Vantage Drilling International Ltd. (VTDRF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Vantage Drilling International First Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Douglas Stewart, General Counsel. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International 2020 First Quarter Earnings Conference Call. On the call today are also Ihab Toma, our CEO; and Tom Cimino, our CFO. This morning, we released our earnings announcement for the quarter ended March 31, 2020. The earnings release is available on our website at vantagedrillng.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. 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. And at the end of our prepared remarks, there will be a question-and-answer session. Please note that due to the company's proactive measures to protect our people during these uncertain times, our offices remain close. 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.

Thanks, Douglas, and welcome, everyone. COVID-19 longer-term impact on every business and every industry is yet to be fully understood and appreciated. However, the short-term impact on our business is starting to crystallize, and tackling it now completely dominates our everyday actions. So I will focus my remarks here on this and will be providing some light on our current operations and contract situation. Our 3 corporate goals that we call our widely important goals for rigs are now more relevant than ever and have proven to be the strong pillars that are allowing us to endure another round of shock waves. As a reminder, our wildly important goals are as follows: Our first goal is to maintain our stellar safety and operational performance. And on this front, protecting the health of our people while operating safely is now front and center. The second goal originally started as putting all of our risk to work. After significant progress on that front, we started to focus on contract quality and increasing day rates. Now our focus is shifting to protecting our current contracts and the previously obtained future awards. Our third goal has been reducing costs and preserving cash. The extreme importance of this goal goes without saying now and here we will continue to build on the success we achieved on this front over the past few years. Beginning with safety and operational performance, which is our first and most important goal, COVID-19 has obviously [ eliminated the ] landscape since March and has had a major impact on how we operate and manage people and logistics. Our main focus throughout this period has been to ensure that our people and offshore installations are safe and isolated from exposure to the virus. To do so, we have implemented various processes in line with both industry practices and advice of International SOS, our health services provider. This starts with prevention. The first step in prevention has been educating our people and ensuring they understand how the virus is transmitted and how best to avoid catching it, in addition to understanding the signs and symptoms associated with the disease, of course. The next step in prevention is through our own screening, testing and quarantine processes to ensure that [ foot ] changes do not bring the virus offshore. We also provided clear guidelines to personnel departing the rig on how best to avoid catching the virus on their way home, as we do not want any of our team catching it and taking it back to their families. These efforts have not gone unrewarded as we have had no recorded cases of COVID-19 onboard the Vantage rig today. As a point of clarification, we have had a nonemergency medical evacuation in 30 March of one of our crewmembers on the Aquamarine Driller in Malaysia for an unrelated illness. When the team member was first tested in the hospital days after arrival at the hospital, the test was negative. But in a subsequent test, 10 days after leaving the rig, the test came back positive. This case was incorrectly reported by some media outlets as being a case onboard our company [indiscernible]. The next challenge has been and continues to be fatigue management as crews are ending up doing extended [indiscernible]. Crew change has been one of the most impacted areas of our business due to countries closing the borders and commercial airline suspending travel flights. Although we have been successful with conducting some crew changes, mostly using charters and special one-off flights, extended crew members' time offshore became unavoided, which has led to fatigue-related concerns. We have as such developed and implemented an industry-leading fatigue risk management plan, which has provided the rig teams with clear guidance for organized rest periods and identifying and managing signs of physical and mental fatigue. The repatriation of stranded crew is also a key goal. And our teams are working tirelessly to ensure we can get our people safely back to their families once country lockdown restrictions are lifted. For our onshore workforce, we were early adopters of the new ways of working and practically closed all of our offices and implemented remote working tools and processes. Now everyone on this call were all working remotely while conducting the call. Our sole focus throughout this unprecedented crisis is to ensure that our people remain healthy and safe while maintaining business continuity with the least possible interruptions. Moving to the second goal. I will now provide life on the contract situation of each rig in our fleet. Our strong relationships and open dialogue with our customers are allowing us to have constructive agreements around current and future contracts. It is important to note that demand visibility is currently low, and although Douglas has provided you with a forward-looking information disclaimer, I want to reemphasize that business projections are now especially difficult to make. With that, I will now give you a rig by rig update. I will start with the Tungsten Explorer. During the first quarter, the Tungsten Explorer completed the Petrobel