Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

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

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Todd P. Scholl - Clarkson Capital Markets, Research Division

Phillips Johnston

Vantage Drilling (VTG) Q2 2012 Earnings Call July 30, 2012 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Vantage Drilling Company Announces Second Quarter 2012 Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mark Howell, Associate General Counsel. Please go ahead, sir.

Mark Howell

Thank you. Good morning, everyone. Welcome to the Vantage Drilling Company's Second Quarter 2012 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 June 30, 2012. 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

Thank you, and good morning, everyone. Although the headline earnings and EBITDA numbers for Q2 appear to be significantly off the trend from the first quarter, the 2 quarters were actually almost look-alikes. Now let me explain that. First, as we have discussed for much of the last year, we've been planning a period of 10 days out of service for our first drillship, Platinum Explorer, to enhance some of the drill floor equipment. The new equipment, supplied by the vendor to us at no cost, had to be manufactured and delivered to us offshore India. The opportunity to change out the equipment finally came in Q2, but the resulting out-of-service period cost us more than $6 million of lost revenues and lost earnings and cash flow. Otherwise, Platinum Explorer enjoyed efficient operations in the quarter. Without the offline time for the upgrade, Platinum performed at about 99% uptime in the period. The second item that results in a difference between the periods is about $2.5 million of costs recognized during the second quarter for Titanium Explorer, our second drillship, even though the ship is not yet in service. Now generally, pre-commencement costs of a new asset are capitalized prior to the rig starting on its first job. However, today's accounting regulations do require a few items, like training and insurance, for example, to be expensed currently.

On the other hand, nearly $40 million of mobilization revenues are fully deferred until post the startup of the unit and will be amortized over the 8-year contract term. So there is a revenue associated with this item, just not in the period. After these 2 items, the second quarter would have been a mirror image of Q1.

Doug Smith will review in detail the financial results in just a few moments. Q2 was another solid quarter of operational excellence for Vantage. Our jackups once again worked at essentially 100% productive time, and the Platinum Explorer had a natural [ph] efficiency of about 91%, but 99% exclusive of that 10-day upgrade period. Titanium Explorer has now completed its transit from Korea to the U.S. Gulf of Mexico. She's currently offshore Louisiana, conducting the initial acceptance test. We're hopeful to complete all of the testing, including the subsea testing in more than 8,000 feet of water, during Q3 and to commence work late in the quarter. Titanium will supplement annual EBITDA by $140 million or more, with that impact starting to be visible in Q4. With Titanium's contribution, Vantage earnings should move solidly profitable. Doug?

Douglas G. Smith

Thanks, Paul. Our second quarter revenues were approximately $105.1 million as compared to $131.8 million in the prior quarter and $121.1 million in the second quarter of 2011. The decrease in revenue from the first quarter was largely due to a $24.2 million decline in revenue from Vantage projects as we acquired the Titanium Explorer during the quarter, ending the shipyard oversight contract we previously had in place. Revenues from contract drilling business for the second quarter was approximately $99.7 million as compared to $105 million in the prior quarter, representing a decrease of 5%. The decrease was primarily due to the scheduled out-of-service time we discussed on the last call for the Platinum Explorer in order to install OEM upgrades to the tubular handling system.

Income from operations for the second quarter was in line with expectations at $32 million as compared to $40.7 million in the prior quarter and $32.2 million achieved in the second quarter of the prior year. The jackup operations for the second quarter had a revenue of $55.2 million, which is consistent with the prior quarter. Productive time for the jackup fleet was in excess of 99% in the second quarter, which was also consistent with the first quarter. The average contract revenue per day for our jackup rigs for this quarter and the previous quarter was approximately $144.5 -- I'm sorry, $144,500 per day, which compares favorably with the $131,500 per day achieved in the prior year. The direct operating cost for the jackup operations was approximately $23.2 million for the second quarter as compared to $23.4 million in the prior quarter. For the quarter, the operating cost per day for the fleet, net of reimbursable expenses, was approximately $59,400 per day as compared to $60,300 per day in the prior quarter. The Platinum Explorer achieved approximately 91.1% productive time for the second quarter, resulting in revenues of $47.3 million as compared to 98.8% productive time and revenue of $52.4 million in the prior quarter. The decrease was primarily due to, as previously discussed, the OEM supply upgrades and the related time out of service. Adjusting for the scheduled out-of-service time, the Platinum Explorer achieved approximately 99% productive time for the quarter. Direct operating costs for the second quarter were approximately $17.3 million as compared to $18.6 million in the prior quarter. Additionally, in the deepwater group, as Paul mentioned, we incurred an additional $2.4 million of expenses associated with the Titanium Explorer.

