some planned maintenance and is now underway to Thailand for the newly awarded work with Medco Thailand. After Medco Thailand, the rig will return to Medco Indonesia, keeping the rig busy until the fourth quarter of this year with options well into 2023.

Moving now to the deepwater fleet. The Platinum Explorer began its 2-year contract with ONGC in India in November and is continuing to perform well under that contract.

The Tungsten Explorer has also started a new contract with Petrobel in Egypt in December, after which, the rig will be moving to start its 2-well campaign in the Mediterranean. We are currently in the final stages of negotiations with a customer for a term contract for the rig in direct continuation after its Mediterranean program at a meaningfully higher day rate in line with the current deepwater market dynamics.

Moving to our Operations and Management Services business. As mentioned previously, we were awarded 179-day firm contract in Indonesia for Premier Oil and Repsol. This Vantage Indonesia contract will be performed by Aquadrill Capella and adds approximately $42 million of backlog. The Capella concluded operations for PTTEP in Malaysia under Seadrill's management and transition to Vantage on March 12. The rig is now going through scheduled maintenance and should commence operations during the second quarter of 2022.

Regarding the Polaris, I would like to highlight that there is high interest for the rig in the region where drillship supply is starting to lack demand, leading us to be optimistic on contracting opportunities for the rig. As a reminder, the rig is currently warm stacked Keyside in Sri Lanka. Additionally, given our performance and contributions Aquadrill have now added an additional rig the Aquarius as one of the rigs under our management. This high-spec modern semi was originally assigned to one of our competitors.

This strategic business line has proven to be an excellent growth opportunity for the company to develop additional sources of revenue while sharing our overhead costs with minimum investment by Vantage.

Industry-wide, after an extremely challenging prior year and following a few years of rig demand significantly lagging market supply, we seem to have finally arrived at a tight balance in both deepwater and shallow water segments of the market. We can see that 2022 is promising to be the year of day rate recovery and higher utilization in both segments. On the back of a stronger crude oil and natural gas environment in 2021, the more recent worldwide political situation and macroeconomic developments have increased the focus on energy security by various governments and hence, our customers' urgent interest in securing offshore drilling units.

This is evident by the flurry of tendering and contracting activities as well as some announced day rates well into the $300,000 per day mark for modern drill ships. The tide seems to have turned indeed.

To conclude, I will discuss corporate goal #3 of reducing cost and preserving cash. which was instrumental in keeping our balance sheet strong during the prolonged downturn. The most important highlight of the fourth quarter of 2021 was the signing of the 2 strategic agreements with ADES. These were a share purchase agreement for the sale of our subsidiary, Emerald Driller Company, the owner of the 3 rigs contracted for work in Qatar and the global strategic alliance to explore future joint commercial and operational opportunities. Also, under the executed share purchase agreement, we will enter into a 3-year support services agreement to support the Qatari operation after the sale.

The sales transaction is comprised of $170 million in cash for the Emerald Driller Company plus reimbursement of contract preparation expenditure to be paid as a lump sum at closing, amounting to up to $35.1 million, a portion of which the buyer as per the drilling contracts will be reimbursed by the customer post-closing. Douglas will further explain the particulars of this transaction, which we expect to close during Q2 2022.

With that, I would like to turn the call over to Douglas to take us through the numbers.

[Douglas Stewart, executive]

Thank you, Ihab. Good morning, everyone. During this portion of the call, I will spend some time briefly discuss the economics of the out of sale transaction and then conclude my segment with my customary discussion of how the company performed financially during the quarter.

As we had mentioned, at the end of the year, we entered into a share purchase agreement with ADES to sell them the Emerald Driller Company, the owner of the 3 rigs contracted for work in Qatar. We expect closing of the transaction to occur in the second quarter of 2022. In summary, the share purchase agreement contemplates the purchase of the Emerald Driller company on a cash-free and debt-free basis. The buyer will pay the purchase price of $170 million in cash and will reimburse us for certain expenditures incurred to prepare the Sapphire Driller and Aquamarine Driller for their respective 3-year contracts with North Oil Company.

Contract preparation expenditures to be reimbursed are capped at $35.1 million. The purchase price and the cost reimbursement are due at closing, while any costs reimbursed by the client under the drilling contracts will be for the account of the buyer. In the subsequent period of 60 to 120 days after closing, the parties will make a final adjustment related to the reconciliation of actual NOC contract preparation expenditures against the estimated amount paid by the buyer closing, and we will also settle actual working capital versus targeted working capital.

Lastly, as also highlighted by Ihab, at closing, parties will enter into a support services agreement, pursuant to which Vantage will provide support services with respect to the 3 rigs in Qatar for 3 years.

Now I'll turn to the company's performance during the quarter. We secured an additional $68 million in backlog during the quarter, including the first contract for 1 of our managed rigs, the West Capella. The company ended the year with approximately $90.6 million of cash including $17.3 million in restricted cash compared to $120.3 million, which included $14.9 million in restricted cash at the end of the third quarter. The decrease in cash is primarily due to an interest payment of $16.2 million, $7.6 million in NOC related contract mobilization and upgrade costs and $6.8 million in the Platinum Explorer's plant maintenance and mobilization costs for the new contract with ONGC.