Egypt campaign safely and with perfect revenue efficiency and has subsequently mobilized to Lebanon where we drilled the country's first offshore rig. The rig is currently in the final phases of the job, and we have accepted the client's request to extend their option strike date for drilling the option well under this contract. We have also reached an agreement in principle to delay the commencement of the following contract in the Mediterranean to Q2 next year, whereby we would be paid contract installment fees. Our Platinum Explorer continues to operate successfully with no interruptions as of today. Although India is in lockdown, we are constantly monitoring and managing crew fatigue as crew changes have not been conducted since the start of the lockdown. The situation continues to be challenging due to the lockdown, and we continue to evaluate various future possibility for crew changes and continuity of supplies. The Titanium Explorer is still warm stacked in South Africa with no update at this time. I will now move to the jack-up segment. Emerald Driller is currently on special COVID-19 standby period that started on April 9. We were able to formulate a proactive plan with our customer, whereby the rig was placed on a special COVID-19 break for 60 to 90 days until it is possible to restart the drilling campaign once the lockdown restrictions would permit doing so. While the rig is on standby, it will undergo a class survey and other work to avoid interrupting operations later in the year. The Sapphire Driller started its 1-year contract extension early April but has now moved to force majeure status since April 30 till the conditions in the country allow for the resumption of operations. Aquamarine Driller finished the campaign for CPOC on April 26 and is currently stacked in Malaysia with reduced crew levels. I will not speculate on the next contract for the rig, but I would say that this high-spec top performer is a popular rig in Southeast Asia. Having said that, the restrictions and travel conditions would not allow for any work to start in the next 2, 3 months, even if a contract was obtained. The Topaz Driller completed a successful campaign for Vaalco in April, and is now stacked in Gabon with reduced crew levels. We have reached an agreement in principle with our customer to postpone the work that was to occur outside of West Africa, for which we previously announced receiving a letter of award. This will likely push the strike date into the first quarter of next year. Staying with the Topaz Driller, the situation in West Africa will likely remain challenging for the short to medium term, and therefore, we're continuing to evaluate with new age on when it will be possible to commence that program in Congo. Given the current conditions, our best estimate to start this work would be late third quarter to early fourth quarter of this year, but this is subject to change. The Soehanah concluded the bareboat charter for Apexindo in January, and we took custody of the rig and subsequently executed its planned shipyard project on time and on budget. Despite challenges caused by the pandemic, the rig was on contract at the end of March, and we are currently operating safely and efficiently for Ophir in Indonesia. Finally, our project management contract for the West Cobalt in DSME shipyard concluded today. In summary, in conjunction with our customers, we are taking proactive safety conscious measures towards maintaining rigs in contract and to provide all parties involved with mutually beneficial solutions while we all weather these difficult times. I will now report on our third goal of reducing cost and preserving cash. Tom will provide you with the Q1 information in his prepared comments so I'll focus here on our level of readiness for the stormy waters ahead of us. Thanks to our prudent approach since our emergence in February 2016 and our continued focus on cost, liquidity and overall balance sheet strength, we are now in a good position to weather the current storm. Since 2016, we have significantly downsized our corporate overhead and our overall cost structure and maintained those levels even after we reactivated 4 rigs and purchased the jack-up. While investing wisely in key enablers like upgrading the Tungsten Explorer with the latest managed pressure drilling package that is becoming key to securing contracts, we have been very vigilant with our liquidity, extending the maturity date of our debt. And as a result, we now have over $210 million supporting us in this difficult time. Our management team has a solid track record of adjusting costs and preserving cash, and we will continue to do so in the coming weeks and months. While we do not provide guidance during this call, I would like to share with you our projected warm stacking cash costs. For the jack-up, our warm stacking cost should level out at around $10,000 to $15,000 per day depending on the region. And for the Tungsten Explorer, the warm stacking cost should level out at around $35,000 per day. In summary, as the whole industry finds itself in extremely challenging times, we find ourselves with a restructured balance sheet with no maturities until the end of 2023, over $210 million of cash and a favorable working capital position. Liquidity and manageable leverage are the new must-haves for the industry. And I'm pleased to say Vantage checks both of these boxes. In addition to our well-capitalized balance sheet and right-sized cost structure, the strength of our management team and strong customer relationships put Vantage in a unique position to endure the anticipated period of reduced activity and to subsequently capitalize on an eventual recovery. With an expected lower supply of rigs and the consolidated number of drilling contractors on the other side of the storm, we are confident that the offshore market will eventually improve, but it will be difficult to put a date on that recovery at this time. With that, I would like to turn the call over to Tom to take us through Q1 and the numbers.

