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

Welcome to the Vantage Drilling International 2020 Fourth Quarter and Full Year Earnings 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.

Good morning, everyone, and welcome to the Vantage Drilling International Fourth Quarter 2020 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, 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 update of any statement or risk factors 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 matters to protect our people during these uncertain times, certain 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 good morning, everyone. The fourth quarter concluded the end of one of the most difficult years for Vantage, our industry and the entire world. I'm very thankful for the way our organization has navigated the challenges we faced in the best possible way, guided by Vantage's 3 corporate goals. These goals were more relevant than ever in 2020 and kept us focused on the right things during these difficult times. As usual, I will frame our challenges and achievements against those 3 goals. As a reminder, those are: one, maintaining our stellar safety and operational performance; two, putting all our rigs back to work; and three, reducing cost and preserving cash to successfully navigate this drawn-out downturn. With regards to goal #1, maintaining our stellar safety and operational performance, our focus throughout this exceptional crisis in 2020 has been and continues to be that our people remain healthy and safe while maintaining business continuity with the least possible interruptions. Regarding safety incidents, I'm pleased to report that as of today, we have done 572 days without any lost time incident and 297 days without any recordable incident. In 2020, it is satisfying to see our lost time incident rate of 0 and our total recordable incident rate of 0.1 being the lowest in our company's history and significantly lower than the offshore industry averages for 2020. On the health front, during the fourth quarter, our COVID-19 testing and quarantine processes and procedures continued to be effective across the fleet with no offshore cases reported. Regarding environment, social and governance, ESG, I'm pleased to report that as of today, we have achieved 534 days since our last overboard still and that the titanium explorer will soon be on its way to a Basel convention approved and environmentally friendly recycling facility to be recycled in an environmentally sound fashion. We take our commitment to ensuring district is professionally recycled very seriously and will employ a dedicated team to closely follow the recycling process. At Vantage, the whole company is committed to continue delivering such stellar HSC results and to our vision of delivering a perfect day every day. Operationally, 2020 was another successful year for Vantage, where revenue efficiency totaled 98.6% for the jack-up fleet and 85.9% for the deepwater fleet as the deepwater fleet results were negatively affected due to the force majeure event in India related to COVID-19. Next, I will comment on our fleet rig-by-rig as I review goal #2, which is to put all of our rigs back to work. The Sapphire Driller is currently warm stacked in Port Gentil, Gabon and is undergoing rig maintenance and repairs in preparation for a 60-day third contract plus several options with Trident Energy that is due to commence in Q2 in Equatorial Guinea. We are seeing increased opportunities for the rigs in West Africa, and also outside of the region, and we are actively marking the rig for follow-on work after the Trident Energy campaign. The Aquamarine Driller is key site of Malaysia and currently undergoing maintenance and contract preparation work. We have received a letter of work for 8 months of work commencing in the second quarter of this year, which should keep the Aquamarine Driller occupied throughout the remainder of 2021. I would also like to highlight that the rig is actively competing for opportunities in and outside of the region. The Soehanah completed a successful drilling campaign with Petronas in Indonesia at the end of February. The rig is currently warm stacked in Indonesia in anticipation for a contract recently awarded to it that is due to commence in June of this year. We are also in discussions with various operators in the region regarding follow-on work and tariff continuation for the rig. The Topaz Driller has mobilized Montenegro to commence 180-day frame contracts, which also contains a 45-day option with any Montenegro. The rig concluded a visit to the shipyard in Malta to complete rig maintenance and contract preparation work. As a reminder, the rig completed mobilization from West Africa to Malta at the end of the fourth quarter of 2020 and the mobilization and contract preparation costs will be recovered through a lump-sum mobilization fee that will be invoiced upon the contract commencement in Montenegro. The Emerald Driller is continuing to work for Total in Qatar and this under firm contract till May 2022 with a 1-year unpriced option following that. Moving over to the deepwater fleet. The Platinum Explorer continues to work for ONGC in India, and is currently completing an ultra-deepwater well. As previously announced, we are pleased that ONGC has awarded the rig a new 2-year contract at a meaningfully higher operating day rate, reflecting the strong performance of the rig and the relative improvement in the benign drillship market. With this new contract, which adds $109 million of -- to our backlog, it is expected that the rig will be under contract until the first quarter of 2023. The Tungsten Explorer is currently warm stacked in Cyprus after working in Egypt and Lebanon in 