VANE DRIL The following discussion is intended to assist you in understanding our financial position as ofJune 30, 2022 , and our results of operations for the three and six months endedJune 30, 2022 and 2021. The discussion should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 30, 2022 . The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Overview
We are an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis, to drill oil and gas wells for our customers. Through our fleet of drilling units, we provide offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for third-party owned drilling units, we provide operations and marketing services for operating and stacked rigs, construction supervision services for rigs that are under construction and preservation management services for rigs that are stacked.
The following table sets forth certain current information concerning our
offshore drilling fleet as of
Water Depth Drilling Depth
Name Year Built Rating (feet) Capacity Location Status
(feet)
Owned Rigs:
Jackups
Topaz Driller 2009 375 30,000 Malta Contract preparation
Soehanah 2007 375 30,000 Indonesia Mobilizing
Drillships (1)
Platinum Explorer 2010 12,000 40,000 India Operating
Tungsten Explorer 2013 12,000 40,000 Cyprus Operating
Managed Rigs:
Drillships
Polaris 2008 10,000 37,500 Malaysia Reactivating
Aquarius 2008 10,000 35,000 High Seas Reactivating
Capella 2008 10,000 37,500 Indonesia Operating
Supported Rigs:
Jackups
Emerald Driller 2008 375 30,000 Qatar Operating
Sapphire Driller 2009 375 30,000 Qatar Operating
Aquamarine Driller 2009 375 30,000 Qatar Operating
(1)The drillships are designed to drill in up to 12,000 feet of water and are currently equipped to drill in 10,000 feet of water.
Recent Developments
Geopolitical Instability Caused by the Conflict in
The markets generally exhibited a strong recovery in global oil prices during 2021, a trend which was further exemplified during the first quarter of 2022, reaching$125.72 per barrel inMarch 2022 . While our management anticipates oil and gas prices to remain robust in the near-term, price volatility is still expected to continue as a result of, among other factors, (i) adverse macroeconomic conditions, including rising inflationary pressures and potential recessionary conditions, (ii) changes in oil and gas inventories, (iii) global market demand, (iv) geopolitical instability, armed conflict and social unrest, including the invasion ofUkraine byRussia inFebruary 2022 , the associated response undertaken by western nations, such as the implementation of broad sanctions, the potential for retaliatory actions on the part ofRussia and the overall impact on OPEC+ countries' ability to reach production targets in the near term, (v) potential future disagreements among OPEC+ countries regarding the supply of oil, (vi) the potential for increased production and activity fromU.S. shale producers and non-OPEC countries driven by the current oil prices, and (vii) the ongoing COVID-19 pandemic, including the transmission and presence of highly contagious and new variants and the pace of vaccine rollouts, and therefore, the Company cannot predict how long oil and gas prices will remain stable or further increase, if at all, or whether they could reverse course and materially decline. 27 -------------------------------------------------------------------------------- In particular, the invasion ofUkraine byRussia has led to, and will likely continue to lead to, geopolitical instability, disruption and volatility in the markets in which we operate. While it is not possible at this time to predict or determine the ultimate consequences of the conflict inUkraine , which could include, among other things, additional sanctions, greater regional instability, embargoes, geopolitical shifts and other material and adverse effects on macroeconomic conditions, including rising inflationary pressures and potential recessionary conditions (and actions taken or being contemplated by central banks and regulators in an attempt to reduce, curtail and address such pressures and conditions), and material changes in energy policy, supply chains, financial markets and currency exchange rates, hydrocarbon price volatility in particular is likely to continue for the foreseeable future. To the extent the conflict inUkraine and adverse macroeconomic conditions continue (or exacerbate), the implementation of further measures taken by governmental bodies and private actors, could have a lasting impact in the near- and long-term on the (i) operations and financial condition of our business and the businesses of our critical counterparties and (ii) the global economy. While our management is actively monitoring the foregoing events and its associated financial impact on our business, it is uncertain at this time as to the full magnitude that volatile and uncertain oil and gas prices will ultimately have on our financial condition and future results of operations.
