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VTG > SEC Filings for VTG > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for VANTAGE DRILLING CO


10-May-2013

Quarterly Report


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 at March 31, 2013 and our results of operations for the three months ended March 31, 2013 and 2012. The discussion should be read in conjunction with the financial statements and notes thereto, included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2012. 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 year presentation.

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 natural gas wells for our customers. We also provide construction supervision services for, and will operate and manage, drilling units owned by others. Through our fleet of drilling units we are a provider of offshore contract drilling services to major, national and independent oil and natural gas companies, focused primarily on international markets.

The following table sets forth certain information concerning our offshore drilling fleet.

                                 Year Built/                              Drilling Depth
                                  Expected            Water Depth            Capacity
Name                              Delivery           Rating (feet)            (feet)                  Status
Jackups
Emerald Driller                          2008                   375                30,000       Operating
Sapphire Driller                         2009                   375                30,000       Operating
Aquamarine Driller                       2009                   375                30,000       Operating
Topaz Driller                            2009                   375                30,000       Operating
Drillships (1)
Platinum Explorer                        2010                12,000                40,000       Operating
Titanium Explorer                        2012                12,000                40,000       Operating
Tungsten Explorer                        2013                12,000                40,000       Commissioning
Palladium Explorer (2)                   2015                12,000                40,000       Under construction

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

(2) The Palladium Explorer is directly owned by Sigma. As of March 31, 2013, we owned 41.9% of the outstanding shares of Sigma. The Palladium Explorerwill be equipped to drill in up to 12,000 feet of water.

Business Outlook

We believe the current market outlook for global oil and gas demand is favorable and will continue to increase demand for our services in the areas of the world where we are currently operating.

The market for jackups continues to improve as operators continue to seek modern, high specification jackups to develop oil and natural gas reserves. As demand from operators has increased, contract rates and utilization have risen with recent contracts being awarded with dayrates in excess of $170,000 per day. Currently, we estimate there are approximately 74 jackups scheduled for delivery through 2014. We believe that the market will absorb these new deliveries without a significant negative impact on future dayrates.

Deepwater and ultra-deepwater projects are typically longer in duration than shallow-water drilling programs, which reduce the volatility of dayrates and utilization to short-term fluctuations in oil and natural gas prices and general economic conditions. Deepwater operators tend to take a longer-term view of the global economic conditions and oil and natural gas prices and demand. We believe the long-term fundamentals for demand for oil and natural gas support a further increase in deepwater and ultra-deepwater development. This is further supported by significant oilfield discoveries offshore Brazil, Africa and in the Gulf of Mexico. We believe oil and gas companies are generally planning to increase their upstream capital spending levels.

As of April 2013, we estimate there are approximately 43 deepwater and ultra-deepwater rigs scheduled for delivery through 2014, of which 23 are contracted to customers. We believe that rig demand is likely to exceed rig supply despite projected delivery of newbuild units. The demand has resulted in an increase in dayrates with some recent ultra-deepwater contract fixtures in excess of $600,000 per day.


Table of Contents

In December 2012, the Titanium Explorer commenced drilling operations in the U.S. Gulf of Mexico. In May 2013, we entered into a drilling services contract for the Tungsten Explorer to work in West Africa for a major international operator. The contract is for two years, with four six-month options. The estimated revenue over the initial two-year firm period of the contract is approximately $468 million, including mobilization. Until the commencement of this contract in the middle of 2014, we will market the Tungsten Explorer in the spot market.

Results of Operations

The first two of our jackup rigs began operations under their initial contracts in February and August 2009, respectively. Our third and fourth jackup rigs commenced operations in January and March 2010, respectively. Our first drillship, the Platinum Explorer, was delivered in November 2010 and commenced operations in December 2010. Our second drillship, the Titanium Explorer, commenced operations in December 2012.

