EDGAR 10-K Filing

Company CIK: 1465872
Filing Year: 2021
Filename: 1465872_10-K_2021_0001564590-21-014207.json

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ITEM 1. BUSINESS
Item 1.
Business.
Our Company
Vantage Drilling International 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 gas wells for our customers. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for drilling units owned by others, we provide construction supervision services for rigs that are under construction, preservation management services for rigs that are stacked and operations and marketing services for operating rigs.
Our Fleet
Jackups
A jackup rig is a mobile, self-elevating drilling platform equipped with legs that are lowered to the ocean floor until a foundation is established for support, at which point the hull is raised out of the water into position to conduct drilling and workover operations. All of our premium jackup rigs were built at PPL Shipyard in Singapore. The design of our premium jackup rigs is the Baker Marine Pacific Class 375. These units are ultra-premium jackup rigs with independent legs capable of drilling in up to 375 feet of water, a cantilever drilling floor and a total drilling depth capacity of approximately 30,000 feet.
Drillships
Drillships are self-propelled and suited for drilling in remote locations because of their mobility and large load carrying capacity. While both of our drillships are dynamically positioned and designed for drilling in water depths of up to 12,000 feet, with a total vertical drilling depth capacity of up to 40,000 feet, the Platinum Explorer and Tungsten Explorer are currently equipped to drill in 10,000 feet of water. Each drillship’s hull design has a variable deck load in excess of 20,000 tons and measures approximately 781 feet long by 138 feet wide. Both of our drillships were built at Daewoo Shipbuilding & Marine Engineering shipyard in South Korea.
The following table sets forth certain information concerning our offshore drilling fleet as of March 11, 2021.
Name
Year Built
Water Depth
Rating (feet)
Drilling Depth
Capacity
(feet)
Location
Status
Jackups
Emerald Driller
30,000
Qatar
Operating
Sapphire Driller
30,000
Gabon
Contract preparation
Aquamarine Driller
30,000
Malaysia
Contract preparation
Topaz Driller
30,000
Malta
Mobilizing
Soehanah
30,000
Indonesia
Warm stacked
Drillships (1)
Platinum Explorer
12,000
40,000
India
Operating
Tungsten Explorer
12,000
40,000
Mediterranean
Warm stacked
(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. On December 31, 2020, we entered into the Purchase and Sale agreement (as defined below under “Recent Developments - Purchase and Sale Agreement to Sell the Titanium Explorer”) to sell the Titanium Explorer, which closed on March 10, 2021. The Titanium Explorer is classified as held for sale on our Consolidated Balance Sheet as of December 31, 2020.
Recent Developments
The Continued Global Spread of COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency as COVID-19 continued to spread globally beyond its point of origin. In March 2020, WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally and the risks posed to the international community. The continued global spread of COVID-19 has caused widespread illness and significant loss of life, leading governments across the world to impose severely stringent limitations on movement and human interaction. Such governmental responses to the pandemic have depressed economic activity worldwide, impacting all industries, but with a significant adverse effect on the oil and gas industry. The response of governments throughout the world to address the spread of COVID-19, including, among other actions, the imposition of travel bans, quarantines and entry restrictions, has notably impacted our operations, particularly challenging the ability to transport personnel and equipment to and from
our rigs, and for our customers and their suppliers to be able to seamlessly manage and conduct their respective operations. See “Note 1. Organization and Recent Events” of the “Notes to Consolidated Financial Statements” for additional information regarding the impact of COVID-19 on our drilling contracts.
The impact of these challenges in 2020 resulted in (i) lower revenue due to terminations of (or amendments to) certain of our drilling contracts and (ii) increased expenses due to higher labor and related costs. We cannot at this time determine with certainty how long these challenges will persist as well as the long-term impact that such challenges may have on our operations on a go-forward basis; however, the Company has been actively managing and continues to actively manage the business in an attempt to mitigate the impact of these matters on the Company’s operations. In order to decrease the Company’s overall operating expenses, the Company undertook significant headcount and salary reductions, both onshore and offshore, as well as other cost reduction measures to reflect the lower operating activity. For more information regarding the impact of these challenges on the status of certain of our contracts, please refer to our Current Report on Form 8-K, which was filed with the SEC on April 6, 2020, as further supplemented by our Current Reports on Form 8-K, which were filed with the SEC on May 12, 2020, June 2, 2020 and July 1, 2020, respectively.
The COVID-19 pandemic continues to spread worldwide, and the extent of the impact of the COVID-19 pandemic on our operational and financial performance beyond 2020 will depend in large part on future developments, which cannot be predicted with confidence at this time. Such developments include, but are not limited to, the duration and further spread of COVID-19, including the discovery of any new strains of COVID-19, the development, availability and effectiveness of treatments or vaccines for COVID-19, and the general resuming of widespread economic activity. Therefore, we can give no assurances that the spread of COVID-19 will not have a material adverse effect on our financial position or results of operations in 2021 and beyond.
Declines in the Demand for Oil and Gas, and the Resulting Oil Price and Market Share Volatility
The collapse in global economic activity resulting from the COVID-19 outbreak in 2020 caused demand for global oil and gas to significantly decline. Moreover, members of OPEC and Russia failed to reach an agreement in March 2020 to extend previously agreed upon oil production cuts and make much needed additional oil production cuts. Thereafter, Saudi Arabia announced an immediate significant reduction in its oil export prices and Russia announced that all agreed oil production cuts between Russia and OPEC members would expire on April 1, 2020. The termination of the previous cooperation between Saudi Arabia and Russia had an immediate impact given that it had supported global oil prices in the past. Saudi Arabia’s subsequent decision to dramatically increase its oil production and engage in a price war with Russia led to a massive oversupply of oil, which resulted in the overwhelming of global oil storage capacities.
This price and market share war was later reversed with OPEC, Russia and many of the world’s major oil producers reaching a record production cut agreement on April 12, 2020 and extending such agreement on June 6, 2020. However, the confluence of the spread of COVID-19 and the resulting global oil surplus significantly and adversely impacted the oil and gas industry beginning in the second quarter of 2020, causing (i) an unprecedented drop in oil prices, with Brent crude reaching $19.33 per barrel, its lowest price since 1999, and (ii) ensuing reductions of exploration and production company capital and operating budgets. Though OPEC, Russia and other major oil and gas producing nations agreed to either cut or maintain levels of oil production as was the case in March 2021, the efforts to contain COVID-19 could continue to depress global economic activity in the near-term, and the supply and demand imbalance of oil and gas will likely continue for the foreseeable future. Notwithstanding the recent recovery in global oil prices since (i) the development and availability of vaccines for COVID-19, (ii) the perception of the reopening of global economies along with (iii) the injection of substantial government monetary and fiscal stimulus, volatility of and uncertainty around global oil prices persist.
It was this volatility and uncertainty in global oil and gas prices that caused oil and gas producers to cancel or delay drilling tenders in 2020, which negatively impacted our reported backlog and could potentially and negatively impact our future backlog. Further, material payment delays, modifications or cancellations on our underlying contracts (including, but not limited to, delays, modifications or cancellations directly or indirectly attributable to COVID-19) reduced the amount of backlog previously reported (and could further reduce the amount of backlog currently reported) and consequently, could inhibit the conversion of that backlog into revenues.
The potential for oil prices to decline in the future continues to put pressure on oil and gas activity levels, particularly in the deepwater segment. Oil and gas prices are expected to continue to be volatile as a result of the ongoing COVID-19 outbreaks, changes in oil and gas inventories and industry demand, and therefore, the Company cannot predict how long oil and gas prices remain stable or further improve, if at all, or whether they could reverse course and decline. While our management is actively monitoring the foregoing events and its associated financial impact on us, it is uncertain at this time as to the full magnitude that volatile and uncertain oil and gas prices will have on our financial condition and future results of operations.
The Company has been, and remains focused on mitigating the impact of the foregoing events on its business. In the second quarter of 2020, we commenced a plan to reduce our costs and preserve our cash. For example, we (i) reduced the annual compensation payable to our independent members of the Board of Directors by 20% as well as the salaries of our workforce by approximately 15 to 20% depending on the position, and subsequently replaced it with a longer-term 10% reduction to annual compensation payable to our independent members of the Board of Directors as well as the salary of our workforce across the Company beginning on July 1, 2020, (ii) secured material price reductions from certain of our vendors and (iii) initiated significant
reductions in both our onshore and offshore personnel in June 2020 to reflect the lower levels of operating activity. We continue to actively seek measures to reduce our operating costs and preserve our cash during these unprecedented times. See our Current Report on Form 8-K, which was filed with the SEC on July 1, 2020, for further information regarding reductions in the salaries of our executive officers in an attempt to reduce the Company’s operating and corporate costs in light of the global economic challenges and the public health crisis resulting from the spread of COVID-19.
Platinum Explorer Contract Award
On February 3, 2021, VDI received a letter of award from Oil and Natural Gas Company (ONGC) for a two-year contract with the Platinum Explorer. The Platinum Explorer is currently performing under an existing three-year contract with ONGC, which is expected to conclude in the second quarter of 2021. The new contract with ONGC is expected to begin once the existing campaign concludes. Expected revenues over the new two-year contract term, exclusive of service tax, are approximately $109 million.
Operations and Management Agreement with Seadrill Partners
On February 9, 2021, Vantage Holdings International (“VHI”), a subsidiary of VDI, entered into a Framework Agreement with Seadrill Partners LLC (“Seadrill Partners”) pursuant to which certain subsidiaries of VHI (the “VHI Entities”) entered into and will enter into additional, management and marketing agreements (the “Management and Marketing Agreements”) with certain subsidiaries of Seadrill Partners (the “Seadrill Entities”). Under the Management and Marketing Agreements, the VHI Entities will provide marketing and operations management services in respect of certain deepwater floaters owned by the Seadrill Entities. These Management and Marketing Agreements are subject to the approval of the U.S. Bankruptcy Court for the Southern District of Texas.
Drilling Contract Arbitration.
On February 22, 2021, the U.S. Supreme Court denied the Petrobras Parties’ petition for certiorari in their efforts to seek the reversal of the U.S. Court of Appeals for the Fifth Circuit’s decision to affirm the U.S. District Court - Texas’s judgment confirming the Petrobras Award. This denial by the U.S. Supreme Court ended the drilling contract arbitration with the Petrobras Parties and all related appeals. See “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” for additional details on the Drilling Contract Arbitration.
Purchase and Sale Agreement to Sell the Titanium Explorer
On December 31, 2020, we entered into a purchase and sale agreement with Best Oasis Limited (the “Buyer”) to sell the Titanium Explorer (the “Purchase and Sale Agreement”), subject to the closing conditions contained in such agreement, for an aggregate purchase price of $13.8 million and we subsequently classified the rig as held for sale on our Consolidated Balance Sheet. The transaction contemplated by the Purchase and Sale Agreement closed on March 10, 2021. Pursuant to the Purchase and Sale Agreement, the Buyer is required to recycle the rig in an environmentally sound manner.
Impairment of the Titanium Explorer’s Carrying Value
During the third quarter of 2020, we evaluated our deepwater drilling rigs that had indicators of impairment and determined that the carrying value of our longer-term warm stacked drillship, the Titanium Explorer, was impaired. As a result, we recognized a non-cash loss on impairment of $128.9 million as of September 30, 2020. See “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” for additional information regarding the impairment of the Titanium Explorer.
Restructuring Agreement and the Associated Settlement Agreement
The Company entered into a settlement agreement with VDC on March 4, 2020 to release each other from claims pertaining to certain intercompany receivables and payables as between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries, on the other. See “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” for additional details on the Restructuring Agreement and the associated settlement agreement.
Strengths
We believe our primary competitive strengths include the following:
We own and operate a diversified, premium fleet. We have a diversified fleet of seven high-specification drilling units that is capable of providing premium drilling services for both shallow water and deepwater applications. We recognize that shallow water and deepwater business cycles may differ, particularly during an industry recovery, and believe our fleet diversity reduces our reliance on any particular market segment. Our fleet currently includes five jackup rigs and two drillships.
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Jackup rigs. We believe that our ultra-premium jackup rigs compare favorably to the majority of the current global jackup rig fleet, which is primarily comprised of rigs that are older, smaller and less capable due to their reliance on, and utilization of, less modern equipment. Each of our jackup rigs is aged 14 years old or less and has a water depth capability of 375 feet and drilling depth capability of 30,000 feet. Our jackup rigs are equipped with offline stand-building systems, which provide significant
drilling efficiency and have at least a 1.4 million pound hook load, allowing more demanding wells to be drilled. Each of our jackup rigs have (i) a cantilever reach envelop of 75 x 30 feet, which enables each rig to reach more well slots on a platform without requiring a rig move, (ii) a large deck space, (iii) up to 3,749 tons of variable deck-load, allowing more equipment and supplies to be stored on the rig, and (iv) a 120-person accommodation, all of which we believe bring efficiencies, better logistics and significant cost savings to our customers. As a result, we believe our jackups are generally preferred by clients for their superior and more efficient drilling performance, better and more cost-effective logistics, and consistent activity levels. As demonstrated since 2015, clients have shown a preference for modern jackups, such as ours, with global modern jackup utilization rebounding more rapidly than older rigs.
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Drillships. Both of our ultra-deepwater drillships are designed to drill in up to 12,000 feet of water, and one of our drillships has been further upgraded with a hook load of 2.5 million pounds, which further enhances its ability to drill deep, complex and demanding wells. Our drillships are currently equipped with risers to drill in water depths of up to 10,000 feet, which we believe is the optimal specification for the majority of current ultra-deepwater development projects. However, additional risers could be added to drill in water depths of up to 12,000 feet as needed by our clients. Finally, an MPD system has been installed on the Tungsten Explorer drillship, and we have the ability to equip this MPD on our other drillship. Based on our experience, a significant number of the recent and active requirements for floaters are requesting an MPD system (or a subset of an MPD system called Riser Gas Handling). We believe these high-specification and upgraded drillships are generally preferred by our clients and will better position us to secure contracts and command premium dayrates as compared to our competitors with less advanced fleets.
Our focus on increased efficiency has led to an optimized cost structure. Following the commodity price downturn in 2014, we implemented company-wide cost savings initiatives in an effort to reduce our rig operating expenses and general and administrative expenses through the right-sizing of shore-based teams and centralization of shore-based operational support in Dubai near key areas of operation. Further, we have significantly reduced our rig operating cost through nationalization and regionalization of senior offshore positions and active supply chain management. Additionally, as a result of the prolonged low price environment in 2020 caused by the spread of COVID-19, the resulting decline in global economic activity during the same period and the associated oil price and market share volatility, we began, and continue, to actively seek measures to reduce our operating costs and preserve cash during these challenging times. We believe our optimized cost structure is among the best in the industry and provides us with the flexibility to operate across business cycles and will lead to enhanced profitability in the event of a recovery in the offshore drilling industry.
We are a leading operator with strong client relationships. We believe that our safety and operational performance, experienced and skilled employees, and modern and highly advanced fleet have produced a track record of high-quality client service and operational safety, efficiency and effectiveness. We have received special recognition from several of our clients for superior drilling services based on key operational metrics, including with respect to safe operations, drilling efficiency, low non-productive time and best contractor performance.
We have a proven management team. Our executive team has a strong reputation for sound execution, customer focus and delivering strong financial performance. Our management team has extensive experience in the oilfield services and offshore drilling industries, as well as experience operating in key global offshore development locations, including the Gulf of Mexico, West Africa, the Middle East, South East Asia and India, with major international and national oil companies as well as independent exploration and production companies. In addition to the members of the management team, we have highly trained personnel operating and maintaining our rigs. We believe that our team’s significant experience, technical expertise and strong client relationships, as well as the functional depth throughout our organization, enhance our ability to deliver superior drilling services to our clients and effectively operate on a global basis.
Strategy
Our principal business objective is to be the preferred provider of premium offshore drilling rig services to the oil and gas industry. Our operating strategy is designed to enable us to provide high-quality, safe and cost-competitive services through the current business cycle, positioning us to benefit from an expected increase in demand for offshore drilling and to increase our cash flow and profits. Specifically, we expect to achieve our business objectives through the following strategies:
Enhanced focus on safety and operational excellence. With cyclical demand for offshore drilling services, excelling in safety and operational ability is a key factor for success. We intend to continue our focus on minimizing safety incidents, while also continually increasing our operational uptime and efficiency. This dual focus is intended to enable us to develop and maintain long-term customer relationships and maximize the utilization of our fleet while also ensuring the safety of our and our customers’ employees and contractors. We intend to maintain our exemplary safety and operational performance through attentive and engaged leadership, ongoing competency and training programs, appropriate incentive structures at all levels and effective management oversight.
Efficiently manage costs to adapt to and withstand a range of market conditions. With a cost-competitive fleet, we believe we are well-positioned to operate across business cycles and achieve enhanced profitability in the event of a recovery in the offshore drilling industry. We have assembled and deployed an active fleet that we believe is at the low end of the cost-of-supply curve through right sizing and centralization of shore-based support, nationalization and regionalization of senior offshore positions, and active supply chain management. We believe these efforts to manage costs will enable us to maintain our industry-leading fleet utilization while generating positive operational cash flows in a cyclical dayrate environment.
Maintain high fleet utilization and consistent activity levels to capitalize on customer preferences for active rigs. We enjoy an industry-leading fleet utilization, which serves as a competitive advantage in securing contracts given operators’ strong preference for rigs with consistent activity levels. Consistent activity helps reduce the uncertainty of any associated costs and preparation time for rigs to undertake new contracts. All of our jackup rigs are currently contracted, preparing for contract or being actively marketed with contract commencements expected in 2021. One of our drillships is currently contracted and one drillship is maintained warm-stacked, scheduled to recommence operations in 2021.
Preserve balance sheet and maintain significant liquidity through business cycles. With approximately $154.5 million cash on our balance sheet as of December 31, 2020 (including $12.5 million of restricted cash) and no near-term debt maturities, we continue to focus on preservation of liquidity as the offshore drilling business cycle continues.
Maintain high-quality asset portfolio with diverse footprint by selectively pursuing acquisitions that we believe align with our operational model and are likely to increase cash flow. Our balanced fleet of jackup rigs and drillships allows us to address the dynamic opportunity set in the offshore drilling industry. We believe the quality of our jackup rig and drillship fleets, combined with our experience in shallow and deepwater markets, position us to compete in various market segments and geographies. We maintain a young fleet with an average age of approximately twelve years; accordingly, our high-specification assets enable us to capitalize on the bifurcation in utilization levels between modern and older rigs, and to secure contracts with premium dayrates. Additionally, high-specification modern drilling units generally provide superior and more efficient drilling performance, as well as enhanced and more cost effective logistics. Newer and more modern drilling units are also generally preferred by crews, which makes it easier to hire and retain high-quality operating personnel. As a result, our fleet is well suited to meet the requirements of customers for efficiently drilling complex wells in demanding locations. To maintain our high-quality asset portfolio, we are focused on disciplined investment in, and the growth of, our active drilling fleet to maximize our profitability. Additionally, we have invested in MPD technology for the Tungsten Explorer ultra-deepwater drillship, technology which is currently required by a significant number of the tenders in the market and is becoming increasingly prevalent in the industry, making such drillship highly regarded and sought after by customers. We have the ability to equip this MPD system on our other drillship.
Our Industry
The offshore contract drilling industry provides drilling, workover and well construction services to oil and gas exploration and production companies through the use of mobile offshore drilling units. Offshore drilling rigs are generally marketed on a worldwide basis as rigs can be moved from one region to another. The cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary between regions. However, significant variations between regions do not tend to exist long-term because of rig mobility.
The offshore drilling market generally consists of shallow water (<400 ft.), midwater (>400 ft.), deepwater (>4,000 ft.) and ultra-deepwater (>7,500 ft.). The global shallow water market is serviced primarily by jackups.
Our jackup fleet is focused on the “long-legged” (>350 ft.) high specification market. The drillships that we operate are focused primarily on the ultra-deepwater segment, but can also operate efficiently and cost effectively in the midwater and deepwater markets.
Historically, the offshore drilling industry has been very cyclical with periods of high demand, limited rig supply and high dayrates alternating with periods of low demand, excess rig supply and low dayrates. Periods of low demand and excess rig supply intensify the competition in our industry and often result in some rigs becoming idle for long periods of time as is the case today. As is common throughout the oilfield services industry, offshore drilling is largely driven by actual or anticipated changes in oil and gas prices and capital spending by companies exploring for and producing oil and gas.
Since 2015, in response to both market conditions and excessive levels of idle capacity in recent years, there has been intense downward pressure on operating dayrates as most drilling contractors had preferred to maintain rigs in an active state and customers had generally favored operating rigs over reactivated cold-stacked rigs. Prior to the COVID-19 outbreak, this downward pressure on pricing was starting to reverse itself as evidenced by opportunities for our services increasing in 2019 and early 2020 and dayrates were showing signs of general improvement. However, beginning in the second quarter of 2020, with the initial arrival, continued spread, and resulting impact of COVID-19, dayrates, rig activity and contract opportunities each declined significantly.
In response to the oversupply of drilling rigs, a number of our competitors began removing older, less efficient rigs from their fleets by either cold stacking the drilling rigs or taking them permanently out of service. This trend has accelerated since the second
quarter of 2020. In addition to the expected increase in scrapping (“recycling”), many offshore drillers, including our competitors, with significant levels of debt on their balance sheets have recently completed, are currently pursuing, or may elect to pursue in the near-term, debt restructurings. (see “Risk Factors-We may not be able to compete effectively against the actions taken by our competitors, which could materially and adversely impact our business operations and financial results” in Part I, Item 1A. of this Annual Report). These debt restructurings may result in lower cost structures, and additional pressure and incentive to recycle rigs. As drillers emerge from these debt restructurings, consolidation could potentially occur thereby reducing the number of industry participants and potentially increasing the market share of certain of our competitors. A combination of recycling, restructuring and consolidation will be necessary for the industry to regain firmer footing. Any industry recovery will also depend significantly on improvements to global macroeconomic conditions, including, but not limited to, the direct and indirect impacts of COVID-19 (see “Risk Factors-The continued global spread of COVID-19, fears relating to the spread of COVID-19, and associated oil market developments could adversely impact our financial condition and results of operations” and “-The ultimate impact and effects of the spread of COVID-19 and the resulting pandemic are highly uncertain and cannot be predicted at this time” in Part I, Item 1A. of this Annual Report). For further information pertaining to our business and trends in our industry, see “Business Outlook” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Customers
Our customers are primarily large multinational oil and gas companies, government owned oil and gas companies and independent oil and gas producers. Contract termination revenue from the Petrobras Parties accounted for approximately 78% of consolidated revenue for the year ended December 31, 2019. For the years ended December 31, 2020, 2019 and 2018, the following customers accounted for more than 10% of our consolidated revenue, in the respective periods:
Year Ended December 31,
2019 (1)
Oil & Natural Gas Corporation
25%
23%
15%
Total E&P Qatar
17%
13%
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Total E&P Liban SAL
14%
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Medco EP
12%
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ENI Congo SA
10%
23%
14%
Total E&P Congo
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40%
Olio Energy Sdn Bhd (2)
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11%
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(1)
Amounts exclude the contract termination revenue received from the Petrobras Parties.
(2)
Olio Energy Sdn Bhd is a contracting party through which we operate, or have operated, for Petronas Carigali, a subsidiary of the national oil company of Malaysia, and CPOC, a joint venture between Petronas Carigali JDA limited, a subsidiary of the national oil company of Malaysia, and PTTEP International Limited, a subsidiary of the national oil company of Thailand.
Drilling Contracts
Our drilling contracts are the result of negotiation with our customers, and most contracts are awarded through competitive bidding against other contractors. Drilling contracts generally provide for payment on a dayrate basis, with higher rates while the drilling unit is operating and lower rates for periods of mobilization or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions or other conditions beyond our control. Currently all of our drilling contracts are on a dayrate basis. A dayrate drilling contract generally extends over a period of time covering either the drilling of a single well (or group of wells) or covering a stated term. Certain of our contracts with customers may be cancelable at the option of the customer upon payment of an early termination fee. Such payments may not, however, fully compensate us for the loss of the contract. Contracts also customarily provide for either automatic termination or termination at the option of the customer typically without the payment of any termination fee, under various circumstances such as non-performance, in the event of extensive downtime or impaired performance caused by equipment or operational issues, or sustained periods of downtime due to force majeure events or for convenience by the customer. Many of these events are beyond our control. The contract term in some instances may be extended by the client exercising options for the drilling of additional wells or for an additional term. Our contracts also typically include a provision that allows the client to extend the contract to finish drilling a well-in-progress. During periods of depressed market conditions, our clients may seek to renegotiate drilling contracts to reduce their obligations or may seek to repudiate their contracts. Suspension of drilling contracts will result in the reduction in or loss of dayrate for the period of the suspension. To the extent (i) our customers cancel some of our contracts and we are unable to secure new contracts on a timely basis and on substantially similar terms, (ii) our contracts are suspended for an extended period of time or (iii) a number of our contracts are renegotiated, it could adversely affect our consolidated statements of financial position, results of operations or cash flows.
The following table sets forth certain information concerning the current contract status of our offshore drilling fleet as of March 11, 2021:
Name
Region
Contract End Date
Customer
Emerald Driller
Middle East
Q2 2022
Total E&P Qatar
Sapphire Driller
West Africa
Q3 2021
Trident Energy
Aquamarine Driller
Southeast Asia
N/A
Contract preparation
Topaz Driller
Mediterranean
Q3 2021
ENI Montenegro SA
Soehanah
Southeast Asia
N/A
Warm stacked
Platinum Explorer
India
Q3 2023
Oil & Natural Gas Corporation
Tungsten Explorer
Mediterranean
N/A
Warm stacked
Contract Backlog
As of December 31, 2020, our owned fleet had total drilling contract backlog of approximately $94.5 million. We expect that approximately $63.9 million of our total contract backlog as of December 31, 2020 will be performed during 2021, with the remainder performed in subsequent years.
Competition
The contract drilling industry is highly competitive. Demand for contract drilling and related services is influenced by a number of factors, including the current and expected prices of oil and gas and the expenditures of oil and gas companies for exploration and development of oil and gas. In addition, demand for drilling services remains dependent on a variety of political and economic factors beyond our control, including worldwide demand for oil and gas, the ability of OPEC to set and maintain production levels and pricing, the level of production of non-OPEC countries and the policies of various governments regarding exploration and development of their oil and gas reserves.
Drilling contracts are generally awarded on a competitive bid or negotiated basis. Pricing (day rate) is often the primary factor in determining which qualified contractor is awarded a job. Rig availability, capabilities, age and each contractor’s safety performance record and reputation for quality also can be key factors in the determination. Operators also may consider crew experience, rig location and efficiency. We believe that the market for drilling contracts will continue to be highly competitive for the foreseeable future. Certain competitors may have greater financial resources than we do, which may better enable them to withstand periods of low utilization, compete more effectively in a low price environment, build new rigs or acquire existing rigs.
