Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist you in understanding our financial position as of March 31, 2022, and our results of operations for the three months ended March 31, 2022 and 2021. The discussion should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 30, 2022. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Overview
We are an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and gas wells for our customers. Through our fleet of drilling units, we provide offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for third-party owned drilling units, we provide operations and marketing services for operating and stacked rigs, construction supervision services for rigs that are under construction and preservation management services for rigs that are stacked.
The following table sets forth certain current information concerning our offshore drilling fleet as of May 9, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Year Built |
|
Water Depth Rating (feet) |
|
|
Drilling Depth Capacity (feet) |
|
|
Location |
|
Status |
Jackups |
|
|
|
|
|
|
|
|
|
|
|
Topaz Driller |
|
2009 |
|
|
375 |
|
|
|
30,000 |
|
|
Tunisia |
|
Operating |
Soehanah |
|
2007 |
|
|
375 |
|
|
|
30,000 |
|
|
Thailand |
|
Operating |
Drillships (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Platinum Explorer |
|
2010 |
|
|
12,000 |
|
|
|
40,000 |
|
|
India |
|
Operating |
Tungsten Explorer |
|
2013 |
|
|
12,000 |
|
|
|
40,000 |
|
|
Egypt |
|
Operating |
Managed Rigs |
|
|
|
|
|
|
|
|
|
|
|
|
Polaris |
|
2008 |
|
|
10,000 |
|
|
|
37,500 |
|
|
Sri Lanka |
|
Warm stacked |
Aquarius |
|
2008 |
|
|
10,000 |
|
|
|
35,000 |
|
|
Newfoundland |
|
Cold stacked |
Capella |
|
2008 |
|
|
10,000 |
|
|
|
37,500 |
|
|
Indonesia |
|
Operating |
Held For Sale (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Emerald Driller |
|
2008 |
|
|
375 |
|
|
|
30,000 |
|
|
Qatar |
|
Operating |
Sapphire Driller |
|
2009 |
|
|
375 |
|
|
|
30,000 |
|
|
Qatar |
|
Operating |
Aquamarine Driller |
|
2009 |
|
|
375 |
|
|
|
30,000 |
|
|
Qatar |
|
Contract preparation |
(1)The drillships are designed to drill in up to 12,000 feet of water and are currently equipped to drill in 10,000 feet of water.
(2)On December 20, 2021, we entered into the ADES Purchase Agreement (as defined below under “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding”) to sell to ADES Arabia (as defined below under “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding”) all of the issued and outstanding equity of EDC, which owns the Emerald Driller, Sapphire Driller and Aquamarine Driller. These rigs are currently classified as held for sale on our Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.
Recent Developments
Geopolitical Instability Caused by the Conflict in Ukraine
The markets generally exhibited a strong recovery in global oil prices during 2021, a trend which was further exemplified during the first quarter of 2022, reaching $125.72 per barrel in March 2022. While our management anticipates the continuation of the upward trend in the near-term, oil and gas prices are still expected to continue to be volatile as a result of, among other factors, (i) the ongoing COVID-19 pandemic, including the transmission and presence of highly contagious and new variants and the pace of vaccine rollouts, (ii) changes in oil and gas inventories, (iii) global market demand, (iv) geopolitical instability, armed conflict and social unrest, including the invasion of Ukraine by Russia in February 2022, the associated response undertaken by western nations, such as the implementation of broad sanctions, the potential for retaliatory actions on the part of Russia and the overall impact on OPEC+ countries’ ability to reach production targets in the near-term, (v) potential future disagreements among OPEC+ countries regarding the supply of oil, and (vi) the potential for increased production and activity from U.S. shale producers and non-OPEC countries driven by the current oil prices, and therefore, the Company cannot predict how long oil and gas prices will remain stable or further increase, if at all, or whether they could reverse course and decline.