The following table sets forth selected contract drilling operational information for the periods indicated:

                                                 Three Months Ended
                                                     March 31,
                                                2013           2012
              Jackups
              Operating rigs, end of period           4              4
              Available days (1)                    360            364
              Utilization (2)                      98.4 %        100.0 %
              Average daily revenues (3)      $ 150,968      $ 144,543
              Deepwater
              Operating rigs, end of period           2              1
              Available days (1)                    180             91
              Utilization (2)                      88.5 %         98.8 %
              Average daily revenues (3)      $ 509,395      $ 582,454

(1) Available days are the total number of rig calendar days in the period. Newbuild rigs are included upon acceptance by the client.

(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.


Table of Contents

The following table is an analysis of our operating results for the three months ended March 31, 2013 and 2012.

                                                  Three Months Ended March 31,
                                               2013           2012           Change
                                                         (In thousands)
   Revenues
   Contract drilling services               $  134,664      $ 104,998      $   29,666
   Management fees                               3,198          2,722             476
   Reimbursables                                 9,139         24,129         (14,990 )

   Total revenues                              147,001        131,849          15,152

   Operating costs and expenses
   Operating costs                              75,317         69,324          (5,993 )
   General and administrative                    7,427          5,260          (2,167 )
   Depreciation                                 24,861         16,572          (8,289 )

   Total operating expenses                    107,605         91,156         (16,449 )

   Income from operations                       39,396         40,693          (1,297 )
   Other income (expense)
   Interest income                                  96             12              84
   Interest expense and financing charges      (59,662 )      (36,763 )       (22,899 )
   Loss on debt extinguishment                 (98,327 )           -          (98,327 )
   Other income                                    901            645             256

   Total other expense                        (156,992 )      (36,106 )      (120,886 )

   Loss before income taxes                   (117,596 )        4,587        (122,183 )
   Income tax provision                          5,605          5,766            (161 )

   Net loss                                 $ (123,201 )    $  (1,179 )    $ (122,022 )

Revenue: Total revenue for the three months ended March 31, 2013 was $147.0 million compared to $131.8 million for the three months ended March 31, 2012, an increase of $15.2 million, or 11%. Contract drilling revenue totaled $134.7 million for the three months ended March 31, 2013 compared to $105.0 million for the same period in 2012, an increase of $29.7 million, or 28%. The increase in drilling revenue was primarily due to the commencement of operations of the Titanium Explorer in December 2012. Deepwater utilization for the three months ended March 31, 2013 was 88.5% compared to 98.8% in the prior year due to the Titanium Explorer incurring normal and expected levels of downtime after initial commencement of operations.

Management fees and reimbursable revenue for the three months ended March 31, 2013 were $3.2 million and $9.1 million, respectively, as compared to $2.7 million and $24.1 million in the prior year. The increase in management fees is due to the addition of management projects to manage the construction and delivery of four jackups and operations management of one jackup for a customer in Mexico. The decrease in reimbursable revenue is due to reduced reimbursable construction purchases on the shipyard oversight project for the construction of a drillship in China.

Operating expenses: Operating expenses for the three months ended March 31, 2013 were $75.3 million compared to $69.3 million for the three months ended March 31, 2012, an increase of $6.0 million, or approximately 9%. This increase was due primarily to the operating costs on the Titanium Explorer of approximately $20.0 million, increased operating costs due to inflation and increased overhead support of approximately $2.2 million partially offset by a $16.2 million reduction in shipyard oversight reimbursable costs.

General and administrative expenses: General and administrative expenses were $7.4 million for the three months ended March 31, 2013 as compared to $5.3 million for the three months ended March 31, 2012. The increase of $2.1 million was primarily due to increased personnel support costs required to support our expanded operations.

Depreciation expense: Depreciation expense was $24.9 million for the three months ended March 31, 2013, as compared to $16.6 million for the three months ended March 31, 2012. The increase of $8.3 million is primarily due to the addition of the Titanium Explorer to our operating fleet in the fourth quarter of 2012.

Interest expense and other financing charges: Interest expense and other financing charges for the three months ended March 31, 2013 increased $23.0 million over the same period in 2012. The increase was primarily attributable to increased levels of debt outstanding in 2013 due to the acquisition of the Titanium Explorer and for the pre-funding of the upcoming final shipyard payment on the Tungsten Explorer.


