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

Welcome to the Vantage Drilling International First Quarter 2021 Earnings 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. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International First Quarter 2021 Earnings Conference Call. On the call today is also Ihab Toma, our CEO. This morning, we released our earnings announcement for the quarter ended March 31, 2021. The earnings release is available on our website at vantagedrilling.com. Please also note that any comments we make today about our expectations of future events and projections are forward-looking statements pursuant to the Private Securities Litigation Reform Act. 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'll 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 expectation. We have prerecorded our prepared remarks and are participating on the call remotely to manage the question-and-answer session segments of the call. In the event there are issues with sound quality or the 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. With 2020 behind us, the first quarter of 2021 appears to mark the early stages of a recovery for the industry with improving tendering and contracting activities. For us, we have increased our backlog by over 1,000 rig days, or $127 million, in the first quarter and received some important letters of award that should soon translate into backlog. I am thankful for the way our organization has continued to navigate the challenges we face in the best possible way, guided by Vantage's 3 corporate goals. These goals continue to help us stay on track while we navigate this pandemic and be in a position to fully participate in the eventual industry recovery. As is my position, I will frame our performance against those 3 goals. As a reminder, these goals are: One, maintaining our stellar safety and operational performance; two, putting all our rigs back to work; and three, reducing costs and preserving cash to successfully navigate this drawn-out downturn. With regard to goal #1, maintaining our stellar safety and operational performance, our focus throughout this exceptional crisis in 2020 and the first quarter of 2021 has been and continues to be that our people remain healthy and safe while maintaining business continuity with the least possible interruptions. Starting with safety, I'm deeply saddened to have to report that during the first quarter we had a fatality on one of our rigs. The event occurred during a rig reactivation where one of our third-party crew members lost his life conducting a nonroutine activity. The details and the learnings of the event are being shared with the industry as we try to ensure this type of event does never occur in our industry or the company again. Moving to health, our COVID-19 testing and quarantine processes continue to be effective during the quarter across the fleet with no cases reported offshore. The situation in India is of great concern for us, not only because of the importance of our operation in India but also because we have significant number of Indian crew members working on all of our rigs everywhere. Our environmental performance continues to show solid results with no spills, either onboard or overboard recorded in the first quarter. As of today, we have achieved 583 days since our last spill. Also, we continue to track our greenhouse gas, GHG, emissions with a view towards setting a company baseline to facilitate the development of future strategies to reduce our environmental footprint. And as announced previously, the Titanium Explorer is now on its way to a Basel convention approved and environmentally friendly recycling facility to be recycled in an environmentally sound fashion. Operationally, during the first quarter, we achieved fleet-wide revenue efficiency of 95.5%. The Platinum Explorer achieved 97.5% revenue efficiency and the jack-up fleet achieved 93.8% revenue efficiency due to some unplanned maintenance on the Emerald Driller and the Soehanah. I will now move to goal #2 and provide an update on our contracting success during the quarter and the general update on the status of our fleet. We have increased our backlog by over $127 million during the quarter, namely the Platinum Explorer 2-year work with ONGC adding $109 million, plus $13 million on the Aquamarine Driller for work in Southeast Asia and about $6 million for the Soehanah with Premier Oil in Indonesia. We have also been successful in securing conditional letters of award that we are currently working to convert to contracts. I'm pleased to announce that we received conditional letters of award for multiyear contracts in the Middle East for the Sapphire Driller and the Aquamarine Driller to start in the first quarter of 2022 and would add approximately $157 million to our backlog once converted to contracts. Finally, we have signed an additional short-term contract during the second quarter with APO in Tunisia for the Topaz Driller that should commence upon the completion of Eni Montenegro work. With regard to other updates on the status of our fleet, I will begin with the Sapphire Driller. The rig recently mobilized from Gabon to Cameroon and is undergoing preparation for the contract with Trident Energy that is due to commence soon in Equatorial Guinea. As I just mentioned, the rig has received a multiyear conditional letter of award to commence operations in the Middle East in the first quarter of 2022. The Aquamarine Driller is currently undergoing contract preparation in Malaysia before starting an 8-month job in Southeast Asia that will keep it busy till early next year. Also, as I mentioned earlier, the rig has received the conditional letter of award for a multiyear contract in the Middle East along with the Sapphire Driller. The Soehanah is currently being prepared for the recently awarded contract with Premier Oil due to commence during the second quarter of this year. We're also in advanced discussion with operators in the region regarding follow-on work in direct continuation. The Topaz Driller has commenced its contract for Eni in Montenegro on April 2. Worthy of a mention here is the day rate of this contract varies based on Brent oil price, and it's currently touching a rate higher than the originally negotiated base day rate. Following the work in Montenegro, the rig will be heading to Tunisia for the recently awarded contract by APO that was signed in Q2 of this year. Moving over to the deported fleet, the Platinum Explorer continues to work for ONGC in India, and the end of its current contract is now expected sometime in the third quarter of this year due to the well in progress contract provision. The rig will be starting its new 2-year contract with the ONGC shortly after the end of the current contract at a meaningfully higher operating day rate reflecting the relative improvement in the deepwater market. This contract had $109 million of backlog, as previously mentioned, and should keep the rig busy into the third quarter of 2023. The Tungsten Explorer is currently warm stacked in Cyprus after having worked in Egypt and Lebanon in 2020 and having its follow-on contract in the Mediterranean postponed due to the COVID-19 pandemic. This 120-day term contract plus 1 well option is now due to start during the fourth quarter of this year, and I hope to be able to report additional work for the rig soon as we currently see increased interest for the rig in the region due to its reputation and its managed pressure drilling capabilities. The last rig to report on is the Titanium Explorer. The previously announced rig sale closed on March 10, 2021, and the rig has been delivered to buyer and has now departed South Africa. Regarding our operations and management business segment, as previously announced, we have reached an agreement with Seadrill Partners for the marketing and operations management services of 4 floaters. The agreement were confirmed by the U.S. Bankruptcy Court and were effective as of March 18. We have commenced the transition from the current manager of the stacked rigs and have begun migrating the West Polaris to Vantage's system and processes and are actively marketing it for operations in Asia. Shifting gears to the broader industry view. The first quarter of 2021 has perhaps been the busiest commercial quarter we had since the start of the 2015 downturn. We've been trending at an average of over $60 a barrel and offshore drillers continuing to remove rig supply from the market. Operators seem to have regained confidence and the required motivation to go out to market and secure long-term contracts for attractive units. National oil companies appear to be leading the pack in shallow water as evidenced by recent long-term rig tenders or awards for jack-ups by Saudi Aramco, PTTEP and ONGC. With capacity being absorbed and rig utilization increasing, we trust that operating day rates could continue to meaningfully increase in the short- to mid-term. Underpinning this potential improvement is an oil price environment that, according to Goldman Sachs, could hit $80 on largest-ever demand jump. Of course, time will tell. Due to the high demand for modern jack-ups, I believe that we are at the cusp of the inflection point and therefore, drilling contractors with modern rigs seem to have regained leverage with respect to contractual terms and day rates. With regards to the deepwater segment, some industry analysts expect investments in the space to grow 11% annually in comparison to 2020 and 9% thereafter through 2023. As mentioned on our previous calls, a significant deepwater recovery should require further industry consolidation and further asset retirements, which we hope will accelerate through 2021 with the offshore drillers now emerging from restructuring and consolidation finally taking place. Lastly, I will discuss corporate goal #3 of reducing costs 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 first quarter with $152.2 million in cash compared to $154.5 million in cash at the end of the fourth quarter of 2020. The decrease in cash is mainly due to the Topaz Driller startup for Eni Montenegro and other rigs reactivation for the contracts that start in Q2 2021. However, please note that the Topaz Driller contract provides for us to receive a mobilization fee to offset the startup costs that was invoiced after contracts start in Q2. On the cost reduction measures, when accounting for both G&A and other centralized operating costs, the company has reduced costs by approximately $3.1 million in Q1 2021 versus the comparable quarter in 2019 and $2.6 million versus the comparable quarter in 2020 on a normalized cash basis. With that, I would like to turn the call over to Douglas to take us through the numbers.

Thank you, Ihab. As Ihab mentioned, we had a strong quarter securing an additional $127 million in backlog. In addition, in the second quarter, we've secured 1 additional contract in Tunisia for the Topaz Driller and 2 conditional letters of award for the Sapphire Driller and Aquamarine Driller for multiyear terms in the Middle East commencing in the first quarter of 2022. The company ended the first quarter with approximately $152.2 million of cash, including $11.9 million in restricted cash, compared to $154.5 million, which included $12.5 million restricted cash at the end of the fourth quarter 2020. The slight decrease in cash is primarily due to rigs startup and reactivation operations, partially offset by the receipt of funds from the sale of the Titanium Explorer, which closed on March 10, 2021. Working capital for the first quarter ended at approximately $178.7 million compared to $203.4 million in the previous quarter due to cash used and support of ongoing operations and an increase in accrued interest related to our first lien debt. For the first quarter of 2021, we achieved revenues of approximately $20.2 million compared to $51.5 million for the first quarter of 2020. This decrease was mostly due to lower utilization across the fleet as there were 3 rigs operating in the current quarter compared to 7 operating in the comparable quarter of 2020, at which time the COVID-19 pandemic had not yet impacted our operations. Total revenues for the current quarter compared favorably to the $18.4 million reported in the fourth quarter of 2020 driven mostly by higher efficiency on the Platinum Explorer and partially offset by lower revenues on the Soehanah, mainly due to less operating days. For the quarter, the Platinum Explorer achieved 97.5% efficiency while our jack-up fleet achieved 93.8% efficiency due to some unplanned maintenance on both the Emerald Driller and the Soehanah. Operating costs for the first quarter of 2021 totaled $25.4 million and were favorable to the $48.6 million in the comparable quarter of 2020, primarily due to lower costs associated with the decrease in fleet utilization, partially offset by increasing logistic costs associated with COVID-19 management. These include, but are not limited to, higher labor costs resulting from overtime pay, the duplication of crews to manage quarantine and other personal logistical items. Operating costs for the current quarter also include a gain of $2.8 million related to the sale of the Titanium Explorer. General and administrative expenses for the first quarter of 2021 totaled approximately $5.5 million as compared to $7.2 million for the comparable quarter in 2020. The decrease from the comparable quarter is primarily due to lower labor costs and lower professional fees as a result of cost reduction measures initiated in 2020. Professional fees totaled $1.5 million in the current quarter, including approximately $500,000 nonrecurring professional fees compared to $2 million in the comparable quarter, which included approximately $600,000 nonrecurring professional fees. The current quarter includes approximately $200,000 in noncash management incentive plan costs as compared to approximately $500,000 in the comparable quarter. Depreciation expense for the first quarter of 2021 was approximately $14.1 million compared to $18.0 million in the first quarter of 2020. The decrease in depreciation is primarily due to the Titanium score been classified as held for sale at the end of 2020. Interest expense for the first quarter of 2021 is approximately $8.5 million, in line with the interest expense in the first quarter of 2020. Interest income totaled $100,000 for the first quarter of 2021 compared to $701,000 in the comparable quarter of 2020. The decrease is primarily due to lower interest rates and lower cash available for investment. Net result was a loss of $36 million for the quarter, or $2.74 per share. As of the end of the quarter, we had approximately $211.4 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 segment of the call.

[Operator Instructions] And we'll take our first question from Fredrik Stene with Clarksons Platou Securities.

Congratulations on another quarter. I have 2 questions for you today. The first one, and this was very good news, the Middle East LOIs here. Could you just remind me what the contract or the amount was for that one? I think you said it in the prepared remarks $157 million?

Yes. For both rigs, Fredrik, it would be $157 million. Yes, these are 2-, 3-year contracts.

Yes. That was my second part of the question after confirming the amount here because you seem quite upbeat with the -- around the high spec jack-up market. So I would expect those contracts to be, as you said, between 2 and 3 years to make the day rate kind of worth locking up the jack-ups up to that amount of time. Is that the way you've thought about it or it was -- is there any kind of other motivation for this? Or -- kind of another part of that question, is there any dynamic here that could govern or take that day rates up or down like a Brent link dynamic that you have in some of the other rigs?

No, I said it is a fixed -- this one is a fixed day rate. I mean the advantage, of course, we have is our ability to operate those rigs in the Middle East at a very healthy OpEx, generating very good cash flow, and having the rigs side-by-side brings economies of scale and reducing the cost of the supporting base and so on. So we are happy with the number. It was a competitive tender, and we did have to put the number that wins, and we are happy with that win very much so.

Okay. That's very good to hear. I have a second question as well which relates to India. You said that, what's going on there at the current time I could go -- and you have a great number of Indian crew members on several of your rigs. So I was just wondering if you're taking any precautions or what you're doing to make sure that you can continue to operate in a safe manner and also make sure that you have as little downtime as possible? Have you changed anything on that front? I know that there is -- it's very significant wave of infections going on there at this time.

Yes. Look, in terms of keeping our crew safe and our rigs safe, we are very comfortable with the way we are doing our quarantine processes, testing, quarantine processes. We have successfully stopped the virus from going offshore now since a few months. Been doing that very successfully. The biggest concern, of course, would be with logistics of crew change or flights to India. At the moment, most flights are being suspended by most countries. So really, what's going on now is that the crews on the rigs, whether it's the rig in India or the rigs elsewhere, are now planning and they are being realistic, but they are likely to stay on the rig for a longer -- much longer time than time because of the crew change issues that we're going to face. So people in India are -- probably know and they are planning to be on the rig for longer than originally planned and Indian crew members elsewhere are not going to be going home anytime soon. Basically, that's what we can translate to.

[Operator Instructions] And at this time, we have no further questions. I'd like to turn the conference back to Douglas Stewart for any additional or closing remarks.

Thanks very much. We appreciate your time today, and we look forward to reporting next quarter's -- this quarter's earnings results next time. Speak soon. Thanks very much.

Thanks, everyone.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.