Vantage Drilling Co. (OTCPK:VTGDF) Q4 2018 Earnings Conference Call March 14, 2019 10:00 AM ET
Douglas Stewart – General Counsel
Ihab Toma – CEO
Tom Cimino – CFO
Conference Call Participants
Patrick Fitzgerald – Baird
Joshua Katzeff – Deutsche Bank
Bill Schwartz – Apollo
Good morning, ladies and gentlemen, and welcome to the Vantage Drilling International Q4 2018 Earnings Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Douglas Stewart, General Counsel. Please go ahead, sir.
Thank you. Good morning everyone and welcome to the Vantage Drilling International 2018 fourth quarter and annual earnings conference call. One the call today are also Ihab Toma, our CEO; and Tom Cimino, our CFO.
This morning, we released our earnings announcement for the quarter and year ended December 31, 2018. The earnings release is available on our website at vantagedrilling.com. We intend to file our annual report on Form 10-K later today.
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. 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. At the end of our prepared remarks, there will be a question-and-answer session.
Now, let me turn over the call to our CEO, Mr. Ihab Toma.
Thank you, Douglas, and good morning everyone.
I would like to take the opportunity of this earnings call fourth quarter 2018, which was another successful year for the Company despite being a fourth year of this unprecedented industry downturn.
I am proud to say that three years after the Company’s emergence from its reorganization, the Company is in a very strong position as we continue to execute and take the actions needed to differentiate Vantage from our peers.
As I have done in the past calls, I’ll rate our success against our key corporate goals, which are; one, maintain our stellar safety and operational performance; two, put all of our rigs to work; and three, reduce costs and preserve cash to successfully mitigate this severe industry downturn.
Starting with our first goal, I am pleased to say that we had a safe and operationally strong 2018. Life safety and health of our people are our most important responsibility as a company and we take this very seriously. We will continue to strive to make sure we provide a safest work environment for our people and the people working on our rigs.
Our lost time incident rate in 2018 was zero and it has now been 22 months since our last lost time incident. This was the fact that none of our recordable incidents during the year were of high potential makes 2018 our safest year since the Company’s inception in 2009. Our investment in developing our offshore supervisors improves through our perfect day leadership training program is clearly paying off.
Additionally, our operation team continues to excel in 2018, delivering 96.2% revenue efficiency during the year and continuing to get recognition from our clients including Total in Congo and Qatar CPOC and New Age. This excellent performance is what keeps our rigs in high demand and allow us to obtain directly negotiate the work with clients that want to work with Vantage. This takes me to our second goal of putting all of our rigs to work.
We achieved an industry leading total utilization of 76% in 2018 compared to 64% in 2017 and 39% in 2016. Also during the year, we successfully added two new contracts for the Topaz Driller as well as contract extensions for Sapphire Driller and Emerald Driller all directly negotiated without a tender because of our operational performance.
Finally, we added a working jackup to our fleet. This newly acquired Baker Marine Pacific Class 375, the Soehanah is a sister rig of our Emerald driller jackup. The purchased rig is currently on bareboat charter contract with Apexindo working for the Indonesian based oil company PT Soehanah offshore Indonesia. We are very pleased to have this rig to our fleet.
Now on the most recent awards, I’m pleased to report that the Tungsten Explorer has now landed strategic work in the Mediterranean offshore Egypt. The Tungsten Explorer is our fleet flagship so it was critical for us to have we’re back in action soon after we’re extremely successful four year campaign for Total in Congo.
This drilling contract with our new client Dynagas was secured through our joint venture with ADES and it’s for one well plus three one well options. This award brings Vantage into very important growing market of the Mediterranean and the joint venture with ADES provides us with additional opportunities to obtain attractive operating costs with the talented and experienced workforce.
The previous contract for the Tungsten Explorer was concluded in October 2018 and the drill shift was mobilized to the Canary Islands for her special periodic survey five-year equipment maintenance and recertification as well as an important managed pressure drilling upgrade, MPD, which is in high demand.
I’m happy to report that this project continues to be on budget and on time and the rig is now being prepared for this new campaign offshore Egypt.