Table of Contents

We capitalized $4.1 million of interest and amortization costs in the three months ended March 31, 2013. We capitalized $3.6 million of interest and amortization costs in the three months ended March 31, 2012.

Loss on extinguishment of debt: In the three months ended March 31, 2013, in connection with the early retirement of the remaining $1.0 billion of 11.5% Senior Notes, we recognized a loss of $98.3 million resulting from the payment of early redemption fees and consent fees of $92.3 million and the write-off of deferred financing costs of $24.0 million, which were offset by the early recognition of debt issuance premium of $17.9 million.

Income tax expense: Income tax expense was $5.6 million for the three month period ended March 31, 2013 as compared to $5.8 million for the comparable period in 2012. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions we operate. These taxes in the first quarter of 2013 were consistent with 2012. In some jurisdictions we do not pay taxes or receive benefits for certain income and expense items including interest expense and loss on extinguishment of debt.

Liquidity and Capital Resources

As of March 31, 2013 we had working capital of approximately $456.0 million. Included in working capital is approximately $457.0 million of cash available for general corporate purposes, including the quarterly payments of principal and interest on our $500 million 2017 Term Loan that began in December 2012, the semi-annual interest payments on our 7.5% Senior Notes beginning in May 2013, the quarterly payments of principal and interest on our $350 million 2019 Term Loan beginning in June 2013 and the semi-annual interest payments on our 7.125% Senior Notes beginning in October 2013. Additionally, we have posted $24.8 million cash as collateral for bid tenders and performance bonds. For the remainder of 2013, we anticipate spending approximately $30.6 million on sustaining capital expenditures and $474.7 million for the final outfitting of the Tungsten Explorer, including the estimated final shipyard payment of $417.0 million. These amounts do not include any capitalized interest related to the Tungsten Explorer or our joint venture investment. We expect to fund these expenditures from our available working capital, cash flow from operations and advances under the Credit Agreement, if needed.

The timing of the Tungsten Explorer commencing initial operations is a significant factor that affects our liquidity position in the second half of 2013. The timing and extent of any contracts, and the related customer's acceptance testing and any third party verifications will impact the commencement date of operations and could negatively impact liquidity.

Long-term Debt

As of March 31, 2013 and December 31, 2012, our long-term debt was composed of
the following:



                                                          March 31,          December 31,
                                                             2013                2012
                                                         (Unaudited)
                                                                  (In thousands)
7.5% Senior Notes, issued at par                         $  1,150,000       $    1,150,000
7.125% Senior Notes, issued at par                            775,000                   -
$500 million 2017 Term Loan, net of discount of
$8,928 and $9,539                                             478,572              484,211
$350 million 2019 Term Loan, net of discount of
$5,240                                                        344,760                   -
11.5% Senior Notes, net of premium of $19,726                      -             1,019,725
7.875% Convertible Notes, net of discount of $2,567
and $2,709                                                     53,933               53,791
F3 Capital Note, net of discount of $18,477 and
$19,418                                                        35,023               34,082

                                                            2,837,288            2,741,809
Less current maturities of long-term debt                      41,000               31,250

Long-term debt                                           $  2,796,288       $    2,710,559

Issuance of 7.125% Senior Notes and $350 Million 2019 Term Loan

In March 2013, the Issuer issued $775.0 million in aggregate principal amount of 7.125% Senior Notes. The 7.125% Senior Notes were issued at par, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The 7.125% Senior Notes mature on April 1, 2023, and bear interest from the date of their issuance at the rate of 7.125% per year. Interest on outstanding 7.125% Senior Notes is payable semi-annually in arrears, commencing on October 1, 2013.

