Vantage Drilling (VTG) on Q1 2016 Results - Earnings Call Transcript

| About: Vantage Drilling (VTG)

Vantage Drilling Company (NYSEMKT:VTG)

Q1 2016 Earnings Conference Call

May 13, 2016, 11:00 ET

Executives

Doug Smith - CFO

Analysts

George Brickfield - Jefferies

Andy Scheffer - Onex Credit Partners

Operator

Welcome to the Vantage Drilling International Announces First Quarter 2016 Results Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Doug Smith, Chief Financial Officer. Please go ahead, sir.

Doug Smith

Thank you. Good morning everyone and welcome to the Vantage Drilling International 2016 first quarter conference call. I'm Doug Smith, Chief Financial Officer. I’ve with me Doug Halkett, our Chief Operating Officer

I will open with a few brief remarks. This morning we released our earnings announcement for the period ended March 31, 2016. This afternoon we intend to file our Form 10-K. 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. 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 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.

For the Vantage Drilling International update, the first quarter was a significant period of transition for the company as we completed our corporate reorganization on February 10, 2016. The reorganization has solidified our financial position and reduced the company's balance sheet risk in light of the current downturn in the industry. The key element of our reorganization plan was the removal of debt service on approximately 2.5 billion of debt as this amount was exchanged 750 million convertible note with non-cash interest paid in kind. Also as part of our amended plan -- part of our plan of amendment, our credit facility to 32 million revolving letter of credit facility and converted the outstanding borrowings to $143 million term loan facility.

We raised approximately 73.9 million of new cash through the issuance of second lien 10% term loan. We incurred approximately 23 million of expenses related to the reorganization of which 7.5 million were paid in the first quarter. The remaining balance has been paid in the second quarter as we receive the final court order approving these dispersants. With the reorganization behind us we continue to focus our efforts on our customers in responding to current market conditions. At this late point in our earnings release cycle I'm sure you have heard the consensus view of the extremely challenging conditions of oil field service companies.

Our customers continue to implement stringent cost control measures and reduce capital expenditures. Many of the discussions with customers regarding identified well programs and contract awards continue to be deferred, ultimately this reduction in expenditure and deferral of drilling programs will result in declining production. Based on the international energy agency's most recent report production is still outstripping demand resulting in continued build in oil supplies.

On a positive note demand continues to grow consistent with projections of 1.2 million to 1.4 million barrels per day increase for 2016 while the production growth rate has slowed significantly. This narrowing of the supply demand gap and unscheduled supply outages around the world have allowed all prices to firm up into the mid-40s. We believe this rebalancing of supply and demand is an important factor for our customers to return to the drilling market. Another key factor for our customers is the deflation of overall well development cost. All sectors of oilfield service industry are experiencing rate reductions which is bringing well development cost more in line with customer expectations.

These first two factors are necessary to get rigs back to work and increase overall industry utilization. However for a real recovery in the drilling industry, industry will need to address the oversupply of available rigs, this will necessitate the scrapping of older less capable rigs. The pace and timing of rig scrapping is difficult to determine as it is complicated by the availability of scrapping yards, the geographical location of the rigs relative to the yards and the related cost to move the rigs. In some cases it's cheaper to stack a rig than to scrap. As these older less capable rigs remain stacked it continues to create additional perception of oversupply in the market.

Fortunately for Vantage, we have one of the youngest most modern fleets with rigs in excellent condition. Our strategy is to continue to control costs, maintain our rigs, provide excellent service to our existing customers while we wait for the industry conditions to improve. Our balance sheet reorganization provide just the liquidity to see this strategy through these difficult times. In recent months we've experienced a moderate increase in the number of rig inquiries and discussions with customers. Our customer on the Topaz driller has exercised two options this year which is anticipated to keep rig the working through September.

As you can see from our fleet status report, in response to market conditions each of these options have been negotiated at a lower rate. While we are optimistic about the long term prospects for our industry we believe the current market conditions will prevail for the remainder of 2016.

Turning to the financial results, in connection with the emergence from our reorganization we adopted fresh start accounting as of February 10, 2016. Fresh start accounting required us to restate our balance sheet to the current fair value of our assets and liabilities upon emergence. Accordingly the results subsequent to February 10, are not comparable to our results prior to February 10. The period subsequent to February 10 are referred to as successor periods with the periods prior to February 10 being the predecessor periods. During the first quarter we achieved revenue of 29.8 million for the successor period and 23.5 million for the predecessor period. The predecessor achieved 220.5 million of revenue in the first quarter of 2015. A significant decline in revenue is due to decline in fleet utilization and day rates.

For the jackups during the first quarter we achieved approximately 57% utilization with an average daily revenue of approximately $90,000 per day as compared to the first quarter of 2015 in which we had utilization of approximately 96% and an average daily revenue of approximately $158,600 per day. For the drill shifts during the first quarter we achieved approximately 33% utilization as we had only had a Tungsten explore on contract. With an average daily revenue of approximately $288,000 per day as compared to the first quarter of 2015 in which we had utilization of approximately 94% for the fleet with an average daily revenue of approximately $606,000 per day.