Our management business had a revenue for the quarter of approximately $2.7 million, consisting of $956,000 of management fees and $1.7 million for reimbursable costs. The second quarter revenue compares to revenue in the prior quarter of $24.1 million, consisting of $2.7 million of management fees and revenue for reimbursable costs of $21.4 million. As previously noted, the contract for the supervision of Titanium Explorer was completed when we reached an agreement to acquire the rig in April.

The operating cost for our Singapore operating base was approximately $6.1 million for the quarter as compared to $5.8 million in the prior quarter. Corporate G&A was $6.7 million and depreciation for the quarter was $16.4 million as compared to $5.3 million and $16.6 million, respectively, in the prior quarter.

EBITDA for the quarter was $48.3 million as compared to $57.3 million in the prior quarter and $48.3 million in the second quarter of 2011. We had interest expense of $36.2 million and tax expense of $6.1 million, which resulted in a net loss of $10 million or $0.03 per share. This compares to interest expense of $36.7 million and tax expense of $5.8 million in the prior quarter, which had a loss of $1.2 million or basically breakeven on a cents per share.

As of June 30, we had approximately $129.6 million of cash on hand, including $5.9 million of restricted cash and outstanding borrowings of $2.1 billion.

Looking to the future guidance, our third quarter is significantly impacted by the timing of the commencement of operations on the Titanium Explorer. We expect our core operations to be consistent with the first quarter of this year, with an EBITDA of $55 million to $57 million. This number will be adjusted for the days in service on the Titanium Explorer, which will be achieving approximately $575,000 per day of revenue. The fourth quarter guidance remains unchanged at $81 million to $85 million of EBITDA. FX, excluding the Titanium Explorer and capitalized interest for the remainder of the year, is estimated to be approximately $19 million. On the Titanium Explorer, we expect an additional $20 million of capital expenditures, primarily for equipment and crew costs prior to the commencement of operations. We'll be filing our 10-Q later today, and with that, I'll turn it back to Paul.

Paul A. Bragg

Thank you. In terms of our ongoing construction, our third ultra-deepwater drillship, Tungsten Explorer, is progressing ahead of schedule. Launching occurred on July 6, and the delivery of the unit is scheduled for May 31 of next year. The managed unit, Dalian Developer, work is progressing at the COSCO facility in China. Scheduled delivery is Q4 this year, whereas actual delivery will likely be in the following quarter.

Let me take a few moments to discuss our market outlook, starting with jackups. In a repeat statement, modern high-spec jackups, as has been the case for some time now, are fully utilized. We expect long-term continuity of our jackup fleet with existing customers. We recently added backlog to the Sapphire Driller at a rate of 165,000 a day, up from 120,000 a day, and in addition to that, we were reimbursed for taxes. We are in the advanced stages of adding additional contract backlog with existing customers for the Emerald Driller and Aquamarine Driller. Together, we expect the added contract for those 2 units to equal 3 to 4 years at prices in the $150,000s. There has also been some commencement of ongoing discussions with respect to the customer for the Topaz Driller.

Current bids for modern jackups are in the $150,000 to $160,000 range, and we believe that rates in this range are now commonly accepted by most of the customers in the business. In terms of ultra-deepwater, international ultra-deepwater continues to strengthen, and the market is seeing fixtures rise $175,000 to $200,000 per day over the last year and a half. Fixtures at $575,000 and above are now prevalent, and some of them, well above $600,000 a day. We expect that the new-build Tungsten Explorer will be well positioned to receive a day rate ranging from high $500,000s to low $600,000s for multiyear work. We have numerous potential jobs for Tungsten under discussion with customers. Some of these discussions are in the third or fourth round currently, and we are preparing more bids currently as well. These projects will match the delivery date of Q2 2013.