Thank you, Ihab, and good morning, everyone. As Ihab mentioned, we have a proven record of managing costs and preserving cash. These efforts are even more focused in this new challenging COVID-19 environment. We ended the first quarter with approximately $210.5 million of cash, including $14.1 million in restricted cash compared to $242.9 million, including $11 million in restricted cash at the end of the fourth quarter. The decrease in cash includes a onetime $15 million settlement payment to Vantage Drilling Company related to a legacy restructuring matter and approximately $5 million associated with the Soehanah jackup for shipyard work and operations prep work, including manning the rig for a new contract in Indonesia. Working capital for the first quarter, however, ended at approximately $258 million, slightly below the $269 million in the previous quarter. It's important to note that our accounts receivable finished higher, mostly due to the Tungsten Explorer's operations in Egypt during the fourth quarter of 2019. These receivables are expected to be fully collected in the second quarter of 2020. For the first quarter of 2020, we achieved revenues of approximately $51.5 million compared to $34.6 million for the first quarter of 2019. This increase was mostly due to higher utilization on the Tungsten Explorer, which worked throughout the first quarter. In the comparable quarter of 2019, Tungsten transitioning back to work after its 5-year maintenance and the [indiscernible]. Higher operating day rates from the Topaz Driller and the Aquamarine Driller also contributed to the increase in revenues in the first quarter. During the quarter, we had 7 of our 8 assets in operations. Total revenues for the quarter also compared favorably to the $49.3 million in the fourth quarter of 2019. This is mostly due to favorable operating day rate on the Tungsten Explorer. Operating costs in the first quarter of 2020 were approximately $48.6 million compared to $38.5 million for the comparable quarter in 2019. Jack-up operating costs were $3.9 million higher than the comparable quarter, primarily due from shipyard work on the Soehanah Driller, including inspection and repairs and maintenance costs following the redelivery of the rig upon conclusion of the bareboat charter. Deepwater operating costs in the first quarter of 2020 were higher by $6.5 million in comparable quarter. This is mostly due to the Tungsten Explorer, which operated the majority of the quarter, and as mentioned, did not operate in the comparable quarter of 2019. General and administrative expenses for the first quarter of 2020 totaled approximately $7.2 million as compared to $8.7 million for the comparable quarter in 2019. Current quarter G&A includes $500,000 for noncash management incentive equity awards and $700,000 for nonrecurring legal and professional fees. The comparable quarter of 2019 also included $700,000 for noncash management incentive equity awards and $2.9 million in nonrecurring legal and related professional fees. Depreciation for the first quarter was approximately $18 million, lower than the $18.5 million in the comparable quarter due to assets being fully depreciated. Financing expense in the first quarter was approximately $8.4 million compared to $15.8 million in the comparable quarter, which included amortization of discount and noncash PIK interest and the now converted third lien notes. Interest income totaled $700,000 for the first quarter compared to $1.1 million in the comparable quarter due to lower interest rates, and the company also recorded a gain in other income of $2.3 million related to the previously mentioned VDC settlement. The net result was a loss of $30.6 million for the quarter or $2.33 per share. Contract utilization for the first quarter was approximately 89% for the jackups and 62% for the drillships as compared to approximately 98% for the jackups and 33% from drillships for the comparable quarter 2019. Increase to the drillships is due to Tungsten Explorer operating 81 more days in the current quarter. As of the end of the quarter, we had approximately $114 million of backlog. Please note, we will file our 10-Q later today. With that, I'll now turn the call back over to the operator to open the call up for any Q&A.

[Operator Instructions] And we'll go first to Joshua Katzeff with Deutsche Bank.

First, I just wanted to start in -- a great job keeping everybody safe and managing through this unprecedented crisis. I wanted to start with some of your comments on cost. You gave some numbers around warm stacking costs for the jackups and for the Tungsten. Are there upfront costs to get in and kind of back end the cost then get out of the stacking rates? So if you want to stack a jackup, is it going to be an upfront investment and back-ended investment to bring it back out? And can you quantify those?

Josh, Ihab here from Dubai. Not exactly. Because when you -- when people are talking about upfront cost, it's because they are cold-stacking a rig. So they have to preserve the equipment because they are going to leave nobody on that rig and just let it sit there until we come back to it. We are warm-stacking those rigs where we can have our maintenance crew on the rig and so on. So those numbers I gave you include the maintenance crew and doing the maintenance on the rig and so on. So there is not exactly an upfront investment. Having said that, we still have standard tools on those rigs that are moving to warm stack. So until such time we successfully take them home, we are [indiscernible] those numbers here, and it will probably take a few weeks to get there.

Got it. And I assume the plan is to warm-stack the Aquamarine and Topaz?

Yes. All the warm-stacked rigs are going down to dock [indiscernible]. The Aqua is ahead of the Topaz in terms of being able to reduce the cost. So a bit easier to go toward that.

And I'm sure this is sensitive, but can you give any kind of commentary, even at a high level on, I guess, the standby rate/force majeure rates you're getting, [ covering ] OpEx puts on margin? Any sort of broad order of magnitude would be helpful.