2020. As you may recall, the rig was supposed to commence its follow-on contract in the Mediterranean in 2020, but due to the COVID-19 pandemic, we have negotiated 2 postponement agreements with the customer and now they plan on commencing this 120-day contract in the fourth quarter of 2021. We are also currently marketing the rig for opportunities in the region, where we are seeing increased interest in the rig, supported by its managed pressure drilling capabilities. The last rig to be discussed is the Titanium Explorer, which was warm stacked in South Africa. On December 31, 2020, we entered into agreement to sell the Titanium Explorer as is, where is, for $13.8 million, and we subsequently classified the rig as held-for-sale on our balance sheet at year-end. The sale closed last week, and the rig has been handed over to the new owner. As mentioned in my earlier remarks, the rig will be departing South Africa to a Basel-approved environmental friendly, recycling facility in the near future to be recycled in an environmentally sound fashion. And we will employ a dedicated team to closely follow the recycling process. The decision of selling this asset for recycling was taken to preserve cash and was driven by the market setbacks seen in 2020. Now for an update on our operations and management business segment. We are pleased to announce that we have reached an agreement with Seadrill Partners for the marketing and operations management services of certain of their deepwater floaters. The agreement is scheduled to be reviewed by, and if approved, confirmed by the U.S. bankruptcy court. This agreement is a testament to the confidence that owners and customers case advantage. We are excited to have the opportunity to collaborate with Seadrill Partners and intend to leverage our efficient management platform to bring first-class operational performance and efficiency to our clients' fleet. We take very seriously that just Seadrill Partners have placed advantage, and we look forward to putting very rigs to work in the most safe and efficient manner. Lastly, I will discuss corporate goal #3 of reducing cost and preserving cash. Douglas will walk you through the full financials in his prepared remarks, but I will provide some color around our cash position and cash preservation measures. We ended the fourth quarter with $154.5 million in cash compared to $179.2 million in cash at the end of the third quarter. The reduction is mostly related to our $16.2 million interest payment. This agreement with one of our clients over the treatment of some downtime due to force majeure and mobilization costs related to the Topaz Driller moved to the Mediterranean, which, as mentioned earlier, will be recovered through a lump sum mobilization fee invoiced at the start of the contract. During the fourth quarter, as previously discussed, we entered into an agreement to sell the Titanium Explorer. And as of last week, we received the full $13.8 million proceeds. Selling the Titanium Explorer will also save us roughly $8 million per year in annual stacking costs as well as not having to plan for significant cash outlays that would have been needed to reactivate this drillship. Finally, our cost reduction measures impacted in Q2 2020 continue to contribute towards our goal of preserving cash. When accounting for both G&A and other centralized operating costs, the company has paid approximately $11 million in 2020 when compared to 2019 on a normalized cash basis. We also believe that at least $8 million of those savings will continue as a reduction in our cost structure on a go-forward basis, despite having all of our rigs now going back to work in 2021. Through these efforts, we maintained our industry-leading cost structure, avoided unnecessary cash leakage and provided the company with a competitive advantage in an industry that has now entered its seventh year of a downturn. As for 2021 on the market, we are all hopeful that the rollout of vaccination and stimulus programs around the globe in 2021 will help fuel recovery and energy demand and our ultra-drilling industry will see the start of a recovery as a result. In general, with Brent prices exceeding $50 for every day of 2021 and $60 every day since February 8, 2021, we are seeing increased interest for our services, especially for jack-ups as evidenced by term work tenders being launched and delayed projects from 2020 being relaxed. As an aside, this increase in Brent price is also providing us with upside of some of our contracts renegotiated in 2020 contain day rate adjustment mechanisms that are indexed to Brent pricing. In regards to the deepwater segment, although some analysts are predicting the start of an oil supercycle, we would likely not see a significant increase in deepwater drilling activity before 2022 or 2023 due to the long lead time nature of such deepwater projects. Also, as mentioned on our previous calls, a meaningful deepwater recovery will require industry consolidation and further asset retirement, which we hope will accelerate in 2021 after the debt restructuring measures taken by multiple offshore dealers. However, with respect of the pace of such recovery, we will continue to focus on our corporate goals and operating in the most ethical manner, committed to doing the right things, which will put the company in the strongest position to endure this prolonged downturn and capitalized on eventual recovery. Once again, in 2020, we were able to demonstrate that Vantage understands how to operate and succeed in the lenience of times. I'm very proud of the company's performance in 2020 during this unprecedented worldwide meltdown. With that, I would like to turn the call over to Douglas to take us through the numbers.

