VANE DRIL The following discussion is intended to assist you in understanding our financial position and our results of operations for the years endedDecember 31, 2022 , 2021 and 2020. 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
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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 operational 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 information concerning our owned, managed
and supported 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 Egypt Operating
Soehanah 2007 375 30,000 Indonesia Operating
Drillships (1)
Platinum Explorer 2010 12,000 40,000 India Operating
Tungsten Explorer 2013 12,000 40,000 Namibia Operating
Third Party Owned Rigs:
Drillships
Polaris 2008 10,000 37,500 India Operating
Aquarius 2008 10,000 35,000 Spain Warm stacked
Capella 2008 10,000 37,500 Labuan Mobilizing
Jackups
Emerald Driller 2008 375 30,000 Qatar Operating
Sapphire Driller 2009 375 30,000 Qatar Operating
Aquamarine Driller 2009 375 30,000 (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.
Business Outlook
Expectations about future oil and gas prices have historically been a key driver of demand for our services. Over the past 18 months, global oil prices have experienced a robust recovery resulting in the strongest annual performance (on a price-per-barrel basis) since 2012. During 2022, specifically Brent crude oil reached a high of approximately$125.00 per barrel inMarch 2022 ; although Brent crude ultimately settled at approximately$85.00 per barrel on the last day of trading inDecember 2022 . The relatively elevated prices exhibited in 2022 were due to, among other factors, the (i) OPEC+ countries' agreement in 2020 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 global turmoil, and political and market instability caused by the Russo-Ukrainian War. Notwithstanding the elevated prices of oil exhibited during the prior 18-month period, market volatility and uncertainty largely remain and the oil and gas industry continues to be materially impacted and shaped by external factors which have influenced its overall development and recovery, including global macroeconomic challenges resulting from inflationary pressures and potential recessionary conditions, as well as geopolitical and market instability caused by the Russo-Ukrainian War. In response to these challenges, OPEC+ agreed onOctober 5, 2022 to a production cut of two million barrels per day, an amount which constitutes approximately 2.0% of overall global oil production. While theU.S. intends to release additional barrels from its strategic oil reserve in response to these production cuts, the actions taken by OPEC+ could contribute to, among other things, greater inflationary pressures and sharp price increases to oil and gas in the near- and long-term. Moreover, the Russo-Ukrainian War 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 increases in the overall global oil and gas supply, and result in reduced commodity prices. In addition, the opening of economies, supply chain constraints and limitations 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, collectively contributed to the highest level of inflation in decades across theU.S. , theUnited Kingdom , 44
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Europe and the global community at large. In theU.S. , for example, the Consumer Price Index reached a 40-year high inJune 2022 . While such rates are expected to ease incrementally in the near-term, our operations could be materially and adversely impacted by any exacerbation to 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 would be borne by us. While we are currently unable to estimate the ultimate impact of inflation, including the associated impact on the 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 they could continue to raise, interest rates in an attempt to gain further control over and reduce inflation in their respective jurisdictions. 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. Backlog
The following table reflects a summary of our contract drilling backlog coverage
of days contracted and related revenue as of
Revenues Contracted
Percentage of Days Contracted (in thousands)
2023 2024 Beyond 2023 2024 Beyond
Backlog
Jackups 43% 0% 0 % $ 14,658 $ 3,956 $ -
Drillships 76% 0% 0 % 106,282 20,863 -
Third party owned rigs (1) 62% 50% 20 % 65,299 5,881 219
(1)
The amounts consist of (i) a fixed management fee paid to us pursuant to the applicable management agreement; (ii) a marketing fee paid to us pursuant to the applicable marketing agreement; (iii) a fixed management fee paid to us pursuant to the applicable EDC Support Services Agreements; or (iv) contract backlog attributable to rigs owned by third parties where we enter into contracts directly with customers and lease the rigs through bareboat charters from the rig owners. These amounts exclude any variable fee payable to us pursuant to the applicable management agreement. The terms of the bareboat charters are consistent with the management agreements, resulting in the same financial impact to us had the rigs remained under the management agreements.
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,
2022 (5) 2021 (5) 2020 (5)
Jackups
Rigs available 2 2 5
Available days (1) 638 730 1,795
Utilization (2) 72.7 % 68.9 % 56.5 %
Average daily revenues (3)
2 2 2
Available days (1) 730 730 1,098
Utilization (2) 94.2 % 38.4 % 38.9 %
Average daily revenues (3)
3 3 -
Available days (1) 438 1,095 -
Utilization (2) 43.6 % 64.4 % N/A
Average daily revenues (3) $ 73,142 $ 67,229 N/A
(1)
Available days are the total number of rig calendar days in the period and excludes rigs under bareboat charter contracts to third parties.
