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Edited Transcript of VTDRF.PK earnings conference call or presentation 5-Mar-20 3:00pm GMT

Q4 2019 Vantage Drilling International Earnings Call

GRAND CAYMAN Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Vantage Drilling International earnings conference call or presentation Thursday, March 5, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas E. Stewart

Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary

* Ihab M. Toma

Vantage Drilling International - CEO & Director

* Thomas J. Cimino

Vantage Drilling International - CFO & Treasurer

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Conference Call Participants

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* Ceki Aluf Medina

Southpaw Asset Management, LP - Partner and MD

* Joshua Katzeff;Deutsche Bank Securities;Director

* Lukas Daul

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Patrick Grow

HBK Investments L.P. - Distressed Credit Analyst

* Patrick John Fitzgerald

Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Vantage Drilling International 2019 Fourth Quarter and Full Year Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Douglas Stewart, General Counsel. Please go ahead, sir.

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Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [2]

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Thank you. Good morning, everyone, and welcome to the Vantage Drilling International 2019 Fourth Quarter and Annual Earnings Conference Call. On the call today are also Ihab Toma, our CEO; and Tom Cimino, our CFO.

This morning, we released our earnings announced for the quarter and year ended December 31, 2019. The earnings release is available on our website at vantagedrilling.com. Please also 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 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, there will be a question-and-answer session.

Now let me turn over the call to our CEO, Mr. Ihab Toma.

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Ihab M. Toma, Vantage Drilling International - CEO & Director [3]

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Thanks, Douglas, and good morning, everyone. 2019 was another successful year for the company, even as the industry continues to work through some persistent challenges. Vantage has differentiated itself from our competitors in multiple ways, which I will take advantage of this call to go into in some detail. This has been accomplished in no small part by our firmly embedded culture of delivering the high level of service our client expects from us and through our continued focus on our 3 corporate goals, which are: One, maintaining our stellar safety and operational performance; two, putting all of our rigs to work; and three, reducing costs and preserving cash.

Beginning with safety and operational performance, which is our first and most important corporate goal, I'm proud to say that we had another safe and operationally strong year. For 2019, we reduced the number of recordable incidents throughout our fleet by 17%, yet we continue to strive for an incident-free environment and achieving our vision of a perfect day, every day. This incident-free vision has been proven possibly by our Emerald Driller rig as I'm proud to report that the rig did not experience any safety incidents in 2019. This means that the rig did not even have a first aid case in the entire year of operations. This is an amazing result that proves that incident-free operation is possible in the offshore drilling industry. Additionally, 3 other rigs did not have any recordable incidents throughout the year. Fleet-wide, we have achieved our lowest year-end total recordable incident rate, TRIR, in the company's history. Our TRIR has shown a steady drop for the past 3 years, which coincides with the implementation of our Perfect Day Leadership program. I attribute this continued good result to the sharp focus of our offshore teams on the foundations of our Perfect Day Leadership program, which is fully supported by all levels of our organization.

Incidents are preventable, and it is this degree of commitment at all levels that prevent them from occurring. The life, safety and health of our people and the protection of the environment where we work are our most important responsibility as a company, and we take this responsibility very seriously. We will continue to strive to make sure we provide the safest work environment of any international offshore drilling company so that everyone on our rigs and officers can go home safely to their families.

Operationally, 2019 was also our most successful year. We received $0.997 from every available dollar of backlog when accounting for bonuses. For those of you that closely follow the industry and our peers, 99.7% revenue efficiency is simply amazing, especially when you factor in changes in clients and locations due to the short nature of some of our contracts. Revenue efficiency directly correlates to uptime and general rig performance.

Zooming in now on rig by rig. The Tungsten Explorer achieved 99.3% revenue efficiency following its 5-year survey and mobilization to Egypt for Dana Gas and subsequently for Petrobel. This performance underlies the rig's continued presence among the very tough ultra-deepwater units in operation. The Platinum Explorer achieved 96.4% revenue efficiency and continued to deliver results for our esteemed client, ONGC in India.

Our jack-up fleet knocked it out of the park, with the Sapphire Driller, the Topaz Driller, the Aquamarine Driller and the Emerald Driller achieving revenue efficiency of 103.2%, 102.7%, 100% and 97.7%, respectively. These levels of operational excellence keep our rigs ranked high on customers' list, making it easier for us to achieve our second goal of putting all of our rigs to work. This also allows us to start refocusing the second corporate goal to increasing day rates. During 2019, all of our 7 marketed rigs had contracts, adding approximately $166 million of backlog during the year, which covered 2,040 days of firm work. For 2020, we have approximately 75% of our available marketed rig days booked through firm contracts and 86%, including the letters of award received for options that are expected to be exercised. For 2021, we have approximately 25% of our available days under contract or letter of award.

I will take you through a rig-by-rig update on utilization and directional contract economics. The Emerald Driller continued to work for Total in Qatar in 2019 and has secured a 1-year extension starting Q2 2020, with a 1-year unpriced option to follow. The Sapphire Driller continued to work for ENI in the Republic of Congo and has also secured a 1-year extension starting Q2 2020. Both of these extensions are at a meaningfully higher day rate than their current rates.

The Topaz Driller was fully utilized throughout 2019 in Gabon, with contracts of superior economics, which reinforces our decision to move the unit from Southeast Asia to West Africa in 2018. We attribute the Topaz Driller's success to the close working relationship we have with Total and ENI, which has then led onto the positive campaign for Vaalco Energy. As you would have seen in the press, Vaalco has had excellent production and exploration successes during this campaign, and hence, continued to exercise their options on the Topaz Driller. During the second quarter of 2020, following the Vaalco campaign, the rig will undertake a short contract in Congo with our repeat client, New Age, at an improved day rate. Subsequent to Congo, due to a recently received letter of award, the rig should be mobilized to its next contract that will keep it busy into early 2021. This letter of award is for our first contract in a while with a clean day rate above $100,000 a day, which reflects the excellent reputation of the rig and the tightness of the premium jack-up market. This is a very important milestone that we are very proud of.

The Aquamarine Driller continued to operate for CPOC in 2019 and should complete its current contract in May. We are at the final stage of negotiations to secure its follow-on work in the region.

Finally, the Soehanah has successfully completed its bareboat charter that extended in January and has undertaken a short scheduled redelivery work, scope and upgrade. Following this out-of-service work, the rig will soon mobilize to its first Vantage stand-alone job for Ophir and Medco in Indonesia.

Keeping the rig utilized in direct continuation has improved terms and economics and in the same region, continues to show the strength of the jack-up business and that Vantage and these high-specification units are desired by operators.

Moving to the deepwater business. The Tungsten Explorer had a very successful campaign in Egypt in 2019, as mentioned in my earlier remarks. Following Egypt, the rig has recently mobilized to Lebanon where it has started an important campaign for Total and for Lebanon, as this is the first offshore well ever to be drilled in the country. This campaign is so significant to the country of Lebanon that we had the pleasure of hosting the country's President, Prime Minister and Energy Minister and the host of our customers' VIPs onboard the rig last week.

After Lebanon, the rig will start a multi-well campaign in the Mediterranean where the managed pressure drilling, MPD, system will be utilized. As you may recall on our prior calls, we have installed the latest generation modular MPD system on the Tungsten Explorer, and we look forward to the benefits that this system will bring to our clients.

The Platinum Explorer continued to provide uninterrupted services to ONGC, achieving over 97% uptime in 2019. We are proud of the rig performance for ONGC and look forward to continuing to provide industry-leading performance to this valued client as they continue increasing their overall drilling programs.

Lastly, the Titanium Explorer continues to be maintained as available in South Africa, with all equipment being maintained and operational. Due to this rig's specifications, especially its off-line capabilities and its 2.5 million pound hook load capacity, the rig remains an eligible candidate for opportunities. We continue to have conversations about this rig with clients and continue to look for opportunities that will provide enough economic returns to justify bringing the rig back to the market.

Before I move to the third quarter goal, I would like to highlight that the current market tightness is allowing us to shift our attention and start focusing on increasing day rates as has been demonstrated by the latest contracts and extensions.

I will now report on our third corporate goal of reducing costs and preserving cash. As we disclosed in 2019, Petrobras and Vantage entered into an agreement on June 20, 2019, under which Petrobras paid our 2 subsidiary claimants in the dispute, Vantage Deepwater Company and Vantage Deepwater Drilling, Inc., an aggregate of approximately $701 million. As publicly disclosed on November 18, 2019, our Board of Directors authorized and directed the conversion of all of the company's then outstanding senior secured third lien convertible notes into common shares of the company. In addition, we announced that Vantage Deepwater Company and Vantage Deepwater Drilling Inc. purchased adjustment preservation insurance policy.

Subsequent to these events, a special cash distribution in the aggregate amount of $525 million was paid in December 2019. This special cash distribution attests to both the company's commitment to returning excess cash to shareholders and also to our superior balance sheet position at a time that liquidity and leverage are the key factors in determining the financial strength and longevity of a drilling contractor.

As of December 31, 2019, the company had approximately $242.9 million in cash compared to $239.4 million at the end of last year. Tom will be giving more details regarding our cash position and financial performance shortly.

With net debt of only $108 million, 7 rigs on contract and an improved overall market, Vantage is well positioned, thanks to our laser focus on these 3 corporate goals to continue to outperform the industry and add value to our shareholders.

With that, I would like to turn the call over to Tom to take you through the numbers.

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Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [4]

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Thank you, Ihab, and good morning, everyone. As previously mentioned, 2019 was another good year for Vantage, both operationally and financially. We streamlined our capital structure, we paid a substantial cash distribution and we closed the year in a stronger cash position in its close of the prior year, finishing the year with $242.9 million and only $108 million of net debt.

In the fourth quarter, we executed a number of transactions that provided clarity to our capital structure. The first event is converting our senior secured third lien convertible notes into common shares. This resulted in the company issuing approximately 8.1 million new common shares and the company having approximately 13.1 million common shares outstanding post conversion. These notes were issued in 2016 and the outstanding principal amount as of the conversion date was approximately $776 million. Conversion eliminates a significant noncash financing charge and going forward, under the current structure, our income statement will include only the interest on our existing $350 million first lien debt.

The next transaction relates to the funds received from the Petrobras arbitration award, in relation to the early termination of the Titanium Explorer contract. As a reminder, in June, the company's subsidiaries received a $701 million payment from the subsidiaries of Petrobras and, in the fourth quarter, the company obtained judgment preservation insurance to ensure against the contingency of being required to return the payment for Petrobras to ultimately succeed in the appeal. Subsequent to securing insurance, the company declared a distribution in the aggregate amount of $525 million or $40.03 per share following conversion. This distribution was paid in December. With the conclusion of the above-mentioned events, and as previously mentioned, the company ended the fourth quarter with $242.9 million of cash, including $11 million in restricted cash compared to the $825.1 million, including $10.4 million in restricted cash at the end of the third quarter.

Working capital for the quarter ended at approximately $269.3 million compared to $837.1 million at the end of the prior quarter. The decrease in both cash and working capital is directly attributable to the $525 million distribution, the insurance and compensation expense related to the distribution and to a $16.2 million interest payment made in the fourth quarter.

For the fourth quarter 2019, we achieved revenues of approximately $49.3 million compared to $43.1 million in the fourth quarter of 2018. This increase was mainly due to higher efficiencies on the Platinum Explorer and higher utilization on the Tungsten Explorer. Additionally, we had bareboat charter revenue related to our Soehanah jack-up, which was purchased in late December 2018. In line with this, during the fourth quarter 2019, we had 7 rigs working throughout the quarter compared to only 6 rigs working in the comparable quarter 2018.

Revenues for the quarter compared favorably to the $40.6 million reported in the third quarter of this year. The increase is primarily attributable to the Tungsten Explorer, which operated for 77 days in the fourth quarter versus only 26 days in the third quarter when it was idle and mobilizing between jobs.

Operating costs in the fourth quarter of 2019 totaled approximately $42.4 million compared to $42.1 million for the comparable quarter 2018. Costs are in line with the comparable quarter, with offsetting variances across the fleet. The Tungsten Explorer costs were lower in 2019 as the comparable 2018 quarter included demob cost and 5-year maintenance expenses. These costs were offset by marginal increases across the remaining fleet, including costs to maintain the condition of our warm stacked drillship, the Titanium Explorer.