Moving to our jackup fleet, I’m pleased to say that we were able to secure two additional contracts in West Africa for the Topaz Driller since our last earnings call. This solidifies our position in the region and supports our strategic decision to relocate this asset from Southeast Asia to the tighter West African market. The first of these contracts is for one well with Tower Resources in Cameroon, which I mentioned as a letter of intent during the last call.
The second and latest is the contract for two wells plus four options in Vaalco in Gabon. Both contracts are at day rate reflecting the tight market in West Africa for premium jackups. This means that our own and operated jackups are now sold out for 2019 with the only exception being that Aquamarine Driller where CPOC has four option extending well into 2020 that they are yet to exercise.
As for the Soehanah which is on the bareboat charter to Apexindo, we currently have an active conversation with them concerning their unpriced option to extend this bareboat arrangement. In the meantime, we are now marketing the rig elsewhere in case an arrangement cannot be reached.
Next, I would like to address our third corporate goal of reducing costs and preserving cash. We continue to operate in a lean and efficient manner and we continue to streamline our SG&A. Furthermore, we achieved an important milestone last November where we were able to arrange $350 million with new debt to among other things.
Pay down all of our first and second lien secure debt, complete the purchase of the Soehanah further improve our runway by bringing in a significant amount of additional cash and pushing back the maturity date of our debt to 2023. This was achieved same-store operational performance, lead quality and high fleet utilization despite a backdrop of a very difficult capital markets and oil price requirement at the time.
To finish the year with approximately $239 million in cash and equivalents compared to approximately $195 million at the end of 2017. For this operational performance, the jackup fleet being fully utilized, the Platinum Explorer on a long-term contract, the Tungsten Explorer completing their upgrades and now lined up for strategic entry into the Mediterranean, coupled with the strong balance sheet and fit for purpose cost structure, we are very happy with how successful 2018 was for us and how 2019 is starting on the strong foundation. I couldn’t be prouder to be part of this successful organization.
With that, I will turn the call over to Tom to take us through Q4 and the numbers.
Thank you, Ihab, and good morning everyone. I’m prepared advised that during the fourth quarter of 2018, we continue to demonstrate our ability to monitor our costs, manage our liquidity and execute our strategy, which includes strengthening our balance sheet. As mentioned Ihab, in the fourth quarter, we successfully refinanced our existing debt between $350 million in new senior secured first lien note. First lien proceeds were used to repay our existing first lien debt due in 2019 and our second lien note due in 2020.
Additional funds raised were used to make the final payment for the recently purchased of Soehanah jackup with the remaining available cash to be used for ongoing general corporate purposes. This transaction further streamlines our capital structure, reduces our cost of capital, provides us with additional liquidity to meet ongoing challenges of the current market and significantly extends the maturity of our near-term debt to the end of 2023.
These efforts results in the Company ending the year with approximately $239.4 million cash including 14.4 million in restricted cash, compared to 183.5 million, including 5 million in restricted cash at the end of the third quarter. Working capital for the year ended at approximately $263.9 million, compared to the $222 million at the end of the prior quarter. The increase in both cash and working capital is primarily due to the recent refinancing as well as our positive cash flows generated from operations.
For the fourth quarter of 2018, we achieved revenues of approximately $43.1 million as compared to $59.8 million for the fourth quarter of 2017. This decrease was mainly due to the Tungsten Explorer successfully completing its contract with Total in October. During the fourth quarter, we had six rigs working compared to seven rigs working in the comparable quarter of 2017, which included the Vantage V260, which has been sold.
Revenues for the quarter compared unfavorably to $64.6 million reported in third quarter of this year. This net decrease was primarily attributable to the previously mentioned Tungsten Explorer completing operations in October, before demobilizing to Tenerife in order to undergo its required special periodic surveys, its planned five year maintenance and to add additional equipment upgrades.
Operating costs for the fourth quarter of 2018 were approximately $42.1 million as compared to $42.7 million for the comparable quarter 2017. Lower costs across the jackup fleet were partially offset by higher costs on the Platinum Explorer, which operated 65 more days in the current quarter and higher costs on the Tungsten Explorer due to the expenses incurred for demobilizing to the shipyard and for its five year planned maintenance activities. Included in the fourth quarter 2018 operating costs were approximately $2.9 million of amortization costs. This includes $1.6 million of non-cash contracts acquisition costs and $1.3 million of deferred mobilization costs.
