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

Welcome to the Vantage Drilling Third Quarter 2020 Call. As a reminder, today's conference is being recorded. I would now like to 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 Third Quarter Earnings Conference Call. On the call today is also our CEO, Mr. Ihab Toma. This morning, we released our earnings announcement for the quarter ended September 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, some of 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 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. Although third quarter of 2020 was another difficult quarter in a challenging year for the industry, we remain committed to our strategy, focusing 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. So now I will summarize the highlights of our third quarter against those goals. With regard to our most important goal, the health and safety is our people and others working on our rigs, we continue to operate our rigs in an extremely safe manner, reflected in the company achieving the lowest total recordable incident case in the history of the company and zero lost-time incident rate. We were, however, impacted by the pandemic directly, as we, unfortunately, experienced cases of COVID-19 on the Platinum Explorer in India. I'm pleased to report that Vantage acted quickly and proactively and through a series of well-planned actions, including isolation and efficient crude replacement measures, we were able to safely return to work after just over 4 weeks under force majeure. On the commercial side and the contracting of our rigs, the highlights of the quarter include extensions on our contracts for the Emerald Driller and the Soehanah. Lastly, on preserving cash, we continue to focus on protecting our rightsize cost structure and continue to challenge the team and the vendors to achieve increased savings so that we can continue to win contracts with healthy cash flow. I will now walk you through these results in more details, starting by health and safety and operational performance, which needless to say, is our first and most important goal. I'm pleased to report that our total recordable incident rate is now at lowest in the company's history, as we have had only 1 recordable incident in the last 12 months. We have also done over 450 days lost time incident-free, and our only incidents year-to-date are 2 first base cases and one recordable injury across our fleet, which is remarkable. It is satisfying to see incident rate significantly lower than the industry average, despite the disruption caused by rigs, stopping and parting and longer than usual hedges for most of our crews offshore. I attribute these results to the sharp focus, dedication and leadership of our crews during these challenging times. As highlighted in my opening remarks, COVID-19 continues to have a major impact on our business. During the quarter, while our testing and quarantine processes continue to be effective for our crews in all other operations, the virus reached the Platinum Explorer in India. As stated earlier, the rig has now returned to work with stricter entry and quarantine requirements for all personnel based in the rig, I'm also glad to say that none of the personnel that have tested positive has developed many serious symptoms. 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, our fleet revenue efficiency dipped to approximately 84.7%, primarily due to the Platinum Explorer's force majeure event. I would like to highlight, however, that the working jack-ups achieved over 100% efficiency due to bonus provisions. So although we have experienced some downtime on the Platinum Explorer caused by the current unusual operating environment, I'm confident in the team's ability to deliver perfect days to our customers despite the challenging environment. In terms of utilization, and our second goal of putting rigs back to work, we ended the quarter with the Emerald Driller, the Soehanah and the Platinum Explorer on contracts and the Topaz Driller, Sapphire Driller and Tungsten Explorer with backlog from future contracts. We can now see some signs of market improvement as evidenced by the volume of inquiries, tenders and direct customer dialogue and most importantly, the customers' willingness to manage COVID-19-related logistic issues while continuing to drill. We have received a large increase in prequalification requests in October, which acts as a leading indicator of potential future tenders. In addition, our marketing team have been much busier responding to a number of tenders in September and October. At present, we have 15 tenders outstanding that are submitted and in various stages of client [ study ]. As a result of our continued focus on our second goal during Q3, I'm pleased to announce a number of short extensions in the Soehanah, which will keep the rig busy into 2021 as well as a 1-year extension of the Emerald Driller contract with Topaz, which will secure work through the rig until May 2022. You will see with our filing that the Titanium Explorer has been financially impaired during the quarter as its cash flow projections, primarily related to the change in market dynamics due to the COVID-19, did not cover its carrying book value. We are currently evaluating options for the ship including but not limited to cold stacking. Our operations and maintenance, O&M segment, where we offer management services on the rigs owned by others, have seen some increased interest recently. We will continue with our marketing efforts on this front where we are promoting the opportunities around synergies and sharing the benefits of the effective and cost-efficient Vantage platform. I will now provide some high-level comments on the offshore market as we see at this point in time. The impact of COVID-19 on the shallow water, offshore market can be segregated into 2 distinct though related charts. Chart number one relates to the virus' impact on logistics and consequently, the physical ability to continue to safely conduct operations. While chart #2 relates to the economic impact of the virus on market dynamics and consequently, the unbalance between supply and demand for offshore drilling rigs. On the first chart, as new methods and certain solutions are being adopted around the logistical challenges of operation, shallow water drilling seems to be slowly making a recovery as evidenced by customers restructuring or relaunching some of the programs that were paused or delayed earlier this year. On the second chart, with Brent crude stabilizing about $40 recently and hopes of a COVID-19 vaccine on the horizon, we have seen and expect to see customers exercising options and some going into the market to secure suitable units as attractive pricing for longer-term programs. With that being said, operations are still mandated to optimize their portfolios at times of uncertainties, which has led to continued drilling contract suspensions, terminations and renegotiations. On the other hand, the ultra-deepwater drillship business is experiencing a more difficult market dynamics where one could reasonably conclude that the eventual recovery could only be achieved by the shedding of the oversupply of floaters through disciplined recycling of rigs and consolidation of drilling contractors. Through consolidation, recycling and in many cases, restructuring or liquidation, I believe that the industry will reach a point of addressing the issue of oversupply and eventually gain back the so-needed pricing power required to achieve adequate returns for our stakeholders. 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 our cash position and the cost measures taken during the third quarter. We have finished the third quarter with approximately $179 million of cash, including restricted cash, compared to $188 million for the second quarter. The decrease in cash is primarily due to the operating loss associated with the Platinum Explorer's force majeure, the stacked rigs and initial mobilization cost of the Topaz Driller from West Africa to the Mediterranean, which will be fully reimbursed at contract commencement. With regard to costs, as previously announced during the last quarter's call, we have rightsized our organizational structure and have achieved corporate overhead saving of approximately 31% during the third quarter of 2020 compared to the comparable quarter of 2019, when adjusting for professional fees and noncash stock-based compensation. We have also relocated the Topaz Driller to a more economical stacking jurisdiction and implemented further cost-cutting measures on the Titanium Explorer. In summary, we continue to strictly manage our cash during this period of low utilization, with approximately $179 million in cash and $226 million in working capital as of the end of the third quarter, Vantage continues to be well-capitalized to deal with the continued challenges our industry faces. With that, I would like to turn the call over to Douglas to take us through Q3 and the numbers.

