Vantage Drilling International

OTC:VTDRF

Earnings Call Analysis

Vantage Drilling Reports Q3 2024 Results and Strategic Advancements

Vantage Drilling experienced a significant quarter, successfully placing the Topaz Driller into contract and generating $49 million in total revenue, down from $103.7 million the previous year. The drop was attributed mainly to completed campaigns. They achieved an EBITDA of $6.4 million and reported a contract backlog of approximately $224.4 million. With liquidity at $57.6 million, Vantage is focused on repaying its $25 million revolving credit facility, having repaid $13.9 million to date. The company plans to issue $50 million in new senior notes to bolster financial strength. Vantage aims to maintain strong safety records while pursuing profitable long-term contracts.

Strong Third Quarter Performance Underpinned by Strategic Sales

In the third quarter ending September 30, 2024, Vantage Drilling reported a challenging yet productive period. The company successfully placed the Topaz Driller under contract, marking a timely start to its operations. Notably, Vantage announced the sale of two jack-up rigs, the Topaz Driller and Soehanah, for a combined total of $190 million. This decision aligns with their strategic focus on optimizing asset management, allowing Vantage to redeem its senior notes at par, utilizing $184.9 million from these sales.

Financial Overview: Revenue and Backlog Insights

Total revenue for Q3 was approximately $49 million, down from $103.7 million during the same period in 2023. This decline was attributed to the conclusion of the Platinum Explorer and Polaris campaigns, alongside fewer operating days for the Topaz Driller, which only commenced its contract on September 30. Despite this drop in revenue, Vantage's contract backlog reflects robust future opportunities, standing at approximately $224.4 million at quarter-end, with the Topaz Driller contract contributing around $107.1 million.

Improving Financial Stability through Debt Management

Vantage is actively addressing its capital structure by repaying portions of its revolving credit facility. To date, the company has repaid $13.9 million of the $25 million drawn down. They aim to fully settle this facility by November, utilizing funds from mobilization and reimbursable upgrades under current contracts, enhancing their financial stability and liquidity.

Strategic Investments and Future Growth Plans

To bolster its liquidity ahead of the joint venture with TotalEnergies, Vantage announced plans to issue $50 million in new senior notes with a 97% original issue discount. This initiative supports capital needs as the company enters 2025, further ensuring the operational readiness of its rigs and positions Vantage for future growth opportunities.

Market Dynamics and Competitive Positioning

The current market environment shows a blend of challenges and opportunities. Vantage is observing a trend of project postponements, particularly for floaters, with utilization rates impacted by recent talks of suspensions. However, optimism remains for jack-up rigs in 2025, fueled by upcoming projects that may absorb idle units. Vantage's strong relationships with key clients and extensive local experience provide a competitive edge in this environment.

Commitment to Safety and Operational Excellence

Vantage achieved a commendable safety record in Q3, with all rigs reporting zero recordable injuries. The company has implemented various safety initiatives, including a new behavioral assessment tool to enhance knowledge retention among crews. This focus on safety not only promotes a healthy work environment but also builds trust with clients, contributing to ongoing contracts and new opportunities.

Outlook for Rigs and Contracts

The Platinum Explorer is slated for operational readiness in early 2025 following scheduled upgrades and maintenance. Meanwhile, the Tungsten Explorer continues its program with TotalEnergies, with prospects for a joint venture sale expected to close by mid-2025, further utilizing Vantage's rigs in valuable markets. The management team remains optimistic about securing long-term drilling contracts to enhance stakeholder returns in an evolving market landscape.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to Vantage Drilling International's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Rafael Blattner, CFO. Please go ahead.

[Rafael Blattner, executive]

Thank you. Welcome, everyone, to the Vantage Drilling International Limited Third Quarter 2024 Earnings Conference Call. On the call today is also Ihab Toma, our CEO. This morning, we released our earnings announcement for the quarter ended September 30, 2024. 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. We have based forward-looking statements on management's current expectations and assumptions and not on historical facts. Examples of these statements include, but are not limited to, our expectations regarding future results, including expectations regarding our liquidity position, future costs and expenses related to upgrades and out of service work as well as contract preparation costs and expenses.

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.

