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Executives

Mark Howell

Paul A. Bragg - Chairman, Chief Executive Officer and Member of Executive Committee

Douglas G. Smith - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Zachary Sadow - Barclays Capital, Research Division

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Megan Repine - FBR Capital Markets & Co., Research Division

Eduardo Royes - Jefferies & Company, Inc., Research Division

Vantage Drilling (VTG) Q1 2013 Earnings Call May 10, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Vantage Drilling Company First Quarter 2013 Earnings Release Date and Conference Call. Today's conference is being recorded.

And at this time, I will turn the conference over to Mr. Mark Howell, Associate General Counsel. Please go ahead, sir

Mark Howell

Thank you. Good morning, everyone. Welcome to the Vantage Drilling Company first quarter 2013 conference call. We appreciate you joining us. I'm Mark Howell, Legal Director and Associate General Counsel for Vantage. With us today on the call, we have Paul Bragg, our Chairman and Chief Executive Officer; and Douglas Smith, our Chief Financial Officer. I'll open with a few brief remarks.

This morning, we released our earnings announcement for the period ended March 31, 2013. This afternoon we intend to file our 10-Q. The earnings release is available on our website at www.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. Forward-looking statements made 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, we will entertain some questions.

With that, I would like to turn things over to Mr. Paul Bragg.

Paul A. Bragg

Thanks, Mark. Today, I have a number of positive developments to discuss with you. I'm pleased to report that this week, we've received a letter of intent for Tungsten Explorer to commence upon delivery of the rig from the shipyard. Likewise, the Tungsten's previously-announced award in West Africa for the Moho Nord development has been formally executed by contract.

We have reached a favorable settlement on a contract termination for the Sapphire Driller, our jackup in West Africa. And we've returned to full operating day rate on Titanium Explorer, our drillship in the Gulf of Mexico.

In March, we completed the refinancing process that we started last October, and we've now retired all of our older 11 1/2% notes. We sold new notes, 10-year notes at 7 1/8%, as well as term loans at LIBOR plus 4.50%. Coupled with our October financing, we have reduced our interest cost to just below 7%. We've saved almost 500 basis points on $2 billion plus worth of borrowings, about $90 million a year.

Our first quarter results were much as expected. That was negatively impacted by the reduced day rate on Titanium Explorer. We've been operating at a 70% day rate as we explained on our last call. This situation was ongoing for much of the quarter. However, this week, the rig returned to the full operating rate.

Filtering out the refinancing charges, Q1 results were a loss of $0.08 per share versus about a $0.04 loss in Q4 2012.

EBITDA was $64.3 million in Q1; that was up about 13% from the previous quarter. And Doug Smith will go into some detail on the financial results in just a few moments.

Q1 was a solid operational quarter for Vantage. Our jackups, once again, worked at approximately 99% utilization during Q1. The deepwater utilization was right around 90% in Q1, with Platinum Explorer at 99% and Titanium Explorer at just under 80% in what was its first full quarter of operation.

Titanium Explorer commenced operations in December and is now drilling in the U.S. Gulf of Mexico in about 8,800 feet of water. The ship has generally functioned well with mechanical uptime well above the industry norm, we believe. Last week, there was no downtime lost at all and that's continuing now.

With that, Doug will go through some of the details of the quarter's results.

Douglas G. Smith

Thank you, Paul. Our first quarter revenues were approximately $147 million as compared to $123 million in the prior quarter and $131.8 million in the first quarter of 2012.

Revenue from contract drilling business for the first quarter was a record $134.7 million as compared to contract drilling revenue of $113.7 million in the prior quarter and $105 million in the prior year, representing a sequential increase of 18.5% and a year-over-year increase to 28.3%. The sequential increase in revenue is due to the Titanium Explorer, which commenced operations on December 7, having a full quarter of activity, and the Topaz Driller, which had 43 days of mobilization from Malaysia to Indonesia during the fourth quarter, also having a full quarter of activity.

Income from operations for the first quarter was $39.4 million as compared to $37.6 million in the prior quarter, and $40.7 million achieved in the first quarter of the prior year.

