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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-159299

 

VANTAGE DRILLING INTERNATIONAL

(Exact name of Registrant as specified in its charter)

 

Cayman Islands

98-1372204

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

c/o Vantage Energy Services, Inc.

777 Post Oak Boulevard, Suite 440

Houston, TX 77056

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (281) 404-4700

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

N/A

N/A

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

The number of Vantage Drilling International Ordinary Shares outstanding as of August 1, 2023 is 13,229,280 shares.

 

 


TABLE OF CONTENTS

Page

SAFE HARBOR STATEMENT

3

PART I—FINANCIAL INFORMATION

 

Item 1

Financial Statements (unaudited)

7

 

 

Consolidated Balance Sheets

7

 

Consolidated Statement of Operations

8

 

 

Consolidated Statement of Shareholders’ Equity

9

 

Consolidated Statement of Cash Flows

10

 

Notes to Unaudited Consolidated Financial Statements

11

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4

Controls and Procedures

37

PART II—OTHER INFORMATION

 

Item 1

Legal Proceedings

38

Item 6

Exhibits

38

SIGNATURES

41

 

 

2


SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are included throughout this Quarterly Report, including under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” When used, statements which are not historical in nature, including those containing words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” “will,” “future” and similar expressions are intended to identify forward-looking statements in this Quarterly Report.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements.

Among the factors that could cause actual results to differ materially are the risks and uncertainties described under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and the following:

reduced expenditures by oil and gas exploration and production companies;
general economic conditions and conditions in the oil and gas industry, including the worldwide supply and demand for oil and gas, and expectations regarding future prices of oil and gas;
excess supply of drilling units worldwide;
competition within our industry;
growing focus on climate change, including regulatory, social and market efforts to address climate change, and its overall impact on the level of investments being directed to fossil fuel exploration and production companies and the associated products or services;
our current level of indebtedness and the ability to incur additional indebtedness in the near- and long-term;
epidemics, pandemics, global health crises, or other public health events and concerns, including any future resurgence of COVID-19, and the effectiveness of associated vaccinations and treatments;
governmental, tax and environmental regulations and related actions and legal matters, including the actions taken by governments in response to any global health events and crises, as well as the results and effects of legal proceedings and governmental audits, assessments, orders and investigations;
volatility in the price of commodities due to actions taken by members of OPEC, OPEC+ and other, oil-exploring countries, with respect to oil production levels and announcements of potential changes in such levels, including the ability of members of OPEC+ to agree on and comply with announced supply limitations;
the potential for increased production from U.S. shale producers and non-OPEC countries driven by current oil prices, including the effect of such production rates on the overall global oil and gas supply, demand balance and commodity prices;
termination or renegotiation of our customer contracts, and the invoking of force majeure clauses;
termination or renegotiation of our management and marketing agreements, including any terminations arising directly or indirectly from the consummation of the Aquadrill Merger (as defined below);
losses on impairment of long-lived assets;
any non-compliance with the U.S. Foreign Corrupt Practices Act, as amended, and any other anti-corruption laws;
the sufficiency of our internal controls, including exposure arising from the failure to (i) establish and maintain effective internal control over financial reporting in accordance with applicable regulatory requirements, and (ii) fully remediate any material weaknesses identified with respect to such internal controls;
operating hazards in the offshore drilling industry;
operations in international markets, including geopolitical, global, regional or local economic and financial market risks and challenges, applicability of foreign laws, including foreign labor and employment laws, foreign tax and customs regimes, and foreign currency exchange rate risk;

3


political disturbances, geopolitical instability and tensions, or terrorist attacks, and associated changes in global trade policies and economic sanctions, including, but not limited to, Russia’s invasion of Ukraine in February 2022 and the Russo-Ukrainian War;
adequacy of, or gaps in, insurance coverage upon the occurrence of a catastrophic or other material adverse event;
effects of new products and new technology on the market;
the occurrence (or recurrence) of cybersecurity incidents, attacks, intrusions or other breaches to our information technology systems;
our small number of customers, related concentration and/or the loss of any customers;
consolidation of our competitors and suppliers;
termination or renegotiation of vendor contracts;
changes in the status of pending, or the initiation of new litigation, claims or proceedings, including our ability to prevail in the defense of any appeal or counterclaim;
changes in legislation removing or increasing current applicable limitations of liability;
limited mobility of our drilling units between geographic regions;
the small size of our fleet and associated vulnerabilities in the case of prolonged downtime of any of our drilling rigs;
levels of operating and maintenance costs;
our dependence on key personnel;
availability of workers and the related labor costs;
increased costs resulting from supply chain constraints, delays and impediments, including, but not limited to, increases in (i) the costs of obtaining supplies, (ii) labor costs, and (iii) freight, transportation and input costs, among others;
changes in tax laws, treaties or regulations;
credit risks of our key customers and other third parties we engage commercially;
compliance with restrictions and covenants in our debt agreements;
our recent lack of overall profitability and whether we will generate material revenues or profits in the near- and long-term;
adverse macroeconomic conditions, including (i) inflationary pressures and potential recessionary conditions, as well as actions taken by central banks and regulators across the world in an attempt to reduce, curtail and address such pressures and conditions, and (ii) the effects of adverse developments at financial institutions, including bank failures, that impact general sentiment regarding the stability and liquidity of banks, and the resulting impact on the stability of the global financial markets at large;
our incorporation under the laws of the Cayman Islands and the limited rights to relief that may be available compared to U.S. law;
compliance with the Economic Substance Act 2021 (as amended) and the Economic Substance Act 2018 (as amended), among other legislation enacted in the Cayman Islands and Bermuda; and
our ability to identify and complete strategic and/or transformational transactions, including acquisitions, dispositions, joint ventures and mergers, as well as the impact that such transactions may have on our operations and financial condition.

Many of these factors are beyond our ability to control or predict. Any, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in filings we may make with the SEC, which may be obtained by contacting us or the SEC. These filings

4


are also available through our website at www.vantagedrilling.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval system (“EDGAR”) at www.sec.gov. The contents of our website are not part of this Quarterly Report.

Unless the context indicates otherwise, all references to the “Company,” “Vantage Drilling International,” “we,” “our” or “us” refer to Vantage Drilling International and its consolidated subsidiaries. References to “VDI” refer to Vantage Drilling International, a Cayman Islands exempted company and the group parent company.

5


GLOSSARY OF TERMS

 

The following terms used in this Quarterly Report have the following meanings, unless specified elsewhere in this Quarterly Report:

Abbreviation/Acronym

 

Definition

2016 Amended MIP

 

The Company's Amended and Restated 2016 Management Incentive Plan

9.25% First Lien Indenture

 

First Lien Indenture, dated as of November 30, 2018, by and between Vantage Drilling International and U.S. Bank National Association

9.25% First Lien Notes

 

The Company's 9.25% Senior Secured First Lien Notes due November 15, 2023

9.50% First Lien Indenture

 

Indenture, dated as of March 1, 2023, by and between VDI, the guarantors party thereto, and U.S. Bank Trust Company, National Association, as trustee and first lien collateral agent

9.50% First Lien Notes

 

The Company's 9.50% Senior Secured First Lien Notes due February 15, 2028

ADES

 

ADES International Holding Ltd, an offshore and onshore provider of oil and gas drilling and production services in the Middle East, India and Africa

ADVantage

 

ADVantage Drilling Services SAE, a joint venture owned 51% by the Company and 49% by ADES

ASC

 

Accounting Standards Codification

Board of Directors

 

The Company's board of directors

Comparable Period

 

The six months ended June 30, 2022

Comparable Quarter

 

The three months ended June 30, 2022

Convertible Notes

 

The Company's 1%/12% Step-Up Senior Secured Third Lien Convertible Notes due 2030

COVID-19

 

Coronavirus disease 2019, a strain of coronavirus caused by SARS-CoV-2

Current Period

 

The six months ended June 30, 2023

Current Quarter

 

The three months ended June 30, 2023

DOJ

 

U.S. Department of Justice

EDC

 

Emerald Driller Company, which owns the Emerald Driller, Sapphire Driller and Aquamarine Driller

EDC Sale

 

The sale by VHI of all of the issued and outstanding equity of EDC to ADES Arabia Holding, pursuant to the terms of that certain Share Purchase Agreement, dated as of December 6, 2021, by and between VHI and to sell to ADES Arabia Holding, as amended, which closed on May 27, 2022

Effective Date

 

February 10, 2016, the date the Company emerged from bankruptcy

EPS

 

Earnings per share

Exchange Act

 

Securities Exchange Act of 1934, as amended

IRS

 

U.S. Internal Revenue Service

OPEC

 

The Organization of the Petroleum Exporting Countries

OPEC+

 

The Organization of the Petroleum Exporting Countries plus 10 non-OPEC nations

Ordinary Shares

 

The Company's ordinary shares, par value $0.001 per share

PBGs

 

Performance-based restricted stock units

QLE

 

A qualified liquidity event as defined in the 2016 Amended MIP

ROU

 

Right-of-use

Russo-Ukrainian War

 

The ongoing war resulting from Russia's invasion of Ukraine in February 2022

SEC

 

Securities and Exchange Commission

Securities Act

 

Securities Act of 1933, as amended

Tax Election

 

Tax election filed with the IRS on January 22, 2020, to allow VDI to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019

TBGs

 

Time-based restricted stock units

TEV

 

Total enterprise value

U.S.

 

United States of America

U.S. GAAP

 

Accounting principles generally accepted in the United States of America

U.S. Holder

 

A beneficial owner of the Ordinary Shares that is, for U.S. federal income tax purposes, (i) a citizen or individual resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) that was organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or such trust has a valid election in effect under applicable treasury regulations to be treated as a U.S. person for U.S. federal income tax purposes

USD or $

 

U.S. Dollar

VDC

 

Vantage Drilling Company, the Company's former parent company

VDI

 

Vantage Drilling International

VHI

 

Vantage Holdings International, a subsidiary of VDI

VIE

 

Variable interest entity

 

6


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

Vantage Drilling International

Consolidated Balance Sheets

(In thousands, except share and par value information)

(Unaudited)

 

 

June 30, 2023

 

 

December 31, 2022

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

79,650

 

 

$

74,026

 

Restricted cash

 

 

455

 

 

 

16,450

 

Trade receivables, net of allowance for credit losses of $3,850 and $4,962, respectively

 

 

83,109

 

 

 

62,776

 

Materials and supplies

 

 

44,759

 

 

 

41,250

 

Prepaid expenses and other current assets

 

 

40,166

 

 

 

25,621

 

Total current assets

 

 

248,139

 

 

 

220,123

 

Property and equipment

 

 

 

 

 

 

Property and equipment

 

 

649,910

 

 

 

647,909

 

Accumulated depreciation

 

 

(330,911

)

 

 

(309,453

)

Property and equipment, net

 

 

318,999

 

 

 

338,456

 

Operating lease ROU assets

 

 

812

 

 

 

1,648

 

Other assets

 

 

12,659

 

 

 

18,334

 

Total assets

 

$

580,609

 

 

$

578,561

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

55,570

 

 

$

57,775

 

Other current liabilities

 

 

65,770

 

 

 

66,179

 

Total current liabilities

 

 

121,340

 

 

 

123,954

 

Long–term debt, net of discount and financing costs of $11,080 and $773, respectively

 

 

188,920

 

 

 

179,227

 

Other long-term liabilities

 

 

9,678

 

 

 

12,881

 

Commitments and contingencies (see Note 8)

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Ordinary shares, $0.001 par value, 50 million shares authorized; 13,229,280 and 13,115,026 shares issued and outstanding, each period

 

 

13

 

 

 

13

 

Additional paid-in capital

 

 

633,605

 

 

 

633,863

 

Accumulated deficit

 

 

(373,971

)

 

 

(373,147

)

Controlling interest shareholders' equity

 

 

259,647

 

 

 

260,729

 

Noncontrolling interests

 

 

1,024

 

 

 

1,770

 

Total equity

 

 

260,671

 

 

 

262,499

 

Total liabilities and shareholders' equity

 

$

580,609

 

 

$

578,561

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7


Vantage Drilling International

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling services

 

$

67,673

 

 

$

42,744

 

 

$

115,590

 

 

$

87,657

 

Management fees

 

 

5,569

 

 

 

2,840

 

 

 

7,689

 

 

 

3,943

 

Reimbursables and other

 

 

34,598

 

 

 

27,654

 

 

 

61,633

 

 

 

39,969

 

Total revenue

 

 

107,840

 

 

 

73,238

 

 

 

184,912

 

 

 

131,569

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

74,383

 

 

 

59,405

 

 

 

140,938

 

 

 

103,338

 

General and administrative

 

 

5,161

 

 

 

6,910

 

 

 

9,992

 

 

 

13,492

 

Depreciation

 

 

11,045

 

 

 

11,087

 

 

 

