UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

x

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

For the quarterly period ended March 31, 2016

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: Not Applicable

 

VANTAGE DRILLING INTERNATIONAL

(Exact name of Registrant as specified in its charter)

 

 

Cayman Islands

 

N/A

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

777 Post Oak Boulevard, Suite 800

Houston, TX 77056

(Address of principal executive offices and zip code)

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

 

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   x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of Vantage Drilling International ordinary shares outstanding as of April 30, 2016 is 5,000,053 shares.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes   ¨     No   x

* The Company is not currently subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, but has agreed under the terms of a shareholders’ agreement and certain of its debt instruments to make filings voluntarily on Form 10-Q.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

SAFE HARBOR STATEMENT

3

 

PART I—FINANCIAL INFORMATION

 

Item 1

 

Consolidated Balance Sheet

5

 

 

Consolidated Statement of Operations

6

 

 

Consolidated Statement of Cash Flows

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

Item 2

 

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

22

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

29

 

Item 4

 

Controls and Procedures

29

 

PART II—OTHER INFORMATION

 

 

Item 5

 

Other Information

30

 

Item 6

 

Exhibits

31

 

SIGNATURES

33

 

 

 

2


 

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the following:

 

·

our small number of customers;

 

·

credit risks of our key customers and certain other third parties;

 

·

reduced expenditures by oil and natural gas exploration and production companies;

 

·

termination or renegotiation of our customer contracts;

 

·

general economic conditions and conditions in the oil and gas industry;

 

·

delays and cost overruns in construction projects;

 

·

competition within our industry;

 

·

limited mobility between geographic regions;

 

·

operating hazards in the oilfield service industry;

 

·

ability to obtain indemnity from customers;

 

·

adequacy of insurance coverage upon the occurrence of a catastrophic event;

 

·

operations in international markets;

 

·

governmental, tax and environmental regulation;

 

·

changes in legislation removing or increasing current applicable limitations of liability;

 

·

effects of new products and new technology on the market;

 

·

our substantial level of indebtedness;

 

·

our ability to incur additional indebtedness;

 

·

compliance with restrictions and covenants in our debt agreements;

 

·

identifying and completing acquisition opportunities;

 

·

levels of operating and maintenance costs;

 

·

our dependence on key personnel;

 

·

availability of workers and the related labor costs;

 

·

increased cost of obtaining supplies;

 

·

the sufficiency of our internal controls;

 

·

changes in tax laws, treaties or regulations;

 

·

any non-compliance with the U.S. Foreign Corrupt Practices Act;  and

 

·

our incorporation under the laws of the Cayman Islands and the limited rights to relief that may be available compared to U.S. laws.

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 voluntarily make with the Securities and Exchange Commission

3


 

(the “SEC”), which may be obtained by contacting us or the SEC. These filings 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 “we,” “our” or “us” refer to Vantage Drilling International (formerly known as Offshore Group Investment Limited) and its consolidated subsidiaries.

 

 

 

 

4


 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

Vantage Drilling International

Consolidated Balance Sheet

(In thousands, except par value information)

(Unaudited)

 

 

Successor

 

 

 

Predecessor

 

 

 

 

March 31,

2016

 

 

 

December 31,

2015

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

249,201

 

 

 

$

203,420

 

 

Restricted cash

 

 

1,000

 

 

 

 

-

 

 

Trade receivables

 

 

51,668

 

 

 

 

70,722

 

 

Inventory

 

 

44,463

 

 

 

 

64,495

 

 

Prepaid expenses and other current assets

 

 

20,167

 

 

 

 

22,106

 

 

Total current assets

 

 

366,499

 

 

 

 

360,743

 

 

Property and equipment

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

898,586

 

 

 

 

3,481,006

 

 

Accumulated depreciation

 

 

(11,997

)

 

 

 

(532,619

)

 

Property and equipment, net

 

 

886,589

 

 

 

 

2,948,387

 

 

Other assets

 

 

9,872

 

 

 

 

23,050

 

 

Total assets

 

$

1,262,960

 

 

 

$

3,332,180

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

41,256

 

 

 

$

49,437

 

 

Accrued liabilities

 

 

38,757

 

 

 

 

21,702

 

 

Current maturities of long-term debt

 

 

1,430

 

 

 

 

 

 

VDC note payable

 

 

 

 

 

 

61,477

 

 

Total current liabilities

 

 

81,443

 

 

 

 

132,616

 

 

Long–term debt, net of discount of $140,073 and $0

 

 

825,040

 

 

 

 

 

 

Other long-term liabilities

 

 

11,528

 

 

 

 

33,097

 

 

Liabilities subject to compromise

 

 

 

 

 

 

2,694,456

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

Shareholder's equity

 

 

 

 

 

 

 

 

 

 

Predecessor ordinary shares, $0.001 par value, 50 million shares authorized; one thousand shares issued and outstanding

 

 

 

 

 

 

 

 

Predecessor additional paid-in capital

 

 

 

 

 

 

595,119

 

 

Successor ordinary shares, $0.001 par value, 50 million shares authorized; 5,000 shares issued and outstanding

 

 

5

 

 

 

 

 

 

Successor additional paid-in capital

 

 

373,972

 

 

 

 

 

 

Accumulated deficit

 

 

(29,028

)

 

 

 

(138,363

)

 

Total VDI shareholder's equity

 

 

344,949

 

 

 

 

456,756

 

 

Noncontrolling interests

 

 

 

 

 

 

15,255

 

 

Total equity

 

 

344,949

 

 

 

 

472,011

 

 

Total liabilities and equity

 

$

1,262,960

 

 

 

$

3,332,180

 

 

 

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

 

 

 

5


 

Vantage Drilling International

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Successor

 

 

 

Predecessor

 

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling services

 

$

24,059

 

 

 

$

20,891

 

 

 

207,981

 

 

Management fees

 

 

959

 

 

 

 

752

 

 

 

1,881

 

 

Reimbursables

 

 

4,768

 

 

 

 

1,897

 

 

 

10,659

 

 

Total revenue

 

 

29,786

 

 

 

 

23,540

 

 

 

220,521

 

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

27,439

 

 

 

 

25,213

 

 

 

95,350

 

 

General and administrative

 

 

9,168

 

 

 

 

2,558

 

 

 

5,990

 

 

Depreciation

 

 

12,076

 

 

 

 

10,696

 

 

 

31,623

 

 

Total operating costs and expenses

 

 

48,683

 

 

 

 

38,467

 

 

 

132,963

 

 

Income (loss) from operations

 

 

(18,897

)

 

 

 

(14,927

)

 

 

87,558

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

6

 

 

 

 

3

 

 

 

12

 

 

Interest expense and other financing charges (contractual interest of $23,219 for the period from January 1, 2016 to February 10, 2016)

 

 

(10,650

)

 

 

 

(1,728

)

 

 

(46,119

)

 

Gain on debt extinguishment

 

 

 

 

 

 

 

 

 

10,825

 

 

Other, net

 

 

1,834

 

 

 

 

(69

)

 

 

(151

)

 

Reorganization items

 

 

(154

)

 

 

 

(452,923

)

 

 

 

 

Total other income (expense)

 

 

(8,964

)

 

 

 

(454,717

)

 

 

(35,433

)

 

Income (loss) before income taxes

 

 

(27,861

)

 

 

 

(469,644

)

 

 

52,125

 

 

Income tax provision

 

 

1,167

 

 

 

 

2,371

 

 

 

29,289

 

 

Net income (loss)

 

 

(29,028

)

 

 

 

(472,015

)

 

 

22,836

 

 

Net income (loss) attributable to noncontrolling interests

 

 

 

 

 

 

(969

)

 

 

190

 

 

Net income (loss) attributable to VDI

 

$

(29,028

)

 

 

$

(471,046

)

 

$

22,646

 

 

 

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

 

 

 

6


 

Vantage Drilling International

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

 

Predecessor

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(29,028

)

 

 

$

(472,015

)

 

$

22,836

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

 

12,076

 

 

 

 

10,696

 

 

 

31,623

 

Amortization of debt financing costs

 

 

76

 

 

 

 

 

 

 

2,127

 

Amortization of debt discount

 

 

6,847

 

 

 

 

 

 

 

602

 

Reorganization items

 

 

 

 

 

 

430,210

 

 

 

 

Non-cash gain on debt extinguishment

 

 

 

 

 

 

 

 

 

(10,816

)

Deferred income tax benefit

 

 

(606

)

 

 

 

 

 

 

(525

)

Loss on disposal of assets

 

 

144

 

 

 

 

 

 

 

19

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

 

 

 

(1,000

)

 

 

 

Trade receivables

 

 

22,629

 

 

 

 

(3,575

)

 

 

(9,162

)

Inventory

 

 

(221

)

 

 

 

223

 

 

 

(2,305

)

Prepaid expenses and other current assets

 

 

(4,954

)

 

 

 

6,893

 

 

 

6,101

 

Other assets

 

 

368

 

 

 

 

941

 

 

 

2,650

 

Accounts payable

 

 

6,708

 

 

 

 

(14,890

)

 

 

(41,651

)

Accrued liabilities and other long-term liabilities

 

 

(5,801

)

 

 

 

21,152

 

 

 

41,696

 

Net cash provided by (used in) operating activities

 

 

8,238

 

 

 

 

(21,365

)

 

 

43,195

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(7,674

)

 

 

 

116

 

 

 

(5,894

)

Net cash provided by (used in) investing activities

 

 

(7,674

)

 

 

 

116

 

 

 

(5,894

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(358

)

 

 

 

(7,000

)

 

 

(40,854

)

Proceeds from issuance of 10% Second Lien Notes

 

 

-

 

 

 

 

76,125

 

 

 

-

 

Debt issuance costs

 

 

(51

)

 

 

 

(2,250

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(409

)

 

 

 

66,875

 

 

 

(40,854

)

Net increase (decrease) in cash and cash equivalents

 

 

155

 

 

 

 

45,626

 

 

 

(3,553

)

Cash and cash equivalents—beginning of period

 

 

249,046

 

 

 

 

203,420

 

 

 

75,801

 

Cash and cash equivalents—end of period

 

$

249,201

 

 

 

$

249,046

 

 

$

72,248

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

1,690

 

 

 

$

1,568

 

 

$

10,453

 

Income taxes

 

 

4,433

 

 

 

 

2,631

 

 

 

9,331

 

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

 

 

 

7


 

VANTAGE DRILLING INTERNATIONAL

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Recent Events

Vantage Drilling International (the “Company” or “VDI”), a Cayman Islands exempted company, is an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and natural gas wells for our customers. We also provide construction supervision services for drilling units owned by others. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and natural gas companies, focused primarily on international markets. The Company was previously known as Offshore Group Investment Limited and changed its corporate name to Vantage Drilling International effective February 11, 2016.

Restructuring Agreement and Emergence from Voluntary Reorganization under Chapter 11 Proceeding

On December 1, 2015, we and Vantage Drilling Company (“VDC”), our former parent company, entered into a restructuring support agreement (the “Restructuring Agreement”) with a majority of our secured creditors. Pursuant to the terms of the Restructuring Agreement, the Company agreed to pursue a pre-packaged plan of reorganization (the “Reorganization Plan”) under Chapter 11 of Title 11 of the United States Bankruptcy Code and VDC would commence official liquidation proceedings under the laws of the Cayman Islands. On December 2, 2015, pursuant to the Restructuring Agreement, the Company acquired two subsidiaries responsible for the management of the Company from VDC in exchange for a $61.5 million promissory note (the “VDC Note”). As this transaction involved a reorganization of entities under common control, it was reflected in the consolidated financial statements, at carryover basis, on a retrospective basis.

On December 3, 2015 (the “Petition Date”), the Company, certain of its subsidiaries and certain VDC subsidiaries who were guarantors of the Company’s pre-bankruptcy secured debt, filed the Reorganization Plan in the United States Bankruptcy Court for the District of Delaware ( In re Vantage Drilling International (F/K/A Offshore Group Investment Limited), et al. , Case No. 15-12422). On January 15, 2016, the District Court of Delaware confirmed the Company’s pre-packaged Reorganization Plan and the Company emerged from bankruptcy effective February 10, 2016 (the “Effective Date”).