Share Purchase Agreement to Sell EDC to
OnDecember 6, 2021 , VHI, a wholly owned subsidiary of the Company, entered into a certain Share Purchase Agreement (the "EDC Purchase Agreement") withADES Arabia Holding ("ADES Arabia"), which wholly owns ADES, pursuant to which VHI agreed to sell to ADES Arabia all of the issued and outstanding equity of VHI's wholly-owned subsidiary, EDC (the "EDC Sale"). EDC is the owner of the following jackup rigs, which are currently operating inQatar : the Emerald Driller; the Sapphire Driller; and the Aquamarine Driller. Each of these rigs was included within our Drilling Services segment for the quarter endedJune 30, 2022 , and in prior quarters. The EDC Purchase Agreement became effective onDecember 20, 2021 and the transactions contemplated under such agreement closed onMay 27, 2022 (the "EDC Closing Date"). On the EDC Closing Date, VHI received$170.0 million as purchase price consideration and$30.0 million in certain contract preparation expense reimbursement and, as a result, VHI recognized a net gain of approximately$60.8 million during the three months endedJune 30, 2022 , all of which is subject to potential adjustments contemplated by the EDC Purchase Agreement, any such adjustments to be finalized bySeptember 24, 2022 . Accordingly, the amount of proceeds actually received by the Company could vary from those set forth above. Simultaneously with the EDC Sale, certain subsidiaries of the Company and ADES entered into three separate services agreements (collectively, the "ADES Support Services Agreements"), pursuant to which a subsidiary of the Company agreed to provide, in exchange for customary fees and reimbursement, support services to EDC with respect to the Emerald Driller, Sapphire Driller and Aquamarine Driller for a three-year term. The Company and ADES also entered into an agreement onDecember 6, 2021 (the "Collaboration Agreement") to pursue a global strategic alliance in order to leverage both the ADES Support Services Agreements and ADVantage, the parties' existing joint venture inEgypt . Pursuant to the Collaboration Agreement, the parties agreed to collaborate on exploring future commercial and operational opportunities. While the Company continues to evaluate potential uses of the proceeds from the EDC Sale, the Company is limited in how it may deploy and utilize such proceeds as a result of the terms of the First Lien Indenture. In particular, the Company may only use the proceeds from the EDC Sale to repay, prepay or purchase our senior secured indebtedness (including the 9.25% First Lien Notes), acquire all or substantially all of the assets or capital stock of any other entity engaged in a similar or complementary business to the Company's lines of business, or make capital expenditures or acquire non-current assets (including vessels and related assets) that are useful in such lines of business (including any deposit or installment payments with respect thereto as well as any expenditures related to the acquisition, construction or "ready for sea" costs of such vessels). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.
Tungsten Explorer Contract Award
OnJune 9, 2022 , a subsidiary of VDI entered into a drilling services contract with a subsidiary of TotalEnergies (the "TotalEnergies Contract") in respect of VDI's ultra-deepwater drillship, the Tungsten Explorer. The TotalEnergies Contract contains a minimum term of 225 days. The Tungsten Explorer is currently operating in the Mediterranean where it will be drilling up to two wells and the Company anticipates that it will mobilize toWest Africa during the third quarter of 2022 or potentially later.
Ongoing Impact of the COVID-19 Pandemic
The global spread of COVID-19, including its highly contagious variants and
sub-lineages, continues to pose significant risks and challenges worldwide, and
has caused and continues to cause widespread illness and significant loss of
life, leading governments across the world to impose and re-impose severely
stringent and extensive limitations on movement and human interaction, with
certain countries, including those where we maintain significant operations and
derive material revenue, implementing quarantine, testing and vaccination
requirements. These governmental reactions to the COVID-19 pandemic, as well as
changes to and extensions of such
28
--------------------------------------------------------------------------------approaches, have led to, and continue to result in, uncertain and volatile economic activity worldwide, including within the oil and gas industry and the regions and countries in which we operate.
While the Company has previously managed, and continues to actively manage, the business in an attempt to mitigate any ongoing and material impact from the spread of COVID-19, management anticipates that our industry, and the world at large, will need to continue to operate in, and further adapt, to the current environment for the foreseeable future.
