Vantage Drilling Company (VTGDF) CEO Ihab Toma on Q4 2019 Results - Earnings Call Transcript

Vantage Drilling Company (OTC:VTGDF) Q4 2019 Earnings Conference Call March 5, 2020 10:00 AM ET

Company Participants

Douglas Stewart - General Counsel

Ihab Toma - Chief Executive Officer

Tom Cimino - Chief Financial Officer

Conference Call Participants

Patrick Fitzgerald - Baird

Lucas Daul - ABG

Patrick Grow - HBK

Joshua Katzeff - Deutsche Bank

Operator

Good morning, ladies and gentlemen, and welcome to the Vantage Drilling International 2019 Fourth Quarter and Full Year Earnings Call. Today’s conference is being recorded.

At this time, I would 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 2019 Fourth Quarter and Annual Earnings Conference Call. On the call today are also Ihab Toma, our CEO; and Tom Cimino, our CFO.

This morning, we released our earnings announcement for the quarter ended December 31, 2019. The earnings release is available on our website at vantagedrilling.com. 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. 2019 was another successful year for the company even as the industry continues to work through some persistent challenges. Vantage has differentiated itself from our competitors in multiple ways, which I will take advantage of this call to go into in some detail. This has been accomplished in no small part by our firmly imbedded culture of delivering the high level of service our clients expects from us and through our continued focus on our three corporate goals; which are: one, maintaining our stellar safety and operational performance; two, putting all of our rigs to work; and three reducing costs and preserving cash.

Beginning with safety and operational performance, which is our first and most important corporate goal, I am proud to say that we had another safe and operationally strong year. For 2019, we reduced the number of recordable incidents throughout our fleet by 17%, yet we continue to strive for an incident-free environment and achieving our vision of a perfect day, every day. This incident-free vision has been proven possible by our Emerald Driller rig, as I am proud to report that the rig did not experience any safety incidents in 2019. This means that the rig did not even have a first aid case in an entire year of operations. This is an amazing result that proves that incident free operation is possible in the offshore drilling industry.

Additionally, three other rigs did not have any recordable incidents throughout the year. Fleet wide, we have achieved our lowest year-end Total Recordable Incident Rate (TRIR) in the company’s history. Our TRIR has shown a steady drop for the past three years, which coincides with the implementation of our perfect day leadership program. I attribute these continued good results to the sharp focus of our offshore teams on the foundations of our Perfect Day Leadership program, which is fully supported by all levels of our organization.

Incidents are preventable and it’s this degree of commitment at all levels that prevents them from occurring. The lives, safety and health of our people and the protection of the environment where we work are our most important responsibility as a company and we take this responsibility very seriously. We will continue to strive to make sure we provide the safest work environment of any international offshore drilling company so that everyone on our rigs and offices can go home safely to their families.

Operationally, 2019 was also our most successful year. We received $0.997 from every available dollar of backlog, when accounting for bonuses. For those of you that closely follow the industry and our peers, 99.7% revenue efficiency is simply amazing, especially when you factor in changes in clients and locations due to the short nature of some of our contracts. Revenue Efficiency directly correlates to uptime and general rig performance.

Zooming in now on rig by rig. The Tungsten Explorer achieved 99.3% revenue efficiency following its five year survey and mobilization to Egypt for Dana Gas and subsequently for Petrobel. This performance underlies the rig’s continued presence among the very top ultra-deepwater units in operations.

The Platinum Explorer achieved 96.4% revenue efficiency and continued to deliver results for our esteemed client ONGC in India. Our jackup fleet knocked it out of the park, with the Sapphire Driller, the Topaz Driller, the Aquamarine Driller and the Emerald Driller achieving revenue efficiency of 103.2%, 102.7%, 100%, and 97.7% respectively.

These levels of operational excellence keep our rigs ranked high on customers’ lists, making it easier for us to achieve our second goal of putting all of our rigs to work. This also allows us to start refocusing this second corporate goal to increasing day rates.