The following table summarizes the components of our pre-bankruptcy debt, all of which was reflected as Liabilities Subject to Compromise (“LSTC”) in our consolidated balance sheet as of December 31, 2015 (in thousands):

 

2017 Term Loan and accrued interest

$

 

326,420

 

 

2019 Term Loan and accrued interest

 

 

344,738

 

 

7.5% Senior Notes and accrued interest

 

 

1,136,748

 

 

7.125% Senior Notes and accrued interest

 

 

736,550

 

 

Old Credit Agreement

 

 

150,000

 

 

   Liabilities Subject to Compromise

$

 

2,694,456

 

 

  Pursuant to the terms of the Reorganization Plan, the LSTC were retired on the Effective Date by issuing the debtholders securities in the reorganized Company, consisting of one new ordinary share of the reorganized Company (the “New Shares”) and $172.61 of principal of the 1%/12% Step-Up Senior Secured Third Lien Convertible Notes due 2030 (the “Convertible Notes”) . The New Shares and the Convertible Notes are issued subject to the terms of an agreement that prohibits the New Shares and Convertible Notes from being transferred or exchanged separately. For every $1,000 of principal, a note holder received 1.722798 New Shares and $297.37 of principal of Convertible Notes for the 2017 Term Loan, 1.725087 New Shares and $297.77 of principal of Convertible Notes for the 2019 Term Loan, 1.786070 New Shares and $308.29 of principal of Convertible Notes for the 7.5% Senior Notes, and 1.728569 New Shares and $298.37 of principal of Convertible Notes for the 7.125% Senior Notes. In total, these debtholders received 4,344,959 New Shares under the Reorganization Plan.

The New Shares issued to these creditors and the Convertible Notes may only be traded together and not separately. The Convertible Notes are convertible into New Shares in certain circumstances, at a conversion price (subject to adjustment in accordance with the terms of the Indenture for the Convertible Notes) which was $95.60 as of the issue date. The Indenture for the Convertible Notes includes customary covenants that restrict the granting of liens and customary events of default, including, among other things, failure to issue securities upon conversion of the Convertible Notes

Other significant elements of the Reorganization Plan included;

8


 

Second Amended and Restated Credit Agreement . The Company’s existing credit agreement was amended to (i) replace the $32.0 million revolving letter of credit commitment with a new $32.0 million revolving letter of credit facility and (ii) repay the $150 million of outstanding borrowings with (a) $7.0 million of cash and (b) the issuance of $14 3.0 million initial term loans (the “2016 Term Loan Facility”).

10% Senior Secured Second Lien Notes . Holders of the Company’s pre-petition  secured debt claims were eligible to participate in a rights offering conducted by the Company for $75.0 million of the Company’s new 10% Senior Secured Second Lien Notes due 2020 (the “10% Second Lien Notes”). In connection with this rights offering, certain creditors entered into a “backstop” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, paid $1.1 million in cash and $1.1 million in additional 10% Second Lien Notes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes, and raising $73.9 million, after deducting the cash portion of the backstop premium.

VDC Note . Effective with the Company’s emergence from bankruptcy, VDC’s former equity interest in the Company was cancelled. Immediately following that event, the VDC Note was converted into 655,094 New Shares in accordance with the terms thereof, in satisfaction of the obligation thereunder, which, including accrued interest, totaled approximately $62.0 million as of such date.

The Reorganization Plan allowed the Company to continue business operations during the court proceedings and maintain all operating assets and agreements. The Company had adequate liquidity prior to the filing and did not have to seek any debtor-in-possession financing. All trade payables, credits, wages and other related obligations were unimpaired by the Reorganization Plan.

Other Events: In July 2015, we became aware of media reports that Hamylton Padilha, the Brazilian agent the Company used in the contracting of the Titanium Explorer drillship to Petroleo Brasileiro S.A. (“Petrobras”), had entered into a plea arrangement with the Brazilian authorities in connection with his role in facilitating the payment of bribes to former Petrobras executives. Among other things, Mr. Padilha provided information to the Brazilian authorities of an alleged bribery scheme between former Petrobras executives and Mr. Hsin-Chi Su, who was, at the time of the alleged bribery scheme, a member of the Board of Directors and a significant shareholder of VDC. When we learned of Mr. Padilha’s plea agreement and the allegations, we voluntarily contacted the U.S. Department of Justice (“DOJ”) and the SEC to advise them of these recent developments, as well as the fact that we had engaged outside counsel to conduct an internal investigation of the allegations. Our internal investigation is ongoing and we are cooperating with the DOJ and SEC in their investigation of these allegations. In connection with our cooperation with the DOJ and SEC, we recently advised both agencies that in early 2010, we engaged outside counsel to investigate a report of allegations of improper payments to customs and immigration officials in Asia. That investigation was concluded in 2011, and we determined at that time that no disclosure was warranted; however, in an abundance of caution, we are reviewing the matter again in light of the allegations in the Petrobras matter. Although we cannot predict the outcome of this matter, if the DOJ or the SEC determine that violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) have occurred, the Company could be subject to civil and criminal sanctions, including monetary penalties, as well as additional requirements or changes to our business practices and compliance programs, any or all of which could have a material adverse effect on our business and financial condition. Additionally, if we become subject to any judgment, decree, order, governmental penalty or fine, this may constitute an event of default under the terms of our secured debt agreements and result in our outstanding debt becoming immediately due and payable.

 

2. Basis of Presentation and Significant Accounting Policies

Basis of Consolidation: The accompanying interim consolidated financial information as of March 31, 2016 and for the periods from February 10, 2016 to March 31, 2016, from January 1, 2016 to February 10, 2016 and the three months ended March 31, 2015 has been prepared without audit, pursuant to the rules and regulations of the SEC and includes our accounts and those of our majority owned subsidiaries and VIEs discussed below. All significant intercompany transactions and accounts have been eliminated. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements (except for the impact of the application of fresh-start accounting). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to provide for fair presentation. The balance sheet at December 31, 2015 is derived from our December 31, 2015 audited financial statements. These interim financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 though, as described below, such prior financial statements may not be comparable to our interim financial statements due to the adoption of fresh-start accounting. 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.

In connection with our bankruptcy filing, we were subject to the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852 Reorganizations (“ASC 852”). All expenses, realized gains and losses and provisions for losses directly associated with the bankruptcy proceedings were classified as “reorganization items” in the consolidated statements of operations. Certain pre-petition liabilities subject to Chapter 11 proceedings were considered as LSTC on the Petition Date and just prior to our emergence from bankruptcy on the Effective Date. The LSTC classification distinguished such liabilities

9


 

from the liabilities that were not expected to be compromised and li abilities incurred post-petition.

ASC 852 requires that subsequent to the Petition Date, expenses, realized gains and losses and provisions for losses that can be directly associated with the reorganization of the business be reported separately as reorganization items in the consolidated statements of operations. We were required to distinguish pre-petition liabilities subject to compromise from those that are not and post-petition liabilities in our balance sheet. Liabilities that were subject to compromise were reported at the amounts expected to be allowed by the Bankruptcy Court, even if they were settled for lesser amounts as a result of the Reorganization Plan.

Upon emergence from bankruptcy on the Effective Date, we adopted fresh-start accounting in accordance with ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheets. The effects of the Reorganization Plan and the application of fresh-start accounting were reflected in our consolidated financial statements as of February 10, 2016 and the related adjustments thereto were recorded in our consolidated statements of operations as reorganization items for the period January 1 to February 10, 2016.  

As a result, our consolidated balance sheets and consolidated statement of operations subsequent to the Effective Date will not be comparable to our consolidated balance sheets and statements of operations prior to the Effective Date. Our consolidated financial statements and related footnotes are presented with a black line division which delineates the lack of comparability between amounts presented on or after February 10, 2016 and dates prior. Our financial results for future periods following the application of fresh-start accounting will be different from historical trends and the differences may be material.

References to “Successor” relate to the Company on and subsequent to the Effective Date. References to “Predecessor” refer to the Company prior to the Effective Date. The consolidated financial statements of the Successor have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.

In addition to the consolidation of our majority owned subsidiaries, we also consolidate variable interest entities (“VIEs”) when we are determined to be the primary beneficiary of a VIE. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE. We consolidated these entities in our Predecessor consolidated financial statements because we determined that they were VIEs and that we were the primary beneficiary.These VIEs who were subsidiaries of VDC, guarantors of our pre-petition debt and were part of the Reorganization Plan, became our subsidiaries upon emergence from bankruptcy on the Effective Date. The following table summarizes the net effect of consolidating these entities on our Predecessor consolidated statement of operations.  

 

 

 

Predecessor

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

(in thousands)

 

 

 

 

 

 

 

 

Revenue

 

$

1,219

 

 

$

5,730

 

Operating costs and expenses

 

 

1,240

 

 

 

5,077

 

Income before taxes

 

 

22

 

 

 

740

 

Income tax provision

 

 

991

 

 

 

550

 

Net income (loss) attributable to noncontrolling interests

 

 

(969

)

 

 

190

 

Cash and Cash Equivalents: Includes deposits with financial institutions as well as short-term money market instruments with maturities of three months or less when purchased.

Inventory: Consists of materials, consumables, spare parts and related supplies for our drilling rigs and is carried at the lower of average cost or market.

Property and Equipment: Consists of the costs of our drilling rigs, furniture and fixtures, computer equipment and capitalized costs for computer software. Drilling rigs are depreciated on a component basis over estimated useful lives ranging from five to thirty-five years on a straight-line basis as of the date placed in service. Other assets are depreciated upon placement in service over estimated useful lives ranging from three to seven years on a straight-line basis. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and a gain or loss is recognized.

We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized would represent the excess of the asset’s carrying value over the estimated fair value.  

10


 

Interest costs and the amortizati on of debt financing costs related to the financings of our drilling rigs are capitalized as part of the cost while they are under construction and prior to the commencement of each vessel’s first contract. We did not capitalize any interest for the report ed periods .

Debt Financing Costs: Costs incurred with debt financings are deferred and amortized over the term of the related financing facility on a straight-line basis which approximates the interest method. Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability.  

Revenue: Revenue is recognized as services are performed based on contracted dayrates and the number of operating days during the period.

In connection with a customer contract, we may receive lump-sum fees for the mobilization of equipment and personnel or the demobilization of equipment and personnel upon completion. Mobilization fees received and costs incurred to mobilize a rig from one geographic market to another are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees or lump-sum payments received for capital improvements to rigs are deferred and amortized to income over the term of the related drilling contract. The costs of such capital improvements are capitalized and depreciated over the useful lives of the assets. Upon completion of drilling contracts, any demobilization fees received are recorded as revenue. We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses.

Rig and Equipment Certifications: We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment and must maintain such certifications through periodic inspections and surveys. The costs associated with these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.

Income Taxes: Income taxes are provided for based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement basis and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes as a component of income tax expense.

We have early adopted the provisions of ASU 2015-17 effective January 1, 2016 and have retrospectively applied its provisions to all periods presented in our Consolidated Financial Statements. Application of the ASU did not have a material impact on our consolidated financial statements.

Concentrations of Credit Risk: Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits. Some of our restricted cash is invested in certificates of deposit. We have a limited number of key customers, who are primarily large international oil and gas operators, national oil companies and other international oil and gas companies. Our contracts provide for monthly billings as services are performed and we monitor compliance with contract payment terms on an ongoing basis. Outstanding receivables beyond payment terms are promptly investigated and discussed with the specific customer. We did not have an allowance for doubtful accounts as of March 31, 2016 or December 31, 2015.

Use of Estimates: The preparation of financial statements 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 revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to property and equipment, income taxes, insurance, employee benefits and contingent liabilities. Actual results could differ from these estimates.

Fair Value of Financial Instruments: The fair value of our short-term financial assets and liabilities approximates the carrying amounts represented in the balance sheet principally due to the short-term nature or floating rate nature of these instruments. At December 31, 2015, the fair value of the 7.125% Senior Notes and the 7.5% Senior Notes was approximately $15.7 million and $23.5 million, respectively, based on quoted market prices, a Level 1 measurement. These notes are classified as LSTC as of December 31, 2015 and were discharged under the Reorganization Plan on the Effective Date. See “ Note 5. Debt ” for the fair value of our post-petition bankruptcy debt.  

Recent Accounting Standards: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers . The ASU supersedes most of the existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance. The ASU is based on the principle that revenue is recognized when an entity transfers promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires significant additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. T he ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, using either a full or a modified retrospective application approach.

11


 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification , to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balan ce sheet and disclosing key information about leasing arrangements. Under these amendments, lessees are required to recognize lease assets and lease liabilities for leases classified as operating leases under ASC 840. The guidance is effective for financia l statements issued for fiscal years beginning after December 15, 2018, and early adoption is permitted.

We are evaluating the provisions of ASU 2016-02 and ASU 2014-09 and have not yet determined the impact of these ASUs on our financial position, results of operations or cash flows.

 

3. Fresh-Start Accounting

Upon our emergence from bankruptcy, we adopted fresh-start accounting in accordance with ASC 852. We qualified for fresh-start accounting because (i) the reorganization value of the our assets immediately prior to the confirmation was less than the post-petition liabilities and allowed claims and (ii) the holders of existing voting shares of the Predecessor company received less than 50% of the voting shares of the post-emergence Successor entity.

Reorganization Value : Reorganization value represents the fair value of the Successor’s total assets and is intended to approximate the amount a willing buyer would pay for the assets immediately after restructuring. Under fresh-start accounting, we allocated the reorganization value to our individual assets based on their estimated fair values.

Our reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long term debt and shareholders’ equity. The estimated enterprise value of the Company of approximately $954.2 million represents management’s best estimate of fair value on the Effective Date and the value contemplated by the Bankruptcy Court in confirmation of the Reorganization Plan after extensive negotiations among the Company and its creditors. The estimated enterprise value, after adding cash plus the estimated fair values of all of the Company’s non-debt liabilities, is intended to approximate the reorganization value. A reconciliation of the reorganization value is provided in the table below:

 

(in thousands)

 

 

 

 

Enterprise value

 

$

954,242

 

Plus: Cash, cash equivalents and restricted cash

 

 

250,046

 

Plus: Working capital surplus

 

 

712

 

Plus: Current liabilities

 

 

80,284

 

Reorganization value of Successor assets

 

$

1,285,284

 

Reorganization value and enterprise value were estimated using numerous projections and assumptions that are inherently subject to significant uncertainties and resolution of contingencies that are beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumption will be realized.

In order to estimate the enterprise value of the Company, we used a discounted cash flow methodology. The discounted cash flow analysis estimates the value of a business by calculating the present value of expected future unlevered after-tax free cash flows to be generated by such business. This analysis is supported through a comparison of indicated values resulting from the use of other valuation techniques including: (i) a comparison of financial multiples implied by the estimated enterprise value to a range of multiples of publicly held companies with similar characteristics, and (ii) an analysis of comparable valuations indicated by precedent mergers or acquisitions of such companies.

The financial projections used to estimate the expected future unlevered after-tax free cash flows were based on our 5-year forecast. The projections were prepared by management and are based on a number of estimates including various assumptions regarding the anticipated future performance of the Company, industry performance, general business and economic conditions and other matters, many of which are beyond our control. The discounted cash flow method also includes assumptions of the weighted average cost of capital (the “Discount Rate”) as well as an estimate of a residual growth rate used to determine the enterprise value represented by the time period beyond the 5-year plan. The Discount Rate was calculated using the capital asset pricing model and resulted in a Discount Rate of 15.2%. The estimated residual growth rate was developed considering the long-term economic outlook of the industry and geographical regions that the Company operates in and resulted in an estimated rate of 2.0%.

12


 

Consolidated Balance Sheet : The adjustments set forth in the following condensed consolidated balance sheet reflect the effect of the consummation of the transactions contemplated by the Reorganization Plan (reflected in the column “R eorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh - start accounting (reflected in the column “Fresh - Start Adjustments”). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions or inputs.

 

 

 

Predecessor Company

February 10, 2016

 

 

Reorganization Adjustments

 

 

Fresh-Start Adjustments

 

 

Successor Company

February 10, 2016

 

(in thousands, except par value information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

182,171

 

 

$

66,875

 

(a)

$

 

 

$

249,046

 

Trade receivables

 

 

74,297

 

 

 

 

 

 

 

 

 

74,297

 

Inventory

 

 

64,272

 

 

 

 

 

 

(20,030

)

(f)

 

44,242

 

Prepaid expenses and other current assets

 

 

16,511

 

 

 

 

 

 

 

 

 

 

16,511

 

Total current assets

 

 

337,251

 

 

 

66,875

 

 

 

(20,030

)

 

 

384,096

 

Property and equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

3,480,890

 

 

 

 

 

 

(2,589,755

)

 

 

891,135

 

Accumulated depreciation

 

 

(543,315

)

 

 

 

 

 

543,315

 

 

 

-

 

Property and equipment, net

 

 

2,937,575

 

 

 

 

 

 

(2,046,440

)

(g)

 

891,135

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

21,963

 

 

 

 

 

 

(11,910

)

(h)

 

10,053

 

Total other assets

 

 

21,963

 

 

 

 

 

 

(11,910

)

 

 

10,053

 

Total assets

 

$

3,296,789

 

 

$

66,875

 

 

$

(2,078,380

)

 

$

1,285,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

34,547

 

 

$

 

 

$

 

 

$

34,547

 

Accrued liabilities

 

 

44,307

 

 

 

 

 

 

 

 

 

44,307

 

Current maturities of long-term debt

 

 

 

 

 

1,430

 

(b)

 

 

 

 

1,430

 

VDC note payable

 

 

62,627

 

 

 

(62,627

)

(c)

 

 

 

 

 

Total current liabilities

 

 

141,481

 

 

 

(61,197

)

 

 

 

 

 

80,284

 

Long–term debt

 

 

 

 

 

818,525

 

(b)

 

 

 

 

818,525

 

Other long-term liabilities

 

 

30,645

 

 

 

 

 

 

(18,148

)

(h)

 

12,497

 

Liabilities subject to compromise

 

 

2,694,456

 

 

 

(2,694,456

)

(d)

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predecessor ordinary shares, $0.001 par value, 50 million shares authorized; one thousand shares issued and outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Predecessor additional paid-in capital

 

 

595,119

 

 

 

(595,119

)

(e)

 

 

 

 

 

Successor ordinary shares, $0.001 par value, 50 million shares authorized; 5,000 shares issued and outstanding

 

 

 

 

 

5

 

(b)(c)

 

 

 

 

5

 

Successor additional paid-in capital

 

 

 

 

 

373,973

 

(b)(c)

 

 

 

 

373,973

 

Accumulated deficit

 

 

(179,198

)

 

 

2,239,430

 

(e)

 

(2,060,232

)

(i)

 

 

Total VDI shareholder's equity

 

 

415,921

 

 

 

2,018,289

 

 

 

(2,060,232

)

 

 

373,978

 

Noncontrolling interests

 

 

14,286

 

 

 

(14,286

)

(e)

 

 

 

 

 

Total equity

 

 

430,207

 

 

 

2,004,003

 

 

 

(2,060,232

)

 

 

373,978

 

Total liabilities and equity

 

$

3,296,789

 

 

$

66,875

 

 

$

(2,078,380

)

 

$

1,285,284

 

 

 

(a)

Reflects the net use of cash on the Effective Date from implementation of the Reorganization Plan (in thousands):

13


 

Sources:

 

 

 

 

Net proceeds from 10% Second Lien Notes

 

$

76,125

 

Total Sources

 

 

76,125

 

 

 

 

 

 

Uses:

 

 

 

 

Repayment of Credit Facility borrowings

 

 

(7,000

)

Debt issuance costs

 

 

(2,250

)

Total Uses

 

 

(9,250

)

 

 

 

 

 

Net Sources

 

$

66,875

 

 

(b)

Represents the issuance of the new debt in connection with the Reorganization Plan; (1) the conversion of the pre-petition revolving credit facility into (i) $143.0 million of the 2016 Term Loan Facility and (ii) $7.0 million of cash; (2) the issuance of $76.1 million of new 10% Second Lien Notes due December 31, 2020 in a rights offering raising net proceeds of approximately $73.9 million after backstop premium and offering costs and (3) issuance of 4,344,959 new ordinary shares of the Company and $750.0 million face value of Convertible Notes.

 

(c)

Reflects the settlement of the VDC Note by issuing 655,094 new ordinary shares in accordance with the Reorganization Plan.

 

(d)

Reflects the settlement of LSTC in accordance with the Reorganization Plan as follows:      

(in thousands)

 

 

 

 

2017 Term Loan

 

$

323,543

 

2019 Term Loan

 

 

341,250

 

7.5% Senior Notes

 

 

1,086,815

 

7.125% Senior Notes

 

 

727,622

 

Prepetition credit facility

 

 

150,000

 

Accrued interest

 

 

65,226

 

Liabilities subject to compromise of the Predecessor Company

 

 

2,694,456

 

Fair value of equity issued to debtholders

 

 

(311,351

)

Fair value of Convertible Notes issued to debtholders

 

 

(603,080

)

Issuance of 2016 Term Loan Facility

 

 

(143,000

)

Credit Facility settled in cash

 

 

(7,000

)

Gain on settlement of liabilities subject to compromise (debt forgiveness)

 

$

1,630,025

 

 

(e)

Reflects the cumulative impact of reorganization adjustments discussed above:

(in thousands)

 

 

 

 

Gain on settlement of liabilities subject to compromise

 

$

1,630,025

 

Cancellation of Predecessor company equity

 

 

595,119

 

Acquisition of non-controlling interests

 

 

14,286

 

Net impact to retained earnings (deficit)

 

$

2,239,430

 

 

(f)

An adjustment of $20.0 million was recorded to inventory to decrease its net book value to estimated fair value. This inventory was part of the original shipyard value and the adjustment is based on the adjustment for the decrease in value for the individual drilling rigs; see (g) below.

 

(g)

An adjustment of $2.0 billion was recorded to decrease the net book value of property and equipment to estimated fair value. The fair value was determined utilizing the income approach for drilling rigs and related rig equipment. The discounted cash flow method under the income approach estimates the future cash flow that an asset is expected to generate. Future cash flow is converted to a present value equivalent using the estimated Discount Rate. The components of property and equipment, net as of February 10, 2016 and the fair value at February 10, 2016 are summarized in the following table (in thousands):  

14


 

 

 

Successor

 

 

 

Predecessor

 

 

 

February 10, 2016

 

 

 

February 10, 2016

 

(in thousands)

 

 

 

 

 

 

 

 

 

Drilling rigs

 

$

847,035

 

 

 

$

2,863,307

 

Capital spares

 

 

16,422

 

 

 

 

32,080

 

Leasehold improvements, office and technology equipment

 

 

18,389

 

 

 

 

18,389

 

Assets under construction

 

 

9,289

 

 

 

 

23,799

 

 

 

$

891,135

 

 

 

$

2,937,575

 

 

(h)

Represents the adjustments of deferred equipment survey and inspection costs, mobilization costs and mobilization revenue to estimated fair value.

 

(i)

Reflects the cumulative impact of fresh-start adjustments discussed above:

(in thousands)

 

 

 

 

Property and equipment fair value adjustments

 

$

(2,046,440

)

Inventory fair value adjustments

 

 

(20,030

)

Deferred mobilization expense write-off

 

 

(7,654

)

Deferred equipment certification write-off

 

 

(4,256

)

Deferred mobilization revenue write-off

 

 

18,148

 

Net impact to retained earnings (deficit)

 

$

(2,060,232

)

 

 

4. Reorganization Items

Reorganization items represent amounts incurred subsequent to the Petition Date as a direct result of the filing of the Reorganization Plan and are comprised of the following:

 

 

Successor

 

 

 

Predecessor

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

(in thousands)

 

 

 

 

 

 

 

 

 

Professional fees

 

$

154

 

 

 

$

22,716

 

Net gain on settlement of LSTC

 

 

 

 

 

 

(1,630,025

)

Fresh-start adjustments

 

 

 

 

 

 

2,060,232

 

 

 

 

 

 

 

 

 

 

 

 

 

$

154

 

 

 

$

452,923

 

For the periods from February 10, 2016 to March 31, 2016 and from January 1, 2016 to February 10, 2016, cash payments for reorganization items totaled $201,000 and $7.3 million, respectively.

 

 

5. Debt

Following our emergence from bankruptcy, our debt as of March 31, 2016 and February 10, 2016 was comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

February 10, 2016

 

(in thousands)

 

 

 

 

 

 

 

 

 

10% Second Lien Notes, net of financing costs of $2,225 and $2,250

 

$

73,900

 

 

 

$

73,875

 

Convertible Notes, net of discount of $140,073 and $146,920

 

 

609,927

 

 

 

 

603,080

 

2016 Term Loan Facility

 

 

142,643

 

 

 

 

143,000

 

 

 

 

826,470

 

 

 

 

819,955

 

Less current maturities of long-term debt

 

 

1,430

 

 

 

 

1,430

 

Long-term debt, net

 

$

825,040

 

 

 

$

818,525

 

15


 

10% Senior Secured Second Lien Notes. The Company engaged in a rights offering for $75.0 million of new 10 % Second Lien Notes for certain holders of its secured debt claims.  In connection with this rights offering, certain creditors entered into a “backstop” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, paid $1.1 million in cash and $1.1 million in additional 10% Second Lien Notes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes, and raising approxima tely $73.9 million in proceeds to the Company, after deducting the cash portion of the backstop premium.

The 10% Second Lien Notes were issued at par and are fully and unconditionally guaranteed (except for customary release provisions), on a senior secured basis, by all of the subsidiaries of the Company. The 10% Second Lien Notes mature on December 31, 2020, and bear interest from the date of their issuance at the rate of 10% per year. Interest on outstanding 10% Second Lien Notes is payable semi-annually in arrears, commencing on June 30, 2016. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. The 10% Second Lien Notes rank behind the 2016 Term Loan Facility as to collateral.

The Indenture for the 10% Second Lien Notes includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens, restrict the making of investments, restrict the incurrence of indebtedness and the conveyance of vessels, limit transactions with affiliates, and require that the Company provide periodic financial reports.

1%/12% Step-Up Senior Secured Third Lien Convertible Notes. The Company issued 4,344,959 New Shares and $750.0 million of the Convertible Notes to certain creditors holding approximately $2.5 billion of pre-petition secured debt claims. The New Shares issued to the creditors and the Convertible Notes may only be traded together and not separately. The Convertible Notes mature on December 31, 2030 and are convertible into New Shares, in certain circumstances, at a conversion price (subject to adjustment in accordance with the terms of the Indenture for the Convertible Notes) which was $95.60 as of the issue date.

The Company’s obligations under the Convertible Notes are fully and unconditionally guaranteed (except for customary release provisions), on a senior secured basis, by all of the subsidiaries of the Company, and the obligations of the Company and guarantors are secured by liens on substantially all of their respective assets. The guarantees by the Company’s subsidiaries of the Convertible Notes are joint and several. The Company has no independent assets or operations apart from the assets and operations of its wholly-owned subsidiaries. Any subsidiaries of the Company other than the subsidiary guarantors are minor. In addition, there are no significant restrictions on the Company’s or any subsidiary guarantor’s ability to obtain funds from its subsidiaries by dividend or loan. The Indenture for the Convertible Notes includes customary covenants that restrict the granting of liens and customary events of default, including, among other things, failure to issue securities upon conversion of the Convertible Notes.

Interest on the Convertible Notes is payable semi-annually in arrears commencing June 30, 2016 as a payment in kind, either through an increase in the outstanding principal amount of the Convertible Notes or, if the Company is unable to increase such principal amount, by the issuance of additional Convertible Notes.  Interest is computed on the basis of a 360-day year comprised of twelve 30-day months at a rate of 1% per annum for the first four years and then increasing to 12% per annum until maturity.

In connection with the adoption of fresh-start accounting, the Convertible Notes were recorded at an estimated fair value of approximately $603.1 million. The difference between face value and the fair value at date of issuance of the Convertible Notes was recorded as a debt discount and is being amortized to interest expense over the expected life of the Convertible Notes using the effective interest rate method.

The principal balance of the Convertible Notes (including payment in kind interest thereon) is convertible into New  Shares at a conversion rate based on an initial price per share of $95.60 per New Share, subject to adjustment, as described in the Indenture for the Convertible Notes. The Convertible Notes are convertible only (a) prior to the third anniversary of the issue date (February 10, 2016), (i) upon the instruction of holders of a majority in principal amount of the Convertible Notes or (ii) upon the full and final resolution of all potential Investigation Claims (as defined below), as determined in good faith by the board of directors of the Company (the “Board”) (which determination shall require the affirmative vote of a supermajority of the non-management directors), and (b) from and after February 10, 2019 through their maturity date of December 31, 2030, upon the approval of the Board (which approval shall require the affirmative vote of a supermajority of the non-management directors). For these purposes, (i) “supermajority of the non-management directors” means five affirmative votes of non-management directors assuming six non-management directors eligible to vote and, in all other circumstances, the affirmative vote of at least 75% of the non-management directors eligible to vote and (ii) “Investigation Claim” means any claim held by a United States or Brazilian governmental unit and arising from or related to the procurement of that certain Agreement for the Provision of Drilling Services, dated as of February 4, 2009, by and between Petrobras Venezuela Investments & Services B.V. and Vantage Deepwater Company, as amended, modified, supplemented, or novated from time to time.

In the event of a change in control, the holders of our Convertible Notes have the right to require us to repurchase all or any part of the Convertible Notes at a price equal to 101% of their principal amount. We assessed the prepayment requirements and concluded that this feature met the criteria to be considered an embedded derivative and must be bifurcated and separately fair valued due to the discount on the Convertible Notes at issuance. We considered the probabilities of a change of control occurring and determined that the derivative had a de minimis value at March 31, 2016.

Second Amended and Restated Credit Agreement. The Company entered into the 2016 Term Loan Facility providing for (i) a $32.0 million revolving letter of credit facility to replace the Company’s existing $32.0 million revolving letter of credit commitment

16


 

under its pre-petition credit facility and (ii) $143.0 million of term loans into which the claims of the lenders under the C ompany’s pre-petition credit facility were converted. The lenders under the Company’s pre-petition credit facility also received $7.0 million of cash under the Reorganization Plan. The obligations under the 2016 Term Loan Facility are guaranteed by substan tially all of the Company’s subsidiaries, subject to limited exceptions, and secured on a first priority basis by substantially all of the Company’s and the guarantors’ assets, including ship mortgages on all vessels, assignments of related earnings and in surance and pledges of the capital stock of all guarantors, in each case, subject to certain exceptions.

The maturity date of the term loans and commitments established under the 2016 Term Loan Facility is December 31, 2019. Interest is payable on the unpaid principal amount of each term loan under the 2016 Term Loan Facility at LIBOR plus 6.5%, with a LIBOR floor of 0.5%. The initial term loans are currently bearing interest at 7.1%. The 2016 Term Loan Facility has quarterly scheduled debt maturities of $357,500 commencing in March 2016.

Fees are payable on the outstanding face amount of letters of credit at a rate per annum equal to 5.50% as such rate may be increased from time to time pursuant to the terms of the 2016 Term Loan Facility.

The 2016 Term Loan Facility includes customary representations and warranties, mandatory prepayments, affirmative and negative covenants and events of default, including covenants that, among other things, restrict the granting of liens, the incurrence of indebtedness, the making of investments and capital expenditures, the sale or other conveyance of assets, including vessels, transactions with affiliates, prepayments of certain debt and the operation of vessels. The 2016 Term Loan Facility also requires that the Company maintain $75.0 million of available cash (defined to include unrestricted cash and cash equivalents plus undrawn commitments).

Upon the occurrence of specified change of control events or certain losses of our vessels in the agreements governing our 10% Second Lien Notes, Convertible Notes or 2016 Term Loan Facility, we will be required to offer to repurchase or repay all (or in the case of events of losses of vessels, an amount up to the amount of proceeds received from such event of loss) of such outstanding debt under such debt agreements at the prices and upon the terms set forth in the applicable agreements. In addition, in connection with certain asset sales, we will be required to offer to repurchase or repay such outstanding debt as set forth in the applicable debt agreements.

 

 

 

6. Shareholders’ Equity

We have 50,000,000 authorized ordinary shares, par value $0.001 per share. Upon emergence from bankruptcy, we issued 5,000,053 ordinary shares in connection with the settlement of LSTC and the VDC Note. As of March 31, 2016, 5,000,053 ordinary shares were issued and outstanding.  

As of December 31, 2015, the Company was a 100% owned subsidiary of VDC and did not have any equity incentive plans of its own. VDC had the 2007 Long-Term Incentive Plan under which time-vested and performance units were awarded to officers and employees of the Company and related share compensation expense was recognized. The vesting of outstanding equity awards provided by VDC was suspended prior to December 31, 2015 as the trading value of the shares of VDC was below the administrative costs of vesting the awards. Outstanding share awards at December 31, 2015 were cancelled due to VDC’s liquidation filing in the Cayman Islands. We recognized share compensation expense allocated from VDC of $1.8 million for the three months ended March 31, 2015.

On February 10, 2016, the Company adopted the 2016 Management Incentive Plan (the “2016 MIP”). Pursuant to the 2016 MIP, the Compensation Committee may grant to executive officers and certain other employees determined by the Compensation Committee, stock options, restricted stock or restricted stock units of the Company, subject to time based vesting and performance based vesting, as determined by the Compensation Committee. As of the Effective Date, the Company established a pool of restricted stock units with an estimated value of $44.5 million for issuance by the Compensation Committee.  No grants from the 2016 MIP have been made to date.

 

7. Income Taxes

We are a Cayman Islands entity. The Cayman Islands does not impose corporate income taxes. We do not have any domestic earnings; all of our earnings are foreign. Consequently, we have calculated income taxes based on the laws and tax rates in effect in the countries in which operations are conducted, or in which we and our subsidiaries are considered resident for income tax purposes. We operate in multiple countries under different legal forms. As a result, we are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Tax rates vary between jurisdictions, as does the tax base to which the rates are applied. Taxes may be levied based on net profit before taxes or gross revenues or withholding taxes on revenue. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Our income tax

17


 

expense may vary substantially from one period to another as a result o f changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions, rig movements or our level of operations or profitability in each tax jurisdiction. Furthermore, our income taxes are generally dependent upon the results of our operations and , when we generate significant revenues in jurisdictions where the income tax liability is based on gross revenues or asset values, there is no correlation between our operating results and the income tax expense. Furthermore, in some jurisdictions we do not pay taxes or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt and write-off of development costs.   

Deferred income tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. We provide for deferred taxes on temporary differences between the financial statements and tax bases of assets and liabilities using the enacted tax rates which are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

In certain jurisdictions we are taxed under preferential tax regimes, which may require our compliance with specified requirements to sustain the tax benefits. We believe we are in compliance with the specified requirements and will continue to make all reasonable efforts to comply; however, our ability to meet the requirements of the preferential tax regimes may be affected by changes in laws, our business operations and other factors affecting our company and industry, many of which are beyond our control.

Our periodic tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate in accordance with the normal statute of limitations in the applicable jurisdiction. These examinations may result in assessments of additional taxes that are resolved with the authorities or through the courts. Resolution of these matters involves uncertainties and there are no assurances as to the outcome. Our tax years 2008 and forward remain open to examination in many of our jurisdictions and we are currently involved in several tax examinations in jurisdictions where we are operating or have previously operated. As information becomes available during the course of these examinations, we may increase or decrease our estimates of tax assessments and accruals.

 

8. 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. Management does not believe any of these matters will have a material adverse impact on the Company’s financial position or results of operations. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims.

In July 2015, we became aware of media reports that Hamylton Padilha, the Brazilian agent the Company used in the contracting of the Titanium Explorer drillship to Petrobras, had entered into a plea arrangement with the Brazilian authorities in connection with his role in facilitating the payment of bribes to former Petrobras executives. Among other things, Mr. Padilha provided information to the Brazilian authorities of an alleged bribery scheme between former Petrobras executives and Mr. Hsin-Chi Su who was, at the time of the alleged bribery scheme, a member of the Board of Directors and a significant shareholder of VDC. When we learned of Mr. Padilha’s plea agreement and the allegations, we voluntarily contacted the DOJ and the SEC to advise them of these recent developments, as well as the fact that we had engaged outside counsel to conduct an internal investigation of the allegations. Our internal investigation is ongoing and we are cooperating with the DOJ and SEC in their investigation of these allegations. In connection with our cooperation with the DOJ and SEC, we recently advised both agencies that in early 2010, we engaged outside counsel to investigate a report of allegations of improper payments to customs and immigration officials in Asia.  That investigation was concluded in 2011, and we determined at that time that no disclosure was warranted; however, in an abundance of caution, we are reviewing the matter again in light of the allegations in the Petrobras matter. Although we cannot predict the outcome of this matter, if the DOJ or the SEC determine that violations of the FCPA have occurred, the Company could be subject to civil and criminal sanctions, including monetary penalties, as well as additional requirements or changes to our business practices and compliance programs, any or all of which could have a material adverse effect on our business and financial condition. Additionally, if we become subject to any judgment, decree, order, governmental penalty or fine, this may constitute an event of default under the terms of our secured debt agreements and result in our outstanding debt becoming immediately due and payable.

 

18


 

9. Supplemental Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

 

 

Successor

 

 

 

Predecessor

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

Prepaid insurance

 

$

2,751

 

 

 

$

1,394

 

Sales tax receivable

 

 

10,166

 

 

 

 

8,203

 

Income tax receivable

 

 

465

 

 

 

 

5,398

 

Other receivables

 

 

265

 

 

 

 

734

 

Other

 

 

6,520

 

 

 

 

6,377

 

 

 

$

20,167

 

 

 

$

22,106

 

 

Property and Equipment, net

Property and equipment, net, consisted of the following:

 

 

Successor

 

 

 

Predecessor

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

Drilling equipment

 

$

863,262

 

 

 

$

3,425,738

 

Assets under construction

 

 

16,880

 

 

 

 

23,421

 

Office and technology equipment

 

 

17,491

 

 

 

 

29,405

 

Leasehold improvements

 

 

953

 

 

 

 

2,442

 

 

 

 

898,586

 

 

 

 

3,481,006

 

Accumulated depreciation

 

 

(11,997

)

 

 

 

(532,619

)

Property and equipment, net

 

$

886,589

 

 

 

$

2,948,387

 

 

Other Assets

Other assets consisted of the following:

 

 

Successor

 

 

 

Predecessor

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

Performance bond collateral

 

$

3,197

 

 

 

$

3,197

 

Deferred certification costs

 

 

5,433

 

 

 

 

10,050

 

Deferred mobilization costs

 

 

 

 

 

 

8,454

 

Deferred income taxes

 

 

192

 

 

 

 

152

 

Deposits

 

 

1,050

 

 

 

 

1,197

 

 

 

$

9,872

 

 

 

$

23,050

 

 

 

19


 

Accrued Liabilities

Accrued liabilities consisted of the following:

 

 

Successor

 

 

 

Predecessor

 

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Interest

 

$

2,172

 

 

 

$

1,125

 

 

Reorganization professional fees

 

 

16,637

 

 

 

 

 

 

Compensation

 

 

7,955

 

 

 

 

8,360

 

 

Income taxes payable

 

 

4,842

 

 

 

 

8,901

 

 

Other

 

 

7,151

 

 

 

 

3,316

 

 

 

 

$

38,757

 

 

 

$

21,702

 

 

 

Other Long-Term Liabilities

Other long-term liabilities consisted of the following:

 

 

Successor

 

 

 

Predecessor

 

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

 

 

 

$

20,247

 

 

Deferred income taxes

 

 

2,070

 

 

 

 

2,635

 

 

Other non-current liabilities

 

 

9,458

 

 

 

 

10,215

 

 

 

 

$

11,528

 

 

 

$

33,097

 

 

 

Transactions with Former Parent Company

The Company's Consolidated Statement of Operations included the following transactions with VDC for the periods indicated:

 

 

Successor

 

 

 

Predecessor

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursable revenues

 

$

 

 

 

$

 

 

$

2,066

 

Interest income

 

 

4

 

 

 

 

3

 

 

 

7

 

Interest expense

 

 

 

 

 

 

(662

)

 

 

 

 

 

$

4

 

 

 

$

(659

)

 

$

2,073

 

 

 

The following table summarizes the balances payable to VDC included in the Company's Consolidated Balance Sheet as of the periods indicated:

 

 

Successor

 

 

 

Predecessor

 

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Accounts payable to related parties, net

 

$

17,282

 

 

 

$

17,340

 

 

VDC Note

 

 

 

 

 

 

61,477

 

 

Accrued liabilities

 

 

 

 

 

 

489

 

 

 

 

$

17,282

 

 

 

$

79,306

 

 

 

 

 

20


 

10. Business Segment and Significant Customer Information

We aggregate our contract drilling operations into one reportable segment even though we provide contract drilling services with different types of rigs, including jackup rigs and drillships, and in different geographic regions. Our operations are dependent on the global oil and gas industry and our rigs are relocated based on demand for our services and customer requirements. Our customers consist primarily of large international oil and gas companies, national or government-controlled oil and gas companies and other international exploration and production companies.  

We also provide construction supervision services for drilling units owned by others. In September 2013, we signed an agreement to supervise and manage the construction of two ultra-deepwater drillships for a third party. We will receive management fees and reimbursable costs during the construction phase of the two drillships, subject to a maximum amount for each drillship. This business represented approximately 3.2%, 3.2% and 0.9% of our total revenue for the periods from February 10, 2016 to March 31, 2016, from January 1, 2016 to February 10, 2016 and for the three months ended March 31 2015, respectively.

For the three months ended March 31, 2016 and 2015, the majority of our revenue was from countries outside of the United States. Consequently, we are exposed to the risk of changes in economic, political and social conditions inherent in foreign operations. Three customers accounted for approximately 58%, 18% and 14% of consolidated revenue for the period from February 10, 2016 2016 to March 31, 2016.  Three customers accounted for approximately 47%, 20% and 17% of consolidated revenue for the period from January 1, 2016 to February 10, 2016.  Three customers accounted for approximately 27%, 24% and 19% of consolidated revenue for the three months ended March 31, 2015.  

Our revenue by country was as follows (in thousands):

 

 

Successor

 

 

 

Predecessor

 

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Congo

 

$

13,859

 

 

 

$

13,769

 

 

$

59,836

 

 

Malaysia

 

 

5,936

 

 

 

 

3,319

 

 

 

 

 

Indonesia

 

 

5,235

 

 

 

 

4,214

 

 

 

 

 

India

 

 

 

 

 

 

 

 

 

52,974

 

 

U.S.

 

 

 

 

 

 

 

 

 

42,977

 

 

Other countries (a)

 

 

4,756

 

 

 

 

2,238

 

 

 

64,734

 

 

Total revenues

 

$

29,786

 

 

 

$

23,540

 

 

$

220,521

 

 

 

(a)

Other countries represent countries in which we operate that individually had operating revenues representing less than 10% of total revenues earned.

Our property and equipment, net by country was as follows (in thousands):

 

 

Successor

 

 

 

Predecessor

 

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Congo

 

$

253,637

 

 

 

$

582,590

 

 

Malaysia

 

 

248,228

 

 

 

 

 

 

South Africa

 

 

208,983

 

 

 

 

851,099

 

 

India

 

 

 

 

 

 

718,966

 

 

Other countries (a)

 

 

175,741

 

 

 

 

795,732

 

 

Total property and equipment

 

$

886,589

 

 

 

$

2,948,387

 

 

 

(a)

Other countries represent countries in which we operate that individually had property and equipment, net representing less than 10% of total property and equipment, net.

A substantial portion of our assets are mobile drilling units. Asset locations at the end of the period are not necessarily indicative of the geographic distribution of the revenues generated by such assets during the periods.

 

 

 

21


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist you in understanding our financial position at March 31, 2016 and our results of operations for the three months ended March 31, 2016 and 2015. 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, 2015. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current year presentation.

Overview

We are an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and natural gas wells for our customers. We also provide construction supervision services for drilling units owned by others. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and natural gas companies, focused primarily on international markets.

The following table sets forth certain current information concerning our offshore drilling fleet as of April 30, 2016.

 

Name

 

 

Year Built

 

  

Water Depth
Rating (feet)

 

  

Drilling Depth
Capacity
(feet)

 

  

Status

Jackups

 

 

 

 

  

 

 

 

  

 

 

 

  

 

Emerald Driller

 

 

2008

  

  

 

375

  

  

 

30,000

  

  

Warm Stacked

Sapphire Driller

 

 

2009

  

  

 

375

  

  

 

30,000

  

  

Warm Stacked

Aquamarine Driller

 

 

2009

  

  

 

375

  

  

 

30,000

  

  

Operating

Topaz Driller

 

 

2009

  

  

 

375

  

  

 

30,000

  

  

Operating

 

Drillships (1)

 

 

 

 

  

 

 

 

  

 

 

 

  

 

Platinum Explorer

 

 

2010

  

  

 

12,000

  

  

 

40,000

  

  

Warm Stacked

Titanium Explorer

 

 

2012

  

  

 

12,000

  

  

 

40,000

  

  

Warm Stacked

Tungsten Explorer

 

 

2013

  

  

 

12,000

  

  

 

40,000

  

  

Operating

(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.

Recent Developments

On the Petition Date, we filed a reorganization plan in the United States Bankruptcy Court for the District of Delaware ( In re Vantage Drilling International (F/K/A Offshore Group Investment Limited), et al. , Case No. 15-12422). On January 15, 2016, the District Court of Delaware confirmed the Company’s pre-packaged reorganization plan and we emerged from bankruptcy effective on the Effective Date.

Pursuant to the terms of the Reorganization Plan, the LSTC were retired on the Effective Date by issuing the debt holders securities in the reorganized Company, consisting of one New Share and $172.61 of principal of the Convertible Notes. The New Shares and the Convertible Notes are issued subject to the terms of an agreement that prohibits the New Shares and Convertible Notes from being transferred or exchanged separately. For every $1,000 of principal, a note holder received 1.722798 New Shares and $297.37 of principal of Convertible Notes for the 2017 Term Loan, 1.725087 New Shares and $297.77 of principal of Convertible Notes for the 2019 Term Loan, 1.786070 New Shares and $308.29 of principal of Convertible Notes for the 7.5% Senior Notes, and 1.728569 New Shares and $298.37 of principal of Convertible Notes for the 7.125% Senior Notes. In total, the debt holders received 4,344,959 New Shares under the Reorganization Plan.

Other significant elements of the Reorganization Plan included:

Second Amended and Restated Credit Agreement . The Company credit agreement was amended to (i) replace the $32.0 million revolving letter of credit commitment under its pre-petition facility with a new $32.0 million revolving letter of credit facility and (ii) repay the $150 million of outstanding borrowings under its pre-petition facility with (a) $7.0 million of cash and (b) the issuance of $143.0 million initial term loans.

10% Senior Secured Second Lien Notes. Holders of the Company’s pre-petition  secured debt claims were eligible to participate in a rights offering conducted by the Company for $75.0 million of the Company’s 10% Second Lien Notes. In connection with this

22


 

rights offering, certain creditors entered into a “backsto p” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, paid $1.1 million in cash and $1.1 million in additional 10% Second Lien N otes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes, and raising $73.9 million, after deducting the cash portion of the backstop premium.

VDC Note. Effective with the Company’s emergence from bankruptcy, VDC’s former equity interest in the Company was cancelled. Immediately following that event, the VDC Note was converted into 655,094 New Shares in accordance with the terms thereof, in satisfaction of the obligation thereunder, which, including accrued interest, totaled approximately $62.0 million as of such date.

The Reorganization Plan allowed the Company to maintain all operating assets and agreements.  All trade payables, credits, wages and other related obligations were unimpaired by the Reorganization Plan.

Upon emergence from bankruptcy on the Effective Date, we adopted fresh-start accounting in accordance with ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheets. The effects of the Reorganization Plan and the application of fresh-start accounting are reflected in our consolidated balance sheet as of March 31, 2016 and the related adjustments thereto were recorded in our consolidated statements of operations as reorganization items.

Business Outlook

Expectations about future oil and natural gas prices have historically been a key driver of demand for our services. The International Energy Agency estimates that demand growth for 2016 will increase by approximately 1.2 million barrels per day or 1.3% which represents a deceleration in growth from 2015 of 1.8 million barrels per day or 1.9%. The combination of surplus production and high inventories continues to depress oil prices.

In response to the significant decline in oil prices, exploration and development companies have been significantly reducing capital expenditure budgets for 2016 and beyond. Worldwide exploration and production spending cuts for 2016 are estimated to be 11% to 17% following an estimated 23% reduction in 2015, making this the largest two-year decline in history. As a result of these dramatic capital expenditure reductions, exploration and development companies have been releasing rigs and significantly reducing equipment orders. We believe that oil production declines in some regions will be necessary to stimulate a significant recovery in the offshore drilling market. Accordingly, we anticipate that our industry will experience depressed market conditions through the remainder of 2016 and 2017.

In addition to the generally depressed market conditions, the widening gap between rig supply and demand has caused the number of new rig contracts to decline approximately 65% for floaters and 50% for jackups between 2013 and 2015. In the same period, total contract length dropped approximately 75% for floaters and 50% for jackups according to industry sources. Further, in what has quickly become a common practice, operators are deferring or cancelling drilling contracts. Existing contracts are being renegotiated at lower dayrates or in “blend and extend” agreements, in which terms are extended in return for a decrease in dayrate. Additionally, the number of newbuilds without contracts has increased and offshore drilling contractors are faced with either deferring or taking delivery of the drilling rigs, which has resulted in their willingness to significantly reduce dayrates to obtain contracts for these rigs.  

In response to the oversupply of drilling rigs, a number of competitors are removing older, less efficient rigs from their fleets by either cold stacking the drilling rigs or taking them permanently out of service. This process takes time as many of the drilling rigs are still working for customers on contracts. Accordingly, while we believe this is an important element in bringing the supply of drilling rigs back into balance with demand, it will not be sufficient to materially improve market conditions in 2016.

A summary of our backlog coverage of days contracted and related revenue as of March 31, 2016 forward is as follows:

 

 

Percentage of Days Contracted

 

 

 

Revenues Contracted

(in thousands)

 

 

 

 

2016

 

 

2017

 

 

 

2016

 

 

2017

 

 

Beyond

 

 

Jackups

 

 

39%

 

 

 

10%

 

 

 

$

34,975

 

 

$

11,760

 

 

$

 

 

Drillships

 

 

33%

 

 

 

33%

 

 

 

$

72,875

 

 

$

102,200

 

 

$

87,000

 

 

 

 

 

23


 

Results of Operations

Our four jackup rigs began operations under their initial contracts in February 2009, August 2009, January 2010 and March 2010.  Our first drillship, the Platinum Explorer , commenced operations in December 2010. Our second drillship, the Titanium Explorer , commenced operations in December 2012. Our third drillship, the Tungsten Explorer , commenced operations in September 2013.

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. The period from February 10 to March 31, 2016 (Successor Company) and the period from January 1 to February 10, 2016 (Predecessor Company) are distinct reporting periods as a result of our emergence from bankruptcy on February 10, 2016.

 

Successor

 

 

 

Predecessor

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

Jackups

 

 

 

 

 

 

 

 

 

 

 

 

Rigs available

 

4

 

 

 

 

4

 

 

 

4

 

Available days (1)

 

204

 

 

 

 

160

 

 

 

360

 

Utilization (2)

 

60.0

%

 

 

 

53.6

%

 

 

96.1

%

Average daily revenues (3)

$

91,262

 

 

 

$

88,347

 

 

$

158,628

 

Deepwater

 

 

 

 

 

 

 

 

 

 

 

 

Rigs available

 

3

 

 

 

 

3

 

 

 

3

 

Available days (1)

 

153

 

 

 

 

120

 

 

 

270

 

Utilization (2)

 

33.3

%

 

 

 

33.3

%

 

 

93.6

%

Average daily revenues (3)

$

252,866

 

 

 

$

332,715

 

 

$

605,991

 

 

 

(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.

The following table is an analysis of our operating results for the periods indicated. The period from February 10 to March 31, 2016 (Successor Company) and the period from January 1 to February 10, 2016 (Predecessor Company) are distinct reporting periods as a result of our emergence from bankruptcy on February 10, 2016. References in these results of operations to the Successor Company refer to the period of February 10, 2016 to March 31, 2016 and references to the Predecessor Company refer to the period of January 1, 2016 to February 10, 2016.

24


 

 

 

 

Successor

 

 

 

Predecessor

 

 

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling services

 

$

24,059

 

 

 

$

20,891

 

 

$

207,981

 

 

 

Management fees

 

 

959

 

 

 

 

752

 

 

 

1,881

 

 

 

Reimbursables

 

 

4,768

 

 

 

 

1,897

 

 

 

10,659

 

 

 

Total revenues

 

 

29,786

 

 

 

 

23,540

 

 

 

220,521

 

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

27,439

 

 

 

 

25,213

 

 

 

95,350

 

 

 

General and administrative

 

 

9,168

 

 

 

 

2,558

 

 

 

5,990

 

 

 

Depreciation

 

 

12,076

 

 

 

 

10,696

 

 

 

31,623

 

 

 

Total operating expenses

 

 

48,683

 

 

 

 

38,467

 

 

 

132,963

 

 

Income (loss) from operations

 

 

(18,897

)

 

 

 

(14,927

)

 

 

87,558

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

6

 

 

 

 

3

 

 

 

12

 

 

 

Interest expense and financing charges

 

 

(10,650

)

 

 

 

(1,728

)

 

 

(46,119

)

 

 

Gain on debt extinguishment

 

 

-

 

 

 

 

-

 

 

 

10,825

 

 

 

Other income (expense)

 

 

1,834

 

 

 

 

(69

)

 

 

(151

)

 

 

Reorganization items

 

 

(154

)

 

 

 

(452,923

)

 

 

-

 

 

 

Total other income (expense)

 

 

(8,964

)

 

 

 

(454,717

)

 

 

(35,433

)

 

Income (loss) before income taxes

 

 

(27,861

)

 

 

 

(469,644

)

 

 

52,125

 

 

Income tax provision

 

 

1,167

 

 

 

 

2,371

 

 

 

29,289

 

 

Net income (loss)

 

 

(29,028

)

 

 

 

(472,015

)

 

 

22,836

 

 

Net income (loss) attributable to noncontrolling interests

 

 

-

 

 

 

 

(969

)

 

 

190

 

 

Net income (loss) attributable to VDI

 

$

(29,028

)

 

 

$

(471,046

)

 

$

22,646

 

 

 

  Revenue: In the first quarter of 2015, all of our rigs were operating under contracts with customers at substantially higher dayrates than in either of the Successor or Predecessor periods in 2016. During the three months ended March 31, 2015, our four jackups utilization averaged approximately 96% with average daily revenue of $158,628, while our three drillships had average utilization of almost 94% with average daily revenue of $605,991.

In the Predecessor period of January 1 to February 10, 2016, we had two jackups working at an average daily revenue of approximately $88,347 as the Sapphire Driller completed its contract in November 2015 and did not work during the Predecessor period and the Emerald Driller completed its contract in early January 2016. Deepwater utilization for the Predecessor period averaged 33% due to the completion of the contract on the Platinum Explorer during the fourth quarter of 2015 and the cancellation of the Titanium Explorer drilling contract by the operator in August 2015. Neither of these rigs worked during the Predecessor period of 2016. Average daily revenue declined for both jackups and drillships due to the supply of drilling rigs exceeding demand and the willingness of drilling contractors to reduce dayrates in an effort to keep their rigs working.

In the Successor period of February 10 to March 31, 2016, we had two jackups that worked the entire period and the Sapphire Driller worked approximately 21 days of the period on a short-term contract in West Africa. These three rigs generated average daily revenue of approximately $91,262.

Management fees for both the Predecessor and Successor periods averaged approximately $18,800 per day as the construction oversight contracts have established billing rates. Reimbursable revenue for the Predecessor period was $1.9 million when three rigs worked for the entire period. Reimbursable revenue for the Successor period was $4.8 million and there were four rigs working during the period.

Operating costs: Operating costs for the three months ended March 31, 2015 were approximately $95.4 million or $151, 400 per day and all drilling rigs operated throughout the period. For the Predecessor period, operating costs were $25.2 million or approximately $90,000 per day based on total available days. Operating costs for the Successor period were $27.4 million or $76,900 per available working days. The reduction in per day amounts for both the Predecessor and Successor periods reflects reduced costs associated with idled rigs as well as cost saving initiatives implemented during the periods on both operating and stacked rigs.

25


 

General and administrative expense s : Successor period general and administrative expense s include severance costs of $4.5 million incurred in connection with the resignation of our Chief Executive Officer, our Chief Administrati ve Officer and our General Counsel and is included in accrued liabilities as of March 31, 2016, in addition to normal recurring general and administrative expenses. There were no similar charges incurred in the Predecessor pe riod or the three months ended March 31, 2015.

Depreciation expense: For the three months ended March 31, 2015 and the Predecessor period, depreciation expense is based on the historical cost basis of our property and equipment. Upon our emergence from Chapter 11, we applied the provisions of fresh-start accounting and revalued our property and equipment to fair value which resulted in a decrease in those values. The Successor period depreciation expense is based on the reduced asset values of property and equipment as a result of the adoption of fresh-start accounting.

Interest expense and other financing charges: Successor period interest expense is calculated on the debt that was issued in connection with our emergence from bankruptcy on February 10, 2016. Interest expense is recorded post-petition if it will be paid during the bankruptcy proceedings or it is probable that the bankruptcy court will allow it as claim. Interest expense for the Predecessor period is calculated on the old Credit Agreement as provided for in the Reorganization Plan and on the VDC Note issued in connection with the Reorganization Plan. Interest expense for the three months ended March 31, 2015 is calculated on the outstanding debt during that period.

Gain on extinguishment of debt: During the three months ended March 31, 2015, we repurchased in the open market, at a discount to face value, $31.8 million of our 7.5% Senior Notes and $7.5 million of our 2017 Term Loan and recognized gains of $9.3 million and $1.5 million, respectively, including the write-off of deferred financing costs of $1.0 million.

Reorganization items: In the Predecessor period, we incurred $22.7 million of post-petition professional fees associated with the bankruptcy cases. Additionally, we incurred non-cash charges of $2.06 billion in fresh-start accounting adjustments, offset by a $1.63 billion non-cash gain on settlement of LSTC.

Income tax expense: Our estimated annualized effective tax rates for the Successor and 2016 Predecessor periods were negative 11.2% and our estimated effective tax rate for the three months ended March 31, 2015 was positive 53.6%, based on estimated annualized loss or profit before income taxes in each respective period, excluding income tax discrete items. For the 2016 Predecessor and Successor periods, we had a loss before income taxes resulting in negative tax rates. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. Decreases in taxes in the Successor and Predecessor periods in 2016 are primarily due to decreases in income before income taxes due to nonoperational status of the majority of the rigs in 2016. In some jurisdictions we do not pay taxes or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt and reorganization expenses.

 

 

Liquidity and Capital Resources

As of March 31, 2016, we had working capital of approximately $285.1 million, including approximately $249.2 million of cash available for general corporate purposes. Additionally, we have posted $4.2 million of cash as collateral for bid tenders and performance bonds. We anticipate our capital expenditures through 2017 to be approximately $6.0 to $8.0 million for sustaining capital expenditures fleet capital spares and information technology. Scheduled principal debt maturities and interest payments from March 31, 2016 to December 31, 2017 are approximately $34.7 million. We expect to fund the capital expenditures and debt related payments from our available working capital and cash flow from operations. We currently have $29.4 million available for the issuance of letters of credit under our revolving letter of credit facility.

The table below includes a summary of our cash flow information for periods indicated.

 

 

 

Successor

 

 

 

Predecessor

 

 

 

 

 

 

Period from February 10, 2016 to March 31, 2016

 

 

 

Period from January 1, 2016 to February 10, 2016

 

 

Three Months Ended March 31, 2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

8,238

 

 

 

$

(21,365

)

 

$

43,195

 

 

 

 

Investing activities

 

 

(7,674

)

 

 

 

116

 

 

 

(5,894

)

 

 

 

Financing activities

 

 

(409

)

 

 

 

66,875

 

 

 

(40,854

)

 

 

  

Changes in cash flows from operating activities for the Successor and Predecessor periods are driven by changes in net income (see discussion of changes in net income in “Results of Operations” above) and significant collections from our customers during the period. Changes in cash flows used in investing activities are dependent upon our level of capital expenditures, which varies based on

26


 

the timing of projects. Cash used for capital expenditures totaled $ 7.7 mil lion in the Successor period . In the three months ended March 31, 2015 we made debt payments of $40.9 million, including both scheduled maturities and discretionary open market purchases of pre-bankruptcy debt. In the Successor period, we made scheduled ma turity payments on post-bankruptcy debt totaling $0.4 million.

The significant elements of our Reorganization Plan included:

Second Amended and Restated Credit Agreement. The Company entered into the 2016 Term Loan Facility to (i) replace the $32.0 million revolving letter of credit commitment under its pre-petition facility with a new $32.0 million revolving letter of credit facility and (ii) repay the $150 million of outstanding borrowings under its pre-petition facility with (a) $7.0 million of cash and (b) the issuance of $143.0 million initial term loans.

The obligations under the 2016 Term Loan Facility are guaranteed by substantially all of the Company’s subsidiaries, subject to limited exceptions, and secured on a first priority basis by substantially all of the Company’s and the guarantors’ assets, including ship mortgages on all vessels, assignments of related earnings and insurance and pledges of the capital stock of all guarantors, in each case, subject to certain exceptions. The maturity date of the term loans and commitments established under the 2016 Term Loan Facility is December 31, 2019. Interest is payable on the unpaid principal amount of each term loan under the 2016 Term Loan Facility at LIBOR plus 6.5%, with a LIBOR floor of 0.5%. The initial term loans are currently bearing interest at 7.1%.  

 

 

Fees are payable on the outstanding face amount of letters of credit at a rate per annum equal to 5.50% as such rate may be increased from time to time pursuant to the terms of the 2016 Term Loan Facility. As of May 10, 2016, we have $2.6 million outstanding under our revolving letter of credit facility.

The 2016 Term Loan Facility includes customary representations and warranties, mandatory prepayments, affirmative and negative covenants and events of default, including covenants that, among other things, restrict the granting of liens, the incurrence of indebtedness, the making of investments and capital expenditures, the sale or other conveyance of assets, including vessels, transactions with affiliates, prepayments of certain debt and the operation of vessels. The 2016 Term Loan Facility also requires that the Company maintain $75.0 million of available cash (defined to include unrestricted cash and cash equivalents plus undrawn commitments).

10% Senior Secured Second Lien Notes. The Company engaged in a rights offering for $75.0 million of 10% Second Lien Notes for certain holders of its secured debt claims. In connection with this rights offering, certain creditors entered into a “backstop” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, paid $1.1 million in cash and $1.1 million in additional 10% Second Lien Notes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes, and raising $73.9 million in proceeds to the Company, after deducting the cash portion of the backstop premium.

The 10% Second Lien Notes were issued at par and are fully and unconditionally guaranteed, on a senior secured basis, by certain subsidiaries of the Company. The 10% Second Lien Notes mature on December 31, 2020 and bear interest from the date of their issuance at the rate of 10% per year. Interest on outstanding 10% Second Lien Notes is payable semi-annually in arrears, commencing on June 30, 2016. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. The 10% Second Lien Notes rank behind the 2016 Term Loan Facility as to collateral.

The Indenture for the 10% Second Lien Notes includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens, restrict the making of investments, restrict the incurrence of indebtedness and the conveyance of vessels, limit transactions with affiliates, and require that the Company provide periodic financial reports.

1%/12% Step-Up Senior Subordinated Secured Third Lien Convertible Notes. The Company issued 4,344,959 New Shares and $750.0 million of Convertible Notes to certain creditors holding approximately $2.5 billion of pre-petition secured debt claims. The New Shares issued to these creditors and the Convertible Notes may only be traded together and not separately. The Convertible Notes mature on December 31, 2030 and are convertible into New Shares, in certain circumstances, at a conversion price (subject to adjustment in accordance with the terms of the Indenture for the Convertible Notes) which was $95.60 as of the issue date. The Indenture for the Convertible Notes includes customary covenants that restrict the granting of liens and customary events of default, including, among other things, failure to issue securities upon conversion of the Convertible Notes.

Interest on the Convertible Notes is payable semi-annually in arrears commencing June 30, 2016 as payment in kind, either through an increase in the outstanding principal amount of the Convertible Notes or, if the Company is unable to increase such principal amount, by the issuance of additional Convertible Notes. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months at a rate of 1% per annum for the first four years and then increasing to 12% per annum until maturity.

The principal balance of the Convertible Notes (including payment in kind interest thereon) is convertible into New Shares at a conversion rate based on an initial price per share of $95.60 per New Share, subject to adjustment, as described in the Indenture for the Convertible Notes. The Convertible Notes are convertible only (a) prior to the third anniversary of the issue date (February 10, 2016), (i) upon the instruction of holders of a majority in principal amount of the Convertible Notes or (ii) upon the full and final resolution of all potential Investigation Claims (as defined below), as determined in good faith by the Board (which determination shall require

27


 

the affirmative vote of a supermajority of the non-management director s), and (b) from and after February 10, 2019 through their maturity date of December 31, 2030, upon the approval of the Board (which approval shall require the affirmative vote of a supermajority of the non-management directors). For these purposes, (i) “s upermajority of the non-management directors” means five affirmative votes of non-management directors assuming six non-management directors eligible to vote and, in all other circumstances, the affirmative vote of at least 75% of the non-management direct ors eligible to vote and (ii) “Investigation Claim” means any claim held by a United States or Brazilian governmental unit and arising from or related to the procurement of that certain Agreement for the Provision of Drilling Services, dated as of February  4, 2009, by and between Petrobras Venezuela Investments & Services B.V. and Vantage Deepwater Company, as amended, modified, supplemented, or novated from time to time.

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. We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.

Critical Accounting Policies and Accounting Estimates

The preparation of 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. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have identified the policies below as critical to our business operations and the understanding of our financial operations.

Fresh-start Accounting: Effective with our bankruptcy filing on December 3, 2015, we were subject to the requirements of ASC 852. All expenses, realized gains and losses and provisions for losses directly associated with the bankruptcy proceedings were classified as “reorganization items” in the consolidated statements of operations. Certain pre-petition liabilities subject to Chapter 11 proceedings were considered liabilities subject to compromise (“LSTC”) on the Petition Date and just prior to our emergence from bankruptcy on the Effective Date. The LSTC classification distinguished such liabilities from the liabilities that were not expected to be compromised and liabilities incurred post-petition.

Upon emergence from bankruptcy, we adopted fresh-start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheets. The effects of the Reorganization Plan and the application of fresh-start accounting are reflected in our consolidated balance sheet as of March 31, 2016 and the related adjustments thereto were recorded in our consolidated statement of operations as reorganization items for the period January 1 to February 10, 2016.  

Property and Equipment: Our long-lived assets, primarily consisting of the values of our drilling rigs, are the most significant amount of our total assets. We make judgments with regard to the carrying value of these assets, including amounts capitalized, componentization, depreciation and amortization methods, salvage values and estimated useful lives. Drilling rigs are depreciated on a component basis over estimated useful lives on a straight-line basis as of the date placed in service. Other assets are depreciated upon placement in service over estimated useful lives on a straight-line basis.

We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized would be computed as the excess of the asset’s carrying value over the estimated fair value. Estimates of future cash flows require us to make long-term forecasts of our future revenues and operating costs with regard to the assets subject to review. Our business, including the utilization rates and dayrates we receive for our drilling rigs, depends on the level of our customers’ expenditures for oil and natural gas exploration, development and production expenditures. Oil and natural gas prices and customers’ expectations of potential changes in these prices, the general outlook for worldwide economic growth, political and social stability in the major oil and natural gas producing basins of the world, availability of credit and changes in governmental laws and regulations, among many other factors, significantly affect our customers’ levels of expenditures. Sustained declines in oil and natural gas prices, worldwide rig counts and utilization, reduced access to credit markets and any other significant adverse economic news could require us to evaluate the realization of our drilling rigs.

Revenue: Revenue is recognized as services are performed based on contracted dayrates and the number of operating days during the period.

In connection with a customer contract, we may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees and costs incurred to mobilize a rig from one geographic market to another are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees or lump-sum payments received for capital improvements to rigs are deferred and amortized to income

28


 

over the term of the related drilling contract. The costs of such capital improvements are capitalized and de preciated over the useful lives of the assets. Deferred revenues under drilling contracts were $ 0 .0 million and $ 20.2 million at March 31 , 2016 and December 31, 2015 , respectively. Deferred revenue is included in either accrued liabilities or other long-term liabilities in our consolidated balance sheet, based upon the initial term of the related drilling contract.

Rig and Equipment Certifications: We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment and must maintain such certifications through periodic inspections and surveys. The costs associated with these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.

Income Taxes: Income taxes have been provided based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement basis and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes as a component of income tax expense.

Recent Accounting Standards: See “ Note 2. Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included elsewhere in this report.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our rigs operate in various international locations and thus are sometimes subject to foreign exchange risk. We may from time to time also be exposed to certain commodity price risk, equity price risk and risks related to other market driven rates or prices. The risks associated with foreign exchange rates were not significant in the first three months of 2016 as all of our drilling contracts have been primarily denominated in U.S. dollars. We do not enter into derivatives or other financial instruments for trading or speculative purposes. The significant decline in worldwide exploration and production spending as a result of the decline in oil prices has negatively impacted the offshore contract drilling business as discussed in “ Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations”

Interest Rate Risk: As of March 31, 2016, we had approximately $142.6 million face amount of variable rate debt outstanding under the 2016 Term Loan Facility. Under the 2016 Term Loan Facility, interest is payable on the unpaid principal amount of each term loan at LIBOR plus 6.5%, with a LIBOR floor of 0.5%. As of March 31, 2016, the 3-month LIBOR rate was 0.62% and the current interest rate on the 2016 Term Loan Facility is 7.1%. Increases in the LIBOR rate would impact the amount of interest that we are required to pay on these borrowings. For every 1% increase in LIBOR (above the LIBOR floor) we would be subject to an increase in interest expense of $1.4 million per annum based on March 31, 2016 outstanding principal amounts. We have not entered into any interest rate hedges or swaps with regard to either of the term loans.

