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| VTG > SEC Filings for VTG > Form 10-Q/A on 19-Aug-2008 | All Recent SEC Filings |
19-Aug-2008
Quarterly Report
Overview
The following discussion is intended to assist you in understanding our financial position at June 30, 2008, and our results of operations for the three and six months ended June 30, 2008 and 2007. The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes contained in this report on Form 10-Q and the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
We are a development stage international drilling company focused on developing and operating a fleet of high-specification drilling rigs. On June 12, 2008, we completed our acquisition of Offshore Group Investment Limited ("OGIL") acquiring the construction contracts for four Baker Marine Pacific 375 jackup rigs, a contract for the purchase of a ultra-deepwater high-specification drillship and the option for a second ultra-deepwater high-specification drillship, currently under development.
Jackups. The Baker Marine Pacific Class 375 ultra-premium jackup rig is an independent leg, cantilever, non-harsh environment jackup rig with a drilling depth of approximately 30,000 feet and may operate in water depths up to 375 feet, depending on ocean and ocean floor conditions. A jackup rig is a mobile, self-elevating drilling platform equipped with legs that are lowered to the ocean floor until a foundation is established for support and then the hull is raised out of the water into position to conduct drilling and workover operations. The rig hull includes the drilling rig, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter deck, and other operating equipment. The cantilever feature allows the drilling platform to be extended out from the hull, permitting the rig to perform drilling and workover operations over pre-existing platforms and structures.
Drillship. The drillships are dynamically positioned self-propelled ultra deepwater drillship with a drilling depth of approximately 30,000 feet and may operate in water up to a depth of 12,000 feet. The computer controlled dynamic positioning system allows the rig to be positioned over the drillsite during operations. The rig hull includes the drilling rig, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter deck, and other operating equipment. Drillships are suitable for deepwater drilling in remote locations because of their mobility and large load-carrying capacity.
Business Outlook
Expectations about future oil and natural gas prices have historically been a key driver for drilling demand; however, the availability of quality drilling prospects, exploration success, availability of qualified rigs and operating personnel, relative production costs, availability and lead time requirements for drilling and production equipment, the stage of reservoir development and political and regulatory environments also affect our customers' drilling programs. We expect global demand for offshore contract drilling services to remain strong, driven by increasing worldwide demand for oil and natural gas, an increased focus by oil and natural gas companies on offshore prospects and increased global participation by national oil companies.
Worldwide demand for jackups in recent years has exceeded supply which has resulted in record dayrates and near full utilization of the worldwide jackup fleet. We believe there are approximately 78 jackups being developed or currently under construction for delivery through the end of 2010, which includes the jackups acquired by the Company. During 2008, dayrates have remained near historically high levels however, rates in certain geographic markets have recently moderated slightly as many of the newbuilds are approaching their initial delivery dates. Although market forecast still show that the incremental supply of jackups is not adequate to meet the incremental demand, several factors, including the increase supply of jackups, the geographic concentration of the newbuild jackups in Southeast Asia and the newbuild operators' desire to obtain long-term work to secure future cash flows, have increased the recent contracting volatility. We anticipate that this volatility will continue through the remainder of 2008 and into 2009 with the long-term trend of increasing jackup rates remaining intact.
We also anticipate that we may continue to see more divergence in the dayrates for older jackup rigs versus higher specification newbuild jackup rigs as contractors owning older rigs may offer lower rates for their rigs in order to get longer term contracts. This is due to the competitive advantages of newbuild jackups, including those delivered in recent years and the jackups currently under construction, offering enhanced drilling capabilities when compared to the older less sophisticated jackups that allow the rigs to drill faster and safer, achieve greater drilling depths, operate in deeper water, and perform more challenging drilling operations required by customers. We believe that these enhanced drilling capabilities will allow the newbuild rigs to sustain the current market dayrates while the older rigs achieve moderately reduced rates.
The market for deepwater (> 4,000 ft.) and ultra-deepwater (>7,500 ft.) has been very strong in recent years and continues to experience increasing dayrates in 2008 as demand for deepwater and ultra-deepwater rigs has exceeded supply. We believe that customer requirements for deepwater drilling capacity will continue to expand as a result of recent successes in exploratory drilling and the need for rigs to complete and maintain existing deepwater offshore developments. We believe that higher prices for oil will continue to encourage the development of new projects by exploration and production companies on a number of major deepwater discoveries beyond 2010. We believe there are approximately 77 deepwater and ultra-deepwater rigs (including both drillships and semisubmersibles) being developed or currently under construction for delivery through the end of 2011, which will add to the worldwide supply. Significant recent oilfield discoveries offshore Brazil and continued deepwater field development in the Gulf of Mexico, West Africa and India are expected to further increase the demand for deepwater and ultra-deepwater drillings rigs. Based on the results of recent tenders and market analysis, we believe that the market for deepwater and ultra-deepwater drilling rigs is significantly under supplied and anticipate more newbuild rigs to be announced. However, we anticipate that these additional newbuild rigs will not be available until after the delivery of our ultra-deepwater drillships.
