Vantage Drilling Company's (VTG) CEO Ihab Toma on Q1 2018 Results - Earnings Call Transcript

Vantage Drilling Company (NYSEMKT:VTG) Q1 2018 Earnings Conference Call May 4, 2018 10:00 AM ET

Executives

Douglas Stewart - General Counsel

Ihab Toma - CEO

Tom Cimino - CFO

Analysts

Patrick Fitzgerald - Baird

Joshua Katzeff - Deutsche Bank

Operator

Good morning, ladies and gentlemen and welcome to the Vantage Drilling International First Quarter 2018 Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Douglas Stewart, General Counsel. Please go ahead, sir.

Douglas Stewart

Thank you. Good morning, everyone and welcome to the Vantage Drilling International 2018 first quarter conference call. On the call today are also Ihab Toma, our CEO and Tom Cimino, our Chief Financial Officer. This morning, we released our earnings announcement for the quarter ended March 31, 2018. The earnings release is available on our website at vantagedrilling.com.

We intend to file our quarterly report on Form 10-Q later today. Please also note that any comments we make today about our expectations of future events and projections are forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements in today's call are subject to a number of risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from the projections made in today's conference call.

We refer you to our earnings release and SEC filings available on our website. Vantage does not undertake the updating of any such statement or risk factor that could cause actual results to differ materially from our expectations. At the end of our prepared remarks, there will be a question-and-answer session.

Now, let me turn over the call to our CEO, Mr. Ihab Toma.

Ihab Toma

Thanks, Douglas and good morning, everyone. I'm pleased to report another successful quarter, in which we continued to deliver against our corporate goals of, one, delivering stellar safety and operational performance; two, putting all our extra work and now maintaining them working with healthy positive cash flow; and three, maintaining our lean cost structure and preserving cash.

First, on safety and our vision of delivering a perfect day every day to our clients. I'm proud to say that the next week, we will be celebrating a one-year with no lost time incident across the company. With safety as our top priority and our firm belief in the importance of investing effort and money to improve our safety programs and defenses, I would like to report on the results, following the introduction of our Perfect Day leadership program for our offshore supervisors across the fleet.

Since the implementation of the program 8 months ago and through the excellent commitment and engagement of our offshore supervisors and members, we have reduced our recordable incidents by 71% and high potential near misses by 60%. We only had two recordable incidents fleet wide during this time frame, which translate to a total recordable incident rate of 0.21 per 200,000 man hours worked.

Operationally, we only achieved 92% uptime during the quarter, due to an operational issue in January on the Platinum Explorer. I would like to point out that the Platinum Explorer downtime was unrelated to its reactivation and I'm proud [indiscernible] interchangeable fleet spares, we were able to safely return to work in approximately 30 days. The downtime event impacted the early part of the quarter and for the remainder of the quarter, the Platinum Explorer uptime was 98%.

We are proud of the current performance of the Platinum Explorer and I'm happy to say that during the month of April, we had the pleasure of hosting the Chairman of ONGC and the Oil Minister of India for the spudding of a new well, where they both experience a Vantage Perfect Day on the rig.

The jack-up segment achieved a remarkable 99% uptime. I'm pleased to report that the Topaz driller concluded its campaign in Southeast Asia in mid-March with an up time of 99.7% and no recordable incidents during the 6.5 month campaign. This type of performance throughout the entire campaign for our client is what makes our clients consider Vantage for their future work before considering to tender it out.

This takes me to our second corporate goal of placing and now maintaining all our rigs working. With six of our seven rigs continuing to work, we have now secured follow-on work in West Africa for our jack-up Topaz driller. After the previously announced 150-day program offshore Cameroon for New Age African Global Energy, we have now secured nine months of work plus options with Total Gabon.

The company is now reaping the benefits of our disciplined approach with margin accretive term contracts, some containing performance bonuses and future options at day rates that are Brent crude indexed. I'm happy to say that half of our current contracts have a provision for extra bonus tied to our goal of delivering perfect days for our clients.

We expect our jack-ups to be utilized for the foreseeable future, allowing us to focus on securing opportunities for our deepwater units that are either rolling off contract or warm stacked. I will further discuss our view of the market in my closing remarks.

