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

Good day, everyone, and welcome to the Vantage Drilling International First Quarter 2022 Earnings Call. As a reminder, today's call is being recorded. I will now turn the call over to Douglas Stewart, CFO and General Counsel. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International First Quarter 2022 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, 2022. The earnings release is available on our website at vantagedrilling.com. Please note that any comments we make today are 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 upgrades and reactivation work as well as contract preparation costs and expenses and receiving payments for certain of such costs under our share purchase agreement with ADES Arabia. 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.

Thank you, Douglas, and good morning, and good afternoon, everyone. The first quarter of 2022 was marked by significant geopolitical instability caused by the war in Ukraine. This instability and renewed focus on energy security triggered a spike in the oil and gas prices and accelerated the already increased demand for offshore drilling units, especially in the deepwater segment. During the quarter, all our rigs were either on contract or in the final stages of preparing to begin new contracts. Once again, I'm pleased with our team's focus on execution during another busy quarter guided by Vantage's 3 corporate goals. As usual, let me now take you through our performance during the quarter against these 3 corporate goals. As a reminder, these goals are: one, maintaining stellar safety and operational performance; two, putting all our rigs to work; and three, reducing costs and preserving cash. Beginning with our goal number one, maintaining stellar safety and operational performance, our attention continues to be on ensuring that everyone at Vantage and all people working on our rigs remain healthy and safe as well as protecting the environment where we operate, while delivering safe and efficient operations to our valued customers. Starting with safety. We continue to focus on training and coaching our offshore crews and supervisors in our Perfect Day leadership program, which is especially important at a time when we have multiple rigs commencing new contracts in new locations and with new crews coming on board. Shifting to health. The COVID-19 pandemic continues to pose challenges. Despite our offshore workforce being fully vaccinated, we have had some active cases across our rigs. However, by using our protocols, we have been able to maintain safe operations with no disruptions. We continued to follow all recommendations and guidelines from our international health and medical advisers in order to further minimize the risk of infections. On the environmental side, our Sustainability Committee continues to work with our selected consultants with a view to develop our fit-for-purpose sustainability strategies, goals and actionable improvements. Moving now to operations. Our revenue efficiency for the fleet during the first quarter was a solid 97.9%, where the deepwater achieved 97.4% and the jack-up fleet came in at 98.8%. I will now provide you with an update on our fleet status or our second corporate goal. Starting with shallow water. The Emerald Driller has successfully finished its farm-out assignment in Qatar to North Oil Company, or NOC, and is now back to work for total energies under a firm contract until the second quarter of 2023. The Sapphire Driller and the Aquamarine Driller successfully finished their major maintenance upgrades and contract preparation projects in Dubai and mobilized to Qatar to start their new 3-year contracts with NOC. The Sapphire Driller was accepted by NOC and its contract began on May 4, while the Aquamarine Driller is expected to start its contract in the coming days. This contract commencement should be the final steps before closing the sale transaction to ADES, which we will be providing further comments on during this call. The Topaz Driller finalized its campaign for Eni Montenegro in January and mobilized Tunisia, where it started a new program for Amilcar Petroleum operations or APO in February. APO recently exercised their contract options, which will keep the rig busy till July of this year. We are currently evaluating subsequent opportunities for the rig and hope to come back with news soon. Lastly, the Soehanah finished its work for Kufpec Caustic in Indonesia and mobilized to Thailand to start a new contract for Medco Thailand. Upon completion of the Medco Thailand contract, the rig is due to move back to Indonesia to work for Medco Indonesia until the fourth quarter of 2022 or potentially till the end of the second quarter of 2023 and if Medco exercises the remaining contractual options. With regard to the deepwater fleet, the Platinum Explorer continues to work for ONGC in India where she is contracted through the fourth quarter of 2023. We are all proud of the Platinum team for their excellent performance and achieving less than 0.5% downtime year-to-date. The Tungsten Explorer is due to complete its program with Petrobel in Egypt during the current month, after which the rig will mobilize to start its 2-well campaign in the Mediterranean estimated to be completed by the end of the third quarter. We are still in the final stages of negotiations for the additional work and direct continuation that we mentioned on the last earnings call, and I will be able to provide you with more color once the contract is signed. Now turning to our Managed Services business. After a successful transition from the previous manager of the Capella, the rig has just commenced its new contract under Vantage Management with Premier Oil in Indonesia, a hardware energy company. We expect the firm term with Premier Oil and Repsol in Indonesia to be for about 6 months. The optional term is not expected to be exercised in direct continuation but we are in advanced discussions for the unit to be taken for another opportunity in the region immediately after the current firm work. I would like to note here that while the deepwater market in Southeast Asia is not as big as some other deepwater provinces. There are not many managed pressure drilling capable drillships available in the region. This is a differentiating factor that we believe will benefit the Capella significantly going forward. Regarding the Polaris, the commercial bid opening for the ONGC 1500-meter tender in India has taken place, and we have emerged as the lowest bidder for this 9 months work. While this is obviously good news to be in such pole position, nothing is certain until an award has actually been made by ONGC. To finalize on the managed services business, I'm pleased to share again that during the quarter, we were entrusted by Aquadrill to manage an additional rig, which is the Aquarius. Aquarius is currently in Canada, and we are actively pursuing opportunities on a worldwide basis for this unique dynamically positioned and more capable ultra-deepwater semisubmersible. The rig has already been prequalified and in some instances, bid on several short-term opportunities. Landing the right opportunity or opportunities to justify the reactivation of this rig may take some time and persistence. But to give you all an indication of the high interest in the unit, we started to have customers visiting the rig in its current location. Industry-wide, the drilling industry have finally arrived at a tight balance in both the deepwater and shallow water segments of the market. The recent worldwide political situation and increased focus on energy security has driven a level of urgency to secure offshore drilling units by our customers not seen in years. To conclude, I will discuss corporate goal number 3 of reducing cost and preserving cash. Douglas will take you through the numbers in more details but I would like to highlight the expected financial impact of our significant transaction, the sale of our subsidiary, Emerald Driller Company to ADES. The sale is a cash-free, debt-free transaction for a total consideration of $170 million and contract preparation expenditure reimbursements up to $35.1 million. Both amounts are due at closing. Upon acceptance of the Aquamarine Driller, which is expected this month, we expect the transaction to close soon thereafter. With that, I would like to turn the call over to Douglas to take us through the numbers.

