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VANTAGE DRILLING INTERNATIONAL - Quarter Report: 2021 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 333-212081

 

VANTAGE DRILLING INTERNATIONAL

(Exact name of Registrant as specified in its charter)

 

 

Cayman Islands

 

98-1372204

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o Vantage Energy Services, Inc.

777 Post Oak Boulevard, Suite 800

Houston, TX 77056

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (281404-4700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

N/A

N/A

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

The number of Vantage Drilling International Ordinary Shares outstanding as of April 26, 2021 is 13,115,026 shares.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes      No  

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

SAFE HARBOR STATEMENT

3

PART I—FINANCIAL INFORMATION

 

Item 1

 

Financial Statements

6

 

 

Consolidated Balance Sheet

6

 

 

Consolidated Statement of Operations

7

 

 

Consolidated Statement of Shareholders’ Equity

8

 

 

Consolidated Statement of Cash Flows

9

 

 

Notes to Unaudited Consolidated Financial Statements

10

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4

 

Controls and Procedures

29

PART II—OTHER INFORMATION

 

Item 1

 

Legal Proceedings

30

Item 6

 

Exhibits

30

SIGNATURES

32

 

 

2


 

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are included throughout this Quarterly Report, including under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” When used, statements which are not historical in nature, including those containing words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” “will,” “future” and similar expressions are intended to identify forward-looking statements in this Quarterly Report.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements.

Among the factors that could cause actual results to differ materially are the risks and uncertainties described under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 18, 2021, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and the following:

reduced expenditures by oil and gas exploration and production companies;
general economic conditions and conditions in the oil and gas industry, including the worldwide supply and demand for oil and gas, and expectations regarding future prices of oil and gas;
excess supply of drilling units worldwide;
competition within our industry;
growing focus on climate change and its impact on the reputation of fossil fuel products or services;
our level of indebtedness;
epidemics, pandemics, global health crises, or other public health events and concerns, such as the spread and resulting impact of COVID-19;
governmental, tax and environmental regulations and related actions and legal matters, including the actions taken by governments in response to the spread of COVID-19, as well as the results and effects of legal proceedings and governmental audits, assessments and investigations;
termination or renegotiation of our customer contracts, including, but not limited to, as a result of the COVID-19 outbreak;
losses on impairment of long-lived assets;
any non-compliance with the U.S. Foreign Corrupt Practices Act, as amended, and any other anti-corruption laws;
the sufficiency of our internal controls;
operating hazards in the offshore drilling industry;
operations in international markets, including geopolitical, global, regional or local economic and financial market risks and challenges, applicability of foreign laws, including foreign labor and employment laws, foreign tax and customs regimes and foreign currency exchange rate risk;
ability to obtain indemnity from customers;
adequacy of insurance coverage upon the occurrence of a catastrophic event;
effects of new products and new technology on the market;
the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems;
our small number of customers;
consolidation of our competitors and suppliers;
changes in the status of pending, or the initiation of new, litigation, claims or proceedings, including our ability to prevail in the defense of any appeal or counterclaim;
changes in legislation removing or increasing current applicable limitations of liability;
limited mobility of our drilling units between geographic regions;

3


 

levels of operating and maintenance costs;
our dependence on key personnel;
availability of workers and the related labor costs;
increased cost of obtaining supplies;
changes in tax laws, treaties or regulations;
credit risks of our key customers and certain other third parties;
our ability to incur additional indebtedness;
compliance with restrictions and covenants in our debt agreements;
our incorporation under the laws of the Cayman Islands and the limited rights to relief that may be available compared to U.S. laws; and
identifying and completing acquisition opportunities.

Many of these factors are beyond our ability to control or predict. Any, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in filings we may make with the SEC, which may be obtained by contacting us or the SEC. These filings are also available through our website at www.vantagedrilling.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval system (EDGAR) at www.sec.gov. The contents of our website are not part of this Quarterly Report.

Unless the context indicates otherwise, all references to the “Company,” “Vantage Drilling International,” “we,” “our” or “us” refer to Vantage Drilling International and its consolidated subsidiaries. References to “VDI” refer to Vantage Drilling International, a Cayman Islands exempted company and the group parent company.

4


 

GLOSSARY OF TERMS

 

The following terms used in this Quarterly Report have the following meanings, unless specified elsewhere in this Quarterly Report:

 

Abbreviation/Acronym

 

Definition

10% Second Lien Notes

 

The Company's 10% Senior Secured Second Lien Notes due 2020

2016 Amended MIP

 

The Company's Amended and Restated 2016 Management Incentive Plan

2016 Term Loan Facility

 

The Company's initial term loans in place in connection with the Reorganization Plan

9.25% First Lien Notes

 

The Company's 9.25% Senior Secured First Lien Notes due November 15, 2023

ADVantage

 

ADVantage Drilling Services SAE, a joint venture owned 51% by the Company and 49% by ADES

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standards Update

Bassoe

 

Bassoe Offshore A.S.

Board of Directors

 

The Company's board of directors

Comparable Quarter

 

The three months ended March 31, 2020

Conversion

 

The conversion of all of the Convertible Notes into Ordinary Shares

Convertible Notes

 

The Company's 1%/12% Step-Up Senior Secured Third Lien Convertible Notes due 2030

COVID-19

 

Coronavirus disease 2019, a new strain of coronavirus caused by SARS-CoV-2

Current Quarter

 

The three months ended March 31, 2021

DOJ

 

U.S. Department of Justice

Effective Date

 

February 10, 2016, the date the Company emerged from bankruptcy

EPS

 

Earnings per share

Exchange Act

 

Securities Exchange Act of 1934, as amended

FASB

 

Financial Accounting Standards Board

First Lien Indenture

 

First Lien Indenture, dated as of November 30, 2018, by and between Vantage Drilling International and U.S. Bank National Association

IRS

 

U.S. Internal Revenue Service

OPEC

 

The Organization of the Petroleum Exporting Countries

Ordinary Shares

 

The Company's ordinary shares, par value $0.001 per share

PBGs

 

Performance-based restricted stock units

QLE

 

A qualified liquidity event as defined in the 2016 Amended MIP

Reorganization Plan

 

The Company's pre-packaged plan of reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy Code

Restructuring Agreement

 

The restructuring support agreement among VDC and a majority of the Company's secured creditors

ROU

 

Right-of-use

SEC

 

Securities and Exchange Commission

Securities Act

 

Securities Act of 1933, as amended

Tax Election

 

Tax election filed with the IRS on January 22, 2020, to allow VDI to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019

TBGs

 

Time-based restricted stock units

TEV

 

Total enterprise value

U.S.

 

United States of America

U.S. GAAP

 

Accounting principles generally accepted in the United States of America

U.S. Holder

 

A beneficial owner of the Ordinary Shares that is, for U.S. federal income tax purposes, (i) a citizen or individual resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) that was organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or such trust has a valid election in effect under applicable treasury regulations to be treated as a U.S. person for U.S. federal income tax purposes

USD or $

 

U.S. Dollar

VDC

 

Vantage Drilling Company, the Company's former parent company

VDC Note

 

A $61.5 million promissory note issued by the Company in favor of VDC

VDI

 

Vantage Drilling International

VIE

 

Variable interest entity

 

5


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

Vantage Drilling International

Consolidated Balance Sheet

(In thousands, except share and par value information)

(Unaudited)

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

140,381

 

 

$

141,945

 

Restricted cash

 

 

7,798

 

 

 

7,996

 

Trade receivables, net of allowance for doubtful accounts of $5.0 million, respectively

 

 

25,147

 

 

 

24,717

 

Materials and supplies

 

 

49,456

 

 

 

49,861

 

Prepaid expenses and other current assets

 

 

20,538

 

 

 

29,151

 

Total current assets

 

 

243,320

 

 

 

253,670

 

Property and equipment

 

 

 

 

 

 

Property and equipment

 

 

795,349

 

 

 

794,944

 

Accumulated depreciation

 

 

(292,684

)

 

 

(278,562

)

Property and equipment, net

 

 

502,665

 

 

 

516,382

 

Operating lease ROU assets

 

 

3,583

 

 

 

3,997

 

Other assets

 

 

14,230

 

 

 

12,126

 

Total assets

 

$

763,798

 

 

$

786,175

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

24,588

 

 

$

25,466

 

Other current liabilities

 

 

39,994

 

 

 

24,734

 

Total current liabilities

 

 

64,582

 

 

 

50,200

 

Long–term debt, net of discount and financing costs of $4,371 and $4,781, respectively

 

 

345,629

 

 

 

345,219

 

Other long-term liabilities

 

 

14,293

 

 

 

15,011

 

Commitments and contingencies (see Note 8)

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Ordinary shares, $0.001 par value, 50 million shares authorized; 13,115,026 shares issued and outstanding, respectively

 

 

13

 

 

 

13

 

Additional paid-in capital

 

 

633,727

 

 

 

634,181

 

Accumulated deficit

 

 

(295,639

)

 

 

(259,655

)

Controlling interest shareholders' equity

 

 

338,101

 

 

 

374,539

 

Noncontrolling interests

 

 

1,193

 

 

 

1,206

 

Total equity

 

 

339,294

 

 

 

375,745

 

Total liabilities and shareholders' equity

 

$

763,798

 

 

$

786,175

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


 

Vantage Drilling International

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Revenue

 

 

 

 

 

 

Contract drilling services

 

$

17,725

 

 

$

44,319

 

Reimbursables and other

 

 

2,441

 

 

 

7,137

 

Total revenue

 

 

20,166

 

 

 

51,456

 

Operating costs and expenses

 

 

 

 

 

 

Operating costs

 

 

25,357

 

 

 

48,555

 

General and administrative

 

 

5,495

 

 

 

7,170

 

Depreciation

 

 

14,125

 

 

 

18,016

 

Total operating costs and expenses

 

 

44,977

 

 

 

73,741

 

Loss from operations

 

 

(24,811

)

 

 

(22,285

)

Other (expense) income

 

 

 

 

 

 

Interest income

 

 

100

 

 

 

701

 

Interest expense and other financing charges

 

 

(8,510

)

 

 

(8,420

)

Other, net

 

 

(614

)

 

 

2,355

 

Total other expense

 

 

(9,024

)

 

 

(5,364

)

Loss before income taxes

 

 

(33,835

)

 

 

(27,649

)

Income tax provision

 

 

2,162

 

 

 

2,921

 

Net loss

 

 

(35,997

)

 

 

(30,570

)

Net (loss) income attributable to noncontrolling interests

 

 

(13

)

 

 

2

 

Net loss attributable to shareholders

 

$

(35,984

)

 

$

(30,572

)

Loss per share

 

 

 

 

 

 

Basic and Diluted

 

$

(2.74

)

 

$

(2.33

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7


 

Vantage Drilling International

Consolidated Statement of Shareholders’ Equity

(In thousands)

(Unaudited)

 

 

 

Three-Month Period Ended March 31, 2020

 

 

 

Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Earnings (Deficit)

 

 

Non-Controlling Interests

 

 

Total Equity

 

Balance January 1, 2020

 

 

13,115

 

 

$

13

 

 

$

634,770

 

 

$

17,064

 

 

$

1,244

 

 

$

653,091

 

Share-based compensation

 

 

 

 

 

 

 

 

698

 

 

 

 

 

 

 

 

 

698

 

Share-based compensation - dividend equivalents

 

 

 

 

 

 

 

 

(2,204

)

 

 

 

 

 

 

 

 

(2,204

)

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

(30,572

)

 

 

2

 

 

 

(30,570

)

Balance March 31, 2020

 

 

13,115

 

 

$

13

 

 

$

633,264

 

 

$

(13,508

)

 

$

1,246

 

 

$

621,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Month Period Ended March 31, 2021

 

 

 

Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Deficit

 

 

Non-Controlling Interests

 

 

Total Equity

 

Balance January 1, 2021

 

 

13,115

 

 

$

13

 

 

$

634,181

 

 

$

(259,655

)

 

$

1,206

 

 

$

375,745

 

Share-based compensation

 

 

 

 

 

 

 

 

306

 

 

 

 

 

 

 

 

 

306

 

Share-based compensation - dividend equivalents

 

 

 

 

 

 

 

 

(760

)

 

 

 

 

 

 

 

 

(760

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(35,984

)

 

 

(13

)

 

 

(35,997

)

Balance March 31, 2021

 

 

13,115

 

 

$

13

 

 

$

633,727

 

 

$

(295,639

)

 

$

1,193

 

 

$

339,294

 

 

The accompanying notes are an integral part of these consolidated financial statements.