On the third corporate goal of reducing cost and preserving cash, we are pleased to have ended the first quarter with approximately 198 million in cash, inclusive of $5 million in restricted cash. Including restricted cash, we have finished the first quarter with approximately $2 million more in cash than the prior quarter, even though we completed the periodic underwater inspection in new dry dock on both the Aquamarine Driller and the Topaz Driller.

It has now been two years since our restructuring and our current level of liquidity is a testament to our cost structure improvements and reactivation and certification efficiencies, which have also allowed us to secure quality backlog. I'm pleased with our success in the first quarter.

And with that, I'll turn the call over to Tom to take us through the numbers.

Tom Cimino

Thank you, Ihab. As mentioned, the company ended the quarter with $197.7 million of cash, including $5 million of restricted cash compared to 195.5 million at the end of 2017. Working capital for the quarter ended at $227.3 million, compared to $228.8 million at the end of the prior quarter.

During the first quarter, we achieved revenues of $57.7 million as compared to $59.8 million in the prior quarter and $42 million in the first quarter of 2017. The marginal decrease compared to the prior quarter is due to the Aquamarine Driller mobilizing between [indiscernible] contracts as well as performing required inspections and contract preparation activities.

Additionally, the Topaz Driller completed its contract on March 14 and is currently mobilizing to West Africa. Both of these rigs operated during the entire prior quarter. Partially offsetting these jack-up activity changes, with higher utilization on the deepwater fleet with the Platinum Explorer on contract with ONGC throughout the first quarter.

The increase in revenues in the first quarter 2018 over the comparable quarter 2017 is primarily due to the improved utilization of the fleet with six of our seven premium rigs working during the first quarter of 2018 versus only three rigs in the comparable quarter 2017.

Contract utilization during the first quarter was 86.2% for the jack-ups and 53.9% for the drill ships as compared to 99.5% for the jack-ups and 45.4% for the drill ships during the prior quarter. Utilization was 50% for the jack-ups and 33.3% for the drill ships during the comparable period 2017.

Operating costs for the first quarter of 2018 were approximately $41 million compared to $42.6 million in the prior quarter and $29 million for the comparable quarter 2017. The first quarter 2018 includes a full quarter of Platinum Explorer costs as the contract commenced operations in November 2017. This increase was offset by both lower operating costs across all working rigs and the recording of a $2.9 million gain for the sale of the Vantage 260 in February.

General and administrative expenses for the first quarter of 2018 were $7.4 million as compared to $11.7 million in the prior quarter and $11.5 million for the comparable quarter 2017. This decrease was primarily due to lower legal and related costs associated with the Petrobras arbitration and the FCPA investigation regarding the Titanium Explorer.

The non-recurring costs totaled approximately $0.6 million for the first quarter of 2018 compared to 5.5 million in the prior quarter, which included an accrued liability of $5 million related to our proposed settlement with the SEC. Non-recurring costs were $4.8 million in the comparable quarter in 2017.

General and administrative expenses for the quarter - for the current quarter and the comparable quarter of 2017 include non-cash share based compensation expense of approximately 1.2 million and 0.6 million respectively. Depreciation for the first quarter was approximately $17.9 million, which is lower than the 18.4 million recorded in both the prior quarter and the comparable quarter 2017, mainly due to assets becoming fully depreciated.

Financing expense for the first quarter was approximately 19.3 million, including non-cash finance charges of approximately 14.3 million. The net result was a loss of $32.1 million for the quarter or $6.43 per share. As of the end of the quarter, we had approximately $265 million of contract drilling backlog.

With that, please note that we will be filing our 10-Q later this afternoon. I'll now hand it over back to Ihab.

Ihab Toma

Thank you, Tom. It was very pleasing to start the OTC week with Brent at $75 per barrel and seeing that the community sentiment has improved dramatically since last year. It was also pleasing to hear certain super majors stating that ultra deepwater is back and is aggressively competing for dollars previously deployed to onshore projects.

The number of contracted floaters seem to have found a bottom and more and more, it is starting to look like an inflection point, is soon to be seen. This trend coupled with the healthy oil price should result in higher floater utilization in 2019.