Thank you, Ihab. As Ihab mentioned, the health and safety of our personnel continue to be our primary focus. In addition, our attention is also on managing our cost structure through these unprecedented times putting our rigs back to work and participating in the recovery in the offshore drilling space. The company ended the fourth quarter with approximately $154.5 million of cash, including $12.5 million restricted cash compared to $179.2 million, including $13.5 million restricted cash at the end of the third quarter. The decrease in cash is primarily due to the $16.2 million interest payment in November. Rig maintenance and mobilization costs. Working capital for the fourth quarter ended at approximately $203.4 million compared to $225.7 million in the previous quarter due to the reasons mentioned, which included raising an allowance for doubtful accounts on our trade receivables in the amount of $5 million and the accrual of an additional $1.8 million in fuel and helicopter expenses that would otherwise be a cost to the customer. These amounts represent our customers' decision not to pay us for days impacted by what we believe are force majeure and other events, for which we would be entitled to receive payment under our contract. Although we disagree with their decision and are evaluating our remedies, if any, under the contract, impairment of the receivable and recognition of the incremental costs are required in accordance with accounting rule requirements. For the fourth quarter of 2020, we achieved revenues of approximately $18.4 million compared to $49.3 million for the fourth quarter of 2019. This decrease was mostly due to lower utilization. There were 3 rigs operating in the current quarter compared to 7 operating in the comparable quarter as we had 3 contracts accumulated or deferred in 2020 due to volatility in oil prices and challenges associated with managing COVID-19. Total revenues for the current quarter compared unfavorably to the $20.2 million reported in the third quarter of 2020, driven mostly by lower revenue efficiency on the Platinum Explorer the Soehanah with the initial mobilization revenue having been fully recognized in September. For the active jack-ups in the fourth quarter, the Emerald Driller achieved revenue efficiency of 112.9%, including bonuses, and the Soehanah Driller achieved 96.6% in the quarter. While the company's fleet as a whole had strong operational performance, the Platinum Driller experienced some equipment-related downtime in the quarter, which negatively impacted its revenue efficiency. Operating costs for the fourth quarter of 2020 totaled $35.2 million and were favorable to the $42.4 million in the comparable quarter of 2019, primarily due to lower costs associated with the decrease in fleet utilization, partially offset by the aforementioned $6.8 million in cost related to our customers' decision not to pay us for days impacted by what we believe are force majeure and other events and due to an increase in labor and logistical costs associated with COVID-19 management. These includes, but are not limited to higher labor costs, resulting from overtime pay, the duplication accrues to manage quarantine and other personnel logistic loss. General and administrative expenses for the fourth quarter of 2020 totaled approximately $5.3 million as compared to $42.5 million for the comparable quarter in 2019, which included $30.3 million for judgment preservation insurance related to the appeal of the arbitration award previously pursued by Petrobras. Aside from the judge preservation insurance, the decrease from the comparable quarter is primarily due to lower professional fees and cost-cutting initiatives taken by the company to align with the decreased operating activity. Professional fees totaled $1.2 million in the current quarter, including $70,000 in nonrecurring legal fees compared to $3.6 million in the comparable quarter of 2019, which included $1.7 million in nonrecurring legal fees. As we had mentioned, the sale of the Titanium Explorer was completed on March 10, 2021, and the company ad received the full $13.8 million in the first quarter. Interest expense for the fourth quarter was approximately $8.5 million compared to $9.9 million for the fourth quarter of 2019. The lower interest expense reflects the elimination of the paid-in-kind interest upon the conversion of our formerly outstanding third lien convertible notes to equity during the fourth quarter of 2019. Interest income totaled $18,000 for the fourth quarter 2020 compared to $2.8 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 $44.9 million for the quarter or $3.42 per share. As of the end of the quarter, we had approximately $94.5 million of contract on backlog. This, of course, does not take into account the substantial backlog we have added since then, including the recently announced 2-year contract with ONGC. And the additional jack-up contracts mentioned by Ihab earlier today. Finally, I wanted to speak to some news that many of you might have already seen. I'm very pleased to note that on February 22, 2021, the U.S. Supreme Court denied Petrobras' petition for certiorari. Petrobras was seeking to reverse the fifth surface decision affirming the district court's decision that confirmed arbitration award in 2018. The denial by the U.S. Supreme Court ends the drilling contract arbitration with Petrobras, and all related appeals. Please note, we will file our 10-K later today. And with that, I will now turn the call back over to the operator to begin Q&A.