Yes. I mean, again, these are confidential contractual numbers that we don't have permission from the client to release it, even if we want to. The only thing I can say that they are definitely covering our costs and giving us some [ money ].

Okay. That's helpful. And then maybe just switching broader to the tendering market, whether it's existing or [ not ]. I mean just kind of your opinion, how much of what you're seeing in the lack of new activity work is directly COVID related versus oil being at $30? Or is it really impossible to differentiate?

Definitely, a common thread is COVID-19 difficulty of operations, but that would be a common thread to all of there. Now at the back end of that, will it become possible to operate again, whichever way, right? Because we have new procedures or we can create a vaccine or because there's effective quarantine process, countries opening up their borders. Whichever way you get to, to the point of saying now we can operate, maybe more expensively, but we can operate, at that point, then this is when you really start to see who's willing to work despite the price of oil. And what would be the price of oil at that point and what would be the projection for the price of oil at that point, that is yet to be seen, but today, it's both, but the COVID-19 is definitely the more -- most apparent and immediate [indiscernible] as of today.

Got it. And I guess, when do you expect to see that's going to -- maybe this is not answerable, but when would you expect to maybe start seeing that open up? Is that when you start seeing the lockdowns extended? Do you have a better idea of kind of where the market is? Do you think there's a pent-up demand to get some of the short-term jackup work back? Or is that still too early to [indiscernible]?

Yes. I mean, I would not say it is completely unanswerable. But there are 2 different categories, one which is rigs that are still on contract and waiting till the opportunity for certain level of restrictions to be lifted so that we can go back to work. An example of that would be the Emerald. That is a different category than work that hasn't started, and the client is yet to get themselves in a position to start that new operation that we have not had before and now get into a position of doing that. I would say this is a bit more difficult. So we will see a rig like the Emerald most likely going back to work before Topaz or Aquamarine can start a new contract.

Got it. Okay, and then maybe one last one. I guess some of the longer-term projects, I guess, specifically ONGC and these kind of maybe projects for 2021 start dates. Has those longer-term tenders changed at all? Or are they still in place? Or there's been just delays indefinitely?

I mean at the moment, I would say, black hole, right? I mean, there is very little visibility of what's happening there. Those clients that have their offices shut down, people are working from home, if they are able to work at all and so on. So there is a little bit of [indiscernible] there, and we will have to wait and see, again, at the back end of the current COVID-19 status quo where are we on those tenders that were underway. But for sure, we may have heard it from everybody else, very little rigs can start this year.

[Operator Instruction] We'll go next to Ceki Medina with Southpaw Asset Management.

I just have a quick statement and 2 questions. First, I pushed back against the dividend 2 quarters ago. With the [ debt ] now trading at $0.50 on the dollar, I think there is no question that this has been to the viability of the company from a market's perspective. I can't use the Tidewater whose bonds are still quoted above par as a model for an offshore company balance sheet and Vantage has that opportunity, and I think it's quantitive, unfortunately. I want to be clear that I'm putting [indiscernible] on the Board here, not on management, sinking such a large dividend was what shareholders' short-term focus would be. And I invite the Chairman to come on the call and defend that decision knowing full well that no shareholder would not [indiscernible] funds that they received. Finally, I would caution against expectations of flexibility from bondholders if some is necessary. Now that being out of the way, I have 2 questions. One, what would you be able to get the drilling down to? It was [ 7 million ], [ 7.5 million ] last quarter. And alongside that, are shore-based costs included in the $10,000 to $15,000 and then $35,000 per day warm-stacking cost that you mentioned? And question number 2, is -- I know Ihab that you are the low-cost operator in this industry. Are you seeing or can you foresee an incremental [ cadre ] of customers who would be looking for low cost -- or low rates for their work to be done that you wouldn't be able to reach for some reason or work with now being interested in your services?

Ceki, thank you for your questions, but I don't plan to answer either of them. The first one is a total projection, and we do not do that. When we do report about Q2, at that point, you might be able to see some of the numbers to answer your question. And the second question is talking about our contracting and sales strategy and that's not something I like to share on public record.

[Operator Instruction]. We'll go next to Brendan Whittington with Longfellow Investment Management.

Could you guys detail a little bit what the corporate SG&A run rate is on a quarterly basis now that you've enacted some of your own cost measures?

I'll pass it to Tom.

Yes, thanks. Each quarter, we kind of back out the noncash items, as I highlighted. So as Ihab mentioned, we're very proactive on managing our costs, and we're doing the same here. That run rate was historically about $5 million in cash, and I won't get into too much detail, but with these cuts, we could probably drive that down about 15% is where we're looking on a cash quarterly basis.

And at this time, we have no additional questions. That will conclude today's call. We thank everyone for your participation. You may now disconnect.