Switching to jack-ups, we continue to see an improved market with clear bifurcation of modern fleet utilization versus vintage fleet. The modern fleet market utilization is up and is soon to hit 75% with the slew of new awards being announced. As for geographies and based on discussions with various operators, we expect the West Africa market to continue to add incremental shallow water demand in the near and mid-term.

Due to our history and unique position in the region, we are confident that we will reap the benefit of having increased our presence in West Africa and that we will be able to translate our proven expertise there into continuous utilization and superior day rates. As for the other matters outstanding, we do not have material updates relating to the Petrobras arbitration or the SEC investigation to make at this time. Due to the nature of these items, we are not going to make comments on those two matters in our prepared remarks or during the Q&A session.

With that, I turn to you Cody for opening for Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. We will take our first question from [indiscernible] with Clarksons Platou Securities.

Unidentified Analyst

Ihab, I wanted to ask you about how you felt about the competitiveness of your drill ships. There has been a lot of talk I guess this past month or so about the tightening market for the higher end. Are there any kind of upgrades that you think would be suitable for your rigs to make them more competitive long-term or do you feel that performances speak for themselves or just kind of curious how you think about that.

Ihab Toma

Definitely, we are very confident on that level of performance that our rigs are doing compared to all those other rigs in the industry. We have results that can show that one of our rigs is beating every dual activity rig out there in terms of efficiency and speed. Our rig has very good offline activity and it's taking those to highest level possible and it's beating the performance of a lot of those rigs out there.

But in addition to that, I had an interesting conversation with one of the super majors recently to compare what is it that are most important for them in terms of bells and whistles to having the rig and 6 gen versus 7 gen and so on. And interestingly, they said that the most important thing they are looking for, or the one thing that makes one of the biggest differences in performance is the dual system, because that can take as long as five days per well to switch from the oil based mud to water based mud and so on and that is a feature that most of the analysts out there are not really looking at and that super major, a big user of rigs out there, of drill ships out there consider this to be the top one thing, because as I said, five days per well is probably one of the most significant items that can bring efficiency to the operation.

The only other thing could be a dual BUP, if you have an unplanned BUP downtime, but other than that, five days per well is way up there and I'm proud to say that our rigs are way up there when it comes to that feature. So coupling this with the fact that, as I said, in terms of actual number of days per well that our rigs are achieving, we're confident that in a conversation with a customer as opposed to a conversation with an analyst or conversation with an investor, our rigs are way up there in the ranking of when a customer is looking for a rig.

And also the one thing that I think they are really all looking for is using hot rigs, rigs that have been working, either coming off contract or just came of contract very recently and that again would put the Tungsten Explorer at the very high shortlist of rigs that they want to hire.

Unidentified Analyst

That's really good color. Thank you for that. And then you also mentioned that a lot of your contracts have exposure to either performance based or Brent crude index. Can you just expand on that and the performance based, is that based on, I guess, efficiency or is that based on no lost time incidents or kind of both or just kind of curious what performance metrics are most vital to those pricing metrics?

Ihab Toma

We defined our Perfect Day as no incident, no downtime and a full satisfied client and basically that's what drives the bonus. The bonus is a little bit more sophisticated and complex than that, but these are the underlying items in the bonus, always safety first, second, efficiency and our ability to deliver the wells under the AFE and in that, we're doing significantly less than our customers have in their plans.

And then of course you still have to have a happy customer and happy customers are usually happy when the whole rig is delivering, including third-party and so on. So usually to have a component of how the whole team is delivering against the objectives and not just how the Vantage break is it on - has it been - having any downtime or not. So that's usually what drives the bonus and as I said, we have half of the contracts having that component and most of the time, we are achieving those bonuses. In terms of options linked to Brent, we actually have one that is exactly that. So the day Brent is at $80, the day rate is $80.

Operator

[Operator Instructions] We'll move on to Patrick Fitzgerald with Baird.

Patrick Fitzgerald

Is the nature of the project that you're working on with the Tungsten Explorer in West Africa such that follow-on work is necessary or likely for you or a competitor there?

Ihab Toma

I really cannot comment on non-public information of one of our customers Patrick. But we are really - for the reasons I mentioned in terms of the level of achievement that triggers - achieving West Africa, everybody is aware of how well the rig is performing and you couple that with the price of oil, where it is now, we are confident that 2019 will be a healthy year for the Tungsten, but I can't really comment on the program of our customers. That's for them to comment on.

