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

Good day and thank you for standing by. Welcome to the Vantage Drilling International's First Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Douglas Stewart, CFO, General Counsel. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Vantage Drilling International First Quarter 2023 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, 2023. The earnings release is available on our website at vantagedrilling.com. Please 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 out-of-service 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 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. Vantage had a safe and effective first quarter of 2023 with some notable achievements to highlight. We successfully refinanced our debt, we commenced the Tungsten Explorer campaign in Namibia, and we made good progress towards recontracting our rigs at higher day rates during the quarter, which ultimately resulted into new letters of awards for the Topaz Driller and the Soehanah that have been received in April. The start of 2023 also marked a gear shift in our three corporate goals. While safety and operational performance remain unchanged as our number one corporate goal, the second and third corporate goals have now been revised to reflect a shift towards maximizing and preserving revenue and achieving superior returns. So we changed our second goal from putting all our rigs to work to contracting the entire fleet at higher day rates. And our third corporate goal from preserving cash and liquidity to achieving excellent stakeholders' returns. I would like now to go through our performance during the quarter against our revised corporate goals. As I mentioned, these goals are now: One, maintain stellar safety and operational performance; two, contracting the entire fleet at higher day rates; and three, achieving excellent stakeholders' returns. As usual, I will begin with our first corporate goal and will start with a safety component of that goal. As the industry and Vantage continue to see the influx of new personnel with more rigs returning to work, we recognize the need to properly train and supervise new personnel. As such, we remain strongly focused on providing our employees with comprehensive training through our Perfect Day Leadership program as well as other supporting training programs to ensure that our safety performance remains top notch. In terms of safety performance during the quarter, I'm proud to say that in the first quarter, we achieved some impressive milestones with the Sapphire Driller achieving 5 years recordable incident-free and the Aquamarine Driller achieving 2 years lost time incident-free, thanks to diligence and professionalism of our rig teams and the support we get from our clients. Moving to health and well-being of our employees, which is also a top priority for us at Vantage. We have reaffirmed our commitment to partnership with International SOS, a renowned international health care provider. Through this partnership, we ensure that all of our personnel have access to top quality health, medical and mental health services. In addition, we have effectively continued to manage COVID-19 and minimize any operational disruption caused by the virus. On ESG, our working group continues to work on identifying suitable and cost beneficial solutions to reduce our greenhouse gas emissions, manage waste from our vessels and improve water usage on board. By reducing our environmental impact, we aim to improve our operations footprint and contribute to a more sustainable future. We are committed to maintaining transparency and accountability in our ESG efforts. Also, our increased focus on ESG will ensure that we are aligned with our clients and that those relationships continue to prosper. Overall, we are proud of our safety performance in the first quarter, which is the #1 reason clients choose to work with us. Moving to operations. Our revenue efficiency for the fleet during the first quarter was 93.4% where the deepwater fleet ended at 92.3% and the jack-up fleet came in at 98%. I will now walk you through our fleet status, which touches on our second corporate goal of contracting the entire fleet at higher day rates. On the shallow water segment, the Topaz Driller remained active in Egypt during the first quarter, working for Petrobel through our bareboat charter structure with ADES. We expect this contract to continue through the second quarter. And once this work is completed, the rig will move to Morocco for the -- any Morocco contract that was signed during the first quarter. We are pleased to announce that in April, we received a conditional letter of award for work in West Africa in direct continuation after Morocco, keeping the rig busy into the first quarter of 2024. The Soehanah continues to be active in Indonesia under the current Medco contract, which should conclude during the third quarter of 2023, subject to the well in progress provisions. We are pleased to announce that in April, we were awarded an unconditional letter of award for a new 2-year contract. The new contract will feature a significantly improved and financially accretive day rate and will be in direct continuation from the current contract. We should be able to provide more information about the specifics of this agreement once the contract has been signed. Moving to the deepwater fleet. The Platinum Explorer continues to work for ONGC in India under a firm 2-year contract through the fourth quarter of 2023. The Platinum Explorer has also been included in the ONGC ongoing 21-month public tender for two drillships in which we are participating. Moving to the Tungsten Explorer. The drillship successfully concluded its thrusters change out, contract preparation and mobilization to Namibia and commenced operations for TotalEnergies there during the first quarter of 2023. Also, during the first quarter, TotalEnergies exercised its first option, securing the rig for continued work through the first quarter of 2024. This is a testament to TotalEnergies' commitment to Namibia, a high-profile basin with significant potential for multiple years of rig activity. In terms of backlog for our own fleet, at the end of the first quarter, our backlog was $216.2 million. During the quarter, we secured additional backlog of $53.3 million, of which $23.8 million is from the Morocco contract for the Topaz Driller and another $29.5 million related to the exercise of the first option for the Tungsten Explorer by TotalEnergies. As I move to our Managed Services business, I would like to start by providing an update on the Managed Services relationship with Seadrill after their acquisition of Aquadrill. Vantage has received formal notice of termination of the marketing agreements for the Polaris, the Capella and Aquarius as well as the termination of the management agreement for the Aquarius. However, since Vantage is the drilling contract holder for the ongoing Polaris and Capella