8


 

Vantage Drilling International

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(35,997

)

 

$

(30,570

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

Depreciation expense

 

 

14,125

 

 

 

18,016

 

Amortization of debt financing costs

 

 

410

 

 

 

410

 

Share-based compensation expense

 

 

306

 

 

 

698

 

Deferred income tax (benefit) expense

 

 

(150

)

 

 

102

 

Gain on disposal of assets

 

 

(2,733

)

 

 

 

Gain on settlement of restructuring agreement

 

 

 

 

 

(2,278

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade receivables, net

 

 

(430

)

 

 

(20,373

)

Materials and Supplies

 

 

9

 

 

 

514

 

Prepaid expenses and other current assets

 

 

(1,766

)

 

 

586

 

Other assets

 

 

(2,069

)

 

 

1,877

 

Accounts payable

 

 

(878

)

 

 

(6,288

)

Other current liabilities and other long-term liabilities

 

 

13,822

 

 

 

6,032

 

Net cash used in operating activities

 

 

(15,351

)

 

 

(31,274

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Additions to property and equipment

 

 

(456

)

 

 

(1,196

)

Net proceeds from sale of Titanium Explorer

 

 

13,557

 

 

 

 

Net cash provided by (used in) investing activities

 

 

13,101

 

 

 

(1,196

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Contributions from holders of noncontrolling interests

 

 

 

 

 

 

Debt issuance costs

 

 

 

 

 

 

Net cash provided by financing activities

 

 

 

 

 

 

Net decrease in unrestricted and restricted cash and cash equivalents

 

 

(2,250

)

 

 

(32,470

)

Unrestricted and restricted cash and cash equivalents—beginning of period

 

 

154,487

 

 

 

242,945

 

Unrestricted and restricted cash and cash equivalents—end of period

 

$

152,237

 

 

$

210,475

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

9

 

 

$

3

 

Income taxes (net of refunds)

 

 

785

 

 

 

1,465

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

Reallocation of Soehanah jack up rig acquisition value from equipment to materials and supplies

 

 

 

 

 

1,019

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

9


 

VANTAGE DRILLING INTERNATIONAL

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Recent Events

Vantage Drilling International, a Cayman Islands exempted company, together with its consolidated subsidiaries (collectively the “Company”), is an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and gas wells for our customers. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for drilling units owned by others, we provide operations and marketing services for operating and stacked rigs, construction supervision services for rigs that are under construction, and preservation management services for rigs that are stacked.

Ongoing Impact of COVID-19 and Declines in the Demand for Oil and Gas

The COVID-19 pandemic continues to spread worldwide and has exacerbated since the World Health Organization first classified the COVID-19 outbreak as a pandemic in March 2020. The global spread of COVID-19 has caused widespread illness and significant loss of life, leading governments across the world to impose severely stringent limitations on movement and human interaction, with certain countries being forced to implement multiple shelter-in-place and stay-at-home orders. While conditions have improved in certain portions of the world, other jurisdictions, including India, are experiencing record incident rates of COVID-19 as of the date of this Quarterly Report. In India, specifically, a second wave of COVID-19 began in early March 2021 and has quickly spread across the country. India has imposed a general and widespread lock-down in response to the substantial increase in cases related to COVID-19. Several states have imposed nightly curfews for all persons (with limited exceptions for essential services). Such governmental responses to the pandemic have depressed economic activity worldwide, impacting all industries, but with a significant adverse effect on the oil and gas industry. The short-term impact of these challenges has resulted in (i) lower revenue due to terminations of (or amendments to) our existing drilling contracts and (ii) increased expenses due to higher labor and related costs.  We cannot at this time determine with certainty how long these challenges will persist as well as the long-term impact that such challenges may have on our operations and growth on a go-forward basis, including in jurisdictions, such as India, where we have significant contractual backlog and derive material revenue; however, the Company is actively managing the business in an attempt to mitigate the impact of the foregoing matters.  In order to decrease the Company’s overall operating expenses, the Company has undertaken significant headcount and salary reductions, both onshore and offshore, as well as other cost reduction measures to reflect the lower operating activity.  Headcount and salary levels have not recovered to pre-pandemic levels.

The reduced global economic activity resulting from the COVID-19 outbreak in 2020 caused demand for global oil and gas to significantly decline.  The efforts to contain the COVID-19 outbreak will likely continue to depress global economic activity in the near-term, and the supply and demand imbalance of oil and gas will likely continue for the foreseeable future. 

The potential for oil prices to decline in the future continues to put pressure on oil and gas activity levels, particularly in the deepwater segment.   Notwithstanding the recovery in global oil prices in early 2021, oil and gas prices are expected to continue to be volatile as a result of the ongoing COVID-19 outbreak, changes in oil and gas inventories and industry demand, and therefore, the Company cannot predict how long oil and gas prices will remain stable or further improve, if at all, or whether they could reverse course and decline. While our management is actively monitoring the foregoing events and its associated financial impact our business, it is uncertain at this time as to the full magnitude that volatile and uncertain oil and gas prices will have on our financial condition and future results of operations.

 

Agreements with Seadrill Partners

On February 9, 2021, Vantage Holdings International (“VHI”), a subsidiary of VDI, entered into a Framework Agreement and related Management and Marketing Agreements, as amended on March 16, 2021 (collectively, the “Operations, Management and Marketing Agreements”) with Seadrill Partners LLC (“Seadrill Partners”) pursuant to which certain subsidiaries of VHI (the “VHI Entities”) will provide operating, management and marketing services to Seadrill Partners and its subsidiaries (the “Seadrill Partner Entities”) in respect of four deepwater floaters owned by the Seadrill Partners Entities, which include two drillships, the West Polaris and the West Capella, and two semisubmersibles, the West Leo and the West Sirius. The Operations, Management and Marketing Agreements were subject to the approval of, and were approved by, the U.S. Bankruptcy Court for the Southern District of Texas on March 18, 2021.

In connection with the entry into the Operations, Management and Marketing Agreements, VHI organized a new legal entity, Vantage Financial Management Co. (“VFMC”), based in the Cayman Islands, to provide certain cash management services to the Seadrill Partners Entities in respect of the management of the vessels subject to the Operations, Management and Marketing Agreements.  VFMC was organized as an unrestricted, indirectly owned subsidiary of the Company and is therefore not subject to the restrictions under the First Lien Indenture.

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Purchase and Sale Agreement to Sell the Titanium Explorer

On December 31, 2020, we entered into a purchase and sale agreement with Best Oasis Limited (the “Buyer”) to sell the Titanium Explorer (the “Purchase and Sale Agreement”), for an aggregate purchase price of $13.8 million and we classified the rig as held for sale on our Consolidated Balance Sheet. The transactions contemplated by the Purchase and Sale Agreement closed on March 10, 2021. Pursuant to the Purchase and Sale Agreement, the Buyer is required to recycle the rig in an environmentally sound manner.

Letter of Award for the Platinum Explorer

On February 3, 2021, our ultra-deepwater drillship, the Platinum Explorer, received a letter of award for a two-year contract from Oil and Natural Gas Company (“ONGC”). The Platinum Explorer is currently performing under an existing three-year contract with ONGC, which is expected to close in the second quarter of 2021, and it will experience some brief out-of-service time for planned maintenance after the existing contract expires. The new contract with ONGC is expected to commence shortly thereafter.

2. Basis of Presentation and Significant Accounting Policies

Basis of Consolidation: The accompanying interim consolidated financial information as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 has been prepared without audit, pursuant to the rules and regulations of the SEC, and includes our accounts and those of our majority owned subsidiaries and VIEs (as discussed below). All significant intercompany transactions and accounts have been eliminated. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to provide for fair presentation. The balance sheet at December 31, 2020 is derived from our December 31, 2020 audited financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 18, 2021. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current period presentation.

In addition to the consolidation of our majority owned subsidiaries, we also consolidate VIEs when we are determined to be the primary beneficiary of a VIE. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE.

ADVantage is a joint venture company formed to operate deepwater drilling rigs in Egypt. We determined that ADVantage met the criteria of a VIE for accounting purposes because its equity at risk was insufficient to permit it to carry on its activities without additional subordinated financial support from us. We also determined that we are the primary beneficiary for accounting purposes since we are entitled to use ADVantage for deepwater drilling contract opportunities rejected by ADES International Holding Ltd., a London-listed offshore and onshore provider of oil and gas drilling and production services in the Middle East and Africa (“ADES”), and have the (a) power to direct the operating activities associated with the deepwater drilling rigs, which are the activities that most significantly impact the entity’s economic performance, and (b) obligation to absorb losses or the right to receive a majority of the benefits that could be potentially significant to the VIE. As a result, we consolidate ADVantage in our consolidated financial statements, we eliminate intercompany transactions and we present the interests that are not owned by us as “Noncontrolling interests” in our Consolidated Balance Sheet. The carrying amount associated with ADVantage was as follows:

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Current assets

 

$

4,173

 

 

$

7,072

 

Non-current assets

 

 

90

 

 

 

84

 

Current liabilities

 

 

910

 

 

 

3,979

 

Non-current liabilities

 

 

945

 

 

 

741

 

Net carrying amount

 

$

2,408

 

 

$

2,436

 

As ADVantage is a majority owned subsidiary of the Company, it serves as a guarantor under the First Lien Indenture. The 9.25% First Lien Notes are secured by a first priority lien on all of the assets of ADVantage, subject to certain exceptions. Creditors’ recourse against ADVantage for liabilities of ADVantage is limited to the assets of ADVantage.

See “Note 9. Supplemental Financial Information” of these “Notes to Unaudited Consolidated Financial Statements” for additional details regarding related party transactions associated with this joint venture.

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities

11


 

at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to property and equipment, income taxes, insurance, employee benefits and contingent liabilities. Actual results could differ from these estimates.

Cash and Cash Equivalents: Includes deposits with financial institutions as well as short-term money market instruments with maturities of three months or less when purchased.

Materials and Supplies: Consists of materials, spare parts, consumables and related supplies for our drilling rigs. We record these materials and supplies at their average cost.