During 2019, all of our seven marketed rigs had contracts, adding approximately $166 million of backlog during the year, which covered 2040 days of firm work. For 2020, we have approximately 75% of our available marketed rig days booked through firm contracts, and 86% when including the Letters of Award received or options that are expected to be exercised. For 2021, we have approximately 25% of our available days under contract or Letter of Award.

I will take you through a rig-by-rig update on utilization and directional contract economics. The Emerald Driller continued to work for Total in Qatar in 2019, and has secured a one-year extension starting Q2 2020, with a one-year unpriced option to follow. The Sapphire Driller continued to work for Eni in the Republic of Congo and has also secured a one-year extension starting Q2 2020. Both of these extensions are at a meaningfully higher day rates than their current rates.

The Topaz Driller was fully utilized throughout 2019 in Gabon with contracts of superior economics, which reinforces our decision to move the unit from South East Asia to West Africa in 2018. We attribute the Topaz Driller’s success to the close working relationship we have with Total and Eni, which has then led onto the positive campaign for Vaalco Energy. As you would have seen in the press, Vaalco has had excellent production and exploration successes during this campaign and hence continued to exercise their options on the Topaz Driller.

During the second quarter of 2020, following the Vaalco campaign, the rig will undertake a short contract in Congo with our repeat client, New Age, at an improved day rate. Subsequent to Congo, due to a recently received Letter of Award, the rig should be mobilized to its next contract that will keep it busy into early 2021. This Letter of Award is for our first contract in a while with a clean day rate above $100,000 a day, which reflects the excellent reputation of the rig and the tightness of the premium jackup market. This is a very important milestone that we are very proud of.

The Aquamarine Driller continued to operate for CPOC in 2019 and should complete its current contract in May. We are at the final stage of negotiations to secure its follow-on work in the region.

Finally, the Soehanah has successfully completed its bareboat charter with Apexindo in January, and has undertaken a short scheduled redelivery work, scope, and upgrade. Following this out of service work, the rig will soon mobilize for its first Vantage standalone job for Ophir and Medco in Indonesia.

Keeping the rig utilized in direct continuation, at improved terms and economics, and in the same region, continues to show the strength of the jackup business and that Vantage and these high specification units are desired by operators.

Moving to the deepwater business, the Tungsten Explorer had a very successful campaign in Egypt in 2019, as mentioned in my earlier remarks. Following Egypt, the rig has recently mobilized to Lebanon, where it has started an important campaign for Total and for Lebanon, as this is first offshore well ever to be drilled in the country. This campaign is so significant to the country of Lebanon that we had the pleasure of hosting the country’s President, Prime Minister, and Energy Minister and a host of our customer’s VIPs on board of the rig last week.

After Lebanon, the rig will start a multi-well campaign in the Mediterranean where the Managed Pressure Drilling (MPD) system will be utilized. As you may recall from our prior calls, we have installed the latest generation modular MPD system on the Tungsten Explorer and we look forward to the benefits that this system will bring to our clients.

The Platinum Explorer continued to provide uninterrupted services to ONGC achieving over 97% uptime in 2019. We are proud of the rig performance for ONGC and look forward to continuing to provide industry leading performance to this valued client, as they continue increasing their overall drilling programs.

Lastly, the Titanium Explorer continues to be maintained as available in South Africa, with all equipment being maintained and operational. Due to the rigs specifications, especially its offline capabilities and its 2.5 million pounds hook load capacity; the rig remains an eligible candidate for opportunities. We continue to have conversations about this rig with clients and continue to look for opportunities that will provide enough economic returns to justify bringing the rig back to the market.

Before I move on to the third corporate goal, I would like to highlight that the current market tightness is allowing us to shift our attention and start focusing on increasing day rates, as has been demonstrated by the latest contracts and extensions.

I will now report on our 3rd corporate goal of reducing cost and preserving cash. As we disclosed in 2019, Petrobras and Vantage entered into an agreement on June 20, 2019 under which Petrobras paid our two subsidiary claimants in the dispute, Vantage Deepwater Company and Vantage Deepwater Drilling, Inc., an aggregate of approximately $701 million.