In the Gulf of Mexico, activity is now officially robust as there are more quarters contracted than prior to Macondo. We expect Gulf of Mexico deepwater drilling to continue its recent surge into 2013 and beyond. The recent discoveries in Angola in East Africa will further build demand for ultra-deepwater rigs. One customer is currently seeking 5 ultra-deepwater rigs for West Africa. Petrobras has taken a bit of a breather as their new management team has taken some time to review the entire portfolio of projects and opportunities, but this process seems to be nearing completion. And one thing is clear is that Petrobras will need additional rigs to meet their production goals, even though they bring those in a bit from previous aggressive targets. Getting additional rigs into that market will be critical for Petrobras.

Considering all of these factors, we believe there will be very strong market conditions for ultra-deepwater drilling for years to come and particularly, in the next several years.

So concluding, last quarter, I concluded that we were in a better position than we've ever been in our history, and today, our position continues to improve. Operations are running smoothly, and we're focused on execution. Major catalysts are already in the queue and essentially date-stamped. Titanium is now in the Gulf of Mexico and should start up around the end of this quarter. Tungsten should be contracted on attractive terms over the next several months, and delivery is 10 months away. We are now just 6 months away from the initial call date on our bond debt, and our jackups are receiving contract extensions at higher rates, which will benefit our results next year and beyond. We are indeed well positioned.

In the near term, I'm sure that investors that invest in this sector will continue to be influenced by things like the European sovereign debt issues, but we remain quite bullish on the factors that are most important and drive our business. We believe offshore drilling will continue to be vibrant, and we believe Vantage investors will be rewarded for their patience. At this point, we are happy to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Robert MacKenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

A question for you, Paul. With the Titanium entering the Gulf now, do you have any kind of updated guidance on where your tax rate might end up?

Paul A. Bragg

The tax rate will still remain -- we're projecting between a 4% and 5% of revenue. We had already taken into account the structure that we're using in the Gulf of Mexico, and we kind of came up with that as our benchmark.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. And then kind of my follow-up question relates to Petrobras to a certain extent and the Dalian Developer. Is there anything you can tell us as to the status of the potential contract negotiations there? Is that kind of on hold given the overall Petrobras comment? And if so, are there other alternatives you're looking at to contract that rig before directly purchasing it?

Paul A. Bragg

Yes. So let me address it a couple ways. I think the interest of Petrobras in the rig and the project remain fairly strong. They did go through this extensive period of evaluating their portfolio, which included that project and others. There's been some positive response since. What I would say from a Vantage perspective is that what's happened in the marketplace, particularly the financial markets, make it less attractive to us without some significant modifications to what we originally contemplated around the unit. I'm not sure that's really in the cards, so I'm much less bullish on that being an opportunity for us or certainly being an opportunity near term. So we'll see. I think it would need to be reformatted in some form or fashion for that to make sense for us.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. Does that then mean that kind of the next venture for Vantage might be a new-build? And if so, have you explored shipyard timing and costs? Anything you can share there?

Paul A. Bragg

I guess I'd first say that the next priority for us is really the existing fleet, so that's not only to contract the Tungsten and get Titanium up and running efficiently but focusing on the balance sheet a bit. In terms of preference of next asset, yes, I think you'd be right to say that it'd probably be a new-build, and we have continually worked with the shipyard to keep an option. We do have an option currently on another unit. And we would be much more inclined to go that direction probably than to acquire something out in the marketplace. But near term, again, I would point you sort of inward to what's in the fleet and work on the balance sheet.

Operator

[Operator Instructions] Our next question comes from Todd Scholl with Clarkson Capital Markets.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Just a quick question. You've answered most of my questions, but as far as the run rate going forward on kind of like your reimbursables, should we now model going forward kind of similar to this quarter now that you have actually taken ownership of the Titanium Explorer?

Paul A. Bragg

On the reimbursables, what you look at is our normal operating fleet tends to do $2 million to $4 million a quarter of reimbursable revenue. The significant amount of reimbursables were associated with the management, the project business, and the reimbursables within the project business kind of fluctuate along with the status of the project. So right now, like you saw for this quarter, we didn't have a whole lot of reimbursables. But as the Dalian Developer gets closer to delivery and begins its mobilization or its commissioning exercises, the level of reimbursables escalates. So if you look back historically, when we've had a ship in the later stages of it, it's project development. You've seen a ramp-up of reimbursables as you put additional crew on the units and start taking delivery of the materials and supplies that will be used to put it in service. So I think for the next quarter, it would probably be fairly similar to this quarter. And then in the first quarter of -- I'm sorry, in the third quarter, it will be similar to the second quarter. By the fourth quarter, we may begin to see that ramp up again in association with the Dalian project. But I would also highlight that, that has very little to no margin contribution.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Yes, okay. And then also for the management fees, now that you guys own the Titanium Explorer, should we expect that number to be similar to this run rate until you get closer to Dalian Developer being deployed?