Thank you, Ihab, and welcome, everyone. During this portion of the call, I will spend some time commenting on some particulars of the ADES sale transaction. and then conclude my segment with my customary discussion of how the company performed financially during the quarter. As Ihab mentioned, the closing of the sale to ADES of the Emerald Driller Company, the owner of the 3 rigs contracted for work in Qatar is expected this month. As mentioned in our last call, the share purchase agreement contemplates the purchase of the Emerald Driller Company on a cash-free and debt-free basis. The buyer will pay the purchase price of $170 million in cash and will reimburse us for certain expenditures incurred to prepare the Sapphire Driller and Aquamarine Driller for their respective 3-year contracts with North Oil Company, which is expected at closing to be $34 million, meaning that a total of $204 million in cash will be received. A price adjustment will be calculated 60 to 120 days after closing. This price adjustment will reflect the final adjustments related to the reconciliation of actual NOC contract preparation expenditures against the estimated amount paid by ADES at closing, and we'll also settle actual working capital in inventory versus targeted amounts. In addition, as previously mentioned, at closing, the parties will enter into a 3-year support services agreement, pursuant to which Vantage will provide support services with respect to the 3 rigs in better. Now turning to the company's performance during the quarter. Backlog at the end of the quarter totaled approximately $359 million, which included $183.6 million of backlog attributable to the held-for-sale assets. The company ended the quarter with approximately $78.6 million of cash, including $16.4 million in restricted cash, compared to $90.6 million, which included $17.3 million in restricted cash at the end of 2021. The decrease in cash is primarily due to $17.7 million in NOC related contract mobilization and upgrade project costs partially offset by $3.1 million in cash proceeds from the sale of equipment and $2.7 million from operations. Working capital for the first quarter ended at approximately $212.6 million, which is in line with the previous quarter working capital of $215.8 million. For the first quarter of 2022, we achieved revenues of approximately $58.3 million compared to $20.2 million for the first quarter of 2021. The increase is mostly due to higher utilization, having 6 rigs operating in the first quarter of 2022. This compares to only 3 rigs working in the first quarter of 2021. In addition to the company's owned rigs, our Managed Services segment contributed $1.1 million in the first quarter in 2022, which compares with approximately $100,000 in the comparable quarter of 2021. Total revenues for the first quarter compared favorably to the $49.8 million reported in the fourth quarter of 2021, driven mostly by higher deepwater rig utilization in the first quarter of 2022 compared to the fourth quarter of 2021, as both the Platinum Explorer and the Tungsten Explorer worked during the first quarter of 2022. For the quarter, our deepwater fleet achieved 97.39% efficiency, which is even more remarkable given the Tungsten began the new contract in late December of last year after being stacked for more than 1 year. Our jack-up fleet continued its strong performance as well, achieving 98.83% efficiency. Operating costs for the first quarter of 2022 totaled $43.9 million and were unfavorable to the $25.4 million in the comparable quarter of 2021, primarily due to the higher number of operating rigs in the first quarter of this year. General and administrative expenses for the first quarter of 2022 totaled approximately $6.6 million, as compared to $5.5 million for the comparable quarter in 2021. The increase is mainly due to higher labor costs of $1.5 million related to short-term incentive plan payout and other costs of $200,000, partially offset by lower professional fees of $600,000. Interest expense for the first quarter 2022 was approximately $8.5 million, in line with interest expense for the first quarter of 2021. I would like to highlight that in the first quarter of 2022, we achieved positive EBITDA of $6.3 million as compared to a negative $11.3 million of EBITDA in the comparable quarter 2021. The net result was a loss of $14.9 million for the quarter or $1.14 loss per share. Please note that 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.