Business Outlook
Expectations about future oil and gas prices have historically been a key driver of demand for our services. Since 2021, global oil prices have experienced a robust recovery resulting in the strongest annual performance (on a price per barrel basis) since 2012, with Brent crude oil trading above$125.00 per barrel inMarch 2022 . This robust recovery is due to, among other factors, the (i) OPEC+ countries' agreement since last year to reduce production by almost 10 million barrels per day, representing approximately 10% of the world's output compared with demand for approximately 96 million barrels a day, and their recent agreement to boost production, but only in measured steps, (ii) development, efficacy, availability and utilization of vaccines for COVID-19, (iii) the reopening of global economies, (iv) injection of substantial government monetary and fiscal stimulus and (v) the ongoing energy supply crisis driven by a shortage of fuel within recovering economies and anticipated extreme weather acrossEurope and northeastAsia , along with years of under investment in oil reserve replacement, all of which has been exacerbated by the global turmoil and political instability caused byRussia's invasion ofUkraine inFebruary 2022 . Notwithstanding the foregoing, the volatility and uncertainty surrounding global oil prices largely remain as the spread of the COVID-19 pandemic and its highly transmissible variants persist and, as a whole, the oil and gas industry continues to be materially impacted and shaped by external factors which have influenced its overall development and recovery, including geopolitical instability caused byRussia's invasion ofUkraine inFebruary 2022 . While OPEC+ countries entered into an agreement inJuly 2021 to gradually phase out certain oil production cuts bySeptember 2022 and subsequently acknowledged that it would continue to observe such agreement to only boost production modestly despite higher oil prices, the long-term commitment of such countries to maintain oil production at or near such levels remains uncertain. More recently, the ongoing conflict inUkraine has caused, and could continue to cause for the foreseeable future, significant instability, disruption, uncertainty and volatility in the hydrocarbon industry and the global markets at large. Further geopolitical developments could occur, including a possible agreement relating toIran's nuclear deal and the subsequent suspension ofU.S. sanctions inIran (which could result in, among other things, the influx of Iranian crude oil into the global markets), any of which could significantly impact our business and operations. With higher crude oil prices there is the potential for increased production fromU.S. shale producers and non-OPEC countries, which could lead to significant increase in the overall global oil and gas supply, and result in reduced commodity prices. In addition, the opening of economies, supply chain bottlenecks occurring throughout the world and across various industries, and the injection of significant levels of governmental monetary and fiscal stimulus to avoid a recession during the peak of the COVID-19 pandemic, have collectively contributed to the highest level of inflation in decades across theU.S. , theUnited Kingdom ,Europe and the global community at large. In theU.S. , for example, the Consumer Price Index reached a 40-year high inMay 2022 , and such rates are expected to increase in the near-term. Therefore, our operations could be materially and adversely impacted by global inflation, including in the form of increases in personnel costs and the prices of goods and services required to operate our rigs. Given that we enter into fixed dayrate contracts that have contractual terms with minimal adjustments to account for rising inflation, the majority (if not all) of these costs will be borne by us. While we are currently unable to estimate the ultimate impact of inflation and the associated rising prices of goods and services, our costs could rise in the near-term and materially impact our profitability and overall financial condition. Furthermore, central banks and regulators across the world have raised, and it is anticipated that they will likely continue to raise, interest rates in an attempt to gain control over and reduce inflation in their respective jurisdictions. In theU.S. , for example, theFederal Reserve further increased rates in lateJuly 2022 . Such efforts being undertaken by central banks and regulators could tip the global economy into a recession, which could materially and adversely impact demand for oil and gas and, in the process, demand for our services. As a result of such volatility, disruption, instability and uncertainty, operators have faced, and will generally continue to face, difficulties when attempting to definitively plan their capital budget programs for the near- and long- term. 29
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Backlog
The following table reflects a summary of our contract backlog coverage of days
contracted and related revenue as of
Revenues Contracted
Percentage of Days Contracted (in thousands)
2022 2023 Beyond 2022 2023 Beyond
Jackups 50% 30% 0% $ 11,809 $ 12,922 $ -
Drillships 85% 70% 0% $ 56,213 $ 109,982 $ -
Managed Rigs -
contracted (1) 38% 31% 0% $ 32,393 $ 59,464 $ -
Managed Rigs - fees
(2) 50% 31% 0% $ 3,434 $ 2,250 $ -
Supported Rigs -
fees 100% 100% 70% $ 1,656 $ 2,628 $ 1,430
(1)The amounts consist of contract backlog attributable to customer drilling contracts secured for rigs managed by us.
(2)
The amounts consist of a fixed management fee paid to us pursuant to the applicable Management Agreement and a marketing fee paid to us pursuant to the applicable Marketing Agreement. The amounts exclude any variable fee payable to us pursuant to the applicable Management Agreement.
Results of Operations
Operating results for our contract drilling services are dependent on three primary metrics: available days; rig utilization; and dayrates. The following table sets forth this selected operational information for the periods indicated:
Three Months Ended June 30 ,
Six Months Ended
2022 2021 2022 2021
Jackups
Rigs available 2 5 2 5
Available days (1) 182 455 362 905
Utilization (2) 98.8 % 39.9 % 79.6 % 35.3 %
Average daily revenues (3)
65,807$ 98,775 Deepwater Rigs available 2 2 2 2 Available days (1) 182 182 362 362 Utilization (2) 99.7 % 49.7 % 99.2 % 49.4 % Average daily revenues (3)$ 139,628 $ 99,194 $ 152,261 $ 99,549 Held for Sale (4) Rigs available 3 0 3 0 Available days (1) 168 0 654 0 Utilization (2) 47.0 % N/A 62.3 % N/A Average daily revenues (3)$ 82,127 N/A$ 34,339 N/A
(1)
Available days are the total number of rig calendar days in the period.
(2)
Utilization is calculated as a percentage of the actual number of revenue earning days divided by the available days in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.
(3)
Average daily revenues are based on contract drilling revenues divided by revenue earning days. Average daily revenue will differ from average contract dayrate due to billing adjustments for any non-productive time, mobilization fees and demobilization fees.
(4)
Each of these rigs were classified as held for sale on our Consolidated Balance Sheets during the Current Period and atDecember 31, 2021 , up to the date of the EDC Closing Date. See "Recent Developments - Share Purchase Agreement to Sell EDC toADES Arabia Holding " in this Part I, Item 2 for additional information.
For the Three Months Ended
Net income attributable to shareholders for the
30
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The following table is an analysis of our operating results for the three months
ended
Three Months Ended June 30, Change
2022 2021 $ %
(unaudited, in thousands)
Consolidated:
Revenues
Contract drilling services $ 42,744 $ 31,655 $ 11,089 35 %
Management fees 2,840 497 2,343 471 %
Reimbursables and other 27,654 3,449 24,205 702 %
Total revenues 73,238 35,601 37,637 106 %
Operating costs and expenses:
Operating costs 59,405 36,056 23,349 65 %
General and administrative 6,910 4,967 1,943 39 %
Depreciation 11,087 14,161 (3,074 ) -22 %
Gain on EDC Sale (60,781 ) - (60,781 ) **
Total operating costs and expenses 16,621 55,184 (38,563 ) -70 %
Income (loss) from operations 56,617 (19,583 ) 76,200 -389 %
Other (expense) income
Interest income 7 10 (3 ) -30 %
Interest expense and financing charges (8,503 ) (8,511 ) 8 0 %
Other, net (1,011 ) (179 ) (832 ) 465 %
Total other expense (9,507 ) (8,680 ) (827 ) 10 %
Income (loss) before income taxes 47,110 (28,263 ) 75,373 -267 %
Income tax (benefit) provision (1,221 ) 720 (1,941 ) -270 %
Net income (loss) 48,331 (28,983 ) 77,314 -267 %
Net income (loss) attributable to
noncontrolling interests 232 (18 ) 250 n/m
Net income (loss) attributable to
shareholders $ 48,099 $ (28,965 ) $ 77,064 -266 %
Drilling Services:
Revenue
Contract drilling services $ 42,744 $ 31,655 $ 11,089 35 %
Management fees - - - **
Reimbursables and other 5,119 2,711 2,408 89 %
Total revenue 47,863 34,366 13,497 39 %
Operating costs and expenses:
Operating costs 36,164 34,867 1,297 4 %
General and administrative - - - **
Depreciation 10,695 13,752 (3,057.0 ) -22 %
Gain on EDC sale - - - **
Total operating costs and expenses 46,859 48,619 (1,760 ) -4 %
Income (loss) from operations 1,004 (14,253 ) 15,257 -107 %
Managed Services:
Revenue
Contract drilling services $ - $
- $ - **
Management fees 2,840 497 2,343 471 %
Reimbursables and other 22,535 738 21,797 n/m
Total revenue 25,375 1,235 24,140 n/m
Operating costs and expenses:
Operating costs 23,241 1,189 22,052 n/m
General and administrative - - - **
Depreciation - - - **
Gain on EDC sale - - - **
Total operating costs and expenses 23,241 1,189 22,052 n/m
Income from operations 2,134 46 2,088 n/m
n/m = not meaningful
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Consolidated Revenue: Total revenue increased
Drilling Services Revenue: Contract drilling revenue increased$11.1 million for theCurrent Quarter as compared to theComparable Quarter . The increase in contract drilling revenue was primarily the result of the number of rigs that were operational, with seven in theCurrent Quarter , including three of the jackup rigs included in the EDC Sale (as discussed in "Recent Developments - Share Purchase Agreement to Sell EDC toADES Arabia Holding " in this Part I, Item 2), compared to four in theComparable Quarter . Reimbursables and other revenue increased$2.4 million in theCurrent Quarter as compared to theComparable Quarter primarily as a result of the number of our rigs which were operational (as discussed immediately above). Managed Services Revenue: Management fees increased$2.3 million in theCurrent Quarter as compared to theComparable Quarter as a result of the management of certain deepwater floaters owned by Aquadrill, which we began managing in lateMarch 2021 . The increase in Reimbursables and other revenue for theCurrent Quarter as compared to theComparable Quarter is primarily as a result of the management of the deepwater floaters owned by Aquadrill (as discussed immediately above).
Consolidated Operating Costs: Total operating costs increased 65% due primarily
to an increase in operating activities in the
Drilling Services Operating costs: Drilling Services operating costs increased 4% in theCurrent Quarter as compared to theComparable Quarter primarily as the result of the changes in our drilling contracts (as discussed in "Drilling Services Revenue" above). Managed Services Operating costs: The increase in Managed Services operating costs in theCurrent Quarter as compared to theComparable Quarter is as the result the management of certain deepwater floaters (as discussed in "Managed Services Revenue above).
General and administrative expenses: Increases in general and administrative
expenses for the
Depreciation expense: Depreciation expense is primarily related to rigs owned by us included in our Drilling Services segment. The Managed Services segment does not currently own depreciable assets. Depreciation expense for theCurrent Quarter decreased 22% as compared to theComparable Quarter , due primarily to a decrease in depreciation expense related to the three jackup rigs that were classified as held for sale onDecember 20, 2021 and subsequently sold in connection with the EDC Sale (which closed onMay 27, 2022 ).
Gain on EDC Sale: During the
Interest income: Decreases in interest income for the
Interest expense and financing charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately$0.4 million for each of theCurrent Quarter and theComparable Quarter . Other, net: Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are re-measured in USD based on a combination of both current and historical exchange rates. Net foreign currency exchange loss of approximately$1.0 million and$0.2 million was included in "other, net," for theCurrent Quarter andComparable Quarter , respectively. Income tax provision: Our annualized effective tax rate for theCurrent Quarter is negative 15.40% based on estimated annualized ordinary loss before income taxes excluding income tax discrete items. Our annualized effective tax rate for theComparable Quarter was negative 7.06%, based on estimated annualized loss before income taxes excluding income tax discrete items. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. In some jurisdictions, we do not pay taxes or receive benefits for certain income and expense items, including interest expense and disposal gains or losses. In other jurisdictions, we recognize income taxes on a net income basis or a deemed profit basis.
For the Six Months Ended
Net income attributable to shareholders for the Current Period was
32
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The following table is an analysis of our operating results for the six months
ended June 30, 2022 and 2021:
Six Months Ended June 30, Change
2022 2021 $ %
(unaudited, in thousands)
Consolidated:
Revenues
Contract drilling services $ 87,657 $ 49,380 $ 38,277 78 %
Management fees 3,943 595 3,348 563 %
Reimbursables and other 39,969 5,792 34,177 590 %
Total revenues 131,569 55,767 75,802 136 %
Operating costs and expenses:
Operating costs 103,338 61,413 41,925 68 %
General and administrative 13,492 10,462 3,030 29 %
Depreciation 22,382 28,286 (5,904 ) -21 %
Gain on EDC Sale (60,781 ) - (60,781 ) **
Total operating costs and expenses 78,431 100,161 (21,730 ) -22 %
Income (loss) from operations 53,138 (44,394 ) 97,532 -220 %
Other (expense) income
Interest income 11 110 (99 ) -90 %
Interest expense and financing charges (17,007 ) (17,021 ) 14 0 %
Other, net (1,786 ) (793 ) (993 ) 125 %
Total other expense (18,782 ) (17,704 ) (1,078 ) 6 %
Income (loss) before income taxes 34,356 (62,098 ) 96,454 -155 %
Income tax provision 217 2,882 (2,665 ) -92 %
Net income (loss) 34,139 (64,980 ) 99,119 -153 %
Net income (loss) attributable to
noncontrolling interests 938 (31 ) 969 n/m
Net income (loss) attributable to
shareholders $ 33,201 $ (64,949 ) $ 98,150 -151 %
Drilling Services:
Revenue
Contract drilling services $ 87,657 $ 49,380 $ 38,277 78 %
Management fees - - - **
Reimbursables and other 10,302 5,054 5,248 104 %
Total revenue 97,959 54,434 43,525 80 %
Operating costs and expenses:
Operating costs 72,602 60,224 12,378 21 %
General and administrative - - - **
Depreciation 21,551 27,467 (5,916 ) -22 %
Gain on EDC sale - - - **
Total operating costs and expenses 94,153 87,691 6,462 7 %
Income (loss) from operations 3,806 (33,257 ) 37,063 -111 %
Managed Services:
Revenue
Contract drilling services $ - $ - $ - **
Management fees 3,943 595 3,348 563 %
Reimbursables and other 29,667 738 28,929 n/m
Total revenue 33,610 1,333 32,277 n/m
Operating costs and expenses:
Operating costs 30,736 1,189 29,547 n/m
General and administrative - - - **
Depreciation - - - **
Gain on EDC sale - - - **
Total operating costs and expenses 30,736 1,189 29,547 n/m
Income from operations 2,874 144 2,730 n/m
n/m = not meaningful
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Consolidated Revenue: Total revenue increased
Drilling Services Revenue: Contract drilling revenue increased$38.3 million for the Current Period as compared to the Comparable Period. The increase in our contract drilling revenue was primarily the result of the number of rigs that were operational, with seven in the Current Period, including four of the jackup rigs included in the EDC Sale (as discussed in "Recent Developments - Share Purchase Agreement to Sell EDC toADES Arabia Holding " in this Part I, Item 2), compared to three in the Comparable Period. Reimbursables and other revenue increased$5.2 million in the Current Period as compared to the Comparable Period primarily as a result of the number of our rigs which were operational (as discussed immediately above). Managed Services Revenue: Management fees increased$3.3 million in the Current Period as compared to the Comparable Period as a result of the management of certain deepwater floaters owned by Aquadrill, which we began managing in lateMarch 2021 . The increase in Reimbursables and other revenue for the Current Period as compared to the Comparable Period is primarily as a result of the management of the deepwater floaters owned by Aquadrill (as discussed immediately above).
Consolidated Operating Costs: Total operating costs increased 68% due primarily to an increase in operating activities in the Current Period as discussed below.
Drilling Services Operating costs: Drilling Services operating costs increased 21% in the Current Period as compared to the Comparable Period primarily as a result of changes to certain of our drilling contracts (as discussed in Drilling Services Revenue above). This increase was partially offset by the sale of various assets during the Current Period and the recognition of a net gain of approximately$1.9 million related to the sale of these assets. The Comparable Period includes the sale of the Titanium Explorer and the recognition of a net gain of approximately$2.8 million related to the sale of the asset. Managed Services Operating costs: The increase in Managed Services operating costs in the Current Period as compared to the Comparable Period is as the result the management of certain deepwater floaters (as discussed in "Managed Services Revenue" above). General and administrative expenses: Increases in general and administrative expenses for the Current Period as compared to the Comparable Period were primarily due to increased labor costs and professional fees. General and administrative expenses for the Comparable Period included approximately$0.2 million for non-cash share-based compensation expense. Non-cash share-based compensation expense for the Current Period was immaterial. Depreciation expense: Depreciation expense is primarily related to rigs owned by us included in our Drilling Services segment. The Managed Services segment does not currently own depreciable assets. Depreciation expense for the Current Period decreased 21% as compared to the Comparable Period, due primarily to a decrease in depreciation expense on the three jackup rigs that were classified as held for sale onDecember 20, 2021 and subsequently sold in connection with the EDC Sale (which closed onMay 27, 2022 ).