Property and Equipment: Consists of our drilling rigs, furniture and fixtures, computer equipment and capitalized costs for computer software. Drilling rigs are depreciated on a component basis over estimated useful lives ranging from five to 35 years on a straight-line basis as of the date placed in service. Other assets are depreciated upon placement in service over estimated useful lives ranging from three to seven years on a straight-line basis. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is included in “Operating costs” or “General and administrative” expenses on the Consolidated Statement of Operations, depending on the nature of the asset. In the three months ended March 31, 2021, we recognized a net gain of approximately $2.7 million related to the sale or retirement of assets. For the three months ended March 31, 2020, the gain/loss related to the sale or retirement of assets was immaterial.

We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized would be computed as the excess of the asset’s carrying value over the estimated fair value. Estimates of future cash flows require us to make long-term forecasts of our future revenues and operating costs with regard to the assets subject to review. Our business, including the utilization rates and dayrates we receive for our drilling rigs, depends on the level of our customers’ expenditures for oil and gas exploration, development and production expenditures. Oil and gas prices and customers’ expectations of potential changes in these prices, the general outlook for worldwide economic growth, political and social stability in the major oil and gas producing basins of the world, availability of credit and changes in governmental laws and regulations, among many other factors, significantly affect our customers’ levels of expenditures. Sustained declines in or persistent depressed levels of oil and gas prices, worldwide rig counts and utilization, reduced access to credit markets, reduced or depressed sale prices of comparably equipped jackups and drillships and any other significant adverse economic news could require us to evaluate the realization of our drilling rigs. The projections and assumptions used during the fourth quarter of 2020 have not changed significantly as of March 31, 2021; accordingly, no triggering event has occurred to indicate that the carrying value of our drilling rigs may not be recoverable.

Interest costs and the amortization of debt financing costs related to the financings of our drilling rigs are capitalized as part of the cost while they are under construction and prior to the commencement of each vessel’s first contract. We did not capitalize any interest for the reported periods.

Debt Financing Costs: Costs incurred with financing debt are deferred and amortized over the term of the related financing facility on a straight-line basis, which approximates the interest method. Debt issuance costs related to a recognized debt liability are presented in the Consolidated Balance Sheet as a direct deduction from the carrying amount of that debt liability.

Rig and Equipment Certifications: We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment, and must maintain such certifications through periodic inspections and surveys. The costs associated with these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.

Revenue Recognition: See “Note 3. Revenue from Contracts with Customers” of these “Notes to Unaudited Consolidated Financial Statements” for further information.

Income Taxes: Income taxes are provided for based upon the tax laws and rates in effect in the countries in which our operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement basis and tax basis of assets and liabilities that will result in future taxable or tax deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We do not establish deferred tax liabilities for certain of our foreign earnings that we intend to indefinitely reinvest to finance foreign activities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes as a component of income tax expense.

Concentrations of Credit Risk: Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits. We have a limited number of key customers, who are primarily large international oil and gas operators, national oil companies and other international oil and gas companies. Our contracts provide for monthly billings as services are performed and we monitor compliance with contract payment terms on an ongoing basis. Payment terms

12


 

on customer invoices typically range from 30 to 45 days. Outstanding receivables beyond payment terms are promptly investigated and discussed with the specific customer.  

Credit Losses – Accounts Receivable: The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. Current estimates of expected credit losses consider factors such as the historical experience and credit quality of our customers. The Company considers historical loss information as the most reasonable basis on which to determine expected credit losses unless current or forecasted future conditions for customers (or customer groups) indicate that risk characteristics have changed. We also considered the impact of the COVID-19 pandemic and the associated oil price and market share volatility on our allowance for doubtful accounts (see “Ongoing Impact of COVID-19 and Declines in the Demand for Oil and Gas” set forth above in “Note 1. Organization and Recent Events” of these “Notes to Unaudited Consolidated Financial Statements”) The allowance for doubtful accounts on our trade receivables was $5.0 million as of each of March 31, 2021 and December 31, 2020, respectively.  This amount represents a customer’s decision not to pay us for days impacted by what we believe were force majeure and other similar events for which we would still be entitled to receive payment under the applicable contract. We disagree with the customer's decision and are currently evaluating our remedies, if any, under the applicable contract.

Earnings (loss) per Share: We compute basic and diluted EPS in accordance with the two-class method. We include restricted stock units granted to employees that contain non-forfeitable rights to dividends as such grants are considered participating securities. Basic earnings (loss) per share are based on the weighted average number of Ordinary Shares outstanding during the applicable period. Diluted EPS are computed based on the weighted average number of Ordinary Shares and ordinary share equivalents outstanding in the applicable period, as if all potentially dilutive securities were converted into Ordinary Shares (using the treasury stock method).

The following is a reconciliation of the number of shares used for the basic and diluted EPS computations

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Weighted average Ordinary Shares outstanding for basic EPS

 

 

13,115

 

 

 

13,115

 

Restricted share equity awards

 

 

 

 

 

 

Adjusted weighted average Ordinary Shares outstanding for diluted EPS

 

 

13,115

 

 

 

13,115

 

 

The following sets forth the number of shares excluded from diluted EPS computations:

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Restricted share equity awards

 

 

218

 

 

 

194

 

Future potentially dilutive Ordinary Shares excluded from diluted EPS

 

 

218

 

 

 

194

 

Functional Currency: We consider USD to be the functional currency for all of our operations since the majority of our revenues and expenditures are denominated in USD, which limits our exposure to currency exchange rate fluctuations. We recognize currency exchange rate gains and losses in “Other, net” in our Consolidated Statement of Operations. For the three months ended March 31, 2021 and 2020, we recognized a net loss of approximately $0.6 million and a net gain of approximately $0.1 million, respectively, related to currency exchange rates.

Fair Value of Financial Instruments: The fair value of our short-term financial assets and liabilities approximates the carrying amounts represented in the balance sheet principally due to the short-term nature or floating rate nature of these instruments. As of March 31, 2021, the fair value of the 9.25% First Lien Notes was approximately $293.6 million based on quoted market prices in a less active market, a Level 2 measurement.

Share-based Compensation: TBGs granted under the 2016 Amended MIP vest annually, ratably over four years; however, accelerated vesting is provided for in the event of a QLE. Otherwise, the settlement of any vested TBGs occurs upon the seventh anniversary of the Effective Date. PBGs granted under the 2016 Amended MIP contain vesting eligibility provisions tied to the earlier of a QLE or seven years from the Effective Date. Upon the occurrence of a vesting eligibility event, the number of PBGs that actually vest will be dependent on the achievement of pre-determined TEV targets specified in the grants.

Both the TBGs and PBGs were classified as liabilities consistent with the classification of the underlying securities prior to the Conversion. Following the Conversion, outstanding TBGs and PBGs were subject to modification accounting and were re-classified as equity awards. Under the provisions of ASC 718 Compensation – Stock Compensation share-based compensation expense is recognized over the requisite service period from the grant date to the fourth year vest date for TBGs. For PBGs, expense will be recognized when it is probable that the TEV targets will be met. Once it is probable the performance condition will be met, compensation expense based on the fair value of the PBGs at the conversion date of the Convertible Notes will be recognized for the service period completed to the seventh anniversary of the Effective Date for PBGs.

Noncontrolling Interest:

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Noncontrolling interests represent the equity investments of the minority owner in ADVantage, a joint venture with ADES that we consolidate in our financial statements.

Recently Adopted Accounting Standards:

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also simplifies and improves consistent application of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted this standard on January 1, 2021, and such adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards:

There have been no new accounting pronouncements not yet effective that have significance, or potential significance, with respect to our consolidated financial statements. 

3. Revenue from Contracts with Customers

The activities that primarily drive the revenue earned in our drilling contracts with customers include (i) providing our drilling rig, work crews, related equipment and services necessary to operate the rig, (ii) delivering the drilling rig by mobilizing to and demobilizing from the drill site, and (iii) performing pre-operating activities, including rig preparation activities and/or equipment modifications required for the contract.

The integrated drilling services that we perform under each drilling contract represent a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods.

Dayrate Drilling Revenue. Our drilling contracts generally provide for payment on a dayrate basis, with higher rates for periods when the drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate billed to the customer is determined based on varying rates applicable to the specific activities performed on an hourly basis. Such dayrate consideration is allocated to the distinct hourly increment it relates to within the contract term and therefore, recognized as we perform the daily drilling services.

Amortizable Revenue. In connection with certain contracts, we receive lump-sum fees or similar compensation for (i) the mobilization of equipment and personnel prior to the commencement of drilling services, (ii) the demobilization of equipment and personnel upon contract completion and (iii) postponement fees in consideration for the postponement of a contract until a later date. These activities are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall single performance obligation.

Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight‑line basis over the initial contract period. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the initial contract term with an offset to an accretive contract asset. In many contracts, demobilization fees are contingent upon the occurrence or non-occurrence of a future event and the estimate for such revenue may therefore be constrained. Postponement fees received that are contingent upon the occurrence (or non-occurrence) of a future event are recognized on a straight-line basis over the contract term. Fees received for the mobilization or demobilization of equipment and personnel are included in “Contract drilling services” in our Consolidated Statement of Operations.

Capital Upgrade/Contract Preparation Revenue. In connection with certain contracts, we receive lump-sum fees or similar compensation for requested capital upgrades to our drilling rigs or for other contract preparation work. These activities are not considered to be distinct within the context of the contract and therefore, fees received are recorded as a contract liability and amortized to contract drilling revenues on a straight-line basis over the initial contract term.  

Revenues Related to Reimbursable Expenses. We generally receive reimbursements from our customers for the purchase of supplies, equipment, personnel services and other services provided at their request in accordance with a drilling contract or other agreement. We are generally considered a principal in such transactions and therefore, recognize reimbursable revenues and the corresponding costs as we provide the customer‑requested goods and services.

We have elected to exclude from the transaction price measurement all taxes assessed by a governmental authority.

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Disaggregation of Revenue

The following tables present our revenue disaggregated by revenue source for the periods indicated:

 

 

Three Months Ended March 31, 2021

 

 

Three Months Ended March 31, 2020

 

 

 

Jackups

 

 

Deepwater

 

 

Management

 

 

Consolidated

 

 

Jackups

 

 

Deepwater

 

 

Management

 

 

Consolidated

 

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayrate revenue

 

$

8,898

 

 

$

8,827

 

 

$

98

 

 

$

17,823

 

 

$

23,986

 

 

$

19,731

 

 

$

546

 

 

$

44,263

 

Charter lease revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

476

 

 

 

 

 

 

 

 

 

476

 

Amortized revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96

 

 

 

506

 

 

 

 

 

 

602

 

Reimbursable revenue

 

 

2,322

 

 

 

21

 

 

 

 

 

 

2,343

 

 

 

3,225

 

 

 

2,555

 

 

 

335

 

 

 

6,115

 

Total revenue

 

$

11,220

 

 

$

8,848

 

 

$

98

 

 

$

20,166

 

 

$

27,783

 

 

$

22,792

 

 

$

881

 

 

$

51,456

 

Dayrate revenue and amortized revenue for Jackups and Deepwater are included within “Contract drilling services” in our Consolidated Statement of Operations. All other revenue, excluding “Contract termination revenue”, are included within “Reimbursables and other” in our Consolidated Statement of Operations.

Accounts Receivable, Contract Liabilities and Contract Costs

Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules. Payment terms on customer invoices typically range from 30 to 45 days.

We recognize contract liabilities, recorded in other “Other current liabilities” and “Other long-term liabilities”, for prepayments received from customers and for deferred revenue received for mobilization, contract preparation and capital upgrades.