25
In particular, the invasion of Ukraine by Russia has led to, and will likely continue to lead to, geopolitical instability, disruption and volatility in the markets with which we operate. While it is not possible at this time to predict or determine the ultimate consequences of the conflict in Ukraine, which could include, among other things, additional sanctions, greater regional instability, embargoes, geopolitical shifts and other material and adverse effects on macroeconomic conditions, supply chains, financial markets and currency exchange rates, hydrocarbon price volatility in particular is likely to continue for the foreseeable future. To the extent negotiations of a cease fire between Russia and Ukraine are unsuccessful, the potential destruction of critical oil-related infrastructure in Ukraine, and the implementation of further sanctions and other measures taken by governmental bodies and private actors, could have a lasting impact in the near- and long-term on the (i) operations and financial condition of our business and the businesses of our critical counterparties and (ii) the global economy. While our management is actively monitoring the foregoing events and its associated financial impact our business, it is uncertain at this time as to the full magnitude that volatile and uncertain oil and gas prices will ultimately have on our financial condition and future results of operations.
Share Purchase Agreement to Sell EDC to ADES Arabia Holding
On December 6, 2021, VHI, a wholly owned subsidiary of the Company, entered into a certain Share Purchase Agreement (the “ADES Purchase Agreement”) with ADES Arabia Holding (“ADES Arabia”), which wholly owns ADES, pursuant to which VHI agreed to sell to ADES Arabia (the “ADES Sale”) all of the issued and outstanding equity of VHI’s wholly-owned subsidiary, EDC. EDC is the owner of the following jackup rigs, each of which are currently operating in Qatar: the Emerald Driller; the Sapphire Driller; and the Aquamarine Driller. The ADES Purchase Agreement became effective on December 20, 2021 and the transactions contemplated under such agreement are expected to close in the second quarter of 2022. Pursuant to the ADES Purchase Agreement, VHI will receive an aggregate cash consideration payment of $170.0 million (the “Cash Consideration Payment”). In addition to the Cash Consideration Payment, the Company anticipates that it will receive from ADES Arabia approximately $34 million in certain reimbursable amounts in relation to the preparation and mobilization costs associated with the Sapphire Driller and Aquamarine Driller Qatari contracts incurred prior to closing of the ADES Sale (the “Reimbursable Amounts”). However, both the Cash Consideration Payment and Reimbursable Amounts are subject to potential adjustments contemplated by the ADES Purchase Agreement, and therefore, the actual amounts of the Cash Consideration Payment and Reimbursable Amounts that are ultimately received by the Company could vary from those set forth above.
Moreover, certain subsidiaries of the Company and ADES agreed, in connection with the ADES Purchase Agreement, to enter into a three-year support services agreement (the “ADES Support Services Agreement”), pursuant to which a subsidiary of the Company agreed to provide support services to EDC with respect to the Emerald Driller, Sapphire Driller and Aquamarine Driller. The Company and ADES also entered into an agreement on December 6, 2021 (the “Collaboration Agreement”) to pursue a global strategic alliance in order to leverage both the ADES Support Services Agreement and ADVantage, the parties’ existing joint venture in Egypt. Pursuant to the Collaboration Agreement, the parties agreed to collaborate on exploring future commercial and operational opportunities.
While the Company continues to evaluate potential uses of the proceeds it anticipates will be derived from the ADES Sale, the Company is limited in how it may deploy and utilize such proceeds as a result of the terms of the First Lien Indenture. In particular, the Company may only use the proceeds from the ADES Sale to repay, prepay or purchase our senior secured indebtedness (including the 9.25% First Lien Notes), acquire all or substantially all of the assets or capital stock of any other entity engaged in a similar or complementary business to the Company’s lines of business, or make capital expenditures or acquire non-current assets (including vessels and related assets) that are useful in such lines of business (including any deposit or installment payments with respect thereto as well as any expenditures related to the acquisition, construction or “ready for sea” costs of such vessels). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.
Ongoing Impact of the COVID-19 Pandemic
The global spread of COVID-19, including its highly contagious variants and sub-lineages, continues to pose significant risks and challenges worldwide, and has caused and continues to cause widespread illness and significant loss of life, leading governments across the world to impose and re-impose severely stringent and extensive limitations on movement and human interaction, with certain countries, including those where we maintain significant operations and derive material revenue, implementing quarantine, testing and vaccination requirements. These governmental reactions to the COVID-19 pandemic, as well as changes to and extensions of such approaches, have led to, and continue to result in, uncertain and volatile economic activity worldwide, including within the oil and gas industry and the regions and countries in which we operate.
While the Company has previously managed, and continues to actively manage, the business in an attempt to mitigate any ongoing and material impact from the spread of COVID-19, management anticipates that our industry, and the world at large, will need to continue to operate in, and further adapt, to the current environment for the foreseeable future.
26
Business Outlook
Expectations about future oil and gas prices have historically been a key driver of demand for our services. Against the backdrop of challenging industry conditions which began in 2015, the initial onset, and continued global spread of the COVID-19 pandemic and the resulting decline in global economic activity, coupled with the short-lived price war between Saudi Arabia and Russia, led to significant reductions and delays in oil and gas exploration and development plans on the part of operators during 2020, largely impeding and unwinding the improvements experienced by the industry in 2019. These reductions and delays led to a substantial drop in oil prices and demand for offshore drilling services globally, including for our services, during, and subsequent to, the second quarter of 2020. However, as a whole, global oil prices experienced a strong recovery during 2021 resulting in the best annual performance (on a price per barrel basis) since 2012, with Brent crude oil trading close to $85.00 per barrel in October 2021 and more recently trading above $125.00 per barrel in March 2022. This strong recovery is due to, among other factors, the (i) OPEC+ countries’ agreement since last year to reduce production by almost 10 million barrels per day, representing approximately 10% of the world's output compared with demand for approximately 96 million barrels a day, and their recent agreement to boost production, but only in measured steps, (ii) development, efficacy, availability and utilization of vaccines for COVID-19, (iii) the reopening of global economies, (iv) injection of substantial government monetary and fiscal stimulus and (v) the ongoing energy supply crisis driven by a shortage of fuel within recovering economies and anticipated extreme weather across Europe and northeast Asia, along with years of under investment in oil reserve replacement, all of which has been exacerbated by the global turmoil and political instability caused by Russia's invasion of Ukraine in February 2022.
Notwithstanding the foregoing, the volatility and uncertainty surrounding global oil prices largely remain as the spread of the COVID-19 pandemic and its highly transmissible variants persist and, as a whole, the oil and gas industry continues to be materially impacted and shaped by external factors which have influenced its overall development and recovery. While OPEC+ countries entered into an agreement in July 2021 to gradually phase out certain oil production cuts by September 2022 and subsequently acknowledged that it would continue to observe such agreement to only boost production modestly despite higher oil prices, the long-term commitment of such countries to maintain oil production at or near such levels remains uncertain. More recently, the ongoing conflict in Ukraine has caused, and could continue to cause for the foreseeable future, significant instability, disruption, uncertainty and volatility in the hydrocarbon industry and the global markets at large. Further geopolitical developments could occur, including a possible agreement relating to Iran’s nuclear deal and the subsequent suspension of U.S. sanctions in Iran (which could result in, among other things, the influx of Iranian crude oil into the global markets), any of which could significantly impact our business and operations. In addition, with higher crude oil prices there is the potential for increased production from U.S. shale producers and non-OPEC countries, which could lead to significant increase in the overall global oil and gas supply, and result in reduced commodity prices. As a result of such volatility, disruption, instability and uncertainty, it has been difficult, and will generally continue to be difficult, for operators to definitively plan their capital budget programs in the near term.
In addition to macroeconomic challenges, including those set forth above, which have led to reduced demand for drilling rigs, the excess supply of delivered and new-build rigs continues to impact overall market demand. It is unclear when these new-build drilling rigs will actually be delivered, if at all, as many rig deliveries have (i) already been deferred to later dates or (ii) been canceled entirely.
In response to the oversupply of drilling rigs, a number of our competitors removed older, less competitive rigs from their fleets by cold stacking the drilling rigs, repurposing rigs for use in other industries or taking them permanently out of service. A substantial number of rigs have been removed from the drilling fleet since the oil price decline in 2014 and this trend has only accelerated since the second quarter of 2020. However, we have recently observed instances where cold-stacked rigs are being reactivated for new contracts as the supply of ready-to-go rigs diminishes. This could result in more rigs competing with us in the market, and in turn cause any recovery in dayrates to stall or reverse, which may materially impact the environment in which we operate and compete.
In addition many offshore drillers with significant levels of debt on their balance sheets have recently completed, are currently pursuing, or may elect to pursue in the near-term, debt restructurings. As drillers emerged and continue to emerge from these debt restructurings, consolidation in the industry transpired and it is likely that further consolidation will occur, reducing the number of industry participants and ultimately lowering cost structures. The combination of recycling, restructuring and consolidation will be necessary for the industry to regain firmer footing. Any industry recovery will also depend significantly on continued and demonstrable improvement in global macroeconomic conditions including the ability to mitigate COVID-19's highly contagious variants and mutations.
In response to both global market conditions and excessive levels of idle capacity in recent years, operating dayrates began to experience intense downward pressure in 2015, a trend which continued through 2021, as most drilling contractors had preferred, and continue to prefer, to maintain rigs in an active state to mitigate the risks and costs of stacking and reactivating rigs and to benefit from the fact that customers had generally favored operating rigs over reactivated cold-stacked rigs. However, dayrates have shown signs of
27
improvement as of 2022, resembling pricing trends exhibited prior to the onset of the COVID-19 pandemic.
With the distribution of vaccines in certain jurisdictions in an attempt to inoculate populations against COVID-19 along with significant governmental assistance directed at combatting the challenging economic environment caused by the COVID-19 pandemic, economic activity in certain portions of the world generally improved during 2021. This improvement has contributed to, among other things, a general increase in the demand for oil and gas. In addition, during the last seven years, oil and gas producers restrained their investment as priorities shifted from exploring and producing to returning capital to investors and minimizing cost during the challenging oil and gas price environment. As a result of these shifting priorities and the restraint on overall investment, reserves have generally decreased. This trend (along with other factors) has contributed to crude oil prices reaching decade- high levels in 2022. The jackup segment experienced visible recovery in 2021 with respect to utilization rates and the deepwater segment continues to exhibit signs of notable recovery regarding utilization rates. In addition, dayrates for both the jack-up and deepwater segments have begun to increase in 2022.
Notwithstanding the foregoing, the recovery experienced could be short lived especially given the quickly changing and ever-evolving dynamics of the COVID-19 pandemic and its highly transmittable variants and sub-lineages. With the COVID-19 pandemic unlikely to completely subside in the near term, the possibility exists that the world will need to continue to learn to operate in and further adapt to the current environment for the foreseeable future. Volatility in global oil and gas prices and how our industry manages the logistical challenges stemming from the COVID-19 pandemic will continue to play a significant role in determining the outlook for the industry, both in the short- and long-term.
Backlog
The following table reflects a summary of our contract drilling backlog coverage of days contracted and related revenue as of March 31, 2022 based on information available as of that date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Days Contracted |
|
|
Revenues Contracted (1) (in thousands) |
|
|
2022 |
|
2023 |
|
Beyond |
|
|
2022 |
|
|
2023 |
|
|
Beyond |
|
Jackups |
38% |
|
0% |
|
|
0 |
% |
|
$ |
14,286 |
|
|
$ |
— |
|
|
$ |
— |
|
Drillships |
82% |
|
45% |
|
|
0 |
% |
|
$ |
69,065 |
|
|
$ |
47,580 |
|
|
$ |
— |
|
Managed Rigs |
33% |
|
0% |
|
|
0 |
% |
|
$ |
39,358 |
|
|
$ |
4,700 |
|
|
$ |
— |
|
Held for Sale |
95% |
|
78% |
|
|
43 |
% |
|
$ |
61,966 |
|
|
$ |
57,670 |
|
|
$ |
64,011 |
|
(1)Includes contract(s) with operating dayrates that may vary based on a variable oil price index rate mechanism calculated utilizing the then applicable average price of Brent crude. For purposes of calculating the backlog with contracts that contain a variable oil price indexed rate mechanism we utilize the applicable oil price as of quarter end multiplied by the number of days remaining in the firm contract period. The average dayrate over the term of the contract could be lower or higher depending upon the average price of Brent crude for such measurable period and such adjustments are not estimated in the backlog dayrate. As certain of our drilling contracts are denominated in currencies other than the USD, backlog could also vary due to movements in the applicable exchange rates.
28
Results of Operations
Operating results for our contract drilling services are dependent on three primary metrics: available days, rig utilization and dayrates. The following table sets forth this selected operational information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Jackups |
|
|
|
|
|
|
Rigs available |
|
|
2 |
|
|
|
5 |
|
Available days (1) |
|
|
180 |
|
|
|
450 |
|
Utilization (2) |
|
|
60.3 |
% |
|
|
30.7 |
% |
Average daily revenues (3) |
|
$ |
74,295 |
|
|
$ |
64,448 |
|
Deepwater |
|
|
|
|
|
|
Rigs available |
|
|
2 |
|
|
|
2 |
|
Available days (1) |
|
|
180 |
|
|
|
180 |
|
Utilization (2) |
|
|
98.8 |
% |
|
|
49.1 |
% |
Average daily revenues (3) |
|
$ |
165,159 |
|
|
$ |
99,911 |
|
Held for Sale (4) |
|
|
|
|
|
|
Rigs available |
|
|
3 |
|
|
|
0 |
|
Available days (1) |
|
|
270 |
|
|
|
0 |
|
Utilization (2) |
|
|
41.5 |
% |
|
N/A |
|
Average daily revenues (3) |
|
$ |
66,813 |
|
|
N/A |
|
(1)Available days are the total number of rig calendar days in the period.
(2)Utilization is calculated as a percentage of the actual number of revenue earning days divided by the available days in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.
(3)Average daily revenues are based on contract drilling revenues divided by revenue earning days. Average daily revenue will differ from average contract dayrate due to billing adjustments for any non-productive time, mobilization fees and demobilization fees.
(4)On December 20, 2021, we entered into the ADES Purchase Agreement to sell to ADES Arabia all of the issued and outstanding equity of EDC, which owns the Emerald Driller, Sapphire Driller and Aquamarine Driller. Each of these rigs are currently classified as held for sale on our Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.
For the Three Months Ended March 31, 2022 and 2021
Net loss attributable to shareholders for the Current Quarter was $14.9 million, or $1.14 per basic share, on operating revenues of $58.3 million, compared to net loss attributable to shareholders for the Comparable Quarter of $36.0 million, or $2.74 per basic share, on operating revenues of $20.2 million.
29
The following table is an analysis of our operating results for the three months ended March 31, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
(unaudited, in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling services |
|
$ |
44,913 |
|
|
$ |
17,725 |
|
|
$ |
27,188 |
|
|
|
153 |
% |
Management fees |
|
|
1,103 |
|
|
|
98 |
|
|
|
1,005 |
|
|
n/m |
|
Reimbursables and other |
|
|
12,315 |
|
|
|
2,343 |
|
|
|
9,972 |
|
|
|
426 |
% |
Total revenues |
|
|
58,331 |
|
|
|
20,166 |
|
|
|
38,165 |
|
|
|
189 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs |
|
|
43,933 |
|
|
|
25,357 |
|
|
|
18,576 |
|
|
|
73 |
% |
General and administrative |
|
|
6,582 |
|
|
|
5,495 |
|
|
|
1,087 |
|
|
|
20 |
% |
Depreciation |
|
|
11,295 |
|
|
|
14,125 |
|
|
|
(2,830 |
) |
|
|
-20 |
% |
Total operating costs and expenses |
|
|
61,810 |
|
|
|
44,977 |
|
|
|
16,833 |
|
|
|
37 |
% |
Loss from operations |
|
|
(3,479 |
) |
|
|
(24,811 |
) |
|
|
21,332 |
|
|
|
-86 |
% |
Other (expense) income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4 |
|
|
|
100 |
|
|
|
(96 |
) |
|
|
-96 |
% |
Interest expense and financing charges |
|
|
(8,504 |
) |
|
|
(8,510 |
) |
|
|
6 |
|
|
|
0 |
% |
Other, net |
|
|
(775 |
) |
|
|
(614 |
) |
|
|
(161 |
) |
|
|
26 |
% |
Total other expense |
|
|
(9,275 |
) |
|
|
(9,024 |
) |
|
|
(251 |
) |
|
|
3 |
% |
Loss before income taxes |
|
|
(12,754 |
) |
|
|
(33,835 |
) |
|
|
21,081 |
|
|
|
-62 |
% |
Income tax provision |
|
|
1,438 |
|
|
|
2,162 |
|
|
|
(724 |
) |
|
|
-33 |
% |
Net loss |
|
|
(14,192 |
) |
|
|
(35,997 |
) |
|
|
21,805 |
|
|
|
-61 |
% |
Net income (loss) attributable to noncontrolling interests |
|
|
706 |
|
|
|
(13 |
) |
|
|
719 |
|
|
n/m |
|
Net loss attributable to shareholders |
|
$ |
(14,898 |
) |
|
$ |
(35,984 |
) |
|
$ |
21,086 |
|
|
|
-59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Services: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling services |
|
$ |
44,913 |
|
|
$ |
17,725 |
|
|
$ |
27,188 |
|
|
|
153 |
% |
Management fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
** |
|
Reimbursables and other |
|
|
5,183 |
|
|
|
2,343 |
|
|
|
2,840 |
|
|
|
121 |
% |
Total revenue |
|
|
50,096 |
|
|
|
20,068 |
|
|
|
30,028 |
|
|
|
150 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs |
|
|
36,438 |
|
|
|
25,357 |
|
|
|
11,081 |
|
|
|
44 |
% |
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
** |
|
Depreciation |
|
|
10,856 |
|
|
|
13,715 |
|
|
|
(2,859 |
) |
|
|
-21 |
% |
Total operating costs and expenses |
|
|
47,294 |
|
|
|
39,072 |
|
|
|
8,222 |
|
|
|
21 |
% |
Income (loss) from operations |
|
|
2,802 |
|
|
|
(19,004 |
) |
|
|
21,806 |
|
|
|
-115 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Services: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling services |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
** |
|
Management fees |
|
|
1,103 |
|
|
|
98 |
|
|
|
1,005 |
|
|
n/m |
|
Reimbursables and other |
|
|
7,132 |
|
|
|
— |
|
|
|
7,132 |
|
|
** |
|
Total revenue |
|
|
8,235 |
|
|
|
98 |
|
|
|
8,137 |
|
|
n/m |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs |
|
|
7,495 |
|
|
|
— |
|
|
|
7,495 |
|
|
** |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
** |
|
Depreciation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
** |
|
Total operating costs and expenses |
|
|
7,495 |
|
|
|
— |
|
|
|
7,495 |
|
|
** |
|
Income from operations |
|
|
740 |
|
|
|
98 |
|
|
|
642 |
|
|
|
655 |
% |
Consolidated Revenue: Total revenue increased $38.2 million due primarily to an increase in operating activities in the Current Quarter.
30
Drilling Services Revenue: Contract drilling revenue increased $27.2 million for the Current Quarter as compared to the Comparable Quarter. The increase in our contract drilling revenue was primarily the result of the number of rigs that were operational, with six in the Current Quarter (including two of the jackup rigs classified as held for sale as discussed in “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding” in this Part I, Item 2) compared to three in the Comparable Quarter. Reimbursables and other revenue increased $2.8 million in the Current Quarter as compared to the Comparable Quarter primarily as a result of the number of our rigs which were operational (as discussed immediately above.)
Managed Services Revenue: Management fees increased $1.0 million in the Current Quarter as compared to the Comparable Quarter as a result of the management of certain deepwater floaters owned by the Aquadrill Entities, which we began managing in late March during the Comparable Quarter. The increase in Reimbursables and other revenue for the Current Quarter as compared to the Comparable Quarter is primarily as a result of the management of the deepwater floaters owned by the Aquadrill Entities (as discussed immediately above.)
Consolidated Operating Costs: Total operating costs increased 73% due primarily to an increase in operating activities in the Current Quarter.
Drilling Services Operating costs: Drilling Services operating costs increased 44% in the Current Quarter as compared to the Comparable Quarter primarily as the result of the changes in our drilling contracts discussed above. This increase was partially offset by the sale of various assets during the Current Quarter and the recognition of a net gain of $1.9 million related to the sale of these assets. The Comparable Quarter includes the sale of the Titanium Explorer and the recognition of a net gain of $2.8 million in related to the sale of the asset.
