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

Good day, and welcome to Vantage Drilling International Third Quarter 2022 Earnings Call. Today's call is being recorded. At this time, I'll now turn the call over to Douglas Stewart, the company's CFO and General Counsel.

Good morning, everyone, and welcome to the Vantage Drilling International Third 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 September 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 any 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 the call to our CEO, Mr. Ihab Toma.

Thank you, Douglas, and good morning and good afternoon, everyone, and welcome to our earnings call. Demand for offshore rigs continued to show strength after strength with marketed utilization for sixth generation and seventh generation drillships now well over 90% and with no active supply remaining in the U.S. Gulf of Mexico, South America and the Mediterranean markets. As a result, day rates have seen healthy increase for both sixth generation and seventh generation drillship segments, with contracts being secured in the range of mid-$300,000s to mid-$400,000s depending on rig specifications and location. The same could be said for the jack-up segment of the market, with the increased contracting activity in the Middle East and India driving day rates to pre-2015 levels. Hence, our focus has now shifted from utilization to capitalizing on the available higher day rates and expanding our margins. As usual, I will take 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 to work on higher day rates; and three, preserving cash and liquidity. Beginning with our goal number one, maintaining stellar safety and operational performance, our focus continues to be on ensuring a healthy and safe environment for everyone working on our rigs and all of our employees in all locations while delivering efficient and safe operations to our esteemed customers. Q3 was another busy quarter operationally with all the challenges that come with rigs start-up, change of locale and new contracts preparation. During the quarter, we had 2 of the rigs undergoing out-of-service maintenance, 2 rigs changing countries where new people join the crews on board, and we continued the reactivation of the Polaris for the ONGC contract. The third quarter is also that time of the year when the very high temperatures in most of the areas where we operate bring additional challenges and safety concerns. With our Vantage Perfect Day Leadership program and other proactive programs like our seasonal Beat the Heat campaign, we strive for 0 incidents and for keeping everyone safe in any working condition on board of our rigs. Our 12-month rolling recordable incident rate stood at 0.33 at the end of the quarter. However, we continue all efforts to bring this incidence rate to the lowest possible level despite the ramp-up of activity everywhere. Moving to health. COVID-19 continues to remain an area of focus. And our processes continue to be successful in reducing the number of cases reaching our rigs and in protecting our teams everywhere. I'm glad to say that through our COVID-19 protocols and our client support, we continue to achieve no disruption to operations caused by health issues on any of our rigs. On the sustainability side, our ESG Committee continues to develop and refine our 2023 ESG strategy that will be fit-for-purpose for our company with ESG goals and actionable improvements. Shifting to operations. Our revenue efficiency for own fleet during the quarter was 97.3%, with the deepwater rigs achieving 96.9% and the jack-ups reaching a solid 98.8%. I'm also proud to report that under our Managed Services segment, the Capella achieved revenue efficiency of 99.2% during the third quarter and a total campaign revenue efficiency of 99.5%. This is a great achievement as the first Aquadrill rig campaign under our management. Moving now to our goal number two of putting all our rigs to work and increasing day rates, I will now take you through our fleet starting with own rigs. The Topaz Driller has finished its scheduled 5-year maintenance and certification work in Malta and mobilized to Egypt to start a contract with Petrobel through a bareboat charter arrangement with ADES Egypt. This campaign will keep the rig busy through early Q2 2023. The underlying drilling contract is for 6 months, where Vantage will earn a fixed bareboat charter fee from ADES Egypt during the contract term as well as during mobilization and demobilization, plus a variable monthly fee tied to the achieved drilling contract margin. The fixed fee, which is the only portion included in our backlog, add approximately $4 million to our backlog. The Soehanah finished its work in Thailand and mobilized to Indonesia to continue working for Medco in Indonesia, a campaign that is expected to conclude in the third quarter of 2023. On the deepwater fleet, the Platinum Explorer continues to work in India for ONGC until Q4 of 2023. The Tungsten Explorer is working for ENI Cyprus with an estimated end date during Q4 2022. Subsequent to Cyprus and before mobilizing to West Africa for its contract with TotalEnergies, the rig will undergo maintenance and contract preparation in Las Palmas. The 225-day firm term TotalEnergies contract also includes options that if all are exercised would keep the rig working through 2024. Moving now to our Managed Services business. The Polaris has now completed its reactivation, contract preparation and upgrades in Labuan, including equipping the rig with the piping required for future use of a managed pressure drilling system. The rig is currently mobilizing to India and is expected to commence the ONGC campaign soon with a total contract value of approximately $66.5 million. Regarding the Capella, the rig successfully completed its work for Premier and Repsol Indonesia in early October and is currently in Labuan undergoing planned 5-year maintenance and equipment certifications. I hope to be in a position to provide you more color on its next contract opportunity soon. With regard to the Aquarius, the rig has arrived in Las Palmas in August and is undergoing strategic maintenance and condition assessments in order to derisk its full reactivation once a contract is secured. Finally, we continue to provide support services to the 3 jack-ups owned by the Emerald Driller Company and ENI's own company. We are happy to report that all 3 rigs are performing well in Qatar for their respective clients, TotalEnergies in the case of the Emerald Driller, and North Oil Company in the case of the Sapphire Driller and the Aquamarine Driller. Indeed, TotalEnergies recently exercised the 1-year option on the Emerald Driller and added an additional option to the contract. From a market perspective, as noted earlier, we are seeing an expansion in the offshore drilling market with industry fundamentals continuing to strengthen, as substantiated by the increased visible demand for offshore drilling units and operators going to the market to secure rigs well ahead of their drilling campaigns. Drillship supply and demand has tightened significantly with all active