As publicly disclosed on November 18, 2019, our board of directors authorized and directed the conversion of all of the company’s then outstanding Senior Secured Third Lien Convertible Notes into common shares of the company. In addition, we announced that Vantage Deepwater Company and Vantage Deepwater Drilling, Inc. purchased a Judgment preservation insurance policy.

Subsequent to these events, a special cash distribution in the aggregate amount of $525 million was paid in December 2019. This special cash distribution attests to both the company’s commitment to returning excess cash to shareholders and also to our superior balance sheet position, at a time that liquidity and leverage are the key factors in determining the financial strength and longevity of a drilling contractor.

As of December 31, 2019, the company had approximately $242.9 million in cash, compared to $239.4 million at the end of last year. Tom will be giving more details regarding our cash position and financial performance shortly.

With net debt of only $108 million, seven rigs on contract and an improved overall market, Vantage is well positioned, thanks to our laser focus on these three corporate goals, to continue to outperform the industry and add value to all our shareholders.

With that, I would like to turn the call over to Tom to take us through the numbers:

Tom Cimino

Thank you, Ihab, and good morning everyone. As previously mentioned, 2019 was another good year for Vantage both operationally and financially. We streamlined our capital structure, we paid a substantial cash distribution, and we closed the year in a stronger cash position than at the close of the prior year, finishing the year with $242.9 million and only $108 million in net debt.

In the fourth quarter, we executed a number of transactions that provided clarity to our capital structure. The first event was converting our senior secured third lien convertible notes into common shares. This resulted in the company issuing approximately 8.1 million new common shares and the company having approximately 13.1 million common shares outstanding post conversion.

These Notes were issued in 2016, and the outstanding principal amount as of conversion date was approximately $776 million. Conversion eliminates a significant non-cash financing charge, and going forward under the current structure; our income statement will include only the interest on our existing $350 million first lien debt.

The next transaction relates to the funds received from the Petrobras arbitration award in relation to the early termination of the Titanium Explorer drilling contract. As a reminder, in June, the company’s subsidiaries received a $701 million payment from the subsidiaries of Petrobras, and in the fourth quarter, the company obtained judgment preservation insurance to insure against the contingency of being required to return the payment for Petrobras to ultimately succeed with its appeal.

Subsequent to securing the insurance, the company declared a distribution in the aggregate amount of $525 million, or $40.03 per share following conversion. This distribution was paid in December. With the conclusion of the above mentioned events and as previously mentioned, the company ended the fourth quarter with $242.9 million of cash, including $11 million in restricted cash, compared to $825.1 million, including $10.4 million in restricted cash at the end of the third quarter.

Working capital for the fourth quarter ended at approximately $269.3 million, compared to $837.1 million at the end of the prior quarter. The decrease in both cash and working capital is directly attributable to the $525 million distribution, the insurance and compensation expense related to the distribution, and to a $16.2 million interest payment made in the fourth quarter.

For the fourth quarter of 2019, we achieved revenues of approximately $49.3 million compared to $43.1 million in the fourth quarter of 2018. This increase was mainly due to higher efficiencies on the Platinum Explorer and higher utilization on the Tungsten Explorer. Additionally, we had bareboat charter revenue related to our Soehanah jackup which was purchased in late December 2018.

In line with this, during the fourth quarter 2019, we had seven rigs working throughout the quarter, compared to only six rigs working in the comparable quarter of 2018. Revenues for the quarter compared favorably to $40.6 million reported in third quarter of this year. This increase was primarily attributable to the Tungsten Explorer, which operated for 77 days in the fourth quarter versus only 26 days in the third quarter, when it was idle and mobilizing between jobs.

Operating cost in for the fourth quarter of 2019 totaled approximately $42.4 million, compared to $42.1 million for the comparable quarter 2018. The costs are in line with the comparable quarter with offsetting variances across the fleet. The Tungsten explorer costs were lower in 2019 as the comparable 2018 quarter included demob cost and five year maintenance expenses. These costs were offset by marginal increases across the remaining fleet, including cost to maintain the condition of our warm stacked drillship, the Titanium Explorer.