Managed Services Operating costs: The increase in Managed Services operating costs in the Current Quarter as compared to the Comparable Quarter is as the result the management of certain deepwater floaters discussed above.
General and administrative expenses: Increases in general and administrative expenses for the Current Quarter as compared to the Comparable Quarter were primarily due to increased labor costs offset by lower professional fees. General and administrative expenses for the Comparable Quarter included approximately $0.3 million for non-cash share-based compensation expense. Non-cash share-based compensation expense for the Current Quarter was immaterial.
Depreciation expense: Depreciation expense is primarily related to rigs owned by us included in our Drilling Services segment. The Managed Services segment does not currently own depreciable assets. Depreciation expense for the Current Quarter decreased 20% as compared to the Comparable Quarter, due primarily to the decreased depreciation expense on the three jackup rigs classified as held for sale on December 20, 2021.
Interest income: Decreases in interest income for the Current Quarter as compared to the Comparable Quarter were due primarily to lower interest rates earned on lower cash investments during the Current Quarter.
Interest expense and financing charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately $0.4 million for the Current Quarter and for the Comparable Quarter, respectively.
Other, net: Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are re-measured in USD based on a combination of both current and historical exchange rates. Net foreign currency exchange loss of approximately $0.8 million and $0.6 million was included in “other, net,” for the Current Quarter and Comparable Quarter, respectively.
Income tax provision: Our annualized effective tax rate for the Current Quarter is negative 17.51% based on estimated annualized ordinary loss before income taxes excluding income tax discrete items. Our annualized effective tax rate for the Comparable Quarter was negative 6.0%, based on estimated annualized loss before income taxes excluding income tax discrete items.
Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. In some jurisdictions, we do not pay taxes or receive benefits for certain income and expense items, including interest expense and disposal gains or losses. In other jurisdictions, we recognize income taxes on a net income basis or a deemed profit basis.
Liquidity and Capital Resources
The prolonged low price environment caused by the spread of COVID-19, the resulting decline in global economic activity and the oil price and market share volatility began to reduce our liquidity and capital resources in the second quarter of 2020 through 2021, a trend which extended into the first quarter of 2022 and could extend further into 2022 and beyond. Such events have had significant adverse consequences for general financial, business and economic conditions, as well as for the financial, business and economic position of our business and the business of our customers and suppliers, and may adversely impact our ability to derive cash flows from our operations and access capital funding from third parties in the future.
We experienced, and could experience further delays in the collection of certain accounts receivables due to logistical obstacles resulting from the COVID-19 pandemic, such as office closures, as well as other impacts to our long-term liquidity. Governmental measures, such as widespread lock downs, nightly curfews , territorial entry restrictions and mandates, could impact our ability to operate
31
in locations where such restrictions and requirements are in place, including those locations where we derive material revenue. During these uncertain times, we have sought, and continue to seek, measures to reduce our operating costs and preserve cash. We could implement further cost reduction measures (in addition to those previously put in place in 2020 and maintained through the Current Period) and alter our general financial strategy in the near- and long-term.
Sources and Uses of Liquidity
Our anticipated cash flow needs, both in the short- and long-term, may include, among others: (i) normal recurring operating expenses; (ii) planned and discretionary capital expenditures; (iii) repayments of interest; and (iv) certain contractual cash obligations and commitments. We may, from time to time, redeem, repurchase or otherwise acquire our outstanding 9.25% First Lien Notes through open market purchases, tender offers or pursuant to the terms of such securities.
We currently expect to fund our cash flow needs with cash generated by our operations, cash on hand or proceeds from sales of assets. As of March 31, 2022, we believe we maintain adequate cash reserves and are continuously managing our actual cash flow and cash forecasts. Accordingly, management believes that we have adequate liquidity to fund our operations for the twelve months following the date our Consolidated Financial Statements are issued and therefore, have been prepared under the going concern assumption. In the event the ADES Sale is not consummated (or should the amount of anticipated proceeds from the ADES Sale differ from our estimates), we nevertheless believe that the cash generated by our operations (including through our $184.7 million of backlog expected to be realized in fiscal year 2022) together with cash on hand will still be sufficient to fund our cash flow needs for the next twelve months.
