Vantage Drilling Company (NYSEMKT:VTG)
Q3 2012 Earnings Call
November 09, 2012, 12:00 pm ET
Mark Howell - Associate General Counsel
Paul Bragg - Chairman & CEO
Douglas Smith - CFO
Doug Garber - Dahlman Rose
Ryan Fitzgibbon - Global Hunter Securities
Good morning, ladies and gentlemen, and welcome to the Vantage Drilling Company Announces Third Quarter 2012 Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Mark Howell, Associate General Counsel. Please go ahead, sir.
Thank you, Shannon. Good morning, everyone. Welcome to the Vantage Drilling Company's third quarter 2012 conference call. We appreciate you joining us. I am 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 September 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.
Thank you Mark. Since our Q2 earnings call, we've accomplished some very important tasks at the company. First, we've refinanced half of our expensive debt and thereby cut our interest costs accordingly, as well as lengthening maturities. We've also debt financed the remaining CapEx for our third drillship, the Tungsten Explorer, even prior to completion and acceptance of the unit. We've added about four years of new jackup contracts over three of the units and we've added operations management contracts for additional jackup rigs, at least one most likely, two or more. However, we do not commenced operations on the Titanium Explorer at the end of the third quarter as we had planned. We will discuss that in more details in a few minutes, but I will say that we do expect to commence operations in Q4.
And looking at the numbers Q3 of 2012 was a breakeven quarter compared to about $0.03 per share loss in Q2. Q3, 2012 earnings were net $2.1 million or $0.01 per share if you exclude a non-cash charge of about $2.5 million related to early retirement of debt.
EBITDA was $52.9 million in the quarter, as opposed to $48.4 in the previous quarter. EBITDA was burdened by about $2.5 million pre-commencement costs that were recognized during the third quarter for Titanium Explorer, our second drillship, and that's even prior to the ship being in service. Similarly, we had about $2.5 million of such costs reducing EBITDA in the previous quarter.
I’ll just point this out, because generally it’s pre-commencement cost of a new asset or capitalized prior to the rig starting up it's first job; however there are a couple of items that require expensing currently. Doug Smith will review the financial results in detail in just a few moments.
From an operational perspective, Q3 was another solid quarter with operational excellence for Vantage. Our jackups again worked at 99% utilization during the quarter and Platinum Explorer achieved utilization of 98% here in the quarter.
The Titanium Explorer acquired in April 2012 and mobilized to U.S. Gulf of Mexico to commence and eight-year contract. Acceptance testing with the customer was interrupted during the quarter, first by Hurricane Isaac, which necessitated that we sell the rig out of harm’s way, wait for the storm to pass and that also further resulted in disruption of the supply chain and the vendor access to the unit for more than a week.
We then moved on and commenced the deepwater testing. Most of the testing protocol has now been completed successfully, including the third-party certification of BOP. The actual functional test of the BOP carried out more than 8,000 feet of water were unfortunately interrupted by operational issues on the customer supplied ROV, so ROV is not something that we provide in the contract. But it's a necessary item for our testing and that the cameras and robotics are essential to carrying out the seafloor testing of the equipment. We lost about 10 days of testing associated with these issues.
During the testing delays, we noted an engine issue onboard Titanium Explorer. We consulted with the engine manufacturer and eventually decided that it would be prudent to not only conduct the repairs as actual problem, but to undertake some preventative upgrade of the engine to ensure that we wouldn’t have any additional problems when we’ll commence the contract. So that’s currently being carried out on all six of the primary engines onboard the rig.
The repair and upgrade is being conducted currently with the completion projected for the third week of November that’s actually about eight days from today. We will spend a couple more days testing before we head-out to deepwater again around the 20th, of November. Following this, we plan to complete the acceptance testing and expect to commence operations under the drilling contract in December.
With that, I will turn it over to Doug Smith to cover the financial results for the quarter.