We anticipate that personnel costs will continue to trend higher, especially for the higher specification equipment, due to the increased level of activity in the drilling industry escalating the competition for skilled labor. Lead times and costs for certain critical equipment components essential to the operation of rigs are anticipated to increase due to limitations in manufacturing capacity. We expect that with the current dayrate environment, we will be able to absorb these costs and maintain favorable margins.
Results of Operations
We have little operating history. Our activity since inception has been to prepare for our fundraising through an offering of our equity securities and, subsequently, to complete a business combination. We completed our initial public offering on May 30, 2007 and the acquisition of OGIL on June 12, 2008. We will not generate any operating income until the construction of the rigs is completed and the rigs are working under day-rate contracts. Until the Acquisition, we generated non-operating income in the form of interest income on the cash held in our trust account.
For the three and six month periods ended June 30, 2008, general and administrative expenses were approximately $2.0 million and $2.7 million, respectively. This compares to general and administrative expenses of approximately $144,000 for both of the comparable periods in 2007. The increases are primarily due to increased expenses incurred for the establishment of a corporate office, hiring of personnel, stock-based compensation expense, expenses incurred to evaluate business combinations, travel expenses and professional fees associated with the establishment of governance, operating and administrative policies and procedures. Additionally, we established operating subsidiaries to recruit and train the international workforce to complete the construction and begin the operation of the jackup rigs and the drillship and opened an office in Singapore where the jackup rigs are being constructed.
Interest income for the three and six month periods ended June 30, 2008 was approximately $1.3 million and $3.8 million, respectively. Interest income was approximately $1.1 million for both the three and six month periods ended June 30, 2007. The increases in 2008 over 2007 is primarily due to generating interest income on the net proceeds of our May 2007 initial public offering of approximately $270.0 million for essentially all of 2008 as compared to a month in 2007.
Liquidity and Capital Resources
As of June 30, 2008, we had approximately $77.3 milion of cash available for general corporate purposes. Additionally, we have posted approximately $600,000 of cash as collateral for bid tenders. The cash was generated by the proceeds from our initial public offer, our private placement, interest earned on the funds less administrative and tax expenses and borrowings of $34.0 million under the Credit Agreement.
Use of Funds Available for General Corporate Purposes. We are currently incurring operating expenses for administration, investor relations, executive, legal, treasury and accounting functions and for building our management information systems, which we believe are critical to successfully deploying the jackup rigs and drillship once the construction has been completed. We are also currently incurring operating expenses for developing operational systems, developing the international human resource function, developing training and safety programs, marketing the jackup rigs and drillship, and providing technical assistance to the shipyard construction. These efforts are critical to successfully contracting and deploying the jackup rigs and drillship, as the construction is completed.
Use of Funds Held in Trust. Under the terms of our initial public offering of
stock, the funds were released to us for general corporate purposes in June 2008
when we completed the acquisition of OGIL. We used the funds held in trust to
(i) fund the $56.0 million non-equity portion of the total consideration to be
paid for the shares of OGIL, as adjusted pursuant to the purchase agreement,
(ii) make scheduled shipyard payments for the construction of the jackup rigs,
(iii) pay the deferred underwriting fee of $8.3 million, (iv) pay income taxes
and (v) fund ongoing operations.