General and administrative expenses for the fourth quarter of 2019 were approximately $42.5 million, as compared to only $6.6 million for the comparable quarter in 2018. Fourth quarter of 2019 included $30.5 million for the purchase of previously mentioned judgment preservation insurance, management incentive award expenses of $4.7 million, and $1.7 million of non-recurring expenses associated with the ongoing Petrobras appeal and other non-routine legal matters. The comparable quarter of 2018 included approximately $2.2 million of non-recurring expenses related to Petrobras and other legal matters.

Current quarter G&A expenses were also higher than the reported $6.6 million in the third quarter of this year, which included approximately $800,000 of non-recurring legal costs. Depreciation for the fourth quarter was approximately $18.3 million, which is marginally lower than the previous quarter of $18.5 million. Financing expenses for the fourth quarter was approximately $9.9 million, including non-cash charges of approximately $1.8 million.

The net result was a loss attributable to shareholders of $61.4 million for the quarter or $8.22 per share. Contract utilization for the fourth quarter was approximately 99.1% for the jackups and 61.1% for the drill ships, as compared to utilization of approximately 96.6% for the jackups, and 35% for the drill ships for the comparable quarter in 2018. The increase in drillship utilization was primarily due to the Tungsten explorer operating 51 more days in the current quarter. As of the end of the year, we had approximately $149 million of backlog.

And with that, I will now turn the call back over to Ihab.

Ihab Toma

Thank you, Tom. The industry continues to deal with high leverage and liquidity challenges. Add to that, we are now dealing with the uncertainty around the coronavirus and the potential impact on the world economy and oil and gas demand. On a positive note, we did see the fundamentals of [Technical Difficulty] rig supply and demand for both the shallow and the ultra-deepwater segments continuing to demonstrate strength in late 2019 and in early 2020.

Total Shallow Water utilization, for units built post 2000, has reached 86% and marketed utilization has reached 91% and continue on a year-on-year positive trend. We trust that this trend will continue, based on the various incremental programs we see in the market, and therefore we see the healthy day rate trend continuing. We are seeing evidence of this already in our recent awards as the market tightens and clients are willing to pay higher rates for companies and rigs with good reputations. As interestingly, we are seeing longer term contracts coming back strongly in the market for jackups as clients try to lock good rigs on longer-term contracts.

The ultra-deepwater segment has also demonstrated improvement and we have now reached marketed utilization of 6th and 7th generation drill ships of over 90%. This is the highest level of utilization since the downturn and with approximately 135 floaters having been scrapped, most regions are reaching an active supply and demand balance. With the oil companies’ improved break-even barrel price, their need for reserve replacement, coupled with contracting discipline by contract drillers, we believe that the 6th and 7th generation drillship segment continue to achieve the necessary improvement in rates.

In summary, aside from the uncertainties recently added by the Coronavirus, the industrial fundamentals of the offshore drilling business remain the strongest since the start of the downturn and Vantage, with its well capitalized balance sheet and 88% of its units utilized, is well-positioned to continue to deliver excellent service to our customers and add value to our shareholders.

With that, I would like to ask the operator to open the call for question-and-answers and one more time, I apologize for all those issues that we had during the call.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take our question from Patrick Fitzgerald from Baird. Please go ahead your line is open.

Patrick Fitzgerald

Hi guys. Thanks for taking the questions. I’m wondering, you still have a lot of cash, your high coupon debt is trading well below par, you know what’s the strategy with the debt now that you’ve done the $525 million equity dividend?

Tom Cimino

Yes. Thanks Patrick, this is Tom. You’re right the debt is trading. I think it is well below par. It is slightly below par and it is something that we monitor, but we will continue to maintain our strong balance sheet position, especially in this environment and we feel that the current capital structure is where we want to be with the $242 million that we closed the quarter for the year-end with. So, I like the position that we are at right now.

Patrick Fitzgerald

Okay. Do you have, I mean, do you have any additional capacity under the bond indentures to pay dividends to the equity at this point or do you use that up is my understanding, is that correct?

Ihab Toma

There is capacity under the indenture specifically carved out for Petrobras proceeds. There is a piece there that we could use, however we continue to value as Tom mentioned our balance sheet and maintain a strong balance sheet though. Otherwise there is no other caught outs under the indenture at this time.

Patrick Fitzgerald

How big is that remaining piece.

Ihab Toma

Approximately 100 million.

Patrick Fitzgerald

Okay. What is your expectation for cash flow this year?

Tom Cimino

Yes. We don’t put out forecasted numbers, but looking at the historical numbers we did add some cash net-net of the Petrobras cash that came in. So, there were some cash there. We did burn some cash, but really what I can tell you is going forward that operations will continue to generate cash, we do have some one-off payments that are accrued on our balance sheet and will burn some cash probably about the level of our interest for the year. That’s the $32 million with an operation basis we are generating cash on an unlevered basis.

Patrick Fitzgerald

Got it, and thanks. That’s helpful. Do you expect your blended day rates to change much in 2020? I mean, I got your commentary on the Topaz Driller so that should be helpful, but you are at 65,000 roughly for the jackups and 107,000 a day for the drill ships, you know you are talking about improved market, but do you expect your blended day rates to actually improve this year?

Ihab Toma

Yes, Patrick I think it was right in the middle. One of the interruption were right in the middle when I was talking about directionally all the new contracts and extension and where the economics of third contract are going and I did that [indiscernible] rig and yes what I can tell you is, every rig we have is reprising up whether because it’s an extension on the current contract or moving to a new contract at a higher rate, every single one, except for the platinum, which is still continuing with the same contract that was a three-year contract and still has about three years to go. So, every other rig is definitely pricing up quite nicely.

Patrick Fitzgerald

Okay. So, the 100 that you called out are over a hundred a day, 100,000 a day, that’s kind of the bright spot, the other ones are going to be above where they are currently, but maybe not as high as that is that fair?

Ihab Toma

Yes. I would say directionally, again, most of the reprising for the jackups is happening in Q2, outside directionally between 20% to 40% increase on all of them.

Patrick Fitzgerald

Okay. Alright. Thanks, I’ll get back in queue.

Ihab Toma

Thank you, Patrick.

Operator

[Operator Instructions] We’ll now take our next question from Lucas Daul from ABG. Please go ahead. Your line is open.

Lucas Daul

Thank you. Good afternoon gentlemen. Ihab, what’s your comments on the tightening market both in the premium jackups and also the high and ultra-deepwater floaters? I mean how are you thinking in terms of going longer on some fixtures or you sort of intend to pick up work on a back to basics and keep it relatively short or what’s your thinking there?

Ihab Toma

Your question Lucas has two elements. One, is how tight is the market getting and second how much appetite that we have for longer term contracts, which we’ve done in this case would be building up backlog, but limiting our ability to get the higher day rates as the market continues to tighten. So, again the market is getting very tight for premium jackups as proven by the increases in the rates that we have been able to achieve and the back-to-back contracting that we have been able to achieve for all our rigs for drill ships.

Drill ships, 6th gen and 7th gen rigs are also getting to a very nice place with a 90% utilization. You have 77 or so drill ships out there that are not cold, and about 70 of them are on contract, plus some of the remaining seven going on contract that you’re all aware of, but they are not yet in the marketplace. So, in terms of tightening and then as a result getting the higher grade rates, unless you know again the coronavirus uncertainty starts to impact this, this is pretty much something we’re very confident of. What’s [indiscernible] necessarily happen is clients committing themselves to longer-term contracts than they need.

They have all the [burned] the past by doing that. They have to pay big termination fees or continue with rigs as much higher rate than market and they are going to avoid doing that as much as they can. So, day rates are going to go up, but turns for drill ships may still be driven by the length of exploration programs and driven by clients going out and giving a certain number of wells as firm and then even more wells as optional and I think we will continue to see that in 2020 until some of those developments long developments start to come in force and start to take rigs of the market for multi-years.