Paul A. Bragg

Yes, the Dalian Developer has a little bit of variability in the fee, but I would expect it to remain less than $1 million a quarter.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Okay, great. That's very helpful. And then just one other kind of quick question. What is the expiration date on your option now? I don't know if I caught that earlier.

Paul A. Bragg

I don't think I said -- I'd say that's confidential, but...

Operator

Our next question comes from [indiscernible] with Nomura.

Unknown Analyst

I just wanted to ask if you could briefly discuss your thoughts around potential refinancing options, especially as kind of Titanium comes closer to being operational, and then also with regards to the financing options on Tungsten?

Douglas G. Smith

I think that what we've said consistently throughout is that the financing opportunities for the Tungsten will be derived once we get the contract in hand. As we do have some visibility into what the parameters may look like on that contract, we've had some initial discussions. So it's really a timing issue with respect to how and when we want to best finance that unit. With respect to the refinancing, the first call date is in February. There's a much cheaper call date in August. Between those 2 call dates, we're evaluating all opportunities. A lot of that will be market-driven, and will also be significantly impacted by the financing on the Tungsten. So I don't know that we really have an update other than we could...

Paul A. Bragg

Clearly, we're going down parallel paths on the financing, and we'll pick which one's best for us at the time. So we've had significant discussions recently with several of the ACAs that -- potential project financing. And then we're also looking at the opportunity to roll the -- take the delivery financing in with the refinancing of the existing debt. So both paths are under consideration.

Operator

We'll take our next question from Phillips Johnston with GeoSphere Capital.

Phillips Johnston

How many deepwater rigs, to your knowledge, either existing or new-builds, have availability in 2013? And of those, how many are available before the Tungsten?

Paul A. Bragg

I can't give you an accurate count on that, but basically, there, you've seen a fair number of contracts announced recently. There's a lot of rumor and discussion about additional units already being committed to various operators. So I would suggest that if you look at one of the analyst reports that actually tracks this sort of stuff, that the number is probably a lot less available than what shows up on the schedule. That seems to be our sense in discussion with customers directly as well. In terms of what's available before Tungsten, it can't be more than 1 or 2 units at this point.

Phillips Johnston

Okay. And when would be the latest sort of drop-dead date that you could fix it without having to encounter some sort of a delay, do you think?

Paul A. Bragg

That would be sometime early part of next year, but we had originally, when we ordered it, said that our target for contracting would be around the end of this year. And then we said based on the level of discussions, that we thought it would occur maybe in August, September, October time frame, and I think that's still consistent. We would expect the next 2 to 3 months that we'll have a fixture. As I said in the earlier comments, we're in round sort of 3 and 4 of discussion with several of the operators, and I think it's reasonably predictable that we're going to end up with a job shortly [ph] on it.

Phillips Johnston

Okay, great. And just last question for the Titanium. Can you give us just a general timetable of events and milestones that sort of need to be achieved before it goes on the contracted day rate?

Paul A. Bragg

Yes, well, in terms of a checklist of various tests to be run and all that, that's being extinguished pretty quickly. We have been loading onboard both the customers' equipment and our equipment. We've been going through testing protocols on things that can be done prior to being on location. Here in the next few weeks, we'll be selling out to Walker Ridge, and we'll be in a bit over 8,000 feet of water. And that's when we commence the subsea testing. And so the BOP will be latched up to existing well, and we'll do emergency disconnects and things of that nature. That's the part of it that's really quite unpredictable is the how long or how well that goes. Virtually, all the uncertainty about completion of the testing is around that. Then also, you get into third-party verification and stuff. So I don't know what to tell you more than that. We're on target in terms of our internal planning, maybe slightly ahead in some areas, maybe a day or 2 behind in other areas. But all in all, we're right on target. We just won't know the exact -- into the testing until we get out there and do those subsea tests.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Paul A. Bragg

No additional remarks on our end. We appreciate your calls, and we'll be available later in the day for follow up if you have any questions. Thanks again for attending.

Operator

That concludes today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vantage Drilling Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts