U.S. Markets close in 1 hr 6 mins

Edited Transcript of VTGGF.PK earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Vantage Drilling International Earnings Call

GRAND CAYMAN Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Vantage Drilling International earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Ceki Aluf Medina

Southpaw Asset Management, LP - Partner and MD

* Joshua Katzeff

* Patrick John Fitzgerald

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Vantage Drilling International Third Quarter 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Douglas Stewart, General Counsel. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

This morning, we released our earnings announcement for the quarter ended September 30, 2019. The earnings release is available on our website at vantagedrilling.com. We intend to file our quarterly report on Form 10-Q later today. 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 the 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 the call to our CEO, Mr. Ihab Toma.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Douglas, and good morning, everyone. As I have done in previous quarterly calls, I will start by reporting the state of our business, measured against our key corporate goals. By being disciplined in the pursuit of our goals, we have achieved healthy results despite this unprecedented downturn.

Our corporate goals are: one, maintaining our stellar safety and operational performance; two, putting all of our rigs to work; three, reduce costs and preserve cash.

I will start with the company's first and most important goal, the safety of everyone working on our rigs and the protection of the environment where we work. As of the end of the third quarter of 2019, we had only 3 recordable incidents in 2019 throughout our fleet. However, we continue to strive for incident-free environment and achieving our vision of a perfect day every day.

On that front, I'm proud to report that 5 of our 7 operating rigs have been recordable incident-free for over a year now, with the Topaz Driller and the Titanium Explorer, completing 5 years without any lost time incidents, and the Sapphire Driller continuing its run with over 10 years without lost time incidents. I attribute this continued good results to the sharp focus of our offshore teams on the foundations of our Perfect Day Leadership program and to our newly refreshed competency management program, with the use of on-the-rig simulators that we now have on all of our rigs, with a mandatory curriculum for all drilling and lifting positions. These programs are fully supported by all levels of our organization, including executive management, all of whom participate in regular on-site safety audits offshore. This disciplined and cultural approach to our safety and following procedures is what stops, preventing those incidents from occurring so that we can send everyone home safely to their families and protect the environment where we work.

Operationally, we continue to satisfy our clients and maximize our contract dollars as we have finished another quarter with over 99% revenue efficiency, 101.8% for the jack-ups due to the achievement of bonuses and 95.4% for the drillships. These levels of operational excellence continue to make the job of our marketing team much easier, which takes me to a second goal of putting all of our rigs to work. I'm happy to confirm that we have recently added 2 years of quality jack-up backlog, with a 1-year extension on the Emerald Driller of Total in Qatar, with an additional year on priced option, and the 1-year extension on the Sapphire Driller for ENI in the Congo, both at improved day rates and superior overall contract economics and terms and conditions.

In addition, we have issued 2 letters of intent for the Soehanah for work in Southeast Asia. Prior to commencing these jobs, the rig will go to Singapore during the first quarter of 2020 for its underwater survey and for its integration into Vantage's operational processes and systems.

Moving to our drillships. I'm pleased to report that the Tungsten Explorer was awarded a 77-day well and commenced operations offshore Egypt for Petrobras. Upon completion of the Petrobras work, the rig will mobilize the (inaudible) to drill the first deepwater well ever to be drilled in the country. The drilling operation for Petrobras in Egypt has started in October and is currently underway. This operational continuity in the Eastern Mediterranean region is providing the best alternative for the rig as we avoid expensive mobilizations, while taking full advantage of the cost competitiveness of our Egyptian joint venture.

Lastly, I would like to report that our plans remain unchanged for the Titanium Explorer, although during the current 2020 budgeting cycle, we spent a significant amount of time, reconfirming our reactivation scope and its related costs. We maintain that we will take a disciplined approach to building this rig and will only bring it out when sufficiently meaningful term and day rate can be achieved.

I will now report on the third quarter goal of reducing cost and preserving cash. As we have previously disclosed, Petrobras and Vantage entered into an agreement on June 20, 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. Accounting for such payment, we finished the quarter with approximately $825 million of unrestricted and restricted cash and equivalents. Tom will have more comments on this in his remarks.

With a sustainable cost structure and the liquidity, and a healthy net debt in a market where liquidity is priced and leverage is penalized, we have differentiated ourselves from the competitors and have been given the opportunity to concentrate on pragmatically running our business and to continue to add value to our customers and shareholders.

With that, I would like to turn the call over to Tom to take us through Q3 and the numbers.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Ihab. Good morning, and welcome, everyone. With no long-term debt maturities until November 2023 and our demonstrated ability to manage our liquidity and monitor our cost, we're well positioned to capitalize on a recovering market. In line with this, the company ended the third quarter with approximately $825.1 million of cash, including $10.4 million in restricted cash compared to $896.8 million, including $10.4 million in restricted cash at the end of the second quarter. The decrease in cash is primarily due to the one-time legal fees directly related to the receipts from Petrobras and the payment of related taxes.

Working capital for the third quarter ended at approximately $837.1 million compared to $846.9 million in the previous quarter.

For the third quarter of 2019, we achieved revenues of approximately $40.6 million compared to $64.6 million for the third quarter of 2018. This decrease was mostly due to the lower day rates and lower utilization on the Tungsten Explorer while operating in Egypt, compared to a full quarter of operations at a higher day rate in the comparable quarter of 2018. We had 7 rigs working during the third quarter of 2019, including the Soehanah jack-up, which was acquired in the fourth quarter of 2018.

Total revenues for the quarter compared unfavorably to the $636.4 million reported in the second quarter, due to the $594 million of contract termination revenue related to the Petrobras award. Contract drilling revenues, however, were $35.8 million for the third quarter and in line with the second quarter revenues.

Operating costs for the third quarter of 2019 were approximately $37.9 million compared to $43.3 million for the comparable quarter of 2018. Jack-up operating costs, excluding reimbursables, were $3.2 million lower than the comparable quarter primarily due to lower mobilization and amortization costs of $1.8 million on the Topaz Driller, and lower contract value amortization costs of $1.6 million on the Sapphire Driller. The comparable quarter of 2018 included amortization costs, associated with mobilizing Topaz Driller from Singapore to West Africa.

Deepwater costs in the third quarter of 2019, excluding reimbursables, were in line with the comparable quarter with lower Tungsten Explorer costs, offset by higher cost on the Platinum Explorer due to the timing of project maintenance. Additionally, we incurred increased de-risking costs, primarily labor on the Titanium Explorer, which remains competitively warm stacked in South Africa.

General and administrative expenses for the third quarter of 2019 totaled approximately $6.6 million as compared to $9.3 million for the comparable quarter in 2018. The current quarter includes an expense of approximately $200,000, and the comparable quarter includes an expense of approximately $2.9 million, both associated with our 2016 management incentive plan. The current quarter also includes $1.6 million of nonrecurring professional fees, associated in part with the arbitration deal and corporate strategic matters surrounding the funds collected from Petrobras. The comparable quarter of 2018 included $2.2 million of nonrecurring professional fees, again primarily related to the arbitration.

Depreciation for the third quarter was approximately $18.5 million, the same as the previous quarter. Financing expense for the third quarter was approximately $10.5 million, including noncash finance charges of approximately $2.3 million. Interest income totaled $4.2 million for the third quarter compared to $533,000 in the comparable quarter. The increase was directly related to the significant increase in cash on our balance sheet.

The net result was a loss of $25.7 million for the quarter or $5.14 per share. The company continues to progress operationally with contract utilizations in the third quarter of approximately 98.4% for the jack-ups and 41.3% for the drillships. We finished the quarter with 6 of our 8 assets under contract and the Tungsten Explorer commencing work with Petrobras in October. Seven of our assets are currently working.

As of the end of the quarter, we had approximately $142.1 million of drilling backlog, which extends into the second quarter of 2021. Please note, we plan to file our 10-Q later today. And with that, I will now hand the call back over to Ihab.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Tom. Leverage and liquidity continue to be the talk in town, overshadowing the meaningful improvements in the business fundamentals, as demonstrated by the improved utilization and day rates across all offshore segments.

Offshore projects continue to gain traction and prove the appeal for oil and gas companies' capital allocation. But the capital markets continue to question balance sheet sustainability and the players' ability to deliver sustainable levels of free cash flow that can support their debt levels.

I will be commenting only on the business fundamentals here and the rig supply-demand outlook. The shallow water segment is well supported by strong demand growth, especially in Mexico, Middle East and Southeast Asia. With the increased utilization, net of incremental new build units deployed, day rates and contract terms have positively reacted and continue to help in the right direction; with 337 jack-ups in contract, 37 more with future contracts, and right-size forecasting a demand increase of approximately 50 incremental rig years by 2021 from today's levels; and with 76 jack-ups that are cold stack with no future work and reaching over 40 years of age, the jack-up segment could easily absorb the forecasted influx of marketable new builds while continuing to increase day rates meaningfully.

Also on a positive trend is the number of ultra-deepwater drillships fixtures year-to-date in 2019 that stands at 67 fixtures, which is already higher than the full year 2019 total by approximately 26%. Also, we currently have 51 open requirement for benign environment of the deepwater rigs, 17 of which are term contracts. This positive increase in ultra-deepwater fixtures activity, coupled with a number of open demand and the additional known demand not included in the numbers I just mentioned, are tangible signs of the floaters segment in recovery.

When we factor in additional estimated traffic candidates on the rig supply side and the industry's well-exhibited pricing discipline, floaters' level of return are going to be strong, starting in 2020. We do not see this being pushed to the right as some are fearing.

In summary, although a large number of offshore drillers remain suppressed by the over-levered balance sheets, the offshore drilling business remains resilient from an industrial perspective. As a result of a few tough years and highly-stressed balance sheets, we could see a number of asset transactions have distressed same values, further scrapping of rigs and potentially additional balance sheet restructurings. In our view, this should be viewed as a positive sign of the end of a difficult down cycle and one step closer to supply and demand balance, with consequently meaningful increase in day rates.

Fortunately for Vantage, we remain highly utilized with a strong balance sheet and a sustainable cost structure. With all of these attributes, I trust that Vantage is in a great position to capitalize on the next stages of the offshore market recovery.

With that, I would like to turn the call over to Douglas Stewart for an update on certain outstanding matters.

--------------------------------------------------------------------------------

Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [6]

--------------------------------------------------------------------------------

Thank you, Ihab. As we have previously disclosed, Petrobras paid our 2 Vantage claimants, approximately $701 million, pursuant to the agreement the parties entered into in June 2019. The payment followed a very favorable decision for Vantage from the U.S. District Court for the Southern District of Texas, which confirms an arbitration award rendered in 2018. The dispute, of course, centered on Petrobras' improperly terminating its drilling service agreement with the Vantage claimants in August of 2015.

The Petrobras parties are seeking the reversal of the U.S. judgment in its appeal to the U.S. Court of Appeals for the Fifth Circuit. They filed a brief on September 25, 2019. We have until November 22, 2019 to file our response.

Consistent with what we have previously stated, we believe there is no basis for the Fifth Circuit to reverse and are vigorously contesting the appeal. For more information about this matter, along with information regarding certain other legal proceedings involved in the company, please see our 10-Q filed later today. Due to the nature of the items that I discussed today, we are not going to make additional comments on those matters in our prepared remarks or during the Q&A session. Thank you very much.

We'll now open the call for a question-and-answer session. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) At this time, there appears to be no questions. I would like to turn the conference back to you Mr. Stewart...

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [2]

--------------------------------------------------------------------------------

No, no. Sorry, we actually see at least 4 people on the line here, in the queue.

--------------------------------------------------------------------------------

Unidentified Company Representative, [3]

--------------------------------------------------------------------------------

Brian?

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Pardon me. So we'll take our first question from Patrick Fitzgerald from Baird.

--------------------------------------------------------------------------------

Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [5]

--------------------------------------------------------------------------------

So just wanted to clarify. You paid the legal fees, the contingent fee and also tax in the quarter. So that's -- those are all behind you at this point?

--------------------------------------------------------------------------------

Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [6]

--------------------------------------------------------------------------------

Yes. Patrick, thanks. This is Tom. Correct. So that's how we pass. This is primarily related to -- you'll see a corresponding direct drop in the AP for about $63 million directly related to contingency fee. So probably an easier way to look at the cash is to clarify for everybody's purposes, and believe me, it's a great position to be in to have this much cash, but even taking out the Petrobras cash, was still in a very solid position.

But if you look at the cash balance of $814 million that we have at the end of the quarter, then I guess, you add in the same restricted. That hasn't changed, that restricted cash, and it's purely to cauterize our LC. We've got a current portion and a long-term portion. That $825 million, you take out the Petrobras cash, which is about $635 million, and that leaves us with about $190 million in cash, which is about a $5 million drop from the previous quarter. And that's in part due to the tax not working, offset by some working capital changes. So that's probably the cleanest way to look at it.

But when you look at big wholesale numbers, the big drop is that payment for the legal and the contingent legal fees that we had disclosed in the corresponding drop in the AP.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And the tax. And Patrick's question was -- are those things behind us now? So maybe you want to clarify it.

--------------------------------------------------------------------------------

Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [9]

--------------------------------------------------------------------------------

What's behind and what is not.

--------------------------------------------------------------------------------

Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [10]

--------------------------------------------------------------------------------

The AP, obviously, on the arbitration question is behind us. And the tax, as we have mentioned...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The tax.

--------------------------------------------------------------------------------

Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [12]

--------------------------------------------------------------------------------

The Tungsten...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The tax.

--------------------------------------------------------------------------------

Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [14]

--------------------------------------------------------------------------------

The tax, yes. That is -- so it was paid in Q3, in September. And then the small piece from the Ops, we could burn a little bit of cash on the Tungsten. And I'd say it's up and running, as we have mentioned.

--------------------------------------------------------------------------------

Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [15]

--------------------------------------------------------------------------------

Great. What is the CapEx outlook for 2020 assuming the Titanium is not reactivated?

--------------------------------------------------------------------------------

Thomas J. Cimino, Vantage Drilling International - CFO & Treasurer [16]

--------------------------------------------------------------------------------

Yes. So CapEx, over the next 12 months, is about $7 million is what we have. About $0.5 million each on the jack-ups and $1 million on the 2 operating -- so as you know, we've got a little bit of an increase there on the Soehanah. We have mentioned in these comments that we're taking Soehanah back, so we've probably got maybe $2 million to $3 million piece there. But those are the biggest components of that $7 million.

--------------------------------------------------------------------------------

Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [17]

--------------------------------------------------------------------------------

Okay. And then I have to ask, how are you thinking about how you can use the cash on the balance sheet from the Petrobras settlement before the appeal is completed?

--------------------------------------------------------------------------------

Douglas E. Stewart, Vantage Drilling International - Chief Compliance Officer, VP, General Counsel & Corporate Secretary [18]

--------------------------------------------------------------------------------

Thanks for your question, and I'll have to say the same thing I've said previously. The Board will continue to evaluate what, if anything, it will do with the use of proceeds. But I appreciate your question.

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [19]

--------------------------------------------------------------------------------

We know you have to ask, Patrick.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

We'll now take our next question from Ceki Medina from Southpaw.

--------------------------------------------------------------------------------

Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [21]

--------------------------------------------------------------------------------

Patrick has asked all my questions. Thank you, Patrick.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Joshua Katzeff, [23]

--------------------------------------------------------------------------------

Congratulations on the additional backlog. Trying to staying on that, but just wanted to touch on the Topaz and the Aquamarine, I guess, those both have some option work coming up. Is there any date where -- or I guess, what is the date that whether that becomes a firm work?

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [24]

--------------------------------------------------------------------------------

On the Aqua, the client still have some time to decide. Again, things like date of the strike option, the strike date for an option is one of the things we negotiate during a contract. And depending when those contracts were negotiated, sometimes the client has the advantage of having pretty short time before they have to make up their mind and the option. So the Aqua goes until January. The client does not have to decide until January, of course, conversations are taking place. But their strike date is January. The Topaz is more or less the same.

--------------------------------------------------------------------------------

Joshua Katzeff, [25]

--------------------------------------------------------------------------------

Got it. And then -- so I guess, can you talk about the market for the Soehanah? You talked about the LOIs. I mean I guess, are those kind of at-market for Asia? And where do you see that market roughly now?

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [26]

--------------------------------------------------------------------------------

I tell you where I see the market -- until it is at market, we'll not be telling you where it is, right? Yes, no, they are at market, and definitely, that market has gone up north of 20% from the levels of a year ago or so.

--------------------------------------------------------------------------------

Joshua Katzeff, [27]

--------------------------------------------------------------------------------

And then on the ...

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [28]

--------------------------------------------------------------------------------

Good news also, Josh, is that we are starting -- yes, I just want to elaborate a little bit more on what we are seeing in terms of day rates improvement. It's not only day rates improvement. We are also starting to get better terms in the contracts, better allowances for downtime and things like that, bonuses. And probably even the most important aspect is that we're starting to get paid for mobilization now. Before we just could not ask for it, and we've been eating it. And everybody has been eating it. And now, I think everybody is getting the mobilization time on cost paid by the customer now.

--------------------------------------------------------------------------------

Joshua Katzeff, [29]

--------------------------------------------------------------------------------

I mean, I guess, we just saw that with Pacific Drilling on one of their short-term contracts. Does that change some of the thinking around the Titanium on reactivation, if you can at least get mobilization to and from location, even if the duration might be a little bit shorter?