General and administrative expenses for the fourth quarter of 2019 were approximately $42.5 million as compared to only $6.6 million for the comparable quarter in 2018. Fourth quarter of 2019 included $30.5 million for the purchase of previously mentioned judgment preservation insurance, management incentive award expense of $4.7 million, and a $1.7 million nonrecurring expense associated with the ongoing Petrobras appeal and other nonroutine legal matters. The comparable quarter of 2018 included approximately $2.2 million of nonrecurring expenses related to Petrobras and other legal matters.

Current quarter G&A expenses were also higher than the reported $6.6 million in the third quarter this year, which included approximately $800,000 of nonrecurring legal costs.

Depreciation for the fourth quarter was approximately $18.3 million, which is marginally lower than the previous quarter of $18.5 million. Financing expense for the fourth quarter is approximately $9.9 million, including noncash charges of approximately $1.8 million. The net result was a loss attributable to shareholders of $61.4 million for the quarter, or $8.22 per share. Contract utilization for the fourth quarter was approximately 99.1% for the jack-ups and 61.1% for the drill ships as compared to utilization of approximately 96.6% for the jack-ups and 35% for the drill ships for the comparable quarter 2018. The increase in drill ship utilization is primarily due to the Tungsten Explorer operating 51 more days in the current quarter. As at the end of the year, we had approximately $149 million of backlog.

And with that, I will now turn the call back over to Ihab.

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Ihab M. Toma, Vantage Drilling International - CEO & Director [5]

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Thanks, Tom. The industry continues to deal with high leverage and liquidity challenges. After that, we are now dealing with the uncertainty around the coronavirus and the potential impact on the world economy and oil and gas demand. On a positive note, we did see the fundamentals of rig supply and demand...

(technical difficulty)

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Operator [6]

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Ladies and gentlemen, please standby as we're experiencing a momentary interruption in today's conference. Thank you for your patience. Please continue to hold.

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Ihab M. Toma, Vantage Drilling International - CEO & Director [7]

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Hi, everybody. I hope you can hear me now. I guess our conference call provider cannot blame this on coronavirus. So hopefully you're not listening to elevator music anymore and let me continue the call. And happy, during the Q&A to start doing some of the clarification of anything that you might have missed because of all these interruptions. Again, really apologize about that. So, yes, I was talking about on a positive note when I got cut off, we did see the fundamentals of rig supply and demand for both the shallow and ultra-deepwater segment continuing to demonstrate strength in late 2019 and in early 2020. Total shallow water utilization for unit built post-2000 has reached 86% and marketed utilization has reached 91% and continue on a year-on-year positive trend. We trust that this trend will continue based on the serious -- based on the various incremental programs we see in the market, and therefore, we see the healthy day rate trend continuing. We are seeing evidence of this already in our recent awards, market pricing and clients are willing to pay higher rates for companies and rigs with good reputation. And interestingly, we are seeing longer-term contracts coming back strongly in the market for jack-ups as clients try to lock good rigs on longer-term contracts.

The ultra-deepwater segment has also demonstrated improvement, and we have now reached marketed utilization for sixth- and seventh-generation drillships of over 90%. This is the highest level of utilization since the downturn and with approximately 135 floaters having been scrapped, most regions are reaching an active supply-demand balance. With oil companies' improved break-even barrel price, their need for reserve replacement, coupled with contracting discipline by contract drillers, we believe that the sixth- and seventh-generation drillship segment continue to achieve the necessary improvement in rates.

In summary, aside from the uncertainties recently added by the coronavirus, the industrial fundamentals of the offshore drilling business remain the strongest since the start of the downturn. And Vantage, with its well-capitalized balance sheet and 88% of its units utilized, is well positioned to continue to deliver excellent service to our customers and add value to our shareholders.

With that, I will ask the operator to open the call for question and answers. And one more time, I apologize for all those issues that we had during the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our question from Patrick Fitzgerald from Baird.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [2]

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I'm wondering, you still have a lot of cash. Your high coupon debt is trading well below par. What's the strategy with the debt now that you've done the $525 million equity dividends?

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Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [3]

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Thanks, Patrick, this is Tom. You're right that, that is trading -- I think, it's well below par. It is slightly below par, and that's something that we monitor. But we will continue to maintain our strong balance sheet position, especially in this environment, and we feel that the current capital structure is where we want to be with the $242 million that we closed the quarter or the year-end with. So we like the position that we're in right now.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [4]

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Okay. Do you have -- I mean do you have any additional capacity under the bond indentures to pay dividends to the equity at this point? Or did you -- you used that up, is my understanding. Is that correct?

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Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [5]

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There was -- there's capacity under the indentures, specifically carve-out for Petrobras proceeds. There is a piece there that we can use. However, we continue to evaluate, as Tom mentioned, our balance sheet and maintaining that strong balance sheet so, otherwise, there's no other carve-outs under the indenture at this time.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [6]

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How big is that remaining piece?

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Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [7]

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Approximately $100 million.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [8]

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Okay. What is your expectation for cash flow this year?

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Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [9]

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Yes, we don't put out forecasted numbers. But looking at the historical numbers, we did add some cash net-net of the Petrobras cash that came in. So there were some cash there, we did burn some cash, but really, what I can tell you is, going forward, that operations will continue to generate cash. We do have some one-off payments that are accrued on our balance sheet, and we'll burn some cash probably about the level of our interest for the year. That's the $32 million. But on an operation basis, we are generating cash on an unlevered basis.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [10]

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Got you. That's helpful. Do you expect your blended day rates to change much in 2020? I mean I got your commentary on the Topaz Driller, so that should be helpful. But you're $65,000, roughly, for the jack-ups and $107,000 a day for the drillships, you're talking about an improved market. But do you expect your blended day rates to actually improve this year?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [11]

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Yes, Patrick, I think it was right in the middle. One of the interruptions were right in the middle when I was talking about, directionally, all the new contracts and extension and where the economics of per contracts are going, and I did that rig by rig. And yes, what I can tell you is every rig we have is repricing up, whether because it's an extension on the current contract or moving to a new contract that is at a higher rate, every single one, except for the Platinum, which is still continue with the same contract that this was a 3-year contract and still has a about a year to go. So every other rig is definitely pricing up quite nicely.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [12]

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Okay. So the $100,000 that you called out are -- over $100,000 a day, $100,000 a day, that's kind of the bright spot. The other ones are going to be above where they are currently, but maybe not as high as that. Is that fair?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [13]

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Yes. I would say, directionally, again, most of the repricing for the jack-ups is happening in Q2. I would say directionally, between 20% to 40% increase on all of them.

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Operator [14]

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(Operator Instructions) We'll now take our next question from Lukas Daul from ABG.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [15]

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Ihab, what's your comment on the tightening market, both in the premium jack-ups and also the high-end ultra-deepwater floaters? I mean how are you thinking in terms of going longer on some fixtures? Or do you sort of intend to pick up work on a back-to-back basis and keep it relatively short? Or what's your thinking there?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [16]

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Your question, Lukas, has 2 elements to it. One is how tight is the market getting, and the second, how much appetite do we have for longer-term contracts, which would then, in this case, would be building up backlog but limiting our ability to take the higher day rates as the market continues to tighten. So again, the market is getting very tight for premium jack-ups as proven by the increases in rates that we have been able to achieve and the back-to-back contracting that we have been able to achieve for all our rigs. For drillships, drillships sixth-gen and seventh-gen rigs are also getting to a very nice place with a 90% utilization. You have 77-or-so drillships out there that are not cold and about 70 of them are on contract, plus some of this remaining 7 going on contract that we are all aware of, but they are not yet in the marketplace.

So in terms of tightening and then, as a result, getting the higher day rates, unless, again, the coronavirus uncertainty starts to impact this, this is pretty much something we're very confident of. What's not going to necessarily happen is clients committing themselves to longer-term contracts than they need. They have all got burned in the past by doing that, they have to pay big termination fees or continue with rigs at much higher rate than market, and they are going to avoid doing that as much as they can. So day rates are going to go up, but terms for drillships may still be driven by the length of exploration programs and driven by clients going out and giving a certain number of wells that's firm and doing then even more wells as optional. And I think we'll start -- we'll continue to see that in 2020 until some of those developments -- long developments start to come in force and start to take rigs off the market for multi-years. I think we'll see exploration type of contracting, driving how rigs are getting contracts, in terms of particularly talking about deepwater in this case in 2020. But jack-ups is other way around. People are really going out of their way to lock up rigs on long term, 5 years and 10-year contracts as we have seen. On that, we have lesser of an appetite to lock our rigs on that -- on current day rates or even the $100,000 a day type day rates for the next 3 to 5 to 10 years. We will not want to do that.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [17]

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Okay, that's good color. And then I don't know if you commented on the Titanium Explorer because the line broke up a couple of times. But are you sort of in a position where you are considering bringing it back? Or what's your thinking there?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [18]

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Yes. I mean, you're right that the line broke during that part of the call again. Yes, we are having conversations. The rig is our wanted rig. It's a good sixth-gen rig. It has excellent off-line capabilities, it has 2.5 million pounds hook load. And rigs are getting tight. And very soon, clients will have to take rigs that are not currently working. As I said, out of the 77, 70 are in contracts and a bunch more of the remaining 7 are going on contract soon. So very soon, rigs that have not worked for a while are going to be needed to come out. Our rig is in perfect condition. We have been spending good money on it while it is stacked. We have between 18 to 23 people on the rig at any given time taking care of it. The equipment are being maintained. If there are repairs that need to take place, we are getting repairs. So the rig is going to be high up on the list of clients at that point they start to look at rigs that are not active today, and that is not too far in the future. But we need to make sure that the job we get for that rig will justify us bringing it and adding it to the market as well as spending the money on reclassification and things like this to get it out and proving the rig, of course. So we are being patient, and we are not keeping it away from the market completely, but we're also not going to rush it into any job that moves.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [19]

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And do you have a rough estimate of what the cost of bringing it back would be?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [20]

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I'll pass that to Tom.

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Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [21]

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Yes. It's about $30 million. $30 million range is what we've said. We have alluded to, we are spending some cash now on labor just to stay on top of what needs to be done, but we're at that $30 million range for reactivating it.

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Ihab M. Toma, Vantage Drilling International - CEO & Director [22]

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Just to clarify what we're spending the money on. Now we're making it to make sure we are derisking the reactivation. So when we say we think we have a range for the reactivating cost of so and so, then we are going to be staying within that range. I'm not going to have surprises either on cost or trying to bring the rig out.

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Operator [23]

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We'll now take our next question from Patrick Grow from HBK.

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Patrick Grow, HBK Investments L.P. - Distressed Credit Analyst [24]

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Tom, you cited that there might be a few onetime cash expenses or outflows this year. Can you kind of just go through what those are in amount and timing?

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Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [25]

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Yes, sure, Patrick. The majority of the nonrecurring onetimes are behind us. Those are with -- obviously had a history with clearing up the S&C and some of the other kinds of stuff with it. Really high onetime item that's an accrual that's on our balance sheet, it's approximately $15 million that we consider a onetime cash payment, and that's a lingering liability from, actually, the restructuring that's been on our balance sheet for some time, and we're hoping to clean that up here in the first half of this year.

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Patrick Grow, HBK Investments L.P. - Distressed Credit Analyst [26]

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Great. And then I might have missed it but on the Aquamarine, did you guys kind of give color -- or could you give color on the second half, and what some of the prospects you're seeing there might be for that rig?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [27]

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Well, Patrick, because we are, as I mentioned, again, I don't know if you heard it or not, in final stages of negotiation, I will not be able to comment much on that. But the rig is a very wanted rig in Southeast Asia. The region is very hot for tenders. I'm sure you can look in the press to see how many active tenders right now that are yet to be awarded. So yes, we are very confident that this rig will be doing very well in the second half of the year.

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Patrick Grow, HBK Investments L.P. - Distressed Credit Analyst [28]

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Great. And last one. The Topaz, which it sounds like it- that's great, that it's going to be in higher rates. Do you know how long or what the cost expense -- the costs associated with the mobilization in between the Vaalco contract and the Congo contract?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [29]

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Again, I will not comment on things that we don't have in the public domain. But what I can tell you is that, that is covered by mobilization fees that are being charged to the client, which is also a change from the past, right, where contract drillers have to eat all this time and all this cost between contracts, we no longer have to do that.

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Operator [30]

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We'll now take our next question from Joshua Katzeff, Deutsche Bank.

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Joshua Katzeff;Deutsche Bank Securities;Director, [31]

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First, congratulations on a big quarter. I just wanted to follow-up on the Aquamarine, understanding sensitivities around commenting around the contracts itself. But is that going to be similar to your Topaz comments where if there's any gap in work that will be covered by mobilization? Or is that going to be a direct continuation of the contract from a utilization standpoint?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [32]

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Josh, thanks for the good question. What we are also able to do now is to be able -- to a little bit to pick and choose. So when there are good opportunities for the Aquamarine that would give us direct continuation back-to-back with the CPOC contract, we would prefer that over one that might have a gap, and then we have to then get into conversations about who is going to cover that gap. And those conversations are happening. And again, we're pretty confident that we're going to have a good contract that has a minimum interruption. It's any.

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Joshua Katzeff;Deutsche Bank Securities;Director, [33]

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Got it. And then maybe switching over to the drillships before I get to my favorite topic. On the Tungsten, I guess, you haven't disclosed day rates, but I guess, can you just put the day rates of the current contracts in Lebanon? Or do you have a follow-on work you have within the broader market? It is a market rate contract?

And then on the options, are those, again, kind of market rate? Are they fixed price? And then at what point do they have to declare those options? So when will you have an idea whether those are firm or not?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [34]

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So in terms of the pricing, it is market price -- if you take the reference where those contracts were being negotiated. So it's probably a little bit less than current market price that those contracts are being initiated today, but these contracts did take place a good year ago or so. So that would have been the good spot rate or whatever for that time, not spot rate but contract rate for that time. But what I can tell you, I gave a bit of a range earlier, saying 20% to 40% pricing up, and that rate would be on the high end of that range from that contract in Egypt. And on the -- whether the options are priced or not, they are priced, yes.

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Joshua Katzeff;Deutsche Bank Securities;Director, [35]

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And timing for when they have to declare those, so when we'll have an idea whether those -- if that's firm or not?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [36]

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I don't have that at the top of my head, Josh, but it is definitely -- with enough time to be able for us to decide what to do with the rig and so on, we'll make sure of that now. Again, in the past, we could not be choosy and the client has until the last minute, if you like, to decide. That's not the case anymore. We have ample time to decide if we have to find a different contract for the rig or not. The good news, again, is that the market is hot and sometimes, you actually prefer that an option doesn't get exercised because then the rig can get another contract at a higher price.

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Joshua Katzeff;Deutsche Bank Securities;Director, [37]

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And then on the Titanium. I guess just trying to get a sense of -- I understand maybe there's not a current contract that justifies bringing it out right this second. But as you mentioned, the interest has increased for that rig. Is there -- are you getting opportunities to see that rig work, albeit on shorter-term contracts so it's not worth it? Or are, I guess, your clients just sitting back and saying, "Hey, what's -- keep all the -- let's keep focusing on the hot rigs, I'm going to start talking about some of these warm stacked rigs for the future." I was just curious whether even -- whether there's an opportunity to get that rig hot immediately, even if it might not economically warrant it?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [38]

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Yes. As you said, this is your favorite topic, Josh, but my answer wouldn't change. We -- if we are to try to buy ourselves into getting a short-term job and take it way below market to get the rig out, we can, but we're not going to do that.

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Joshua Katzeff;Deutsche Bank Securities;Director, [39]

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Got it. And I guess, we just saw the Meltem -- or I guess the reason the Meltem is now moving to the Gulf of Mexico for a contract, a rig that's never worked before. I mean, I guess, how do you put the Titanium up against some of those other, maybe, newer but unproven or other rigs without working histories?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [40]

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I mean it is a very good example of clients now not insisting on taking hot rigs that have worked with immediate track record. People are now accepting that they have to start looking to the rigs that are not working today and have not worked. And as you said, in this case, it's a rig that has never worked before. So it depends on the client's preference. Is it -- are they looking for very high-specification rig at a good price or looking for a rig that has worked before and has the track record of having delivered. And both will have their flavor and both will have preference by different clients. And it's just -- we read very positively in the fact that the rig is being mobilized in the Gulf of Mexico for a contract.