Patrick Fitzgerald

Does arbitration have to end to put the Titanium Explorer to work or does that hinder your ability to get new work for that vessel or is that totally unrelated?

Ihab Toma

It's really totally unrelated, Patrick. And, the reason the rig is not out there today is because we are being a little bit careful, taking it out for 60 days work or 90 days' work, which is most of the work available in 2018 and then pray for some follow-on work. So the rig could have been out working right now, but we are being a little bit careful with what work opportunities do we go after and we're really focusing on the long term opportunities that will keep the rig utilized for the long term as opposed to just 60 to 90 days.

Patrick Fitzgerald

Okay. Do you think you can keep OpEx per vessel flat or are you starting to see some cost inflation?

Ihab Toma

No. We are confident we will be able to keep it at those levels and we still have a few tricks in that to continue using, to keep those levels of OpEx even as some more rigs start to get reactivated and people get start to get rehired and so on. Namely some regionalization and nationalization of the crew is something that we would always continue to look at.

Patrick Fitzgerald

Okay. And you said in your remarks that you expect utilization to tighten in 2019. Do you expect day rates to start to improve in 2019 as well or what are you looking for and what's in your opinion, important for day rates to start to move?

Ihab Toma

I think the inflection point of needing more rigs than rigs coming off contract will almost immediately drive day rates up, because that will require rigs coming off stacking and when the rigs come off stacking, there is an initial investment that is required and even though some of the drilling contractors may choose to consider this as an investment in getting the rig out as opposed to trying to charge it to the first contract, but once the rig is out, it needs to have the higher day rate to justify the spend on getting it out. So I think the minute we start to see more demand than the rigs coming off contract, it would be very, very fast that you will see day rates starting to climb up. And yeah, I'm hoping that we can see that in 2019, but if not, it's 2020.

Patrick Fitzgerald

And then a clarification question, for the third liens to convert, I know there's a voting feature, but I believe there's like an automatic feature well. Does that involve both the conclusion of the FCPA investigations and the conclusion of the arbitration or is it just the FCPA.

Tom Cimino

Patrick, I'll just refer you to the public documents on the file and the indenture and rely to make those interpretations. The company won't speak to that on this call.

Operator

And that does conclude today's question-and-answer session. I apologize. We do have another question in the queue. We'll now take our next question from Joshua Katzeff with Deutsche Bank.

Joshua Katzeff

Just wanted to kind of circle back on what you were saying about the Titanium and the ability to get work, just wanted to clarify that. Have you actually had the ability to contract the rig? Have you had customers say, we want that rig and you've held off and bring it out or are you just holding it back from new tenders because the tenders are actually short term?

Ihab Toma

I think a different way - a better way to answer the question, Josh, is to say we have been pre-qualifying the rig for a lot of the tenders out there and I would say almost most of the time, the rig has pre-qualified. Then, what number do we actually put? Do we put a number that we are trying to win with or do we even follow through with the actual tendering? This is where I'm saying we're kind of being a bit cautious, but in terms of pre-qualifying the rig and keeping it in the minds of customers, we keep on doing that and it almost always pre-qualified.

Joshua Katzeff

And then just following up, I mean, do you see these longer term or maybe longer lead tenders coming out, where it might make sense for you to tender those rigs and follow through hallway, I mean is that coming out? Are you seeing anything now for maybe 2019 that kind of fits the bill for the rig or is this just you're hoping to see that?

Ihab Toma

Sure, Josh. The rig, as we speak, is being bid. Seriously being bid in to work for the first end of the year or into early 2019. So that's taking place. I was just commenting on the likelihood of the rig actually coming out this year is less than the rig winning work this year that starts next year.

Operator

Thank you. And that does conclude our question-and-answer session for today. I'd like to turn the conference back over to management for any additional or closing remarks.

Ihab Toma

Thanks. No additional closing remarks. Again, we continue to enjoy running Vantage here with happy management team and we plan to keep it that way. And thank you for all your support out there.

Operator

Thank you. And it does conclude today's conference. Thank you all for your participation.