seventh generation units fully contracted. The lack of availability of the seventh generation drillships has translated into recent fixtures in the mid-$400,000s in the U.S. Gulf of Mexico and is significantly improving day rates for the sixth generation drillships. In addition, we have started to see increased contract terms and lead times moving further out as clients try and attract and secure assets for their future programs. This tight supply of assets and increasing demand by our clients will continue to put upward pressure on day rates. In the jack-up space, the Middle East continues to dominate both in terms of the number of rigs operating and future demand. And with the stated public intentions of the major national oil companies, we see the jack-up market continuing to tighten, with day rates continuing to increase, especially for premium assets. To conclude my prepared remarks, I will discuss our corporate goal number three, focusing on cash. During the third quarter, our cash increased by approximately $16 million with a $17.7 million increase in cash from operations. This positive change in cash mostly attributable to rig activity in the quarter of $3.4 million, the significant collection of overdue receivables, net of payables, amounting to a net $11.5 million, offset by $1.3 million representing a post-closing payment to ADES in relation to the EDC sale. Douglas will provide a bit more color in his prepared remarks. 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 big quarter because we generated positive EBITDA even with one of our own rigs out of service undergoing maintenance. We also were successful in collecting seasonally overdue accounts receivable, which you may recall we highlighted that we were experiencing during last quarter's call. During the quarter, we finalized the purchase price adjustment in connection with the sale of the Emerald Driller Company and its 3 rigs to ADES Arabia. After finalizing the purchase price adjustment, Vantage owed ADES Arabia with $5.3 million, $4 million of which was released from the escrow of EDC sale cash proceeds and we paid ADES the remaining $1.3 million. Now turning to the company's performance during the quarter. Backlog at the end of the quarter totaled approximately $177.4 million and $68.9 million contract value attributable to customer joint contracts secured for rigs managed by us. The company ended the quarter with approximately $262.3 million of cash, including $18.7 million in restricted cash compared to $246.3 million, which included $18.9 million in restricted cash in the previous quarter. The increase in cash is primarily due to $14.9 million provided by rig activity and the collection of overdue receivables, net of payables, and $8.6 million of other changes in working capital, partially offset by G&A-associated payments of $5.8 million: $1.3 million for the aforementioned settlement of the purchase price adjustment related to the sale of EDC; and $400,000 in capital expenditures. In addition, at September 30, 2022, Vantage maintained $19.7 million of cash pre-funded by our Managed Services customers to address near-term obligations associated with the operation of their rigs. Working capital for the third quarter ended at approximately $269.1 million compared with the previous quarter working capital of $265.5 million. The increase in working capital is mainly due to cash provided from our operations, partially offset by the purchase price adjustment payment in regards to the sale of EDC. For the third quarter of 2022, we achieved revenues of approximately $71 million compared to $52.9 million for the third quarter of 2021. The increase is mostly due to higher utilization, especially in the deepwater segment, which partially offset the decrease in the jack-up segment due to the sale of the EDC rigs during the second quarter of 2022. In addition to the company's own rigs, our Managed Services segment contributed $29.5 million in revenue in the third quarter of 2022, of which approximately $25 million constituted reimbursable revenue and $4.5 million were management fees. This compares with approximately $4.4 million from our Managed Services segment in the comparable quarter of 2021, of which $3.7 million constituted reimbursed revenue and $700,000 were management fees. Total revenues for the third quarter compared unfavorably by $2.2 million to the $73.2 million reported in the second quarter of 2022, driven also by the sale of the EDC rigs and partially offset by the higher efficiency achieved in the deepwater segment. For the quarter, our own deepwater fleet achieved 96.92% efficiency and our own jack-up fleet achieved a solid 98.77% efficiency. Operating costs for the third quarter of 2022 totaled $66.4 million and were unfavorable to the $45.4 million in the comparable quarter of 2021, primarily due to the substantially increased activity for the managed rigs in the third quarter of 2022. Total operating costs for the third quarter were unfavorable to the second quarter by $7 million, mainly due to higher operating costs for the deepwater segment in the Mediterranean and higher reimbursable costs in the Managed Services segment. General and administrative expenses for the third quarter of 2022 totaled approximately $4.3 million as compared to $4.6 million for the comparable quarter in 2021. The decrease is mainly due to lower labor costs of $600,000 related to special bonuses, partially offset by higher professional fees of $300,000. Interest expense for the third quarter of 2022 was approximately $8.5 million, in line with the interest expense for the third quarter of 2021. The net result was a loss of $20.2 million for the quarter or $1.54 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.

[Operator Instructions] We'll take our first question from Sunny Chhabra from Ironshield Capital.

I'm sorry. I think I missed part of Ihab's comments, so apologize if I'm asking a question that's already been answered. I think I wanted to check with you what did you guys comment on the user proceeds, the cash and balance sheet and what's the plan? And how do you see it all shaping up over the next 6 months or so?

Great. Thanks, Sunny. So consistent with what we said on the previous call, the Board continues to evaluate all uses of its cash, and the Board continues obviously to work closely with management and is very aware of the company's obligations and financial positions. So this, we'll continue to evaluate. That's really all I have on that point.

And any time frame, anything -- any more color on -- you guys have so much cash on balance sheet and still you're paying interest on the bonds. It's still a bit inefficient use of cash, looks like. Just want to understand what's behind that and why is it taking so much time.

No. I think I don't -- listen, other than it's just the Board is continuing to evaluate all uses of cash and certainly are very mindful of our obligations, we'll continue to take a look at what makes sense for the company.

[Operator Instructions] There are no further question on the line. Thank you, everyone, for joining today's call. You may now disconnect.