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

Welcome to the Vantage Drilling International Third Quarter 2021 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.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International Third 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 September 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 an 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 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 and good afternoon, everyone. During the third quarter of 2021, we have continued to see a steady upward trend in oil price, coupled with increased demand for offshore drilling units and in turn, higher offshore rig utilization. During the quarter, Vantage added an additional 2,400 rig backlog dates, totaling $169 million. This was later augmented by an additional backlog of $41 million associated with a contract award for Aquadrill's West Capella received in October. At the end of October, our backlog added up to approximately $401 million. I'm very proud of the organization's continued focus on Vantage's 3 corporate goals, especially during a very busy and demanding third quarter, as various rigs were transitioning back into operations, while still operating under the challenging pandemic situation. As usual, I'm going to walk you through our performance during the quarter against our 3 corporate 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. Beginning with goal #1, maintaining stellar safety and operational performance. Our focus continues to be on safeguarding the health and safety of our people and protecting the environment where we operate while safely and seamlessly conducting operations and preparing for new contracts. Starting with safety. I'm proud to report that this was another quarter where we had no recordable incidents. This is a great achievement by our crews and operations team especially when during the quarter, we had 3 rigs restarting operations under the logistical challenges associated with the COVID-19 pandemic. Moving to health. We have again managed to keep COVID-19 off our rigs through our robust screening and quarantine processes. We had no reportable COVID-19 cases on any of our rigs offshore as our protocols showed to be effective, where all cases of COVID-19 were detected and managed before traveling offshore, keeping our teams offshore safe and protected. We have also made excellent progress towards having a largely, fully vaccinated workforce which is allowing us to reduce the number of travel quarantine days and associated costs. On the environmental side, we continue to record and monitor our environmental footprint in preparation to further develop our sustainability strategy. Now moving to operations. Our revenue efficiency for the fleet during the third quarter was 97.8%, where the Platinum Explorer achieved an impressive 99.8% and the jack-up fleet came in at 97.5%. This is solid performance considering the number of post reactivation new contracts starting during the quarter and the impact on logistics caused by the pandemic. Moving now to goal #2, putting all our rigs back to work. I will provide you with an update on our contracting activities and the general update on our fleet status. As mentioned earlier, during the quarter, our backlog increased by approximately $169 million, mainly through the Qatar contracts for the Sapphire Driller and Aquamarine Driller, which each added $78 million of backlog while the KUFPEC and Medco contracts for the Soehanah added an additional $13 million. Turning to our Operations and Management Services business. I am pleased to announce that in October 2021, we were awarded 160-day firm contract for Aquadrill's West Capella to operate in Indonesia. This Vantage Indonesia contract will be subcontracted to Aquadrill and will add approximately $41 million of backlog. This is an important milestone for us and for Aquadrill and proves the viability of Vantage, as a management platform, marketing and operating rigs on behalf of other owners. I will now go over our fleet status, starting with the shallow water rigs. The Sapphire Driller continued to work for Trident Energy in Equatorial Guinea throughout Q3, and it is estimated to conclude this work and start to be mobilized to the Middle East later this quarter for contract preparation and commencement of its 3-year NOC contract in Qatar. Moving to our Aquamarine Driller. The rig is expected to be operating for CPOC in Malaysia until the first quarter of next year. After CPOC, the Aquamarine Driller will be mobilized in the Middle East for contract preparation and commencement of its 3-year NOC contract in Qatar. The Emerald Driller continues to successfully work uninterrupted on its Qatar contract, which is firm until May of 2023 and with 1 year option after that. As previously mentioned, we are looking forward to the synergy gains of having the 3 sister rigs working side-by-side in Qatar in close proximity to our Dubai co-headquarters. Regarding the Soehanah, the rig is finalizing the premier oil work in Indonesia, and we'll be starting a new 90-day campaign with KUFPEC Indonesia in direct continuation. As previously announced, the rig is lined up to work for Medco Indonesia next year, and we now have a Letter of Intent for work after KUFPEC and before Medco Indonesia that will largely close a small gap that has existed on its program for 2022. The Topaz Driller continues to work for Eni Montenegro and will subsequently be mobilized to Tunisia to work for APO. The rig is strategically placed in the Mediterranean, and we believe that we will be able to capitalize on opportunities in the region in 2022. Moving over to the deepwater fleet. The Platinum Explorer finished its ONGC contract during the third quarter and has just completed its scheduled out-of-service maintenance and should soon be starting its new 2-year contract with ONGC. With regards to the Tungsten Explorer, the drillship is being reactivated to recommence operations in the Mediterranean in December. I hope to soon be in a position to share more details on the exact program for the rig, which is being finalized right now and should see the rig drilling multiple wells in direct continuation. Regarding our Operations and Management Services business, as mentioned, we were recently awarded a contract for the West Capella in Indonesia, which is scheduled to start during the first quarter of 2022. We are very pleased with this new development and look forward to continued success with these Aquadrill floaters that are proving quite attractive to operators in the region. To conclude on our fleet activity and as a general comment on the industry. With oil prices steady in the 80s, we are seeing that operators are tendering and contracting at a much faster pace and a lot of work seems to be firming up for 2022 now. It is evident that the expected upward day rate trends driven by the recovery in rig demand is pushing operators to tender with some urgency to secure rigs as early as possible, and for the first time in a few years have started to consider some reactivated cold stacked units. The key to our full recovery now will be for drillers to apply a much-needed pricing discipline so that shareholders can finally make a suitable return on their investment. To conclude, I will discuss corporate goal #3 of reducing cost and preserving cash. Douglas will give you more in-depth information on the full financials during his talk. But before, let me provide you with some information regarding our cash position and cash preservation focus. Our cash position remains relatively flat from second to third quarter with $120.3 million at the end of the third quarter compared to $124.3 million in cash at the end of the second quarter of 2021. We estimate to have some cash burn in the fourth quarter, mainly due to our interest payment and the mobilization and contract preparation of the Sapphire Driller. However, a large portion of the mobilization and preparation costs will be offset by the mobilization fee to be received in 2022. As mentioned in the previous quarter, we estimate that our cash burn will be reversed after the start of the NOC contracts in 2022, with all of our own rigs contracted, coupled with the revenue from our Operations and Management Services business. With that, I would like to turn the call over to Douglas to take us through the numbers.