Vantage does not undertake the updating of any such statement or risk factor that could cause actual results to differ materially from our expectations. We refer you to our earnings release and financials available on our website.

We have prerecorded our prepared remarks and are participating on the call remotely to manage the question-and-answer session segment of the call. In the event there are issues with sound quality or of a similar nature, please accept our apologies in advance, and thank you for your understanding. Now let me turn over the call to our CEO, Mr. Ihab Toma.

[Ihab Toma, executive]

Thank you, Rafael. Good morning and good afternoon, everyone. Even good evening for people in Dubai, like us. I am pleased to report a successful third quarter of 2024, marked by safe and efficient operations.

During the quarter, we placed the Topaz Driller on contract on time and on budget, signed the agreements for the sale of the Topaz Driller and the Soehanah and advanced our efforts towards listing the company on Oslo Euronext Børs, which have been successfully completed in October.

Also, as a result of the recent jack-up sales, which qualify as vessel sales under the indenture, we are required to apply the net proceeds towards redemption. Finally, and to cover large equipment orders ahead of the JV incorporation and the planned out-of-service period for the Tungsten Explorer post sale, we issued $50 million in new notes to ensure adequate liquidity.

Vantage will be reimbursed for most of these expenses after the JV is incorporated and ahead of the actual out-of-service period for the rig. Rafael will provide more color on the new notes in his prepared remarks.

I will now take you through our performance for the quarter in relation to our 3 corporate goals of: one, maintaining stellar safety and operational performance; two, contracting of our fleet; and three, achieving excellent stakeholders' returns. I will begin with our goal #1 of maintaining our stellar safety and operational performance.

From a safety perspective, Q3 was a good quarter for Vantage as we saw all our rigs achieved 0 recordable injuries for the quarter. This is an exceptional achievement that highlights the commitment of our crews to our safety programs and the success of the training initiatives that we have implemented over the year.

I would like to highlight some of the key advancements in our safety and competency program this quarter as we continue driving safety and operational excellence across the company. We have recently introduced the Fail Safe versus Fail Lucky concept, which is a recognition that not all incidents are preventable. And when something does fail, we continue to ensure that appropriate mitigation controls are in place to minimize the risk of people being injured if and when something does fail.

A simple example of that is to enforce red zones where no personnel could be present while activity is taking place at height above that zone. It is worth noting that our goal is still to achieve 0 injuries as we believe this principle is paramount to the success of our organization and reinforces our ongoing commitment to refining safety protocols to reduce risk in our operations.

This quarter, we completed the first round of our innovative behavioral assessment tool. BAT program, which comprises using the 100- to 120-day space learning journey for our offshore teams to improve knowledge retention on key aspects of our behavioral-based safety program. Post training surveys have shown a significant improvement in knowledge retention across the group, thanks to this initiative. We are now advancing the BAT process with an AI component that defines the 9 core topics under our Perfect Day Leadership training program, which will further enhance the knowledge retention after the training.

We also continued with the rollout of the latest version of our Perfect Day Leadership, PDL training program. And this time, we included key client representatives and a new member of our Board and received highly positive feedback on our company's culture. These initiatives highlight our focus and strategic commitment on safety and talent development as we strive to conclude the year on a strong note.

Aligned with our existing commitment to environmental stewardship, we are analyzing supply chain data to identify ways for minimizing packaging materials shipped to our rigs thereby reducing waste and transportation impact. Furthermore, as part of our focus on sustainability with our third-party logistics suppliers, we are now compiling information related to how we ship our spares and equipment from our vendors to our fleet in general.

This data will provide us concise information on one of our largest sources of emissions and allow us to make informed decisions going forward. These initiatives reflect our dedication to sustainable operations, enhancing our long-term value for both shareholders and the environment.

Switching to operations. Revenue efficiency for the owned fleet during the third quarter of 2024 was 97.4%, with the deepwater fleet and the jack-up fleet achieving revenue efficiency of 97% and 98.3%, respectively.

I'll now walk you through our fleet status, which directly ties to our second corporate goal of contracting our rigs and securing full fleet utilization. Starting with the jack-ups, the Soehanah had an uninterrupted quarter working for Medo, Indonesia on its 776-day contract at $119,900 per day. As mentioned during the previous earnings call, the rig is currently contracted until the latter part of 2025.

