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

Welcome to the Vantage Drilling International Second Quarter 2020 Earnings Conference Call. As a reminder, today's conference is being recorded. I will now turn the call over to Douglas Stewart, the company's CFO and General Counsel.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International 2020 second Quarter Earnings Conference Call. On the call today is also Ihab Toma, our CEO. This morning, we released our earnings announcement for the quarter ended June 30, 2020. 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. 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. At the end of our prepared remarks, there will be a question-and-answer session. Please note that due to the company's continued proactive measures to protect our people during these uncertain times, our offices remain closed. 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 that 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. The second quarter of 2020 was a very challenging quarter. But despite the very tough conditions caused by COVID-19, I'm pleased to report that we continue to focus on delivering against our 3 corporate goals of: one, maintaining our stellar safety and operational performance; two, putting all of our rigs back to work; and three, reducing costs and preserving cash. The highlights of our second quarter could be summarized as follows. Health- and safety-wise, we have been successful in preventing the virus from making its way offshore. We have also successfully implemented a transition back-to-work program after the effective implementation of the [ effective ] management program. Staying with health and safety, we have been successful in repatriating the majority of our stranded crews after some very long stays offshore. Operationally, the Tungsten Explorer successfully completed the drilling of the first well ever to be drilled offshore Lebanon with Total. Moving to the contracting of the fleet. The award of a contract by ENI for the Topaz Driller for a drilling project offshore Montenegro was the highlight of the quarter. Lastly, on preserving cash. We have implemented further cost structure rightsizing in line with the current offshore drilling market conditions. These achievements were only made possible due to our employees' relentless focus and commitment despite all causes of distraction in the backdrop. I'm personally very appreciative of the team's continuous motivation and effort during these difficult times, which has allowed us to deliver another safe and operationally sound quarter across our operating fleet. Moving to reporting against the corporate goals in more detail. I will start with health and safety and operational performance as usual, which is our first and most important goal. COVID-19 continues to have a major impact on how we operate and manage people and logistics. Regarding safety incidents, I'm pleased to report that to date in 2020, we only have had 2 first aid cases and 1 recordable injury despite the disruption caused by rigs stopping and starting and very long [ issues ] for most of our crews offshore. It is clear to the dedication and leadership of our crews during these challenging times. During the quarter, our testing and quarantine processes continued to be effective in preventing the virus from making its way offshore as some asymptomatic positive cases were being identified before traveling offshore. On the other hand, smooth crew change logistics continued to be a challenge as countries continue to restrict movement of people due to COVID-19. The inconsistent approach to travel and travel restrictions around the world makes it difficult to plan crew changes. And while we have had some significant success in this area, we still have difficulties in some countries to crew-change certain nationalities. We continue to utilize and investigate various options such as dedicated charter flights, changing staffing locations of our rigs and adjusting rotation schedules to minimize the disruption of planned crew changes and the impact this has on our personnel and operation. The repatriation of the remaining stranded crews continues to be a key focus, and our teams continue to work tirelessly to ensure we can get our people safely back to their families once country lockdown restrictions permit. Our fatigue risk management arrangements continue to work effectively as we find that employees who have been on the rig for extended duration are working safely, which is highlighted by the minimal number of injuries across the fleet. As part of our continuous assessment of our situation, we have identified that personnel returning to their rigs after extended time off, close to 5 months in some cases, may present more of a risk than those they are replacing. As a result, we developed and implemented our transition back-to-work campaign, which ties into our Perfect Day Leadership program. The program focuses on reeducating employees on the Vantage way before they arrive back on the rig, while they are in quarantine onshore and once they get back to the rig as well as an increased level of supervision in their first week back. Basically, we are treating them as new employees until they are fully back up to speed with the way we do things the Vantage way again. Our focus throughout this unprecedented crisis has been and continues to be that our people remain healthy and safe while maintaining business continuity with the least possible interruptions. Operationally, we had another good quarter with the active regenerating revenue efficiency of approximately 97%. I would like to highlight that the Tungsten Explorer realized over 100% efficiency and that the Platinum Explorer achieved approximately 93% revenue efficiency, although India was under a complete shutdown people-wise and supplies-wise. I'm again very pleased with the team's strong contribution in achieving these figures given these difficult operating conditions. Moving to the second goal. In terms of utilization, we had 7 of our 8 rigs under contract at the start of the quarter. However, as reported in our June 30 fleet status report, we ended the quarter with only the Emerald Driller, the Soehanah and the Platinum Explorer remaining on contract and the Topaz Driller and the Tungsten Explorer with future contract, which takes me to our second goal of putting rigs back to work. For our jack-ups, inquiries, tenders and direct customer dialogue today have become more active than experienced during the first month of the current crisis. And our available rigs seem to fit quite well within some of these customer programs. However, it is difficult at this time to identify with certainty as to when these programs will commence. Some could start as early as the fourth quarter of 2020, but most are likely to be delayed further due to continued COVID-19 logistical constraints. I will now move to give a rig by rig update. I will start with the Tungsten Explorer. During the second quarter, the Tungsten Explorer completed the drilling of Lebanon's first-ever offshore well of Total and their partners. The program was operationally successful, achieving a perfect safety record and excellent uptime. As reported during our May earnings call, we have reached an agreement to delay the commencement of the follow-on contract for the Tungsten Explorer in the Mediterranean until the first half of next year and have negotiated contract postponement fees as part of the arrangement. The Tungsten Explorer is currently warm