Thanks Paul. Our third quarter revenues were approximately $111.5 million as compared to $105.1 million in the prior quarter and a $118.6 million in the third quarter of 2011. Revenues from contract drilling business for the third quarter was a record $105.5 million as compared to revenue of $99.7 million in the prior quarter and $89.9 million in the prior year, representing a sequential increase of 5.8% and a year-over-year increase 17.4%. The sequential increase is due to increased utilization on the Platinum Explorer which had scheduled upgrades in the prior quarter and year-over-year increase is due to both increased utilization on the fleet and increased day rates in the jackups.
Income from operations for the third quarter was $36.3 million as compared to $32 million in the prior quarter and $26.7 million achieved in the third quarter of the prior year. The jackup operations for the third quarter had revenue of $55.3 million consistent with prior quarter. Productive time for the jackup fleet was in excess of 99% in the third quarter, which was consistent with the first two quarters of the year.
The average contract revenue per day for our jackup rigs was approximately $144,900 per day, slightly up from a $144,400 in the prior quarter and up from a $118,800 in the prior year. The direct operating cost for the jackup operations was approximately $22.9 million for the third quarter as compared to $23.2 million in the prior quarter. For the quarter, the operating cost per day for the fleet, net of reimbursable expenses, was approximately $58,600 per day as compared to $59,400 per day in the prior quarter.
The Platinum Explorer achieved approximately 98% productive time in the third quarter, resulting in revenues of $52.8 million as compared to 91.1% productive time and revenue of $47.3 million in the prior quarter. The increase in productive time revenue was due to the planned out of service time to install some OEM supplied equipment upgrades to the tubular handling system during the prior quarter. The direct operating cost for the third quarter were approximately $18.2 million as compared to $17.3 million in the prior quarter. Additionally, the deepwater, we incurred as Paul previously mentioned about $2.5 million of costs associated with the Titanium Explorer which related to non-capitalized project cost. Our management business for the quarter had approximately $3.4 million of revenue consisting of $966,000 of management fees and $2.5 million of revenue for reimbursable costs.
The third quarter revenue compares to revenue in the prior quarter of $2.7 million consisting of $956,000 of management fees and revenue for reimbursable costs of $1.7 million. The operating costs for our Singapore operating base in deepwater support was approximately $5.8 million for the quarter as compared to $6.1 million in the previous quarter.
G&A was $6.6 million and depreciation for the quarter was $16.6 million as compared to $6.7 million and $16.4 million respectively in the previous quarter. EBITDA for the quarter was $52.9 million as compared to $48.4 million in the prior quarter and $42.7 million in the third quarter of 2011.
Net interest expense at $31.6 million, a loss from early retirement of debt of $2.5 million and tax expense $2.7 million for the quarter which resulted in a net loss of approximately $538,000 or less than a penny a share. This compares to interest expense of $36.2 million and tax expense of $6.1 million in the prior quarter which resulted in a net loss of $10 million or $0.03 per share.
The loss from the early retirement of debt was due to F3 Capital’s $6.5 million participation in our convertible debt which they exchanged their previous loan for. This required us to write-off the original issue discount and associated deferred financing costs totaling the $2.5 million charge.
As of September 30, we had approximately $68.4 million of cash on hand including $5.9 million of restricted cash and outstanding borrowings of $2.1 billion. In October following the end of the quarter, we issued a $500 million of five-year term loan and $1.2 billion or 7.5% senior notes which mature in 2019.
The proceeds were used to retire $1 billion of the company's existing 11.5% senior notes for total consideration of $1.1 billion including a $115 million paid for the early redemption in consent fee. We also paid deal expenses of approximately $42.7 million including a 2% original issue discount on the term loan, the balance of the proceeds is available for general corporate purposes which we intend use to fund a $415 million final shipyard payment on the Tungsten Explorer.
The term loan bears interest of LIBOR plus 5% within our LIBOR 4 of 1.25 for an initial interest rate of 6.25%. Looking at the future guidance for the company, the most significant item for the fourth quarter clearly will be when the Titanium Explorer goes on contract. Additionally, we have one other item for the fourth quarter which is the modifications to the Topaz Driller contract we announced today.
As our rig moves from Malaysia to Indonesia, all the revenue and expenses during the period will be deferred and recognized over the firm period of the contract principally in 2013. The Topaz Driller will be on standby rates while we and the customer conclude all of the necessary permitting and during the physical mobilization of the rig. We anticipate this period to be approximately 60 days.
Depending upon the actual time incurred to import the rig, we anticipate that the impact of this deferral will be approximately $3 million to $6 million of EBITDA for the fourth quarter. It is important to note that we will be [compensated] for all of this time and the expenses for the mobilization are reimbursed by the customer. This is only a timing issue for financial reporting purposes.
The remainder of our fleet and overhead expenses are generally anticipated to be inline with the third quarter. CapEx for the third quarter consisted of $2 million for the operating fleet, $28 million of expenses associated with the Titanium Explorer, $3 million for the Tungsten Explorer and $29 million of interest capitalization. CapEx for the fourth quarter, now including interest capitalization is estimated to be approximately $20 million on the Titanium Explorer as we pay for the final deliveries of equipment.
$3 million on the Tungsten Explorer, $5 million for the operating fleet including our year end IT initiatives. We will be filing our 10-Q later today and with that, I'll turn it back over to Paul.
Thanks Doug. I'll cover the status of our construction projects and our view of the market before concluding today. Our third ultra-deepwater drillship Tungsten Explorer is progressing ahead of schedule, launching occurred back on July 6. We are scheduled for the naming ceremony in Korea on the April 11 of next year, with delivery occurring on May 31, 2013.
The managed unit, Dalian Developer work is progressing at the COSCO facility in China. Scheduled delivery was intended to be around the end of this year with actual delivery likely to be the following quarter or later during 2013.
Additionally, we entered into a contract with [Oro Negro] a Mexican entity for the construction supervision and operations management of the new build jackup that’s currently under construction in Singapore and scheduled to be delivered next month at December 2012. Oro Negro also has an option to acquire second new build jackup and we will provide the similar service on that rig if the option is exercised. Now this project leverages our management expertise and enables us to increase our footprint in the marketplace.
In terms of our market outlook, with regard to jackups, we see modern high spec jackups continue to be fully utilized. With the recent contract additions, we will have long-term continuity across our fleet with our existing customers. We recently added two additional years of contract duration for the Emerald Driller and one additional year for the Aquamarine Driller.
We have also agreed with our customer for Topaz Driller to move the unit from Malaysia to Indonesia as Doug mentioned. And this is pursuant to a new one year contract. That contract has multiple option periods for work in Indonesia as well as maintaining an option year for follow-on work in Malaysia. You might recall that this rig has been drilling hot pressure ultra high temperature wells in Malaysia.
The contract rates on all these rigs are in the mid 150s. So up significantly from their expiring contracts. Current bids for modern jackups are generally in the 150 to 160 range. However, we believe that rates may begin to rise significantly in the first half of 2013 based on demand we see in the marketplace currently.
On the ultra-deepwater side, international ultra-deepwater rates are holding firm from the high 500s to the low 600s. We continue to expect that the contract for the new-build Tungsten Explorer will be generally in that range for multiyear work.
We have numerous potential jobs for the Tungsten under discussion with customers as we speak. Gulf of Mexico and Africa are the most active areas ultra-deepwater work, and the most likely location for Tungsten Explorer to commence.
We continue to believe that there will be strong market conditions for ultra-deepwater drilling for some years to come and particularly in the next several years.
So in conclusion, I feel very strongly that Vantage is extremely well positioned for success in the future. We have been clear about our strategic priorities to achieve full deployment of the fleet which will allow us to have the cash flow at a levels to rapidly retire our debts and secondly, to refinance the suboptimal capital structure.
We’ve now already refinanced half of that debt and we are imminent to startup the Titanium Explorer and only are about six months way from the delivery of Tungsten Explorer, so all of this is coming together quickly. Market conditions are strong and Vantage is executing well. Our stock has been a top performer amongst the peers we believe there is yet a lot to come.