The Topaz Driller completed its contract upgrades on the 15th of September and successfully started its 2-year firm contract with CPOC at $125,000 per day in the joint development area of Malaysia and Thailand on the 30th of September 2024. The contract also includes 9 months of unpriced options which, if exercised, will follow in direct continuation to the firm duration of the contract.

As recently announced on October 30, Vantage sold the Soehanah and the Topaz Driller to ADES for a total of $190 million. Alongside the sale, we signed 2 3-year management agreements for the sold jack-ups and renewed the support services agreement for the Emerald Driller. These agreements are expected to generate up to $7.5 million per year with the management agreements being performance-based and the support services agreement at a fixed rate.

These transactions are a testament to Vantage's commitment to returning value to our shareholders and a forward step in executing on our asset-light strategy while further expanding our global alliance with our partner, ADES.

Switching to deepwater, the Platinum Explorer continues its cyclical recertifications and upgrades, including the upgrade of the BOP from 5 to 6 ramps. The rig should be available for work later in the first quarter of 2025. And we continue to pursue various suitable opportunities.

Moving on to the Tungsten Explorer. The rig continues its campaign with TotalEnergies in the Republic of Congo. The current program is expected to continue into the second quarter or third quarter of 2025, after which the rig will be sold to the JV. The 10-year management contract will commence and the rig will undergo periodic maintenance and upgrades prior to mobilization to its next assignment.

As a reminder, the Tungsten Explorer will be sold to the JV for $65 million, where TotalEnergies and Vantage will own 75% and 25%, respectively. We expect to finalize the JV incorporation and execute the definitive agreement before the end of this quarter.

Regarding the backlog, at the end of the third quarter, our backlog totaled $224.4 million, with the Topaz Driller contract with CPOC contributing approximately $107.1 million to the backlog. Finally, in our Managed Services segment, we returned the Capella to Seadrill during the third quarter following the completion of drilling program for Mubadala in Indonesia.

At the end of this contract, we received a perfect feedback score from Mubadala highlighting the rig's excellent performance, the crew's high competence, proactive approach and strong communication alongside our exemplary safety leadership and commitment to a strong safety culture. Customer feedback like this is what keeps operators and management service clients returning to Vantage as a trusted partner.

We remain committed to expanding our management segment and continue to pursue opportunities to add rigs under our management. Currently, we are engaged in several active discussions and tenders for marketing and operating drilling units, including several multiyear projects. Recently, we signed a memorandum of understanding with a floater owner and are now preparing the related marketing and operations management agreements to bid this rig to some tenders.

We continue to see long-term opportunities for both jack-ups and floaters in regions where we have strong customer relationships and deep local experience. We are actively evaluating rigs to manage for owners in response to various tenders and continue to receive inbound interest to discuss new opportunities.

Turning to market dynamics. We continue to see a trend of project postponements with anticipated idle periods for floater extending into late 2025. While long-term sentiment remains positive for both floaters and jack-ups, recent talks of additional jack-up suspensions have impacted near-term utilization and rate expectations in that segment. However, multiple opportunities scheduled to commence in 2025 are expected to help absorb a number of premium jack-up rigs as they come off contract.

Moving to our third corporate goal, achieving excellent stakeholders' returns. During the third quarter of 2024, we achieved $6.4 million of EBITDA, reflecting an improvement from the previous quarter. After the quarter end, we listed the company on Euronext Growth in Oslo and made progress on our capital structure. This includes beginning repayment of the revolving credit facility, which should be fully paid off in November using proceeds from mobilization and reimbursable upgrades under the CPOC contract, along with issuing $50 million in new notes, as mentioned in my earlier remarks. Rafael will provide further details in his prepared remarks.

In conclusion, we remain focused on achieving exceptional safety performance and securing profitable long-term drilling contracts to deliver strong future returns for our stakeholders.

With that, I would like to again turn the call over to Rafael to take us through the numbers. Thank you.

[Rafael Blattner, executive]

Thank you, Ihab, and welcome, everyone. I'll now provide an overview of the company's financial performance for the quarter ending September 30, 2024, and share key updates since then.

As Ihab mentioned, Q3 was a productive quarter. The Topaz Driller began operations, and we announced the sale of both the Topaz Driller and Soehanah jack-up rigs. In October, we listed the company on the Euronext Growth, completed the sale of these 2 jack-ups and announced the mandatory redemption of senior notes at par using the $184.9 million in net proceeds from the sale of the jack-ups.

We also addressed our near-term capital needs by announcing the future issuance of $50 million in new senior notes, structured as a tap at a 97 original issue discount, which will be repaid at par following the sale of the Tungsten Explorer to the joint venture with TotalEnergies in 2025. These new senior notes will be issued under the terms of our existing indenture.

Finally, we have begun reducing our $25 million revolving credit facility balance with $13.9 million repaid to date. This proactive approach supports a strong balance sheet and ensure sufficient liquidity leading up to the planned Tungsten Explorer sale to the joint venture.

Switching to the third quarter results. Contract backlog at the end of the quarter totaled approximately $224.4 million, which includes the Topaz Driller contract for CPOC, contributing approximately $107.1 million to our backlog. In regards to liquidity, the company ended the quarter with approximately $57.6 million of cash. This total includes $6.4 million of restricted cash and $12.4 million prefunded by our managed services customers for near-term obligations.

In comparison, on December 31, 2023, Vantage had $84 million in cash, including $10.8 million of restricted cash and $11.6 million prefunded by our managed services customers. The decrease in cash is primarily due to capital expenditures, interest payments, dividend equivalent payments and income tax payments offset by the draw from the revolving credit facility and inflows from operations.

Working capital for the third quarter of 2024, ended at approximately $94.3 million compared to $88.1 million in the previous quarter. The increase was primarily driven by the invoicing of the mobilization and reimbursable upgrades to CPOC as the Topaz Driller was accepted on contract on September 30, increase of critical inventory spares on the Tungsten Explorer and increase in cash due to the draw of the revolver and cash generated by operations.

The cash increase was partially offset by capital expenditures on the Topaz Driller and the Platinum Explorer. As I mentioned earlier, we are required to repay the revolving credit facility using funds from the CPOC mobilization and reimbursable upgrades. So far, we have repaid $13.9 million of the $25 million drawn and we will apply the remaining funds from CPOC to pay off the balance during the fourth quarter.

For the third quarter of 2024, we achieved total revenue of approximately $49 million compared to $103.7 million for the third quarter of 2023. The decrease in revenue was primarily due to the conclusion of the Platinum Explorer and Polaris campaigns and fewer operating days on the Topaz Driller while preparing for the CPOC contract, which commenced on September 30.

For the third quarter of 2024, the Tungsten Explorer, the Soehanah and the Topaz Driller achieved revenue efficiency of 97%, 98.3% and 100%, respectively. Operating costs for the third quarter of 2024 of $38 million were lower compared to $74 million in the comparable quarter of 2023, primarily due to lower fleet-wide activity and lower reimbursable costs from the Managed Services segment.

General and administrative expenses for the quarter totaled approximately $5.7 million, which were in line with the comparable quarter in 2023. Interest expense for the quarter was approximately $6.4 million compared to $5.3 million in the comparable quarter in 2023. The increase was primarily due to the interest and financing costs associated with the $25 million revolving credit facility.

The net result for the third quarter ended September 30, 2024, was EBITDA of approximately $6.4 million and a net loss attributable to shareholders of approximately $10.6 million. Please note, we will post our quarterly report to our website later today.

And with that, I will now turn the call back over to the operator to begin the Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Fredrik Stene of Clarksons Securities.

[Fredrik Stene, analyst]

Ihab and Rafael, hope all is well, and thank you for some additional color in the prepared remarks. I have a couple of questions. And first, I wanted to touch briefly on the Platinum Explorer. I think my base case is that, that rig eventually will work again in India. So I was wondering if you had any color on what ONGC is currently planning in terms of progress on tenders that have been rumored to come to market, et cetera? Any color there would be very helpful.

[Ihab Toma, executive]

Thanks, Fredrik. Yes. I mean, the status has not changed since we last had an earnings call and so on the -- as you have read in the news, we are planning to come up with 3 tenders, 2 for drillships and 1 for semi, but that has not happened yet. That is still the plan and -- but the tender is not out yet. .