The jackup operation for the first quarter had revenue of $57 million, compared to $51.7 million in the prior quarter. The increase in revenue is due to the 43 days of mobilization that the Topaz Driller had in the prior quarter. Productive time for the jackup fleet, while on contract, was in excess of 98.4% in the first quarter. Average contract revenue per day for our jackup rigs was approximately $158,500 for the first quarter, which is consistent with the prior quarter and ahead of the $151,800 in the first quarter of the prior year.

The direct operating cost for the jackup operations was approximately $23.9 million for the first quarter, as compared to $24.9 million in the prior quarter.

For the quarter, the operating cost per day for the fleet, net of reimbursable expenses, was approximately $60,700 per day, as compared to $61,300 per day in the prior quarter.

Moving to the deepwater. The Platinum Explorer achieved an excess of 99% productive time for the first quarter, resulting in revenues of $51.9 million, which is consistent with the prior quarter, adjusting for the number of days in the quarter.

Direct operating costs for the first quarter were approximately $17.8 million, as compared to $17.1 million in the prior quarter. The Titanium Explorer, which commenced operations on December 7, had productive time of approximately 78%, and generated revenue of approximately $29.6 million with direct operations cost of approximately $18.1 million, as compared to $11.6 million of revenue and direct operating cost of $6.7 million in the prior quarter.

Looking at our management business, we had revenue for the quarter of approximately $8.4 million, consisting of $3.2 million of management fees and $5.2 million of revenue for reimbursable costs.

The first quarter revenue compares to revenue in the prior quarter of $5.8 million, which consists of $2 million of management fees and revenue for reimbursable costs of $3.8 million.

During the first quarter, we had a full quarter of contribution from the contracts to manage 4 jackups for a newly-formed drilling contractor in Mexico and a shipyard construction management agreement with a drillship being built by Sigma, a venture where we have a 42% equity interest.

The cost for our operation support was approximately $8 million for the quarter, as compared to $5.7 million in the prior quarter. The increase was primarily to accommodate the growth of our business including taking on the 5 additional shipyard projects and putting the Titanium Explorer into service.

Corporate G&A was $7.4 million and depreciation for the quarter was $24.9 million, as compared to $7.4 million and $19.2 million, respectively, in the prior quarter. The increase in depreciation was due to the Titanium Explorer being in-service for a full quarter as compared to 1 month in the previous quarter.

EBITDA for the quarter was approximately $64.3 million as compared to $56.8 million in the prior quarter and $57.3 million in the first quarter of 2012.

We had interest expense of $59.7 million, a loss on the early retirement of debt of $98.3 million and tax expense of $5.6 million for the quarter, which resulted in a net loss of approximately $123.2 million or $0.41 per share. This compares to interest expense of $44.6 million, loss on the early retirement of debt of $122.1 million and tax expense of $4.4 million in the prior quarter, which resulted in a net loss of approximately $133.6 million or $0.45 per share.

The loss in the early retirement of debt is due to the refinancing cost of a $1 billion, which I'll discuss in a more detail in a minute.

Excluding the loss on early retirement of debt, net loss for the first quarter was approximately $24.9 million or $0.08 per share, as compared to a net loss of approximately $11.5 million or $0.04 per share in the prior quarter.

Turning to the balance sheet. As of March 31, we had approximately $460.5 million cash on hand, including $3.5 million of restricted cash, now seen in [ph] Borrowings of approximately $2.8 million.

In March, we issued $350 million of 6-year term loan and $775 million of 7 1/4% -- excuse me, 7 1/8% senior notes, which mature in 2023. The proceeds were used to retire $1 billion of the company's existing 11 1/2% senior notes for a total consideration of approximately $1.1 billion.

The term loan bears interest of LIBOR plus 4.5%, the LIBOR floor of 1.25%, in connection with the refinancing to recognize a loss of approximately $98.3 million, consisting primarily of "make-whole" premium and write-off of related deferred costs.

Looking to the future guidance for the company, the Titanium Explorer, which is now back on full day rate, due to additional unforeseen difficulties remained on a reduced rate through April, which reduced our second quarter projections. We currently project EBITDA for the second quarter of $70 million to $80 million.