22,094

 

 

 

22,382

 

(Gain) loss on EDC Sale

 

 

 

 

 

(60,781

)

 

 

3

 

 

 

(60,781

)

Total operating costs and expenses

 

 

90,589

 

 

 

16,621

 

 

 

173,027

 

 

 

78,431

 

Income from operations

 

 

17,251

 

 

 

56,617

 

 

 

11,885

 

 

 

53,138

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

141

 

 

 

7

 

 

 

190

 

 

 

11

 

Interest expense and other financing charges

 

 

(5,346

)

 

 

(8,503

)

 

 

(10,904

)

 

 

(17,007

)

Other, net

 

 

(457

)

 

 

(1,011

)

 

 

(135

)

 

 

(1,786

)

Total other expense

 

 

(5,662

)

 

 

(9,507

)

 

 

(10,849

)

 

 

(18,782

)

Income before income taxes

 

 

11,589

 

 

 

47,110

 

 

 

1,036

 

 

 

34,356

 

Income tax provision (benefit)

 

 

10,584

 

 

 

(1,221

)

 

 

2,606

 

 

 

217

 

Net income (loss)

 

 

1,005

 

 

 

48,331

 

 

 

(1,570

)

 

 

34,139

 

Net (loss) income attributable to noncontrolling interests

 

 

(457

)

 

 

232

 

 

 

(746

)

 

 

938

 

Net income (loss) attributable to shareholders

 

$

1,462

 

 

$

48,099

 

 

$

(824

)

 

$

33,201

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

3.67

 

 

$

(0.06

)

 

$

2.53

 

Diluted

 

$

0.11

 

 

$

3.61

 

 

$

(0.06

)

 

$

2.49

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

8


Vantage Drilling International

Consolidated Statement of Shareholders’ Equity

(In thousands)

(Unaudited)

 

 

Six-Month Period Ended June 30, 2022

 

 

 

Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Deficit

 

 

Non-Controlling Interests

 

 

Total Equity

 

Balance January 1, 2022

 

 

13,115

 

 

$

13

 

 

$

633,847

 

 

$

(369,792

)

 

$

1,783

 

 

$

265,851

 

Share-based compensation

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Share-based compensation - dividend equivalents

 

 

 

 

 

 

 

 

(63

)

 

 

 

 

 

 

 

 

(63

)

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

(14,898

)

 

 

706

 

 

 

(14,192

)

Balance March 31, 2022

 

 

13,115

 

 

$

13

 

 

$

633,810

 

 

$

(384,690

)

 

$

2,489

 

 

$

251,622

 

Share-based compensation

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

18

 

Net income

 

 

 

 

 

 

 

 

 

 

 

48,099

 

 

 

232

 

 

 

48,331

 

Balance June 30, 2022

 

 

13,115

 

 

$

13

 

 

$

633,828

 

 

$

(336,591

)

 

$

2,721

 

 

$

299,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six-Month Period Ended June 30, 2023

 

 

 

Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Deficit

 

 

Non-Controlling Interests

 

 

Total Equity

 

Balance January 1, 2023

 

 

13,115

 

 

$

13

 

 

$

633,863

 

 

$

(373,147

)

 

$

1,770

 

 

$

262,499

 

Share-based compensation issuance of shares

 

 

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased to settle withholding taxes

 

 

 

 

 

 

 

 

(246

)

 

 

 

 

 

 

 

 

(246

)

Share-based compensation

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Share-based compensation - dividend equivalents

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

 

 

 

(37

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,286

)

 

 

(289

)

 

 

(2,575

)

Balance March 31, 2023

 

 

13,229

 

 

$

13

 

 

$

633,591

 

 

$

(375,433

)

 

$

1,481

 

 

$

259,652

 

Share-based compensation

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

1,462

 

 

 

(457

)

 

 

1,005

 

Balance June 30, 2023

 

 

13,229

 

 

$

13

 

 

$

633,605

 

 

$

(373,971

)

 

$

1,024

 

 

$

260,671

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

9


Vantage Drilling International

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net (loss) income

 

$

(1,570

)

 

$

34,139

 

Adjustments to reconcile net income (loss) to net cash used in operating activities

 

 

 

 

 

 

Depreciation expense

 

 

22,094

 

 

 

22,382

 

Amortization of debt financing costs

 

 

862

 

 

 

820

 

Share-based compensation expense

 

 

25

 

 <