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

Welcome to the Vantage Drilling International Second 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, sir.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International Second 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 June 30, 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. We have based forward-looking statements on management's current expectations and assumptions and not on historical facts. Examples of these statements include, but are not limited to, our expectations regarding future results, including expectations regarding our liquidity position; future costs and expenses related to out-of-service and reactivation work; the reactivation of the Tungsten Explorer in December 2021 as well as additional contract preparation costs and expenses; entering into anticipated new drilling contracts and receiving payments under such contracts and other existing drilling contracts. 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. 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 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 good morning and good afternoon, everyone. The second quarter of 2021 continued to show an increased recovery trend in our industry, with positive indicators on both the tendering and contracting fronts. Vantage added an approximately 500 rig days or $33 million of backlog during the quarter. And accounting for the additional backlog of $169 million from contracts that have been signed in July after the contract closed, our backlog stood at approximately $380 million at the end of July. With the pandemic still having a significant impact in some of the regions where we operate, especially in Asia, I'm proud of the organization's continued focus on Vantage's 3 corporate goals. As such, I'm going to walk you through our performance during the quarter against these 3 goals. As a reminder, these goals are: one, maintaining stellar safety and operational performance; two, putting all our rigs back to work; and three, reducing costs and preserving cash to navigate this drawn-out downturn. Starting with goal #1, maintaining stellar safety and operational performance. Our focus remains on safeguarding the health and safety of our people and protecting the environment where we operate while we continue to safely and seamlessly put more rigs back to work. Starting with the safety element, I'm pleased to report that we have had no recordable incidents during the second quarter. This is great performance by our operations team given that during the quarter we reactivated 3 rigs under extremely challenging pandemic-related difficulties and travel restriction in West Africa and in Asia. Moving to health, our COVID-19 testing and quarantine processes continued to be effective during the quarter across the fleet. While we have had no cases reported on any of our rigs offshore, our quarantine process have continued to protect our offshore workers, with cases of COVID-19 detected and managed within the onshore quarantine environment before people travel to offshore. On our environmental efforts, we continue to track our greenhouse gas emissions with a view towards setting a company baseline to facilitate the development of future strategies to reduce our environmental footprint, along with further developing our sustainability position with regards to ESG management and reporting. Operationally, during the second quarter, we achieved fleet-wide revenue efficiency of 98.7%, where the Platinum Explorer achieved 97.5% revenue efficiency and the jack-up fleet achieved an impressive 99.2% revenue efficiency. This performance is remarkable as this level of efficiency was achieved while we smoothly placed the rigs back to work during the quarter, with no downtime following the restart of operations on these rigs. I will now move to goal #2 and provide an update on our contracting achievements and the general update on the status of our fleet. As mentioned earlier, we have increased our backlog by nearly $33 million during the quarter, mainly through the Emerald Driller contract extension of Total, which added $25 million of backlog. And the rest comes from the APO contract for the Topaz Driller in Tunisia and the exercise of an option by Trident for the Sapphire Driller in Equatorial Guinea. I'm pleased to announce that the 2 conditional letters of award mentioned on the previous call have been converted into contracts in July and that on aggregate they add approximately $156 million to our backlog. These contracts for work in Qatar with North Oil Company are a significant company accomplishment, and I would like to thank the entire Vantage team for their efforts and our client North Oil Company for entrusting us with these campaigns. Finally, I'm pleased to announce that also in July 2021, we concluded contract extensions for the Soehanah to continue to operate in Indonesia for a firm period of 200 days plus multiple options, in direct continuation of their current contract. These extensions add approximately $13 million to our backlog and are split into 2 campaigns with a small gap in between, and we are in active discussion with operators to secure work during this gap. Overall, since Q1 2021, we have increased our backlog by approximately 80% to $380 million at the end of July, which is a backlog level last seen in late 2018. I will now give you a more detailed status of our fleet, and I will begin with the Sapphire Driller. The rig has successfully commenced its contract with Trident Energy on June 21 Equatorial Guinea. And as mentioned, we have recently signed the 3-year contract for operations in Qatar, starting in the first quarter of 2022. The rig would be mobilized to the Middle East later in Q4 this year and will go through a period of contract preparation before starting its new contract in Qatar in February 2022. The Aquamarine Driller has successfully started its 240-day contract with CPOC in Malaysia on June 30, keeping the rig busy til Q1 next year. Subsequently, the rig will join the Sapphire Driller and the Emerald Driller in Qatar for a 3-year contract. The Emerald Driller has been extended by 1 year til May 2023 with an unpriced option added til May 2024. This will make it the first time that we operate 3 sister rigs in the same location and in close proximity to our Dubai headquarters, allowing us to capture further efficiencies there. Moving to the Soehanah. The previously announced contract for the rig with Premier Oil in Indonesia has successfully started on July 2, and we were able to secure the aforementioned 200 days firm work with KUFPEC and Medco in direct continuation of the current campaign. The interest for the rig remains strong, and we are in advanced discussion with operators in the region to secure work to close the gap that currently exists after the KUFPEC campaign and before we commence operations for Medco. To conclude on the shallow-water fleet, the Topaz Driller is continuing to operate for Eni Montenegro. Following the work in Montenegro, the rig will depart for Tunisia for the recently awarded contract with APO. And we hope the rig will remain in the region for some time as we have received initial interest from other operators for the rig for work there. Moving over to the deepwater fleet, as mentioned on the last call, the Platinum Explorer is finishing up their current campaign for ONGC in India which is expected to end this month. And then following its scheduled out-of-service time, the rig will commence its new 2-year contract, also with ONGC. On the last trip in our fleet, the Tungsten Explorer remains warm, stuck in Cyprus and is expected to recommence operations during the latter part of the fourth quarter 2021. It is important to note that we are currently in advanced discussions for new opportunities in the Mediterranean that I hope to conclude soon and being in a position to announce during the next earnings call. Regarding our operations and management business segment and aqua drill floaters, I'm pleased to report that we are currently engaged in advanced discussions with operators in Asia for work starting early 2022 as well as being involved in other tenders. To conclude this section on rigs contracting and to comment on the industry at large, we are currently seeing increased confidence by the operators, reflected in an upward trend in the tendering and contracting activity, both in the shallow and deepwater segment. This increase in contracting activity, coupled with the industry's consolidation and asset scrapping, should further narrow the supply and demand gap and allow dayrates to reach the levels required for healthy shareholders' returns. 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 you with some color on our cash position and cash preservation measures. We ended the second quarter with $124.3 million in cash compared to $152.2 million in cash at the end of the first quarter of 2021. The decrease in cash is primarily due to the debt interest payment in May and the reactivation and contract preparation costs associated with the Sapphire Driller, the Aquamarine Driller and the Soehanah, all of which have commenced contracts in June and July. I would like to highlight that both the Sapphire Driller and the Aquamarine Driller contracts include mobilization fees, which should be received during the third quarter. With 6 of our 7 rigs now working and with the Tungsten Explorer expected to go to work before the end of the year, we believe that this cash burn trend will be reversed soon. In conclusion, Vantage continues to focus on safety, operational excellence, contracting of the fleet and financial discipline. And as the market continues to improve, we see this focus starting to pay off with 100% utilization before the end of the year. With that, I would like to turn the call over to Douglas to take us through the numbers. Thank you.

Thank you, Ihab. Good morning, and welcome, everyone. As Ihab mentioned, the health and safety of our personnel is our primary concern as we continue to navigate pandemic-related challenges where we operate. From a commercial perspective, we had another good quarter, securing an additional $33 million in backlog and an additional $169 million of contracts executed so far during the third quarter. The company ended the second quarter with approximately $124.4 million of cash, including $13 million in restricted cash, compared to $152.2 million, which included $11.9 million in restricted cash at the end of the first quarter. The decrease in cash is primarily due to the payment of interest on our bonds, along with rig reactivation and contract preparation costs as we had 3 rigs reactivated during the quarter. We expect to continue to use cash over the second half of this year, accounting for, among other things, the payment of interest on our bonds, out-of-service work on the Platinum Explorer, the reactivation of the Tungsten Explorer as it commences work towards the end of the year and additional contract preparation costs and expenses for the 2 rigs going to Qatar incurred in 2021, while mobilization revenues and reimbursable cost recovery are received in 2022 upon the start of the 2 contracts. With actual drilling contracts in place for 2022 and contracts we expect to sign, we anticipate that we will be cash flow breakeven next year. Working capital for the second quarter ended at approximately $161.2 million compared to $178.7 million in the previous quarter, mainly due to the reasons just described. For the second quarter of 2021, we achieved revenues of approximately $35.6 million compared to $36.8 million for the second quarter 2020. The slight decrease was mostly due to the Tungsten Explorer nonoperating in the second quarter of 2021, which was mostly offset by higher utilization from our jack-up fleet. Total revenues for the current quarter compared favorably to the $20.2 million reported in the first quarter of 2021, driven mostly by a higher number of rigs working and higher efficiency overall. For the quarter, the Platinum Explorer achieved 97.5% efficiency, while our jack-up fleet achieved 99.2% efficiency. Operating costs for the second quarter of 2021 totaled $36.1 million and were favorable to the $38.1 million in the comparable quarter of 2020, primarily due to Tungsten Explorer nonoperating in the second quarter of 2021. General and administrative expenses for the second quarter of 2021 totaled approximately $5 million as compared to $4.7 million for the comparable quarter in 2020. The increase from the comparable quarter is primarily due to higher nonrecurring professional fees. Professional fees totaled $1 million in the current quarter, including $528,000 in nonrecurring professional fees, compared to $600,000 in the comparable quarter, which included $152,000 in nonrecurring professional fees. This quarter includes $30,000 in the comparable quarter. The comparable quarter includes approximately $208,000, respectively, for noncash management incentive plan expenses and $1,177,000 in the current quarter compared to $932,000 in the comparable quarter for Petrobras litigation awards. Interest expense for the second quarter of 2021 was approximately $8.5 million compared to $8.6 million for the second quarter of 2020. Interest income totaled $10,000 for the first quarter 2021 compared to $111,000 in the comparable quarter. The decrease is primarily due to lower interest rates on a lower cash balance. The net result was a loss of $29 million for the quarter or $2.21 per share. As of the end of the quarter, we had approximately $229.5 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 Q&A session.

[Operator Instructions] We can now take the first question from [ Jordy Ariasgin from Kairos Capital ].

I have a couple of questions. First one is if you have an update on the status of the drillship Titanium Explorer. And the second one, within your framework of cash preservation, would you have any thoughts on additional use of cash in the balance sheet to perhaps any extension or reduction of the debt. It's one of the main costs in a quarterly basis in the cash movement.

Jordy, just to make sure, you are asking about -- the first question was about the Titanium, which is the rig that we have sold for recycling?

Right. Okay.

Yes. So that rig has been sold for recycling. It has been delivered to buyer already a few months ago and it is in their hands now. Do you have any other points about this before I pass it to Douglas to answer your second question?

No, that was clear.

Okay.

Yes, thank you very much for your question. At this time, the Board will consider uses of cash in its normal course, but there's no -- nothing specific or affirmative at this time with respect to use of cash to repurchase or extend debt.

[Operator Instructions] We can now take the next question from Sunny Chhabra from Ironshield Capital.

Can you hear me?