stacked in the region. The Platinum Explorer continues to operate successfully for ONGC, although the India lockdown has posed significant crew change challenges. We have finally managed the crew change successfully, and we continue to effectively manage crew fatigue and transition back to work. ONGC has also encountered logistical issues with regard to their drilling program that has seen several of our competitors put on force majeure standby. We are pleased to have been able to provide ONGC with a suitable solution by moving and commencing the drilling of 2 ultra-deepwater wells that were not on the original program, which will likely keep the rig on current contract into Q1 or Q2 of next year. Lastly, as has been reported in the market, ONGC has canceled their 3,000-meter ultra-deepwater tender and have simultaneously launched 2-year 1,500-meter drillship tender. The Titanium Explorer is still warm stacked in South Africa. I will now move to the jack-up segment. The Emerald Driller was placed on a special COVID-19 standby period from April 9 until July 10. While the rig was on standby, in order to avoid further stoppage later in the year, we performed the required maintenance and class surveys in drydock in Qatar. The rig is now back operating and is firmly contracted until the second quarter of 2021, with a 1-year option beyond that. We are in discussions with the client regarding exercising such option, which we believe is an indication of customers continuing to commit to further shallow water programs in the region. The Sapphire Driller contract came to an end during the second quarter, and the rig was recently moved from offshore Congo to a stacking location next to the Topaz Driller in Port Gentil in Gabon. As mentioned during our last earnings release call, West Africa had been severely logistically impacted by COVID-19. And therefore, we don't see a possible restart of activity in the region in Q3 of this year and potentially not before the end of the year. We have agreed in principle with our customer, New Age, to moving their Congo contract from the Topaz Driller to the Sapphire Driller while exploring a reasonable window to commence their drilling operation in the country. Aside from New Age, there are several term opportunities in West Africa that we expect to be relaunched later this year for work commencing in 2021. The Topaz Driller completed a successful campaign for Vaalco in April and continues to be warm stacked in Gabon at reduced crew levels. As previously announced and as mentioned in the earlier remarks, we were awarded an approximately 6-month contract plus option for any -- for a drilling campaign in Montenegro. Although I'm not at liberty to speak about the terms of such contract at this time, I will say that the job is currently planned to start in the first quarter of 2021, and we will be 100% covered for the mobilization and demobilization of the rig between West Africa and the Adriatic Sea. The Soehanah continues operations for Ophir in Indonesia during the quarter and have now commenced operations for Medco in the Natuna Sea. Due to the rig's excellent performance since moving to Vantage and the client's demonstrated interest in the region, we hope to maintain the rig working in Indonesia for the foreseeable future. The Aquamarine Driller finished their campaign for CPOC earlier in the second quarter and is currently warm stacked quayside in Malaysia with clients visiting the rig remotely. Virtual visits has temporarily replaced physical rig visits during this time, and these visits are an indication that customers are actively planning the resumption of their [ pent up ] programs that have been delayed because of COVID-19 once the situation permits. The Aquamarine Driller is known as a top performer in the region, and we are confident in their ability to secure work in the near to medium term. I will now provide some high-level comments on the offshore market as we see it at this point in time. Although the offshore market at large has been significantly impacted in the last few months, we do see customers starting to cautiously plan for new shallow-water campaigns starting as early as the fourth quarter of 2020. We do also see some shallow water customers taking the opportunity to lock in some of the best units at positive dayrate when planning for their 2021 programs. As most shallow-water activity are economical when Brent crude is trading in the $40s, we think that difficulties associated with logistics are the principal impediment to shallow water recovery. Therefore, we expect customers to resume their drilling programs and relaunch some new programs once they have the level of confidence that the operational and logistical challenges associated with COVID-19 are easing up to manageable levels. In the deepwater segment, things are definitely more difficult to predict, but the current plans of restructuring caused by much needed consolidation and fleet reductions should positively address some of the issues associated with the current oversupply of floaters. I will now report on our third goal of reducing cost and preserving cash. Douglas will walk you through the numbers in his prepared remarks, but I will provide some color on the cost measures taken during the second quarter. Further to what we stated during the last quarter's earnings release call, during the second quarter, we took some tough measures to further rightsize the organization and cost structure to bring them in line with the current state of the offshore drilling market. I can now report that we were able to rightsize the organization without sacrificing the current platform's ability for further upscaling or to execute on operations and management opportunities, which, as a reminder, is one of Vantage's existing business segments. These cost adjustment measures were mainly the following. We adjusted the size of our offshore workforce down by 38% to match the current level of activity. We consolidated the departments and roles across the company, yielding a 25% reduction of offshore headcount. The consolidation of department heads and roles has allowed us to maintain the management platform well staffed and therefore ready for further upscaling when required. We reduced base salaries across the company by 10%, onshore and offshore. We further reduced base salaries of crews on warm stacked rigs when the rig goes back on contract. In addition, we changed the offshore pay structure to allow for additional flexibility during times when equal time rotation is no longer possible. Finally, we secured various concessions from our vendors. These measures should allow us to achieve the necessary G&A reduction as well as reach our targeted warm stacking costs during Q3, although we have experienced some cost spikes related to COVID-19 logistics during Q2. Our jack-up warm stacking costs should level out around $10,000 to $15,000 per day depending on the region. And for the Tungsten Explorer, the warm stacking cost should level out below $35,000 per day. In summary, with the implementation of the above-mentioned cost structure rightsizing measures and favorable balance sheet and strong liquidity position consisting of approximately $188 million in cash and $242 million in working capital as of the end of the second quarter, Vantage should continue to be well positioned to capitalize in the early stages of the eventual of offshore drilling recovery. With that, I would like to turn the call over to Douglas to take us through Q2 and the numbers.