(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.
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(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 Year 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 Part I, Item 1 of this Annual Report for additional information. (5) Excludes third party owned rigs operated by the Company.
Years Ended
Net loss for the Current Year was$3.4 million , or$0.26 per basic share, on operating revenues of$278.7 million , compared to net loss for the Prior Year of$110.1 million , or$8.40 per basic share, on operating revenues of$158.4 million .
The following table is an analysis of our operating results for the years ended
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Year Ended December 31, Change
2022 2021 $ %
(in thousands)
Consolidated:
Revenues
Contract drilling services $ 154,116 $ 131,703 $ 22,413 17 %
Management fees 10,834 2,351 8,483 361 %
Reimbursables and other 113,766 24,366 89,400 367 %
Total revenues 278,716 158,420 120,296 76 %
Operating costs and expenses:
Operating costs 234,832 150,668 84,164 56 %
General and administrative 23,009 20,539 2,470 12 %
Depreciation 44,428 56,242 (11,814 ) -21 %
Gain on EDC Sale (61,409 ) - (61,409 ) **
Total operating costs and expenses 240,860 227,449 13,411 6 %
Income (loss) from operations 37,856 (69,029 ) 106,885 -155 %
Other (expense) income
Interest income 1,108 124 984 794 %
Interest expense and financing charges (34,351 ) (34,034 ) (317 ) 1 %
Other, net (3,668 ) (2,171 ) (1,497 ) 69 %
Total other expense (36,911 ) (36,081 ) (830 ) 2 %
Income (loss) before income taxes 945 (105,110 ) 106,055 -101 %
Income tax provision 4,313 5,141 (828 ) -16 %
Net loss (3,368 ) (110,251 ) 106,883 -97 %
Net loss attributable to noncontrolling
interests (13 ) (114 ) 101 -89 %
Net loss attributable to shareholders $ (3,355 ) $ (110,137 ) $ 106,782 -97 %
Drilling Services:
Revenue
Contract drilling services $ 151,509 $ 131,703 $ 19,806 15 %
Management fees - - - **
Reimbursables and other 27,685 15,114 12,571 83 %
Total revenue 179,194 146,817 32,377 22 %
Operating costs and expenses:
Operating costs 142,935 140,138 2,797 2 %
General and administrative - - - **
Depreciation 42,813 54,565 (11,752 ) -22 %
Gain on EDC sale - - - **
Total operating costs and expenses 185,748 194,703 (8,955 ) -5 %
Loss from operations (6,554 ) (47,886 ) 41,332 -86 %
Managed Services:
Revenue
Contract drilling services $ 2,607 $ - $ 2,607 **
Management fees 10,834 2,351 8,483 361 %
Reimbursables and other 86,081 9,252 76,829 830 %
Total revenue 99,522 11,603 87,919 758 %
Operating costs and expenses:
Operating costs 91,896 10,530 81,366 773 %
General and administrative - - - **
Depreciation - - - **
Gain on EDC sale - - - **
Total operating costs and expenses 91,896 10,530 81,366 773 %
Income from operations 7,626 1,073 6,553 611 %
n/m = not meaningful
Consolidated Revenue: Total revenue increased
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Drilling Services Revenue: Contract drilling revenue increased$19.8 million for the Current Year as compared to the Prior Year. The increase in contract drilling revenue was primarily the result of the Tungsten Explorer operating during the Current Year compared to the rig being warm stacked during most of the Prior Year and the Platinum Explorer operating 93 more days and at a higher day rate during the Current Year than in the Prior Year. This increase was offset by lower contract drilling revenue for the three jackup rigs included in the EDC Sale (as discussed in " Recent Developments - Share Purchase Agreement to Sell EDC toADES Arabia Holding " in Part I, Item 1 of this Annual Report) and the Topaz Driller operating fewer days during the Current Year due to routine maintenance. Reimbursables and other revenue increased$12.6 in the Current Year as compared to the Prior Year primarily as a result of the changes in drilling contracts (as discussed immediately above). Managed Services Revenue: Contract drilling revenue increased$2.6 million in the Current Year due to the Polaris, which began operating under a bareboat charter for the Company. Management fees increased$8.5 million in the Current Year as compared to the Prior Year primarily due to the Capella operating during the Current Year, which we began managing inMarch 2022 as well as the management of the rigs included in the EDC Sale. The increase in Reimbursables and other revenue for the Current Year as compared to the Prior Year is primarily as a result of the management of the deepwater floaters owned by Aquadrill.