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [30]

--------------------------------------------------------------------------------

Josh, I know you are always keen to see that rig coming out. It will not only be about what is the day rate and what -- whether the client is paying mobilization for the rig to go. It will be -- probably the most important factor there is going to be term. And we will not bring the rig out for anything less than 6 months, I would say.

--------------------------------------------------------------------------------

Joshua Katzeff, [31]

--------------------------------------------------------------------------------

Are you more optimistic on that market now? I mean it seems like there's been, I guess, a longer negotiation period for a lot of these tenders. But I guess you are more optimistic on the market for the Titanium now than, I guess, 3 months ago.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Definitely, the market for sixth-gen and seventh-gen after the quarter drillships is getting pretty tight. So we are seeing it in day rates, and we're seeing it in things like the client paying for mobilization, as we just discussed. What will take a bit longer before we start to see is to have all contracts being long-term contracts. We will continue to see shorter-term ones because these are what -- the client is getting -- accepting -- the day rates are going up and is accepting to pay the correct day rate. The day rate is whatever it is. But for them to take rigs longer than they need to, that's not going to happen anytime soon. We have seen at the end of the last up-cycle. A lot of clients were stuck with rigs that they did not really need at very high day rate, and I will have to continue using them at very high day rate or pay a very big termination fee. So that's the one thing that we'd be extremely careful with now. If they need the rig for 2 years, they will hire it for a year and say that the second year is option or 1-well and 4-well options or whatever. They'll continue to try to do that as long as they can. But the day rates are definitely -- they're not going up as we speak.

Term contracts are coming when the client needs them, but it's not going to be -- it is going to be a while before the client is forced to give you a term contract that they don't have to.

--------------------------------------------------------------------------------

Joshua Katzeff, [33]

--------------------------------------------------------------------------------

All right. And then, I guess, that's it. We note that obviously, it would be great to see that you guys have a great liquidity and cash position. So I guess in my opinion, you have excess liquidity position, which is always positive. It would be great to see some of that return to shareholders. So I know the Board is working on that, you guys are working on that. But it would be great to see that.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

(Operator Instructions) We'll now take our next question from [Tobias] (inaudible).

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

So my first question was covered already by what you commented regarding the terms getting better. So that's good to hear. Second question. On the back of recent news flow, which is pending a somewhat softening shale outlook, have you seen any changes in how your customers view and assess the shale versus offshore allocation game?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think the importance of offshore and onshore being able to compete with shale has already materialized, and we have been materializing now for a few months, I would say. And whether we are seeing a big shift away from shale into offshore for the next year cycle, I would say, no, it's just a normal, normal level of offshore projects that have been envisaged for a while, are now starting to come online. People are coming out. The possible requirements we knew about are becoming real requirements and the clients are coming out now with the actual tender or with the pre-tender for those possible requirements. So it is going as planned. Let's put it that way.

Definitely, for shallow water, nobody can compete to shallow water. That's probably the best return that I get. So that shallow water is really -- is taking off and will continue to take off for now.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

And we'll take our next question from Ceki Medina from Southpaw.

--------------------------------------------------------------------------------

Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [38]

--------------------------------------------------------------------------------

I did come up with a question and a comment. So the question is, is there any CapEx you can make on either of the 3 drillships to increase their competitiveness? And are you thinking about them?

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [39]

--------------------------------------------------------------------------------

There are possibilities, of course. But we have already decided what we wanted to put money on, and that was the MPD. And that has nicely paid off the work that we are going to from now on. Both of them do require MPD, and that is one of the reasons why the competition list was much shorter. And a lot of the work we are bidding on right now is the requiring MPD. Doing other upgrades, like for example, adding a second duty, which we have. We do have a BOP in Houston. We could add it to the Titanium, for example. It's something that is possible, but it's not something we're considering right now.

--------------------------------------------------------------------------------

Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [40]

--------------------------------------------------------------------------------

Got it. As for the comment, I do hear the shareholders looking to get some of the cash flow or cash balance. I would also point that the first-lien bonds are now sold in legal at par. So I think it would be to your advantage to see them trade at par below dividend-ing some cash to shareholders.

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [41]

--------------------------------------------------------------------------------

Thanks for your comment.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

At this time, there appears to be no further questions. I'd like to turn the conference back to you, Mr. Douglas, for any closing remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Thanks very much for attending today's conference, and we'll talk to you next time.

--------------------------------------------------------------------------------

Ihab M. Toma, Vantage Drilling International - CEO & Director [44]

--------------------------------------------------------------------------------

Thanks, everybody.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

This concludes today's call. Thank you for your participation. You may now disconnect.