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| VTG > SEC Filings for VTG > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Overview
The following discussion is intended to assist you in understanding our financial position at September 30, 2008, and our results of operations for the three and nine months ended September 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. Certain reclassifications have been made to previously reported amounts to conform to the current period presentation.
We are a development stage international drilling company focused on developing and operating a fleet of high-specification drilling rigs. We completed our business combination with Vantage Energy and OGIL on June 12, 2008 (the "Acquisition"). In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141 Business Combinations, Vantage Energy was determined to be the acquirer for purposes of accounting for the business combination. Accordingly, the historical financial statements present the historical financial information of Vantage Energy with the financial information of Vantage Drilling and OGIL included as of June 12, 2008. The Acquisition included the construction contracts for four Baker Marine Pacific Class 375 jackup rigs, a contract for the purchase of an 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 drillships 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.
Contract for the Emerald Driller
In August 2008, we entered into a two year contract for the Emerald Driller to work in Southeast Asia. The rig is expected to commence operations in early February 2009, following the completion of its construction and commissioning activities in Singapore. The contract is expected to generate approximately $128.3 million in revenue, excluding revenues for cost escalations and client reimbursables, over the initial term. The contract contains operational requirements customary to the drilling industry.
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. The current, deteriorating global economic environment has caused a significant decrease in oil and gas prices since the second quarter of 2008. Crude oil prices that reached an all time high of $147 per barrel ("bbl") in the second quarter of 2008 declined to approximately $100 per bbl at the end of the third quarter and have continued to decline to approximately $60 per bbl as of early November 2008.
The global financial crisis has significantly reduced the availability of credit to businesses in the near-term, but the implications for our industry are uncertain at present. The current financial crisis significantly limits the credit market access of some our potential customers which combined with lower prevailing oil and natural gas commodity prices, may lead to potential customers to delay or cancel drilling activity. As the global financial crisis limits the access to credit markets, it could result in a protracted decline in global economic growth, which would reduce the demand for oil and gas commodities. Such a decrease in demand for oil and gas commodities could cause our potential customers to adjust exploration and production spending to lower levels. A reduction in drilling activity may adversely affect the award of new drilling contracts and cause a reduction in dayrates.
The Company's strategic plan anticipated that the Company would raise funds to support the development of the Platinum Explorer and Titanium Explorer drillships in the form of additional equity and debt financings. Both the debt and equity markets experienced significant disruption during the third quarter 2008 and continuing through the date of this report. We were unsuccessful in our efforts to raise the additional funding and have suspended our efforts to complete a debt financing. As a result, we did not make the September 13, 2008 installment on our purchase agreement for the drillship Platinum Explorer. In September 2008, as authorized by the board of directors, we made a partial payment of $32.0 million on the obligation.
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 71 jackups being developed or currently under construction for delivery through the end of 2010, which includes the jackups being acquired by the Company. However, the global credit crisis may significantly impair the rig owners from completing these rigs.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 increased 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.
We also anticipate that we may continue to see more divergence in the dayrates and utilization 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; otherwise the older, less capable rigs may not be contracted. 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 higher levels of utilization and dayrates.
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 there are approximately 82 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. However, the global credit crisis may significantly impair the rig owners from completing these rigs. 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.
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.
Results of Operations
We have little operating history as a company. 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 dayrate contracts. Until the acquisition of OGIL, we generated non-operating income in the form of interest income on the cash held in our trust account. With the acquisition of OGIL, we established an operational base in Singapore to oversee the construction of the rigs and prepare for operation of the rigs upon completion of construction.
For the three and nine month periods ended September 30, 2008, operating expenses were approximately $2.0 million and $2.2 million, respectively. We opened a Singapore office where the jackup rigs are being constructed to recruit and train the international workforce and to complete the construction and begin the operation of the jackup rigs and the drillship. We currently have approximately 30 people in Singapore, most of whom are expatriates, and the expenses include, but are not limited to, salaries and related benefits, leases for living accommodations and cars, schooling costs for dependents, travel and related expenses and stock-based compensation expense associated with the granting of stock options and restricted stock. There were no comparable expenses for the same periods of 2007.
For the three and nine month periods ended September 30, 2008, general and administrative expenses were approximately $3.4 million and $5.9 million, respectively. This compares to general and administrative expenses of approximately $255,000 and 399,000, respectively for the comparable periods of 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 potential business combinations, expenses incurred to secure financing for the first drillship, travel expenses and professional fees associated with the establishment of governance, operating and administrative policies and procedures. We currently have 10 fulltime corporate office employees as compared to two at the end of 2007. Additionally, we established our marketing headquarters in Singapore and have incurred expenses related to the marketing and contracting of the jackup rigs and drillship.