Working capital for the fourth quarter ended approximately $215.8 million, compared to $149 million in the previous quarter. The increase is mainly due to the Emerald Driller company being classified as held for sale. $87 million in fixed assets in relation to the 3 rigs and 5.1 million noncurrent assets, which included deferred contract costs and operating lease expenses were classified as held-for-sale assets. These were partially offset by $1.3 million of noncurrent liabilities classified as held for sale liabilities and a decrease in cash for the reasons explained in my previous remarks.

For the fourth quarter of 2021, we achieved revenues of approximately $49.8 million, compared to $18.4 million for the fourth quarter of 2020. The increase was mostly due to higher utilization having all of our 7 rigs operating in the fourth quarter of 2021, including the 3 rigs classified as held for sale. This compared to the 3 rigs working in the fourth quarter of 2020.

Total revenues for the fourth quarter compared unfavorably to the $52.9 million reported in the third quarter of 2021, driven mostly by higher deepwater rig utilization in the third quarter of 2021 compared to the fourth quarter of 2021 as the Platinum Explorer was out of service for almost 2 months during the fourth quarter of 2021.

For the quarter, our deepwater fleet achieved 95.23% efficiency, which is a notable achievement given that our 2 drill ships commenced new contracts during the quarter. Our jack-up fleet continued its strong performance, achieving 98.69% efficiency.

Operating costs for the fourth quarter of 2021 totaled $43.9 million and were unfavorable to the $35.2 million in the comparable quarter of 2020, primarily due to the higher number of operating rigs in the fourth quarter of 2021.

General and administrative expenses for the fourth quarter of 2021 totaled approximately $5.5 million as compared to the $5.3 million for the comparable quarter in 2020. Interest expense for the fourth quarter 2021 was approximately $8.5 million, in line with the interest expense for the fourth quarter of 2020. The net result was a loss of $23.5 million for the quarter or $1.39 loss per share.

As of the end of the quarter, we had approximately $398.2 million in contract drilling backlog, which included $191 million of backlog attributable to the held for sale assets.

That concludes my prepared remarks today. And with that, I will now turn the call back over to the operator to begin the Q&A session.

[Operator]

[Operator Instructions] We'll go ahead and take our first question from Fredrik Stene with Clarkson Platou Securities.

[Fredrik Stene, analyst]

Nice to be on again. I actually have quite a few questions, but I'll leave myself to begin with. So just for the Tungsten Explorer starting there, I think you said that you were in the final stages of a term contract at the rates that were more in line with what we have seen for the deepwater market recently. Have you -- are you able to say anything about the length of that term? Are we talking 6 months? Or are we talking 2 years?

[Ihab Toma, executive]

Really timely, we cannot yet. If it was a contract, we definitely could have been talking about it. It's not a contract yet. So when it becomes one, we'll definitely be letting you know.

[Fredrik Stene, analyst]

Perfect. Then I'll just keep waiting. Turning to your ADES deal here. Two questions on that one. The first, it seems like the closing is happening somewhere around April, May, maybe if it was when the last rig was accepted. Do you think there's a chance that your preparation cost will surpass that $35.1 million? That's the first pretty straightforward question.

And in terms of the strategic alliance that you've also entered into. Could you maybe talk a little bit more about that? What does that entail? And maybe tie that back to how you think about your own scale now that you're letting 3 rigs go?

[Douglas Stewart, executive]

Right. So I'll speak to the first question, and then I'll let Ihab speak to the question regarding the strategic alliance. With respect to costs, we're going to be very close to that number. So I don't expect if we are over, it will be nothing materially over that number. So that's what I'll say with respect to that. And then Ihab can speak to the second question.

[Ihab Toma, executive]

So on the second question, I don't think it's a secret for anyone to see how ambitious as this is in their growth. And that's organic growth in terms of adding more rigs to current business that they have or completely new business that they have not been into like Qatar, for example, before, and in that ambitious growth, Vantage is very well positioned to help them with that as a very successful management platform that does have capacity to operate more rigs and have capacity to operate in markets that they have not operated before.

So over and above Qatar, and you said that we are now going to be less rigs less. Maybe I remind you that part of what the deal is, we will continue to support those 3 rigs for 3 years. So we are not really letting those rigs go. Maybe some of certain back-office activity will not be handled by Vantage, will not be needed to be handled by Vantage, but Vantage will continue to be involved for the next 3 years. So we are not really shedding that much in terms of scale. But at the same time, we're always set up to handle more. And that's where the opportunities to work further more with ADES is.

[Fredrik Stene, analyst]

That's very helpful. Just a final follow-up on the ADES side. Do you have -- can you give any color on the economics of that management deal relating to the 3 rigs or support agreement?

[Ihab Toma, executive]

Yes. No, we don't have more color to that we are able to provide publicly. But you can imagine, of course, I mean, there are public models out there, which is our model with Aquadrill, but the Aquadrill model is for floaters and it's for different regions and so on. While for this deal here, it is rigs that already contracted. There are rigs in 1 country and they are jack-ups, not floaters. So of course, it's not the same magnitude, but kind of similar structure, it's per day per rig kind of fee.