Under the First Lien Indenture, we are required to apply the proceeds derived from the ADES Sale to repay, prepay or purchase our senior secured indebtedness (including the 9.25% First Lien Notes), acquire all or substantially all of the assets or capital stock of any other entity engaged in a similar or complementary business to the Company’s lines of business, or make capital expenditures or acquire non-current assets (including vessels and related assets) that are useful in such lines of business (including any deposit or installment payments with respect thereto as well as any expenditures related to the acquisition, construction or “ready for sea” costs of such vessels). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.
Our 9.25% First Lien Notes mature in November 2023. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, including in order to satisfy our obligations under the 9.25% First Lien Notes, we anticipate that they will be obtained through incurrence of additional indebtedness, additional equity financings, sales of assets or a combination of these potential sources of funds. However, there can be no assurance that we will be able to obtain additional funds on terms acceptable to us, on a timely basis or at all. The failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the results of operations, and financial condition. If we are unable to fund capital expenditures with our cash flow from operations or sales of non-strategic assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by certain restrictive covenants under the agreements governing our credit agreement and notes, by changes in laws and regulations or interpretation thereof and by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. For example, the invasion of Ukraine by Russia in February 2022, and the resulting impact of sanctions imposed by western nations against Russia, Russian-backed separatist regions in Ukraine, certain banks, companies, government officials, and other individuals in Russia and Belarus, could adversely impact the global oil and gas markets for the foreseeable future and, in the process, our ability to access additional capital funding sources. The failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the results of operations, and financial condition.
As of March 31, 2022, we had working capital of approximately $212.6 million, including approximately $62.2 million of cash available for general corporate purposes. Scheduled debt service consists of interest payments through December 31, 2022 of approximately $32.4 million. We anticipate capital expenditures through December 31, 2022 to be between approximately $4.0 million and $4.9 million. As our rigs obtain new contracts, we could incur reactivation and mobilization costs for these rigs, as well as additional customer requested equipment upgrades. These costs could be significant and may not be fully recoverable from the customer. Based on our expected levels of activity, incremental expenditures through December 31, 2022 for special periodic surveys, major repair and maintenance expenditures and equipment re-certifications to be between approximately $21.0 million and $25.7 million. Approximately $1.0 million and $6.8 million of capital expenditures and incremental expenditures, respectively, are anticipated to be reimbursed to the Company at the close of the ADES Sale. As of March 31, 2022, we had approximately $49.9 million available for the issuance of letters of credit under our cash collateralized letter of credit facility.
32
The following table includes a summary of our cash flow information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(unaudited, in thousands) |
|
2022 |
|
|
2021 |
|
Cash flows (used in) provided by: |
|
|
|
|
|
|
|
Operating activities |
|
$ |
(8,205 |
) |
|
$ |
(15,351 |
) |
|
Investing activities |
|
|
(3,799 |
) |
|
|
13,101 |
|
|
Financing activities |
|
|
— |
|
|
|
— |
|
Changes in cash flows from operating activities are driven by changes in net loss during the relevant periods (see the discussion of changes in net loss above in “Results of Operations” of this Part I, Item 2).
Cash flows from investing activities in the Current Quarter include net proceeds of $3.1 million from the sale of various assets. The Comparable Quarter include net proceeds of $13.6 million from the sale of the Titanium Explorer.
The significant elements of the 9.25% First Lien Notes are described in “Note 5. Debt” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.
We enter into operating leases in the normal course of business for office space, housing, vehicles and specified operating equipment. Some of these leases contain options that would cause our future cash payments to change if we exercised those options.
Commitments and Contingencies
We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. Information regarding our legal proceedings is set forth in “Note 8. Commitments and Contingencies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.
There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.
Critical Accounting Policies and Accounting Estimates
The preparation of unaudited financial statements and related disclosures in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our significant accounting policies are included in “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to the Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of the Board of Directors.
Our critical accounting policies are those related to property and equipment, impairment of long-lived assets and income taxes. For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” in Part II of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 30, 2022. During the Current Quarter, there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates are based.
Recent Accounting Pronouncements: See “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.