On June 12, 2008, we entered into a $440.0 million credit agreement (the "Credit Agreement") with a syndicate of lenders to finance the construction and delivery of the four Baker Marine Pacific 375 jackup rigs. The Credit Agreement consists of the following: (i) a term loan in the amount of $320.0 million (the "Term Loan"); (ii) a top-up loan in the amount of $80.0 million (the "Top-up Loan"); and (iii) a revolving loan in the amount of $40.0 million (the "Revolving Loan"). Each of the Term Loan, Top-up Loan and Revolving Loan shall be split into four equal tranches; one for each of the jackup rigs. The Credit Agreement required each of the jackup rigs be placed in a separate entity which we have established as Emerald Driller Company, Sapphire Driller Company, Aquamarine Driller Company and Topaz Driller Company (each individually a "Borrower"). The Term Loan is restricted to the payment of construction costs of each Borrower's respective jackup rig. The Top-up Loan is available for general corporate purposes provided the Borrower has (i) the relevant jackup rig being employed under a drilling contract, and (ii) such drilling contract has sufficient forecasted cash flow to repay in full the Top-up Loan during the term of the drilling contract, in addition to the scheduled payments due under the Term Loan. The Revolving Loan will be used primarily for working capital, providing letters of credit to support contract bids and performance bonds to support drilling contracts.
The maturity date for each tranche of the Term Loan and Revolving Loan will be seven years plus three months from the delivery date of the relevant jackup rig. In no event will the maturity date occur after June 30, 2017. Each tranche under the Term Loan will be repayable in 28 consecutive quarterly installments of $2.0 million each, commencing six months from the delivery of the relevant jackup rig. A balloon payment of $24.0 million will be due at maturity together with the last quarterly installment. Each tranche of the Top-up Loan will be repaid in full, in equal quarterly installments, during the relevant drilling contract period. Any outstanding amount of the Revolving Loan tranche will be repayable in full on the maturity date. The Borrower's excess cash flow as defined by the credit agreement will be applied first to any outstanding Top-Up Loan, second to the outstanding Term Loan and third to any outstanding Revolving Loan.
The interest rate for each of the Credit Facilities is based on LIBOR plus a margin ("Applicable Margin") ranging from 1.75% to 2.75%. The Applicable Margin is based on the Borrower's contract backlog and the operational status of the jackup rig. The Credit Facilities are secured by a lien on substantially all of the assets of the Borrowers and the Guarantors, including all of the equity interests of certain subsidiaries of the Company whose jurisdiction or organization is the Cayman Islands, and all of the Company's equity interests in Vantage Energy, but excluding all of the Company's equity interests in its subsidiaries whose jurisdiction of organization is Singapore. As of June 30, 2008, we have borrowed $34.0 million under the Credit Agreement.
We are subject to certain limitations under the Credit Agreement, including restrictions on the ability to make any dividends, distributions or other restricted payments; incur debt or sell assets; make certain investments and acquisitions and grant liens. We are also required to comply with certain financial covenants, including a covenant which limits capital expenditures, a maximum leverage ratio covenant, a maximum net debt to capitalization ratio covenant, a covenant which requires the maintenance of cash balances above a certain threshold level, a minimum working capital ratio and a minimum fixed charge coverage ratio. The Credit Agreement contains customary events of default, the occurrence of which could lead to an acceleration of our obligations.
The purchase agreement for the drillship is for total consideration of $676.0 million, which includes change orders requested by us including an upgrade to the derrick pipe handling capability and modification to the hull design. Thirty percent (30%) of the drillship's purchase price will be paid in September 2008 with the balance payable upon acceptance of the completed drillship. Of the total consideration of $331.0 million paid for the shares of OGIL, $8.0 million will be applied against the September 2008 drillship payment. In addition to the consideration paid for the drillship, we anticipate incurring approximately $40.0 million of rig outfitting and completion costs, critical spares and inventory, $16.5 million of shipyard supervision expenses and $28.0 million of start-up costs including maintaining rig crews prior to starting the initial drilling operation, commission costs in excess of commission provided by the shipyard to comply with the Company's operating standards. These costs do not include any interest capitalization.
We anticipate exercising the option in November 2008 for the second drillship for total consideration of $695.0 million which will require us to make a payment of thirty percent (30%) of the drillship's purchase price in December 2008. We will have scheduled payments in June 2009 and December 2009 of ten percent (10%) with the remaining balance of 50% due upon delivery in July 2011. In addition to the consideration paid for the drillship, we anticipate incurring approximately $40.0 million of rig outfitting and completion costs, critical spares and inventory, $18.5 million of shipyard supervision expenses and $28.2 million of start-up costs including maintaining rig crews prior to starting the initial drilling operation, commission costs in excess of commission provided by the shipyard to comply with the Company's operating standards. These costs do not include any interest capitalization.
We also anticipate spending an additional $40.0 million for fleet spares which we believe prudent to the operation of a fleet of four high-specification jackups and two ultra-deepwater drillships and may be required to contract the rigs with certain operators. These fleet spares include, among other items, spare thrusters, risers and blowout preventer parts. Each of these items has a very long lead time to acquire and in the event of a mechanical failure would prevent the rig from operating at full capacity. We believe it is critical to our goal of providing best-of-class service to our customers that we maintain these fleet spares and can ensure that we provide our services to our customers with minimal disruption.