Certain direct and incremental costs incurred for contract preparation, initial mobilization and modifications of contracted rigs represent contract fulfillment costs as they relate directly to a contract, enhance resources that will be used to satisfy our performance obligations in the future and are expected to be recovered. These costs are deferred as a current or noncurrent asset depending on the length of the initial contract term and are amortized on a straight-line basis to operating costs as services are rendered over the initial term of the related drilling contract. Costs incurred for capital upgrades are capitalized and depreciated over the useful life of the asset.

Costs incurred for the demobilization of rigs at contract completion are recognized as incurred during the demobilization process. Costs incurred to mobilize a rig without a contract are expensed as incurred.

The following table provides information about contract cost assets and contract revenue liabilities from contracts with customers:

 

 

March 31, 2021

 

 

December 31, 2020

 

 

(unaudited, in thousands)

 

 

 

 

 

 

 

Current contract cost assets

 

$

4,965

 

 

$

2,905

 

 

Current contract revenue liabilities

 

 

10,759

 

 

 

5,100

 

 

Significant changes in contract cost assets and contract revenue liabilities during the three months ended March 31, 2021 are as follows:

 

 

Contract Costs

 

 

Contract Revenues

 

(unaudited, in thousands)

 

 

 

 

 

 

Balance as of December 31, 2020

 

$

2,905

 

 

$

5,100

 

Increase (decrease) due to contractual changes

 

 

2,060

 

 

 

5,659

 

Balance as of March 31, 2021 (1)

 

$

4,965

 

 

$

10,759

 

(1)
We expect to recognize contract revenues of approximately $6.9 million during the remaining nine months of 2021 and $3.9 million thereafter related to unsatisfied performance obligations existing as of March 31, 2021.

We have elected to utilize an optional exemption that permits us to exclude disclosure of the estimated transaction price related to the variable portion of unsatisfied performance obligations at the end of the reporting period, as our transaction price is based on a single performance obligation consisting of a series of distinct hourly increments, the variability of which will be resolved at the time of the future services.

4. Leases

We have operating leases expiring at various dates, principally for office space, onshore storage yards and certain operating equipment. Additionally, we sublease certain office space to third parties. We determine if an arrangement is a lease at inception. Operating leases with an initial term greater than 12 months are included in “Operating lease ROU assets”, “Other current liabilities”, and “Other long-term liabilities” on our Consolidated Balance Sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made prior to or at the commencement date and is reduced by lease incentives received and initial direct costs incurred. Our lease terms may include options

15


 

to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally not accounted for separately. Certain of our leases include provisions for variable payments. These variable payments are not included in the calculation of lease liability and ROU assets.

The components of lease expense were as follows:

 

 

Three Months Ended March 31,

 

(unaudited, in thousands)

Classification in the Consolidated Statement of Operations

2021

 

 

2020

 

Operating lease cost(1)

Operating costs

$

902

 

 

$

966

 

Operating lease cost(1)

General and administrative

 

152

 

 

 

152

 

Sublease income

Operating costs

 

(121

)

 

 

(121

)

Sublease income

General and administrative

 

(62

)

 

 

(62

)

Total operating lease cost

 

$

871

 

 

$

935

 

(1)  Short-term lease costs were approximately $0.1 million during the three months ended March 31, 2021 and 2020, respectively. Operating cash flows used for operating leases approximates lease expense.

 

(unaudited, in thousands)

Classification in the Consolidated Balance Sheet

March 31, 2021

 

 

December 31, 2020

 

Assets:

 

 

 

 

 

 

Operating lease assets

Operating lease ROU assets

$

3,583

 

 

$

3,997

 

Total leased assets

 

$

3,583

 

 

$

3,997

 

Liabilities:

 

 

 

 

 

 

Current operating

Other current liabilities

$

1,979

 

 

$

2,038

 

Noncurrent operating

Other long-term liabilities

 

2,028

 

 

 

2,371

 

Total lease liabilities

 

$

4,007

 

 

$

4,409

 

 

As of March 31, 2021, maturities of lease liabilities were as follows:

(unaudited, in thousands)

Operating Leases

 

Remaining nine months of 2021

$

1,746

 

2022

 

1,705

 

2023

 

949

 

2024

 

 

2025

 

 

Total future lease payments

$

4,400

 

Less imputed interest

 

(393

)

Present value of lease obligations

$

4,007

 

As of March 31, 2021, the weighted average discount rate and the weighted average remaining lease term for operating leases was 9.25% and 2.12 years, respectively. ROU assets and lease liabilities recorded for leases commencing during the three months ended March 31, 2021 was $0.6 million.

The bareboat charter contract on the Soehanah jackup rig was accounted for as an operating lease with charter revenue included in “Reimbursables and other” in the Consolidated Statement of Operation for the three months ended March 31, 2020. In May 2019, the parties to the bareboat charter terminated the charterer’s right to acquire the rig at the end of the term of the bareboat charter, which was originally intended to end on December 31, 2019. However, under the terms of the bareboat charter, the lease term continued until the rig was redelivered to the Company, which occurred on February 3, 2020.

5. Debt

Our debt was composed of the following as of the dates indicated:

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

9.25% First Lien Notes, net of financing costs of $4,371 and $4,781, respectively

 

$

345,629

 

 

$

345,219

 

Less current maturities of long-term debt

 

 

 

 

 

 

Long-term debt, net

 

$

345,629

 

 

$

345,219

 

9.25% First Lien Notes. On November 30, 2018, the Company issued $350.0 million in aggregate principal amount of 9.25% First Lien Notes in a private placement. The 9.25% First Lien Notes were issued at par and are fully guaranteed on a senior secured basis by the Company’s direct and indirect subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries, in each case subject to certain exceptions. The 9.25% First Lien Notes are subject to first payment priority in favor of holders of up to $50.0 million of future super-priority debt and are subject to both mandatory and optional redemption provisions.

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The 9.25% First Lien Notes mature on November 15, 2023 and bear interest from the date of their issuance at the rate of 9.25% per year. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months and is payable semi-annually in arrears, commencing on May 15, 2019.

The First Lien Indenture includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens, restrict the making of investments, restrict the incurrence of indebtedness and the conveyance of vessels, limit transactions with affiliates, and require that the Company provide periodic financial reports.

The net proceeds from the issuance were used (i) to repay all obligations under the 2016 Term Loan Facility and to terminate the credit agreement governing such facility, (ii) to redeem all outstanding 10% Second Lien Notes, (iii) to fund the remaining amounts to be paid in connection with the purchase of the Soehanah jackup rig, (iv) to pay fees and expenses related to the foregoing and to the offering of the 9.25% First Lien Notes and (v) for general corporate purposes.

Concurrently with the issuance of the 9.25% First Lien Notes, we entered into a letter of credit facility to replace the letter of credit facility existing under the 2016 Term Loan Facility. The facility has a capacity of $50.0 million, with all outstanding letters of credit being cash collateralized. We have issued $11.0 million in letters of credit under this facility as of March 31, 2021.  

6. Shareholders’ Equity

Stock Issuance

VDI has 50,000,000 authorized Ordinary Shares. Upon emergence from bankruptcy on the Effective Date, VDI issued 5,000,053 Ordinary Shares in connection with the settlement of Liabilities Subject to Compromise in accordance with the Reorganization Plan and the VDC Note. On December 4, 2019, VDI issued an additional 8,114,977 Ordinary Shares to convert all of the outstanding Convertible Notes. As of March 31, 2021, 13,115,026 Ordinary Shares were issued and outstanding.

Share-based Compensation  

 On August 9, 2016, the Company adopted the 2016 Amended MIP to align the interests of participants with those of the shareholders by providing incentive compensation opportunities tied to the performance of the Company’s equity securities. Pursuant to the 2016 Amended MIP, the Compensation Committee may grant to employees, directors and consultants stock options, restricted stock, restricted stock units or other awards.

No awards were granted to employees or directors during the three months ended March 31, 2021 and 2020. During the three months ended March 31, 2021, 18,224 of previously granted TBGs vested.

Both the TBGs and PBGs are classified as equity awards. For the three months ended March 31, 2021 and 2020, we recognized share-based compensation expense related to the TBGs of approximately $0.3 million and $0.7 million, respectively. As of March 31, 2021, we concluded that it was not probable that the TEV performance condition would be met and therefore, no share based compensation expense was recognized for PBGs.

Pursuant to the 2016 Amended MIP and the terms of the applicable unit awards, participants holding restricted stock units are contractually entitled to receive all dividends or other distributions that are paid to VDI’s stockholders, provided that any such dividends will be subject to the same vesting requirements of the underlying units. Dividend payments accrue to outstanding awards (both vested and unvested) in the form of “Dividend Equivalents” equal to the dividend per share underlying the applicable award under the 2016 Amended MIP. As a result of a special cash distribution paid to shareholders of record on December 17, 2019, $8.8 million has been recorded in “Other long-term liabilities” in our Consolidated Balance Sheet at March 31, 2021 to be paid upon settlement of the TBGs.

7. Income Taxes

VDI is a Cayman Islands company operating in multiple countries through its subsidiaries. The Cayman Islands do not impose corporate income taxes. Consequently, we have calculated income taxes based on the laws and tax rates in effect in the countries in which operations are conducted, or in which we and our subsidiaries are considered resident for income tax purposes. Our income taxes are generally dependent upon the results of our operations and when we generate significant revenues in jurisdictions where the income tax liability is based on gross revenues or asset values, there is no correlation to the net operating results and the income tax expense. Furthermore, in some jurisdictions we do not pay taxes, pay taxes at lower rates or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt, gains or losses on disposal or transfer of assets, reorganization expenses and write-off of development costs.

On January 22, 2020, VDI filed the Tax Election with the IRS to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019. As a result, U.S. Holders are required to take into account their allocable share of items of income, gain, loss deduction and credit of VDI for each taxable year of VDI ending with or within the U.S. Holder’s taxable year, regardless of whether any distribution has been or will be received from VDI. Each item generally will have the same character and source (either U.S. or foreign) as though the U.S. Holder had realized the item directly. VDI’s change in tax status has not had a material impact on our consolidated financial statements as of March 31, 2021.

17


 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, a sweeping stimulus bill intended to bolster the U.S. economy and provide emergency financial assistance to qualifying businesses and individuals. The CARES Act, among other things, modified the net operating losses carryovers and carrybacks rules, and included modifications to Section 163(j) of the Code to increase the allowable business interest deduction.  On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted as part of the Consolidated Appropriations Act, 2021, followed by the American Rescue Plan Act on March 1, 2021. These recent laws, among other provisions, expand and extend the refundable employee retention tax credits previously made available under the CARES Act. As of March 31, 2021, our analysis of the provisions of the CARES Act revealed no material implications on the income tax provision.

Deferred income tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. We provide for deferred taxes on temporary differences between the financial statements and tax bases of assets and liabilities using the enacted tax rates which are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are also provided for certain tax losses and tax credit carryforwards. A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. We do not establish deferred tax liabilities for certain of our foreign earnings that we intend to indefinitely reinvest to finance foreign activities.

In certain jurisdictions we are taxed under preferential tax regimes, which may require our compliance with specified requirements to sustain the tax benefits. We believe we are in compliance with the specified requirements and will continue to make all reasonable efforts to comply; however, our ability to meet the requirements of the preferential tax regimes may be affected by changes in laws or administrative practices, our business operations and other factors affecting the Company and industry, many of which are beyond our control.