Gain on EDC Sale: During the Current Period, we recorded a net gain of
approximately
Interest income: Decreases in interest income for the Current Period as compared to the Comparable Period were due primarily to lower interest rates earned on lower cash investments during the Current Period. Interest expense and financing charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately$0.8 million for each of the Current Period and Comparable Period, respectively. Other, net: Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are re-measured in USD based on a combination of both current and historical exchange rates. Net foreign currency exchange loss of approximately$1.8 million and$0.8 million was included in "other, net," for the Current Period and Comparable Period, respectively. Income tax provision: Our annualized effective tax rate for the Current Period is negative 15.40% based on estimated annualized ordinary loss before income taxes excluding income tax discrete items. Our annualized effective tax rate for the Comparable Period was negative 7.06%, based on estimated annualized loss before income taxes excluding income tax discrete items. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. In some jurisdictions, we do not pay taxes or receive benefits for certain income and expense items, including interest expense and disposal gains or losses. In other jurisdictions, we recognize income taxes on a net income basis or a deemed profit basis. 34 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The prolonged low price environment caused by the spread of COVID-19, the resulting decline in global economic activity and the oil price and market share volatility began to reduce our liquidity and capital resources in the second quarter of 2020 through 2021, a trend which extended into the second quarter of 2022 and could extend further into 2023 and beyond. Such events have had significant and adverse consequences for general financial, business and economic conditions, as well as for the financial, business and economic position of our business and the business of our customers and suppliers, and may continue to adversely impact our ability to derive cash flows from our operations and access capital funding from third parties in the future. We experienced, and could experience further delays in the collection of certain accounts receivables due to logistical obstacles resulting from the COVID-19 pandemic, such as office closures, as well as other impacts to our long-term liquidity. Ongoing and additional governmental measures, such as widespread lock downs, nightly curfews, territorial entry restrictions and mandates, could impact our ability to operate in locations where such restrictions and requirements are in place, including those locations where we derive material revenue. In addition, the invasion ofUkraine byRussia inFebruary 2022 , and the resulting impact of sanctions imposed by western nations, could adversely impact the global oil and gas markets for the foreseeable future and, in the process, our ability to access additional capital funding sources. During these uncertain times, we have sought, and continue to seek, measures to reduce our operating costs and preserve cash. We could implement further cost reduction measures (in addition to those previously put in place in 2020 and maintained through the Current Period) and alter our general financial strategy in the near- and long-term.