Depreciation for the second quarter will be approximately $25 million, interest expense is estimated to be approximately $47.4 million, and income taxes of approximately $5.8 million.

This results in a profit range of approximately $2 million profit to loss of approximately $8 million, or $0.01 per share of earnings to a loss of $0.03 per share.

CapEx for the first quarter consisted of $4.5 million for the operating fleet, consisting primarily of fleet spares; $11.8 million associated with the development of the Tungsten Explorer, including $3.4 million of capitalized interest; and $2.2 million for software upgrade projects.

For the second quarter, the primary CapEx commitments are the $417 million final shipyard payment for the Tungsten Explorer, plus approximately $30 million of equipment and initial mobilization cost.

We'll be filing our 10-Q later today, and with that, I'll turn it back to Paul.

Paul A. Bragg

And next, I'd like to update you with regard to construction projects. Our third ultra-deepwater drillship, Tungsten Explorer, is nearing delivery. The naming ceremony occurred in Korea on April 11 and the sea trials were conducted immediately afterwards.

The delivery will occur in June, will likely sail way around the third week of June. We expect mobilization of the rig to our customer in Southeast Asia to follow and operations to commence around August of 2013.

This initial contract will last approximately 90 days and the total value of the contract is about $68.2 million. Detailed engineering and procurement is ongoing for the Palladium Explorer with STX in Korea. The managed unit, Dalian Developer -- work is progressing at the COSCO facility in China. And our team is also providing construction oversight for 5 managed jackup rigs under construction at 2 different yards in Singapore. A sixth jackup was recently mobilized to Mexico and is preparing for start-up in June.

Turning to the market, the status of our rigs and our market outlook. Well, on the jackup front, we see modern high-specification jackups continuing to be fully utilized. All 4 of the Vantage jackups are with repeat customers. Sapphire Driller will complete a job this month in the Ivory Coast. We had contracted the rig to another party in Ivory Coast, in continuity, however, that party has sold a major interest in its Ivory Coast concession and, as a result, delayed the drilling program. Following that, the drilling contract has been terminated at an agreed cancellation fee of $12.4 million. We expect to receive a commitment for a short-term replacement contract in West Africa very shortly, with little or very -- no downtime, whatsoever, in between.

We also expect to reach an agreement on a follow-on contract for the unit for a longer duration, and I'll just point out that the rates on high-specification jackups in West Africa range from the very high 1 60s up into the 1 90s.

Current bids for modern jackups in Asia are generally in the 1 60 to 1 80 range.

On the ultra-deepwater front, we see international ultra-deepwater rates holding firm, generally around $600,000 a day. Now assuming the receipt of customary host government approval, Tungsten Explorer will be contracted for its initial well in Southeast Asia to immediately follow on the shipyard delivery and mobilization. As I mentioned, the revenues will be a little over $68 million, to be earned in about a 90-day contract period.

We think this is quite attractive, even though it's a short-term project. We plan to drill at least one more project prior to starting the Moho Nord development in West Africa in the middle of 2014.

We currently have about 5 additional projects being discussed seriously. Our confidence is high that, as such, that the work will be scheduled in continuity on attractive terms.

We continue to believe there will be strong market conditions for ultra-deepwater rigs for years to come, and particularly in the next several years.

So including -- concluding our prepared remarks, I'll just say that we've completed many of our near-term goals, financing, contracting and operating. The recently-obtained contracts have added to a strong backlog and more contracts are expected in the near term.

The delivery of Tungsten Explorer is just around the corner and upon its start-up, our financial performance will take a huge step forward and upwards.

We're quite excited with what the balance of the year is going to bring for Vantage. We'll turn to question-and-answer at this point.

Question-and-Answer Session

Operator

Operator Instructions] We'll hear first from Zach Sadow from Barclays.

Zachary Sadow - Barclays Capital, Research Division

Are you seeing an uptick in floater inquiries in Southeast Asia? And do you think this market might be stronger than current perceptions?

Douglas G. Smith

I think there are a lot of different perceptions and they -- some range from very strong to not so strong. But we have seen an increase in inquiries, and not just in Southeast Asia.

