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

Welcome to the Vantage Drilling International Second Quarter 2022 Earnings Call. As a reminder, today's conference is being recorded. I will now turn the call over to Douglas Stewart.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International Second Quarter 2022 Earnings Call. On the call today is also Ihab Toma, our CEO. This morning, we released our earnings announcement for the quarter ended June 30, 2022. 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 upgrades and reactivation work as well as contract preparation costs and expenses. 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 any 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. During the second quarter of 2022, we saw oil prices stabilize over $100 per barrel, which, in turn, has led to a steady increase in demand for offshore drilling rigs, consolidating the belief that an industry upcycle is underway. We are pleased to have added backlog of $103 million for our own rigs and $66 million of backlog for drilling contracts secured for third party-owned rigs, totaling an increase in backlog for the quarter of $169 million. Another important milestone achieved during this quarter was the closing of the previously announced sale of the Emerald Driller Company to ADES Arabia and the commencement of our 3-year support agreement for the 3 Emerald Driller Company jack-ups. As usual, I will walk you through our performance during the quarter against our three corporate goals. As a reminder, these goals are: one, maintaining stellar safety and operational performance; two, putting all our rigs to work and now with a focus on increasing dayrates; and three, preserving cash and liquidity. Starting with our goal number one, maintaining stellar safety and operational performance. We continue to be focused on the health and safety of our people and in protecting the environment while performing our operations in an efficient and safe manner to fully satisfy our valued customers. During the quarter, two of our wholly owned rigs completed upgrades on a tight schedule prior to commencing new contracts in Qatar, and certain of our other rigs mobilized and began new contracts. Under these challenging conditions, I'm proud of all the work performed by our team in maintaining a safe working environment with no recordable incidents during these projects and start-ups. Moving to health. COVID-19 remains our biggest health risk and continues to pose challenges. I'm glad to say that our clients have been fully supportive of our COVID-19 protocols and that those protocols have been instrumental in achieving no disruption to operations. We seek to minimize the risk of infections by following all recommendations and guidelines from our international health and medical advisers. Finally, in regards to the environmental side, I'm pleased to report that we have had no environmental incidents since the last call. Now moving to operations. Our revenue efficiency for the fleet during the quarter was 99.6%, with the deepwater achieving 97.8% and the jack-ups reaching an impressive 102.3% when accounting for earned bonuses. I will now turn to our goal number two, putting all our rigs to work and now with a clear focus on increasing dayrates. As previously mentioned, our backlog increased by approximately $169 million during the quarter, mainly through the Tungsten Explorer contract with TotalEnergies, which added $76 million; the Soehanah extension in Thailand and the 230 days Indonesia option exercise in it, which added an additional $17 million; and the 273 days contract for the Polaris with ONGC in India, which added $66 million. An additional $10 million of management and support fees bring up the added backlog to the reported $169 million. Now I will go through the details of our fleet status, starting with the jack-up fleet. The Topaz Driller has successfully finished the work for Amilcar Petroleum Operations, APO, in Tunisia, and is currently undergoing scheduled maintenance prior to the commencement of a new contract in the Mediterranean. We have the letter of award for this work, and soon I should be able to provide more details regarding this campaign once the contract is finalized, which should keep the rig busy into 2023. Moving over to the Soehanah. We just finished the work for Medco in Thailand in late July, and the rig has been mobilized to Indonesia to continue to drill for Medco Indonesia until the third 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, joining the Emerald Driller in operations there. As mentioned, the rigs were later sold to ADES Arabia. Regarding our deepwater fleet, the Platinum Explorer continues to successfully work for ONGC in India and should be on that contract through Q4 of 2023. The Tungsten Explorer completed its program with Petrobel in Egypt in late May and mobilized to Cyprus for a 2-well campaign, which is estimated to be finalized during Q4 2022. The rig will subsequently mobilize to West Africa for a firm 225-day contract for TotalEnergies. This contract has options, and, if exercised, the rig should be contracted through 2024. Regarding our managed services business, I'm pleased to announce the award of a 273-day contract for the Polaris by ONGC in India. The rig has mobilized from Sri Lanka and is currently being reactivated in Labuan, Malaysia, and the contract is expected to commence during the fourth quarter of 2022. Switching to the Capella. The rig successfully completed the work for Premier in Indonesia in mid-July and is currently working for Repsol also in Indonesia. Due to the successful Premier well and other interested farm-in prospects, we are in discussions with Premier regarding the exercise of their unpriced options for work starting in 2023. For the avoidance of doubt, I would like to clarify that their priced option for work in direct continuation after Repsol has expired. It's also worth noting that we continue to market the Capella globally. Lastly, we have just completed this week their movement of the Aquarius from Canada to Las Palmas as we position the rig in a locale where we could do the reactivation more efficiently and where some scheduled work will be performed. It is important to point out that the rig owner is not