General and administrative expenses for the fourth quarter of 2018 were approximately $6.6 million as compared to $11.7 million for the comparable quarter 2017. Fourth quarter included $2.2 million of non-recurring expenses associated with the ongoing Petrobras arbitration, the finalization of our settlement with the SEC and other non-routine legal matter. A comparable quarter of 2017 included a non-recurring accrual of $5 million for the SEC settlement which was paid in the current quarter.
General and administrative expenses also included anon-cash credit of $500,000 in the current quarter and a non-cash expense of $800,000 in the comparable quarter both for share based compensation costs, which is dependent on a re-measurement of our staple securities at the end of each reporting period.
Current quarter general administrative expenses were also lower than the reported $9.3 million in the third quarter of this year, which included approximately $2.2 million of non-recurring legal costs and $2.9 a non-cash shared base compensation.
Depreciation for the fourth quarter was approximately 17.2 million, which is lower than the previous quarter of 17.6 million. Financing expenses for the fourth quarter was approximately 20.7 million including non-cash charges of approximately 14.3 million. The net result was a loss of $52.2 million for the quarter or $10.44 per share.
Contract utilization for the fourth quarter was approximately 96.6% for the jackup and 35% for the drillship. The decline in the drillship utilization was primarily due to the Tungsten Explorer completing its contract with Total in October. As of the end of the year, we had approximately $156.7 million of contracts backlog. Please note we will be filling our 10-K today.
And with that, I will now turn the call back over to Ihab.
Thanks, Tom. I would not like to say a few words regarding the two markets we are in, the deepwater floater market and the modern jackup market. For the backdrop of historical higher free cash flow for top E&P operators coupled with lower breakeven cost for most offshore projects.
We estimate that 2019 will be the year for deepwater to catch to the modern jackups recovery that started a few quarters ago. It’s also worth mentioning that the short-lived drop in oil price in Q4, 2018, did not have any significant impact on operators’ plans for 2019 and beyond.
In deepwater, we have observed that customers are now coming back to the market at faster rates and with longer lead time. Tendering activity for ultra-deepwater drillships is up 92% year-on-year and we’re starting to see tenders with commencements dates over two years later therefore signs are pointing to a tightening of the market for sixth and seventh generation floaters.
Seventh generation market utilization is pushing us to the upwards and expected to soon exceed their friction point historically seen at 85% utilization. This we pushed seven generation day rates into the mid-2000 and higher setting the stage for a strong recovery for the marketed sixth generation drillship both in terms of utilization and day rates.
On the modern jackup front, the improving demand that started in Q4, 2017 continues and the later day rates in certain areas are pushing $80,000 and $90,000 per day. We now see many more multi-year and multi-rig tenders which will further tighten the supply demand equation for this class of jackups.
In conclusion, we see the stage set in 2019 for the beginning of a recovery of the deepwater and continued recovery for the modern jackup market.
I would like to turn the call over to Douglas Stewart now for an update on certain outstanding matters.
Thank you, Ihab. I briefly will address the material legal matters involving the Company 2018. First regarding the arbitration award rendered in June 2018 relating to our dispute with Petrobras for the termination of the joint contract for the Titanium Explorer now stands at approximately $720 million.
The Company is seeking to confirm the award in United States District Court for the Southern District of Texas, the effect of which if we are successful, will be convert the award into a judgment. The court held hearing on March 8, 2019, to listen to our motion to confirm the award and Petrobras’ motion to vacate the award.
The parties will make one more filing with the court on or before Friday March 15th, and we will then wait for decision from the Federal District Court. Our ability to fully recover the award against Petrobras is subject to legal, procedural, solvency and other risks associated with enforcing arbitration awards in these circumstances. Accordingly no assurances can be given as to whether or to what extent such award will ultimately be recovered, if at all.
On November 19, 2018, the Company concluded a settlement agreement with the SEC resolving the SEC’s investigations, the possible violation of the internal accounting control provision of the FCPA by our former parent VDC and VDC’s subsidiaries, which included Vatange and Vantage’s subsidiaries as former subsidiaries of VDC at the commencement of the investigation.