Should we be delinquent in making any payments to Mandarin or any its affiliates, we will make Mandarin or any of its affiliates whole for their payments to the shipyard including any unfavorable fluctuations in interest rates or exchange rates from the time that Mandarin makes the payment until we make Mandarin or its affiliate whole.
We intend to secure additional financing in the form of debt and equity in order to fund our scheduled drillship payments. We have received indicative term sheets from potential lenders which we are evaluating. Each of the term sheets has conditions which must be achieved prior to finalization of terms and conditions including amortization periods, interest rates, required equity contributions and total funding available. These principle conditions include the dayrate and length of the operating agreement, the credit quality of our customer, the anticipated operating costs, applicable tax rates and other factors that impact the future cash flows available to service the debt. While our discussions with potential lenders have been favorable, there can be no assurances that adequate debt and equity financing will be available or available on acceptable terms to fund the purchase of the drillships.
Contingent Obligations. We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. As of June 30, 2008, we are not aware of any litigation, claims or disputes, whether asserted or unasserted.
Off-Balance Sheet Arrangements, Commitments, Guarantees and Contractual Obligations
Contemporaneously with the consummation of our initial public offering, we issued to the underwriters, in exchange for consideration of $100, an option to purchase up to an aggregate of 1,250,000 units at $9.60 per unit. The units issuable upon exercise of this option are identical to the other units outstanding except that the warrants included in the option have an exercise price of $7.20 per share (120% of the exercise price of the warrants included in the units sold in the initial public offering).
As of June 30, 2008, we had approximately $376.0 million of commitments related to the construction contracts for the four Baker Marine Pacific 375 jackups and $668.0 million of commitment related to the purchase of our drillship. Additionally, we anticipate exercising our purchase option for a second drillship for $695.0 million; if we elect not to exercise our purchase option, we will be required to pay a $10.0 million termination fee. In preparing our rigs for operations, we have made approximately $19.7 million of commitments for the purchase of critical spares, design modifications and inventory.
Critical Accounting Policies and Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the policies below as critical to our business operations and the understanding of our financial operations. The impact of these policies and associated risks are discussed in Management's Discussion and Analysis where such policies affect our reported and expected financial results. A complete discussion of our accounting policies is included in Note 2 of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Property and Equipment: Consists of furniture and fixtures and computer equipment, depreciated, upon placement in service, over estimated useful lives ranging from three to seven years on a straight-line basis, and capitalized costs for computer software as accounted for in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Additionally, the fair market values as of the date of the Acquisition, and subsequent expenditures for the jackup rigs and drillships under construction are included in Property and Equipment.
Acquisition Costs: Consists of costs incurred directly related to the acquisition of OGIL as described above. These costs, which consisted primarily of consulting fees, legal fees and the costs of obtaining a fairness opinion on the Acquisition were allocated to the fair values of the assets acquired.
Debt Financing Costs: Costs incurred with debt financings are capitalized and amortized over the term of the related financing facility.
Capitalized Interest Costs: Interest costs related to the credit agreements for the financing of the jackup rigs have been capitalized as part of the cost of the respective jackups while they are under construction. Total interest costs capitalized during the three months ended June 30, 2008 totaled approximately $53,600.
Stock-Based Compensation: We account for employee stock-based compensation using the fair value method as prescribed in SFAS No. 123(R), Share-Based Payment. Under this method, we record the fair value attributable to stock options based on the Black-Scholes option pricing model and the market price on date of grant for our restricted stock grants. The fair values are amortized to expense over the service period required to vest the stock options and stock grants. In June 2008, we granted 1,312,750 stock options at an exercise price of $8.40 per option and 1,616,850 restricted shares valued at $8.40 per share. We recognized $183,825 of stock-based compensation in the three and six month periods ended June 30, 2008.
New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We are evaluating the effect, if any, that SFAS No. 162 will have on our financial statements.
In May 2008, the FASB issued FASB Staff Position No. ARB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP ARB 14-1"). FSP ARB 14-1 requires that entities with convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) separately account for the liability and equity components in a manner that reflects the entity's nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We will adopt the provisions of FSP ARB 14-1 on January 1, 2009. We do not expect the adoption to significantly impact our financial position, results of operations or cash flows.
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