Zachary Sadow - Barclays Capital, Research Division

Okay. You previously suggested that the Tungsten Explorer would likely go to the U.S. Gulf of Mexico. Any reason why that doesn't come to fruition? And are you noticing any change in tendering activity in the region, following the recent discoveries in the Lower Tertiary?

Paul A. Bragg

We announced the project for Tungsten Explorer about 4 months ago, which is a significant development project in West Africa. The rig's on a 2-year firm with 2 years of options. We found that to be an attractive project. It could've easily have gone to the Gulf of Mexico, it was bid on multiple jobs and basically it's first come, first served. So we bid each project on a basis where we'd be happy to receive it, and this is the project that committed and we received it first. Though we've been in the process of scheduling some work ahead of that project, which gives us a window in the middle of next year for arrival, so we're announcing this additional project today. And we would expect to have one more to announce prior to the completion of the initial project. So we'll likely -- about the time that we leave the shipyard, we would expect to have as much as 5 years' worth of expected work on the unit, with about 3 of that being committed, and the other subject to options.

Operator

[Operator Instructions] We'll now hear from Ryan Fitzgibbon with Global Hunter Securities.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

I'm going to follow on Zach's question there, for the Tungsten. The math that you guys gave us, $68.2 million over 90 days, obviously it spits out a big rate. What's the clean rate after you adjust for mobilization and the upgrade cost?

Douglas G. Smith

That in -- we gave the entire revenues from the project. At this point in time, not really in a position to go into more detail about that. It's obviously an attractive rate for us.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Fair enough. And then the follow up there. It sounds like there's additional work in the queue. Should we think of that as in Southeast Asia? Or East Africa? Essentially what I'm looking for is, what kind of downtime should we expect? Or days not on revenue in 2014 for that rig?

Paul A. Bragg

The way we are bidding all the projects, any day that is not worked is being compensated -- from a revenue recognition standpoint, it'll be recognized over the days that it works, and works under that particular contract. But we do not anticipate any non-compensated days with regard to the rig. There are currently 5 projects that are in an advanced state of discussion, negotiation, whatever, tender. Any one of those 5, I think, if it weren't for the presence of the other 4, would result in a contract. But in the end, it will be first come, first serve, again, whichever commits will be the follow-on project. Those projects range from Southeast Asia to West Africa.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Got it. That's helpful. And then my second question is on the Titanium. Paul, can you talk a little bit more about issues with the rig so far? I believe last call was something related to downhole. Basically just looking for additional detail as to why it's been on the lower rate for...

Paul A. Bragg

The lower rate, as we mentioned in the previous call, was a downhole situation that really didn't have anything to do with the mechanical performance of the rig. The rig -- I'd say the first 30 or 40 days, had a fair -- kind of not a super clean start, but an expected start, nothing particularly bad, but some days lost here or there. Since that point in time, it's actually operated above expectations. And over the last 2 or 3 weeks, I would say, it's operated extremely well.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

That's good to hear. Should we model that rig earning bonuses for the back half of this quarter?

Paul A. Bragg

Well, our own practice is that in the first year, you take some caution about what the utilization rate's going to be. In this case, the bonus is earned starting at 90%. So we're going to be pretty conservative. We do expect some months that we're going to earn bonuses. And there will probably be some months that we don't. Interestingly, this last month, during the period of the reduced rate, the actual uptime performance was such that it would've resulted in a calculated bonus, near whole bonus, I guess, for the period.

Operator

Megan Repine from FBR Capital Markets has the next question.

Megan Repine - FBR Capital Markets & Co., Research Division

So my first question is, really, with all of the jackup rigs coming to market in the next few years, just how do you see the bifurcation of the jackup market playing out? And are you already starting to see signs of these with some of your contracts rolling off this year?

Paul A. Bragg

I guess, the change I would see from 4, 5 years ago is that now that the new modern rigs are really the standard, there's just fewer projects where the operator would consider the older unit. It used to be the other way around, that there were fewer project opportunities where the guy was demanding the modern rig. So the jackup market is quite strong and almost across the board. We see good activity and in Asia, in Middle East, in West Africa. Now, obviously, some pickup in activity in Mexico with a lot of rigs being absorbed to go into that market, and probably, more to go there yet. So we think the indications for jackups are quite strong for the foreseeable future.