[Operator]

[Operator Instructions] We'll go ahead and take our next question from [indiscernible] with Rodon.

[Unknown Analyst]

I just have 2 questions quickly. The first one was what are the use of proceeds of the disposals of the jack-ups you'd be paying down the bonds? And the second question is, can you give an update on the special survey and CapEx costs in the coming 2 years?

[Douglas Stewart, executive]

Right. Okay. With respect to the use of proceeds, thanks for your question. The company continues and the Board specifically continues to evaluate the use of the proceeds. We will do it in accordance -- use the proceeds in accordance with our indenture, which, of course, governs the bonds. As a reminder, these proceeds framework under the indenture, we can use it for CapEx. We can use it for purchasing companies in the same line of business. To the extent that we don't use it for those purposes than within 365 days, we will be required to apply the proceeds to offer to purchase the notes. But the fundamental thing at this stage is the Board is still considering what to do with respect to the use of the proceeds.

And with respect to your second question, not going to give CapEx amounts beyond the 12 months. We include that within our 10-K in our liquidity and capital resources section, and I would say that essentially, we're giving a range in that section of about $6.4 million to about $7.8 million through December 31, 2022. So consistent with what our disclosure is, which you'll see later today in our 10-K.

[Operator]

And we'll go ahead and take our next question from Sunny Chhabra with Ironshield Capital.

[Sunny Chhabra, analyst]

Can you hear me?

[Douglas Stewart, executive]

Can you hear us?

[Sunny Chhabra, analyst]

Just a couple of questions, a few clarifications actually. Firstly, has there been any contract preparation expenditure that has already been expensed?

[Douglas Stewart, executive]

So in -- yes, in December for 2021, yes, approximately under around $3 million last year 2021.

[Sunny Chhabra, analyst]

$3 million, got it. That's not really significant so far.

[Douglas Stewart, executive]

So far -- so yes. I'd say most of the incurrence has been post in 2022.

[Sunny Chhabra, analyst]

Got it. And then secondly, I just wanted to tie up the cash balances on balance sheet and cash flow. Balance sheet is roughly $75 million, cash flow statements was around $90 million. Is $15 million in the asset held for sale?

[Douglas Stewart, executive]

Yes.

[Ihab Toma, executive]

Let's make sure we got this right. Repeat those numbers again, one more time please.

[Sunny Chhabra, analyst]

Sure. So the balance sheet says around $75 million that's cash, including restricted cash, and the cash flow statement is $90 million, the difference is roughly $15 million.

[Douglas Stewart, executive]

Yes. It's restricted cash actually. What's supporting collateral obligations things that essentially, we don't have access to at this time. That's...

[Sunny Chhabra, analyst]

Got it. But I thought the restricted cash is a separate line item on the balance sheet. I was actually including that in my calculation.

[Douglas Stewart, executive]

Right. So the $90 million is broken up between $73 million of cash and cash equivalents, another $1.6 million of current restricted cash and another $15.6 million of longer term noncurrent restricted cash.

[Sunny Chhabra, analyst]

Got it. Got it. And is there any cash in the asset held for sale in the Emerald drilling?

[Ihab Toma, executive]

I misspoke. It's not. No, it's not.

[Sunny Chhabra, analyst]

That's right? Okay. And then so basically, the delta $15 million is the long-term restricted cash. Where do I see that on the balance sheet?

[Douglas Stewart, executive]

You'll see it in the -- what you see on 10-K when it comes out later today, there's a disclosure that speaks to the cash equivalents and restricted cash, and it breaks it out for you.

[Sunny Chhabra, analyst]

Got it. Got it. All right. That's what I want to check.

[Ihab Toma, executive]

Sunny, let me just say something on the first part of the question, because I'm not an accountant and the only in cash things like normalization costs that took place in Q4, the cash was spent, but it did not hit the cost because it is getting deferred -- getting deferred over the lack of the contract. So when you look at costs, it is not there and only $3 million as Douglas explained, but there is actually cash spend that will get reimbursed as part of the reimbursement that we talked about, but it was not yet expensed. I think...

[Sunny Chhabra, analyst]

Got it. And how much cash has been spent so far you have on it? I'm just thinking from the cash perspective, how much additional I should be adding to that $75 million? Because that would be reimbursed and EBIT from your customer?

[Douglas Stewart, executive]

Right. So we'll speak to that when we have our earnings call covering of Q1, but we're really just speaking today as of...

[Ihab Toma, executive]

No, because that's cash was spent in Q4, but...

[Douglas Stewart, executive]

That's in our Q4 going forward.

[Ihab Toma, executive]

Q4, I think, right? Sunny, you're asking about Q4?

[Sunny Chhabra, analyst]

Yes. Yes.

[Douglas Stewart, executive]

Yes. So let me take a look real quick and we'll get back to you on that number.

[Operator]

All right. Well it appears there are no further questions at this time. That will conclude today's call. Thank you all for your participation. You may now disconnect.