speculatively reactivating the unit and the full reactivation will only be committed once this attractive semisub lands one of the various opportunities it is being marketed for. Turning to the market. As mentioned earlier, we continue to see positive dynamics in the offshore drilling space with a number of new contracts at notably higher dayrates awarded in the past few months. We believe that this positive trend will continue and the market will continue to tighten as new awards materialize for some open opportunities such as the 10-jack-up tender from Saudi Aramco and the Petrobras deepwater tender for up to 8 floaters. These are examples of operators looking to secure assets for the long term in anticipation of further market tightening. In addition, with the potential for further supply constraint, we are beginning to see operators signing or seeking to sign contracts that commence in 2024. Finally, and to conclude my prepared remarks, I will take you through our corporate goal number three of preserving cash and improving liquidity. Cash during the second quarter, excluding the sale of the Emerald Driller Company, EDC, decreased by $32.3 million. The decrease is mainly due to the $16.2 million semiannual interest payment, $10.7 million for the EDC rigs preparation and special bonuses of $4.6 million. I would like to highlight that during the second quarter, we have generated rig-level cash flow of approximately $14 million, offset by cash G&A of $6 million and $8 million of negative working capital, mostly due to delayed collections. With all our owned rigs now contracted and the management segment positive cash flow contribution, we are confident that we are on our way to positive cash generation. Lastly, I would like to stress that the $200 million received from the cash sale of EDC provide us with a unique ability to continue to optimize our capital structure. We are evaluating various opportunities, and I hope to be in a position to update you on this matter soon. With that, I would like to turn the call over to Douglas to take us through the numbers.

Thank you, Ihab. Good morning and welcome, everyone. As Ihab mentioned during his remarks, this was a very good quarter in terms of contracting activity as we ended the quarter with backlog of $294 million, of which $92 million relates to drilling contracts secured for rigs that we manage for others. As announced and discussed earlier on this call, we closed the sale of the Emerald Driller Company during the second quarter and received a total of $170 million in cash as purchase price consideration, along with $34 million as the reimbursement for certain expenditures incurred to prepare the Sapphire Driller and Aquamarine Driller for their respective 3-year contracts with North Oil Company. $4 million of the cash proceeds remain in an escrow account until a determination is made with regard to the purchase price adjustment to be finalized no later than the end of September 2022. I now turn to the company's performance during the quarter. As mentioned, backlog at the end of the quarter totaled approximately $294 million, representing an almost 70% increase from the previous quarter after adjusting for the held-for-sale rigs. The company ended the quarter with approximately $246.3 million of cash, including $18.9 million in restricted cash, compared to $78.6 million, which included $16.4 million in restricted cash in the previous quarter. The increase in cash is primarily due to $200 million from the EDC sale and approximately $14 million generated by rig activity, partially offset by net G&A of $6 million, a $16.2 million interest payment, $10.7 million in payments related to the NOC rig upgrades, $4.6 million in extraordinary bonuses and Petrobras litigation awards and $8.8 million of other changes in working capital. Working capital for the second quarter ended at approximately $263.5 million compared with the previous quarter working capital of $212.6 million. The increase in working capital is mainly due to cash derived from the gain of the EDC sale and higher accounts receivable balance. During the quarter, there were some delays in collecting cash from operations. However, we are already seeing significant progress in collections, and we believe in the course of the coming quarter the situation will continue to normalize. For the second quarter of 2022, we achieved revenues of approximately $73.2 million compared to $35.6 million for the second quarter of 2021. The increase was mostly due to higher utilization, especially in the deepwater segment, in the second quarter of 2022. In addition to the company's own rigs, our managed services segment contributed $25.4 million in the second quarter of 2022, which compares with approximately $1.2 million in the comparable quarter of 2021. Total revenues for the second quarter compared favorably to the $58.3 million reported in the first quarter of 2022 driven mostly by higher revenue from the managed services business in the second quarter 2022 compared to the first quarter 2022 as the Capella went on contract and the Polaris started reactivating during the second quarter of 2022. For the quarter, our deepwater fleet achieved 97.82% efficiency, a great achievement given that the Tungsten Explorer commenced a new campaign in a new country during the quarter. Our jack-up fleet excelled by achieving 102.31% efficiency. Operating costs for the second quarter of 2022 totaled $59.4 million and were unfavorable to the $36.1 million in the comparable quarter of 2021, primarily due to a higher number of operating rigs and substantially increased activity for our managed rigs in the second quarter of 2022. General and administrative expenses for the second quarter of 2022 totaled approximately $6.9 million as compared to $5 million for the comparable quarter in 2021. The increase was mainly due to higher professional fees of $1.5 million related to the EDC sale transaction, travel expenses of $200,000 and labor costs of $200,000. Interest expense for the second quarter of 2022 was approximately $8.5 million, in line with the interest expense for the second quarter of 2021. The net result was a profit of $48.1 million for the quarter or $3.67 per share. 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.