Additionally during March 2013, we entered into the $350 million 2019 Term Loan. The 2019 Term Loan was issued at 98.5% of the face value and bears interest at LIBOR plus 4.5%, with a LIBOR floor of 1.25%. The 2019 Term Loan has annual scheduled debt maturities, payable quarterly, of 1% of the original principal amount with final maturity in 2019. The original issue discount, reported as a direct deduction from the face amount of the 2019 Term Loan, will be recognized over the life of the 2019 Term Loan using the effective interest rate method. The 2019 Term Loan is secured on a senior secured basis by us and certain of our subsidiaries.


Table of Contents

The net proceeds, after fees and expenses, from the 7.125% Senior Notes and the 2019 Term Loan of approximately $1.1 billion were used to retire approximately $1.0 billion of the Issuer's existing 11.5% Senior Notes for total consideration of approximately $1.1 billion, including $92.3 million paid for the early redemption and consent fees and $18.2 million for accrued and unpaid interest. The balance of the proceeds is available for payment of transaction expenses and general corporate purposes.

7.5% Senior Notes and $500 Million 2017 Term Loan

In October 2012, the Issuer issued $1.150 billion in aggregate principal amount of 7.5% Senior Notes under an indenture. The 7.5% Senior Notes were issued at par, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The 7.5% Senior Notes mature on November 1, 2019, and bear interest from the date of their issuance at the rate of 7.5% per year. Interest on outstanding 7.5% Senior Notes is payable semi-annually in arrears, commencing on May 1, 2013. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

Concurrent with the closing of the 7.5% Senior Notes, we entered into the $500 million 2017 Term Loan. The 2017 Term Loan was issued at 98% of the face value and bears interest at LIBOR plus 5%, with a LIBOR floor of 1.25%. The 2017 Term Loan has scheduled debt maturities, payable quarterly, of 5% in the first year and 10% in subsequent years with final maturity in 2017. The original issue discount, reported as a direct deduction from the face amount of the 2017 Term Loan, will be recognized over the life of the 2017 Term Loan using the effective interest rate method. The 2017 Term Loan is secured on a senior secured basis by us and certain of our subsidiaries.

The net proceeds from the above described financings, after fees and expenses, of approximately $1.6 billion were used (i) to pay the total consideration and accrued and unpaid interest on a concurrent tender offer of $1.0 billion of our 11.5% Senior Notes and related consent solicitation, (ii) for general corporate purposes, including to fund the final construction payment for the Tungsten Explorer drillship pursuant to the construction contract with DSME, and (iii) to pay fees and expenses related to both of the financings, consent solicitation and related transactions.

11.5% Senior Secured Notes

In July 2010, the Issuer issued $1.0 billion aggregate principal amount of 11.5% Senior Notes. These 11.5% Senior Notes were fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The 11.5% Senior Notes were scheduled to mature on August 1, 2015 and interest on outstanding 11.5% Senior Notes was payable semi-annually in arrears.

In June 2011 and April 2012, the Issuer issued $225.0 million and $775.0 million, respectively, aggregate principal amount of additional 11.5% Senior Notes at a price equal to 107% and 108%, respectively of their face value. In October 2012, we completed a tender offer for $1.0 billion of 11.5% Senior Notes. In March 2013, we completed a tender offer for the remaining $1.0 billion of 11.5% Senior Notes outstanding. In connection with the retirement of the remaining 11.5% Senior Notes, we recognized a $98.3 million loss on debt extinguishment in the three months ended March 31, 2013.

7.875% Senior Convertible Notes

In August 2012, we issued $56.5 million aggregate principal amount of Convertible Notes under an indenture. The Convertible Notes will mature on September 1, 2042, unless earlier converted, repurchased or redeemed, and bear interest at a rate of 7.875% per annum, payable semiannually, in arrears, on March 1 and September 1 of each year, commencing on March 1, 2013. The Convertible Notes are our senior unsecured obligation and rank equal in payment with our other senior unsecured debt but are structurally subordinated to the debt of our subsidiaries as the Convertible Notes are not guaranteed by any of our subsidiaries. We issued $6.5 million of the Convertible Notes to F3 Capital. The net proceeds, after fees and expenses, of approximately $48.3 million were used to fund capital expenditures and working capital needs, and for general corporate purposes.