[Operator Instructions] Our first question from Fritz Piper with Private Investment Firm.

I just want to commend the management team for keeping all the rigs going. I've been a long-term stockholder, and our firm has a significant position. My question is mostly related to support of the stock price. What is the company proactively doing to support the stock price at this time?

Thank you for your question. The company continues to operate in the normal course of business, which is to bring value to our stakeholders. And I just want to say, nothing has changed in that regard. But thank you for your involvement and following the company.

We'll take our next question from Patrick Fitzgerald with Baird.

I wanted to ask about the Seadrill Partners news that you talked about. Does anything change, with respect to costs, non-reimbursable costs, I should say, in entering this deal?

Patrick, I'm not sure I understand your question. Can you -- I understand, of course, against Seadrill Partner deal, but I'm not sure what the question is again, can you repeat that, please?

Yes. What changes in terms of your costs? Is anything in taking on the Seadrill Partners deal?

Of course, the deal is -- will depend on how many at the end will be approved for us to summer breaks to mention and geographies and so on. With the way things are -- seem to be going right now, the increase to our cost would be minimum. Other than the increased cost that will be recharged as reimbursable to the reorders. I thought that's what you meant and that answers your question, Patrick?

Yes, yes, that does. And there were some other news on diamonds this week managing potentially managing 3 rigs. Would you guys manage the other 5? Is that how it would work?

If you -- again, I don't want to comment on behalf of our clients, the owners. But if you look at some of the filings, you will see that 1 rig is also being likely to be managed by somebody else, so that leaves 4 for us.

Okay. And I know there's fixed and variable payments. Is there any way to think about the potential range of revenue that you could potentially generate; one, if they're all stacked? And two, if they're all active? I mean, do you think...

Patrick, I would really not want to put numbers out there. But I think all elements of the agreement have made us to that core filing at different stages. And I think I'll leave it to you to make your own assumptions, and what would that transit to in terms of revenue and margins.

Got you. Okay. If I could ask, what is your -- you gave $109 million of additional backlog versus the $90.4 million that you had at the end of the year, what else would go into backlog based on what you've signed to date?

This will be the cost incremental jack-up contracts mentioned, some of them are contracts so that they will be reported as backlog at the end of the quarter. If it is a letter of a word, like I mentioned, there is one of it, for example, the rest of the world. That is not going to be a backlog compute as backlog until it becomes a contract. But I mean, the bulk, of course, the biggest part is that 2-year contract for the Titanium Explorer in India with ONGC. And that is $109 million.

Okay. Great. Any -- with the backlog that you've signed, any sense of where you stand from kind of a free cash flow perspective this year, the $13.8 million sale of the Titanium, obviously, there's a factor there. But outside of that, would you expect to be cash flow breakeven this year?