Our periodic tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate in accordance with the normal statute of limitations in the applicable jurisdiction. These examinations may result in assessments of additional taxes that are resolved with the authorities or through the courts. Resolution of these matters involves uncertainties and there are no assurances as to the outcome. Our tax years from 2010 onward remain open to examination in many of our jurisdictions and we are currently involved in several tax examinations in jurisdictions where we are operating or have previously operated. As information becomes available during the course of these examinations, we may increase or decrease our estimates of tax assessments and accruals.

8. Commitments and Contingencies

We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims.

Brazil Improbity Action

On April 27, 2018, the Company was added as an additional defendant in a legal proceeding (the “Improbity Action”), initiated by the Brazilian Federal Prosecutor against certain individuals, including an executive of Petrobras and two political lobbyists, in connection with the contracting of the Titanium Explorer drillship to Petrobras under the Drilling Contract, with the Brazilian Government and Petrobras as plaintiffs. Vantage is alleged to have been involved in and benefitted from the purported bribery scheme at Petrobras through Hamylton Padilha, the Brazilian agent our former parent company, VDC, used in the contracting of the Titanium Explorer drillship to Petrobras, and Mr. Hsin-Chi Su, a former member of VDC’s board of directors and a significant shareholder of VDC. We first became aware of the legal proceeding on July 19, 2018 as it was previously under seal. On March 22, 2019, we were formally served in the United States, and we filed our preliminary statement of defense with the 11th Federal court of the Judicial Branch of Curitiba, State of Parana, Brazil (the “Brazilian Federal Court”) on April 12, 2019 in response. On August 20, 2020, the Brazilian Federal Court dismissed our preliminary statement of defense. On October 5, 2020, we subsequently filed a motion to clarify with the Brazilian Federal Court requesting the reconsideration of certain aspects of the decision dismissing our preliminary statement of defense. Our motion to clarify was denied on December 14, 2020, and on February 10, 2021 we filed an appeal to the 4th Federal Court of Appeals seeking to reverse the Brazilian Federal Court’s denial of our preliminary defense.   On April 15, 2021, the Brazilian authorities served us indirectly through the U.S. Department of Justice agreeing to formally send us documents related to the Improbity Action. We will be obligated to file a statement of defense in the matter as soon as the case docket demonstrates that all of the defendants have been served again in this legal proceeding. The Company understands that the Improbity Action, is a civil action and is part of the Brazilian Federal Prosecutor’s larger “Car Wash” investigation into money laundering and corruption allegations in Brazil.

The damages claimed in the proceeding are in the amount of BRL 102.8 million (approximately $18.3 million), together with a civil fine equal to three times that amount. The Company understands that the Brazilian Federal Court previously issued an order authorizing the seizure and freezing of the assets of the Company and the other three defendants in the legal proceeding, as a precautionary measure, in the amount of approximately $73.4 million. The Company and the other three defendants are jointly and severally liable for this amount. The seizure order has not had an effect on the Company’s assets or operations, as the Company does not own any assets in Brazil, and does not currently intend to relocate any assets to Brazil. On February 13, 2019, the Company learned that the Brazilian Federal Prosecutor had previously requested mutual legal assistance from the U.S. DOJ pursuant to the United Nations Convention against Corruption of 2003 to obtain a freezing order against the Company’s U.S. assets in the approximate amount of $73.4

18


 

million. The Company believes this request is not supported by applicable law and intends to vigorously oppose and defend against any attempts to seize its assets.

On April 12, 2019, the Company filed an interlocutory appeal with the 4th Circuit of the Federal Court of Appeals in Porto Alegre, State of Rio Grande do Sul, Brazil (the “Brazilian Appellate Court”), the appellate court hearing appeals in the “Car Wash” cases, to stay the seizure and freezing order of the Brazilian Federal Court.

On May 20, 2019, the Company announced that the Brazilian Appellate Court ruled in favor of the Company’s appeal to stay the seizure and freezing order of the Brazilian Federal Court. The foregoing ruling is still subject to confirmation by a three-judge panel, and is subject to appeal, and the Company can offer no assurances that the stay will be confirmed or as to the outcome of any appeal thereof. The Company has communicated the Brazilian Appellate Court’s ruling to the DOJ, and has asked the Brazilian Federal Court to do the same. On July 18, 2019, the Company announced that the Brazilian Government made a filing with the Brazilian Federal Court reporting that the DOJ has advised the Brazilian Ministry of Justice that it would not be possible for the DOJ to comply with the mutual assistance request in respect of the asset freeze order. The Company also announced that it learned from the Brazilian Ministry of Justice that the DOJ’s response to the request for mutual assistance stated that no legal grounds existed for implementing the requested asset freeze, and that the DOJ was returning the request without taking action and considers the matter concluded.

The Company intends to vigorously defend against the allegations made in the Improbity Action. However, we can neither predict the ultimate outcome of this matter nor that there will not be further developments in the “Car Wash” investigation or in any other ongoing investigation or related proceeding that could adversely affect us. At this time, we are not yet able to determine the likelihood of loss, if any, arising from this matter.

Restructuring Agreement and the Associated Settlement Agreement

Pursuant to the terms of the Restructuring Agreement among VDC and a majority of our secured creditors, the Company agreed to the Reorganization Plan and VDC agreed to commence official liquidation proceedings under the laws of the Cayman Islands. On December 2, 2015, pursuant to the Restructuring Agreement, the Company acquired two subsidiaries responsible for the management of the Company from VDC in exchange for the VDC Note. In connection with our separation from VDC, we and the Joint Official Liquidators, appointed to oversee the liquidation of VDC, entered into discussions regarding the settlement of certain intercompany receivables and payables as between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries, on the other. On March 4, 2020, we, and our subsidiaries on the one hand, and VDC and their subsidiaries, on the other, entered into a settlement agreement pursuant to which the parties to the settlement agreement agreed to release each other from certain claims in exchange for Vantage paying VDC $15.0 million, subject to the approval of the Court of Grand Cayman. On March 16, 2020, the Court of Grand Cayman approved the settlement agreement. On March 25, 2020, the Company paid $15.0 million in accordance with the settlement agreement, fully resolving the matter. We recorded a gain of $2.3 million related to the settlement agreement included in “Other Income” in the Consolidated Statement of Operations during the three months ended March 31, 2020.

9. Supplemental Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of the dates indicated:  

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Sales tax receivable

 

$

5,738

 

 

$

6,797

 

Assets held for sale (1)

 

 

 

 

 

10,113

 

Other receivables

 

 

1,232

 

 

 

1,517

 

Income tax receivable

 

 

853

 

 

 

826

 

Prepaid insurance

 

 

859

 

 

 

386

 

Current deferred contract costs

 

 

4,965

 

 

 

2,905

 

Other

 

 

6,891

 

 

 

6,607

 

 

 

$

20,538

 

 

$

29,151

 

(1)  Includes the aggregate carrying amount of the Titanium Explorer, along with related assets, as of December 31, 2020. See Note 1. Organization and Recent Events of these “Notes to Unaudited Consolidated Financial Statements” for additional details regarding the Purchase and Sale Agreement to sell the Titanium Explorer.

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Property and Equipment, net

Property and equipment, net, consisted of the following as of the dates indicated:  

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Drilling equipment

 

$

774,848

 

 

$

774,813

 

Assets under construction

 

 

931

 

 

 

561

 

Office and technology equipment

 

 

18,405

 

 

 

18,405

 

Leasehold improvements

 

 

1,165

 

 

 

1,165

 

 

 

 

795,349

 

 

 

794,944

 

Accumulated depreciation

 

 

(292,684

)

 

 

(278,562

)

Property and equipment, net

 

$

502,665

 

 

$

516,382

 

Other Assets

Other assets consisted of the following as of the dates indicated:  

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Noncurrent restricted cash

 

$

4,058

 

 

$

4,546

 

Deferred certification costs

 

 

5,498

 

 

 

4,535

 

Deferred income taxes

 

 

2,033

 

 

 

1,923

 

Other noncurrent assets

 

 

2,641

 

 

 

1,122

 

 

 

$

14,230

 

 

$

12,126

 

Other Current Liabilities

Other current liabilities consisted of the following as of the dates indicated:  

Other current liabilities

 

 

 

 

 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Interest

 

$

12,229

 

 

$

4,139

 

Compensation (1)

 

 

6,371

 

 

 

7,128

 

Income taxes payable

 

 

5,483

 

 

 

2,951

 

Current deferred revenue

 

 

10,759

 

 

 

5,100

 

Current portion of operating lease liabilities

 

 

1,979

 

 

 

2,038

 

Other

 

 

3,173

 

 

 

3,378

 

 

 

$

39,994

 

 

$

24,734

 

(1)  Includes $3.4 million as of March 31, 2021 and $2.1 million as of December 31, 2020 related to cash awards granted to certain key employees of the Company pursuant to underlying award agreements and issued under the 2016 Amended MIP.

Other Long-term Liabilities

Other Long-term liabilities consisted of the following as of the dates indicated:

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Deferred income taxes

 

$

929

 

 

$

970

 

2016 MIP - Dividend Equivalents (1)

 

 

8,766

 

 

 

8,006

 

Noncurrent operating lease liabilities

 

 

2,028

 

 

 

2,371

 

Other non-current liabilities

 

 

2,570

 

 

 

3,664

 

 

 

$

14,293

 

 

$

15,011

 

(1)  Dividend Equivalents on vested TBGs are payable on settlement of the applicable award.

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Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows as of the dates indicated:

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

Cash and cash equivalents

 

$

140,381

 

 

$

141,945

 

Restricted cash

 

 

7,798

 

 

 

7,996

 

Restricted cash included within Other Assets

 

 

4,058

 

 

 

4,546

 

Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows

 

$

152,237

 

 

$

154,487

 

Restricted cash represents cash held by banks as certificates of deposit collateralizing letters of credit.

Related Party Transactions

In association with the establishment of ADVantage, the Company and ADES contributed cash to ADVantage in excess of the issued capital of the joint venture, with the understanding that such amounts are to be considered shareholder loans. As of March 31, 2021, the total outstanding amount due to ADES for such excess cash contributions was approximately $711,000, which is included in “Other current liabilities” on the Consolidated Balance Sheet.

In conjunction with the establishment of ADVantage, the Company entered into a series of agreements with ADES, including: (i) a Secondment Agreement; (ii) a Manpower Agreement; and (iii) a Supply Services Agreement. Pursuant to these agreements, the Company, largely through its seconded employees, will provide various services to ADES and ADES will in turn provide various services to ADVantage. As of March 31, 2021, accounts payable to ADES totaled approximately $0.2 million, included in “Accounts payable,” on the Consolidated Balance Sheet. There were no outstanding accounts receivable from ADES as of March 31, 2021.

We did not have any related party transactions that were not conducted in the ordinary course of business as of March 31, 2021.

10. Business Segment and Significant Customer Information

We aggregate our contract drilling operations into one reportable segment even though we provide contract drilling services with different types of rigs, including jackup rigs and drillships, and in different geographic regions. Our operations are dependent on the global oil and gas industry and our rigs are relocated based on demand for our services and customer requirements. Our customers consist primarily of large international oil and gas companies, national or government-controlled oil and gas companies, and other international exploration and production companies. The Soehanah jackup rig operated under a bareboat charter contract in place as of acquisition.