Thank you, Ihab. As Ihab mentioned, the health and safety of our personnel are paramount. At the same time, we are also very focused on aligning our cost structure with activity levels and preserving cash during these unprecedented times. The company ended the second quarter with approximately $188.4 million of cash, including $13.1 million in restricted cash. This compares to $210.5 million of cash, which included $14.1 million in restricted cash at the end of the first quarter. The decrease in cash is primarily due to our semiannual $16.2 million interest payment, together with delayed receivables caused by logistical challenges resulting from COVID-19-related closures and, to a lesser extent, the cash flow impacts of contracting changes during the quarter. Working capital for the second quarter was approximately [ $242.5 ] million compared to [ $257.9 ] million in the previous quarter for the reasons I just mentioned. As indicated in our previous call, we had expected to collect $14.2 million in receivables from our Egyptian client, Petrobel, during the quarter. Due to lockdown in Egypt and the requirement to furnish certain documentation to the client, we were unable to do so. We recently completed the process, however, and expect collection to occur in the third quarter. For the second quarter of 2020, we achieved revenues of approximately $36.8 million compared to $636.4 million for the second quarter of 2019. This decrease was mostly related to the contract termination revenue of $594 million received from Petrobras in the comparable quarter and lower fleet utilization as we had 7 of 8 rigs under contract in the second quarter of 2019. Total revenues for the current quarter compared unfavorably to the $51.5 million reported in the first quarter of 2020 driven mostly by rigs coming off contracts and the postponement of the follow-on Tungsten Explorer contract, as mentioned by Ihab in his prepared remarks. Operating costs for the same quarter of 2020 of approximately $38.1 million were in line with the comparable quarter in 2019 primarily due to lower costs associated with the decrease in fleet utilization, offset by an increase in logistic costs associated with COVID-19 management. These included, but are not limited to, higher labor costs resulting from overtime pay, the duplication of crews to manage quarantine and other personnel logistical items. General and administrative expenses for the second quarter of 2020 totaled approximately $4.7 million as compared to $70.7 million for the comparable quarter in 2019. The decrease in the comparable quarter is primarily due to changes in nonrecurring legal and professional fees. The comparable quarter of 2019 included $65 million of nonrecurring professional fees, including a $62.6 million contingent legal fee related to the receipt of the Petrobras payment. Excluding nonrecurring professional fees, general and administrative expenses for the second quarter were $4.6 million as compared to $5.1 million in the comparable quarter of 2019. General and administrative expenses for the current quarter includes $600,000 in severance costs associated with headcount reductions. This quarter and the comparable quarter also include $200,000 and $700,000, respectively, for noncash management incentive plan expense. Depreciation for the second quarter was approximately $18.4 million and was in line with the comparable quarter. Interest expense for the second quarter was approximately $8.6 million compared to $10.4 million for the second quarter of 2019. The lower interest expense reflects the elimination of the paid-in-kind interest on the conversion of our formerly outstanding third lien convertible notes to equity during the fourth quarter of 2019. Interest income totaled $111,000 for the second quarter 2020 compared to $108.3 million in the comparable quarter. The decrease is primarily due to the comparable quarter including $106.9 million in interest income included in the Petrobras payment. The net result was a loss of $31.9 million for the quarter or $2.43 per share. Please note we will file our 10-Q later today. And with that, I'll now turn the call back over to the operator for Q&A.