Our competition ranges from large international companies offering a wide range of drilling and other oilfield services to smaller, locally owned companies. Competition for rigs is usually on a global basis, as these rigs are highly mobile and may be moved, although at a cost that is sometimes substantial, from one region to another in response to demand.
Operating Hazards
Our operations are subject to many hazards inherent in the offshore drilling business, including, but not limited to: blowouts, craterings, fires, explosions, equipment failures, loss of well control, loss of hole, damaged or lost equipment and damage or loss from inclement weather or natural disasters.
These hazards could cause personal injury or death, serious damage to or destruction of property and equipment, suspension of drilling operations, or damage to the environment, including damage to producing formations and surrounding areas. Generally, we seek to obtain contractual indemnification from our customers for some of these risks. To the extent not transferred to customers by contract, we seek protection against some of these risks through insurance, including property casualty insurance on our rigs and drilling equipment, protection and indemnity, commercial general liability, which has coverage extension for underground resources and equipment coverage, commercial contract indemnity and commercial umbrella insurance.
There are risks that are outside of our control. Nonetheless, we believe that we are adequately insured for liability and property damage to others with respect to our operations. However, such insurance may not be sufficient to protect us against liability for all consequences of well disasters, extensive fire damage or damage to the environment. For more information regarding the risks related to our insurance policies, see “Risk Factors-Our business involves numerous operating hazards, and our insurance and contractual indemnity rights may not be adequate to cover our losses” in Part I, Item 1A of this Annual Report.
Insurance
We maintain insurance coverage that includes coverage for physical damage, third party liability, employer’s liability, war risk, general liability, vessel pollution and other coverage. However, our insurance is subject to exclusions and limitations and there is no assurance that such coverage will adequately protect us against liability from all potential consequences and damages.
Our primary marine package provides for hull and machinery coverage for our drilling units up to a scheduled value for each asset, which we believe approximates replacement cost. The maximum coverage for our eight drilling units, including the Titanium Explorer, which is classified as held for sale on our Consolidated Balance Sheet, is $910 million. The policies are subject to certain exclusions, limitations, deductibles and other conditions. Deductibles for physical damage to our jackup rigs and our drillships are $2.5 million and $5.0 million, respectively, per occurrence. Our protection and indemnity policy provides liability coverage limits of $500.0 million per rig. In addition to these policies, we have separate policies providing coverage for onshore general liability, employer’s liability, auto liability and non-owned aircraft liability, with customary coverage, limits and deductibles.
Foreign Regulation
Our operations are conducted in foreign jurisdictions and are subject to, and affected in varying degrees by, governmental laws and regulations in countries in which we operate, including laws, regulations and duties relating to the importation and exportation of and operation of drilling units and other equipment, currency conversions and repatriation, oil and gas exploration and development, environmental protection, taxation of offshore earnings and earnings of expatriate personnel and the use of local employees and suppliers by foreign contractors. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration for oil and gas and other aspects of the oil and gas industries in their countries. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil and gas companies and may continue to do so. Furthermore, these regulations have limited the opportunities for international drilling contractors to participate in tenders for contracts or to perform services in certain countries as the governments have strongly favored local service providers. Operations in less developed countries may be subject to legal systems that are not as predictable as those in more developed countries, which can lead to greater uncertainty in legal matters and proceedings.
The shipment of goods, services and technology across international borders subjects us to extensive trade laws and regulations. Our import and export activities are governed by unique customs laws and regulations in each of the countries where we operate. The laws and regulations concerning import and export activity, recordkeeping and reporting, import and export control and economic sanctions are complex and constantly changing. These laws and regulations may be enacted, amended, enforced or interpreted in a manner materially impacting our operations. Governments also may impose economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities. Shipments can be delayed and denied import or export for a variety of reasons, some of which are outside our control and some of which may result from failure to comply with existing legal and regulatory regimes. Shipping delays or denials could cause unscheduled operational downtime.
Governmental and Environmental Regulation
For a discussion of the effects of governmental and environmental regulation on our current operations, see “Risk Factors-Our business is subject to numerous governmental laws and regulations, including those that may impose significant costs and liability on us for environmental and natural resource damages” and “-Public concern and legislative and regulatory initiatives regarding the risks associated with climate change and the environmental and social impacts of fossil fuel extraction and use, and the growing emphasis by investors on investing in companies that are committed to environmental sustainability, could adversely affect our operations, the demand for oil and gas, our reputation and our access to capital and ability to refinance our debt” in Part I, Item 1A of this Annual Report.
Many aspects of our operations are affected by foreign, federal, state and local governmental laws, rules, regulations and policies that may relate directly or indirectly to the contract drilling industry, including those requiring us to control the discharge of oil and other contaminants into the environment or otherwise relating to environmental protection. Moreover, with the recent change in administration of the U.S. government, it is likely that new legislation, regulatory enforcement actions and executive orders, which are specifically aimed at reducing greenhouse gas emissions, or prohibiting, delaying or restricting oil development activities in certain jurisdictions, will be proposed and adopted in the near-term (see “Risk Factors-Our business is subject to numerous governmental laws and regulations, including those that may impose significant costs and liability on us for environmental and natural resource damages” in Part I, Item 1A of this Annual Report for further information).
We have historically conducted work in the Gulf of Mexico and may conduct such work in the future. Although we are not currently conducting any operations under the jurisdiction of U.S. environmental and natural resource agencies, similar restrictions and concerns apply in the jurisdictions in which we currently operate. These requirements and concerns may be more or less stringent than those associated with the following U.S. laws.
Heightened environmental concerns have led to greater and more stringent environmental regulations, higher drilling costs, and a more difficult and lengthy well permitting process in many jurisdictions throughout the world. Requirements applicable to our operations include regulations that would require us to obtain and maintain specified permits or governmental approvals, control the discharge of materials into the environment, require removal and cleanup of materials that may harm the environment, or otherwise relate to the protection of the environment. Laws and regulations protecting the environment have become more stringent and may in
some cases impose strict liability, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. Some of these laws and regulations may expose us to liability for the conduct of, or conditions caused by, others or for acts which were in compliance with all applicable laws at the time they were performed. The application of these requirements or the adoption of new or more stringent requirements could have a material adverse effect on our financial condition and results of operations.
Environmental requirements include water quality laws, regulations and policies that prohibit and/or regulate the discharge of pollutants, including petroleum, into the waters. Certain facilities that store or otherwise handle oil are required to prepare and implement Spill Prevention Control and Countermeasure Plans and Facility Response Plans relating to the possible discharge of oil to surface waters. Violations of monitoring, reporting, permitting and other requirements can result in the imposition of administrative, civil and criminal penalties. Laws governing air emissions and solid and hazardous waste also apply to our operations.
A variety of initiatives intended to enhance vessel security have been adopted in certain jurisdictions where we operate. For example, these initiatives may require the development of vessel security plans and on-board installation of automatic information systems to enhance vessel-to-vessel and vessel-to-shore communications.
The International Maritime Organization (the “IMO”), a specialized agency of the United Nations, is responsible for developing measures to improve the safety and security of international shipping and to prevent marine pollution from ships. Among the various international conventions negotiated by the IMO is the International Convention for the Prevention of Pollution from Ships (“MARPOL”). MARPOL imposes environmental standards on the shipping industry relating to oil spills, management of garbage, the handling and disposal of noxious liquids, harmful substances in packaged forms, sewage and air emissions.
Annex VI to MARPOL (“Annex IV”) sets limits on sulfur dioxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances. Annex VI also imposes a global cap on the sulfur content of fuel oil and allows for specialized areas to be established internationally with more stringent controls on sulfur emissions. For vessels 400 gross tons and greater, platforms and drilling units, Annex VI imposes various survey and certification requirements. For this purpose, gross tonnage is based on the International Tonnage Certificate for the vessel. The United States has ratified Annex VI. In addition, any drilling units we operate internationally are subject to the requirements of Annex VI in those countries that have implemented its provisions. We believe the drilling units we currently offer for international projects comply with Annex VI, but changes to our equipment and ratifying countries’ regulatory interpretations of the Annex VI requirements could impose additional costs on us, which could be significant.
Although significant capital expenditures may be required to comply with these governmental laws and regulations, such compliance has not materially adversely affected our earnings or competitive position. We believe that we are currently in compliance in all material respects with the environmental regulations to which we are subject.
We anticipate that we will continue to make expenditures to comply with governmental and environmental requirements. To date, we have not expended material amounts beyond those amounts spent on our basic rig designs in order to comply and we do not believe that our compliance with such requirements will have a material adverse effect upon our results of operations or competitive position or materially increase our capital expenditures.
Human Capital
Employees and Reporting
As of December 31, 2020, we managed a workforce consisting of approximately 670 employees worldwide, of which 320 were our direct employees. We report on a monthly basis to senior management on headcount, recruitment, compensation, competency and attrition. We also report human capital-related data to the Board of Directors on a quarterly or on an as required basis.
Compensation and Benefits
We believe we offer market competitive compensation as well as an attractive benefits package. We are dedicated to hiring and building a strong diverse team offering equal opportunities to realize and develop our team’s full potential.
People Development
We develop and grow our personnel with zero discrimination and strive to add value in the jurisdictions and regions in which we operate. We achieve this by (i) creating local employment, (ii) making commitments to training and development, and (iii) where possible, utilizing local supply chains. Our offshore employees have the opportunity to enhance their competence via our Vantage Competency Assurance Program, which includes state of the art rig simulators located on each rig. This supplements our comprehensive onboarding, induction and on and off-the-job training programs. Our key personnel also complete ethics and bribery training on an annual basis.
Quality, Health, Safety and Environment
We are committed to conducting our activities in a manner that (i) protects and prioritizes the health and safety of all of our personnel and (ii) minimizes our environmental footprint in the jurisdictions and regions in which we operate. Our stated vision is to have “A Perfect Day - Every Day,” which includes the paramount objective of having zero incidents in our operations. For the year ended December 31, 2020, we finished the year with a Lost Time Incident Rate of zero, which is best in class for our sector, and a Total Recordable Incident Rate of 0.1, which was the best in our history. We have focused on, and will continue to emphasize, the following goals and priorities, among others, in order to continue the foregoing trends:
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Providing visible and active leadership that creates a mature safety culture, which preserves the wellbeing of our personnel and their families;
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Continuously improving our world-class Quality, Health, Safety and Environment (“QHSE”) management system by continuously measuring and reviewing our overall QHSE performance;
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Reporting and investigating all incidents and implementing the lessons learned from each such incident;
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Complying with, and where feasible, exceeding the requirements of applicable laws and regulations;
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Developing and enhancing our personnel’s technical and systems competence;
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Systematically identifying hazards and managing the risks and exposures associated with such hazards to a level considered As Low As Reasonably Practicable (ALARP);
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Caring for and protecting the environment;
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Maintaining the integrity of our assets through professional operations and sound maintenance practices;
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Ensuring all personnel are aware of their obligation to promptly ‘Stop’ a job if they notice something unsafe; and
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Complying with the principles and intent of the Vantage Perfect Day Leadership Foundations.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website at www.vantagedrilling.com as soon as practicable after we electronically file such material with the SEC through EDGAR at www.sec.gov. Information contained on or accessible from our website is not incorporated by reference into this Annual Report and should not be considered a part of this Annual Report or any other filing that we make with the SEC.
This Annual Report also contains summaries of the terms of certain agreements that we have entered into that are filed as exhibits to this Annual Report. The descriptions contained in this Annual Report of those agreements do not purport to be complete and are subject to, and qualified in their entirety by reference to, the respective definitive agreements. You may request a copy of the agreements described herein at no cost by writing or telephoning us at the following address: Vantage Drilling International, Attention: General Counsel, c/o Vantage Energy Services, Inc., 777 Post Oak Boulevard, Suite 800, Houston, Texas 77056, phone number (281) 404-4700. You can also obtain copies of any of the agreements that are filed as exhibits to this Annual Report from the SEC through the SEC’s website at www.sec.gov.

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors.
There are numerous factors that affect our business and operating results, many of which are beyond our control. Immediately below is a summary of the principal factors that might cause our future operating results to differ materially from those currently expected. The risk factors summarized below are not the only risks facing us. Additional discussion of the risks summarized in the “Risk Factor Summary,” as well as other risks that may affect our business and operating results, can be found below under the heading “Risk Factors,” and should be carefully considered and evaluated before making an investment decision regarding our business. Moreover, additional risks and uncertainties not specified herein, not currently known to us or currently deemed to be immaterial also may materially adversely affect our business, financial position, operating results or cash flows.
Risk Factor Summary:
Risks Related to the Operation of our Business:
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a continued low amount of, or further reduction in, expenditures by oil and gas exploration and production companies due to low levels of oil and gas prices, a decrease in demand for oil and gas, or other factors, could adversely affect our business;
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low prices for oil and gas may reduce demand for our services and could have a material adverse effect on our revenue and profitability;
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public concern and legislative and regulatory initiatives regarding the risks associated with climate change and the environmental and social impacts of fossil fuel extraction and use, and the growing emphasis by investors on investing in companies that are committed to environmental sustainability, could adversely affect our operations, the demand for oil and gas, our reputation and our access to capital and ability to refinance our debt;
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our level of indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations;
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our drilling contracts are generally short-term in duration, and we could experience reduced profitability if customers reduce activity levels or if we otherwise fail to secure new drilling contracts or extend existing contracts upon their termination;
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we may be required to make substantial capital and operating expenditures to maintain and upgrade our fleet to maintain our competitiveness and to comply with laws and the applicable regulations and standards of governmental authorities and organizations;
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our business involves numerous operating hazards, and our insurance and contractual indemnity rights may not be adequate to cover our losses associated with such operating hazards;
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the international nature of our operations creates additional political, economic, legal and other uncertainties not generally associated with domestic operations;
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the continued global spread of COVID-19, fears relating to the spread of COVID-19, and associated oil market developments could adversely impact our financial condition and results of operations, and the ultimate impact and effects of the spread of COVID-19 and the resulting pandemic are highly uncertain and cannot be predicted at this time;
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a small number of customers account for a significant portion of our revenues, and the loss of one or more of these customers could materially adversely affect our financial condition and results of operations;
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the concentration of revenue with a small number of customers also exposes us to credit risk of these customers for non-payment or contract termination;
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operating and maintenance costs will not necessarily fluctuate in proportion to changes in operating revenues;
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we are subject to litigation and other disputes that could have a material and adverse effect on our business operations and financial condition;
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there may be limits to our ability to mobilize drilling units between geographic markets and the time and costs of such drilling unit mobilizations may be material to our business;
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failure to employ a sufficient number of skilled workers or an increase in labor costs could materially and adversely impact our operations;
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construction projects are subject to risks, including delays and cost overruns, which could have an adverse impact on our liquidity and results of operations;
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we may engage in certain strategic or transformational transactions in the future which could affect the value or type of our assets;
Risks Related to Governmental Regulations and Laws:
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our business is subject to numerous governmental laws and regulations, including those that may impose significant costs and liability on us for environmental and natural resource damages;
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because VDI is incorporated under the laws of the Cayman Islands, stakeholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited;
Risks Related to our Financial Condition and Taxes:
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changes in tax laws, treaties or regulations, effective tax rates and adverse outcomes resulting from examination of our tax returns could adversely affect our financial results; and
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distributions made by VDI may reduce a U.S. Holder’s tax basis in the Ordinary Shares, and therefore, U.S. Holders may realize a greater gain on the disposition of their Ordinary Shares than they otherwise may expect, and may have a tax gain even if the price they receive in a disposition of their Ordinary Shares is less than their original tax basis.
Risk Factors:
Risks Related to Operations of our Business
A continued low amount of, or further reduction in, expenditures by oil and gas exploration and production companies due to low levels of oil and gas prices, a decrease in demand for oil and gas, or other factors, could adversely affect our business.
Our business, including the utilization rates and dayrates we achieve for our drilling units, depends on the level of activity in oil and gas exploration, development and production expenditures of our customers. Oil and gas prices and customers’ expectations of potential changes in these prices significantly affect this level of activity. Commodity prices are affected by numerous factors, including the following:
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changes in global economic conditions;
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the worldwide supply and demand for oil and gas;
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the cost of exploring for, producing and delivering oil and gas;
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expectations regarding future prices;
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advances in exploration, development and production technology;
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the ability or willingness of OPEC to set and maintain production levels and pricing;
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the availability and discovery rate of new oil and gas reserves in offshore areas;
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the availability and discovery rate of new oil and gas reserves in the U.S. shale oil and gas regions;
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the rate of decline of existing and new oil and gas reserves;
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the level of production in non-OPEC countries;
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domestic and international tax policies;
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the development and exploitation of alternative fuels;
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severe and unpredictable weather conditions;
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public concern regarding the risks associated with climate change;
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blowouts and other catastrophic events;
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governmental laws and regulations, including those aimed at environmental preservation and reductions in carbon emissions;
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the policies of various governments regarding exploration and development of their oil and gas reserves;
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volatility in the exchange rate of USD against other currencies; and
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the worldwide political environment, uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in significant oil and gas producing regions or further acts of terrorism.
In addition to oil and gas prices, the offshore drilling industry is influenced by additional factors, including:
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the availability of competing offshore drilling vessels and the level of construction activity for new drilling vessels;
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the consolidation of market participants;
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the level of costs for associated offshore oilfield and construction services;
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oil and gas transportation costs;
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the discovery of new oil and gas reserves;
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the cost of non-conventional hydrocarbons; and
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regulatory restrictions on offshore drilling.
Any one of these factors could significantly reduce the demand, or prices paid, for our services and materially and adversely affect our business and results of operations.
Low prices for oil and gas may reduce demand for our services and could have a material adverse effect on our revenue and profitability.
Demand for our services depends on oil and gas industry activity and expenditure levels that are directly affected by trends in oil and gas prices. In addition, demand for our services is particularly sensitive to the level of exploration, development and production activity of and the corresponding capital spending by, oil and gas companies. Any prolonged weakness in oil and gas prices could depress the near-term levels of exploration, development and production activity. Perceptions of longer-term lower oil and gas prices by oil and gas companies could similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity result in a corresponding decline in the demand for our services, which could have a material adverse effect on our revenue and profitability. Additionally, these factors may adversely impact our financial position if they are determined to cause an impairment of our long-lived assets.
Our industry is highly competitive, cyclical and subject to intense price competition.
Historically, the offshore contract drilling industry has been cyclical and volatile with periods of high demand, limited supply and high dayrates alternating with fluctuating periods of low demand, excess supply and low dayrates. Many offshore drilling units are highly mobile. Competitors may move drilling units from region to region in response to changes in demand. According to Bassoe, there were 41 jackups and 26 deepwater/harsh environment floaters on order at shipyards as of December 2020. It is unclear when these drilling rigs will actually be delivered, if at all, as many rig deliveries have (i) already been deferred to later dates, or (ii) been canceled entirely. Periods of low demand and excess supply intensify competition in our industry and often result in some of our drilling units becoming idle for long periods of time. Prolonged periods of low utilization and dayrates, or extended idle time, could result in the recognition of impairment charges on our drilling units if cash flow estimates, based upon information made available to management at the time, indicate that the carrying value of the drilling units may not be recoverable.
Public concern and legislative and regulatory initiatives regarding the risks associated with climate change and the environmental and social impacts of fossil fuel extraction and use, and the growing emphasis by investors on investing in companies that are committed to environmental sustainability, could adversely affect our operations, the demand for oil and gas, our reputation and our access to capital and ability to refinance our debt.
Global climate issues, including the emission of greenhouse gases, continue to attract considerable public and scientific attention, and there has been increased focus on the oil and gas industry as a result. Numerous reports, including, the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, have caused concern about the adverse impacts of human activity on the world’s climate. The adoption of any legislation or regulation that requires reporting of greenhouse gases, or otherwise restricts emissions of greenhouse gases from our operations, could require us to incur significant costs to reduce such emissions, could adversely affect demand for the oil and gas that we extract or limit our access to financial capital.
Over the recent years, sovereign wealth, pension and endowment funds have begun to divest fossil fuel equities and pressure lenders to limit funding to companies engaged in the extraction of fossil fuels. These efforts have greatly intensified during the COVID-19 pandemic, both in the United States and throughout the world. For example, New York State’s Pension Fund, which had already divested from nearly two dozen thermal coal companies in July 2020, announced in December 2020 that it would seek to divest from fossil fuel stocks by 2025 and sell its shares in other companies that contribute to climate change by 2040. Likewise, in January 2021, two of New York City’s largest pension funds, the New York City Employees’ Retirement System and the New York City Teachers’ Retirement System, approved the divestment of approximately $4 billion from fossil fuel companies, and the New York City Board of Education Retirement System is expected to follow suit. Furthermore, Sweden’s state-backed pension funds were recently admonished by the Swedish Society for Nature Conservation, one of Sweden’s largest climate organizations, for continuing to invest in fossil-fuel companies, and recent proposed changes to the ethical investment guidelines for the Government Pension Fund Global, Norway’s sovereign wealth fund, could result in the fund selling approximately €910 million of its holdings.
The initiatives aimed at limiting climate change and reducing air pollution and the emission of greenhouse gases, including divestment from the oil and gas industry, could significantly interfere with our operations, business activities, and ability to access the capital markets and refinance our debt. Likewise, successful divestment efforts in the oil and gas industry could materially and adversely impact prices of our debt or equity securities. Given that members of the investment community have begun to heavily factor in, and will likely continue in the near-term to assess, a company’s commitment to environmental, social and governance (“ESG”)-related initiatives and sustainability performance as part of its overall investment strategy and thesis, investors, including large institutional investors, investment advisors and large sovereign wealth, pension and endowment funds, could elect to forego their investment in us to the extent we fail to satisfy such metrics. Such investors may also continue to accelerate their commitment to increasing the overall percentage of their portfolios that are allocated towards companies that have shown significant commitment to ESG-related matters and environmental sustainability. In light of the foregoing, investors may seek to re-allocate portions of their capital away from deepwater projects. These concerns and the uncertainty around global oil and gas prices may cause deepwater projects to become one of the least attractive areas for investment by our clients given the large capital requirements and the significant amount of time between discovery and production of oil and/or gas. Separately, we could lose existing investors in their
entirety if we or our securities fail to meet the ESG-related standards and initiatives being sought and prioritized by such investors. Our failure to satisfy such metrics could also harm our overall reputation amongst members of the investment community, our critical counterparties and in the markets more generally.
Furthermore, the increased focus by the investment community on environmental, social and governance-related practices and disclosures, including emission rates and overall impacts to global climate, has created, and will create for the foreseeable future, increased pressure regarding the enhancement of, and modification to, the disclosure and governance practices in our industry. For example, BlackRock, one of the largest asset managers in the world, which previously affirmed its commitment to divest from investments in fossil fuels due to concerns over climate change, recently called for the oil companies and other polluting-generating industries it invests in to disclose their carbons emissions and set clear targets to decrease the amounts of such pollution. As a result, we currently face, and could continue to face, increasing pressure regarding our ESG disclosures and related practices.
Lastly, increased attention regarding the risks of climate change and the emission of greenhouse gases augments the possibility of litigation or investigations being brought by public and private entities against oil and gas companies in connection with their greenhouse emissions. Should we be targeted by any such litigation or investigations, we may incur liability, which, to the extent that political or societal pressures or other factors are involved, could be imposed without regard to the causation of, or contribution to, the asserted damage, or to other mitigating factors.
Our level of indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations.
As of December 31, 2020, we had approximately $350 million aggregate principal amount of debt outstanding under the 9.25% First Lien Notes. Our level of indebtedness could have significant and adverse effects on our business. For example, our level of indebtedness and the terms of our debt agreements could:
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make it more difficult for us to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;
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prevent us from raising the funds necessary to repurchase notes tendered to us if we undergo a change of control;
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require us to use a substantial portion of our cash flow from operations to pay interest and principal on the notes and other debt, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes;
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limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments, or general corporate purposes, which may limit our ability to execute our business strategy;
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limit our ability to refinance our indebtedness on terms that are commercially reasonable, or at all;
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heighten our vulnerability to downturns in our business, our industry or in the general economy, and restrict us from exploiting business opportunities or making acquisitions;
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place us at a competitive disadvantage compared to those of our competitors that may have proportionately less debt;
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limit management’s discretion in operating our business; and
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limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.
Each of these factors may have a material and adverse effect on our financial condition and viability. Our ability to satisfy our other debt obligations will depend on our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors affecting our company and industry, many of which are beyond our control.
Our drilling contracts are generally short-term in duration, and we could experience reduced profitability if customers reduce activity levels or if we otherwise fail to secure new drilling contracts or extend existing contracts upon their termination.
Many of our drilling contracts are short-term, and oil and gas companies tend to reduce shallow water activity levels quickly in response to downward changes in oil and gas prices. Due to the short-term nature of most of our drilling contracts, a decline in market conditions can quickly and significantly affect our business if customers reduce their levels of operations. We may not be able to secure new contracts for our vessels or extend contracts on favorable terms, if at all, or satisfy any conditions precedent to finalizing any letters of intent or award with respect to our vessels. This could result in one or more of our vessels being idle for an extended period of time, which could adversely affect our profitability, financial position, results of operations and cash flows.
We may not be able to replace expiring or terminated contracts for our existing rigs at dayrates that are economically feasible for us.
Due to the cyclical nature and high level of competition in our industry, we may not be able to replace expiring or terminated contracts. Our ability to replace expiring or terminated contracts will depend on prevailing market conditions, the specific needs of our customers, and numerous other factors beyond our control. Additionally, any contracts for our drilling units may be at dayrates that are below existing dayrates, which could have a material adverse effect on our overall business, financial condition, results of operations and future prospects.
Our drilling contracts may be terminated early in certain circumstances and our customers may seek to renegotiate the terms of their existing drilling contracts with us.
In certain instances, our customers may have the contractual right to terminate, or may seek to renegotiate, their existing drilling contracts with us if we experience excessive downtime, operational issues above the contractual limit or safety-related issues, if the drilling unit is a total loss, if the drilling unit is not delivered to the customer within the period specified in the contract or in other specified circumstances, which include force majeure events beyond the control of either party.
Some of our current drilling contracts, and some drilling contracts that we may enter into in the future, may include terms allowing customers to terminate contracts without cause, with little or no prior notice and without penalty or early termination payments. In addition, we could be required to pay penalties, which could be material, if some of these contracts are terminated due to downtime, operational issues or failure to deliver. Some of the contracts with customers that we enter into in the future may be cancellable at the option of the customer upon payment of a penalty, which may not fully compensate us for the loss of the contract. Early termination of a contract may result in a drilling unit being idle for an extended period of time. The likelihood that a customer may seek to terminate a contract is increased during periods of market weakness. Under most of our contracts, it is an event of default if we file a petition for bankruptcy or reorganization, which would allow the customer to terminate such contract.
Further, during depressed market conditions, a customer may no longer need a unit that is currently under contract or may be able to obtain a comparable unit at a lower dayrate. As a result, customers may seek to renegotiate the terms of their existing drilling contracts or avoid their obligations under those contracts. For a discussion of the termination of, or amendment to, certain of our drilling contracts as a result of the COVID-19 pandemic, see “Risk Factors- The continued global spread of COVID-19, fears relating to the spread of COVID-19, and associated oil market developments could adversely impact our financial condition and results of operations.”
We may experience downtime as a result of repairs or maintenance, human error, defective or failed equipment, or delays waiting for replacement parts.
Our operations may be suspended because of machinery breakdowns, human error, abnormal operating conditions, failure of subcontractors to perform or supply goods or services, delays on replacement parts or personnel shortages, which may cause us to experience operational downtime and could have an adverse effect on our results of operations.
We may be required to make substantial capital and operating expenditures to maintain and upgrade our fleet to maintain our competitiveness and to comply with laws and the applicable regulations and standards of governmental authorities and organizations, each of which could negatively affect our financial condition, results of operations and cash flows.
Our business is highly capital intensive and dependent on having sufficient cash flow and or available sources of financing in order to fund capital expenditure requirements. We can provide no assurance that we will have access to adequate or economical sources of capital to fund necessary capital expenditures. Such capital expenditures could increase as a result of changes in, among other things, any of the following:
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the cost of labor and materials;
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customer requirements;
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fleet size;
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the cost of replacement parts for existing drilling rigs;
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the geographic location of the drilling rigs;
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the length of drilling contracts;
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governmental regulations and maritime self-regulatory organization and technical standards relating to safety, security or the environment; and
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industry standards.
Changes in offshore drilling technology, customer requirements for new or upgraded equipment and competition within our industry may require us to make significant capital expenditures in order to maintain our competitiveness. In addition, changes in governmental regulations, safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations, may require us to make additional unforeseen capital expenditures. As a result, we may be required to take our rigs out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our older rigs profitably during the remainder of their economic lives.
In addition, we may require additional capital in the future. If we are unable to fund capital expenditures with our cash flow from operations or sales of non-strategic assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by certain restrictive covenants under the agreements governing our credit agreement and notes, by changes in laws and regulations or interpretation thereof and by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. If we raise funds by issuing equity securities, existing shareholders may experience dilution. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business and on our consolidated statements of financial condition, results of operations and cash flows.
The market value of our current vessels may decrease, which could cause us to take accounting charges or incur losses if we decide to sell them following a decline in their values.
If the offshore contract drilling industry continues to suffer adverse developments, the fair market values of our vessels may decline. The fair market values of the vessels we currently own or may acquire in the future may increase or decrease depending on a number of factors, many of which are beyond our control, including the general economic and market conditions affecting the oil and gas industry and the possible corresponding adverse effect on the level of offshore drilling activity.
Any such deterioration in the market values of our vessels could require us to record an impairment charge in our financial statements, which could adversely affect our results of operations. If we sell any of our vessels when prices for such vessels have fallen, the sale may be at less than such drillship’s carrying amount on our financial statements, resulting in a loss.
We may not be able to compete effectively against the actions taken by our competitors, which could materially and adversely impact our business operations and financial results.
Our competitors have engaged, and may continue to engage, in the process of restructuring their respective balance sheets and, in the process, reducing their overall cost structure. In addition, it is anticipated that some of these competitors may enter into strategic transactions, including mergers, which could provide further cost savings and efficiencies through synergies, the recycling of assets and other means. It is possible that such competitors could emerge stronger financially as a result of such transactions and therefore, be better positioned to secure valuable drilling contracts at lower rates. The emergence of stronger competitors in an already challenging financial environment could adversely affect our ability to secure critical drilling contracts and thereby adversely affect our business operations and financial condition.
New technology and/or products may cause us to become less competitive, and higher levels of capital expenditures may be necessary in order to remain competitive.
The offshore contract drilling industry is subject to the introduction of new drilling techniques and services using new technologies, some of which may be subject to patent protection. As competitors and others use or develop new technologies, we may be placed at a competitive disadvantage. Further, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may enable them to more readily access technological advantages and implement new technologies before we can. We cannot be certain that we will be able to implement new technology or products on a timely basis or at an acceptable cost. Thus, our inability to effectively use and implement new and emerging technology may have a material and adverse effect on our financial condition and results of operations.
Our business involves numerous operating hazards and is subject to severe weather events, and our insurance and contractual indemnity rights may not be adequate to cover our losses resulting from such hazards and events.
Our operations are subject to the usual hazards inherent in the drilling and operation of oil and gas wells, such as blowouts, reservoir damage, loss of production, loss of well control, punch-throughs, craterings, fires and pollution. The occurrence of any one of these events could result in the suspension of drilling or production operations, claims by the operator and others affected by such events, severe damage to, or destruction of, the property and equipment involved, injury or death to drilling unit personnel, environmental damage and increased insurance costs. We may also be subject to personal injury lawsuits and other claims of drilling unit personnel as a result of our drilling operations. Operations also may be suspended because of machinery breakdowns, abnormal operating conditions, failure of subcontractors to perform or supply goods or services and personnel shortages.
In addition, our operations are subject to risks inherent in and endemic to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Severe weather could have a material adverse effect on our operations. Our drilling units could be damaged by high winds, turbulent seas or unstable sea bottom conditions which could potentially cause us to curtail operations for significant periods of time until such damages are repaired.
Damage to the environment could result from our operations, particularly through oil spillage or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by host governments, oil and gas companies and other businesses operating offshore and in coastal areas, as well as claims by individuals living in or around coastal areas.
As is customary in our industry, the risks of our operations are partially covered by our insurance and partially by contractual indemnities from our customers. However, insurance policies and contractual rights to indemnify us may not adequately cover losses, and we may not have insurance coverage or rights to indemnify us for all such risks (see “Risks Factors - Customers may be unable or unwilling to indemnify us”). Moreover, pollution and environmental risks generally are not fully insurable. If a significant accident or other event resulting in damage to our drilling units, including severe weather, terrorist acts, war, civil disturbances, pollution or environmental damage, occurs and is not fully covered by insurance or a recoverable indemnity from a customer, it could materially and adversely affect our financial condition and results of operations.
The international nature of our operations creates additional political, economic, legal and other uncertainties not generally associated with domestic operations.
Our business strategy is to operate in international oil and gas producing areas. Our international operations are subject to a number of risks inherent in any business operating in foreign jurisdictions, including:
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political, social and economic instability, war and acts of terrorism;
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government corruption;
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potential seizure, expropriation or nationalization of assets;
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damage to our equipment or violence directed at our employees, including kidnappings;
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piracy;
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increased operating costs;
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complications associated with repairing and replacing equipment in remote locations;
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repudiation, modification or renegotiation of contracts;
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limitations on insurance coverage, such as war risk coverage in certain areas;
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import-export quotas;
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confiscatory taxation;
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work stoppages;
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unexpected changes in regulatory requirements;
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wage and price controls;
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imposition of trade barriers;
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imposition or changes in enforcement of local content laws;
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restrictions on currency or capital repatriations;
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currency fluctuations and devaluations; and
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other forms of government regulation and economic conditions that are beyond our control.
Our financial condition and results of operations could be susceptible to adverse events beyond our control that may occur in the particular jurisdictions in which we operate our business. Additionally, we may experience currency exchange losses where, at some future date, revenues are received and expenses are paid in nonconvertible currencies or where we do not hedge exposure to a foreign currency. We may also incur losses as a result of an inability to collect revenues because of a shortage of convertible currency available in the country of operation, controls over currency exchange or controls over the repatriation of income or capital.
Many governments favor or effectively require that drilling contracts be awarded to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may result in inefficiencies or put us at a disadvantage when bidding for contracts against local competitors.
Our offshore contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipment and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development, taxation of offshore earnings and earnings of expatriate personnel, the use of local employees and suppliers by foreign contractors and duties on the importation and exportation of drilling units and other equipment. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration for oil and gas and other aspects of the oil and gas industries in their countries. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil and gas companies and may continue to do so. Operations in less developed countries can be subject to legal systems which are not as predictable as those in more developed countries, which can lead to greater uncertainty in legal matters and proceedings.
The continued global spread of COVID-19, fears relating to the spread of COVID-19, and associated oil market developments could adversely impact our financial condition and results of operations.
On January 30, 2020, WHO announced a global health emergency as COVID-19, continued to spread globally beyond its point of origin. In March 2020, WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally and the risks posed to the international community. During this time, the market experienced a rapid decline in oil prices in response to oil demand concerns due to the economic impacts of COVID-19 and anticipated increases in supply from Russia and OPEC, particularly Saudi Arabia. These actions led to (i) significant weaknesses in oil prices and (ii) ensuing reductions of oil and gas company capital and operating budgets. It is not possible at this time to predict the ultimate effect of the continued spread, or fear of continued spread, of COVID-19 globally on our business, financial condition and results of operations could be materially and adversely impacted.
Moreover, the COVID-19 pandemic has generally affected our customers, suppliers, vendors, and other business partners. If our customers or suppliers experience material and adverse business consequences due to the spread of COVID-19, demand for our services could also be adversely affected, and existing counterparties could seek to invoke “force majeure” clauses under their contracts with us and/or terminate such contracts. For example, as of the date of this Annual Report, and as a result of these challenges: (a) one of our customers invoked the “force majeure” clause under its drilling contract with us and subsequently terminated the drilling contract in accordance with its terms, and there is the potential for others to similarly exercise “force majeure” clauses under their respective drilling contracts; (b) two other customers terminated their drilling contracts prior to the end of their respective terms (both contracts were to expire in the normal course in the second quarter of 2020); (c) in December 2020, a customer terminated its drilling contract prior to the commencement of operations; (d) we reached an agreement in April 2020 to place one rig on a stand-by rate for the majority of the second quarter of 2020 (such “force majeure” rates or stand-by rates received by the Company are generally less than the original day rates otherwise payable to the Company); however, this rig returned to operations in July 2020; (e) we reached agreements with two other clients to delay the start dates of their new drilling programs and we continue to be in discussions with another customer regarding our operations and their existing drilling contract and program; (f) we experienced, and could continue to experience, delays in the collection of certain accounts receivables due to logistical obstacles, such as office closures resulting from further the COVID-19 outbreak, as well as other impacts to our long-term liquidity; and (g) we incurred additional labor costs and could continue to incur additional labor costs in the future as a result of our efforts to keep our personnel safe, quarantine requirements, closures and movement restrictions in certain jurisdictions in which we operate, as well as the home countries in which certain of our offshore crews are located, which in many cases have impeded, and could continue to impede for the foreseeable future, the regular transportation of crews to their home countries and result in the payment of compensation to stranded crews working longer than their routine rotation schedule (in addition to the use of charter flights in the absence of commercial flights).
The impact of these challenges in 2020 resulted in (i) lower revenue due to terminations of (or amendments to) certain of our drilling contracts and (ii) increased expenses due to higher labor and related costs. We cannot at this time determine with certainty how long these challenges will persist as well as the long-term impact that such challenges may have on our operations on a go-forward basis; however, the Company has been actively managing and continues to actively manage the business in an attempt to mitigate the impact of the foregoing events. In the case of additional expenses incurred as a result of the foregoing matters, the Company undertook significant cost-saving measures, including reductions in salaries and workforce, both onshore and offshore, to reflect the lower operating activity. The extent to which COVID-19 will continue to impact the counterparties in which we engage in business will depend on future developments, which are highly uncertain and cannot be predicted at this time.
The ultimate impact and effects of the spread of COVID-19 and the resulting pandemic are highly uncertain and cannot be predicted at this time.
There remains continued and significant uncertainty relating to the impact of COVID-19, which is predicated on future developments that cannot be determined or predicted with certainty at this time, including, but not limited to, the occurrence and
continuity of a ‘second wave’ in the markets in which we, our customers and suppliers operate. Throughout 2020, we observed deterioration in macroeconomic conditions, oil price and market volatility, and reductions and delays in oil and gas exploration and development plans by operators as a result of the economic impact of the COVID-19 pandemic. We determined these events constituted “triggering events” requiring an assessment for impairment. We recorded a loss on impairment of $128.9 million during the year ended December 31, 2020.
The COVID-19 pandemic continues to spread worldwide, and the extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Such developments include, but are not limited to, the duration and further spread of COVID-19, including the discovery of any new strains of COVID-19, the development, availability and effectiveness of treatments or vaccines for COVID-19, and the general resuming of widespread economic activity. Therefore, we can give no assurances that the spread of COVID-19 will not have a material adverse effect on our financial position or results of operations in 2021 and beyond.
We are continuously monitoring our own operations and have taken, and intend to continue to take, appropriate actions to mitigate the risks arising from the COVID-19 pandemic to the best of our abilities. Nevertheless, there can be no assurances that we will be successful in doing so. The ultimate magnitude and effect of the continued spread of COVID-19 globally, and the resulting social, economic and labor instability attributable to COVID-19, cannot be predicted or estimated at this time.
The ability of our offshore and onshore employees to work and conduct our business has been, and may continue to be, significantly impacted by COVID-19.
Like the global economy at large, both our offshore and onshore employees are being significantly impacted by the spread of COVID-19. Our operations in all of the jurisdictions in which we operate have been impacted by varying levels of government responses to the spread of COVID-19, including government-enforced quarantines, “stay-at-home” orders and restrictions on travel. The impact of such governmental actions have been particularly felt by our personnel working offshore on our rigs. In some cases, our offshore personnel have had to remain onboard the rig on which they serve beyond the usual length of time due to general restrictions on transporting persons onto (and off of) the rig and other offshore personnel have not been able to travel to the applicable offshore locations at all. Even if our offshore personnel are able to successfully travel to the countries where we operate, they may nevertheless be required to self-quarantine for a minimum number of days before continuing on toward the rig. Furthermore, other of our offshore personnel may be able to depart the rig, but are then required to remain in the same country for an extended period of time until (i) the government-imposed quarantine expires, (ii) the country from which they are traveling permits departure and/or (iii) the country to which they intend to travel permits entry. In addition, our office and management personnel are working remotely and are subject to varying governmental restrictions depending on the level of actions taken by governments of countries in which such onshore personnel are located. As the health of our workforce is paramount, we have implemented, and will continue to implement for the foreseeable future, precautionary measures to help minimize the risk of our employees being potentially exposed to, or contracting, COVID-19. Our management team has been, and remains, focused on mitigating the adverse effects of the spread of COVID-19, which has required, and will continue to require, a significant investment of time and resources across the entire Company, thereby diverting time, energy and resources from other priorities that existed prior to the spread of COVID-19. If these conditions exacerbate, or last for an extended period of time, our ability to manage our business may be negatively impacted, and preexisting operational and other business risks that we (and our industry) face may be heightened, including, but not limited to, cybersecurity risks. For a discussion regarding cybersecurity risks to our business, see “Risk Factors - Our information technology systems and those of our service providers are subject to cybersecurity risks and threats.”
Public health threats could have a material adverse effect on our financial position, results of operations or cash flows.
Public health threats, including, but not limited to, the COVID-19 pandemic, Ebola, the H1N1 flu virus, the Zika virus, Severe Acute Respiratory Syndrome and other highly communicable diseases, outbreaks of which have occurred fairly recently in various parts of the world in which we operate, could adversely impact our operations, the operations of our clients and the global economy, including the worldwide demand for oil and gas and the level of demand for our services. Any quarantine of personnel or the inability to access our offices or rigs could adversely affect our operations. Travel restrictions or operational problems in any part of the world in which we operate, or any reduction in the demand for drilling services caused by public health threats in the future, may adversely affect our financial position, results of operations or cash flows.
A small number of customers account for a significant portion of our revenues, and the loss of one or more of these customers could materially adversely affect our financial condition and results of operations. The concentration of revenue with a small number of customers also exposes us to credit risk of these customers for non-payment or contract termination.
We derive a significant portion of our revenues from a few customers. Five customers accounted for approximately 78% of our revenue during the fiscal year ended December 31, 2020. Our financial condition and results of operations could be materially and adversely affected if any one of these customers interrupts or curtails their activities, fails to pay for the services that have been performed, terminates their contracts, fails to renew their existing contracts or refuses to award new contracts and we are unable to
enter into contracts with new customers on comparable terms. The loss of any of our significant customers could materially adversely affect our financial condition and results of operations.
Operating and maintenance costs will not necessarily fluctuate in proportion to changes in operating revenues.
We cannot predict what operating and maintenance costs will fluctuate in proportion to changes in operating revenues. Operating revenues may fluctuate as a function of changes in dayrates. However, costs for operating a drilling unit are generally fixed or only semi-variable regardless of the dayrate being earned. In addition, should the drilling units incur idle time between contracts, we would typically maintain the crew to prepare the drilling unit for its next contract and may not be able to reduce costs to correspond to the decrease in revenue. During times of moderate activity, reductions in costs may not be immediate as the crew may be required to prepare the drilling units for stacking, after which time the crew will be reduced to a level necessary to maintain the drilling unit in working condition with the extra crew members assigned to active drilling units or dismissed. In addition, as drilling units are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. Equipment maintenance expenses fluctuate depending upon the type of activity the drilling unit is performing and the age and condition of the equipment. Contract preparation expenses vary based on the scope and length of contract preparation required and the duration of the firm contractual period over which such expenditures are amortized.
Our insurance coverage may not be adequate if a catastrophic event occurs.
As a result of the number and significance of catastrophic events in the history of the offshore drilling industry, insurance underwriters have increased insurance premiums and increased restrictions on coverage and have made other coverages unavailable to us on commercially reasonable terms. During the recent industry downturn, in addition to paying lower day rates, many oil and gas companies have negotiated less favorable terms with respect to risk allocation and indemnity rights in the drilling service contracts to which we are or may become a party.
While we believe we have reasonable policy limits of property, casualty and liability insurance, including coverage for acts of terrorism, with financially sound insurers, we cannot guarantee that our policy limits for property, casualty, liability and business interruption insurance, including coverage for severe weather, terrorist acts, war, civil disturbances, pollution or environmental damage, would be adequate should a catastrophic event occur related to our property, plant or equipment, or that our insurers would have adequate financial resources to sufficiently or fully pay related claims or damages. When any of our coverage expires, or when we seek coverage in the future, we cannot guarantee that adequate coverage will be available, offered at reasonable prices, or offered by insurers with sufficient financial soundness. Additionally, we do not have third party windstorm insurance and we may not have windstorm insurance for any vessel that we operate in the Gulf of Mexico in the future. The occurrence of an incident or incidents affecting any one or more of our drilling units could have a material adverse effect on our financial position and future results of operations if asset damage and/or our liability were to exceed insurance coverage limits or if an insurer was unable to sufficiently or fully pay related claims or damages.
We may suffer losses as a result of foreign currency fluctuations.
A significant portion of the contract revenues of our foreign operations will be paid in USD; however, some payments are made in foreign currencies. As a result, we are exposed to currency fluctuations and exchange rate risks as a result of our foreign operations. To minimize the financial impact of these risks when we are paid in non-U.S. currency, we attempt to match the currency of operating costs with the currency of contract revenue. If we are unable to substantially match the timing and amounts of these payments, any increase in the value of USD in relation to the value of applicable foreign currencies could adversely affect our operating results.
We are subject to litigation and other disputes that could have a material and adverse effect on our business operations and financial condition.
We are, from time to time, involved in litigation and disputes that could negatively affect our business operations and financial condition. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic tort claims, employment and tax matters, claims of infringement of patent and other intellectual property rights, and other litigation that arises in the ordinary course of our business. In addition, during periods of volatile and depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us. Furthermore, actions or decisions we have taken or may take, or failed to take, as a consequence of the COVID-19 pandemic may result in investigations, litigation or legal claims against us. We cannot predict with certainty the outcome or effect of any dispute, claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation or dispute. While we maintain insurance coverage for potential litigation matters and disputes, some of these matters and disputes may not be covered by existing insurance. Moreover, to the extent we do maintain such insurance coverage it may not be sufficient, insurers may not remain solvent, other claims may exhaust some or all of the insurance available to us or insurers may interpret our insurance policies such that they refuse to cover all (or a portion) of the losses for which we make claims or may otherwise dispute claims made. The risks associated with these litigation matters and disputes may be difficult to assess or
quantify and the existence and magnitude of potential claims often remain unknown for substantial periods of time. Furthermore, litigation and other disputes may have a material adverse effect on us because of potential adverse outcomes, defense costs, the diversion of our management’s resources and other risk factors inherent in litigation or relating to the claims that may arise. Our involvement in any litigation matter or other disputes could cause us to incur significant legal and other associated costs, including the payment of damages.
The loss of some of our key executive officers and employees could negatively impact our business prospects.
Our future operational performance depends to a significant degree upon the continued service of key members of our management as well as marketing, technical and operations personnel. The loss of one or more of our key personnel could have a material adverse effect on our business. We believe our future success will also depend in large part upon our ability to attract, retain and further motivate highly skilled management, marketing, technical and operations personnel. We may experience intense competition for personnel, and we cannot assure you that we will be able to retain key employees or that we will be successful in attracting, assimilating and retaining personnel in the future.
Customers may be unable or unwilling to indemnify us.
Consistent with standard industry practice, our customers generally assume liability for and indemnify us against well control and subsurface risks under our dayrate contracts, and we do not separately purchase insurance for such indemnified risks. These risks are those associated with the loss of control of a well, such as blowout or cratering, the cost to regain control or redrill the well and associated pollution. In the future, we may not be able to obtain agreements from customers to indemnify us for such damages and risks or the indemnities that we do obtain may be limited in scope and duration or subject to exceptions. Additionally, even if our customers agree to indemnify us, there can be no assurance that they will necessarily be financially able to indemnify us against all of these risks.
There may be limits to our ability to mobilize drilling units between geographic markets and the time and costs of such drilling unit mobilizations may be material to our business.
The offshore contract drilling market is generally a global market as drilling units may be mobilized from one market to another market. However, geographic markets can, from time to time, have material fluctuations in costs and risks as the ability to mobilize drilling units can be impacted by several factors including, but not limited to, governmental regulation and customs practices, the significant costs to move a drilling unit, availability of tow boats or heavy lift vessels, weather, political instability, civil unrest, military actions and the technical capability of the drilling units to operate in various environments. Any increase in the supply of drilling units in the geographic areas in which we operate, whether through new construction, refurbishment or conversion of drilling units from other uses, remobilization or changes in the law or its application, could increase competition and result in lower dayrates and/or utilization, which would adversely affect our financial position, results of operations and cash flows. Additionally, while a drilling unit is being mobilized from one geographic market to another, we may not be paid by the customer for the time that the drilling unit is out of service. Also, we may mobilize the drilling unit to another geographic market without a customer contract which could result in costs not reimbursable by future customers.
Reactivation of idle rigs may take longer or be more costly than we anticipate.
Reactivation of idle rigs may take longer and be more costly than anticipated. As our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. In general, labor costs increase primarily due to higher salary levels and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity the rig is performing and the age and condition of the equipment. Contract preparation expenses vary based on the scope and length of contract preparation required and the duration of the firm contractual period over which such expenditures are amortized.
Failure to employ a sufficient number of skilled workers or an increase in labor costs could materially and adversely impact our operations.
We require skilled personnel to operate and provide technical services to, and support for, our drilling units. In periods of increasing activity and when the number of operating units in our areas of operation increases, either because of new construction, re-activation of idle units or the mobilization of units into the region, shortages of qualified personnel could arise, creating upward pressure on wages and difficulty in staffing. The shortages of qualified personnel or the inability to obtain and retain qualified personnel also could negatively affect the quality and timeliness of our work. In addition, our ability to expand operations depends in part upon our ability to increase the size of the skilled labor force. Due to the extremely weak conditions in the offshore drilling market, the lack of employment and lower wages for offshore personnel have caused and will continue to cause many of our current offshore personnel to permanently leave the industry for employment opportunities in other industries. If industry conditions improve, there is no guarantee these workers will return to the offshore industry resulting in a shortage of qualified personnel that we will be able to employ.
Our information technology systems and those of our service providers are subject to cybersecurity risks and threats.
We depend on information technology systems that we manage, and others that are managed by our third-party service and equipment providers, to conduct our operations, including critical systems on our drilling units, and these systems are subject to risks associated with cyber incidents or attacks as well as breaches due to human error. It has been reported that unknown entities or groups have mounted cyber-attacks on businesses and other organizations solely to disable or disrupt computer systems, disrupt operations and, in some cases, steal data. Due to the nature of cyber-attacks, breaches to our systems or the systems of our service or equipment providers could go unnoticed for a prolonged period of time. These cybersecurity risks could disrupt our operations and result in downtime, loss of revenue or the loss of critical data, as well as result in higher costs to correct and remedy the effects of such incidents. The Audit Committee of our Board of Directors has oversight responsibility related to our cybersecurity risk management programs and periodically reviews reports on cybersecurity and other information technology risks.
In 2018, we experienced a cybersecurity breach which temporarily hindered our ability to utilize our email server and obstructed certain back-up data. However, the breach did not have a material adverse effect on our business, reputation, financial condition, results of operations or cash flows, and did not compromise any customer data. The costs to restore the data and services impacted by the cybersecurity breach were not material. While we believe such breach to be an isolated incident, we cannot provide assurance that we will not in the future experience any other actual or attempted breaches of our cybersecurity. If either our systems or the systems of our service or equipment providers used for protecting against cyber incidents or attacks prove to be insufficient and another incident were to occur, it could have a material adverse effect on our business, reputation, financial condition, results of operations or cash flows. Currently, we carry limited insurance for losses related to cybersecurity attacks and may elect to not increase such coverage in the future. Furthermore, in response to the COVID-19 pandemic, many of our office personnel began working remotely in 2020, which heightens potential cybersecurity risks given the reliance on remote networking capabilities and utilization of external devices. If either our systems or the systems of our service or equipment providers used for protecting against cyber incidents or attacks prove to be insufficient and incidents were to occur as a result of working remotely, it could have a material adverse effect on our business, reputation, financial condition, results of operations or cash flows.
Consolidation of suppliers and vendors may increase the costs of obtaining critical supplies and services, which may have a material adverse effect on our results of operations and financial condition.
We rely on certain third parties to provide supplies and services necessary for our offshore drilling operations, including, but not limited to, suppliers and vendors which provide, among other things, drilling equipment, machinery, and catering services. Recent mergers have reduced and consolidated the number of available suppliers and vendors, resulting in fewer alternatives for sourcing key supplies and services. Such consolidation, combined with a high volume of drilling units under construction, could result in a shortage of supplies and services thereby increasing the cost of such supplies and services, and potentially inhibit the ability of suppliers and vendors to deliver on time, if at all. Cost increases and delays in, or the unavailability of, critical supplies and services could have a material and adverse effect on our results of operations and result in drilling unit downtime, and cause, among other things, delays in the repair and maintenance of our drilling units.
Construction projects are subject to risks, including delays and cost overruns, which could have an adverse impact on our liquidity and results of operations.
As part of our growth strategy we may contract from time to time for the construction of drilling units or may enter into agreements to manage the construction of drilling units for others. Construction projects are subject to the risks of delay or cost overruns inherent in any large construction project, including costs or delays resulting from the following:
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unexpected long delivery times for, or shortages of, key equipment, parts and materials;
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shortages of skilled labor and other shipyard personnel necessary to perform the work;
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unforeseen increases in the cost of equipment, labor and raw materials, particularly steel;
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unforeseen design and engineering problems;
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unanticipated actual or purported change orders;
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work stoppages;
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latent damages or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions;
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failure or delay of third-party service providers and labor disputes;
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disputes with shipyards and suppliers;
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delays and unexpected costs of incorporating parts and materials needed for the completion of projects;
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financial or other difficulties at shipyards;
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severe and adverse weather conditions; and
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inability to obtain required permits or approvals.
If we experience delays and costs overruns in the construction of drilling units due to certain of the factors listed above, it could also adversely affect our business, financial condition and results of operations.
We may engage in certain strategic or transformational transactions in the future, which could affect the value or type of our assets and financial condition.
From time to time, our management independently evaluates, and separately receives indications of interest in respect of, a variety of strategic and/or transformational transactions in respect of our assets or a particular subset thereof. While the documents governing our indebtedness include certain restrictions on our ability to dispose of our assets or to finance the acquisitions of new assets, such restrictions contain various exceptions and limitations.
To the extent we were to pursue or engage in such transactions, there is no guarantee that such transactions will be successful or, even if consummated, improve our operating results. We may incur costs, breakage fees or other expenses in connection with any such transactions, and any such transactions may ultimately have a material adverse effect on our operating results and on our ability to pay amounts due on our debt.
In addition, such transactions may be transformative and consequently, may result in a change in the type of the assets we hold. Such new assets may be valued differently as compared to our current assets in the event of a liquidation thereof or due to changes in applicable market conditions even absent such a liquidation scenario. Accordingly, there can be no guarantee that any replacement assets will continue to hold comparable value to our current assets. Any such changes to our asset mix may also be viewed negatively by the market and could have an adverse effect on the trading price of our securities.
Negative publicity may adversely affect us.
Media coverage and public statements that insinuate improper actions by us, regardless of their factual accuracy or truthfulness, may result in negative publicity, litigation or governmental investigations by regulators. Addressing negative publicity and any resulting litigation or investigations may distract management, increase costs and divert resources. Negative publicity may have an adverse impact on our reputation and the morale of our employees, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because our common stock is not listed on a national securities exchange, it is less liquid and its price may be negatively impacted by factors that are unrelated to, and independent of, our business operations.
Because our common stock is not listed on a national securities exchange, it is less liquid and its price may be negatively impacted by factors that are unrelated to, and independent of, our business operations, and therefore, beyond our control. Consequently, there is no assurance that a sufficient market will develop in our common stock, if at all, in which case it could be difficult for shareholders to sell their respective shares of common stock. Even if one or more brokers elects to make a market for our common stock on an over-the-counter market and complies with the applicable regulatory requirements, the market price of our common stock could fluctuate substantially in response to various factors and events, many of which are beyond our control, including the following:
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a shortfall in rig utilization, operating revenues, or net income from that expected by securities analysts and investors;
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changes in securities analysts’ estimates of the financial performance of us or our competitors or the financial performance of companies in the oil and gas industry generally;
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changes in actual or market expectations with respect to the amounts of exploration and development spending by oil and gas companies;
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general conditions in the economy and in energy-related industries;
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general conditions in the securities markets;
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political disturbances, war, or terrorist attacks and changes in global trade policies and economic sanctions;
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the outcome of pending and future legal proceedings, investigations, tax assessments, and other claims to which we are a party or made a party; and
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fluctuations in the trading volume of our common stock.
There can be no assurances that any public market for our common stock will exist in the future or that we will choose or be able to relist our common stock on a national securities exchange.
Risks Related to Government Regulations and Laws
Political disturbances, war, or terrorist attacks and changes in global trade policies and economic sanctions could adversely impact our operations.
Our operations are subject to political and economic risks and uncertainties, including instability resulting from civil unrest, political demonstrations, mass strikes, or an escalation or additional outbreak of armed hostilities or other crises in oil or gas producing areas, which may result in extended business interruptions, suspended operations and danger to our employees, or result in claims by our customers of a force majeure situation and payment disputes. Additionally, we are subject to risks of terrorism, piracy, political instability, hostilities, expropriation, confiscation or deprivation of our assets or military action impacting our operations, assets or financial performance in many of our areas of operations.
Our offshore drilling operations could be adversely impacted by changes in regulation of offshore oil and gas exploration and development activity.
Offshore drilling operations could be adversely impacted by changes in regulation of offshore oil and gas exploration and development activities. New regulatory requirements in the future could impose greater costs on our operations, which could have a material adverse impact on our results of operations. We do not currently operate in the United States, but may do so in the future. The jurisdictions in which we currently operate have imposed requirements for offshore oil and gas exploration and development activities and, like the U.S., may impose new regulatory requirements in the future.
Our business is subject to numerous governmental laws and regulations, including those that may impose significant costs and liability on us for environmental and natural resource damages.
Many aspects of our operations are affected by foreign, federal, state and local governmental laws, rules, regulations and policies that may relate directly or indirectly to the contract drilling industry, including those requiring us to control the discharge of oil and other contaminants into the environment or otherwise relating to environmental protection. Countries where we currently operate have environmental laws and regulations covering the discharge of oil and other contaminants and protection of the environment in connection with operations. Operations and activities in the United States and its territorial waters are subject to numerous environmental laws and regulations, including the Clean Water Act, the Oil Pollution Act, the Outer Continental Shelf Lands Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Air Act, the Resource Conservation and Recovery Act and MARPOL. While we do not currently operate in the United States, many of the countries in which we currently operate have similar requirements. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, the denial or revocation of permits or other authorizations and the issuance of injunctions that may limit or prohibit operations.
Laws and regulations protecting the environment have become more stringent in recent years and may in certain circumstances impose strict liability, rendering us liable for environmental and natural resource damages without regard to negligence or fault on our part. These laws and regulations may expose us to liability for the conduct of, or conditions caused by, others or for acts that were in compliance with all applicable laws at the time the acts were performed. The application of these requirements, the modification of existing laws or regulations or the adoption of new laws or regulations relating to exploratory or development drilling for oil and gas could materially limit future contract drilling opportunities or materially increase our costs. In addition, we may be required to make significant capital expenditures to comply with such laws and regulations.
In addition some financial institutions are imposing, as a condition to financing, requirements to comply with additional non-governmental environmental and social standards in connection with operations outside the United States, such as the Equator Principles, a credit risk management framework for determining, assessing and managing environmental and social risk in project finance transactions. Such additional standards could impose significant new costs on us, which may materially and adversely affect us.
Further, certain governments at the international, national, regional and state level are at various stages of considering or implementing treaties and environmental laws that could limit emissions of greenhouse gases, including carbon dioxide, associated with the burning of fossil fuels. It is not possible to predict how new laws to address greenhouse gas emissions would impact our business or that of our customers, but these laws and regulations could impose costs on us or negatively impact the market for offshore drilling services, and consequently, our business.
Changes in laws and regulations of jurisdictions where we operate, including those that may impose significant costs and liability on us for environmental and natural resource damages, may adversely affect our operations. The jurisdictions where we
operate have modified or may in the future modify their laws and regulations in a manner that would increase our liability for pollution and other environmental damage.
With the recent change in administration of the U.S. federal government, it is likely that new legislation, regulatory enforcement actions and executive orders, which are specifically aimed at reducing greenhouse gas emissions, or prohibiting, delaying or restricting oil development activities in certain jurisdictions, will be proposed and adopted in the near-term. On January 20, 2021, an executive order was signed directing all executive departments and agencies to immediately commence work to confront the climate crisis, including recommending that the Administrator of the Environmental Protection Agency consider new regulations to establish comprehensive standards of performance and emission guidelines for methane and volatile organic compound emissions from existing operations in the oil and gas sector, including the exploration and production, transmission, processing and storage segments, by September 2021. Moreover, an executive order was signed on January 27, 2021, which, among other things, places the climate crisis at the forefront of the United States’ foreign policy and national security planning, including submitting the United States instrument of acceptance to rejoin the Paris Agreement, affirming the achievement of global reductions of greenhouse gas emissions and net-zero global emissions by 2050 or prior, and reestablishing the United States as a leader in addressing climate change. Additionally, the executive order provides that, consistent with applicable law, the acting Secretary of the Department of the Interior shall pause new oil and gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of U.S. federal oil and gas permitting and leasing practices in light of the Secretary of the Interior’s broad stewardship responsibilities over the public lands and in offshore waters, including potential climate and other impacts associated with oil and gas activities on public lands or in offshore waters. The execution of the foregoing executive orders and any additional executive orders, as well as the adoption and implementation of any new federal or state legislation or regulations could have a material and adverse impact on our business, financial condition, results of operations and cash flow, including through the creation of increased compliance costs and operating restrictions.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
The FCPA and similar worldwide anti-bribery laws (together, anti-corruption laws) prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our extensive training and compliance program, we cannot assure you that our internal control policies and procedures will protect us from improper acts committed by our directors, employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business and operations. We may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licenses or other preferential treatment by making payments to government officials and others in positions of influence or using other methods that U.S. laws and regulations prohibit us from using.
In order to effectively compete in some foreign jurisdictions, we utilize local agents and seek to establish joint ventures with local operators or strategic partners. In addition, in some foreign jurisdictions in which we operate, we are required to retain the services of a national agent or sponsor. Although we have procedures and controls in place to monitor internal and external compliance, if we are found to be liable for violations of anti-corruption laws (either due to our own acts or omissions, or due to the acts or omissions of others, including actions taken by our agents and our strategic or local partners, even though our agents and partners may not be subject to the FCPA), we could suffer from civil and criminal penalties or other sanctions, which could have a material adverse effect on our business, financial position, results of operations and cash flows.
In July 2015, we became aware of media reports that Hamylton Padilha, the Brazilian agent VDC used in the contracting of the Titanium Explorer drillship to Petrobras, had entered into a plea arrangement with Brazilian authorities in connection with his role in facilitating the payment of bribes to former Petrobras executives. We voluntarily contacted the DOJ and the SEC to advise them of these developments. On August 2017, we received a letter from the DOJ indicating that the DOJ had closed its investigation on the matter without any action and on November 19, 2018, we concluded a settlement agreement with the SEC, including a payment of $5.0 million, resolving the SEC’s investigation into possible violations of the internal accounting control provisions of the FCPA by VDC and VDC’s subsidiaries (including Vantage and Vantage’s subsidiaries, the foregoing having been subsidiaries of VDC at the commencement of the investigation). With the settlement of this matter with the SEC, the U.S. government’s investigation of Vantage and VDC for possible violations of the FCPA was formally concluded.
We are exposed to potential risks from the requirement that we evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002.
We have evaluated our internal controls systems in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. We have performed the system and process evaluation and testing required to comply with the management certification requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. While we have been able to fully implement the requirements relating to internal controls and all other aspects of
Section 404 in a timely fashion, we cannot be certain that our internal control over financial reporting will be adequate in the future to ensure compliance with the requirements of the Sarbanes-Oxley Act or the FCPA. If we are not able to maintain adequate internal control over financial reporting, we may be susceptible to sanctions or investigation by regulatory authorities, such as the DOJ and the SEC. Any such action could adversely affect our business operations and financial results.
Because VDI is incorporated under the laws of the Cayman Islands, stakeholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited.
VDI is an exempted company incorporated with limited liability under the laws of the Cayman Islands. In addition, substantially all of our assets are located outside the United States. As a result, it may be difficult for holders of our securities to effect service of process within the United States upon our directors or executive officers, or enforce judgments obtained in the U.S. courts against our directors or executive officers.
Our corporate affairs are governed by our third amended and restated memorandum and articles of association, the Companies Law (as the same may be supplemented or amended from time to time) of the Cayman Islands, and the common law of the Cayman Islands. The rights of holders of our securities to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are, to a large extent, governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from those under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws which may provide significantly less protection to investors as compared to the United States, and some states, such as Delaware, which have more fully developed and judicially interpreted bodies of corporate law.
The Cayman Islands courts are also unlikely:
•
to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
•
to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.
Additionally, Cayman Islands companies may not have standing to sue before the federal courts of the United States. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without re-examination of the merits of the underlying dispute, provided such judgment:
•
is final;
•
imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;
•
is not in respect of taxes, a fine, or a penalty; and
•
was neither obtained in a manner, nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.
The Grand Court of the Cayman Islands may stay proceedings if concurrent proceedings are being brought elsewhere.
Risks Related to Our Financial Condition and Taxes
We may be required to repurchase certain of our indebtedness with cash upon a change of control or other triggering events.
Upon the occurrence of specified change of control events or certain losses of our vessels in the agreements governing the 9.25% First Lien Notes, 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 the 9.25% First Lien Notes at the price and upon the terms set forth in the applicable agreement. In addition, in connection with certain asset sales, we will be required to offer to repurchase or repay the 9.25% First Lien Notes as set forth in the agreement governing the 9.25% First Lien Notes. We may not have sufficient funds available to repurchase or repay all of the debt that becomes due and payable pursuant to any such offer, which would constitute an event of default that, in turn, would likely trigger a default under any other then-existing debt agreements. Moreover, the creditors under certain of our debt agreements may limit our ability to repurchase debt. In that event, we would need to refinance the applicable debt, or obtain a waiver under the applicable debt agreement, before making an offer to purchase. We may be unable to refinance such indebtedness or obtain a waiver. Any requirement to offer to repurchase or repay any of our existing debt may therefore require us to refinance some or all of our other outstanding debt, which we may not be able to accomplish on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.
Our current backlog of contract drilling revenue may not be fully realized, which may have a material adverse impact on our consolidated statement of financial position, results of operations or cash flows.
As of December 31, 2020, our owned fleet had total drilling contract backlog of approximately $94.5 million. This amount was calculated based on certain estimates and assumptions regarding operations and payments to be received under such drilling contracts. Although management believes that such estimates and assumptions are reasonable, actual amounts received under these contracts could materially differ from the projected amount. Material differences between the projected contract backlog amount and the amounts actually received pursuant to such contracts could be caused by a number of factors, including rig downtime or suspension of operations. We may not be able to realize the full amount of our contract backlog due to events beyond our control.
Our financial results may not reflect historical trends.
Our past financial performance may not be indicative of our future financial performance. We have a limited operating history since our emergence from bankruptcy on the Effective Date. Further, we became a new entity for financial reporting purposes when we adopted fresh-start accounting as of our emergence from bankruptcy. As a result, our financial results for periods following our emergence from bankruptcy are different from historical trends and the differences may be material.
Changes in tax laws, treaties or regulations, effective tax rates or adverse outcomes resulting from examination of our tax returns could adversely affect our financial results.
Our future effective tax rates could be adversely affected by changes in tax laws, treaties, and regulations both internationally and domestically. Tax laws, treaties and regulations are highly complex and subject to interpretation. Our income tax expense is based upon the interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings.
Our consolidated effective income tax rate is impacted by a mix between our domestic and international pretax earnings or losses, as well as the mix of the international tax jurisdictions in which we operate. The extent of the impact cannot be anticipated due to the uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions. For example, in recent years we observed a global trend, in various jurisdictions, of enacted and proposed laws and regulations which aim to limit deductions, deny treaty benefits and /or impose additional taxes; all of these efforts are aligned with the base erosion and profit shifting framework. Should we operate in any of the locations where this trend is ongoing, our financial position and business operations may be adversely impacted.
A loss of a tax dispute or a successful tax challenge to our operating structure, intercompany pricing policies or the taxable presence of our subsidiaries in certain countries could result in a higher tax rate on our worldwide earnings, which could in turn result in a material adverse effect on our financial condition and results of operations.
Income tax returns that we file will be subject to review and examination. We recognize the benefit of income tax positions we believe are more likely than not to be sustained upon challenge by a tax authority. If any tax authority successfully challenges our operational structure, intercompany pricing policies or the taxable presence of our subsidiaries in certain countries, if the terms of certain tax treaties are interpreted in a manner that is adverse to our structure, or if we lose a material tax dispute in any jurisdiction, our effective tax rate on our worldwide earnings could increase substantially and result in a material adverse effect on our financial condition.
U.S. Holders will be required to pay U.S. taxes on their share of VDI’s income even if they do not receive any cash distributions from VDI.
Because VDI is treated as a partnership for U.S. federal income tax purposes, U.S. Holders will be required to pay U.S. federal income taxes and, in some cases, U.S. state and local income taxes on their share of VDI’s taxable income. Given VDI’s current structure as a holding entity with no direct operations at the VDI level, we do not currently expect to generate material positive taxable income at VDI in the near term. However, to the extent VDI does generate positive taxable income, U.S. Holders would still be required to pay U.S. taxes on their share of said income regardless of whether or not we make corresponding distributions to our equity holders. In addition, we cannot assure you that our current structure will not change in the future. U.S. Holders may not receive cash distributions from VDI equal to their share of VDI’s taxable income or even equal to the actual tax liability that results from their share of VDI’s taxable income.
An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes may, unless an exception applies, nonetheless be taxable as a corporation if it is a “publicly traded partnership.” An entity that would otherwise be classified as a partnership is a publicly traded partnership if (1) interests in the partnership are traded on an established securities market or (2) interests in the partnership are readily tradable on a secondary market or the substantial equivalent thereof. It is likely that VDI will be treated as a “publicly traded partnership.” However, an exception to taxation as a corporation, referred to as the “Qualifying Income
Exception,” exists if at least 90% of such partnership’s gross income for every taxable year consists of “qualifying income” and the partnership is not required to register under the Investment Company Act. Qualifying income includes certain interest income, dividends, real property rents, gains from the sale or other disposition of real property, and any gain from the sale or disposition of a capital asset or other property held for the production of income that otherwise constitutes qualifying income. VDI believes that it currently meets, and expects that it will continue to meet, the Qualifying Income Exception.
Distributions made by VDI may reduce a U.S. Holder’s tax basis in the Ordinary Shares, and therefore, U.S. Holders may realize a greater gain on the disposition of their Ordinary Shares than they otherwise may expect, and may have a tax gain even if the price they receive in a disposition of their Ordinary Shares is less than their original tax basis.
If U.S. Holders sell their Ordinary Shares, they will recognize gain or loss for U.S. federal income tax purposes that is equal to the difference between the amount realized and their tax basis in those Ordinary Shares. Prior distributions in excess of the total net taxable income allocated decrease a U.S. Holder’s tax basis and will, in effect, become taxable income if Ordinary Shares are sold at a price greater than their tax basis, even if the price received is less than the U.S. Holder’s original tax basis. Future cash distributions that exceed the U.S. Holder’s tax basis would result in a gain for U.S. federal income tax purposes.
In the case of a disposition of Ordinary Shares, VDI’s debt must be taken into account under the partnership tax accounting rules.
From time to time, VDI may incur debt for a variety of reasons. Under partnership tax accounting principles, VDI’s debt will generally be allocable to holders of VDI’s Ordinary Shares, and the holders will include their respective allocable shares of the debt in the U.S. federal income tax basis of their Ordinary Shares. A holder’s U.S. federal income tax basis in VDI’s Ordinary Shares will be adjusted for, among other things, distributions of cash, if any, and allocations of items of VDI’s income, gain, loss and deduction. At the time a U.S. Holder of VDI’s Ordinary Shares later sells its Ordinary Shares, for U.S. federal income tax purposes, the U.S. Holder’s amount realized on the sale will include not only the sales price of the Ordinary Shares but also the U.S. Holder’s portion of VDI’s indebtedness that is allocable to those Ordinary Shares.
U.S. tax-exempt holders and non-U.S. Holders face unique U.S. tax issues from owning Ordinary Shares that may result in adverse U.S. tax consequences to them.
Organizations exempt from U.S. federal income tax under Section 501(a) of the Code are subject to tax on “unrelated business taxable income” (“UBTI”). UBTI arises primarily as income from an unrelated trade or business regularly carried on or as income from “debt-financed” property. U.S. tax-exempt holders of Ordinary Shares generally would be subject to tax on their allocable shares of UBTI realized by VDI in the same manner as if such UBTI were realized directly by such organizations. Debt-financed property means property held to produce income with respect to which there is “acquisition indebtedness” (i.e., indebtedness incurred in acquiring or holding property). As VDI has incurred “acquisition indebtedness” (such as, for example, the 9.25% Senior Secured First Lien Notes), U.S. tax-exempt holders of Ordinary Shares may be subject to the tax on UBTI on their investment (for so long as VDI is treated as a partnership for U.S. federal income tax purposes and has acquisition indebtedness).
VDI expects to conduct its affairs so that it will not be treated as engaged in a trade or business within the U.S. for U.S. federal income tax purposes. As a consequence, VDI expects that (i) non-U.S. Holders will not be subject to U.S. federal tax on a net income basis with respect to the income of VDI, and (ii) VDI will not be required to withhold tax under Section 1446 of the Code with respect to non-U.S. Holders. If, however, VDI were determined to be engaged in a trade or business within the United States for U.S. federal income tax purposes, and had income effectively connected therewith, then, in the case of a non-U.S. Holder; (a) the share of VDI’s income that is effectively connected with such trade or business that is allocable to such non-U.S. Holder could be subject to U.S. federal income withholding tax at a rate equal to the highest applicable U.S. federal income tax rate and such holder could be required to file a U.S. federal income tax return and pay U.S. federal income tax on its allocable share of VDI’s net effectively connected income; (b) all or a portion of the gain on the disposition (including by redemption) of Ordinary Shares by such non-U.S. Holder could be taxed as effectively connected income to the extent such gain is attributable to assets of VDI that generate effectively connected income; (c) if such non-U.S. Holder is a corporation, such income could be subject to an additional branch profits tax of 30% on its allocable share of VDI’s effectively connected earnings and profits, adjusted as provided by law (subject to reduction by any applicable tax treaty); and (d) such non-U.S. Holder, whether or not a corporation, could be viewed as being engaged in a trade or business within the United States and as maintaining an office or other fixed place of business within the United States, and certain other income of such non-U.S. Holder could be treated as effectively connected income (for example, a non-U.S. Holder who, pursuant to an applicable tax treaty, is currently not subject to tax with respect to a trade or business within the United States because such holder does not have a permanent establishment in the United States could lose the benefits of the tax treaty as a result of its ownership of Ordinary Shares).

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments.
None.

---

ITEM 2. PROPERTIES
Item 2.
Properties.
We maintain offices, land bases and other facilities in several worldwide locations, including our principal executive offices in Houston, Texas, an operational, executive and marketing office in Dubai and a regional administrative office in Singapore. We lease all of these facilities.
The description of our drilling fleet included under “Business” in Part I, Item 1 of this Annual Report is incorporated by reference in its entirety into this Part I, Item 2.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings.
Information regarding the Company’s legal proceedings is set forth in “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 3.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Prices and Distributions
Since February 2020, our Ordinary Shares have been quoted on the OTC Pink Open Market under the symbol “VTDRF.” Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.
Many of our shareholders hold shares electronically, all of which are owned by a nominee of DTC. As of March 8, 2021, there were approximately 174 holders of record of our Ordinary Shares.
The Board of Directors declared the Special Cash Distribution to shareholders of record as of the close of business on December 10, 2019.
Other than the Special Cash Distribution, we have not made any cash or other distributions in respect of our New Shares to date and do not anticipate paying cash distributions in the immediate future as we contemplate that our cash flows will be used for debt reduction and growth. The payment of future distributions, if any, will be determined by the Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements, restrictions in financing agreements, business conditions and other factors. We are subject to certain restrictive covenants under the terms of the agreements governing our indebtedness, including restrictions on our ability to pay any cash distributions.
Repurchases of Equity Securities
The ability to make share repurchases is subject to, among other things, the discretion of our Board of Directors and the covenants in our credit agreement. There are no share repurchase programs outstanding at December 31, 2020.
There were no repurchases of equity securities during the fiscal fourth quarter ended December 31, 2020.
Information regarding the Company’s shares available for issuance in connection with equity compensation plans is set forth in “Note 7. Shareholders' Equity” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 5.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Selected Financial Data.
The following selected financial information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data.”
Successor
Predecessor
Year Ended December 31,
Period from February 10, 2016 to December 31, 2016
Period from January 1, 2016 to February 10, 2016
(in thousands)
Consolidated Statement of Operations Data
Revenue
$
126,862
$
760,848
(2)
$
225,747
$
212,846
$
158,648
$
23,540
Operating costs
149,084
156,893
171,041
161,974
123,069
25,213
General and administrative expenses
21,022
128,548
29,544
41,648
36,922
2,558
Depreciation and amortization
69,216
73,820
70,447
73,925
67,920
10,696
Loss on impairment
128,876
-
-
-
-
-
(Loss) income from operations
(241,336
)
401,587
(45,285
)
(64,701
)
(69,263
)
(14,927
)
Loss on debt extinguishment
-
-
(1,271
)
(3)
-
-
-
Interest (expense) income, net
(33,170
)
69,793
(2)
(76,881
)
(75,633
)
(67,005
)
(1,725
)
Other income (expense)
2,646
(1)
(1,505
)
2,807
1,179
(69
)
Reorganization items
-
-
-
-
(1,380
)
(452,919
)
(4)
Bargain purchase gain
-
-
-
1,910
-
-
(Loss) income before income taxes
(271,860
)
471,596
(124,942
)
(135,617
)
(136,469
)
(469,640
)
Income tax provision
4,897
15,121
16,526
14,168
10,948
2,371
Net (loss) income
(276,757
)
456,475
(141,468
)
(149,785
)
(147,417
)
(472,011
)
Net (loss) income attributable to noncontrolling interests
(38
)
-
-
-
(969
)
Net (loss) income attributable to shareholders
$
(276,719
)
$
455,734
$
(141,468
)
$
(149,785
)
$
(147,417
)
$
(471,042
)
(Loss) earnings per share
Basic
$
(21.10
)
$
80.27
$
(28.29
)
$
(29.96
)
$
(29.48
)
N/A
Diluted
$
(21.10
)
$
80.27
$
(28.29
)
$
(29.96
)
$
(29.48
)
N/A
Special Cash Distribution declared per share
N/A
$
40.03
N/A
N/A
N/A
N/A
Other Financial Data
EBITDA Reconciliation
Net (loss) income
$
(276,757
)
$
456,475
$
(141,468
)
$
(149,785
)
$
(147,417
)
$
(472,011
)
Interest expense (income)
33,170
(69,793
)
76,881
75,633
67,005
1,725
Income tax provision
4,897
15,121
16,526
14,168
10,948
2,371
Depreciation
69,216
73,820
70,447
73,925
67,920
10,696
EBITDA (5)
(169,474
)
475,623
22,386
13,941
(1,544
)
(457,219
)
Loss on impairment
128,876
-
-
-
-
-
Gain on settlement of restructuring agreement
(2,278
)
-
-
-
-
-
Gain on debt extinguishment
-
-
1,271
-
-
-
Reorganization items
-
-
-
-
1,380
452,919
Bargain purchase gain
-
-
-
(1,910
)
-
-
Adjusted EBITDA (6)
$
(42,876
)
$
475,623
$
23,657
$
12,031
$
(164
)
$
(4,300
)
Balance Sheet Data (as of end of period)
Cash and cash equivalents
$
141,945
$
231,947
$
224,967
$
195,455
$
231,727
N/A
Total other current assets
109,897
113,890
101,266
102,541
78,479
N/A
Property and equipment, net
516,382
721,126
787,303
763,191
834,528
N/A
Total other assets
16,123
23,774
16,026
21,935
15,694
N/A
Total assets
$
784,347
$
1,090,737
$
1,129,562
$
1,083,122
$
1,160,428
N/A
Total current liabilities
$
48,372
$
76,535
$
62,355
$
69,213
$
55,161
N/A
Long-term debt
345,219
343,579
1,109,011
919,939
867,372
N/A
Other long-term liabilities
15,011
17,532
22,889
17,195
11,335
N/A
Controlling interest shareholder's equity (deficit)
374,539
651,847
(64,693
)
76,775
226,560
N/A
Noncontrolling interests
1,206
1,244
-
-
-
N/A
Total liabilities and shareholders’ equity
$
784,347
$
1,090,737
$
1,129,562
$
1,083,122
$
1,160,428
N/A
Cash Flow Data
Net cash (used in) provided by operating activities
$
(85,302
)
$
535,639
$
12,794
$
(19,873
)
$
(4,874
)
$
(20,365
)
Net cash (used in) provided by investing activities
(3,155
)
(7,798
)
(94,613
)
(14,969
)
(11,964
)
Net cash (used in) provided by financing activities
-
(524,284
)
125,751
(1,430
)
(1,481
)
66,875
(1)
Includes a $2.3 million gain related to the settlement agreement between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries, on the other.