Additionally, for drilling units owned by others, we provide construction supervision services while under construction, preservation management services when stacked and operations and marketing services for operating rigs. Our management business (excluding reimbursable revenue) represented less than 1% and 1% of our total revenue for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 and 2020, a substantial amount of our revenue was derived from countries outside of the United States. Consequently, we are exposed to the risk of changes in economic, political and social conditions inherent in foreign operations. Three customers accounted for approximately 44%, 36% and 20% of consolidated revenue for the three months ended March 31, 2021. Seven customers accounted for approximately 19%, 15%, 14%, 13%, 12%, 11%, and 10% of consolidated revenue for the three months ended March 31, 2020.

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Our revenue by country was as follows for the periods indicated (periods representing revenues of less than 10% are included in “Other countries”):

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

(unaudited, in thousands)

 

 

 

 

 

 

India

 

$

8,855

 

 

$

9,681

 

Qatar

 

 

7,197

 

 

 

5,503

 

Indonesia

 

 

3,970

 

 

 

 

Congo

 

 

 

 

 

7,581

 

Gabon

 

 

 

 

 

7,414

 

Egypt

 

 

 

 

 

6,801

 

Lebanon

 

 

 

 

 

6,305

 

Malaysia

 

 

 

 

 

4,939

 

Other countries (1)

 

 

144

 

 

 

3,232

 

Total revenues

 

$

20,166

 

 

$

51,456

 

(1)  “Other countries” represent countries in which we operate that individually had operating revenues representing less than 10% of total revenues earned.

Our property and equipment, net by country, was as follows as of the dates indicated (as of dates representing property and equipment of less than 10% are included in “Other countries”): 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

(unaudited, in thousands)

 

 

 

 

 

 

International waters

 

$

217,779

 

 

$

225,484

 

India

 

 

107,685

 

 

 

111,485

 

Indonesia

 

 

67,925

 

 

 

69,434

 

Other countries (1)

 

 

109,276

 

 

 

109,979

 

Total property and equipment

 

$

502,665

 

 

$

516,382

 

 

(1)  “Other countries” represent countries in which we individually had property and equipment, net, representing less than 10% of total property and equipment, net.

A substantial portion of our assets are mobile drilling units. Asset locations at the end of the period are not necessarily indicative of the geographic distribution of the revenues generated by such assets during the periods.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist you in understanding our financial position as of March 31, 2021 and our results of operations for the three months ended March 31, 2021 and 2020. The discussion should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 18, 2021. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Overview

We are an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and gas wells for our customers. Through our fleet of drilling units, we provide offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for drilling units owned by others, we provide operations and marketing services for operating rigs, construction supervision services for rigs that are under construction and preservation management services for rigs that are stacked.

The following table sets forth certain current information concerning our offshore drilling fleet as of April 26, 2021.

Name

 

Year Built

 

Water Depth
Rating (feet)

 

 

Drilling Depth
Capacity
(feet)

 

 

Location

 

Status

Jackups

 

 

 

 

 

 

 

 

 

 

 

Emerald Driller

 

2008

 

 

375

 

 

 

30,000

 

 

Qatar

Operating

Sapphire Driller

 

2009

 

 

375

 

 

 

30,000

 

 

Cameroon

Contract preparation

Aquamarine Driller

 

2009

 

 

375

 

 

 

30,000

 

 

Malaysia

Contract preparation

Topaz Driller

 

2009

 

 

375

 

 

 

30,000

 

 

Montenegro

Operating

Soehanah

 

2007

 

 

375

 

 

 

30,000

 

 

Indonesia

Warm stacked

Drillships (1)

 

 

 

 

 

 

 

 

 

 

 

Platinum Explorer

 

2010

 

 

12,000

 

 

 

40,000

 

 

India

Operating

Tungsten Explorer

 

2013

 

 

12,000

 

 

 

40,000

 

 

Mediterranean

Warm stacked

(1)
The drillships are designed to drill in up to 12,000 feet of water. The Platinum Explorer and Tungsten Explorer are currently equipped to drill in 10,000 feet of water.

Recent Developments

Ongoing Impact of COVID-19 and Declines in the Demand for Oil and Gas

The COVID-19 pandemic continues to spread worldwide and has exacerbated since the World Health Organization first classified the COVID-19 outbreak as a pandemic in March 2020. The global spread of COVID-19 has caused widespread illness and significant loss of life, leading governments across the world to impose severely stringent limitations on movement and human interaction, with certain countries being forced to implement multiple shelter-in-place and stay-at-home orders. While conditions have improved in certain portions of the world, other jurisdictions, including India, are experiencing record incident rates of COVID-19 as of the date of this Quarterly Report. In India, specifically, a second wave of COVID-19 began in early March 2021 and has quickly spread across the country. India has imposed a general and widespread lock-down in response to the substantial increase in cases related to COVID-19. Several states have imposed nightly curfews for all persons (with limited exceptions for essential services).  Such governmental responses to the pandemic have contributed to reduced economic activity worldwide, impacting all industries, but with a significant adverse effect on the oil and gas industry. The short-term impact of these challenges has resulted in (i) reduced oil and gas activity leading to lower revenue than immediately prior to the widespread outbreak of COVID-19 and (ii) increased expenses due to higher labor and related costs.  We cannot at this time determine with certainty how long these challenges will persist as well as the long-term impact that such challenges may have on our operations and growth on a go-forward basis, including in jurisdictions, such as India, where we have significant contractual backlog and derive material revenue; however, the Company is actively managing the business in an attempt to mitigate the impact of the foregoing matters.  In order to decrease the Company’s overall operating expenses, in 2020 the Company undertook significant headcount and salary reductions, both onshore and offshore, as well as other cost reduction measures to reflect the lower operating activity. Headcount and salary levels have not recovered to pre-pandemic levels. For additional information regarding the spread of COVID-19 in India and the impact it may have on our business, see the Business Outlook section in this this Part I, Item 2

The reduced global economic activity resulting from the COVID-19 outbreak in 2020 caused demand for global oil and gas to significantly decline. The efforts to contain the COVID-19 outbreak will likely continue to depress global economic activity in the near-term, and the supply and demand imbalance of oil and gas will likely continue for the foreseeable future.

The potential for oil prices to decline in the future continues to put pressure on oil and gas activity levels, particularly in the deepwater segment.  Notwithstanding the recovery in global oil prices in early 2021, oil and gas prices are expected to continue to be

23


 

volatile as a result of the ongoing COVID-19 outbreak, changes in oil and gas inventories and industry demand, and therefore, we cannot predict how long oil and gas prices remain stable or further improve, if at all, or whether they could reverse course and decline. While our management is actively monitoring the foregoing events and its associated financial impact on our business, it is uncertain at this time as to the full magnitude that volatile and uncertain oil and gas prices will have on our financial condition and future results of operations.

Agreements with Seadrill Partners

On February 9, 2021, Vantage Holdings International (“VHI”), a subsidiary of VDI, entered into a Framework Agreement and related Management and Marketing Agreements, as amended on March 16, 2021 (collectively, the “Operations, Management and Marketing Agreements”) with Seadrill Partners LLC (“Seadrill Partners”) pursuant to which certain subsidiaries of VHI (the “VHI Entities”) will provide operating, management and marketing services to Seadrill Partners and its subsidiaries (the “Seadrill Partner Entities”) in respect of four deepwater floaters owned by the Seadrill Partners Entities, which include two drillships, the West Polaris and the West Capella, and two semisubmersibles, the West Leo and the West Sirius. The Operations, Management and Marketing Agreements were subject to the approval of, and were approved by, the U.S. Bankruptcy Court for the Southern District of Texas on March 18, 2021.

In connection with the entry into the Operations, Management and Marketing Agreements, VHI organized a new legal entity, Vantage Financial Management Co. (“VFMC”), based in the Cayman Islands, to provide certain cash management services to the Seadrill Partners Entities in respect of the management of the vessels subject to the Operations, Management and Marketing Agreements.  VFMC was organized as an unrestricted, indirectly owned subsidiary of the Company and is therefore not subject to the restrictions under the First Lien Indenture.

Purchase and Sale Agreement to Sell the Titanium Explorer

On December 31, 2020, we entered into a purchase and sale agreement with Best Oasis Limited (the “Buyer”) to sell the Titanium Explorer (the “Purchase and Sale Agreement”), for an aggregate purchase price of $13.8 million and we classified the rig as held for sale on our Consolidated Balance Sheet. The transactions contemplated by the Purchase and Sale Agreement closed on March 10, 2021. Pursuant to the Purchase and Sale Agreement, the Buyer is required to, among other things, recycle the rig in an environmentally sound manner.

Letter of Award for the Platinum Explorer

On February 3, 2021, our ultra-deepwater drillship, the Platinum Explorer, received a letter of award for a two-year contract from Oil and Natural Gas Company (“ONGC”). The Platinum Explorer is currently performing under an existing three-year contract with ONGC, which is expected to close in the second quarter of 2021, and it will experience some brief out-of-service time for planned maintenance after the existing contract concludes. The new contract with ONGC is expected to commence shortly thereafter.

Business Outlook

Expectations about future oil and gas prices have historically been a key driver of demand for our services. Against the backdrop of already challenging industry conditions since 2015, the initial onset, and continued global spread of COVID-19 and the resulting collapse in global economic activity, coupled with the short-lived price war between Saudi Arabia and Russia, led to significant reductions and delays in oil and gas exploration and development plans on the part of operators during 2020, largely impeding and unwinding the recovery experienced by the industry in 2019. These reductions and delays led to a substantial drop in oil prices and demand for offshore drilling services globally, including for our services, during, and subsequent to, the second quarter of 2020. Although OPEC, Russia and other major oil and gas producing nations reached an agreement to drastically cut oil production in 2020, the efforts to contain COVID-19 continue to create significant challenges to, and the hampering of, global economic activity and recovery, and consequently, the supply and demand imbalance of oil will likely continue into 2021 and beyond. As a result of this decline in demand, operators drastically cut their capital spending in the offshore space in 2020. While global oil prices have experienced some recovery in the beginning of 2021 due to the (i) development, purported efficacy and availability of vaccines for COVID-19, (ii) perception of the reopening of global economies and (iii) injection of substantial government monetary and fiscal stimulus, the volatility and uncertainty surrounding global oil prices largely remain. As a result of such volatility and uncertainty, it is difficult for operators to develop and set their capital budget programs for the near and long-term.

In addition to the macroeconomic challenges, including those set forth above, which have led to reduced demand for drilling rigs, the additional supply of new-build rigs continues to be an overhang on the market. According to industry reports, there are currently 52 jackups and 23 deepwater/harsh environment floaters on order at shipyards. It is unclear when these drilling rigs will actually be delivered, if at all, as many rig deliveries have (i) already been deferred to later dates or (ii) been canceled entirely.

In response to an oversupply of drilling rigs, a number of our competitors began removing older, less competitive, rigs from their fleets by either cold stacking the drilling rigs or taking them permanently out of service. According to industry reports, this trend has accelerated since the second quarter of 2020, as 61 rigs (in the aggregate) were removed from the drilling fleet in 2020 and 2021, and a total of 320 rigs have been removed from the drilling fleet since the oil price decline in 2014. We expect further rig recycling to occur

24


 

with warm stacked rigs (and potentially recently operated rigs) joining cold-stacked rigs as candidates for recycling. While this emphasis on recycling of rigs is expected to narrow the gap somewhat between rig supply and demand, we do not, however, anticipate that the reduction in the supply of offshore drilling rigs alone will be sufficient to materially improve, and ultimately offset the impact of, existing market conditions, especially with regard to the deepwater segment where significant marketed fleet reduction is needed before any material improvements can be observed.