Foreign Currency Exchange Rate Risk.  As we operate in international areas, we are exposed to foreign exchange risk. Our primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both U.S. dollars, which is our functional currency, and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements over the contract term. Due to various factors, including customer acceptance, local banking laws, other statutory requirements, local currency convertibility and the impact of inflation on local costs, actual foreign exchange needs may vary from those anticipated in the customer contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign currencies have not had a material impact on our overall results. If we find ourselves in situations where payments of local currency do not equal local currency requirements, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, may be used to mitigate foreign currency risk. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. We do not enter into derivative transactions for speculative purposes. As of March 31, 2016, we did not have any open foreign exchange derivative contracts or material foreign currency exposure risk.

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we voluntarily file or submit to the SEC is recorded, processed, summarized, and reported, within the time periods required by our debt agreements.

We carried out an evaluation, under the supervision and with the participation of our Office of the Chief Executive and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2016 to provide reasonable assurance that information required to be disclosed on our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was (1) accumulated and communicated to our management, including our Office of the Chief Executive and Chief Financial Officer, to allow timely

29


 

decisions regarding required disclosure and (2) recorded, summarized and reported withi n the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 5. Other Information

On May 9, 2016, the Company entered into Amendment No. 1 to the Registration Rights Agreement dated February 10, 2016, by and between the Company and the Holders listed therein, to extend the required filing date of the initial shelf registration to June 16, 2016.

 

 

 

30


 

PART II – OTHER INFORMATION

Item 6. Exhibits

 

Exhibit No.

  

Description

2.1

 

Joint Prepackaged Chapter 11 Plan of Offshore Group Investment Limited and its Affiliated Debtors, dated December 1, 2015, which is Exhibit A to the Disclosure Statement (Incorporated by reference to Exhibit 99.T3E.1 of the Form T-3 filed by Offshore Group Investment Limited with the SEC on December 2, 2015).

4.1

  

Second Amended and Restated Credit Agreement by and between Offshore Group Investment Limited, certain subsidiaries thereof as Guarantors, the lenders from time to time party thereto as Lenders and Royal Bank of Canada as Administrative Agent and Collateral Agent, dated as of February 17, 2016 (Incorporated by reference to Exhibit 4.1 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

4.2

  

Second Lien Indenture by and between Offshore Group Investment Limited, the guarantors from time to time party thereto (including certain of the Assignors, as defined therein) and U.S. Bank National Association, as trustee and noteholder collateral agent, dated as of February 10, 2016 (Incorporated by reference to Exhibit 4.2 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

4.3

  

Third Lien Indenture by and between Offshore Group Investment Limited, the guarantors from time to time party thereto (including certain of the Assignors, as defined therein) and U.S. Bank National Association, as trustee and noteholder collateral agent, dated as of February 10, 2016 (Incorporated by reference to Exhibit 4.3 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.1

  

Shareholders Agreement by and among Offshore Group Investment Limited and the Shareholders (as defined therein) dated as of February 10, 2016 (Incorporated by reference to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.2

  

Registration Rights Agreement by and among Offshore Group Investment Limited and each of the Holders (as defined therein) party thereto dated as of February 10, 2016 (Incorporated by reference to Exhibit 10.2 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.3

 

Amendment No. 1 to the Registration Rights Agreement dated as of May 9, 2016, by and among Vantage Drilling International (f/k/a Offshore Group Investment Limited) and each of the Holders (as defined therein) party thereto  *

10.4

  

Offshore Group Investment Limited 2016 Management Incentive Plan by and between Offshore Group Investment Limited, its executive officers and certain other employees dated as of February 10, 2016(Incorporated by reference to Exhibit 10.3 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.5

 

Form of Restricted Stock Unit Award Agreement (Performance-Based) between Offshore Group Investment Limited and each Participant (as defined therein) dated as of February 10, 2016(Incorporated by reference to Exhibit 10.4 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.6

  

Form of Restricted Stock Unit Award Agreement (Time-Based) between Offshore Group Investment Limited and each Participant (as defined therein) dated as of February 10, 2016(Incorporated by reference to Exhibit 10.5 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.7

  

Form of Petrobras Litigation Award Agreement(Incorporated by reference to Exhibit 10.6 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.8

  

Form of Petrobras Litigation Letter (Incorporated by reference to Exhibit 10.7 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.9

  

Third Amended and Restated Employment and Non-Competition Agreement between Offshore Group Investment Limited and Paul A. Bragg, dated February 10, 2016 (Incorporated by reference to Exhibit 10.8 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.10

 

Third Amended and Restated Employment and Non-Competition Agreement between Offshore Group Investment Limited and Douglas G. Smith, dated February 10, 2016 (Incorporated by reference to Exhibit 10.9 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.11

 

Third Amended and Restated Employment and Non-Competition Agreement between Offshore Group Investment Limited and Douglas W. Halkett, dated February 10, 2016 (Incorporated by reference to Exhibit 10.10 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.12

 

Third Amended and Restated Employment and Non-Competition Agreement between Offshore Group Investment Limited and William L. Thomson, dated February 10, 2016(Incorporated by reference to Exhibit 10.11 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

10.13

 

Second Amended and Restated Employment and Non-Competition Agreement between Offshore Group Investment Limited and Nicolas J. Evanoff, dated February 10, 2016(Incorporated by reference to Exhibit 10.12 of the Company’s current report on Form 8-K filed with the SEC on February 17, 2016)

 

31.1

  

 

Certification of Principal Executive, Financial and Accounting Officer Pursuant to Section 302*

31


 

Exhibit No.

  

Description

 

32.1

  

 

Certification of Principal Executive, Financial and Accounting Officer Pursuant to Section 906*

 

101.INS

  

 

— XBRL Instance Document *

 

101.SCH

  

 

— XBRL Schema Document *

 

101.CAL

  

 

— XBRL Calculation Document *

 

101.DEF

  

 

— XBRL Definition Linkbase Document *

 

101.LAB

  

 

— XBRL Label Linkbase Document *

 

101.PRE

  

 

— XBRL Presentation Linkbase Document *

*

Filed herewith.

 

 

 

32


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

VANTAGE DRILLING INTERNATIONAL

 

Date: May 13, 2016

 

By:

  /s/    DOUGLAS G. SMITH 

 

 

 

Douglas G. Smith

 

 

 

(Chief Financial Officer and Treasurer)

 

 

 

Principal Executive Financial and Accounting Officer

 

33

Exhibit 10.3

AMENDMENT NO. 1
TO THE REGISTRATION RIGHTS AGREEMENT

THIS AMENDMENT NO. 1 (this “ Amendment ”) to that certain Registration Rights Agreement dated February 10, 2016 (the “ Registration Rights Agreement ”) by and among Offshore Group Investment Limited, an exempted company incorporated with limited liability in the Cayman Islands (the “ Company ”), and each of the Holders party thereto, is made as of May 9, 2016 by and among the Company and the Holders listed on the signature pages hereto. All capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Registration Rights Agreement.

WHEREAS, the Company desires to amend the Indenture, dated as of February 10, 2016, (the “ Indenture ”) governing its 1%/12% Step-Up Senior Secured Third Lien Convertible Notes due 2030 (the “ Notes ”) by and among the Company, the Guarantors party thereto, U.S. Bank National Association, as trustee, and U.S. Bank National Association, as noteholder collateral agent, and the Third Lien Security Agreement, dated as of February 10, 2016 (the “ Security Agreement ”), by and among the grantors listed on the signature pages thereto and U.S. Bank National Association, as noteholder collateral agent, to exclude the capital stock and other securities of any of the Guarantors from the Collateral (as defined in the Indenture) to the extent the pledge of such capital stock or other securities to secure the Notes would cause such Guarantor to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time) (the “ Proposed Amendments ”);

WHEREAS, currently, such separate financial statements would be required of the following Guarantors: Vantage Holdings Cyprus ODC Limited, Vantage Driller ROCO S.R.L., Vantage International Management Co., and Vantage Drilling Africa (collectively, the “ Affected Guarantors ”);

WHEREAS, the security pledge on the assets held by the Affected Guarantors and the guarantee provided by the Affected Guarantors would remain in effect and unchanged as a result of the Proposed Amendments;

WHEREAS, the failure to enact the Proposed Amendments may result in (i) significant delays in filing the Registration Statement contemplated by the Registration Rights Agreement and (ii) significant costs to the Company in preparing the audited financial statements of the Affected Guarantors in connection with preparing and filing each of (x) the Registration Statement contemplated by the Registration Rights Agreement, (y) any future registration statement to be filed by the company and (z) any annual reports on Form 10-K to be filed by the Company with the Commission;

WHEREAS, to enact the Proposed Amendments, the Company must complete a consent solicitation, which, because of an ongoing CUSIP reassignment process at The Depository Trust Company with respect to the Registrable Securities, cannot be completed on or prior to the ninetieth (90th) day following the Plan Effective Date (the “ Outside Date ”), and the Company requires an extension of the Outside Date in order to comply with its obligations under the Registration Rights Agreement;

1–


NOW, THEREFORE, in consideration of the mutual promises and covenants contained in the Registration Rights Agreement and this Amendment, the parties hereto agree , represent and warrant as follows :

1. Each Holder hereby represents and warrants that as of the date hereof, it is the beneficial owner of the number of shares of Registrable Securities listed on its signature page to this Amendment.

2. Section 2(a) of the Registration Rights Agreement is hereby amended and restated in its entirety as follows:

“(a) The Company shall prepare a Shelf Registration Statement (the “ Initial Shelf Registration Statement ”), and shall include in the Initial Shelf Registration Statement the Registrable Securities of each Holder who shall request inclusion therein of some or all of their Registrable Securities by checking the appropriate box on the signature page of such Holder hereto or by written notice to the Company no later than seventy-five (75) days after the Plan Effective Date. The Company shall file the Initial Shelf Registration Statement with the Commission on or prior to June 16, 2016; provided, however, that the Company shall not be required to file or cause to be declared effective the Initial Shelf Registration Statement unless Holders request (and have not by the seventy-fifth day after the Plan Effective Date revoked such request by written notice to the Company) the inclusion in the Initial Shelf Registration Statement of Registrable Securities constituting at least fifteen percent (15%) of all Registrable Securities, and such Holders otherwise timely comply with the requirements of this Agreement with respect to the inclusion of such Registrable Securities in the Initial Shelf Registration Statement.”

3. Except as otherwise expressly set forth in this Amendment, the Registration Rights Agreement shall continue to be in full force and effect in accordance with its terms.

4. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same document. This Amendment may be executed by facsimile signatures.

[Signatures pages follow]

 

2–


IN W ITNESS WHEREOF, the undersigned has caused this Amendment to be executed as of the da te and year first written above

 

 

Vantage Drilling International (f/k/a Offshore Group Investment Limited)

 

By: __________________________

Name:

Title:

 


[ Signature Page to Amendment No. 1 to the Registration Rights Agreement ]


IN WITNESS WHEREOF, the undersigned Holder has caused this Amendment to be executed as of the date and year first written above, and hereby represents and warrants that it is the beneficial owner of the number of Registrable Securities set forth under its name on the date hereof.

 

HOLDER :

____________________________

 

 

By: ______________________

Name:

Title:

 

Number of Shares of Registrable Securities Beneficially Owned: ______________

 

[ Signature Page to Amendment No. 1 to the Registration Rights Agreement ]

Exhibit 31.1

CERTIFICATE PURSUANT TO

RULES 13a-14(a) and 15d-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002

I, Douglas G. Smith, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Vantage Drilling International;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

May 13, 2016

 

/s/ DOUGLAS G. SMITH

 

 

 

Douglas G. Smith

 

 

 

(Chief Financial Officer and Treasurer)

 

 

 

Principal Executive, Financial and Accounting Officer

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 USC. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Vantage Drilling International (the “Company”) for the quarter ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas G. Smith, Principal Executive, Financial and Accounting Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

May 13, 2016

 

/s/ DOUGLAS G. SMITH

 

 

 

Douglas G. Smith

 

 

 

(Chief Financial Officer and Treasurer)

 

 

 

Principal Executive, Financial and Accounting Officer