(2)
Includes $594.0 million in “Contract termination revenue” and $106.9 million in “Interest Income” associated with the Petrobras Payments from the Petrobras Parties.
(3)
Includes the write-off of $1.0 million of deferred financing costs.
(4)
Includes $2.1 billion in adjustments as a result of the adoption of fresh-start accounting and $22.7 million of post-petition professional fees incurred in connection with our bankruptcy proceedings offset by $1.6 billion net gain on settlement of LSTC in accordance with the Reorganization Plan.
(5)
EBITDA represents net income (loss) before (i) interest income (expense), (ii) provision for income taxes and (iii) depreciation and amortization expense. EBITDA is not a financial measure under GAAP as defined under the rules of the SEC, and is intended as a supplemental measure of our performance. We believe this measure is commonly used by analysts and investors to analyze and compare companies on the basis of operating performance.
(6)
Adjusted EBITDA represents EBITDA adjusted to exclude gain (loss) on debt extinguishment, reorganization items and bargain purchase gain. Adjusted EBITDA is a non-GAAP financial measure as defined under the rules of the SEC, and is intended as a supplemental measure of our performance. We believe this measure is commonly used by analysts and investors to analyze and compare companies on the basis of operating performance.
EBITDA and Adjusted EBITDA are not a substitute for GAAP measures of net income, operating income or any other performance measure derived in accordance with GAAP or as an alternative to cash flows from operating activities or other liquidity measures derived in accordance with GAAP.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
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 and our results of operations for the years ended December 31, 2020, 2019 and 2018. The following discussion should be read in conjunction with the information contained in “Item 1. Business,” “Item 1A. Risk Factors” in Part I of this Annual Report and “Item 8. Financial Statements and Supplementary Data” in Part II of this Annual Report. 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 gas wells for our customers. Through our fleet of drilling units we are a provider of offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for drilling units owned by others, we provide construction supervision services for rigs that are under construction, preservation management services for rigs that are stacked, and operational and marketing services for operating rigs.
The following table sets forth certain information concerning our offshore drilling fleet as of March 11, 2021.
Name
Year Built
Water Depth
Rating (feet)
Drilling Depth
Capacity
(feet)
Location
Status
Jackups
Emerald Driller
30,000
Qatar
Operating
Sapphire Driller
30,000
Gabon
Contract preparation
Aquamarine Driller
30,000
Malaysia
Contract preparation
Topaz Driller
30,000
Malta
Mobilizing
Soehanah
30,000
Indonesia
Warm stacked
Drillships (1)
Platinum Explorer
12,000
40,000
India
Operating
Tungsten Explorer
12,000
40,000
Mediterranean
Warm stacked
(2)
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. On December 31, 2020, we entered into the Purchase and Sale Agreement (as defined below under “Organization and Recent Events”) to sell the Titanium Explorer, which closed on March 10, 2021. The Titanium Explorer is classified as held for sale on our Consolidated Balance Sheet as of December 31, 2020.
Business Outlook
Expectations about future oil and gas prices have historically been a key driver of demand for our services. In its January 2021 Oil Market Report, the International Energy Agency provided that, following the unprecedented collapse of demand of oil by 8.8 million barrels per day in 2020, it expects demand to recover by 5.5 million barrels per day to 96.6 million barrels per day in 2021. From the middle of 2019 through early March 2020, oil prices increased and activity levels generally improved for the oil and gas industry, including the offshore sector, with rig day rates increasing to multi-year highs in respect of shallow water and tendering activity markedly improving for the deepwater segment. However, the arrival of, and continued global spread of COVID-19 and the resulting collapse in global economic activity, coupled with the short-lived price war between Saudi Arabia and Russia, led to significant reductions and delays in oil and gas exploration and development plans on the part of operators. These reductions and delays led to a substantial drop in oil prices and demand for offshore drilling services during and subsequent to the second quarter of 2020, including our services. Although OPEC, Russia and other major oil and gas producing nations reached an agreement to drastically cut oil production in 2020, the efforts to contain COVID-19 could continue to pose challenges to global economic activity and the supply and demand imbalance of oil will likely continue. As a result of this decline in demand for the foreseeable future, operators drastically cut their capital spending in the offshore space in 2020. Notwithstanding the recent recovery in global oil prices since (i) the development and availability of vaccines for COVID-19, (ii) the perception of the reopening of global economies along with (iii) the injection of substantial government monetary and fiscal stimulus, volatility of and uncertainty around global oil prices persist. This volatility and uncertainty surrounding global oil prices has made it difficult for operators to plan their capital budget programs in the near term.
In addition to macroeconomic challenges, including those set forth above, which have led to reduced demand for drilling rigs, the additional supply of new-build rigs continues to be an overhang on the market. According to Bassoe, there are currently 41 jackups and 26 deepwater/harsh environment floaters on order at shipyards. It is unclear when these drilling rigs will actually be delivered, if at all, as many rig deliveries have (i) already been deferred to later dates or (ii) been canceled entirely.
Since 2015 in response to both market conditions and excessive levels of idle capacity in recent years, there has been intense downward pressure on operating dayrates as most drilling contractors had preferred to maintain rigs in an active state and customers had generally favored operating rigs over reactivated cold-stacked rigs. Prior to the COVID-19 outbreak, this downward pressure on pricing was starting to reverse itself as evidenced by opportunities for our services increasing in 2019 and early 2020 and dayrates were showing signs of general improvement. However, beginning in the second quarter of 2020, with the arrival of and continued spread, and resulting impact, of COVID-19, dayrates, rig activity and contract opportunities each declined significantly.
In response to the oversupply of drilling rigs, a number of competitors began removing older, less efficient rigs from their fleets by either cold stacking the drilling rigs or taking them permanently out of service. This trend has accelerated since the second quarter of 2020 with 41 rigs removed from the drilling fleet in 2020 and a total of 284 rigs that have been removed from the drilling fleet since the oil price decline in 2014 according to Pareto Offshore. We expect further rig recycling to occur with warm stacked rigs (and potentially recently operated rigs) joining cold-stacked rigs as candidates for recycling. While this emphasis on recycling of rigs is expected to narrow the gap somewhat between rig supply and demand, we do not, however, anticipate that the reduction in the supply of offshore drilling rigs alone will be sufficient to materially improve, and ultimately offset the impact of, existing market conditions, especially with regard to the deepwater segment where significant fleet reduction is needed before any material improvements can be observed.
In addition to the expected increase in recycling, many offshore drillers with significant levels of debt on their balance sheets have recently completed, are currently pursuing, or may elect to pursue in the near-term, debt restructurings. These debt restructurings may result in lower cost structures, and create additional pressure and incentive to recycle rigs. As drillers emerge from these debt restructurings, it is likely that consolidation will occur reducing the number of industry participants and potentially increasing the market share of certain of our competitors. The combination of recycling, restructuring and consolidation will be necessary for the industry to regain firmer footing. Any industry recovery will also depend significantly on improvements to global macroeconomic conditions.
The oil and gas industry generally, as well as the global economy at large, has been significantly impacted by the spread of COVID-19, and we are unable to predict at this time when market conditions may improve or estimate the ultimate impact that current market conditions may have on our financial condition and results of operations (see “Risk Factors-The continued global spread of COVID-19, fears relating to the spread of COVID-19, and associated oil market developments could adversely impact our financial condition and results of operations” and “-The ultimate impact and effects of the spread of COVID-19 and the resulting pandemic are highly uncertain and cannot be predicted at this time” in Part I, Item 1A. of this Annual Report).
With the initial distribution of vaccines in certain jurisdictions in an attempt to inoculate populations against COVID-19 along with significant governmental spending directed at combatting the challenging economic environment caused by COVID-19, global economic activity appears to have improved since early 2020. This improvement has contributed to, among other things, an increase in the demand for oil and gas. Since dropping to multi-year lows in the second quarter of 2020, Brent crude oil prices have retraced upward, reaching healthier levels in January 2021. If this improvement continues or is sustained, operators could begin to sanction new activity, which would lead to rigs going back to work and potentially higher day rates. Notwithstanding the foregoing, any recovery experienced could be short lived especially given the quickly changing and ever-evolving dynamics of the COVID-19 pandemic.
The following table reflects a summary of our contract drilling backlog coverage of days contracted and related revenue as of December 31, 2020 and thereafter (based on information made available at that time). For more information regarding the impact of the current economic environment on the status of certain of our existing contracts, please refer to “Recent Developments” in this Part I, Item 2 as well as our Current Report on Form 8-K, which was filed with the SEC on April 6, 2020, and further supplemented by our Current Reports on Form 8-K, which were filed with the SEC on May 12, 2020, June 2, 2020 and July 1, 2020, respectively.
Percentage of Days Contracted
Revenues Contracted
(in thousands)
Beyond
Jackups
36%
7%
$
51,163
$
16,687
$
-
Drillships
10%
8%
$
12,722
$
13,906
$
-
Results of Operations
Operating results for our contract drilling services are dependent on three primary metrics: available days, rig utilization and dayrates. The following table sets forth this selected operational information for the periods indicated:
Year Ended December 31,
Jackups
Rigs available
Available days (1)
1,795
1,460
1,514
Utilization (2)
56.5
%
97.4
%
92.2
%
Average daily revenues (3)
$
60,633
$
63,459
$
61,452
Deepwater
Rigs available
Available days (1)
1,098
1,095
1,095
Utilization (2)
38.9
%
46.1
%
54.5
%
Average daily revenues (3)
$
118,129
$
107,660
$
197,284
(1)
Available days are the total number of rig calendar days in the period. Rigs are excluded while under bareboat charter contracts and removed upon classification as held for sale and no longer eligible to earn revenue.
(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.
Years Ended December 31, 2020 and 2019
Net loss for the Current Year was $276.7 million, or $21.10 per basic share, on operating revenues of $126.9 million, compared to net income for the Comparable Year of $455.7 million, or $80.27 per basic share, on operating revenues of $760.8 million.
The following table is an analysis of our operating results for the year ended December 31, 2020 and 2019.
Year Ended December 31,
Change
$
%
(in thousands)
Revenues
Contract drilling services
$
112,013
$
144,571
$
(32,558
)
%
Contract termination revenue
-
594,029
(594,029
)
%
Reimbursables and other
14,849
22,248
(7,399
)
%
Total revenues
126,862
760,848
(633,986
)
%
Operating costs and expenses
Operating costs
149,084
156,893
(7,809
)
%
General and administrative
21,022
128,548
(107,526
)
%
Depreciation
69,216
73,820
(4,604
)
%
Loss on impairment
128,876
-
128,876
**
Total operating costs and expenses
368,198
359,261
8,937
%
Income (loss) from operations
(241,336
)
401,587
(642,923
)
%
Other income (expense)
Interest income
116,368
(115,497
)
%
Interest expense and financing charges
(34,041
)
(46,575
)
12,534
%
Other, net
2,646
2,430
%
Other income (expense)
(30,524
)
70,009
(100,533
)
%
Income (loss) before income taxes
(271,860
)
471,596
(743,456
)
%
Income tax provision
4,897
15,121
(10,224
)
%
Net income (loss)
(276,757
)
456,475
(733,232
)
%
Net income (loss) attributable to noncontrolling interests
(38
)
(779
)
%
Net income (loss) attributable to shareholders
$
(276,719
)
$
455,734
$
(732,453
)
%
Revenue: Total revenue decreased $634.0 million due primarily to $594.0 million of revenue received from the Petrobras Parties during the Comparable Year as a result of the termination of the Titanium Explorer contract. Please refer to “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for additional details on payments received from the Petrobras Parties. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
Contract drilling revenue decreased 23% for the Current Year as compared to the Comparable Year. The decrease was primarily due to lower utilization on three of our jackup rigs due to the drilling contracts being terminated as a result of the volatility in oil prices and the challenges presented by the spread of COVID-19, which in turn resulted (i) in a decrease of $46.3 million in contract drilling revenue and (ii) downtime on the Platinum Explorer, which resulted in a decrease of $6.4 million. These decreases were offset by the commencement of operations of the Soehanah jackup rig, which contributed an additional $17.5 million in contract drilling revenue during the Current Year.
Reimbursables and other revenue for the Current Year decreased $7.4 million as compared to the Comparable Year primarily as a result of the changes in drilling contracts discussed immediately above, which resulted in a decrease of $3.2 million in reimbursable revenue, and the termination of the bareboat charter lease on the Soehanah jackup rig, which was redelivered to the Company in February 2020.
Operating costs: Operating costs for the Current Year decreased 5% as compared to the Comparable Year primarily as a result of the aforementioned changes to our drilling contracts, with lower costs incurred on warm stacked rigs, and a $3.8 million decrease in operations support costs in the Current Year as compared to the Comparable Year as a result of reductions in personnel headcount and salaries paid to personnel. Operating costs for the Current Year includes approximately $5.0 million for bad debt expense representing our current estimate of credit losses associated with our “Trade receivables” and $1.8 million in fuel and helicopter costs that would otherwise be a cost to the customer. These amounts represent our customer’s decision not to pay us for days impacted by what we believe are force majeure and other events for which we would be entitled to receive payment under our contract. We disagree with their decision and are evaluating remedies, if any, under the contract.
Loss on impairment: During the three months ended September 30, 2020, we evaluated our deepwater drilling rigs that had indicators of impairment and determined that the carrying value of our longer-term warm stacked drillship, the Titanium Explorer, was impaired. As a result, we recognized a non-cash loss on impairment of $128.9 million. See “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for additional information regarding such impairment. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
General and administrative expenses: Decreases in general and administrative expenses for the Current Year as compared to the Comparable Year were primarily due to a $101.6 million decrease in expenses associated with non-routine matters, including, among others, a $62.6 million contingency fee related to the collection of the Petrobras Award and a $30.5 million cost for judgment preservation insurance to insure against the contingency of being required to return the Petrobras Payment. General and administrative expenses for the Current Year and for the Comparable Year include approximately $1.1 million and $0.6 million, respectively, for non-cash share-based compensation expense.
Depreciation expense: Depreciation expense for the Current Year decreased 6% as compared to the Comparable Year, due primarily to the write down of the carrying value of the Titanium Explorer in the Current Year.
Interest income: Interest income for the Current Year decreased $115.5 million as compared to the Comparable Year due primarily to interest derived from the Petrobras Payments received during the Comparable Year. Please refer to “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
Interest expense and financing charges: Interest expense for the Current Year decreased 27% as compared to the Comparable Year primarily due to lower outstanding debt after the Conversion of the Convertible Notes in December 2019. Interest expense included non-cash discount accretion, PIK interest and deferred financing costs totaling approximately $1.6 million and $14.1 million for the Current Year and for the Comparable Year, respectively.
Other, net: We recorded a gain of $2.3 million during the Current Year related to the settlement agreement between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries, on the other. See “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for additional detail on the settlement agreement. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are remeasured in USD based on a combination of both current and historical exchange rates. A net foreign currency exchange gain of $0.4 million and $0.2 million were included in other, net, for the Current Year and the Comparable Year, respectively.
Income tax provision: Income tax expense decreased in the Current Year as compared to the Comparable Year, mainly due to the change in jurisdiction of operations and tax benefits realized in certain jurisdictions. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. In some jurisdictions we do not pay taxes or receive benefits for certain income and expense items, including interest expense and disposal gains or losses. In other jurisdictions, we recognize income taxes on a net income basis or a deemed profit basis. Our operations are usually carried out in taxable jurisdictions that impact our income tax provision.
Years Ended December 31, 2019 and 2018
For a comparison of our results of operations for the fiscal years ended December 31, 2019 and 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 10, 2020.
Liquidity and Capital Resources
The prolonged low price environment caused by the spread of COVID-19, the resulting decline in global economic activity and the associated oil price and market share volatility began to reduce our liquidity and capital resources in the Current Year, a trend which could extend into subsequent quarters in 2021 and beyond, depending on, among other factors, how long COVID-19 remains a significant public health crisis and global economic activity remains depressed. Such events have had significant adverse consequences on general financial, business and economic conditions, as well as for the financial, business and economic position of our business and the business of our customers and suppliers, and may adversely impact our ability to derive cash flows from our operations and access capital funding from third parties in the future.
We have experienced, and could further experience, delays in the collection of certain accounts receivables due to logistical obstacles, such as office closures resulting from the COVID-19 outbreak, as well as other impacts to our long-term liquidity. We are actively seeking, and assessing the viability of, measures to reduce our operating costs and preserve cash during these challenging times. For example, we (i) reduced the annual compensation payable to our independent members of the Board of Directors by 20%
as well as the salaries of our workforce by approximately 15 to 20% depending on the position and subsequently replaced it with a longer-term 10% reduction to annual compensation payable to our independent members of the Board of Directors as well as the salary of our workforce across the Company beginning on July 1, 2020, (ii) secured material price reductions from certain of our vendors and (iii) initiated significant reductions in both our onshore and offshore personnel in June 2020 to reflect the lower levels of operating activity. We remain committed to actively seeking measures to reduce our operating costs and preserve our cash during these unprecedented times. The effects of the decline in global economic activity and other oil price and market share volatility may cause us to implement additional cost reduction measures and alter our general financial strategy in the near- and long-term.
As of December 31, 2020, we believe we maintain adequate cash reserves and are continuously managing our actual cash flow and cash forecasts. Accordingly, our management believes that we have adequate liquidity to fund our operations for the twelve months following the date our Consolidated Financial Statements are issued and therefore, have been prepared under the going concern assumption.
As of December 31, 2020, we had working capital of approximately $203.5 million, including approximately $141.9 million of cash available for general corporate purposes. Scheduled interest payments through December 31, 2021 are approximately $32.4 million. We do not have any scheduled principal debt maturities until 2023. We anticipate capital expenditures through December 31, 2021 to be between approximately $5.1 million and approximately $6.3 million for sustaining capital and capital spares. As our rigs obtain new contracts, we could incur reactivation and mobilization costs for these rigs, as well as customer requested equipment upgrades. These costs could be significant and may not be fully recoverable from the customer. Additionally, through December 31, 2021, we anticipate incremental expenditures for special periodic surveys, major repair and maintenance expenditures and equipment recertifications to be between approximately $17.0 million and approximately $20.8 million. As of December 31, 2020, we had $39.9 million available for the issuance of letters of credit under our cash collateralized letter of credit facility.
On June 20, 2019, VDEEP and VDDI entered into the Petrobras Agreement with the Petrobras Parties relating to the Petrobras Award. Please refer to “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for further information regarding the Petrobras Agreement and the Petrobras Award. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
The table below includes a summary of our cash flow information for the periods indicated:
Year Ended December 31,
(in thousands)
Cash flows (used in) provided by:
Operating activities
$
(85,302
)
$
535,639
$
12,794
Investing activities
(3,155
)
(7,798
)
(94,613
)
Financing activities
-
(524,284
)
125,751
Changes in cash flows from operating activities are driven by changes in net income (see discussion of changes in net income above in “Results of Operations” in this Part II, Item 7).
Cash flows used in investing activities in the Comparable Year are primarily for capital expenditures on an MPD system.
Cash flows used in financing activities in the Comparable Year are primarily for the Special Cash Distribution paid to shareholders of record as of the close of business on December 10, 2019. See “Note 7. Shareholders’ Equity” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for further information.
For a comparison of our Cash Flows for the fiscal years ended December 31, 2019 and 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 10, 2020.
The significant elements of the 9.25% First Lien Notes are described in “Note 6. Debt” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report.
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.
Contractual Obligations
In the table below, we set forth our contractual obligations as of December 31, 2020. Some of the figures included in this table are based on our estimates and assumptions about these obligations, including their duration and other factors. The contractual obligations we may actually pay in future periods may vary from those reflected in the table because the estimates and assumptions are subjective.
Total
2022-2023
2024-2025
After 5 Years
(in thousands)
Principal payments on 9.25% First Lien Notes
$
350,000
$
-
$
350,000
$
-
$
-
Interest payments (1)
97,218
32,378
64,840
-
-
Operating lease payments (2)
4,882
2,340
2,542
-
-
Purchase obligations (3)
10,247
10,247
-
-
-
Total as of December 31, 2020
$
462,347
$
44,965
$
417,382
$
-
$
-
(1)
Interest on the 9.25% First Lien Notes is payable at 9.25% in May and November of each year until the maturity date of November 15, 2023.
(2) Amounts represent lease payments under existing operating leases. We enter into operating leases in the normal course of business, some of which contain renewal options. Our future cash payments would change if we exercised those renewal options and if we enter into additional operating leases.
(3)
Amounts consist of obligations to external vendors primarily related to capital expenditures, materials, spare parts, consumables and related supplies for our drilling rigs.
On November 30, 2018, we issued $350.0 million in aggregate principal amount of 9.25% First Lien Notes in a private placement at par. The proceeds of the issuance were used (i) to repay all obligations under the 2016 Term Loan Facility and to terminate the credit agreement governing such facility, (ii) to redeem all outstanding 10% Second Lien Notes, (iii) to fund the remaining amounts to be paid in connection with the purchase of the Soehanah jackup rig, (iv) to pay fees and expenses related to the foregoing and to the offering of the 9.25% First Lien Notes and (v) for general corporate purposes. The 9.25% First Lien Notes are guaranteed on a joint and several basis by the Company’s direct and indirect subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries, in each case subject to certain exceptions. The 9.25% First Lien Notes will not be registered under the Securities Act or any state securities laws.
Concurrently with the issuance of the 9.25% First Lien Notes, we entered into a new letter of credit facility to replace the letter of credit facility existing under the 2016 Term Loan Facility. The new facility has a capacity of $50.0 million, with all outstanding letters of credit being cash collateralized. As of December 31, 2020, we had $39.9 million available for the issuance of letters of credit under this cash collateralized letter of credit facility.
Commitments and Contingencies
We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. Information regarding our legal proceedings is set forth in “Note 9. Commitments and Contingencies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
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 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. Our significant accounting policies are included in “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report. 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. We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of the Board of Directors.
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 gas exploration, development and production expenditures. Oil and 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 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 or persistent depressed levels of oil and gas prices, worldwide rig counts and utilization, reduced access to credit markets, reduced or depressed sale prices of comparably equipped jackups and drillships and any other significant adverse economic news could require us to evaluate the realization of our drilling rigs. In connection with our adoption of fresh-start accounting upon our emergence from bankruptcy on the Effective Date, an adjustment of $2.0 billion was recorded to decrease the net book value of our drilling rigs to estimated fair value.
As a result of the spread of COVID-19 and oil price and market share volatility, we tested for impairment based on impairment indicators identified in the first quarter of 2020. The recoverability test performed resulted in no impairment loss being recorded as the estimated undiscounted cash flows generated from our drilling rigs exceeded their carrying values as of March 31, 2020. The projections and assumptions used in that analysis did not change significantly during the three months ended June 30, 2020; accordingly, no triggering event had occurred to indicate that the carrying value of our drilling rigs would not be recoverable at that time.
During the third quarter of 2020, we identified indicators that the carrying amounts of our deepwater asset groups may not be recoverable. Such indicators included the continued impact of COVID-19 on global economic activity and the resulting reductions and delays in deepwater oil and gas exploration and development plans on the part of operators leading to increased barriers for the reactivation of stacked rigs. As a result of our impairment testing, we determined that the carrying amount of our long-term warm stacked drillship, the Titanium Explorer, was impaired and we recognized a non-cash loss on impairment of $128.9 million as of September 30, 2020. We measured the fair value of the Titanium Explorer by applying the market approach, using estimates of the exchange price that would be received for the assets in the principal or most advantageous market as of the measurement date. Our estimate of fair value required us to use other significant observable inputs, representative of Level 3 fair value measurements, including the marketability of the rig and prices of comparable rigs that may be sold for scrap value. The recoverability test performed on our other two deepwater rigs resulted in no impairment loss being recorded as the estimated undiscounted cash flows generated by those rigs exceeded their carrying values as of September 30, 2020. The Platinum Explorer is currently operating and the Tungsten Explorer is scheduled to recommence operations during the second quarter of 2021. The projections and assumptions used during the third quarter of 2020 have not changed significantly as of December 31, 2020; accordingly, no triggering event has occurred to indicate that the current carrying value of our drilling rigs may not be recoverable.
Income Taxes: VDI is a Cayman Islands company. The Cayman Islands do not impose corporate income taxes. Consequently, we have calculated income taxes based on the laws and tax rates in effect in the countries in which our 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 as withholding taxes on revenue. Determination of income tax expense 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. We recognize interest and penalties related to income taxes as a component of income tax expense.
Our income tax expense may vary substantially from one period to another as a result of changes in the tax laws, regulations, agreements and treaties, foreign currency exchange restrictions and fluctuations, 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 to the net operating results and the income tax expense.
Furthermore, in some jurisdictions we do not pay taxes or pay taxes at low rates or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt, gains or losses on disposal or transfer of assets, reorganization expenses and write-off of development costs. 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 or administrative practices, our business operations and other factors affecting the Company and industry, many of which are beyond our control.