In addition to the expected increase in recycling, many offshore drillers with significant levels of debt on their balance sheets have recently completed, are currently contemplating and pursuing, or may elect to pursue in the near-term, debt restructurings. These debt restructurings may result in lower cost structures, and additional pressure and incentive to recycle rigs. As drillers emerge from these debt restructurings, it is likely that consolidation will occur, reducing the number of industry participants and potentially increasing the market share of certain of our competitors. The combination of recycling, restructuring and consolidation will be necessary for the industry to regain firmer footing. Any industry recovery will also depend significantly on improvements to global macroeconomic conditions.

Since 2015, in response to both market conditions and excessive levels of idle capacity in recent years, there has been intense downward pressure on operating dayrates, as most drilling contractors preferred to maintain rigs in an active state due to the fact that customers had generally favored operating rigs over reactivated cold-stacked rigs. Prior to the COVID-19 outbreak, this downward pressure on pricing was starting to reverse itself, as evidenced by increased demand for our services in 2019 and early 2020, and dayrates were showing signs of general improvement. However, beginning in the second quarter of 2020, with the initial onset, continued spread and resulting impact, of the COVID-19 outbreak, dayrates, rig activity and contract opportunities each came under significant pressure again.

With the initial distribution of vaccines in certain jurisdictions in an attempt to inoculate populations against COVID-19 along with significant governmental assistance directed at combatting the challenging economic environment caused by the COVID-19 outbreak, economic activity in certain portions of the world appears to have shown some signs of improvement in early 2021. This improvement has contributed to, among other things, an increase in the demand for oil and gas. Since dropping to multi-year lows in the second quarter of 2020, Brent crude oil prices have begun to trend upward, reaching healthier levels in early 2021. As a result, the jackup segment has experienced greater recovery as compared to the deepwater segment, where such recovery has been less apparent.  This bifurcation may be partly due to the fact that a significant amount of time transpires between the date a final investment decision is taken with regard to a deepwater project and the date on which the program actually commences. However, if the improvement in global economic activity continues to improve or is, at a minimum, sustained at its current levels, operators could begin to sanction new activity, which could lead to rigs going back into service and potentially higher day rates.

Notwithstanding the foregoing, any recovery experienced could be short lived especially given the quickly changing and ever-evolving dynamics of the COVID-19 pandemic. For example, certain jurisdictions, including India, are experiencing record incident rates of COVID-19 as of the date of this Quarterly Report. In India, specifically, a second wave of COVID-19 began in early March 2021 and has quickly spread across the country. As of April 27, 2021, India had reportedly recorded more than 300,000 daily new cases of COVID-19 for the sixth day in a row, resulting in the Indian government imposing a general and widespread lock-down to contain the further spread of the COVID-19 outbreak. In addition to a general and widespread lock-down, several states have imposed nightly curfews for all persons (with limited exceptions for essential services). Notwithstanding the aforementioned measures, the speed with which cases have increased has begun to overwhelm the health care system in many places in India. The World Health Organization recently announced that it planned to deliver 4,000 oxygen concentrators and other essential supplies in support of the hospitals that are struggling to treat the huge surge in COVID-19 cases. With a further deterioration of the situation or in the absence of an improvement in India, the Company’s ability to transport personnel and equipment to and from our rig may be impacted, which could have a corresponding effect on our ability to operate there.  Given our existing contract backlog and amount of revenue derived from India, to the extent the conditions in India continue or exacerbate, it could have a material and adverse effect on our financial condition and future results of operations.

The following table reflects a summary of our contract drilling backlog coverage of days contracted and related revenue as of March 31, 2021 and thereafter (based on information available at that time).

 

Percentage of Days Contracted

 

Revenues Contracted (1)
(in thousands)

 

 

2021

 

2022

 

2021

 

 

2022

 

 

Beyond

 

Jackups

59%

 

7%

 

$

68,196

 

 

$

8,827

 

 

$

 

Drillships

30%

 

42%

 

$

34,838

 

 

$

67,342

 

 

$

32,208

 

(1)
Includes contract(s) with operating day rates that may vary based on a variable oil price index rate mechanism calculated utilizing the then applicable average price of Brent crude. For purposes of calculating the backlog with contracts that contain a variable oil price indexed rate mechanism we utilize the applicable oil price as of quarter end multiplied by the number of days remaining in the firm contract period. The average dayrate over the term of the contract could be lower or higher depending upon the average price of Brent crude for such measurable period and such adjustments are not estimated in the

25


 

backlog dayrate. As certain of our drilling contracts are denominated in currencies other than the USD, backlog could also vary due to movements in the applicable exchange rates.

Results of Operations

Operating results for our contract drilling services are dependent on three primary metrics: available days, rig utilization and dayrates. The following table sets forth this selected operational information for the periods indicated:  

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Jackups

 

 

 

 

 

 

Rigs available (at end of period)

 

 

5

 

 

 

5

 

Available days (1)

 

 

450

 

 

 

420

 

Utilization (2)

 

 

30.7

%

 

 

88.9

%

Average daily revenues (3)

 

$

64,448

 

 

$

64,475

 

Deepwater

 

 

 

 

 

 

Rigs available

 

 

2

 

 

 

3

 

Available days (1)

 

 

180

 

 

 

273

 

Utilization (2)

 

 

49.1

%

 

 

61.8

%

Average daily revenues (3)

 

$

99,911

 

 

$

119,930

 

(1)
Available days are the total number of rig calendar days in the period. Rigs are excluded while under bareboat charter contracts and removed upon classification as held for sale and no longer eligible to earn revenue.
(2)
Utilization is calculated as a percentage of the actual number of revenue earning days divided by the available days in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.
(3)
Average daily revenues are based on contract drilling revenues divided by revenue earning days. Average daily revenue will differ from average contract dayrate due to billing adjustments for any non-productive time, mobilization fees and demobilization fees.

For the Three Months Ended March 31, 2021 and 2020

Net loss attributable to shareholders for the Current Quarter was $36.0 million, or $2.74 per basic share, on operating revenues of $20.2 million, compared to net loss attributable to shareholders for the Comparable Quarter of $30.6 million, or $2.33 per basic share, on operating revenues of $51.5 million.

The following table is an analysis of our operating results for the three months ended March 31, 2021 and 2020:

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2021

 

 

2020

 

 

$

 

 

%

 

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling services

 

$

17,725

 

 

$

44,319

 

 

$

(26,594

)

 

 

-60

%

Reimbursables and other

 

 

2,441

 

 

 

7,137

 

 

 

(4,696

)

 

 

-66

%

Total revenues

 

 

20,166

 

 

 

51,456

 

 

 

(31,290

)

 

 

-61

%

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

25,357

 

 

 

48,555

 

 

 

(23,198

)

 

 

-48

%

General and administrative

 

 

5,495

 

 

 

7,170

 

 

 

(1,675

)

 

 

-23

%

Depreciation

 

 

14,125

 

 

 

18,016

 

 

 

(3,891

)

 

 

-22

%

Total operating costs and expenses

 

 

44,977

 

 

 

73,741

 

 

 

(28,764

)

 

 

-39

%

Loss from operations

 

 

(24,811

)

 

 

(22,285

)

 

 

(2,526

)

 

 

11

%

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

100

 

 

 

701

 

 

 

(601

)

 

 

-86

%

Interest expense and financing charges

 

 

(8,510

)

 

 

(8,420

)

 

 

(90

)

 

 

1

%

Other, net

 

 

(614

)

 

 

2,355

 

 

 

(2,969

)

 

 

-126

%

Total other expense

 

 

(9,024

)

 

 

(5,364

)

 

 

(3,660

)

 

 

68

%

Loss before income taxes

 

 

(33,835

)

 

 

(27,649

)

 

 

(6,186

)

 

 

22

%

Income tax provision

 

 

2,162

 

 

 

2,921

 

 

 

(759

)

 

 

-26

%

Net loss

 

 

(35,997

)

 

 

(30,570

)

 

 

(5,427

)

 

 

18

%

Net income (loss) attributable to noncontrolling interests

 

 

(13

)

 

 

2

 

 

 

(15

)

 

 

-750

%

Net loss attributable to shareholders

 

$

(35,984

)

 

$

(30,572

)

 

$

(5,412

)

 

 

18

%

Revenue: Total revenue decreased $31.3 million due primarily to the decrease in operating activities in the Current Quarter.

26


 

Contract drilling revenue decreased 60% for the Current Quarter as compared to the Comparable Quarter. During the Current Quarter, only three of our rigs were operational due to the fact that: (i) three of our drilling contracts were terminated in the second quarter of 2020 as a result of the volatility in oil prices and the challenges presented by the spread of COVID-19; (ii) another drilling contract expired in the second quarter of 2020 in accordance with its terms; and (iii) another drilling contract was amended to reduce the applicable dayrate. The decrease in our contract drilling revenue for the Current Quarter as compared to the Comparable Quarter was primarily a result of these contract changes.

Reimbursables and other revenue for the Current Quarter decreased $4.7 million as compared to the Comparable Quarter as a result of the changes in drilling contracts discussed immediately above as well as the termination of the bareboat charter lease on the Soehanah jackup rig, which was redelivered to the Company in February 2020.

Operating costs: Operating costs for the Current Quarter decreased $23.2 million as compared to the Comparable Quarter. The decrease in operating costs was primarily the result of changes to our drilling contracts which resulted in only three of our rigs operating in the Current Quarter, with lower costs incurred on warm stacked rigs, and a $1.2 million decrease in operational support costs in the Current Quarter as compared to the Comparable Quarter as a result of reductions in personnel headcount and salaries paid to personnel. Decreases in Operating cost in the Current Quarter were further impacted by the sale of the Titanium Explorer on March 10, 2021 and the recognition of a net $2.8 million related to the sale of the asset.

General and administrative expenses: Decreases in general and administrative expenses for the Current Quarter as compared to the Comparable Quarter were primarily due to cost cutting initiatives to reflect the lower levels of operating activity in the Current Quarter. General and administrative expenses for the Current Quarter and for the Comparable Quarter included approximately $0.2 million and approximately $0.5 million, respectively, for non-cash share-based compensation expense.

Depreciation expense: Depreciation expense for the Current Quarter decreased 22% as compared to the Comparable Quarter, due primarily to a $3.8 million decrease in depreciation expense on the Titanium Explorer, which was classified as held for sale on December 31, 2020.

Interest income: Interest income for the Current Quarter decreased $0.6 million as compared to the Comparable Quarter, due primarily to lower interest rates earned on lower cash investments during the Current Quarter.

Interest expense and financing charges: Interest expense for the Current Quarter increased 1% as compared to the Comparable Quarter. Interest expense includes non-cash deferred financing costs totaling approximately $0.4 million for the Current Quarter and for the Comparable Quarter, respectively.

Other, net: We recorded a gain of $2.3 million during the Comparable Quarter related to the settlement agreement between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries, on the other. See “Note 8. Commitments and Contingencies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report for additional detail on the settlement agreement.

Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are re-measured in USD based on a combination of both current and historical exchange rates. Net foreign currency exchange loss of approximately $0.6 million and gain of approximately $0.1 million was included in “other, net,” for the Current Quarter and Comparable Quarter, respectively.