As part of the settlement agreement, we pay the SEC $5 million. We neither admitted nor denied any of the SEC allegations except as to jurisdiction, which we admitted. We accrued a liability for the payment in the fourth quarter of ’17. With the settlement of this matter with the SEC and the earlier decision by the DOJ to close its inquiry into Vantage and VDC without taking any action. United States Government’s investigation at Vantage and VDC for possible violations of the FCPA as formally concluded.
Finally, as previously discussed on July 19, 2018, Vantage became aware of legal proceedings in Brazil naming it among others as a defendant in connection with the contract into the Titanium Explorer drillship to Petrobras under the drilling contracts. The Company still has not been formally served nor advised by any Brazilian authorities of any particular charges. The damages claimed in the proceedings are in the amount of Brazilian reais of 102.8 million which is approximately $31 million, together with a civil fine equal to 3 times that amount.
The Company understands that the order issued by the court during the preceding has authorized to seizure and freezing of the assets of the defendant in the legal proceeding, including any assets of Vantage as a precautionary measure in the amount of approximately 124 million. The seizure order has not had an effect on the Company’s assets or operations as Vantage does not own any assets in Brazil and does not currently intend to relocate any assets to Brazil.
On February 13, 2019, we learned to the Brazilian federal prosecutor has required mutual legal assistance from the U.S. Department of Justice pursuant to the United Nations Convention against Corruption of 2003, to obtain a freezing order against the Company’s U.S. assets in the amount of 124 million. The Company believes this request is not supported by its applicable law and intends to vigorously oppose and defend against any attempts to seize its assets. Further, the Company intends to vigorously defend against the allegations made in the underlying in probity action. However, we cannot predict the ultimate outcome of this matter.
While we would not be surprised if the DOJ assisted the Brazilian federal prosecutors in effecting service process on the Company. We do not believe the DOJ would assist with respect to freezing our assets in the U.S. given the history of this case. The DOJ has discretion in these matters and as we have previously disclosed, has closed its investigation without taking any action.
We believe no new facts have arisen since such time other than the Company’s victory in its arbitration against Petrobras. For more information about this matter, along with information regarding certain other legal proceedings involved in the Company, please see our 10-K filed later today. Due to the nature of these items, we’re not going to make additional comments on those matters in our prepared remarks or during the Q&A session.
With that, I’d like to turn it over for question-and-answer.
Thank you. [Operator Instructions] And we’ll take our first question from Eric [indiscernible] from Clarkson.
Just a question on the Tungsten. First of all, you mentioned the attractive OpEx in Egypt . Can you give any more specific numbers around that?
Because we have a lot more specific than just that high level comment, but it’s a market where you can have very talented workforce as cost well below the international market. So that’s all what I can say at the moment and it’s a workforce that have been in the industry for indicates, so you have another deeper there.
And then just on the option period there. Will that be at the same rate at the fixed term? Or is it on a step up or market adjustments? Can you say anything about that?
I’m not sure I can say much about, but there is a little bit of a step up.
And then secondly on the Titanium, I mean, you mentioned that you’re seeing the market getting better for the deepwater rigs as well. Are you now seeing better opportunities for that rig or should we still expect that rig to stay warm stacked for some time?
I think clients again will be picking up the rig in kind of the older preference and the older preference will have active rig that just came of contracts. And the top of the backing older followed by pipe certification rates which the Titanium would fit that bill, but I think you need to see the active rigs going towards first rig for the Titanium will come up. And also from our point of view, we do have to reactivate the rig and we must want to reactivate it for one or two wells. So, it’s a long-term job that will justify getting the rig out mostly at least a year away. So, I would say not before a year from now.
We will take our next question from Patrick Fitzgerald with Baird.
What’s the restricted cash on the balance sheet this quarter?
Patrick, I’ll take that. It’s $14 million, so you’ve get $4 million that’s in long term assets because we have cash collateralized LCs, so the longer term contract for Platinum it’s working through the end of 2020. That cash — restricted cash collateralizing debt contract that was $14 million, $10 million is current, $4 million that’s another assets.