So yes, you are saying that it is your -- that's what you have in your model, that's fine, nothing wrong with that, but at the same time, of course, we're also chasing other opportunities.

[Fredrik Stene, analyst]

I think you also said, turning to the managed part of the business that you had a memorandum of understanding in place now for another floater that you would start to bid into tenders. Are you able to share any additional color on that? Are we talking Southeast Asia, Africa, I would kind of assume that these regions that you're already present in, but any additional [ color ] startup or whatever you can give would be helpful.

[Ihab Toma, executive]

Yes. No, we -- I cannot talk about who's the owner and which floater. But I mean, otherwise, I would have said in the prepared remarks. But of course, you're right that where we will be bidding it is where we have experience and we have the know-how and we have the good relationship with the clients. So it is, in general, the areas where we have worked in the past.

[Fredrik Stene, analyst]

And just 1 final technical question. Now that the 2 jack-ups have been sold, do you have a date for when your bonds will be called the first $185 million I guess it's within 30 days?

[Rafael Blattner, executive]

Yes. So we simply notice aligned with when we sold the jack-ups, you are correct. As per the inventories it's going to be in 30 days.

[Fredrik Stene, analyst]

Do you think it will happen before that or on the 30th day. .

[Ihab Toma, executive]

No, it's going to happen really on the 30th day. It has to be -- yes, it's -- yes. And at the same time, we'll be we'll be tapping the $50 million in order to avoid any necessary leakage in terms of interest.

[Operator]

Our next question comes from the line of Loren Harman of Bank of America Merrill Lynch.

[Loren Harman, analyst]

I was wondering if you could speak a little bit more about the Oslo listing and specifically what it means for the existing shares. I guess -- are there 2 separate classes of shares? Is that the right way to think about it? Or...

[Ihab Toma, executive]

No, thanks for the question. No, it's just 1 class of share we listed at the end of October. The purpose for that was just to attempt -- to get more liquidity into the [indiscernible] and also to have more following in terms of market research and equity analysis in a market that we believe understands our business well, which happens to be Norway.

[Loren Harman, analyst]

So I guess we're all of the shares did on the Oslo Exchange or I guess...

[Ihab Toma, executive]

Yes. So if you're familiar with the VPS process, we migrated -- not everyone has migrated as of yet, but there's a threshold that needs to be met for us to be able to list. The threshold was obviously met and we're qualified for listening in Norway. However, some shareholders still need to be transferring their shares into these VPS-created accounts in Norway. If you happen to be 1 of them, just feel free to reach out personally to me. And if I have to push you together with Continental or BNB I'll facilitate that process.

[Loren Harman, analyst]

Okay. Got it. I'll reach out to you guys separately.

[Operator]

[Operator Instructions] Our next question come from the line of Garrett Fellows of J.H. Lane Partners.

[Garrett Fellows, analyst]

You mentioned some JV costs that you'll be reimbursed for here. Could you just let us know what the number is on those?

[Ihab Toma, executive]

Are you talking about this CPOC reimbursable, just to understand your question, Garrett.

[Garrett Fellows, analyst]

Sure. Sorry. I mean you mentioned some JV costs are the CPOC reimbursables, yes.

[Rafael Blattner, executive]

Okay. So if you're talking about the JV costs, as Ihab mentioned in his prepared remarks, the rig subsequently to finishing its job in the column of TotalEnergies will go into an out-of-service period. The out-of-service period is going to happen post the closing of the rig sale. However, there will be items capital items that need to be ordered ahead of time. And with that, we need to make some payments into these original equipment manufacturers. Some of these payments are material. So they will be paid.

Once we finalize the JV enter into the definitive agreement, Vantage will be reimbursed for most of these capital outlays that it's making on behalf of the joint venture. We are not actually guiding on that particular paper. But part of the money that's being raised in the new notes is to satisfy those obligations and the remainder of that is just to make sure that the company has adequate liquidity to keep on managing the rig and finalizing the Platinum upgrade and hopefully, to be able to deploy that rig to a future contract.

[Operator]

And ladies and gentlemen, that does conclude Vantage Drilling International Conference Call. Thank you for your participation. You may now disconnect. Have a great day.