[Operator Instructions] And we'll first hear from [ Nick Marcio of Cross Ocean Partners ].

For the held-for-sale rigs -- for the held-for-sale rigs, for the total contract preparation costs that you expect will be reimbursed, how much of that has been spent through the end of Q1 '22?

So we -- let's just say that the -- in Q1, $17.7 million was spent. In Q4 of last year, $5.2 million were spent. So there's a decent amount spent in April, but it's captured with our reimbursement request to ADES. You can probably figure that number out.

[Operator Instructions] Next, we'll hear from Patrick Fitzgerald of Baird.

I know this is going to be in the queue, but what were the average day rates for jackups and floaters?

The average -- the average day rate for the jackups and floaters, well, I'm going to defer to the queue, because we obviously have -- our day rates that we don't speak to on a gross level and the average will be reflected in the queue, so it just be easier.

Okay. And still no update on what the plan is with the cash when the deal closes?

Right. Yes. There's no update. The Board obviously is super focused on the transaction. We are -- as we indicated in the background according that we are expecting to close this month. That's the highest priority. And the Board is staying to close the situation and is evaluating -- still evaluating these proceeds.

Okay. And then obviously, you guys are turning the corner in terms of profitability with a significant positive EBITDA this quarter. When do you -- you think you'll be free cash flow positive in the second half of this year?

Yes. So we're obviously going to hold off on projections, but I think it's fair to say that we're going to -- it's going to be pretty stable overall through the rest of the year.

Okay. And how do you guys feel about the M&A market currently? Obviously, you've sold 3 rigs, and now you're kind of a smaller operator. So what...

I think -- we do get questions about that. And I guess I would just clarify that maybe in owned assets where maybe a small operator, but we're operating 10 assets, and it's a fantastic business for us and we will continue to look to expand the managed services side of things. So we'll focus on that. Obviously, the lower capital -- very less capital-intensive nature of that business is very attractive. So our focus is on that, and we'll be mindful of the M&A space to keep our finger on the pulse, but we're pleased where we are.

[Operator Instructions] And this will conclude our question-and-answer session for today. Also, this does conclude today's conference. Thank you all for your participation. You may now disconnect.

Thanks very much, everyone.