[Operator Instructions] We'll go first to Sunny Chhabra with Ironshield Capital.

I have 3. Firstly, just on your working capital position. Can you update on buildup some of the working capital in Q4 and Q1? Are you expecting any releases towards the second half of this year? First question. Second one on -- any update on your plans for Titanium Explorer given it's costing you around $10 million a year to keep it warm? And thirdly, you mentioned you negotiated some contract postponement fee for the Tungsten Explorer. Can you comment anything on that, please?

Okay. I'll address the working capital piece, and then Ihab can speak to the remaining 2 questions. With respect to the working capital, obviously, as we indicated in the -- in my prepared remarks and also if you can see in the -- for the quarter, AR increased somewhat due to some COVID-19-related issues. Where we operate, obviously it's been a little bit difficult -- more difficult to ensure collection. But we are certainly focused on it and making progress, and so I expect that to normalize in the late portion of the year. That's what we'd say. And AP is coming down. But again, I'm not going to give any guidance with respect to -- beyond that.

All right. Thanks, Sunny. I'll take the 2 other questions. So yes, the Titanium, of course, our due -- or how optimistic we are on putting it back to work, putting it back to work are a bit different today than they were, I would say, 6 months ago. So we -- of course, we evaluate all possibility. But at the moment, what we are focused on is to reduce the warm stacking cost, so it doesn't cost that much. It has been costing about [ $20,000 ] per day, and we will be looking to reducing that going forward. On your second -- last question, third part of your question on the postponement fee for the Tungsten, we do -- I don't have clearance from the client to disclose that, but we did receive some postponement fee payment, and there will be another portion of that payment later if the drilling program does not start on time, and we've advised them that we'll just go back to work.

Just one follow-up on the Titanium Explorer. If you can just discuss a little bit more about the possibilities you see for that. Even with the new ONGC contract, do you see any possibility there? Just a little bit more color on -- because you mentioned the delayed recovery for the deepwater. So that's what I wanted to understand, where you see or when you see Titanium going back to work.

Yes. I mean at the moment, I really cannot see it going back to work anytime soon. So we still have the follow-on work for the Platinum to secure. We do have the work for the Tungsten to conduct and secure follow-on work, right. So the Titanium would have to come in third behind those 2. So at the moment, at this point of time, I don't -- cannot really guarantee taking any particular opportunities where we can [indiscernible] the 2.

We will next hear [ Craig Palovita ] with [indiscernible].

My questions were [ answered ].

[ Craig ], we -- I think we [indiscernible] -- sorry? [indiscernible].

I think my questions were answered.

Were answered, yes. Oh, okay. Yes, all right.

Okay. Good. Thank you. Thanks.

[Operator Instructions] And at this time, there are no questions. At this time, this does conclude today's conference. We thank you for your participation.