Thank you, Ihab. Good morning. As Ihab mentioned, the health and safety of our personnel remain our primary concern as we continue to navigate pandemic-related challenges where we operate. From a commercial perspective, we had a very good quarter, securing an additional $169 million in backlog and a further $41 million of contracts executed thus far during the fourth quarter. The company ended the third quarter with approximately $120.3 million of cash, including $14.9 million in restricted cash compared to $124.4 million which included $13 million in restricted cash at the end of the second quarter. The decrease in cash is primarily due to the payment of reactivation and scheduled maintenance costs on the drillships. Working capital for the second quarter ended at approximately $149 million compared to $161.2 million in the previous quarter, mainly due to the reasons just described. For the third quarter of 2021, we achieved revenues of approximately $52.9 million compared to $20.2 million for the third quarter of 2020. The increase was due to having 6 rigs operating in the third quarter of 2021 compared to 3 in the third quarter of 2020. Total revenues for the current quarter compared favorably to the $35.6 million reported in the second quarter of 2021, driven mostly by higher rig utilization. For the quarter, the Platinum Explorer achieved 99.76% efficiency, while our jack-up fleet achieved 97.51% efficiency. Operating costs for the third quarter of 2021 totaled $45.4 million and were unfavorable to the $27.2 million in the comparable quarter of 2020, primarily due to having less rigs operating in the second quarter of 2020. General and administrative expenses for the third quarter of 2021 totaled approximately $4.6 million as compared to $3.8 million for the comparable quarter in 2020. The increase from the comparable quarter is primarily due to higher professional fees. Professional fees totaled $1 million in the current quarter, including $333,000 in nonrecurring professional fees compared to $0.5 million in professional fees in the comparable quarter, which included $47,000 in nonrecurring professional fees. This quarter includes $30,000 in noncash management incentive plan expenses compared to $208,000 in the comparable quarter and $912,000 for Petrobras litigation awards in the current quarter compared to $860,000 in the comparable quarter of 2020. Interest expense for the third quarter of 2021 was approximately $8.5 million compared to $8.5 million for the third quarter of 2020. Interest income totaled $8,000 for the third quarter of 2021 compared to $41,000 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 $21.7 million for the quarter or $1.66 per share. As of the end of the quarter, we had approximately $365.5 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 to the operator to begin the Q&A.

[Operator Instructions] Our first question will come from Sebastien Bourgeois with Caius Capital Management.

I just have 2 questions. One is on the Tungsten, you mentioned that there will be activity in the Eastern Mediterranean beyond the current term of the contract. Can you please give us a bit more color about this?

Sebastien, thank you for your question. I mean, as I said in my prepared remarks, I hope to be in a position to be able to clarify the program. The program is still at the moment being finalized with client. So I really -- unfortunately, I will not be able to do more than what we have on the fleet status report for now, Sebastien.

Okay. All right. And the second is, what are your thoughts regarding the evolution of the capital structure coming into '21 -- sorry, coming into the end of '21 and next year? You still have some time before the maturity, but would you try to do something earlier?

Yes. Sebastien, thank you for the question. We're not going to comment on the capital structure. The company is going to continue to focus on what it does best and that's putting rigs back to work and serving our clients, and we're excited about the quarter having rigs, having a great quarter itself, and we're hopeful that we'll continue to do that with the market recovery. But with respect to the capital structure, we're not going to address that on this call.

[Operator Instructions] I am currently showing no further questions at this time. I would now like to turn the conference back over for closing remarks.

I'd love to thank everybody and look forward to discussing again in a few months. And hopefully, we'll have more information by then.

Thanks, everyone.

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