It is important to note that the decline in utilization is strictly due to having only one rig on contract and non-operating performance. The Tungsten explorer achieved near 100% operating performance for the quarter. Operating cost for the successor during the first quarter of 2016 was approximately 27.4 million and for the predecessor of approximately 25.2 million. The predecessor had approximately 95.4 million of operating cost for the first quarter of 2015. The decline is driven by the decline in rig utilization in the current year as well as cost cutting initiatives implemented on our rigs and within our operations board [ph]. General and administrative expenses for the successor during the first quarter of 2016 were approximately 9.2 million and for the processor approximately 2.6 million.

The Successor's first quarter G&A included approximately 4.5 million of accrued severance costs associated with resignation of several of our officers. The Predecessor incurred approximately 6 million of G&A in the first quarter of 2015. Depreciation for the successor during the first quarter of 2016 was approximately 12.1 million and the Predecessor incurred approximately 10.7 million. In the prior year the predecessor incurred approximately 31.6 million of depreciation. The decrease in depreciation is primarily driven by the write-down of our assets in accordance with fresh start accounting. The decrease might be less than expected. However this is the result of the most significant write-downs being for a longer lived assets as a result there is not a proportional decline in depreciation with the write down of asset values. Included in other income and expense the most significant item for the successor is interest of approximately $10.7 million. As part of fresh start accounting we had to fair value our debt upon emergence which resulted in the recognition of a significant discount approximately 6.8 million of non-cash amortization of debt discount is included in the Successor's interest expense. The most significant item and other expense for the predecessor is approximately 152.9 million of reorganization items representing the fees incurred as part of the reorganization, the gain on the exchange of debt and the write down of assets pursuant to fresh start accounting. A detail of these charges is included in the 10Q which we will file later today.

For the Successor we reported a loss of approximately 29 million for the first quarter. Looking to the balance sheet as a March 31, we had approximately 250.2 million of cash on hand as compared to 203.4 million of cash on hand at December 31, 2015. We have approximately 826.5 million of debt outstanding net of discount of approximately 140 million. The details of our balance sheet and the reported amounts following the adoption of fresh start accounting will be provided in the 10Q again which we will file later today.

As for other outstanding matters we continue to progress the Petrobras arbitration in our FCPA investigation related to the contract in a Titanium Explorer. We do not have a material update to make at this time, due to the nature of these items we are not going to make additional comment in our prepared remarks or comments during the Q&A session.

With that I would like to turn it over to the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. And we'll take our first question from George Brickfield with Jefferies.

George Brickfield

Can you talk about what level on a commodity price do you expect that your customers will start to -- activity levels will start to pick up again with your customer base?

Doug Smith

I think there's both the commodity price and the expectation that the commodity price will continue for some period of time before they commit. So you know at current commodity levels we would anticipate that there would be some uptake in drilling activity but I think the customers are waiting for assurances that the current supply demand rebalancing will take hold and that they can plan to have the current rates for a sustained period of time. And we believe that you know the longer that it maintains these levels we will experience an increase in activity and obviously an additional increase in rates would be beneficial.

George Brickfield

And when you’re talking to customers out there I mean is there no interest in equipment at any level or is there interest in equipment but it's at levels that just are not economical for you at this point?

Doug Smith

Most of the discussions are around the drilling programs and moving forward is not until they're ready to commit to a drilling program that we get into a pricing discussion. So I'm not sure that it's really practical operator to cut your price to stimulate demand. I think it's more they're taking care of their business and when they get to happy with oil price they're comfortable with the rigs available in the market at that point they will tender. So it's not a situation where we're saying would you consider it a lower rate. It's really -- they need to establish the drilling program and their commitment to move forward.

George Brickfield

And then just last question. When they put that tender out what's the typical time line between going from tender to starting to generate revenue on ship, what's that cycle like?

Doug Smith

I think in this particular what you've seen over the last two years is there is no particular about it. There are some on some short term work that have happened rather quickly but most of them as they've gotten into it there's been additional decisions to delay programs and defer work and so there hasn't been a -- what I would consider a typical cycle of really the last two years and what we're experiencing today. You know at some point as oil prices firm and people decide to go back to work we'll get some more normal times but I don't think there's anything that you can look at today that says it's 1, 3, 5, 6 month type process.

Operator

[Operator Instructions]. We will take our next question from Andy Scheffer with Onex Credit Partners.

Andy Scheffer

Can you walk us through what you're stacking quotes are for the drill ships and the jack ups and what state are you keeping them?

Doug Smith

Yes I think it's consistent with what our peers are doing. Those costs have come down dramatically as the industry is really turned into somewhat of a stacking specialist. But I don't think we have a clearly defined guidance that we're willing to provide with respect to that. The investment that each driller is making in their rigs through stacking cost is an important competitive aspect of how you compete on the upcoming tenders and so we’re evaluating the upcoming tenders and our outlook for work and making sure that we maintain the rigs in a capacity where we can meet that demand and we'll continue to reduce cost where we can. So we're not willing at this time to go forward providing a specific walk through each of our vessels.

Operator

[Operator Instructions]. And with no further questions at this time I would like to turn the call back over to Mr. Doug Smith for any additional or closing remarks.

Doug Smith

I just like to thank everybody for attending the call today and we appreciate your continued interest and we'll look forward to catching up with you next quarter.

Operator

That does conclude today's conference. Thank you for your participation and you may now disconnect.

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