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Operator [41]

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At this time, there appear to be no further questions. I would like to turn the conference back to you for any additional or closing remarks.

Pardon me, we just have a question that come in from Ceki Medina from Southpaw.

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [42]

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Congratulations, gentlemen, a good quarter. All right, can you give us -- this is the actual question, some time line on the appeals process? When is it going to be heard? And how much time does it usually take for the appeals court to decide?

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Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [43]

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Sure. We anticipate that there will be an oral argument set in the next few months, and we're -- we believe it's likely that a decision will be rendered this year. That's the color I can give with respect to the time.

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [44]

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Okay. Second, can you remind us what the backlog was as of the end of the third quarter, so I can compare it with $141 million, you said?

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Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [45]

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Yes. I think it was around $140 million, and we finished at $149 million, I think, is what we put here at year-end. So it's a marginal increase.

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [46]

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Very good, okay. Ihab, you noted the customers' preferences moving between either paying up for a proven sixth- to seventh-gen rig or being willing to take a rig with lesser or no work history as in the case of the one that Josh said. I guess, there is another one option, which is taking a rig with lesser qualities. Do you see any customers going in there? Maybe they selected a very good rig or a highly capable rig despite the fact that their requirements did not necessarily necessitate the use of such rig and they're going back to hiring what they require. Do you see that -- to cut price, do you see that happening?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [47]

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Look, Ceki, most clients now have kind of, let's me say, tested blood and have seen what the model rigs can do compared to the lesser rigs. And I think it will be very difficult for them to really go back until -- unless there's a huge bifurcation in day rates, which it is a possibility, of course, but at the moment, we don't see it in the marketplace.

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [48]

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Okay. And lastly, we do see, I mean you said contracts are short-termed on the ultra-deepwater drilling space, and there are several contracts ending in the second half of this year. So we have heard chatter that there is going to be a suppression of rates when it comes to negotiations that start at that point in time. Do you see that happening? Or you're not feeling as much -- or you're not seeing it as much, generally?

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Ihab M. Toma, Vantage Drilling International - CEO & Director [49]

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As I said, the clients are accepting that those low rates what we have seen over the last few years are not going to be there anymore. And they are a lot less than fit to those rates. Some numbers, I think, I gave in previous calls. One of the majors telling me that the spread cost when they hire a rig used to be $1.1 million to $1.2 million a day. Now it's about $450 million. And the rig cost is less than half, 1/4 or 1/3 or 1/4 of that number. So even if those rates start to even double, we still have sitting at half of the spread cost of what it used to be a few years ago or when the activity was really at the peak. So they have a big room to move up and still be okay with their economics for their projects and so on. What they will not want to do is to go out of their way and give longer work just for the sake of it. Again, when markets were very tight, clients had to give 3-year contract, 5-year contract and longer to even have anybody willing to offer them a rig. Today, they are able to get rigs. "Higher day rate is fine, but we are not going to go and just give you 5-year contracts just for the sake of it."

Unless they have -- just to clarify, unless they have 5 years of work, right? So if we have a development in the 5 years or at a few years or whatever, they will give that long. As a matter of fact, they will want to give that length of time because they will not want to take the uncertainty that at the end of their development, they don't have a rig or they have the rig but it's much, much higher. But what I'm saying is they are not going to give the work too long unless their work is long.

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Operator [50]

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At this time, there appears to be no further questions. I would like to turn the conference back to you for any additional closing remarks.

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Ihab M. Toma, Vantage Drilling International - CEO & Director [51]

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All good. Thank you very much. Again, one last time, I apologize for the technical issues we have on this call, and we'll make sure they will never happen again.

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Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [52]

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We look forward to speaking with you next time to talk about our results for the first quarter of 2020.

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Operator [53]

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Thank you for your participation. You may now disconnect.