Thank you, Ihab. So we are seeing improvement on the horizon, the third quarter continued to present the industry with challenges related to pandemic and reduced levels of activity. We experienced some interruption to the Platinum Explorer's operations due to force majeure resulting from COVID-19 reaching the rig from third parties. Fortunately, our team acted quickly and professionally, and we were able to safely return to work. We remain focused on the health and safety of our personnel. At the same time, preserving cash during these unprecedented times is a priority. The company ended the third quarter with approximately $179.2 million of cash, including $13.5 million in restricted cash compared to $188.4 million of cash in the second quarter, which included $13.1 million in restricted cash. The decrease in cash is primarily due to negative cash flows with 4 rigs rolling off contracts during the second quarter and the mentioned force majeure-related days experienced by the Platinum Explorer. Working capital for the third quarter ended at approximately $225.7 million compared to $242.5 million in the previous quarter due to the reasons mentioned during this call. In our previous earnings call, I highlighted the fact that we were in the process of collecting an outstanding account receivable related to the Tungsten's campaign in Egypt from 2019. This receivable has come down from $14.2 million at the end of June 2020 to approximately $5.3 million as of today. The client is not disputing the campaign's billings, and we currently expect to have this account fully settled by the end of the year. For the third quarter of 2020, we achieved revenues of approximately $20.2 million compared to $40.6 million for the third quarter of 2019. This decrease was mostly due to the previously mentioned force majeure events interrupting the Platinum Explorer's operations and to lower utilization with 3 rigs operating in the current quarter compared to 6 operating in the comparable quarter. Total revenues for the current quarter compared unfavorably to the $36.8 million reported in the second quarter 2020, driven mostly by rigs coming off contracts. Operating costs for the third quarter of 2020 totaled $27.2 million and were $10.7 million lower than the $37.9 million incurred in the comparable quarter of 2019. This decrease was primarily due to lower costs associated with the reduced fleet utilization, partially offset by increasing costs associated with managing logistical challenges posed by the pandemic. General and administrative expenses for the third quarter of 2020 totaled approximately $3.8 million as compared to $6.6 million for the comparable quarter in 2019. The decrease from the comparable quarter is primarily due to cost-cutting initiatives to align our cost structure with lower levels of operating activity as well as lower professional fees. Q3 2020 also includes $200,000 in noncash expenses associated with the management incentive plan as compared to a credit of approximately $700,000 in the comparable quarter in 2019. The adjustment in the comparable quarter related to the remeasurement of the fair value of the awards, which was required while the awards were classified as a liability. That is until the formally outstanding third-lien convertible notes were converted to equity. Depreciation for the third quarter ended September 30, 2020, was approximately $18.2 million compared to $18.5 million in the previous quarter. During the quarter ended September 30, 2020, as part of our evaluation of asset impairment indicators, we determined that while there were no indicators of impairment for our shallow water assets, there were with respect to our deepwater assets. As a result of these indicators, we performed a recoverability analysis on our deepwater assets and determine that the asset values of the Tungsten Explorer and the Platinum Explorer were recoverable. However, the recoverability analysis of our longer-term warm stack drillship, the Titanium Explorer, identified that the asset value was not recoverable. As a result, its carrying value was impaired, and we recognized a noncash loss on impairment of $128.9 million during the quarter ended September 30, 2020. Interest expense for the third quarter of 2020 was approximately $8.5 million compared to $10.5 million for the third quarter of 2019. The lower interest expense reflects the elimination of the paid-in-kind interest upon the conversion of our third-lien convertible notes to equity during the fourth quarter of 2019. Interest income totaled $41,000 for the third quarter 2020 compared to $4.2 million in the comparable quarter. The decrease is primarily due to lower interest rates and a lower cash balance after the $525 million dividend in the fourth quarter of 2019. The net result was a loss of $169.3 million for the quarter or $12.91 per share. As of the end of the quarter, we had approximately $90.5 million of contract drilling backlog. Please note, we will file our 10-Q later today. And with that, I will now turn the call back over to the operator to begin the question-and-answer session.

Thank you, sir. Before we start the Q&A. I'd like to hand the call back to Ihab Toma for additional comments.