Consolidated Operating Costs: Total operating costs increased 56% due primarily to an increase in operating activities in the Current Year as discussed below.
Drilling Services Operating Costs: Drilling Services Operating costs for the Current Year increased 2% as compared to the Prior Year primarily as a result of changes in activity (as discussed in "Drilling Services Revenue" above). This increase was partially offset by the sale of various assets during the Current Year and the recognition of a net gain of approximately$1.9 million related to the sale of these assets. The Prior Year includes the sale of the Titanium Explorer and the recognition of a net gain of approximately$2.8 million related to the sale of such asset. Managed Services Operating Costs: The increase in Managed Services operating costs in the Current Year as compared to the Prior Year is the result of our 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 Year as compared to the Prior Year were primarily due to increased labor costs as the result of the reversal of cost cutting initiatives implemented during 2020 and higher professional fees. General and administrative expenses for the Prior Year included approximately$0.3 million for non-cash share-based compensation expense. Non-cash share-based compensation expense for the Current Year 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 Year decreased 21% as compared to the Prior Year, due primarily to a decrease in depreciation expense on the three jackup rigs that were classified as held for sale as ofDecember 20, 2021 and subsequently sold in connection with the EDC Sale (which closed onMay 27, 2022 ).
Gain on EDC Sale: During the Current Year, we recorded a net gain of
approximately
Interest Income: Increases in interest income for the Current Year as compared to the Prior Year were due primarily to higher interest rates during the Current Year, which were partially offset by lower cash investments. Interest Expense and Financing Charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately$2.4 million for the Current Year which included a$0.7 million write-off of deferred financing costs as a result of the partial redemption of the 9.25% First Lien Notes as described in " Note 5. Debt " of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report, and$1.6 million for the Prior Year. 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 remeasured in USD based on a combination of both current and historical exchange rates. A net foreign currency exchange gain of$3.7 million and$2.2 million were included in Other, net, for the Current Year and the Prior Year, respectively. Income Tax Provision: Income tax expense decreased in the Current Year as compared to the Prior Year, mainly due to the change in jurisdictions of operations. Our income taxes are generally dependent upon the results of our operations and the local income tax regimes 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 are subject to income taxes on a net income basis or a deemed profit basis.
Years Ended
Net loss for the Prior Year was$110.1 million , or$8.40 per basic share, on operating revenues of$158.4 million , compared to net loss for the Previous Year of$276.7 million , or$21.10 per basic share, on operating revenue of$126.9 million . 48
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The following table is an analysis of our operating results for the years endedDecember 31, 2021 and 2020: Year Ended December 31, Change 2021 2020 $ % (in thousands) Consolidated: Revenues Contract drilling services$ 131,703 $ 112,013 $ 19,690 18 % Management fees 2,351 798 1,553 195 % Reimbursables and other 24,366 14,051 10,315 73 % Total revenues 158,420 126,862 31,558 25 % Operating costs and expenses: Operating costs 150,668 149,084 1,584 1 % General and administrative 20,539 21,022 (483 ) -2 % Depreciation 56,242 69,216 (12,974 ) -19 % Loss on impairment - 128,876 (128,876 ) -100 % Total operating costs and expenses 227,449 368,198 (140,749 ) -38 % Loss from operations (69,029 ) (241,336 ) 172,307 -71 % Other (expense) income Interest income 124 871 (747 ) -86 % Interest expense and financing charges (34,034 ) (34,041 ) 7 0 % Other, net (2,171 ) 2,646 (4,817 ) -182 % Total other expense (36,081 ) (30,524 ) (5,557 ) 18 % Loss before income taxes (105,110 ) (271,860 ) 166,750 -61 % Income tax provision 5,141 4,897 244 5 % Net loss (110,251 ) (276,757 ) 166,506 -60 % Net loss attributable to noncontrolling interests (114 ) (38 ) (76 ) 200 % Net loss attributable to shareholders$ (110,137 ) $ (276,719 ) $ 166,582 -60 % Drilling Services: Revenue Contract drilling services$ 131,703 $ 112,013 $ 19,690 18 % Management fees - - - ** Reimbursables and other 15,114 13,634 1,480 11 % Total revenue 146,817 125,647 21,170 17 % Operating costs and expenses: Operating costs 140,138 148,444 (8,306 ) -6 % General and administrative - - - ** Depreciation 54,565 66,427 (11,862 ) -18 % Loss on impairment - 128,876 (128,876 ) -100 % Total operating costs and expenses 194,703 343,747 (149,044 ) -43 % Loss from operations (47,886 ) (218,100 ) 170,214 -78 % Managed Services: Revenue Contract drilling services $ - $ - $ - ** Management fees 2,351 798 1,553 195 % Reimbursables and other 9,252 417 8,835 n/m Total revenue 11,603 1,215 10,388 855 % Operating costs and expenses: Operating costs 10,530 640 9,890 n/m General and administrative - - - ** Depreciation - - - ** Total operating costs and expenses 10,530 640 9,890 n/m Income from operations 1,073 575 498 87 % n/m = not meaningful
Consolidated Revenue: Total revenue increased
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Drilling Services Revenue: Contract drilling revenue increased$19.7 million for the Prior Year as compared to the Previous Year. The increase in contract drilling revenue was primarily the result of the number of rigs that were operational, with six in the Prior Year (including the three jackup rigs classified as held for sale as discussed in "Recent Developments - Share Purchase Agreement to Sell EDC toADES Arabia Holding " in this Part I, Item 1 of this Annual Report) compared to three in the Previous Year. Reimbursables and other revenue increased$1.5 million in the Prior Year as compared to the Previous Year, primarily because of the number of our rigs which were operational, offset by decreased reimbursable revenue on the Tungsten Explorer as a result of lower utilization in the Prior Year as compared to the Previous Year. Managed Services Revenue: Management fees increased$1.6 million for the Prior Year as compared to the Previous Year as a result of our management of certain deepwater floaters owned by the Aquadrill Entities, which we began managing during the first quarter of 2021. The increase in Reimbursable and other revenue for the Prior Year as compared to the Previous Year is primarily the result of our management of the deepwater floaters owned by Aquadrill (as discussed immediately above).
Consolidated Operating Costs: Total operating costs increased 1% due primarily to an increase in operating activities in the (Prior Year as discussed immediately below).
Drilling Services Operating Costs: Drilling Services operating costs for the Prior Year decreased 6% as compared to the Previous Year primarily as a result of (i) decreases on the Platinum Explorer and Tungsten Explorer due to lower utilization in the Prior Year compared to the Previous Year, (ii) the close of the sale of the Titanium Explorer onMarch 10, 2021 , and (iii) the recognition of a net gain of$2.8 million related to the sale of the Titanium Explorer. Operating costs for the Previous Year included approximately$5.0 million for bad debt expense 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. Managed Services Operating Costs: The increase in Managed Services operating costs in the Prior Year as compared to the Previous Year is the result of the management of certain deepwater floaters (as discussed in "Managed Services Revenue" above.) General and Administrative Expenses: Decreases in general and administrative expenses for the Prior Year as compared to the Previous Year were primarily due to cost cutting initiatives implemented in 2020 to reflect the lower levels of operating activity in the Previous Year. General and administrative expenses for the Prior Year and for the Previous Year include approximately$0.3 million and$1.1 million , respectively, for non-cash share-based compensation expense. 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 Prior Year decreased 19% as compared to the Previous Year, due primarily to a$11.5 million decrease in depreciation expense on the Titanium Explorer, which was classified as held for sale as ofDecember 31, 2020 and subsequently sold onMarch 10, 2021 . Loss on Impairment: During the three months endedSeptember 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 and no impact in 2021. Interest Income: Interest income for the Prior Year decreased$0.7 million as compared to the Previous Year due primarily to lower interest rates earned on lower cash investments during the Prior Year. Interest Expense and Financing Charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately$1.6 million for each of the Prior Year and the Previous Year. Other, net: We recorded a gain of$2.3 million during the Previous 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 8. 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$2.2 million and$0.4 million were included in other, net, for the Prior Year and the Previous Year, respectively. 50
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Income tax provision: Income tax expense increased in the Prior Year as compared to the Previous Year, mainly due to the change in jurisdictions of operations. Our income taxes are generally dependent upon the results of our operations and the local income tax regimes 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 are subject to income taxes on a net income basis or a deemed profit basis.