I think we still see exploration type of contracting driving how rigs are getting contracts and [indiscernible] in this case in 2020, but jackups is other way around, people are really going out of their way to look up rigs on long-term five years and ten year contracts as we have seen. On that we have lesser of an appetite to lock our rigs on current day rates or even the 100K day rate for the next three to five to 10 years. We will not want to do that.

Lucas Daul

Okay. That’s good color. And then I don’t know if you commented on the Titanium Explorer because the line broke up a couple of times, but are you sort of in a position where you are considering bringing back or what’s your thinking there?

Ihab Toma

Yes, I mean you are right. The line broke during that part of the call again. Yes, we are having conversations. The rig is our wanted rig, it’s a good 6th gen rig, it has excellent offline capabilities, it has plus 2.5 million pound hook load and the rigs are getting tight and very soon clients will have to take rigs that are not currently working. As I said, out of the 77, 70 are on contracts and a bunch more of the remaining 7 are going on contract soon.

So, very soon rigs that have not worked for a while are going to be needed to come out. Our rig is in perfect condition. We have been spending good money on [indiscernible] stacked; we have between 18 to 23 people on the rig at any given time, taking care of it. The equipments are being maintained. There are repairs at least to take place as we are getting repaired. So, the rig is going to be high up on the list of clients that at that point start to look at rigs that are not active today and that day is not too far in the future, but we need to make sure that the job we will get for that rig will justify us bringing it and adding it to the market, as well as spending the money on the re-certifications on things that we wish to get it out and truly better of course. So, we are being patient and we are not keeping it away from the market completely, but we are also not rush it into any job that moves.

Lucas Daul

And do you have a rough estimate of what the cost of bringing it back would be?

Ihab Toma

I’ll pass that to Tom.

Tom Cimino

It’s about $30 million. $30 million range is what we have said and you have alluded to. We are spending some cash now on labor just to stay on top of what needs to be done, but we have set that $30 million range for reactivating.

Ihab Toma

Just to clarify what we are spending the money on. Now, we are making it to make sure we are de-risking the reactivation. So, when we say we think we have a range for the reactivation cost of so and so then we are willing to be staying within that range and not going to have surprises either on cost or time to bring the rig out.

Lucas Daul

Okay, good. Thank you very much guys.

Operator

We will now take our next question from Patrick Grow from HBK. Please go ahead.

Patrick Grow

Hi guys. Tom, you sighted that there might be a few one-time cash expenses or [indiscernible] this year, can you kind of just go through what those are in amount and toning?

Ihab Toma

Yes, sure Patrick. The majority of the non-recurring one-times are behind us. There is obviously a lot of history with clearing up the SEC and some of the other [indiscernible] one-one item that’s an accrual that’s on our balance sheet. It’s approximately $50 million that we consider one-time cash payment and that’s a lingering liability from actually the restructuring. It’s been on our balance sheet for some time and we’re hoping to clean that up here in the first half of this year.

Patrick Grow

Great, and then I about missed it, but on the Aquamarine, do you guys kind of give color or could you give color on the second half of what some of the prospects you are seeing there, might be for that rig?

Ihab Toma

Patrick because we are in – as I mentioned again, [indiscernible] in final stages of negotiation I will not be able to comment much on that, but the rig is a very wanted rig in Southeast Asia the region is very hot with tenders, I am sure you can look in the press to see how many active tender right now that are yet to awarded. So, yes we are very confident that this rig will be doing very well in the second half of the year.

Patrick Grow

Great. And last one, the Topaz which, it sounds like that’s great and it’s going to be any higher rates, do you know how long or what the cost expense – the cost associated with the mobilization in between the Vaalco contract in the Congo contracts?

Ihab Toma

Again, I will not comment on things that we don’t have in the public domain, but what I can tell you is that that is covered by mobilization fees that are being charged to the client, which is also a change from the past where contract drillers have to eat all this time and all this cost between contracts we no longer have to do that.