At this point, we will be happy to take your questions.
(Operator Instructions) And our first question will comes from Robert Mackenzie of FBR Capital Markets.
This is actually [Megan] filling in for Rob this morning. My first question is on the Titanium. Can you guys clarify whether or not Petrobras is assessing any kind of late penalty on given the new start date for the rig?
The contract provided for a period of liquidated damages, you remember that we modified the contracting. So that was already there. It was capped really within the contract period. The real financial impact here is just the opportunity loss of starting up earlier.
Is there any kind of drop in that date on the window that they have given you?
That's not an issue currently. We are going to be back very shortly and in coordination with Petrobras.
And then on the engine upgrades, can you guys share how much that is actually costing whether or not you are getting reimbursed at all and if you are capitalizing that.
Well, the actual cost - most of the cost is warranty work being provided by the engine manufacturers in the shipyard. I think the logistics angle of it is ours, so we have to transport people to the ship and so forth. And everyday we have people on the payroll without corresponding income so that's really it. The actual cost of the repair is not much for us to bear, but the cost of being sidelined is less expensive.
And then lastly just a housekeeping item here, can you guys clarify when you will begin depreciating the Titanium, will it be, or are you already depreciating it or will it be in December when it goes on contract just for modeling purposes.
The depreciation will start on the mid-month convention in the month that it goes into service.
And we will take our next question from (inaudible) Jefferies.
First on that follow-up on the engine issue, is this something that is a broader design issue that maybe can be applied as you look out to the Tungsten Explorer or is this specific just kind of a one-off issue to that rig as far as you know.
The engines on board the Tungsten have already been upgraded the same preventative step that is being applied to Titanium.
So that wouldn't result in any delay, right that's figured into the current schedule. Okay, another housekeeping item on the titanium. Just as we think about the quarter and EPS, how do we think about the OpEx on that rig while its in the yard right now for upgrades. Is most of that being capitalized I assume the crew and everybody is on their waiting part to go, so how should we think about that.
There would be similar to run rates what we had in the second and third quarter with returns of about $2.5 million per quarter. The costs that are being expensed will continue to be expensed, the majority of the remainder of the costs are still capitalizeable as this is still readying the vessel for a fit to use and so unless there is some one-off prepare item incidental not to preparing it for it’s initial use, everything else will be capitalized.
The worst thing conducted offshore, with the engine room of the ships. We’ll have to mobilize from shipyard or anything. We will get back in deepwater in a days time.
Okay, that’s helpful. Can you talk a little bit about the management fee structure on the (inaudible) what you guys have done for?
Well, it's similar but these are jackup rigs. You are dealing with smaller dollars. So there is a fixed and variable element to it when we are, the remaining time for completion at the units is quite short. So there is not any meaningful money to be generated on the construction of their site. When we go in to operations mode, the contribution will be sort of $10,000 to $12,000 day range per unit.
Okay, those were good answers. Thank you very much. I will turn it over.
Our next question will come from Doug Garber of Dahlman Rose.
Doug Garber - Dahlman Rose
I want to ask about your jackup outlook. You guys seem to indicate that you think our rates to go above the current mid-150. Are you currently seeing, or I know you guys don’t have that much out there but are you seeing rates bid out above 160 right now for the sort of rates that you have?
Well, you’ve seen a couple of fixtures in the market in the last few weeks where they were a bit higher, I know you one around 180, and indeed we are quoting the [Safa] the rig that’s in West Africa for to work out in 2013, and we are increasing the price expectations there based on what we see in the marketplace for 2013 or mid-year and onward.
Doug Garber - Dahlman Rose
I also wanted to ask you for the first half of the year I can understand they tend a little tighter, but there is some 90 something rigs over the next two years, how do you see the bifurcation of the jackup market playing out with that supply coming?