Megan Repine - FBR Capital Markets & Co., Research Division

Okay, that's helpful. And then just on some modeling questions on the Tungsten. So when should we expect you will begin depreciating that? And then also, how should we think about capitalized interest as we approach delivery?

Douglas G. Smith

The capitalized interest will jump up in the quarter in which it's delivered. So later this quarter, we will see capitalized interest as you increase the investment when you take delivery. That'll, obviously, through your calculation in capitalized interest, increase that dramatically. But then you'll only capitalize interest or the period until it gets on contract. And as we're expecting a fairly near term commencement of the operation in Southeast Asia, there won't be as significant a capitalized interest as what you've seen on some of our prior rigs. So we're looking at 2, 3 months of capitalized interest at a full cost level. What was your first question?

Megan Repine - FBR Capital Markets & Co., Research Division

Just when you'll start depreciating the rig? Is it when it goes on contract or...

Douglas G. Smith

Yes, we'll take -- the month that it goes on contract is the month we'll begin depreciating it.

Operator

[Operator Instructions] We'll now hear from Eduardo Royes from Jefferies.

Eduardo Royes - Jefferies & Company, Inc., Research Division

Just -- I guess I'll go, like everybody else, following up on the Tungsten. A couple of things, number one, is there anything you've learned from sort of the Titanium Explorer and the downhole issue, which you said multiple times are not rig-related, but were still an issue? Is there anything you're able to sort of apply, or able to apply from some of those issues, which obviously again not rig-regulated, still took a bit of a toll on the uptime, or the revenue you guys generate on the rig, as you negotiated the Tungsten Explorer contract? Or maybe put simply, do you feel like there's any progress or anything you've been able to do to sort of further streamline uptime there, reduce risk all around, once you get that rig on rate?

Paul A. Bragg

In a general sense, I think you learn from all your experiences. In terms of applicability from this to another job, or another rig, there's really not much. This was a fairly unique situation that occurred, unlikely to be repeated anytime soon. I mean, no one operates at perfection. And we -- overall, I'd say we come pretty close to it. But we're not -- we're never going to operate at perfection nor will anyone else.

Douglas G. Smith

I think it's important to note that the contract provisions that provide for the reduced rate are standard to the industry. And when you have the much larger operators, obviously, they have larger fleets, so when they lose a portion of a day rate on an individual rig, they don't comment on it with respect to their phone calls, conference calls. We've had to explain it just due to the size of our fleet. I would not prefer to be sharing this level of detail but that's really the nature of where we're at. So I'd say this is a standard across the industry-type provision.

Eduardo Royes - Jefferies & Company, Inc., Research Division

Okay. That's a -- one more clarifying and then I got one more. You guys said you think the rig should be on rate around August, was that correct?

Paul A. Bragg

The Tungsten, yes.

Eduardo Royes - Jefferies & Company, Inc., Research Division

The Tungsten. Yes. Okay. And then switching gears just a little bit. We've seen 25, 30 jackups or so ordered this year. We're even seeing one of the engineering firms introduce a -- speculative design ships this week. Just given your management experience, how should we think about -- or how are you guys thinking about further opportunity sets? Because obviously, a lot of the guys who are ordering rigs are, in some cases, not even known, we don't even know who they are. It's just sort of undisclosed and ODS, or the yards are not proven. You guys had that experience, you're obviously doing stuff in Mexico. Just wondering how you guys think about that going forward, given all those opportunities between really now and the last time we spoke 3 months ago?

Paul A. Bragg

I think, everyone, including ourself has limited -- limited human assets and you're -- want make sure that you use them wisely. We like to pick management projects that have a long-term nature to them and that have some strategic advantage to us. We feel that we get that with the project in Mexico. In the case of the Sigma unit, there's management services being provided, but we have an ownership stake in the project as well. So it's a natural. But broadly, to go out and do exotic stuff is not really in our plans.

Operator

We have no further questions at this time. Mr. Howell, I'll turn the conference back over to you for closing or additional remarks.

Mark Howell

All right. We appreciate everyone's attendance today. Thanks a lot.

Operator

And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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