We do not establish deferred tax liabilities for certain of our foreign earnings that we intend to indefinitely reinvest to finance foreign activities. Should a future distribution be made from any unremitted earnings of our foreign subsidiaries, we may be required to record additional taxes in certain jurisdictions. However, it is not practical at this time to estimate the unremitted earnings or the potential tax liability due to the complexity of the hypothetical calculations.
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 losses and 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.
Change in accounting for credit losses (Adoption of ASC Topic 326).
We adopted ASC Topic 326: Credit Losses, as amended, on January 1, 2020 electing to apply the standard prospectively and not restating comparative periods. We also adopted ASC Subtopic 350-40, as amended on January 1, 2020. Please refer to “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.
Recent Accounting Standards: See “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part II, Item 7.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
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. 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 reduced oil prices since 2014 has negatively impacted the offshore contract drilling business as discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Interest Rate Risk: As of December 31, 2020, we had no variable rate debt outstanding.
Foreign Currency Exchange Rate Risk. Our functional currency is USD, which is consistent with the oil and gas industry. However, outside the United States, a portion of our expenses are incurred in local currencies. Therefore, when USD weakens (strengthens) in relation to the currencies of the countries in which we operate, our expenses reported in USD will increase (decrease). A substantial majority of our revenues are received in USD, our functional currency; however, in certain countries in which we operate, local laws or contracts may require us to receive some payment in the local currency. We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in that foreign currency. In order to mitigate the effect of exchange rate risk, we attempt to limit foreign currency holdings to the extent they are needed to pay liabilities in the local currency. To further manage our exposure to fluctuations in currency exchange rates, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, may be used. 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 USD payment equal to the value of such exchange. We do not enter into derivative transactions for speculative purposes. As of December 31, 2020, we did not have any open foreign exchange derivative contracts or material foreign currency exposure risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Vantage Drilling International
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vantage Drilling International (the “Company”) and subsidiaries as of December 31, 2020 and 2019, the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2020 and 2019 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Property and equipment Impairment Assessment
As described in the Company's consolidated financial statements, the net carrying value of property and equipment as of December 31, 2020 was $516.3 million. As described in Note 2, the Company evaluates the recoverability of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable ("triggering events"). During 2020, the Company observed deterioration in macroeconomic conditions, oil price and market share volatility and reductions and delays in oil and gas exploration and development plans by operators as a result of the economic impact of the COVID-19
pandemic. The Company determined these events constituted triggering events requiring an assessment of each asset group for impairment, which resulted in a $128.9 million property and equipment impairment loss during the year ended December 31, 2020.
We identified the significant judgments made by management to prepare the undiscounted cash flow analyses by asset group to evaluate whether an impairment existed for each asset group as a critical audit matter. Significant assumptions used in the undiscounted cash flows estimates included the effect of day rates and utilization metrics. Auditing these elements was especially challenging and required significant auditor judgment due to nature and extent of audit effort required in performing procedures and evaluating audit evidence related to management’s assumptions.
The primary procedures we performed to address this critical audit matter included:
•
Evaluating the reasonableness of the dayrate and utilization assumptions used in the undiscounted cash flow estimates by (i) evaluating the completeness and accuracy of current backlog, (ii) potential drilling rig opportunities and (iii) considering available industry reports and data on supply and demand trends and future oil and gas prices.
•
Comparing the assumptions used in the Company’s historic undiscounted cash flow estimates to assess for management biases in the estimates.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014
Houston, Texas
March 18, 2021
Vantage Drilling International
Consolidated Balance Sheet
(In thousands, except share data)
December 31,
December 31,
ASSETS
Current assets
Cash and cash equivalents
$
141,945
$
231,947
Restricted cash
7,996
2,511
Trade receivables, net of allowance for doubtful accounts of $5.0 million and $0.0 million, respectively
24,717
46,504
Materials and supplies
49,861
48,368
Prepaid expenses and other current assets
27,323
16,507
Total current assets
251,842
345,837
Property and equipment
Property and equipment
794,944
1,002,968
Accumulated depreciation
(278,562
)
(281,842
)
Property and equipment, net
516,382
721,126
Operating lease ROU assets
3,997
6,706
Other assets
12,126
17,068
Total assets
$
784,347
$
1,090,737
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable
$
23,638
$
49,599
Other current liabilities
24,734
26,936
Total current liabilities
48,372
76,535
Long-term debt, net of discount and financing costs of $4,781 and $6,421
345,219
343,579
Other long-term liabilities
15,011
17,532
Commitments and contingencies (see Note 9)
Shareholders' equity
Ordinary shares, $0.001 par value, 50 million shares authorized; 13,115,026 shares issued and outstanding, respectively
Additional paid-in capital
634,181
634,770
Accumulated (deficit) earnings
(259,655
)
17,064
Controlling interest shareholders' equity
374,539
651,847
Noncontrolling interests
1,206
1,244
Total equity
375,745
653,091
Total liabilities and shareholders’ equity
$
784,347
$
1,090,737
The accompanying notes are an integral part of these consolidated financial statements.
Vantage Drilling International
Consolidated Statement of Operations
(In thousands, except per share data)
Year Ended December 31,
Revenue
Contract drilling services
$
112,013
$
144,571
$
203,565
Contract termination revenue
-
594,029
-
Reimbursables and other
14,849
22,248
22,182
Total revenue
126,862
760,848
225,747
Operating costs and expenses
Operating costs
149,084
156,893
171,041
General and administrative
21,022
128,548
29,544
Depreciation
69,216
73,820
70,447
Loss on impairment
128,876
-
-
Total operating costs and expenses
368,198
359,261
271,032
(Loss) income from operations
(241,336
)
401,587
(45,285
)
Other income (expense)
Interest income
116,368
1,898
Interest expense and other financing charges
(34,041
)
(46,575
)
(78,779
)
Loss on debt extinguishment
-
-
(1,271
)
Other, net
2,646
(1,505
)
Total other (expense) income
(30,524
)
70,009
(79,657
)
(Loss) income before income taxes
(271,860
)
471,596
(124,942
)
Income tax provision
4,897
15,121
16,526
Net (loss) income
(276,757
)
456,475
(141,468
)
Net (loss) income attributable to noncontrolling interests
(38
)
-
Net (loss) income attributable to shareholders
$
(276,719
)
$
455,734
$
(141,468
)
(Loss) earnings per share
Basic and Diluted
$
(21.10
)
$
80.27
$
(28.29
)
The accompanying notes are an integral part of these consolidated financial statements.
Vantage Drilling International
Consolidated Statement of Shareholder’s Equity
(In thousands)
Ordinary Shares
Shares
Amount
Additional Paid-in Capital
Accumulated Earnings (Deficit)
Non-Controlling Interests
Total Equity (Deficit)
Balance December 31, 2017
5,000
$
$
373,972
$
(297,202
)
$
-
$
76,775
Net loss
-
-
-
(141,468
)
-
(141,468
)
Balance December 31, 2018
5,000
$
$
373,972
$
(438,670
)
$
-
$
(64,693
)
Common stock issued (see Note 7)
8,115
779,071
-
-
779,079
Reclassification of Share-based compensation (see Note 7)
-
-
12,087
-
-
12,087
Distribution to shareholders (see Note 7)
-
-
(524,994
)
-
-
(524,994
)
Share-based compensation
-
-
-
-
Share-based compensation - dividend equivalents (see Note 7)
-
-
(5,801
)
-
-
(5,801
)
Contributions from holders of noncontrolling interests
-
-
-
-
Net income
-
-
-
455,734
456,475
Balance December 31, 2019
13,115
$
$
634,770
$
17,064
$
1,244
$
653,091
Share-based compensation
-
-
1,615
-
-
1,615
Share-based compensation - dividend equivalents (see Note 7)
-
-
(2,204
)
-
-
(2,204
)
Net loss
-
-
-
(276,719
)
(38
)
(276,757
)
Balance December 31, 2020
13,115
634,181
(259,655
)
1,206
375,745
The accompanying notes are an integral part of these consolidated financial statements.
Vantage Drilling International
Consolidated Statement of Cash Flows
(In thousands)
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
$
(276,757
)
$
456,475
$
(141,468
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities
Depreciation expense
69,216
73,820
70,447
Amortization of debt financing costs
1,640
1,627
Amortization of debt discount
-
5,354
49,417
Amortization of contract value
-
1,643
6,311
PIK interest on the Convertible Notes
-
7,132
7,648
Share-based compensation expense
1,615
7,165
Non-cash loss on debt extinguishment
-
-
Deferred income tax expense (benefit)
(51
)
1,742
Loss (gain) on disposal of assets
(1,301
)
Gain on settlement of restructuring agreement
(2,278
)
-
-
Loss on impairment
128,876
-
-
Changes in operating assets and liabilities:
Trade receivables, net
21,787
(18,073
)
16,948
Materials and supplies
(1,852
)
(3,174
)
1,911
Prepaid expenses and other current assets
(1,237
)
(6,121
)
Other assets
3,716
4,265
2,339
Accounts payable
(23,683
)
5,227
4,706
Other current liabilities and other long-term liabilities
(6,618
)
(489
)
(8,481
)
Net cash (used in) provided by operating activities
(85,302
)
535,639
12,794
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment
(3,155
)
(7,798
)
(14,316
)
Cash paid for Soehanah acquisition
-
-
(85,000
)
Net proceeds from sale of Vantage 260
-
-
4,703
Net cash used in investing activities
(3,155
)
(7,798
)
(94,613
)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt
-
-
(216,265
)
Proceeds from issuance of 9.25% First Lien Notes
-
-
350,000
Contributions from holders of noncontrolling interests
-
1,197
-
Distributions to shareholders
-
(524,994
)
-
Debt issuance costs
-
(487
)
(7,688
)
Debt prepayment costs
-
-
(296
)
Net cash (used in) provided by financing activities
-
(524,284
)
125,751
Net (decrease) increase in unrestricted and restricted cash and cash equivalents
(88,457
)
3,557
43,932
Unrestricted and restricted cash and cash equivalents-beginning of period
242,944
239,387
195,455
Unrestricted and restricted cash and cash equivalents-end of period
$
154,487
$
242,944
$
239,387
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest
$
32,388
$
31,125
$
22,538
Income taxes (net of refunds)
7,780
13,548
14,859
Non-cash investing and financing transactions:
Reallocation of Soehanah jackup rig acquisition value from equipment to materials and supplies
1,019
-
-
Conversion of Convertible Notes into Ordinary Shares
-
779,079
-
Payment of interest in kind on the Convertible Notes
-
3,867
7,647
Trade-in value on equipment upgrades
-
-
The accompanying notes are an integral part of these consolidated financial statements.
VANTAGE DRILLING INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Recent Events
Vantage Drilling International, a Cayman Islands exempted company, together with its consolidated subsidiaries (collectively the “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 gas wells for our customers. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for drilling units owned by others, we provide construction supervision services for rigs that are under construction, preservation management services for rigs that are stacked and operations and marketing services for operating rigs.
The Continued Global Spread of COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency as COVID-19 continued to spread globally beyond its point of origin. In March 2020, WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally and the risks posed to the international community. The continued global spread of COVID-19 has caused widespread illness and significant loss of life, leading governments across the world to impose severely stringent limitations on movement and human interaction. Such governmental responses to the pandemic have depressed economic activity worldwide, impacting all industries, but with a significant adverse effect on the oil and gas industry. The response of governments throughout the world to address the spread of COVID-19, including, among other actions, the imposition of travel bans, quarantines and entry restrictions, has notably impacted our operations, particularly challenging the ability to transport personnel and equipment to and from our rigs, and for our customers and their suppliers to be able to seamlessly manage and conduct their respective operations. As a result of these challenges: (a) one of our customers invoked the “force majeure” clause under its drilling contract with us and subsequently terminated the drilling contract in accordance with its terms, and there is the potential for others to similarly exercise “force majeure” clauses under their respective drilling contracts; (b) two other customers terminated their drilling contracts prior to the end of their respective terms (both contracts were to expire in the normal course in the second quarter of 2020); (c) in December 2020, a customer terminated its drilling contract prior to the commencement of operations; (d) we reached an agreement in April 2020 to place one rig on a stand-by rate for the majority of the second quarter of 2020 (such “force majeure” or stand-by rates received by the Company are generally less than the original day rates otherwise payable to the Company); however, this rig returned to operations in July 2020; (e) we reached agreements with two other customers to delay the start dates of their new drilling programs and we remain in ongoing discussions with another customer regarding our operations and their existing drilling contract and program; (f) we experienced, and could continue to experience further, delays in the collection of certain accounts receivables due to logistical obstacles, such as office closures resulting from the COVID-19 outbreak, as well as other impacts to our long-term liquidity; and (g) we incurred additional labor costs and could continue to incur additional labor costs in the future as a result of our efforts to keep our personnel safe, quarantine requirements, closures and movement restrictions in certain jurisdictions in which we operate, as well as the home countries in which certain of our offshore personnel are located, which in many cases have impeded, and could continue to impede for the foreseeable future, the regular transportation of crews to their home countries and result in the payment of compensation to stranded crews working longer than their routine rotation schedule (in addition to the use of charter flights in the absence of commercial flights).
The impact of these challenges in 2020 resulted in (i) lower revenue due to terminations of (or amendments to) certain of our drilling contracts and (ii) increased expenses due to higher labor and related costs. We cannot at this time determine with certainty how long these challenges will persist as well as the long-term impact that such challenges may have on our operations on a go-forward basis; however, the Company has been actively managing and continues to actively manage the business in an attempt to mitigate the impact of the foregoing matters. In order to decrease the Company’s overall operating expenses, the Company undertook significant headcount and salary reductions, both onshore and offshore, as well as other cost reduction measures to reflect the lower operating activity.
Declines in the Demand for Oil and Gas, and the Resulting Oil Price and Market Share Volatility
The collapse in global economic activity resulting from the COVID-19 outbreak in 2020 caused demand for global oil and gas to significantly decline. Moreover, members of OPEC and Russia failed to reach an agreement in March 2020 to extend previously agreed upon oil production cuts and make much needed additional oil production cuts. Thereafter, Saudi Arabia announced an immediate significant reduction in its oil export prices and Russia announced that all agreed oil production cuts between Russia and OPEC members would expire on April 1, 2020. The termination of the previous cooperation between Saudi Arabia and Russia had an immediate impact given that it had supported global oil prices in the past. Saudi Arabia’s subsequent decision to dramatically increase its oil production and engage in a price war with Russia led to a massive oversupply of oil, which resulted in the overwhelming of global oil storage capacities.
This price and market share war was later reversed with OPEC, Russia and many of the world’s major oil producers reaching a record production cut agreement on April 12, 2020 and extending such agreement on June 6, 2020. However, the confluence of the spread of COVID-19 and the resulting global oil surplus significantly and adversely impacted the oil and gas industry beginning in the second quarter of 2020, causing (i) an unprecedented drop in oil prices, with Brent crude reaching $19.33 per barrel, its lowest price since 1999, and (ii) ensuing reductions of exploration and production company capital and operating budgets. Though OPEC, Russia and other major oil and gas producing nations agreed to either cut or maintain levels of oil production as was the case in March 2021, the efforts to contain COVID-19 could continue to depress global economic activity in the near-term, and the supply and demand imbalance of oil and gas will likely continue for the foreseeable future. Notwithstanding the recent recovery in global oil prices since (i) the development and availability of vaccines for COVID-19, (ii) the perception of the reopening of global economies along with (iii) the injection of substantial government monetary and fiscal stimulus, volatility of and uncertainty around global oil prices persist.
It was this volatility and uncertainty in global oil and gas prices that caused oil and gas producers to cancel or delay drilling tenders in 2020, which negatively impacted our reported backlog and could potentially and negatively impact our future backlog. Further, material payment delays, modifications or cancellations on our underlying contracts (including, but not limited to, delays, modifications or cancellations directly or indirectly attributable to COVID-19) reduced the amount of backlog previously reported (and could further reduce the amount of backlog currently reported) and consequently, could inhibit the conversion of that backlog into revenues.
The potential for oil prices to decline in the future continues to put pressure on oil and gas activity levels, particularly in the deepwater segment. Oil and gas prices are expected to continue to be volatile as a result of the ongoing COVID-19 outbreaks, changes in oil and gas inventories and industry demand, and therefore, the Company cannot predict how long oil and gas prices will remain stable or further improve, if at all, or whether they could reverse course and decline. While our management is actively monitoring the foregoing events and its associated financial impact, it is uncertain at this time as to the full magnitude that volatile and uncertain oil and gas prices will have on our financial condition and future results of operations.
Platinum Explorer Contract Award
On February 3, 2021, VDI received a letter of award from Oil and Natural Gas Company (ONGC) for a two-year contract with the Platinum Explorer. The Platinum Explorer is currently performing under an existing three-year contract with ONGC, which is expected to conclude in the second quarter of 2021. The new contract with ONGC is expected to begin once the existing campaign concludes. Expected revenues over the new two-year contract term, exclusive of service tax, are approximately $109 million.
Operations and Management Agreement with Seadrill Partners
On February 9, 2021, Vantage Holdings International (“VHI”), a subsidiary of VDI, entered into a Framework Agreement with Seadrill Partners LLC (“Seadrill Partners”) pursuant to which certain subsidiaries of VHI (the “VHI Entities”) entered into, and will enter into additional, management and marketing agreements (the “Management and Marketing Agreements”) with certain subsidiaries of Seadrill Partners (the “Seadrill Entities”). Under the Management and Marketing Agreements, the VHI Entities will provide marketing and operations management services in respect of certain deepwater floaters owned by the Seadrill Entities. These Management and Marketing Agreements are subject to the approval of the U.S. Bankruptcy Court for the Southern District of Texas.
Drilling Contract Arbitration.
On February 22, 2021, the U.S. Supreme Court denied the Petrobras Parties’ petition for certiorari in their efforts to seek the reversal of the U.S. Court of Appeals for the Fifth Circuit’s decision to affirm the U.S. District Court - Texas’s judgment confirming the Petrobras Award. This denial by the U.S. Supreme Court ended the drilling contract arbitration with the Petrobras Parties and all related appeals. See “Note 9. Commitments and Contingencies” of these “Notes to Consolidated Financial Statements” for additional details on the Drilling Contract Arbitration.
Purchase and Sale Agreement to Sell the Titanium Explorer
On December 31, 2020, we entered into a purchase and sale agreement with Best Oasis Limited (the “Buyer”) to sell the Titanium Explorer (the “Purchase and Sale Agreement”), subject to the closing conditions contained in such agreement, for an aggregate purchase price of $13.8 million and we subsequently classified the rig as held for sale on our Consolidated Balance Sheet. The transactions contemplated by the Purchase and Sale Agreement closed on March 10, 2021. Pursuant to the Purchase and Sale Agreement, the Buyer is required to recycle the rig in an environmentally sound manner.
Impairment of the Titanium Explorer’s Carrying Value
During the third quarter of 2020, we evaluated our deepwater drilling rigs that had indicators of impairment and determined that the carrying value of our longer-term warm stacked drillship, the Titanium Explorer, was impaired. As a result, we recognized a non-cash loss on impairment of $128.9 million as of September 30, 2020. See “Note 2. Basis of Presentation and Significant Accounting Policies” of these “Notes to Consolidated Financial Statements” for additional information regarding the impairment of the Titanium Explorer.
Restructuring Agreement and the Associated Settlement Agreement
The Company entered into a settlement agreement with VDC on March 4, 2020 to release each other from claims pertaining to certain intercompany receivables and payables as between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries, on the other. See “Note 9. Commitments and Contingencies” of these “Notes to Consolidated Financial Statements” for additional details on the Restructuring Agreement and associated settlement agreement.
2. Basis of Presentation and Significant Accounting Policies
Basis of Consolidation: The accompanying consolidated financial information as of December 31, 2020 and 2019, for the years ended December 31, 2020, 2019 and 2018, have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC and include our accounts and those of our majority owned subsidiaries and VIEs discussed below. All significant intercompany transactions and accounts have been eliminated.
In addition to the consolidation of our majority owned subsidiaries, we also consolidate 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.
ADVantage is a joint venture company formed to operate deepwater drilling rigs in Egypt. We determined that ADVantage met the criteria of a VIE for accounting purposes because its equity at risk was insufficient to permit it to carry on its activities without additional subordinated financial support from us. We also determined that we are the primary beneficiary for accounting purposes since we are entitled to use ADVantage for deepwater drilling contract opportunities rejected by ADES, and have the (a) power to direct the operating activities associated with the deepwater drilling rigs, which are the activities that most significantly impact the entity’s economic performance, and (b) obligation to absorb losses or the right to receive a majority of the benefits that could be potentially significant to the VIE. As a result, we consolidate ADVantage in our consolidated financial statements, we eliminate intercompany transactions and we present the interests that are not owned by us as “Noncontrolling interests” in our Consolidated Balance Sheet. The carrying amount associated with ADVantage was as follows:
December 31,
December 31,
(unaudited, in thousands)
Current assets
$
7,072
$
14,589
Non-current assets
3,643
Current liabilities
3,979
11,560
Non-current liabilities
4,159
Net carrying amount
$
2,436
$
2,513
As ADVantage is a majority owned subsidiary of the Company, it serves as a guarantor under the First Lien Indenture relating to the 9.25% First Lien Notes. The 9.25% First Lien Notes are secured by a first priority lien on all of the assets of ADVantage, subject to certain exceptions. Creditors’ recourse against ADVantage for liabilities of ADVantage is limited to the assets of ADVantage.
See “Note 1. Organization and Recent Events” and “Note 10. Supplemental Financial Information” of these “Notes to Consolidated Financial Statements” for additional details regarding this joint venture.
Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires our 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.
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.
Materials and Supplies: Consists of materials, spare parts, consumables and related supplies for our drilling rigs. We record these materials and supplies at their average cost.
Property and Equipment: Consists 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 35 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 balance sheet and the resulting gain or loss is included in “Operating costs” or
“General and administrative” expenses on the Consolidated Statement of Operations, depending on the nature of the asset. For the years ended December 31, 2020, 2019 and 2018, we recognized a net loss of approximately $0.1 million, a net loss of approximately $0.2 million and a net gain of approximately $1.3 million, respectively, related to the sale or retirement of assets.
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 gas exploration, development and production expenditures. Oil and 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 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 or persistent depressed levels of oil and gas prices, worldwide rig counts and utilization, reduced access to credit markets, reduced or depressed sale prices of comparably equipped jackups and drillships and any other significant adverse economic news could require us to evaluate the realization of our drilling rigs. In connection with our adoption of fresh-start accounting upon our emergence from bankruptcy on the Effective Date, an adjustment of $2.0 billion was recorded to decrease the net book value of our drilling rigs to the then estimated fair value.
As a result of the continued spread of COVID-19 and oil price and market share volatility, we tested for impairment based on impairment indicators identified in the first quarter of 2020. The recoverability test performed resulted in no impairment loss being recorded as the estimated undiscounted cash flows generated from our drilling rigs exceeded their carrying values as of March 31, 2020. The projections and assumptions used in that analysis did not change significantly during the three months ended June 30, 2020; accordingly, no triggering event had occurred to indicate that the carrying value of our drilling rigs would not be recoverable at that time.
During the third quarter of 2020, we identified indicators that the carrying amounts of our deepwater asset groups may not be recoverable. Such indicators included the continued impact of COVID-19 on global economic activity and the resulting reductions and delays in deepwater oil and gas exploration and development plans on the part of operators leading to increased barriers for the reactivation of stacked rigs. As a result of our impairment testing, we determined that the carrying amount of our longer-term warm stacked drillship, the Titanium Explorer, was impaired and we subsequently recognized a non-cash loss on impairment of $128.9 million as of September 30, 2020. We measured the fair value of the Titanium Explorer by applying the market approach, using estimates of the exchange price that would be received for the assets in the principal or most advantageous market as of the measurement date. Our estimate of fair value required us to use other significant observable inputs, representative of Level 3 fair value measurements, including the marketability of the rig and prices of comparable rigs that may be sold for scrap value. The recoverability test performed on our other two deepwater rigs resulted in no impairment loss being recorded as the estimated undiscounted cash flows generated by those rigs exceeded their carrying values as of September 30, 2020. The Platinum Explorer is currently operating and the Tungsten Explorer is scheduled to recommence operations during the second quarter of 2021. The projections and assumptions used during the third quarter of 2020 have not changed significantly as of December 31, 2020; accordingly, no triggering event has occurred to indicate that the current carrying value of our drilling rigs may not be recoverable.
Interest costs and the amortization 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 reported periods.
Intangible Assets: In April 2017, pursuant to a purchase and sale agreement with a third party, we completed the purchase of the Vantage 260, a class 154-44C jackup rig, and a related multi-year drilling contract for $13.0 million. In connection with our acquisition we recorded an identifiable intangible asset of $12.6 million for the fair value of the acquired favorable drilling contract. The resulting intangible asset was amortized on a straight-line basis over the two-year term of the drilling contract, which ended April 2019. We recognized approximately $1.6 million and $6.3 million of amortization expense for intangible assets for the years ended December 31, 2019 and 2018, respectively.
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.
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.
Revenue Recognition: See “Note 3. Revenue from Contracts with Customers” of these “Notes to Consolidated Financial Statements” for further information.
Income Taxes: Income taxes are provided for based upon the tax laws and rates in effect in the countries in which our 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 tax 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. We do not establish deferred tax liabilities for certain of our foreign earnings that we intend to indefinitely reinvest to finance foreign activities. 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.
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. 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. Payment terms on customer invoices typically range from 30 to 45 days. Outstanding receivables beyond payment terms are promptly investigated and discussed with the specific customer.
Credit Losses - Accounts Receivable: The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. Current estimates of expected credit losses consider factors such as the historical experience and credit quality of our customers. The Company considers historical loss information as the most reasonable basis on which to determine expected credit losses unless current or forecasted future conditions for customers or customer groups indicate that risk characteristics have changed. We considered the impact of the COVID-19 pandemic and the associated oil price and market share volatility (see “The Continued Global Spread of COVID-19” and “Declines in the Demand for Oil and Gas, and the Resulting Oil Price and Market Share Volatility” each of which are set forth above in “Note 1. Organization and Recent Events” of these “Notes to Consolidated Financial Statements”) on our current estimate of credit losses as of December 31, 2020. As of December 31, 2020, the allowance for doubtful accounts on our trade receivables was $5.0 million. This amount represents our customer’s decision not to pay us for days impacted by what we believe are force majeure and other events for which we would be entitled to receive payment under our contract. We disagree with their decision and are evaluating remedies, if any, under the contract. As of December 31, 2019, the allowance for doubtful accounts on our trade receivables was immaterial.
