Vantage Drilling Management Discusses Q2 2012 Results - Earnings Call Transcript

Vantage Drilling (VTG)

Q2 2012 Earnings Call

July 30, 2012 10:00 am ET

Executives

Mark Howell

Paul A. Bragg - Chairman, Chief Executive Officer and Member of Executive Committee

Douglas G. Smith - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Todd P. Scholl - Clarkson Capital Markets, Research Division

Phillips Johnston

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Vantage Drilling Company Announces Second Quarter 2012 Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mark Howell, Associate General Counsel. Please go ahead, sir.

Mark Howell

Thank you. Good morning, everyone. Welcome to the Vantage Drilling Company's Second Quarter 2012 Conference Call. We appreciate you joining us. I'm Mark Howell, Legal Director and Associate General Counsel for Vantage. With us today on the call, we have Paul Bragg, our Chairman and Chief Executive Officer; and Douglas Smith, our Chief Financial Officer.

I'll open with a few brief remarks. This morning, we released our earnings announcement for the period ended June 30, 2012. This afternoon, we intend to file our 10-Q. The earnings release is available on our website at www.vantagedrilling.com.

Please note that any comments we make today about our expectations of future events and projections are forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements made in today's call are subject to a number of risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from the projections made in today's conference call. We refer you to our earnings release and SEC filings available on our website. Vantage does not undertake the updating of any such statement or risk factor that could cause actual results to differ materially from our expectations. At the end of our prepared remarks, we will entertain some questions. With that, I would like to turn things over to Mr. Paul Bragg.

Paul A. Bragg

Thank you, and good morning, everyone. Although the headline earnings and EBITDA numbers for Q2 appear to be significantly off the trend from the first quarter, the 2 quarters were actually almost look-alikes. Now let me explain that. First, as we have discussed for much of the last year, we've been planning a period of 10 days out of service for our first drillship, Platinum Explorer, to enhance some of the drill floor equipment. The new equipment, supplied by the vendor to us at no cost, had to be manufactured and delivered to us offshore India. The opportunity to change out the equipment finally came in Q2, but the resulting out-of-service period cost us more than $6 million of lost revenues and lost earnings and cash flow. Otherwise, Platinum Explorer enjoyed efficient operations in the quarter. Without the offline time for the upgrade, Platinum performed at about 99% uptime in the period. The second item that results in a difference between the periods is about $2.5 million of costs recognized during the second quarter for Titanium Explorer, our second drillship, even though the ship is not yet in service. Now generally, pre-commencement costs of a new asset are capitalized prior to the rig starting on its first job. However, today's accounting regulations do require a few items, like training and insurance, for example, to be expensed currently.

On the other hand, nearly $40 million of mobilization revenues are fully deferred until post the startup of the unit and will be amortized over the 8-year contract term. So there is a revenue associated with this item, just not in the period. After these 2 items, the second quarter would have been a mirror image of Q1.

Doug Smith will review in detail the financial results in just a few moments. Q2 was another solid quarter of operational excellence for Vantage. Our jackups once again worked at essentially 100% productive time, and the Platinum Explorer had a natural [ph] efficiency of about 91%, but 99% exclusive of that 10-day upgrade period. Titanium Explorer has now completed its transit from Korea to the U.S. Gulf of Mexico. She's currently offshore Louisiana, conducting the initial acceptance test. We're hopeful to complete all of the testing, including the subsea testing in more than 8,000 feet of water, during Q3 and to commence work late in the quarter. Titanium will supplement annual EBITDA by $140 million or more, with that impact starting to be visible in Q4. With Titanium's contribution, Vantage earnings should move solidly profitable. Doug?

Douglas G. Smith

Thanks, Paul. Our second quarter revenues were approximately $105.1 million as compared to $131.8 million in the prior quarter and $121.1 million in the second quarter of 2011. The decrease in revenue from the first quarter was largely due to a $24.2 million decline in revenue from Vantage projects as we acquired the Titanium Explorer during the quarter, ending the shipyard oversight contract we previously had in place. Revenues from contract drilling business for the second quarter was approximately $99.7 million as compared to $105 million in the prior quarter, representing a decrease of 5%. The decrease was primarily due to the scheduled out-of-service time we discussed on the last call for the Platinum Explorer in order to install OEM upgrades to the tubular handling system.

Income from operations for the second quarter was in line with expectations at $32 million as compared to $40.7 million in the prior quarter and $32.2 million achieved in the second quarter of the prior year. The jackup operations for the second quarter had a revenue of $55.2 million, which is consistent with the prior quarter. Productive time for the jackup fleet was in excess of 99% in the second quarter, which was also consistent with the first quarter. The average contract revenue per day for our jackup rigs for this quarter and the previous quarter was approximately $144.5 -- I'm sorry, $144,500 per day, which compares favorably with the $131,500 per day achieved in the prior year. The direct operating cost for the jackup operations was approximately $23.2 million for the second quarter as compared to $23.4 million in the prior quarter. For the quarter, the operating cost per day for the fleet, net of reimbursable expenses, was approximately $59,400 per day as compared to $60,300 per day in the prior quarter. The Platinum Explorer achieved approximately 91.1% productive time for the second quarter, resulting in revenues of $47.3 million as compared to 98.8% productive time and revenue of $52.4 million in the prior quarter. The decrease was primarily due to, as previously discussed, the OEM supply upgrades and the related time out of service. Adjusting for the scheduled out-of-service time, the Platinum Explorer achieved approximately 99% productive time for the quarter. Direct operating costs for the second quarter were approximately $17.3 million as compared to $18.6 million in the prior quarter. Additionally, in the deepwater group, as Paul mentioned, we incurred an additional $2.4 million of expenses associated with the Titanium Explorer.

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