Patrick Grow

Great. Thank you guys.

Ihab Toma

Thank you, Patrick.

Operator

We will now take our next question from Joshua Katzeff from Deutsche Bank. Please go ahead your line is open.

Joshua Katzeff

Hi, good morning everyone.

Ihab Toma

Good morning.

Joshua Katzeff

I appreciate you taking my questions. First, congratulations on a good quarter.

Ihab Toma

Thank you.

Joshua Katzeff

Just wanted to follow up on the Aquamarine understanding sensitivities around, commenting around the contract I should tell, but is that going to be similar to your Topaz comments where if there is any gap at work that will be covered by mobilization, but was that going to be a direct continuation of a contract from a collocation standpoint?

Ihab Toma

Josh, thanks for the good question. What we are also able to do now is we have [indiscernible] to pick and choose. So when there are good opportunities for the Aquamarine that would give us that continuation back-to-back with the Seaport contract. We would prefer that over one that might cut the gap and then we have to engage into conversations or two we are going to cover that gap, and those conversations are happening and again we are pretty confident that we are going to have a good contract that has a minimum interruption if any.

Joshua Katzeff

Got it. And then maybe switching over to the drill ships before I get to my favorite topic, on the Tungsten, I guess you haven't disclosed day rates, but I guess can you just put the day rates of the current contract in Lebanon on you know the fall on what you have within the border market. It’s a market rate contract and then on the options are those kind of market rate are they fixed price and then at what point do they have to declare those options, so what more you have an idea whether those are firmer than that?

Ihab Toma

So, in terms of the pricing, it is market price compared to – if you take the reference where those contracts were being negotiated. So, it’s probably a little bit less than current market prices as those contracts are being negotiated today, but these contracts did take place a good year ago or so, so that would have been the good spot rate or whatever for that time, not spot rate, but contract rate for that time, but what I can tell you, I gave a bit of a range earlier saying 20% to 30% pricing up and that rig would be on the high end of that range from that contract in Egypt. Whether the options are priced or not, they are priced, yes.

Joshua Katzeff

And timing for when that – to declare those right, so when we will have an idea whether if that’s framework or not?

Ihab Toma

I don't have that at the top of my head Josh, but it is definitely with enough time to being able for us to decide whether what to do with the rate and so we will make sure of that now. Again, in the past we could not be choosy and the client has been in the last minute if you like to decide, that’s [indiscernible] we have more ample time to decide if you have to find a different contract for the regular knot. The good news again is that the market is hot and sometimes you actually prefer that an option doesn't get exercised because then the rig can get another contract at higher price.

Joshua Katzeff

And then on the titanium, I guess trying to get a sense of, I understand maybe there’s not a current contract that justifies bringing that rate to second, but you mentioned the interest has increased for that rig, is there, are you getting opportunities to see that rig work albeit on shorter term contract, so it’s not worth it or are, you know I guess your clients just sitting back and saying hey what’s all – let's keep focusing on the hot rigs, and start talking about some of these warm staked rigs for the future, just curious whether there is an opportunity to get that rig hot immediately even if it might not economically want it?

Ihab Toma

Yes. As you said this is your favorite topic Josh, but my answer wouldn’t change. We – if we are to try to buy ourselves into getting a shot-term job and take it way below market to get the rig out, we can, but we're not going to do that.

Joshua Katzeff

Got it. And I guess, we just saw the meltdown or I guess [indiscernible] meltdown is now moving to the Gulf of Mexico for a contract to a rig that’s never worked before. I mean, I guess how do you put the titanium up against some of those other maybe newer, but on unproven or other rigs without working histories?

Ihab Toma

I mean it’s a very good example of clients, now not insisting on picking hot rigs that have worked with you know immediate track record. People are now accepting that they have to start looking to the rigs that are not working today and have not worked. And as you said, in this case the rig rate has never worked before, so it depends on the clients preference, are they looking for very high specification rig at a good price or looking for a regulatory work before and has the track record of having delivered and both will have their flavor and both will have preference by different clients and you know we did very positively in the fact that the rig is being mobilized [indiscernible] for a contract.