Income tax provision: Our annualized effective tax rate for the Current Quarter is negative 6.0% based on estimated annualized loss before income taxes excluding income tax discrete items. For the Comparable Quarter, we were not able to reliably forecast annual “ordinary” income and calculated the effective tax rate based on year-to-date results, pursuant to ASC 70-270-30-18, as opposed to estimating an annual effective tax rate. The Company’s effective tax rate for the Comparable Quarter was negative 10.56%, including the impact of discrete items. Due to the different methodologies utilized to calculate the interim tax provisions, it is not beneficial to numerically reconcile the change in estimated tax rate.

Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. In some jurisdictions, we do not pay taxes or receive benefits for certain income and expense items, including interest expense and disposal gains or losses. In other jurisdictions, we recognize income taxes on a net income basis or a deemed profit basis.

Liquidity and Capital Resources

The prolonged low price environment caused by the spread of COVID-19, the resulting decline in global economic activity and the oil price and market share volatility began to reduce our liquidity and capital resources in the second quarter of 2020, a trend which could extend into subsequent quarters in 2021 and beyond, depending on, among other factors, how long COVID-19 remains a significant public health crisis and global economic activity remains depressed. Such events have had significant adverse consequences for general financial, business and economic conditions, as well as for the financial, business and economic position of our business and the business of our customers and suppliers, and may adversely impact our ability to derive cash flows from our operations and access capital funding from third parties in the future.

27


 

We have experienced, and could experience further, delays in the collection of certain accounts receivables due to logistical obstacles, such as office closures resulting from the COVID-19 outbreak, as well as other impacts to our long-term liquidity. For example, in addition to a general and widespread lock-down in response to an increase in cases related to the COVID-19 outbreak in India, several states have imposed nightly curfews for all persons (with limited exceptions for essential services) (see the “Ongoing Impact of COVID-19 and Declines in the Demand for Oil and Gas” of this Part I, Item 2 for further information pertaining to the ongoing impact of COVID-19 on our operations and financial condition). These types of governmental measures could impact our ability to operate in locations where such restrictions are in place.  With this uncertainty, we have sought, and continue to seek, measures to reduce our operating costs and preserve cash during these challenging times. The effects of the decline in global economic activity and other oil price and market share volatility may cause us to implement cost reduction measures in addition to those put in place in 2020 and alter our general financial strategy.

As of March 31, 2021, we have adequate cash reserves and are continuously managing our actual cash flow and cash forecasts. As a result of these factors, management believes that we have adequate liquidity to fund our operations for the twelve months following the date our consolidated financial statements are issued and therefore, have been prepared under the going concern assumption.

As of March 31, 2021, we had working capital of approximately $178.7 million, including approximately $140.4 million of cash available for general corporate purposes. Scheduled debt service consists of interest payments through December 31, 2021 of approximately $32.4 million. We anticipate capital expenditures through December 31, 2021 to be between approximately $5.5 million and $6.7 million, for sustaining capital and capital spares. As our rigs obtain new contracts, we could incur reactivation and mobilization costs for these rigs, as well as customer requested equipment upgrades. These costs could be significant and may not be fully recoverable from the customer. Based on our expected levels of activity, incremental expenditures through December 31, 2021 for special periodic surveys, major repair and maintenance expenditures and equipment recertifications to be between approximately $17.2 million and $21.0 million. As of March 31, 2021, we had $39.0 million available for the issuance of letters of credit under our cash collateralized letter of credit facility.

The following table includes a summary of our cash flow information for the periods indicated:

 

 

 

Three Months Ended March 31,

 

(unaudited, in thousands)

 

2021

 

 

2020

 

Cash flows (used in) provided by:

 

 

 

 

 

 

 

Operating activities

 

$

(15,351

)

 

$

(31,274

)

 

Investing activities

 

 

13,101

 

 

 

(1,196

)

 

Financing activities

 

 

 

 

 

 

Changes in cash flows from operating activities are driven by changes in net income during the periods (see the discussion of changes in net income above in “Results of Operations” of this Part I, Item 2).

Cash flows from investing activities in the Current Quarter include net proceeds of $13.6 million from the sale of the Titanium Explorer.

The significant elements of the 9.25% First Lien Notes are described in “Note 5. Debt of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.

We enter into operating leases in the normal course of business for office space, housing, vehicles and specified operating equipment. Some of these leases contain options that would cause our future cash payments to change if we exercised those options.

 

Commitments and Contingencies

We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. Information regarding our legal proceedings is set forth in “Note 8. Commitments and Contingencies of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.

There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.

Critical Accounting Policies and Accounting Estimates

The preparation of unaudited financial statements and related disclosures in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our significant accounting policies are included in Note 2. Basis of Presentation and Significant Accounting Policiesof the “Notes to the

28


 

Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of the Board of Directors.

Our critical accounting policies are those related to property and equipment, impairment of long-lived assets and income taxes. For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” in Part II of our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 18, 2021. During the Current Quarter, there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates are based.

Recent Accounting Pronouncements: See “Note 2. Basis of Presentation and Significant Accounting Policies of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our rigs operate in various international locations and thus are sometimes subject to foreign exchange risk. We may from time to time also be exposed to certain commodity price risk, equity price risk and risks related to other market driven rates or prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. The significant decline in worldwide exploration and production spending as a result of reduced oil prices since 2014, the continual spread of COVID-19 and its designation as a pandemic, and the ongoing oil price and market share volatility have each negatively impacted the offshore contract drilling business at large, as discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operationsof this Quarterly Report.

Interest Rate Risk: As of March 31, 2021, we had no variable rate debt outstanding.

Foreign Currency Exchange Rate Risk: Our functional currency is the USD, which is consistent with the oil and gas industry. However, outside the U.S., a portion of our expenses are incurred in local currencies. Therefore, when the USD weakens (strengthens) in relation to the currencies of the countries in which we operate, our expenses reported in USD will increase (decrease). A substantial majority of our revenues are received in USD, our functional currency; however, in certain countries in which we operate, local laws or contracts may require us to receive some payment in the local currency. We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in that foreign currency. In order to mitigate the effect of exchange rate risk, we attempt to limit foreign currency holdings to the extent they are needed to pay liabilities in the local currency. To further manage our exposure to fluctuations in currency exchange rates, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, may be used. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent USD payment equal to the value of such exchange. We do not enter into derivative transactions for speculative purposes. As of March 31, 2021, we did not have any open foreign exchange derivative contracts or material foreign currency exposure risk.

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we voluntarily file or submit to the SEC is recorded, processed, summarized, and reported within the time periods required by our debt agreements.

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2021 to provide reasonable assurance that information required to be disclosed on our reports filed or submitted under the Exchange Act was (1) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) recorded, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

While the majority of our office and management personnel are working remotely due to the spread of COVID-19 and the resulting pandemic, we have not as of the date of this Quarterly Report experienced any material impact on our internal controls over financial reporting. Our management continues to monitor and assess the current situation as it relates to our internal controls over financial reporting in order to minimize the impact, if any, to their design and operating effectiveness.

29


 

PART II – OTHER INFORMATION

Information regarding the Company’s legal proceedings is set forth in “Note 8. Commitments and Contingencies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference into this Part II, Item 1.

Item 6. Exhibits

 

 

 

 

 

 

 

Incorporated by Reference

Exhibit

Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

File Number

 

Exhibit

 

Filing

Date

2.1

 

Joint Prepackaged Chapter 11 Plan of Offshore Group Investment Limited and its Affiliated Debtors, dated December 1, 2015, which is Exhibit A to the Disclosure Statement

 

 

 

T-3

 

022-29012

 

99.T3E.1

 

12/02/15

3.1A

 

Certificate of Incorporation of the Company

 

 

 

S-4

 

333-170841

 

3.3

 

11/24/10

3.1B

 

Fourth Amended and Restated Memorandum and Articles of Incorporation of the Company

 

 

 

8-K

 

333-159299-15

 

 

3.1

 

03/08/19

4.1

 

First Lien Indenture, dated as of November 30, 2018, by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent

 

 

 

8-K

 

333-159299-15

 

4.1

 

12/04/18

4.2

 

First Supplemental Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated January 24, 2019

 

 

 

10-K

 

333-159299-15

 

4.4

 

03/10/2020

4.3

 

Second Supplemental Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated February 13, 2019

 

 

 

10-K

 

333-159299-15

 

4.5

 

03/10/2020

4.4

 

Shareholders Agreement dated as of February 10, 2016, by and among Offshore Group Investment Limited and the Shareholders (as defined therein)

 

 

 

8-K

 

333-159299-15

 

10.1

 

02/17/16

4.5

 

Amendment No. 1 to the Shareholders Agreement, dated as of February 10, 2016, by and among Offshore Group Investment Limited and the Shareholders (as defined therein)

 

 

 

8-K

 

333-159299-15

 

10.1

 

03/08/19

4.6

 

Registration Rights Agreement, dated as of February 10, 2016, by and among Offshore Group Investment Limited and each of the Holders (as defined therein) party thereto

 

 

 

8-K

 

333-159299-15

 

10.2

 

02/17/16

4.7

 

Amendment No. 1 to the Registration Rights Agreement, dated as of May 9, 2016, by and among Vantage Drilling International (f/k/a Offshore Group Investment Limited) and each of the Holders party thereto

 

 

 

10-Q

 

333-159299-15

 

10.3

 

5/13/16

4.8

 

Registration Rights Agreement among Vantage Drilling International, Vantage Drilling Company and the joint official liquidators of Vantage Drilling Company, dated as of April 26, 2017

 

 

 

10-K/A

 

333-212081

 

10.1

 

05/01/17

 

30


 

10.1

 

Agreement, dated June 20, 2019, among Vantage Deepwater Company, Vantage Deepwater Drilling, Inc., Petroleo Brasileiro S.A., Petrobras America, Inc. and Petrobras Venezuela Investments & Services, BV.

 

 

 

8-K

 

333-159299-15

 

10.1

 

06/24/19

31.1

 

Certification of Principal Executive Officer Pursuant to Section 302

 

X

 

 

 

 

 

 

 

 

31.2

 

Certification of Principal Financial and Accounting Officer Pursuant to Section 302

 

X

 

 

 

 

 

 

 

 

32.1**

 

Certification of Principal Executive Officer Pursuant to Section 906

 

 

 

 

 

 

 

 

 

 

32.2**

 

Certification of Principal Financial and Accounting Officer Pursuant to Section 906

 

 

 

 

 

 

 

 

 

 

101.INS

 

— XBRL Instance Document

 

X

 

 

 

 

 

 

 

 

101.SCH

 

— XBRL Schema Document

 

X

 

 

 

 

 

 

 

 

101.CAL

 

— XBRL Calculation Document

 

X

 

 

 

 

 

 

 

 

101.DEF

 

— XBRL Definition Linkbase Document

 

X

 

 

 

 

 

 

 

 

101.LAB

 

— XBRL Label Linkbase Document

 

X

 

 

 

 

 

 

 

 

101.PRE

 

— XBRL Presentation Linkbase Document

 

X

 

 

 

 

 

 

 

 

** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

 

31


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

VANTAGE DRILLING INTERNATIONAL

 

 

 

 

Date: May 6, 2021

 

By:

/s/ DOUGLAS E. STEWART 

 

 

 

Douglas E. Stewart

 

 

 

Chief Financial Officer, General Counsel and Corporate Secretary

 

 

 

(Principal Financial and Accounting Officer)

 

 

32