When do you start to see an uplift in day rates on the jackup side, I guess industry in general, how much do you think that uplift could be?
So, I will comment on the modern jackup. As I said, this is the market we are involved in and that has already started, everything is relative of course. I would say day rates are a good just top of my head, a good 20% higher than they used to be over the last year or too. So, it’s heading the direction market are getting tighter for those modern jackups, and especially in certain areas, they are definitely getting tighten up where as I said we’re starting to see day rates getting into the 80s and that will continue and I think next year will again it will be a good year.
You may come to a point where there is a cap that will be forced on the day rates by the availability of new rigs that have never worked before, and those rigs will required certain day rates to come out and will require also the clients to accept them because the client again they preferred to have working rigs. So on the only when they get that the working rigs, the active rig gets too expensive in their view than they will accept a rig that has never worked before. And of course, I’m generalizing the view of course there are all the exceptions to what I just said. So, I would say the eight is to a 100 is a level that we will start to see over the next few quarters.
Should we expect much margin on the Tungsten contract? And then beyond 2019 assuming those options are exercised, you talked about seventh gen I believe in the mid to 200,000 a day range in 2020. I mean, do you think that the for sixth gen rigs, do you think that number is in the 200 plus range?
Let me take the first part of your question and I will answer it very carefully again just not to say something I’m not supposed to say. Once the rig start operating, it will be cash accretive and it will be creating of the cash flow. But of course, there is the part of the preparing the rig using the certification done what we are doing right now and preparing for the job and mobilizing increases. That’s how we not count I think the positive cash flow. But once we are operating we are generating positive cash flow.
On second part of your question, I think as I mentioned in previous call, history has shown us that the last rig standing gets the higher day rate. It’s not — at that point, it’s not a longer about whether you have the more higher specs on your rigs, it becomes the fact that you are one of the few available rigs. And if the sixth gen will be coming to the market or starting to get that recovery after the seventh gen, my guess is that we will be seeing higher day rates for sixth gen that we will see for seventh gen. Again, question of availability as opposed to question of when the rig will available.
Do you think you’ll see additional M&A in 2019? And do you believe operating a relatively smaller company hurts your ability to win contracts?
I mean it’s good for the industry and definitely consolidations good for the industry, and that’s for everybody is realizing and everybody is working towards. But again, it’s not easy to consummate the one that are taking place or underway right now. They’re going to take a bit of time. And follow that, you will — might see another wave of M&A being small does not stop anybody from getting work, but being bigger, it’s good for their industry from a cost point of view and of course from having less players out there definitely helps the day rates.
So having the remaining cost reduction opportunity in the industry today is their G&A. We still have way too many companies that all of them have a complete top to toe under operation. And as we have seen from all the announcements that came out of the merger that have place our underway now, the level of saving, the synergies bring and these are the biggest numbers or the only remaining cost reduction opportunities. That helps us made some better margin while we’re trying to get the day rates up, but also once you have left expert players out there, it’s much faster to start getting that process of getting the day rates up. So, M&A is good, everybody wants it. So, it’s just a question of how easy it is to execute them.
With kind of day rates kind of moving higher or trending higher, what do you think in terms of OpEx?
The OpEx number that is sensitive to much tightening or activity going up is usually people. And we still have very high percentage of the workforce that is not working right now. And even when we go to a level where we’re very happy with, you still have a very high percentage of the workforce that are coming back towards yet, because of just the fact that a lot of those friends have been retired over the last couple of years.
So the competition for the talent is not going to be as far as in 2013 and 2014 where record really, rig counts going up vary significantly and we’re all competing for the same people. Today, people are going to be available and they don’t see any significant cost escalation going to happen on over the next few years that you will have some, which is natural and normal, but it’s not going to be anything crazy.
[Operator Instructions] And we’ll take our next question from Joshua Katzeff with Deutsche Bank.
Just want to start off with the jackup market and not necessarily asking for specific day rates on rig. But can you talk about maybe the difference you’re seeing between day rates in West Africa and Asia? I mean, I guess you’ve been talking about the tightness in West Africa. Is there magnitude you give us between the two markets?
Yes, it’s first with the two that difference in day rates in the Mediterranean. The difference in operating costs maybe half of that. So, yes, the margins in West Africa are definitely better than Southeast Asia. And thus of course came from the fact that you have a lot of new rigs in shipyards waiting for their opportunity to come out and they’re right there in Southeast Asia.
And then with the Aquamarine, what’s the timing on the first option extension? Are you going to know pretty soon? Or is this kind of drag into the summer on when you know about the additional work?
Yes, it will be into the summer before we have to decide. We don’t have to decide prior to that.
And then shifting down for, I guess, the Soehanah. If it’s not extended on his current contract, is that another rig that you would consider moving towards West Africa? Or do you see work for that rate in Asia, or it’s just too early?
We are busy in everywhere from East, South, West and North, not much North, but yes, everywhere. So, it’s being busy everywhere and we will decide on what is the best opportunity for the rig at once something is starting to materialize or once we agreed something with the Apexindo on the extension of the current arrangement.
If it extends on the current arrangement, are you’re going to keep the bareboat charter structure? Or is this something where you can take over the OpEx? And if you do, are you able to take increased that margin? Or I mean I don’t really know how the rigs being managed now?
Yes, I mean, the option we have is unpriced. So, the bareboat charter rate is unpriced and that’s what we’re negotiating right now. But if we are to extend it at least for the rest of this year, it will be on the same current arrangement for bareboat charter.
And then moving to the new bareboat to Tungsten, can you give us any more kind of I guess details about the structure with the JV? I assume you have to bareboat charter the rig into the joint venture and then if there’s a profit share. Is that bareboat charter in at least a fixed margin that we could count on plus a profit share on top of that? Or is that all going to be kind of floating rate on what the actual earnings rigs — the actual rig earnings are?
Again, I would not be able to get into any details, Josh, but I can say that the way you described, it is correct. So, we have a JV where we have 51% and others at 49%. And that JV operates the rig and that rig is being bareboat charter into the JV by Vantage. So, that’s the structure that’s all I can say about it and let’s just leave it there for now.
And then just to rehash an old point on the Titanium. We’ve now seen a competitor come out and reactivate a rig opportunistically. I guess, you’ve always been — I guess Vantage has always been kind of hesitant to do that for a short-term contract. Are you seeing any sort of shift? I know you said this probably not going to happen this year. Are there any kind of discussions you’re seeing now that can change that or can maybe accelerate that? Or do you think it’s pretty much going to be status quo for that rig?
I will be setting wrong expectations, if I say that I see it coming out this year. We might be lucky and land the contract for it this year, but that contract will not start this year. It will be one of the longer term drops that we start in future years. And again because of the market tightness, it starts to make sense for us to reactivate the rig and for the client to take it.
So, I would say this year the rig will continue to be on stacked. And again, I remind you that the rig is in perfect shape and we have 18 people at any given time taking care of all aspects of the rig from maintenance to fixing things that anything requires repair. And I remind again that couple of board meetings ago, we took the board and we went through the rig and we did the board meeting in the conference room on the rig.
So, that’s how well the rig is being maintained right now. It’s a rig we’re very proud of, when you take a client to see, we will have — we will have no hesitation — and they had no hesitation to select it, but the question is. The price tag you do that and then you go out for one well or two wells and then you hope you’re going to get for own work and you don’t that could be a blow to the rig and to the operation and to our bottom line. So, we’re not going to do that.
We now take a follow-up from Patrick Fitzgerald with Baird.
I am not asking about that litigation. I am just asking about timing. Is there any impact in the Netherlands proceeding from whether or not you get a judgment in the United States District Court from a timing perspective? Or is that just proceeding?
That’s proceeding, but again I’d rather not to get into the litigation.
[Operator Instructions] It appears there are — we’ll take a next question from Bill Schwartz with Apollo.
I don’t want to get into litigation, but at the top of the call you listed out a couple of dates. Could you just go over those dates again?
Sure. The date is relevant to the United States, March 8th last — essentially last week of Court heard our petition to confirm the award and Petrobras’s petition to vacate the award. That was the first date I mentioned and then May 14th is the date of the Netherland’s hearing.
[Operator Instructions] It appears there are no further questions at this time and that does conclude today’s presentation. Thank you for your participation. You may now disconnect.