Earnings (loss) per Share: We compute basic and diluted EPS in accordance with the two-class method. We include restricted stock units granted to employees that contain non-forfeitable rights to dividends as such grants are considered participating securities. Basic earnings (loss) per share are based on the weighted average number of Ordinary Shares outstanding during the applicable period. Diluted EPS are computed based on the weighted average number of Ordinary Shares and ordinary share equivalents outstanding in the applicable period, as if all potentially dilutive securities were converted into Ordinary Shares (using the treasury stock method).
The following is a reconciliation of the number of shares used for the basic and diluted EPS computations:
Year Ended December 31,
(In thousands)
Weighted average Ordinary Shares outstanding for basic EPS
13,115
5,677
5,000
Restricted share equity awards
-
-
-
Adjusted weighted average Ordinary Shares outstanding for diluted EPS
13,115
5,677
5,000
The following sets forth the number of shares excluded from diluted EPS computations:
Year Ended December 31,
(In thousands)
Convertible Notes
-
-
7,995
Restricted share equity awards
Future potentially dilutive Ordinary Shares excluded from diluted EPS
8,034
Functional Currency: We consider USD to be the functional currency for all of our operations since the majority of our revenues and expenditures are denominated in USD, which limits our exposure to currency exchange rate fluctuations. We recognize currency exchange rate gains and losses in “Other, net” in our Consolidated Statement of Operations. For the years ended December 31, 2020, 2019 and 2018, we recognized a net gain of $0.4 million, a net gain of $0.2 million and a net loss of $1.5 million, respectively, related to currency exchange rates.
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, 2020, the fair value of the 9.25% First Lien Notes was approximately $197.9 million based on quoted market prices in a less active market, a Level 2 measurement.
Share-based Compensation: TBGs granted under the 2016 Amended MIP vest annually, ratably over four years; however, accelerated vesting is provided for in the event of a QLE. Otherwise, the settlement of any vested TBGs occurs upon the seventh anniversary of the Effective Date. PBGs granted under the 2016 Amended MIP contain vesting eligibility provisions tied to the earlier of a QLE or seven years from the Effective Date. Upon the occurrence of a vesting eligibility event, the number of PBGs that actually vest will be dependent on the achievement of pre-determined TEV targets specified in the grants.
Both the TBGs and PBGs were classified as liabilities consistent with the classification of the underlying securities prior to the Conversion. Following the Conversion, outstanding TBGs and PBGs were subject to modification accounting and were re-classified as equity awards. Under the provisions of ASC 718 Compensation - Stock Compensation share-based compensation expense is recognized over the requisite service period from the grant date to the fourth year vest date for TBGs. For PBGs, expense will be recognized when it is probable that the TEV targets will be met. Once it is probable the performance condition will be met, compensation expense based on the fair value of the PBGs at the conversion date of the Convertible Notes will be recognized for the service period completed to the seventh anniversary of the Effective Date for PBGs.
Noncontrolling Interest: Noncontrolling interests represent the equity investments of the minority owner in ADVantage, a joint venture with ADES that we consolidate in our financial statements.
Recently Adopted Accounting Standards:
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses.” This ASU, and the related ASUs issued subsequently by the FASB, introduce a new model for recognizing credit losses on financial assets not accounted for at fair value through net income, including loans, debt securities, trade receivables, net investments in leases and available-for-sale debt securities. The new ASU broadens the information that an entity must consider in developing estimates of expected credit losses and requires an entity to estimate credit losses over the life of an exposure based on historical information, current information and reasonable, supportable forecasts. We adopted this ASU on January 1, 2020, using the modified retrospective approach. The adoption of this ASU did not have a material impact on our consolidated financial statements as our customers are primarily international oil companies, national oil companies and large independent oil companies that have historically had a very low incidence of bad debt expense. The Company has monitored, and will continue to actively monitor, the impact of the COVID-19 outbreak on expected credit losses.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software." This ASU requires capitalization of certain implementation costs incurred in a cloud computing arrangement that is a service contract. We adopted the standard on January 1, 2020 with no impact to our consolidated financial statements.
Recently Issued Accounting Standards:
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also simplifies and improves consistent application of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and for interim periods therein with, early adoption permitted. We will adopt this ASU on the effective date in the first quarter of 2021. As of the date of this Annual Report, we do not anticipate the adoption will materially affect our consolidated financial statements.
3. Revenue from Contracts with Customers
The activities that primarily drive the revenue earned in our drilling contracts with customers include (i) providing our drilling rig, work crews, related equipment and services necessary to operate the rig, (ii) delivering the drilling rig by mobilizing to and demobilizing from the drill site, and (iii) performing pre-operating activities, including rig preparation activities and/or equipment modifications required for the contract.
The integrated drilling services that we perform under each drilling contract represent a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods.
Dayrate Drilling Revenue. Our drilling contracts generally provide for payment on a dayrate basis, with higher rates for periods when the drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate billed to the customer is determined based on varying rates applicable to the specific activities performed on an hourly basis. Such dayrate consideration is allocated to the distinct hourly increment it relates to within the contract term and therefore, recognized as we perform the daily drilling services.
Amortizable Revenue. In connection with certain contracts, we receive lump-sum fees or similar compensation for (i) the mobilization of equipment and personnel prior to the commencement of drilling services, (ii) the demobilization of equipment and personnel upon contract completion or (iii) postponement fees in consideration for the postponement of a contract until a later date. These activities are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall single performance obligation.
Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the initial contract period. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the initial contract term with an offset to an accretive contract asset. In many contracts, demobilization fees are contingent upon the occurrence or non-occurrence of a future event and the estimate for such revenue may therefore be constrained. Postponement fees received that are contingent upon the occurrence (or non-occurrence) of a future event are recognized on a straight-line basis over the contract term. Fees received for the mobilization or demobilization of equipment and personnel or the postponement of a contract to a later date are included in “Contract drilling services”.
Capital Upgrade/Contract Preparation Revenue. In connection with certain contracts, we receive lump-sum fees or similar compensation for requested capital upgrades to our drilling rigs or for other contract preparation work. These activities are not considered to be distinct within the context of the contract and therefore, fees received are recorded as a contract liability and amortized to contract drilling revenues on a straight-line basis over the initial contract term.
Contract Termination Revenue. On June 20, 2019, VDEEP and VDDI entered into the Petrobras Agreement with the Petrobras Parties relating to the Petrobras Award. See “Note 9. Commitments and Contingencies” of these “Notes to Consolidated Financial Statements” for additional information regarding the Petrobras Agreement and the Petrobras Award. For the year ended December 31, 2019, we recognized approximately $594.0 million in “Contract termination revenue” and $106.9 million in “Interest income” associated with the Petrobras Payments (as defined in “Note 9. Commitments and Contingencies” of these “Notes to Consolidated Financial Statements”).
Revenues Related to Reimbursable Expenses. We generally receive reimbursements from our customers for the purchase of supplies, equipment, personnel services and other services provided at their request in accordance with a drilling contract or other agreement. We are generally considered a principal in such transactions and therefore, recognize reimbursable revenues and the corresponding costs as we provide the customer-requested goods and services.
We have elected to exclude from the transaction price measurement all taxes assessed by a governmental authority.
Disaggregation of Revenue
The following tables present our revenue disaggregated by revenue source for the periods indicated:
Year Ended December 31 , 2020
Jackups
Deepwater
Management
Consolidated
(in thousands)
Dayrate revenue
$
59,624
$
46,455
$
$
106,877
Charter lease revenue
-
-
Amortized revenue
1,889
4,045
-
5,934
Reimbursable revenue
7,576
5,582
13,575
Total revenue
$
69,565
$
56,082
$
1,215
$
126,862
Year Ended December 31 , 2019
Jackups
Deepwater
Management
Consolidated
(in thousands)
Dayrate revenue
$
88,606
$
52,005
$
1,277
$
141,888
Contract termination revenue
-
594,029
-
594,029
Charter lease revenue
4,461
-
-
4,461
Amortized revenue
1,626
2,334
-
3,960
Reimbursable revenue
8,937
4,676
2,897
16,510
Total revenue
$
103,630
$
653,044
$
4,174
$
760,848
Year Ended December 31, 2018
Jackups
Deepwater
Management
Consolidated
(in thousands)
Dayrate revenue
$
84,777
$
115,406
$
1,220
$
201,403
Amortized revenue
1,049
2,333
-
3,382
Reimbursable revenue
10,229
6,115
4,618
20,962
Total revenue
$
96,055
$
123,854
$
5,838
$
225,747
Dayrate revenue and amortized revenue for “Jackups” and “Deepwater” are included within “Contract drilling services” in our Consolidated Statement of Operations. All other revenue, excluding “Contract termination revenue”, are included within “Reimbursables and other” in our Consolidated Statement of Operations.
Accounts Receivable, Contract Liabilities and Contract Costs
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules. Payment terms on customer invoices typically range from 30 to 45 days.
We recognize contract liabilities, recorded in other “Other current liabilities” and “Other long-term liabilities” on our Consolidate Balance Sheet, for prepayments received from customers and for deferred revenue received for mobilization, contract preparation and capital upgrades.
Certain direct and incremental costs incurred for contract preparation, initial mobilization and modifications of contracted rigs represent contract fulfillment costs as they relate directly to a contract, enhance resources that will be used to satisfy our performance obligations in the future and are expected to be recovered. These costs are deferred as a current or noncurrent asset depending on the length of the initial contract term and are amortized on a straight-line basis to operating costs as services are rendered over the initial term of the related drilling contract. Costs incurred for capital upgrades are capitalized and depreciated over the useful life of the asset.
Costs incurred for the demobilization of rigs at contract completion are recognized as incurred during the demobilization process. Costs incurred to mobilize a rig without a contract are expensed as incurred.
The following table provides information about contract cost assets and contract revenue liabilities from contracts with customers:
December 31, 2020
December 31, 2019
(in thousands)
Current contract cost assets
$
2,905
$
Noncurrent contract cost assets
-
1,598
Current contract revenue liabilities
5,100
2,912
Noncurrent contract revenue liabilities
-
2,090
Significant changes in contract cost assets and contract revenue liabilities during the year ended December 31, 2020 are as follows:
Contract Costs
Contract Revenues
(in thousands)
Balance as of December 31, 2019
$
1,730
$
5,002
Increase due to contractual additions
3,641
9,295
Decrease due to recognition
(2,466
)
(8,674
)
Decrease due to transfer to payable during the period
-
(523
)
Balance as of December 31, 2020 (1)
$
2,905
$
5,100
(1)
We expect to recognize contract revenues of approximately $5.1 million in 2021 related to unsatisfied performance obligations existing as of December 31, 2020.
We have elected to utilize an optional exemption that permits us to exclude disclosure of the estimated transaction price related to the variable portion of unsatisfied performance obligations at the end of the reporting period, as our transaction price is based on a single performance obligation consisting of a series of distinct hourly increments, the variability of which will be resolved at the time of the future services.
4. Acquisitions
On June 13, 2018, we entered into a share purchase agreement with Ship Finance International Limited to acquire the shares of Rig Finance Limited, an entity that owns the Soehanah jackup rig, a Baker Marine Pacific Class 375 jackup rig, and related bareboat
charter to which Rig Finance Limited is a party, for $84.6 million, subject to certain adjustments for working capital and liabilities of the entity not discharged by the acquisition date. We made a down payment of $15.0 million in connection with the execution of the share purchase agreement, and the remaining $69.6 million was paid at closing on December 31, 2018. In May 2019, the parties to the bareboat charter terminated the charterer’s right to acquire the rig at the end of the term of the bareboat charter.
We accounted for the acquisition as an asset purchase in accordance with accounting guidance considering that substantially all of the fair value of the gross assets acquired was concentrated in the Soehanah jackup rig and in-place lease intangible. Using the cost accumulation model, the cost of the acquisition was allocated to the assets acquired as follows:
(in thousands)
Total cash consideration (1)
$
85,000
Purchase price allocation:
Soehanah rig and equipment
81,850
Materials, supplies and spare parts
3,150
Cash
Charterer deposit
(913
)
Net assets acquired
$
85,000
(1)
Including $0.4 million of transaction costs.
Pro forma results of operations related to the acquisition are not material to our consolidated statement of operations.
In April 2017, pursuant to a purchase and sale agreement with a third party, we completed the purchase of a class 154-44C jackup rig and related multi-year drilling contract for $13.0 million. A down payment of $1.3 million was made in February 2017 upon execution of the agreement and the remaining $11.7 million was paid at closing. In August 2017, we substituted the Sapphire Driller, a Baker Marine Pacific Class 375 jackup rig, to fulfill the drilling contract. The rig, renamed the Vantage 260, was classified as held for sale on acquisition and was sold on February 26, 2018 for $5.1 million.
5. Leases
We have operating leases expiring at various dates, principally for office space, onshore storage yards and certain operating equipment. Additionally, we sublease certain office space to third parties. We determine if an arrangement is a lease at inception. Operating leases with an initial term greater than 12 months are included in “Operating lease ROU assets”, “Other current liabilities”, and “Other long-term liabilities” on our Consolidated Balance Sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made prior to or at the commencement date and is reduced by lease incentives received and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally not accounted for separately. Certain of our leases include provisions for variable payments. These variable payments are not included in the calculation of lease liability and ROU assets.
The components of lease expense were as follows:
(in thousands)
Classification in the Consolidated Statement of Operations
Operating lease cost(1)
Operating costs
$
3,509
$
5,633
Operating lease cost(1)
General and administrative
1,160
Sublease income
Operating costs
(485
)
(475
)
Sublease income
General and administrative
(247
)
(296
)
Total operating lease cost
$
3,384
$
6,022
(1)
Short-term lease costs were $0.5 million and $2.5 million during the years ended December 31, 2020 and 2019, respectively. Operating cash flows used for operating leases approximates lease expense.
(in thousands)
Classification in the Consolidated Balance Sheet
December 31, 2020
December 31, 2019
Assets:
Operating lease assets
Operating lease ROU assets
$
3,997
$
6,706
Total leased assets
$
3,997
$
6,706
Liabilities:
Current operating
Other current liabilities
$
2,038
$
3,963
Noncurrent operating
Other long-term liabilities
2,371
3,139
Total lease liabilities
$
4,409
$
7,102
As of December 31, 2020, maturities of lease liabilities were as follows:
(unaudited, in thousands)
Operating Leases
$
2,340
1,593
-
-
Total future lease payments
$
4,882
Less imputed interest
(473
)
Present value of lease obligations
$
4,409
As of December 31, 2020, the weighted average discount rate and the weighted average remaining lease term for operating leases was 9.25% and 2.3 years, respectively. ROU assets and lease liabilities recorded for leases commencing during the three months ended December 31, 2020 was immaterial.
The bareboat charter contract on the Soehanah jackup rig was accounted for as an operating lease with charter revenue included in “Reimbursables and other” in the Consolidated Statement of Operations. In May 2019, the parties to the bareboat charter terminated the charterer’s right to acquire the rig at the end of the term of the bareboat charter, which was originally intended to end on December 31, 2019. However, under the terms of the bareboat charter, the lease term continued until the rig was redelivered to the Company, which occurred on February 3, 2020. Please refer to “Note 4. Acquisitions” of these “Notes to Consolidated Financial Statements” for additional information pertaining to our acquisition of the Soehanah jackup rig.
6. Debt
Our debt was composed of the following as of the dates indicated:
December 31,
(in thousands)
9.25% First Lien Notes, net of financing costs of $4,781 and $6,421, respectively
$
345,219
$
343,579
Less current maturities of long-term debt
-
-
Long-term debt, net
$
345,219
$
343,579
Aggregate scheduled principal maturities of our debt for the next five years and thereafter are as follows (in thousands):
$
-
-
350,000
-
-
Thereafter
-
Total debt (1)
350,000
Less:
Current maturities of long-term debt
-
Future amortization of financing costs
(4,781
)
Long-term debt
$
345,219
(1) Excludes financing costs of $4.8 million on the 9.25% First Lien Notes.
9.25% First Lien Notes. On November 30, 2018, the Company issued $350.0 million in aggregate principal amount of 9.25% First Lien Notes in a private placement. The 9.25% First Lien Notes were issued at par and are fully guaranteed on senior secured basis, by the Company’s direct and indirect subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries, in each case subject to certain exceptions. The 9.25% First Lien Notes are subject to first payment priority in favor of holders of up to $50.0 million of future super-priority debt and are subject to both mandatory and optional redemption provisions.
The 9.25% First Lien Notes mature on November 15, 2023 and bear interest from the date of their issuance at the rate of 9.25% per year. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months and is payable semi-annually in arrears, commencing on May 15, 2019.
The First Lien Indenture 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.
The net proceeds from the issuance were used (i) to repay all obligations under the 2016 Term Loan Facility and to terminate the credit agreement governing such facility, (ii) to redeem all outstanding 10% Second Lien Notes, (iii) to fund the remaining amounts to be paid in connection with the purchase of the Soehanah jack up rig, (iv) to pay fees and expenses related to the foregoing and to the offering of the 9.25% First Lien Notes and (v) for general corporate purposes.
Concurrently with the issuance of the 9.25% First Lien Notes, we entered into a new letter of credit facility to replace the letter of credit facility existing under the 2016 Term Loan Facility. The new facility has a capacity of $50.0 million, with all outstanding letters of credit being cash collateralized. We have issued $10.1 million in letters of credit under this facility as of December 31, 2020.
On July 8, 2019, we commenced the Offer to repurchase up to $75.0 million of the 9.25% First Lien Notes at a purchase price equal to 100.0% of the principal of the 9.25% First Lien Notes to be repurchased, plus accrued and unpaid interest and additional amounts, if any, but not including, the date fixed for the purchase of the 9.25% First Lien Notes tendered pursuant to the Offer. The Offer to purchase for cash was made pursuant to the terms of the First Lien Indenture in connection with the receipt by our subsidiaries, VDEEP and VDDI, of approximately $690.8 million and $10.1 million, respectively, on June 21, 2019 on account of the Petrobras Award. In accordance with the First Lien Indenture, we were required to offer to purchase at least $75.0 million of the 9.25% First Lien Notes in accordance with the terms thereof. No 9.25% First Lien Notes were tendered for purchase as of the Offer Expiration Date. Accordingly, the Company concluded its obligation under the First Lien Indenture to conduct such offer, and, in accordance with the terms of the First Lien Indenture, the proceeds from the Petrobras Agreement (net of direct costs relating to the recovery thereof) are available for use by the Company without any restrictions under the First Lien Indenture.
Convertible Notes. As a part of the Reorganization Plan, 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 could only be traded together and not separately. The Convertible Notes were to mature on December 31, 2030 and were 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 included customary covenants that restricted, among other things, the granting of liens and customary events of default, including among other things, failure to issue securities upon conversion of the Convertible Notes.
On June 7, 2019, the Company announced that the Board of Directors had approved the conversion of all of the Convertible Notes into Ordinary Shares of the Company to take effect on or as promptly as practicable after July 1, 2019, subject to the satisfaction of certain conditions required by the indenture governing the Convertible Notes. The Company then announced on July 18, 2019 that, in light of the Petrobras Agreement between the Petrobras Parties and certain of the Company’s subsidiaries, the Board of Directors had decided to reevaluate whether it was in the best interests of the Company and its shareholders to proceed with the Conversion at that point in time. No action was undertaken by the Company at that time to proceed with the Conversion.
On November 18, 2019, the Company announced that the Board of Directors had authorized the Conversion. On December 4, 2019, the outstanding principal amount of approximately $775.8 million was converted to outstanding Ordinary Shares at a rate of approximately 0.01046, which equates to one ordinary share per $95.60 principal amount of the Convertible Notes.
7. Shareholders’ Equity
Stock Issuance
VDI has 50,000,000 authorized Ordinary Shares. Upon emergence from bankruptcy on the Effective Date, VDI issued 5,000,053 Ordinary Shares in connection with the settlement of LSTC in accordance with the Reorganization Plan and the VDC Note. On December 4, 2019, VDI issued an additional 8,114,977 Ordinary Shares to convert all of the outstanding Convertible Notes. See “Note 6. Debt” of these “Notes to Consolidated Financial Statements” for additional information regarding the Conversion. As of December 31, 2020, 13,115,026 Ordinary Shares were issued and outstanding.
Special Cash Distribution
On November 18, 2019, the Company announced that its Board of Directors declared a special cash distribution in the aggregate amount of $525.0 million, or $40.03 per share, paid on December 17, 2019, to shareholders of record as of the close of business on December 10, 2019, (the “Special Cash Distribution”). The Special Cash Distribution is a use of proceeds from the Petrobras Award. The Company bound judgment preservation insurance to insure against the contingency of being required to return the Petrobras Payment. See Note 9. Commitments and Contingencies of these “Notes to Consolidated Financial Statements” for additional information on the Petrobras Award and the Petrobras Payment.
Share-based Compensation
On August 9, 2016, the Company adopted the Amended 2016 MIP to align the interests of participants with those of the shareholders by providing incentive compensation opportunities tied to the performance of the Company’s equity securities. Pursuant to the 2016 Amended MIP, the Compensation Committee may grant to employees, directors and consultants stock options, restricted stock, restricted stock units or other awards. As of December 31, 2020, there were 308,239 shares available for future grant under the Amended 2016 MIP.
Prior to the Conversion, both the TBGs and PBGs were classified as liabilities consistent with the classification of the underlying securities. Following the Conversion, outstanding TBGs and PBGs were subject to modification accounting and were reclassified as equity awards. In connection with the Conversion, each restricted stock unit was converted into approximately 2.868 Company common shares, with a per-share average fair value of $66.26. No additional compensation costs were recognized at conversion as there was no change in the terms affecting the estimate of fair value.
Pursuant to the Amended 2016 MIP and the terms of the applicable unit awards, participants holding restricted stock units are contractually entitled to receive all dividends or other distributions that are paid to VDI stockholders provided that any such dividends will be subject to the same vesting requirements of the underlying units. Dividend payments accrue to outstanding awards (both vested and unvested) in the form of “Dividend Equivalents” equal to the dividend per share underlying the applicable MIP award. As a result of the Special Cash Distribution discussed above in this “Note 7. Shareholders’ Equity” of the “Notes to Consolidated Financial Statements”, $8.0 million has been recorded in “Other long-term liabilities” in our Consolidated Balance Sheet at December 31, 2020 to be paid on settlement of TBGs. The outstanding TBGs and PBGs were subject to modification accounting as a result of the Special Cash Distribution as discussed above in this “Note 7. Shareholders’ Equity” of the “Notes to Consolidated Financial Statements”. No additional compensation costs were recognized as a result of the Special Cash Distribution as there was no change in the terms affecting the estimate of fair value.
For the years ended December 31, 2020, 2019 and 2018, we recognized share-based compensation related to the TBGs of approximately $1.6 million, $1.0 million and $7.2 million, respectively. As of December 31, 2020, there was approximately $0.5 million of total unrecognized share-based compensation expense related to TBGs, which is expected to be recognized over the remaining weighted average vesting period of approximately 0.5 years. The total award date value of time vested restricted shares that vested during the year ended December 31, 2020 was approximately $3.6 million.
Share-based compensation expense for PBGs will be recognized when it is probable that the TEV targets will be met. Once it is probable the performance condition will be met, compensation expense based on the fair value of the PBGs at the conversion date will be recognized for the service period completed. As of December 31, 2020, we concluded that it was not probable that the TEV performance condition would be met and therefore, no share-based compensation expense was recognized for PBGs, which have a remaining weighted average vesting period of approximately 2.1 years.
A summary of the status of non-vested restricted units at December 31, 2020 and changes during the year ended December 31, 2020 is as follows:
Time
Vested
Restricted
Units
Outstanding
Weighted
Average
Award
Date Unit
Price
Performance
Vested
Restricted
Units
Outstanding
Weighted
Average
Award
Date Unit
Price
Nonvested restricted units at December 31, 2019
80,209
$
66.26
475,792
$
66.26
Awarded
-
-
-
-
Vested
(55,074
)
66.26
-
-
Forfeited
(4,428
)
66.26
(41,355
)
66.26
Nonvested restricted units at December 31, 2020
20,707
$
66.26
434,437
$
66.26
8. Income Taxes
VDI is a Cayman Islands corporation operating in multiple countries through its subsidiaries. The Cayman Islands do not impose corporate income taxes. 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. 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 to the net operating results and the income tax expense. Furthermore, in some jurisdictions we do not pay taxes, pay taxes at lower rates or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt, gains or losses on disposal or transfer of assets, reorganization expenses and write-off of development costs.
On January 22, 2020, VDI filed the Tax Election with the IRS to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019. As a result, U.S. Holders are required to take into account their allocable share of items of income, gain, loss deduction and credit of VDI for each taxable year of VDI ending with or within the U.S. Holder’s taxable year, regardless of whether any distribution has been or will be received from VDI. Each item generally will have the same character and source (either U.S. or foreign) as though the U.S. Holder had realized the item directly. We do not anticipate that VDI’s tax status will have a material impact on the consolidated financial statements.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, a sweeping stimulus bill intended to bolster the U.S. economy and provide emergency financial assistance to qualifying businesses and individuals. The CARES Act, among other things, modified the net operating losses carryovers and carrybacks rules, and included modifications to Section 163(j) of the Code to increase the allowable business interest deduction. As of December 31, 2020, our analysis of the provisions of the CARES Act revealed no material implications on the income tax provision.
The income tax expense (benefit) consisted of the following (in thousands):
Year Ended December 31,
Current
$
4,676
$
15,172
$
14,784
Deferred
(51
)
1,742
Total
$
4,897
$
15,121
$
16,526
A reconciliation of statutory and effective income tax rates is shown below:
Year Ended December 31,
Statutory rate
0.0
%
0.0
%
0.0
%
Effect of:
Taxes on foreign earnings
(2.5
)
%
3.6
%
(14.1
)
%
Uncertain tax positions
0.3
%
0.1
%
0.3
%
Other
0.4
%
(0.5
)
%
0.6
%
Total
(1.8
)
%
3.2
%
(13.2
)
%
The components of the net deferred tax assets and liabilities were as follows:
December 31,
December 31,
(in thousands)
Deferred tax assets:
Share-based compensation
$
1,144
$
1,014
Accrued bonuses/compensation
Special compensation
Start-up costs
Loss carry-forwards
2,091
2,015
Deferred revenue
-
Other deferred tax assets
-
Total deferred tax assets
3,733
3,924
Valuation allowance
(2,009
)
(2,015
)
Net deferred tax assets
1,724
1,909
Deferred tax liabilities:
Property and equipment
(755
)
(732
)
Deferred cost
-
(2
)
Deferred revenue
(6
)
-
Other deferred tax liability
(10
)
-
Total deferred tax liabilities
(771
)
(734
)
Net deferred tax asset
$
$
1,175
At December 31, 2020, we had foreign tax loss carry forwards of approximately $7.9 million, which will expire beginning in 2021. The increase in foreign tax loss carry forwards is primarily due losses incurred during the Current Year which offset expired and utilized amounts. The reduction in the valuation allowance primarily results from the expiration of loss carryforwards and valuation allowance releases upon utilization of certain loss carry forwards.