Patrick, we're -- thanks for your question. I appreciate that. We're not going to speak to projected cash flow, or where we are with respect to cash.

Okay. And then last one, kind of a big picture, just in terms of M&A, what -- given your capital structure, what role would you expect to play in M&A process as it feels like there will be some deals done this year?

Again, it's not something I can speculate on the call like this one, but it's just fair to say that we will be very interested to be watching and participating whenever stockholder. Otherwise, as I said in my prepared remarks, we are going to keep our head down, execute against our corporate goals and keep the results coming and then see what M&A opportunities that are available to us particularly there.

[Operator Instructions] We'll go to our next question from Fredrik Stene with Clarksons Platou Securities.

It's Fredrik here. I think Patrick probably touched upon most of my questions relating to the management deal here. But I was wondering in terms of, call it, incentives and how that's structured. Obviously, you have your jack-ups, but you also have some floaters and bigger partners, they have floaters. So if you end up managing these 4 rigs that are named in the dockets here, how would you go about that in terms of, call it, prioritizing your rigs versus Seadrill Partners rig? Is there some dynamic governing how that will play out?

Yes. I mean there are definitely provisions in the agreement that govern exactly that, but I mean, I just in general, one of the reasons we were chosen as a good choice for managing those assets with the lack of overlap between our assets and the Seadrill Partners as that will be managing. The specs of the rigs are different. The geographies of the rigs are different. We only have one floater in Asia, and that floater has just been contracted until late 2023, Q3 2023. And the assets that we are going to be looking at are mostly there. And then we have -- that is only another floater from our own rigs and that floater again geographically speaking and from a specs point of view is different and very little overlap or conflict we expect to see between the assets we will be managing for Seadrill Partners and that one asset that is most completely sold out. But there are provisions in that in itself on how such conflicts will be managing the other.

Okay. That's perfect. I have another question here on the sale of the Titanium, I think I heard $13.8 million. Was that correct?

That's correct. I did read it.

Yes. And to me, that means or from what I've read and come across in other documents here, retaining sales of our stacked assets through 2020, I think that it seems like a very good price. I think the range that I've seen on floaters is between I think $2 million to $9 million, mostly. So is there anything in this deal here? Is it sold as is where is, or is there some sort of provision that you have to take care of in addition to this follow-up on the green recycling thing that you mentioned that should explain that price difference?

No, the ground explanation for the price differences that were really good. The rig has really been caused as is where it is and we are even also recovering some of the inventory and sales and so on that will help us with our economy of scale on the others.

We'll go to our next question from [ John Batista ] with [indiscernible] Asset Management.

I just wanted to ask you if you could give us a little bit more color on your reduction in EBITDA from Q3 to Q4. Was that linked to reactivation costs of getting your rigs back to work during H1, or just could you give us a little bit more detail on that, please?

Absolutely. So I think what you're focused on is the increase in OpEx from Q3 to Q4. And as I indicated in the call, in the prepared remarks, $6.8 million of that was related to a disagreement on how our customer has treated certain days of not -- essentially downtime days. Our view, of course, is that those are force majeure related days. They have taken a different view. But that -- the requirements under the accounting rules require us to take a $5 million loss provision so we keep revenue at the rates that were recognized, levels that were recognized, but we take a $5 million loss provision and that goes to OpEx. In addition, there was a $1.8 million related -- $1.8 million related fuel and helicopter expense that should have been, again, under the contract, that would be a cost customer. But the way it was treated was it was pushed to us. And so that's the $6.8 million that's added to the -- to OpEx, and it shows the major part of the difference between Q3 and Q4 with respect to EBITDA.

It appears there are no further questions at this time. Mr. Stewart, I'll turn the call back to you for any additional or closing remarks.

Great. Thank you very much. Thank you for attending today's conference call, and we look forward to speaking again during our next conference -- earnings conference call for Q1. Thanks again.

This concludes today's call. Thank you for your participation. You may now disconnect.