The Convertible Notes are convertible into our ordinary shares, or a combination of cash and ordinary shares, if any, at our election, based upon an initial conversion rate of 476.1905 ordinary shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $2.10 per ordinary share). Holders of the Convertible Notes may voluntarily elect to convert all, or any portion, of their holdings at any time. In addition, for any conversions prior to September 1, 2017, holders will be entitled to a make-whole payment upon conversion.

The Convertible Notes are subject to redemption at our option on or after September 1, 2015 and before September 1, 2017 if the volume weighted average price of our ordinary shares is greater than or equal to 125% of the applicable conversion price for at least 20 trading days during any 30 consecutive trading day period. Further, the Convertible Notes are subject to mandatory conversion at our option on or before September 1, 2015 if the volume weighted average price of our ordinary shares is greater than or equal to 150% of the applicable conversion price for at least 20 trading days during any 30 consecutive trading day period.


Table of Contents

Credit Agreement

In June 2012, we entered into the Credit Agreement to provide us with advances and letters of credit up to an aggregate principal amount of $25.0 million. In March 2013, in connection with the issuance of the 7.125% Senior Notes and the 2019 Term Loan, we amended the Credit Agreement to increase the aggregate principal amount to $200.0 million and the Credit Agreement will now mature on April 25, 2017. Advances under the Credit Agreement bear interest at the adjusted base rate (as defined in the Credit Agreement) plus a margin of 2.50% or LIBOR plus a margin of 3.50%, at our option. We may prepay outstanding advances subject to certain prepayment minimums at any time.

The Credit Agreement includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens on certain assets, restrict the incurrence of indebtedness and the conveyance of and modification to vessels and require us to maintain certain financial ratios and provide periodic financial reports. Advances under the Credit Agreement are secured by a lien on certain of our assets, which are substantially similar to those assets pledged in connection with the 7.125% Senior Notes, the 7.5% Senior Notes, the 2017 Term Loan and the 2019 Term Loan. We believe we were in compliance with all financial covenants of the Credit Agreement at March 31, 2013. As of March 31, 2013, we have not drawn down any amounts under the Credit Agreement.

F3 Capital Note

The F3 Capital Note accrues interest at 5% per annum and matures in January 2018. If we do not repay the F3 Capital Note on its scheduled maturity date or upon the occurrence of certain customary default provisions, the interest rate on any amounts outstanding under the F3 Capital Note will rise to 10% per annum. In connection with the August 2012 issuance of the Convertible Notes, F3 Capital elected to apply $6.5 million aggregate principal amount of the F3 Capital Note as consideration for an equivalent amount of Convertible Notes. We did not receive any cash proceeds from this direct placement. As a result of this transaction, we recognized a charge of approximately $2.5 million related to the early extinguishment of the debt.

Commitments and Contingencies

On August 21, 2012, we filed a lawsuit against Mr. Hsin-Chi Su, a former member of our Board of Directors and the owner of F3 Capital, our largest shareholder, asserting breach of fiduciary duties, fraud, fraudulent inducement and negligent misrepresentation, and unjust enrichment based on Mr. Su's conduct in his dealings with the Company both immediately prior to and during his tenure as one of our directors. The lawsuit, styled Vantage Drilling Company vs. Hsin-Chi Su a/k/a Nobu Su, is currently pending in the United States District Court for the Southern District of Texas. In the lawsuit, we are seeking to recover actual and punitive damages as well as other relief, in each case, relating to our past transactions with Mr. Su and F3 Capital, including our joint venture with Mandarin Drilling Corporation, an entity formerly owned and controlled by Mr. Su, our acquisition of the Platinum Explorer from Mandarin Drilling Corporation and the financing thereof, and the acquisition of the Titanium Explorer. We can provide no assurance as to the outcome of this legal action.

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. 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.

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 renewal options which would cause our future cash payments to change if we exercised those renewal options.

Critical Accounting Policies and Accounting Estimates

The preparation of financial statements and related disclosures in accordance . . .

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