We include as a component of our income tax provision potential interest and penalties related to recognized tax contingencies within our global operations. Interest and penalties expense of approximately $(0.4) million is included in 2020 income tax expense and total interest and penalties of approximately $1.3 million are accrued as of December 31, 2020.
A reconciliation of our unrecognized tax benefits amount, excluding interest and penalties that we recognize as a component of income tax expense, is as follows (in thousands):
Gross balance at January 1, 2020
$
2,714
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
-
Expiration of statues
(390
)
Tax settlements
-
Gross balance at December 31, 2020
2,331
Related tax benefits
-
Net reserve at December 31, 2020
$
2,331
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 from 2010 onward 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.
9. 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. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims.
Drilling Contract Arbitration
On August 31, 2015, PAI and PVIS, both subsidiaries of Petrobras, notified the Company of the termination of the Drilling Contract between PVIS and VDEEP, which had been novated to PAI and VDDI, claiming the Company had breached its obligations under the Drilling Contract. VDEEP and VDDI are both wholly-owned subsidiaries of the Company. We immediately filed an international arbitration claim against the Petrobras Parties, claiming wrongful termination of the Drilling Contract.
On July 2, 2018, an international arbitration tribunal issued the Petrobras Award in favor of VDEEP and VDDI. The tribunal found that the Petrobras Parties breached the Drilling Contract, and awarded VDEEP and VDDI damages in the aggregate amount of $622.0 million against the Petrobras Parties and dismissed the Petrobras Parties’ counterclaims against the Company with prejudice. The tribunal also awarded the Company interest on the foregoing award amount at an annual rate of 15.2%, compounded monthly, to accrue from (i) April 1, 2018, with respect to $615.6 million thereof, (ii) October 20, 2015, with respect to $5.2 million thereof, and (iii) November 19, 2015, with respect to $1.2 million thereof, in each case, until final payment of the Petrobras Award. In accordance with the terms of the Petrobras Award, each of the Company and Petrobras bore its own legal fees, and the fees and expenses of the tribunal, including the compensation of the arbitrators, aggregating approximately $1.5 million, were borne equally by both sides.
On July 2, 2018, VDEEP and VDDI filed a petition (the “Petition”) in the U.S. District Court - Texas to confirm the Petrobras Award against the Petrobras Parties. On August 31, 2018, the Petrobras Parties filed with the U.S. District Court - Texas, among other things, a response to the Petition and a motion to vacate the Petrobras Award (the “Response and Motion to Vacate”). On March 8, 2019, the U.S. District Court - Texas heard both the Petition and the Response and Motion to Vacate.
On May 20, 2019, the U.S. District Court - Texas granted the Petition to confirm the Petrobras Award against the Petrobras Parties and denied the Petrobras Parties’ motion to vacate the Petrobras Award. On May 22, 2019, the U.S. District Court - Texas rendered its final judgment in favor of VDEEP and VDDI in the amount of approximately $734.0 million.
Separately, in connection with enforcing the Petrobras Award against the Petrobras Parties, VDEEP and VDDI secured an order from the Amsterdam District Court in the Netherlands on August 22, 2018, which froze certain assets of Petrobras and PVIS in the Netherlands that we believe are valued in excess of our claim at this time. On November 15, 2018, VDEEP and VDDI filed a petition in the Court of Appeals in The Hague, the Netherlands, to recognize and enforce the Petrobras Award against the Petrobras Parties in the Netherlands (the “Dutch Enforcement Action”). On March 1, 2019, the Petrobras Parties filed their statement of defense with the Court of Appeals. The Court of Appeals heard the petition of VDEEP and VDDI and the Petrobras Parties’ statement of defense on May 14, 2019.
On June 20, 2019, VDEEP and VDDI entered into the Petrobras Agreement with the Petrobras Parties relating to the Petrobras Award. The Petrobras Agreement considered the Petrobras Award amount together with interest calculated through May 22, 2019 and reduced that amount by 4.5%. Pursuant to the Petrobras Agreement, PVIS agreed to pay VDEEP $690,810,875 and PAI agreed to pay VDDI $10,128,565 (collectively, the “Petrobras Payments”), in full satisfaction and payment of the Petrobras Award and the related judgment entered by the U.S. District Court - Texas confirming the Petrobras Award (the “Judgment”). Neither party released any of its claims, except for certain claims in respect of certain pre-judgment attachments made by VDEEP and VDDI on certain assets of PVIS and Petrobras in the Netherlands. VDEEP and VDDI received the Petrobras Payments in full on June 21, 2019. Under the Petrobras Agreement, VDEEP and VDDI were required to take actions in order to release liens on certain Petrobras assets in the United States and the Netherlands. In addition, the parties agreed under the Petrobras Agreement to a stay of the Dutch Enforcement Action until such time as there is a final, non-appealable judgment in the U.S. proceedings or until such time as the Petrobras Parties assert a claim for reimbursement of all or any part of the Petrobras Payments, whichever is earlier.
The Petrobras Parties filed a notice of appeal with the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) seeking a reversal of the Judgment, which confirmed the Petrobras Award and denied their motion for vacatur. The U.S. Court of Appeals for the Fifth Circuit held oral arguments among the parties on June 10, 2020 and on July 16, 2020, the court affirmed the Judgment and the Petrobras Award in our favor and denied the Petrobras Parties’ motion for vacatur. Subsequently, the Petrobras Parties filed a petition with the Fifth Circuit for a rehearing by the panel that heard the appeal and, separately, for a rehearing by the entire Fifth Circuit. On August 28, 2020, the three-judge panel and the entire Fifth Circuit denied the Petrobras Parties’ respective petitions for rehearing. The Petrobras Parties filed a petition for certiorari with the U.S. Supreme Court on January 25, 2021 seeking the reversal of the Fifth Circuit’s decision affirming the U.S. District Court’s decision to confirm the Petrobras Award. On February 22, 2021, the U.S. Supreme Court denied the Petrobras Parties’ petition and therefore, the foregoing matter is closed.
Brazil Improbity Action
On April 27, 2018, the Company was added as an additional defendant in a legal proceeding initiated by the Brazilian Federal Prosecutor against certain individuals, including an executive of Petrobras and two political lobbyists, in connection with the contracting of the Titanium Explorer drillship to Petrobras under the Drilling Contract, with the Brazilian Government and Petrobras as plaintiffs. Vantage is alleged to have been involved in and benefitted from the purported bribery scheme at Petrobras through Hamylton Padilha, the Brazilian agent, our former parent company, VDC, used in the contracting of the Titanium Explorer drillship to Petrobras, and Mr. Hsin -Chi Su, a former member of VDC’s board of directors and a significant shareholder of VDC. We first
became aware of the legal proceeding on July 19, 2018 as it was previously under seal. On March 22, 2019, we were formally served in the United States and on April 12, 2019, we filed our preliminary statement of defense with the 11th Federal court of the Judicial Branch of Curitiba, State of Parana, Brazil (the “Brazilian Federal Court”). On August 20, 2020, the Brazilian Federal Court dismissed our preliminary statement of defense. On October 5, 2020, we subsequently filed a motion to clarify with the Brazilian Federal Court requesting the reconsideration of certain aspects of the decision dismissing our preliminary statement of defense. We will be obligated to file a statement of defense in the matter once all of the defendants are served again in this legal proceeding. The Company understands that the legal proceeding, which is called an improbity action, is a civil action and is part of the Brazilian Federal Prosecutor’s larger “Car Wash” investigation into money laundering and corruption allegations in Brazil.
The damages claimed in the proceeding are in the amount of BRL 102.8 million (approximately $20.4 million as of the date of this Annual Report), together with a civil fine equal to three times that amount. The Company understands that the Brazilian Federal Court the proceeding has issued an order authorizing the seizure and freezing of the assets of the Company and the other three defendants in the legal proceeding, as a precautionary measure, in the amount of approximately $81.6 million as of the date of this Annual Report. The Company and the other three defendants are jointly and severally liable for this amount. The seizure order has not had an effect on the Company’s assets or operations, as the Company does not own any assets in Brazil, and does not currently intend to relocate any assets to Brazil. On February 13, 2019, we learned that the Brazilian Federal Prosecutor had previously requested mutual legal assistance from the U.S. DOJ pursuant to the United Nations Convention against Corruption of 2003 to obtain a freezing order against the Company’s U.S. assets in the amount of $81.6 million as of the date of this Annual Report. The Company believes this request is not supported by applicable law and intends to vigorously oppose and defend against any attempts to seize its assets.
On April 12, 2019, we filed an interlocutory appeal with the 4th Circuit of the Federal Court of Appeals in Porto Alegre, State of Rio Grande do Sul, Brazil (the “Brazilian Appellate Court”), the appellate court hearing appeals in the “Car Wash” cases, to stay the seizure and freezing order of the Brazilian Federal Court.
On May 20, 2019, the Company announced that the Brazilian Appellate Court ruled in favor of the Company’s appeal to stay the seizure and freezing order of the Brazilian Federal Court. The foregoing ruling is still subject to confirmation by a three-judge panel, and is subject to appeal, and the Company can offer no assurances that the stay will be confirmed or as to the outcome of any appeal thereof. The Company has communicated the Brazilian Appellate Court’s ruling to the DOJ, and has asked the Brazilian Federal Court to do the same. On July 18, 2019, the Company announced that the Brazilian Government made a filing with the Brazilian Federal Court reporting that the DOJ has advised the Brazilian Ministry of Justice that it would not be possible for the DOJ to comply with the mutual assistance request in respect of the asset freeze order. The Company also announced that it learned from the Brazilian Ministry of Justice that the DOJ’s response to the request for mutual assistance stated that no legal grounds existed for implementing the requested asset freeze, and that the DOJ was returning the request without taking action and considers the matter concluded.
The Company intends to vigorously defend against the allegations made in the underlying improbity action. However, we can neither predict the ultimate outcome of this matter nor that there will not be further developments in the “Car Wash” investigation or in any other ongoing investigation or related proceeding that could adversely affect us. At this time, we are not yet able to determine the likelihood of loss, if any, arising from this matter.
Restructuring Agreement and Associated Settlement Agreement
Pursuant to the terms of the Restructuring Agreement among VDC and a majority of our secured creditors, the Company agreed to the Reorganization Plan and VDC agreed to 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 the VDC Note. In connection with our separation from VDC, we and the Joint Official Liquidators, appointed to oversee the liquidation of VDC, entered into discussions regarding the settlement of certain intercompany receivables and payables as between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries on the other. On March 4, 2020, we and our subsidiaries, on the one hand, and VDC and their subsidiaries, on the other, entered into a settlement agreement pursuant to which the parties to the settlement agreement agreed to release each other from certain claims in exchange for Vantage paying VDC $15.0 million, subject to the approval of the Court of Grand Cayman. On March 16, 2020, the Court of Grand Cayman approved the settlement agreement. On March 25, 2020, the Company paid $15.0 million in accordance with the settlement agreement, fully resolving the matter. We recorded a gain of $2.3 million related to the settlement agreement included in “Other Income” in the Consolidated Statement of Operations for the year ended December 31, 2020.
Other Commitments
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 renewal options which would cause our future cash payments to change if we exercised those renewal options. See “Note 5. Leases” of these “Notes to Consolidated Financial Statements” for information pertaining to our future minimum lease obligations.
At December 31, 2020, we had purchase commitments of $10.2 million. Our purchase commitments consist of obligations outstanding to external vendors primarily related to capital upgrades, materials, spare parts, consumables and related supplies for our drilling rigs.
10. Supplemental Financial Information
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
December 31,
(in thousands)
Sales tax receivable
$
6,797
$
8,356
Assets held for sale (1)
10,113
-
Other receivables
1,517
1,523
Income tax receivable
Prepaid insurance
Current deferred contract costs
2,905
Other
4,779
5,703
$
27,323
$
16,507
(1)
Includes the aggregate carrying amount of the Titanium Explorer, along with related assets, as of December 31, 2020. See “Note 1. Organization and Recent Events” of these “Notes to Consolidated Financial Statements” for additional details regarding the Purchase and Sale Agreement to sell the Titanium Explorer.
Property and Equipment, net
Property and equipment, net consisted of the following:
December 31,
(in thousands)
Drilling equipment
$
774,813
$
963,401
Assets under construction
19,991
Office and technology equipment
18,405
18,452
Leasehold improvements
1,165
1,124
794,944
1,002,968
Accumulated depreciation
(278,562
)
(281,842
)
Property and equipment, net
$
516,382
$
721,126
Other Assets
Other assets consisted of the following:
December 31,
(in thousands)
Noncurrent restricted cash
$
4,546
$
8,486
Deferred certification costs
4,535
3,959
Noncurrent deferred contract costs
-
1,598
Deferred income taxes
1,923
1,919
Other noncurrent assets
1,122
1,106
$
12,126
$
17,068
Other Current Liabilities
Other current liabilities consisted of the following:
December 31,
(in thousands)
Interest
$
4,139
$
4,139
Compensation (1)
7,128
10,370
Income taxes payable
2,951
3,493
Current deferred revenue
5,100
2,912
Current portion of operating lease liabilities
2,038
3,963
Other
3,378
2,059
$
24,734
$
26,936
(1)
Includes $2.1 million and $2.4 million as of December 31, 2020 and 2019, respectively, related to cash awards granted to certain key employees of the Company pursuant to underlying award agreements and issued under the 2016 MIP.
Other Long-term Liabilities
Other long-term liabilities consisted of the following:
December 31,
(in thousands)
Noncurrent deferred revenue
$
-
$
2,090
Deferred income taxes
2016 MIP - Dividend Equivalents (1)
8,006
5,801
Noncurrent operating lease liabilities
2,371
3,139
Other non-current liabilities
3,664
5,758
$
15,011
$
17,532
(1)
Dividend Equivalents on vested TBGs are payable on settlement of the applicable award. See “Note 7. Shareholders’ Equity” of these “Notes to Consolidated Financial Statements” for additional information regarding the Dividend Equivalents.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows as of the dates indicated:
December 31,
(in thousands)
Cash and cash equivalents
$
141,945
$
231,947
Restricted cash
7,996
2,511
Restricted cash included within Other Assets
4,546
8,486
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows
$
154,487
$
242,944
Restricted cash represents cash held by banks as certificates of deposit collateralizing letters of credit.
Transactions with Former Parent Company
The following table summarizes the balances payable to VDC included in the Company’s Consolidated Balance Sheet as of the dates indicated:
December 31,
(in thousands)
Accounts payable to related parties, net
$
-
$
17,278
$
-
$
17,278
See “Note 9. Commitments and Contingencies” of these “Notes to Consolidated Financial Statements” for additional information regarding the balances payable to VDC.
Related Party Transactions
In association with the establishment of ADVantage, the Company and ADES contributed cash to ADVantage in excess of the issued capital of the joint venture, with the understanding that such amounts are to be considered shareholder loans. As of December 31, 2020, the total outstanding amount due to ADES for such excess cash contributions was approximately $708,000, which is included in “Other current liabilities” on the Consolidated Balance Sheet.
In conjunction with the establishment of ADVantage, the Company entered into a series of agreements with ADES, including: (i) a Secondment Agreement; (ii) a Manpower Agreement; and (iii) a Supply Services Agreement. Pursuant to these agreements, the Company, largely through its seconded employees, will provide various services to ADES and ADES will in turn provide various services to ADVantage. As of December 31, 2020, accounts receivable from ADES totaled approximately $2.2 million and accounts payable to ADES totaled approximately $3.1 million, included in “Trade receivables” and “Accounts payable,” respectively, on the Consolidated Balance Sheet. See “Note 1. Organization and Recent Events” of these “Notes to Consolidated Financial Statements” for additional details regarding this joint venture.
Mr. Thomas R. Bates, Jr. is the chairman and a director of the Company and in December 2019, was elected as chairman of Weatherford International (“Weatherford”), a provider of equipment and services to the Company, from December 2019 until June 30, 2020. The Company engaged in various transactions in the ordinary course of business with Weatherford for the purchase of certain equipment and services during Mr. Bates’ tenure as chairman of Weatherford, which totaled $0.3 million for the six months ended June 30, 2020.
Except for the foregoing, we did not have any related party transactions that were not conducted in the ordinary course of business as of December 31, 2020.
11. Business Segment 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. The Soehanah jackup rig operated under a bareboat charter contract in place as of acquisition.
Additionally, for drilling units owned by others, we provide construction supervision services while under construction, preservation management services when stacked and operations and marketing services for operating rigs. Our management business (excluding reimbursable revenue) represented less than 1% of our total revenue for each of the years ended December 31, 2020, 2019 and 2018, respectively.
For the years ended December 31, 2020, 2019 and 2018, a substantial amount 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. Five customers accounted for approximately 25%, 17%, 14%, 12% and 10% of consolidated revenue for the year ended December 31, 2020. Contract termination revenue from the Petrobras Parties accounted for approximately 78% of consolidated revenue for the year ended December 31, 2019. Excluding the contract termination revenue received from the Petrobras Parties, four customers accounted for approximately 23%, 23%, 13% and 11% of consolidated revenue for the year ended December 31, 2019. Three customers accounted for approximately 40%, 15% and 14% of consolidated revenue for the year ended December 31, 2018.
Our revenues by country were as follows (periods representing revenues of less than 10% are included in “Other countries”):
For the Years Ended December 31,
Cayman Islands
$
-
$
561,530
$
-
India
31,836
-
32,630
Qatar
21,679
-
-
Indonesia
19,832
-
-
Lebanon
17,376
-
-
Congo
13,299
-
123,605
Other countries (1)
22,840
199,318
69,512
Total revenues
$
126,862
$
760,848
$
225,747
(1)
“Other countries” represent countries in which we had revenues representing less than 10% of total revenues earned.
Our property and equipment, net by country was as follows (as of dates representing property and equipment of less than 10% are included in “Other countries”):
December 31, 2020
December 31, 2019
International waters
$
225,484
$
-
India
111,485
126,124
Indonesia
69,434
75,830
Egypt
-
207,166
South Africa
-
149,231
Other countries (1)
109,979
162,775
Total property and equipment
$
516,382
$
721,126
(1)
“Other countries” represent countries in which we operate that individually had property 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.
12. Supplemental Quarterly Information (Unaudited)
The following table reflects a summary of the unaudited interim results of operations for the years ended December 31, 2020 and 2019 (in thousands except per share amounts).
Quarter Ended
March 31
June 30
September 30
December 31
Revenues
$
57,663
$
60,461
$
64,556
$
43,067
(Loss) income from operations
(8,544
)
(8,178
)
(5,692
)
(22,871
)
Other expense
(19,620
)
(19,706
)
(18,853
)
(21,478
)
Net loss attributable to shareholders
(32,137
)
(31,094
)
(26,060
)
(52,177
)
Loss per share
Basic and Diluted
$
(6.43
)
$
(6.22
)
$
(5.21
)
$
(10.44
)
Revenues
$
34,555
$
636,383
$
40,644
$
49,266
(Loss) income from operations (1)
(31,188
)
509,101
(22,374
)
(53,952
)
Other (expense) income
(14,569
)
97,812
(6,123
)
(7,111
)
Net (loss) income attributable to shareholders
(47,890
)
590,729
(25,720
)
(61,385
)
(Loss) earnings per share
Basic
$
(9.58
)
$
116.96
$
(5.14
)
$
(8.22
)
Diluted
$
(9.58
)
$
116.86
$
(5.14
)
$
(8.22
)
Revenues
$
51,456
$
36,775
$
20,211
$
18,420
(Loss) from operations (2)
(22,285
)
(24,446
)
(157,955
)
(36,650
)
Other expense
(5,364
)
(8,478
)
(8,515
)
(8,167
)
Net loss attributable to shareholders
(30,572
)
(31,912
)
(169,327
)
(44,908
)
Loss per share
Basic and Diluted
$
(2.33
)
$
(2.43
)
$
(12.91
)
$
(3.42
)
(1)
During the quarter ended December 31, 2019, we recorded $1.6 million and $5.6 million in “Operating costs” and “General and administrative expense”, respectively for cash awards granted to certain key employees of the Company pursuant to underlying award agreements and issued under the Amended 2016 MIP. We also recorded $30.5 million in “General and administrative expense” related to insurance costs for judgment preservation insurance to insure against the contingency of being required to return the Petrobras Payment.
(2)
During the quarter ended December 31, 2020, we recorded $5.0 million in “Operating costs” for bad debt expense representing our current estimate of credit losses associated with our “Trade receivables” and $1.8 million in fuel and helicopter costs that would otherwise be a cost to the customer. These amounts represent our customer’s decision not to pay us for days impacted by what we believe are force majeure and other events for which we would be entitled to receive payment under our contract. We disagree with their decision and are evaluating remedies, if any, under the contract.
Earnings (loss) per share is computed independently for each of the periods presented. Therefore, the sum of the periods’ earnings (loss) per share may not agree to the total computed for the year.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures.
Disclosure 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.
Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit to the SEC is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020 and, based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective in providing reasonable assurance that information requiring disclosure is recorded, processed, summarized, and reported within the time periods required by our debt agreements.
Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer 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 Annual Report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective as of December 31, 2020 to provide reasonable assurance that information required to be disclosed on our reports filed or submitted under the Exchange Act was (1) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) recorded, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance.
Consistent with previous years and in accordance with the requirements of the SEC, the information required by this item will be filed with the SEC on Form 10-K/A within 120 days of December 31, 2020.
We have adopted a Code of Business Conduct and Ethics that applies to directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Business Conduct and Ethics is posted on our website at www.vantagedrilling.com in the “Corporate Governance” area. Any waivers from our Code of Business Conduct and Ethics must be approved by the Board of Directors or a designated board committee. Any amendments to, or waivers from, the Code of Business Conduct and Ethics will be posted on our website and reported pursuant to applicable rules and regulations of the SEC.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation.
Consistent with previous years and in accordance with the requirements of the SEC, the information required by this item will be filed with the SEC on Form 10-K/A within 120 days of December 31, 2020.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters.
Consistent with previous years and in accordance with the requirements of the SEC, the information required by this item will be filed with the SEC on Form 10-K/A within 120 days of December 31, 2020.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Consistent with previous years and in accordance with the requirements of the SEC, the information required by this item will be filed with the SEC on Form 10-K/A within 120 days of December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accounting Fees and Services.
Consistent with previous years and in accordance with the requirements of the SEC, the information required by this item will be filed with the SEC on Form 10-K/A within 120 days of December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits, Financial Statement Schedules.
(a)
List of documents filed as part of this report
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).
3.1
Fourth Amended and Restated Memorandum and Articles of Incorporation of the Company effective as of March 4, 2019 (Incorporated by reference by Exhibit 3.1 of the Company’s current report on Form 8-K filed with the SEC on March 8, 2019)
4.1
First Lien Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated as of November 30, 2018 (Incorporated by reference to Exhibit 4.1 of the Company’s current report on Form 8-K filed with the SEC on December 4, 2018)
4.2
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)
4.3
Supplemental Indenture, dated as of June 8, 2016, among Vantage Drilling International (f/k/a Offshore Group Investment Limited), the guarantors party thereto, and U.S. Bank National Association, as trustee and noteholder collateral agent, to the Third Lien Indenture dated as of February 10, 2016 (Incorporated by reference to Exhibit 4.4 of the Company’s Form S-1 filed with the SEC on June 16, 2016)
4.4
First Supplemental Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated January 24, 2019 (Incorporated by reference to Exhibit 4.4 of the Company's Form 10-K filed with the SEC on March 10, 2020)
4.5
Second Supplemental Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated February 13, 2019 (Incorporated by reference to Exhibit 4.5 of the Company's Form 10-K filed with the SEC on March 10, 2020)
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 (Incorporated by reference to Exhibit 10.3 of the Form 10-Q filed with the SEC on May 13, 2016)
10.4
Vantage Drilling International Amended and Restated 2016 Management Incentive Plan (Incorporated by reference to Exhibit 10.4 of the Amendment No. 1 to Form S-1 filed with the SEC on August 25, 2016)
10.5
Form of Restricted Stock Unit Award Agreement (Performance-Based) under the Vantage Drilling International Amended and Restated 2016 Management Incentive Plan (Incorporated by reference to Exhibit 10.5 of the Amendment No. 1 to Form S-1 filed with the SEC on August 25, 2016)
10.6
Form of Restricted Stock Unit Award Agreement (Time-Based) under the Vantage Drilling International Amended and Restated 2016 Management Incentive Plan (Incorporated by reference to Exhibit 10.6 of the Amendment No. 1 to Form S-1 filed with the SEC on August 25, 2016)
10.7
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)
10.8
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)
10.9
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)
10.10
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)
Exhibit No.
Description
10.11
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)
10.12
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)
10.13
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)
10.14
Employment Agreement between Vantage Drilling International and Douglas E. Stewart, dated May 10, 2016 (Incorporated by reference to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the SEC on May 17, 2016)
10.15
Employment Agreement between Vantage Drilling International and Ihab Toma, dated August 9, 2016 (Incorporated by reference to Exhibit 10.13 of the Amendment No. 1 to Form S-1 filed with the SEC on August 25, 2016)
10.16
Employment Agreement Between Vantage Drilling International and Thomas J. Cimino, dated September 22, 2016 (Incorporated by reference to Exhibit 10.14 of the Amendment No. 2 to Form S-1 filed with the SEC on October 11, 2016)
10.17
Registration Rights Agreement among Vantage Drilling International, Vantage Drilling Company and the joint official liquidators of Vantage Drilling Company, dated as of April 26, 2017 (Incorporated by reference to Exhibit 10.1 of the Form 10-K/A filed with the SEC on May 1, 2017)
10.18
Amendment to the Shareholders Agreement of Vantage Drilling International dated March 4, 2019 (Incorporated by reference to Exhibit 10.1 of the Form 8-K filed with the SEC on March 8, 2019)
10.19
Agreement, dated June 20, 2019, among Vantage Deepwater Company, Vantage Deepwater Drilling, Inc., Petroleo Brasileiro S.A., Petrobras America, Inc. and Petrobras Venezuela Investments & Services, BV. (Incorporated by reference to Exhibit 10.1 of the From 8-K filed with the SEC on June 24, 2019)
21.1
Subsidiaries of Vantage Drilling International (Filed herewith)
31.1
Certification of Principal Executive Officer Pursuant to Section 302 (Filed herewith)
31.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 302 (Filed herewith)
32.1
Certification of Principal Executive Officer Pursuant to Section 906 (Filed herewith)
32.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 906 (Filed herewith)
101.INS
- XBRL Instance Document (Filed herewith)
101.SCH
- XBRL Schema Document (Filed herewith)
101.CAL
- XBRL Calculation Document (Filed herewith)
101.DEF
- XBRL Definition Linkbase Document (Filed herewith)
101.LAB
- XBRL Label Linkbase Document (Filed herewith)
101.PRE
- XBRL Presentation Linkbase Document (Filed herewith)