contracts, Vantage will continue to manage these rigs for the duration of the respective drilling contracts and any exercise options. About the Capella, the rig was awarded a 1-well contract in East Africa during the first quarter and was mobilized during the first quarter to commence the contract. Upon completion of this East Africa work, the Capella will mobilize to Indonesia, where that contract firm term will keep it busy through the second quarter of 2024. The Polaris continues to work for ONGC in India through the end of the third quarter of 2023, subject to the well-in-progress provisions. I would like to point out that the Polaris remains a strong candidate for 1 of the 2 21-month tender slots for ONGC in India. Subject to the rig availability, as confirmed by Seadrill, and in the event that the contract is awarded for the rig, the Polaris will remain under Vantage management for the duration of such new ONGC contract. Finally, the Aquarius is currently in the process of transitioning back to Seadrill. From a market perspective, we continue to see the highest levels of tendering and direct negotiations activity since 2014. This, along with the limited availability of capable rigs, has resulted in jack-up rates rising well above $120,000 per day and deepwater rates reaching and exceeding $400,000 per day. Now moving to our third corporate goal of achieving excellent stakeholders' returns. Even though achieving excellent stakeholders' returns has always been a top priority for us at Vantage, the prolonged industry downturn did force us to accept tough optimal drilling day rates and contracts to avoid the cost and risks associated with prolonged stacking periods and reactivation uncertainties. During this time, we maintained a strong focus on controlling our costs to ensure adequate liquidity. Now the day rates are on the rise. It is imperative that we protect this revenue stream by strengthening the organization while maintaining our trademark competitive cost structure. In addition, we have been successful in negotiating reasonable contractual provisions targeting paid time allowances for performing planned maintenance. I'm pleased to say that our clients have been open to providing such allowances in our recent contracts in addition to the financially accretive day rates these latest contracts bring. Now on our cash position, we ended the quarter with a cash balance of $79 million, including Aquadrill prefunded cash. The net Vantage Drilling International cash balance was relatively consistent with the beginning of the quarter, ending the quarter slightly above $63 million. During the quarter, we generated positive rig level cash flow, inclusive of corporate G&A of approximately $5 million and $5 million from net new money from refinancing. The positive cash flow was offset by the payment of circa $5 million related to the 2022 accrued annual bonuses and another $5 million in dividend equivalents. These were paid in connection with the settlement of the underlying time-based restricted stock units previously granted to certain members of management. Looking ahead, we expect to continue improving our cash position as our fleet is now fully utilized and rigs are gradually transitioning to the higher day rate contracts. 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, the closing of our debt refinancing and the start of operations for the Tungsten Explorer in Namibia were among the key events for the first quarter of 2023. Starting with our refinancing, we successfully placed our new $200 million bond maturing in 2028. The bond was issued with a 9.5% coupon and a yield to maturity of approximately 10.3%. In addition, the bonds have an excess cash flow sweep provision that will allow us to make yearly principal payments contributing to a systematic deleveraging of our capital structure as we generate cash. Excess cash flow payments are calculated at 50% of EBITDA less CapEx, less cash interest and cash taxes and are made at par. Now turning to the company's performance during the quarter. Total backlog at the end of the quarter equaled approximately $216.2 million, which includes $39.6 million related to Polaris as we entered into a contract directly with ONGC and lease the rig through a bareboat charter from our Managed Services client. The company ended the quarter with approximately $78.8 million of cash, including $8.9 million in restricted cash compared to $93.3 million, which included $19.2 million in restricted cash at the end of 2022. At March 31, 2023, Vantage maintained $15.6 million of cash prefunded by our Managed Services customer to address near-term obligations associated with the operation of their rigs. The decrease in cash is primarily due to delayed collections. Working capital for the first quarter ended approximately $116 million compared to $96.2 million in the fourth quarter of 2022. For the first quarter of 2023, we achieved revenues of approximately $77.1 million compared to $58.3 million for the first quarter of 2022. The increase is mostly due to Vantage being the operating party to the Polaris drilling contract as the Tungsten Explorer was either undergoing out-of-service work or mobilizing for most of the quarter and operated three less rigs with the sale of the EDC rigs when comparing the quarter to the comparable quarter in 2022. Total revenues for the first quarter were in line with the $76.2 million reported in the fourth quarter of 2022. For the quarter, our deepwater fleet achieved 96.3% revenue efficiency and our jack-up fleet continued its strong performance, achieving 98% revenue efficiency. Operating costs for the first quarter of 2023 equaled $66.6 million and were unfavorable to the $43.9 million in the comparable quarter of 2022, principally due to increased activity in the Managed Services segment, driven primarily by the Polaris activity and reimbursable costs. This is partially offset by the reduction in operating costs in the shallow water business as we own less rigs due to the sale of the three EDC rigs in the second quarter of 2022. General and administrative expenses for the first quarter of 2023 totaled approximately $4.8 million as compared to $6.6 million for the comparable quarter in 2022. The decrease is mainly due to lower labor costs of $2.2 million related to annual incentive plan compensation in the comparable quarter, partially offset by higher professional fees of $400,000. Interest expense for the first quarter of 2023 was approximately $5.6 million compared to $8.5 million in the comparable quarter. The decrease was due to the refinancing of the 9.25% notes during the quarter. I'd like to highlight that in the first quarter of 2023, we achieved positive EBITDA of $6.3 million, in line with the first quarter of 2022. The net result was a loss of $2.3 million for the quarter or $0.17 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] There are no questions in the queue. This does conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.