I think there we’ve got a pretty good view on it, because we have seen rigs being delivered almost continuously for the last seven years, and the market has absorbed those and after that the only thing that really interrupted was the post [Lehman] downturn on a global basis, but shortly after that the market tightened up and all the new rigs have gotten jobs and maintain jobs and rates have been on a gradual recovery. But right now looking out into next year it looks like the market is going to tighten up even with the additional rigs coming into the marketplace.
(Operator Instructions) And our next question comes from Philips Johnson of (inaudible) Capital.
Hi gentlemen, it seems like once you get Tungsten contracted and assuming that you are able to add some more turn on the platinum beyond 2015 that you’d have three ideal assets that can fit in to an MLP structure which could generate tremendous value uplift. So my question is what are your thoughts on forming an MLP or an MLP like structure and what do you think of a major pluses and minuses of such a structure?
I think it’s something that’s clearly interesting to us. We’ve looked at the structure for better part of the last year. Right now its too early for us and that we need to have a number of units like you mentioned that are actually in service and producing cyclical cash flow before it becomes a structure that will get through us. So this is probably one of those cases where not being the first guy to go out in the market with an MLP plays to our advantage and we can see how that, once that are formed trade over the next six months for a year and then evaluate whether it makes sense for us to proceed that as well.
Clearly it has the opportunity, if the opportunity were there for us to form one and it trade or a similar basis to the recent one and that would be a substantial uplift in value from the way our stock price. So we will continue to look at that.
Okay. And you said the Tungsten is a slightly ahead of schedule which is good to hear. Do you still think that the latest date that you could fix it without encountering material delay would be sometime in early next year?
Yeah, I don't think it’s going to be a long while off before it [takes] down because we continue to have a number of active discussions but we could go well into the first quarter and still be in a position to deploy timing and continuity acceptance in May.
And just last question on the Titanium, following the completion of the engine upgrades, can you give us sort of a check list of what else has to occur with the acceptance testing before the rig sort of officially starts this contract?
Right, so we had already done some of the functional testing in deepwater over unless it is over 8,000 feet of water at the time that we came back in. We have not, we will go back out and redo a couple of the tests that have already been done in terms of closing the BOP but then the main one that we didn't get to was the emergency disconnect. So that's the primary thing. It remains on the schedule in terms of our subsea equipment. Clearly, we and the customer want to see that engines are performing well and that's that. It’s a pretty short list of things to be done at this point.
And our next question will come from Ryan Fitzgibbon of Global Hunter Securities.
Ryan Fitzgibbon - Global Hunter Securities
Question on the Tungsten, I know you can't get too granular on what exactly, what contracts exactly you are bidding on but when should we be modeling that rig actually on revenue, is that a late Q3 event or should we think in Q4?
Depending on location from the time you take delivery, you are looking at I would say most likely locations being West Africa or Gulf of Mexico. So you are looking at three months or so of transit time and then probably another month or 45 days of supply locally and concluding all your acceptance testing and actually get no contract. So generally about four to five months after taking delivery of the unit on May 31.
Ryan Fitzgibbon - Global Hunter Securities
And then on the Dalian, what are bid opportunities looking like for that rig and can you give us any update as to whether Petrobras still has any interest in using that for the (inaudible) balance joint program.
I think there's probably some interest there as far as the feedback that we have. I wouldn't count Dalian in the company's long term plans at this point. So our current engagement and likely the end of our engagement is to oversee the remaining construction.
Ryan Fitzgibbon - Global Hunter Securities
And last one on the Topaz, I believe there's a couple of options associated with the new contract, are those fixed price and if so what's the rate?
The additional contract periods in Indonesia are at the same rate.
And it does appear there are no further questions at this time. I will turn the conference back over to our speakers for any additional or closing comments.
Okay, well we appreciate your interest and attendance today and we will keep you inform in terms of developments on Titanium which hopefully we’ll be through that and contract bearing shortly. So, again appreciate your attendance today. Thanks
And that does conclude today's teleconference. Thank you all for your participation.
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