Sources and Uses of Liquidity
Our anticipated cash flow needs, both in the short- and long-term, may include, among others: (i) normal recurring operating expenses; (ii) planned and discretionary capital expenditures; (iii) repayments of interest; and (iv) certain contractual cash obligations and commitments. We may, from time to time, redeem, repurchase or otherwise acquire our outstanding 9.25% First Lien Notes through open market purchases, tender offers or pursuant to the terms of such securities. We currently expect to fund our cash flow needs with cash generated by our operations, cash on hand or proceeds from sales of assets. As ofJune 30, 2022 , we believe we maintain adequate cash reserves and are continuously managing our actual cash flow and cash forecasts. Accordingly, management believes that we have adequate liquidity to fund our operations for the twelve months following the date our Consolidated Financial Statements are issued and therefore, have been prepared under the going concern assumption. Under the First Lien Indenture, we are required to apply the proceeds derived from the EDC Sale to repay, prepay or purchase our senior secured indebtedness (including the 9.25% First Lien Notes), acquire all or substantially all of the assets or capital stock of any other entity engaged in a similar or complementary business to the Company's lines of business, or make capital expenditures or acquire non-current assets (including vessels and related assets) that are useful in such lines of business (including any deposit or installment payments with respect thereto as well as any expenditures related to the acquisition, construction or "ready for sea" costs of such vessels). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds. The 9.25% First Lien Notes mature inNovember 2023 . To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, including in order to satisfy our obligations under the 9.25% First Lien Notes, we anticipate that they will be obtained through incurrence of additional indebtedness, additional equity financings, sales of assets or a combination of these potential sources of funds. However, there can be no assurance that we will be able to obtain additional funds on terms acceptable to us, on a timely basis or at all. The failure to obtain sufficient funds on acceptable terms when needed, including the ability to refinance any portion of the 9.25% First Lien Notes, could have a material and adverse effect on the results of operations, and financial condition. If we are unable to fund capital expenditures with our cash flow from operations or sales of non-strategic assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by certain restrictive covenants under the agreements governing our credit agreement and notes, by changes in laws and regulations or interpretation thereof and by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. For example, the invasion ofUkraine byRussia inFebruary 2022 , and the resulting impact of sanctions imposed by western nations againstRussia , Russian-backed separatist regions inUkraine , certain banks, companies, government officials, and other individuals inRussia andBelarus , could adversely impact the global oil and gas markets for the foreseeable future and, in the process, our ability to access additional capital funding sources. The failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the results of operations, and financial condition. As ofJune 30, 2022 , we had working capital of approximately$265.5 million , including approximately$227.3 million of cash available for general corporate purposes in accordance with our First Lien Indenture. Scheduled debt service consists of interest payments throughJune 30, 2023 of approximately$32.4 million . We anticipate capital expenditures throughJune 30, 2023 to be between approximately$4.8 million and$5.9 million . As our rigs obtain new contracts, we could incur reactivation and mobilization costs for these rigs, as well as additional customer requested equipment upgrades. These costs could be significant and may not be fully 35 -------------------------------------------------------------------------------- recoverable from the customer. Based on our expected levels of activity, incremental expenditures throughJune 30, 2023 for special periodic surveys, major repair and maintenance expenditures and equipment re-certifications are anticipated to be between approximately$21.6 million and$26.4 million . As ofJune 30, 2022 , we had approximately$49.9 million available for the issuance of letters of credit under our cash collateralized letter of credit facility.
The following table includes a summary of our cash flow information for the periods indicated:
Six Months Ended June 30,
(unaudited, in thousands) 2022 2021
Cash flows (used in) provided by:
Operating activities $ (39,705 ) $ (40,944 )
Investing activities 195,364 10,846
Financing activities - -
Changes in cash flows from operating activities are driven by changes in net loss during the relevant periods (see the discussion of changes in net loss above in "Results of Operations" of this Part I, Item 2).
Cash flows from investing activities in theCurrent Quarter include net proceeds of$200.0 derived from the EDC Sale and$3.1 million derived from the sale of various assets.The Comparable Quarter include net proceeds of$13.6 million from the sale of the Titanium Explorer. The significant elements of the 9.25% First Lien Notes are described in " Note 5. Debt" of the "Notes to Unaudited Consolidated Financial Statements" in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.
We enter into operating leases in the normal course of business for office space, housing, vehicles and specified operating equipment. Some of these leases contain options that would cause our future cash payments to change if we exercised those options.
Commitments and Contingencies
We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. Information regarding our legal proceedings is set forth in " Note 8. Commitments and Contingencies " of the "Notes to Unaudited Consolidated Financial Statements" in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.
Critical Accounting Policies and Accounting Estimates
The preparation of unaudited financial statements and related disclosures in accordance withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our significant accounting policies are included in " Note 2. Basis of Presentation and Significant Accounting Policies " of the "Notes to the Unaudited Consolidated Financial Statements" in Part I, Item 1 of this Quarterly Report. These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of the Board of Directors. Our critical accounting policies are those related to property and equipment, impairment of long-lived assets and income taxes. For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 30, 2022 . During theCurrent Quarter , there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates are based. Recent Accounting Pronouncements: See " Note 2. Basis of Presentation and Significant Accounting Policies " of the "Notes to Unaudited Consolidated Financial Statements" in Part I, Item 1 of this Quarterly Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2. 36
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