Interest income for the three and nine month periods ended September 30, 2008 was approximately $257,000 and $4.1 million, respectively. Interest income was approximately $3.4 million and $4.5 million, respectively, for the three and nine month periods ended September 30, 2007. The decrease in interest income for the three months ended September 30, 2008 as compared to the same period of 2007is the result of having lower cash balances available for investment. Vantage Energy, our predecessor, completed its initial public offering of approximately $270.0 million in May 2007 and substantially all the proceeds were invested in interest bearing securities for the third quarter of 2007.
Liquidity and Capital Resources
As of September 30, 2008, we had approximately $13.0 million of cash available for general corporate purposes. Additionally, we have posted approximately $1.1 million cash as collateral for bid tenders. The cash was generated by the proceeds from the initial public offering, our private placement, interest earned on the funds less administrative and tax expenses and borrowings of $79.0 million under the Credit Agreement (as defined below). Once we receive and accept the Emerald Driller in December 2008, we will be able to draw up to $20.0 million under the terms of the Top-up Loan (described below) for general corporate purposes. Additionally, we will be able to draw up to $10.0 million under the terms of the Revolving Loan (described below) to fund working capital for the start-up of the Emerald Driller.
Use of Funds Available for General Corporate Purposes. We are currently incurring general and administrative expenses for administration, investor relations, executive, legal, marketing, 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 the initial public offering, 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 Class 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 September 30, 2008, we have borrowed $79.0 million under the Credit Agreement.
We are subject to certain restrictive covenants 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 Platinum Explorer required a payment of approximately $194.8 million payable on September 13, 2008 which the Company did not make. The Company initiated a process to obtain both debt and equity financing for this payment. However, due to significant unforeseen difficulties in the global debt and equity markets, the Company was not able to complete these funding efforts. The Company held a general board of directors meeting, including the directors appointed by TMT, on September 21, 2008. During the meeting, TMT expressed interest in restructuring the agreement between TMT and the Company including taking debt or equity in lieu of the payment. The board of directors appointed a special committee of the board of directors consisting of independent directors to evaluate both proposals from TMT and other strategic alternatives. The board of directors authorized management to make a partial payment on the obligation on $32.0 million, which we paid in September 2008.
Management engaged in multiple discussions regarding financing alternatives with banks, investment funds and potential strategic and financial partners and communicated the results of these discussions to the special committee. On October 27, 2008, management subject to special committee approval and TMT board approval, reached agreement on a proposal, as discussed below, from TMT which was determined to be superior to other alternatives available. TMT's board approved the proposal on October 30, 2008 and the special committee of the board approved the proposal on November 3, 2008, subject to final negotiations.
Vantage Drilling and TMT are working to complete the necessary documentation. The proposal provides that the Platinum Explorer drillship owning entity, Mandarin, will be owned fifty-five percent by TMT and forty-five percent by Vantage Drilling. As consideration for its purchase of the 45% ownership interest, Vantage Drilling, in lieu of further cash consideration, may issue new shares of common stock and/or warrants. TMT will assume all additional shipyard payments prior to the delivery of the Platinum Explorer scheduled for November 2010. The responsibility for the final shipyard payment and all other development costs, net of any Mandarin debt financing, will be in accordance with the ownership percentage. The final terms and conditions are subject to the final agreement
The Company agreed to enter into shipyard oversight agreements with Mandarin for the Platinum Explorer and with TMT for the two drillships wholly owned by TMT, the Titanium Explorer and TMT #3. The shipyard oversight agreements will provide Vantage compensation for overseeing the construction of the three drillships.
The Company and TMT have agreed that the Company will enter into management agreements with the owners of the three drillships to market and operate the drillships. These management agreements will provide the Company with a fixed management fee paid on a dayrate basis plus a percentage of the operating margins that are earned by the drillships. These management agreements will allow the Company to market the drillships on a worldwide basis prior to the delivery of the drillships. The management fees would become effective following the delivery and acceptance of the drillships.
The Company retains the option to purchase the Titanium Explorer for $695.0 million until November 30, 2008. TMT and the Company have agreed to modify the termination fee associated with this option in the event that we do not exercise the option to allow the Company to either issue 5 million shares of common stock or pay $10.0 million. We are currently marketing the Titanium Explorer.
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 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.
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 September 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 September 30, 2008, we had approximately $310.4 million of commitments related to the construction contracts for the four Baker Marine Pacific Class 375 jackups and $636.0 million of commitment related to the purchase of our drillship. In preparing our rigs for operations, we have made approximately $31.1million of commitments for the purchase of critical spares, design modifications, inventory and third-party training.
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 and nine months ended September 30, 2008 totaled approximately $1,659,000 and $1,712,000, respectively.
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 . . .
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