Joshua Katzeff

Yes. That was a good side of the market as well. I appreciate your times and thank you.

Ihab Toma

Thank you, Josh.

Operator

At this time there appears to be no further questions. So, I would like to turn the conference back to you for any additional and closing remarks. Pardon me, we just have a question that has come in from [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you very much. Congratulations gentlemen on a good quarter.

Ihab Toma

Thank you.

Unidentified Analyst

Thank you. Alright. Can you give us some, this is a factual question, some timeline on the appeals process, when is it going to be heard and how much time does it usually take for the appeals court to decide?

Tom Cimino

Sure. We anticipate that there will be more arguments in the next few months and we are, we believe it is likely that a decision will be rendered this year. That’s a color I can give with respect to the timing.

Unidentified Analyst

Okay. Second, can you remind us of what the backlog was as of the end of the third quarter so I can compare with 141 you said?

Tom Cimino

Yes. I think it was around 140 and we finished at 149 I think as what we put at year end, so a marginal increase.

Unidentified Analyst

Very good. Okay. You noted the customers preferences moving between either paying up for a proven 6th to 7th gen rig or being willing to take a rig with lesser or no work history as in the case of the one that Josh said, I guess there is another one option which is taking a rig with lesser qualities. Do you see any customers going in there, may be they selected a very good rig or a highly capable rig despite the fact that their requirements did not necessarily necessary necessitate the use of such rig and they are going back to hiring what they require? Do you see that had to cut price, do you see that happening?

Ihab Toma

Look. Most clients now have kind of, let me say tasted blood, and have seen what the modern rigs can do compared to the lesser rigs and I think it will be very difficult for them to really go back until or unless there is a huge bifurcations in day rates, which, you know it is a possibility of course, but at the moment we don't see it in the marketplace.

Unidentified Analyst

Okay. And lastly, we do see, I mean, you said contracts are short-termed on the ultra-deepwater drilling space and there are several contracts ending in the second half of this year. So, we have heard chatter that there is going to a suppression of rates when it comes to negotiations that start at that point in time, do you see that happening or you're not feeling as much or you're not seeing it as much generally?

Ihab Toma

As I said, the clients are accepting that those low rates that we have seen over the last few years are not going to be there anymore and they are a lot less sensitive to those rates. Some numbers I think I gave in previous calls, you know one of them the majors telling me that this first cost when they hire a rig used to be $1.1 million to $1.2 million a day, now it’s about 450. The rig crossed its [indiscernible] half a quarter or one-third of a quarter of that number.

So, even if those rates start to even double, we still have sitting at half of the third cost of what it used to be few years ago or when the activity was really at the peak. So, they have a big room to move up and still be okay with their economics or their projects and so on. What you will not want to do is to go out of your way and give longer work just for the sake of it. Again, when markets were very tight clients have to give three-year contract, five-year contract, and longer to even have anybody willing to offer them a rig. Today, we are able to get rigs, however their rate is fine, but they are not going to go and just give you five-year contract just for the sake of it.

Unidentified Analyst

Very good.

Ihab Toma

Unless you have – but just to clarify, unless you have five years of work, right. So, if they have a development in their five years or at a few years or whatever they will give [that length] as a matter of fact you will want to give that length of time because they will not want to take it on uncertainty, but at the end of their development, they don't have a rig or they have a rig that is much, much higher, but what I'm saying is, they are not going to give the work to long unless they’re work is long.

Unidentified Analyst

Okay, understood. Thank you.

Ihab Toma

Thank you.

Operator

At this time, there appears to be no further questions. I would like to turn the conference back to you for any additional or closing remarks.

Ihab Toma

Good. Thank you very much. Again one last time I apologize for the technical issues we had on this call and we will make sure it will never happen again.

Tom Cimino

We look forward to speaking with you next time to talk about our results for the first quarter of 2020.

Operator

This concludes today's call. Thanks for your participation. You may now disconnect.