Liquidity and Capital Resources
Sources and Uses of Liquidity
Our anticipated cash flow needs, both in the short- and long-term, will generally include: (i) normal recurring operating expenses; (ii) planned and discretionary capital expenditures; (iii) repayments of interest; and (iv) certain contractual cash obligations and commitments. Moreover, we may, from time to time, elect to redeem, repurchase or otherwise acquire outstanding 9.50% 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 ofDecember 31, 2022 , we believe we maintain adequate cash reserves and are continuously managing our actual cash flow and cash forecasts. Accordingly, management believes that we have adequate liquidity to fund our operations for the twelve months following the date our Consolidated Financial Statements are issued and therefore, our Consolidated Financial Statements have been prepared under the going concern assumption. As ofDecember 31, 2022 , we had working capital of approximately$96.2 million , including approximately$74.0 million of cash available for general corporate purposes. Scheduled debt service requirements consist of interest payments of approximately$5.1 million related to the 9.25% First Lien Notes, which were redeemed in full onMarch 6, 2023 (see " Note 5. Debt " of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report for additional information pertaining to the redemption of the 9.25% First Lien Notes) and approximately$9.5 million related to the 9.50% First Lien Notes throughDecember 31, 2023 . We anticipate that our capital expenditures throughDecember 31, 2023 will be between approximately$5.9 million and approximately$7.3 million . 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. Based on our currently anticipated levels of activity and incremental expenditures throughDecember 31, 2022 for special periodic surveys, major repair and maintenance expenditures and equipment recertifications, our capital expenditures for 2023 are anticipated to be between approximately$14.5 million and approximately$17.7 million . Concurrently with the issuance of the 9.25% First Lien Notes, we entered into a letter of credit agreement with Credit Suisse AG (the "Credit Suisse Letter Agreement ") to replace the letter of credit facility formerly existing under the 2016 Term Loan Facility. TheCredit Suisse Letter Agreement provided for up to$50.0 million in letters of credit, with all outstanding letters of credit being cash collateralized. TheCredit Suisse Letter Agreement expired inNovember 2022 . We subsequently transitioned our letter of credit needs toJPMorgan Chase Bank N.A ., which provides us with individual letters of credit on demand and not part of any formal letter of credit facility. These letters of credit support our bank guarantee and similar needs. As ofDecember 31, 2022 , we had letters of credit outstanding in the amount of$21.5 million ,$13.6 million of which relate to bank guarantees supporting obligations under drilling contracts we no longer are a party to as they were included in the EDC Sale. In connection with the issuance of the 9.50% First Lien Notes, we are permitted to have up to$25.0 million in letters of credit outstanding to support our operations. As ofMarch 24, 2023 we had letters of credit outstanding in the amount of$11.4 million . This amount includes$3.6 million related to bank guarantees supporting obligations under drilling contracts we no longer are a party to as they were included in the EDC Sale which we expect to be released in 2023. The table below includes a summary of our cash flow information for the periods indicated: Year Ended December 31, 2022 2021 2020 (in thousands) Cash flows (used in) provided by: Operating activities$ (18,874 ) $ (70,391 ) $ (85,302 ) Investing activities 191,523 6,512 (3,155 ) Financing activities (170,000 ) - - Changes in cash flows from operating activities are driven by changes in net (loss) income (see discussion of changes in net (loss) income above in "Results of Operations" in this Part II, Item 7). Cash flows provided by investing activities in the Current Year include net proceeds of$198.7 million derived from the EDC Sale and$3.1 million derived from the sale of various assets. The Prior Year includes$13.6 million from the sale of the Titanium Explorer. Cash flows used in financing activities in the Current Year include a partial redemption of the 9.25% First Lien Notes as discussed in " Note 5. Debt " of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report. 51
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For a comparison of our Cash Flows for the fiscal years endedDecember 31, 2021 and 2020, 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 endedDecember 31, 2021 , filed with theSEC onMarch 30, 2022 . The significant elements of the 9.25% First Lien Notes are described in " Note 5. Debt " 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.
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
A description of our material contractual obligations as ofDecember 31, 2022 is set forth immediately below. Some of the figures discussed therein 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.
•
Principal payments on the 9.25% First Lien Notes as discussed in " Note 5. Debt " 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).
•
Interest on the 9.25% First Lien Notes was payable at 9.25% in May and November or each year until the maturity date of the 9.25% First Lien Notes onNovember 15, 2023 . See additional information regarding scheduled payments throughDecember 31, 2023 above in "Liquidity and Capital Resources" in this Part II, Item 7, which is incorporated by reference in its entirety into this Part II, Item 7).
•
Operating lease payments as discussed in " Note 4. Leases " 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).
•
Our purchase obligations as discussed in " Note 8. 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).
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 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 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 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 included in the Drilling Services segment, are the most significant amount of our total assets. Maintenance and routine repairs are charged to income while replacements and betterments that upgrade or increase the functionality of our existing equipment and that significantly extend the useful life of an existing asset are capitalized. Significant judgments, assumptions and estimates may be required in determining whether or not such replacements and betterments meet the criteria for capitalization and in determining useful lives and salvage values of such assets. Changes in these judgments, assumptions and estimates could produce results that differ from those reported. 52
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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. Management's assumptions are necessarily subjective and are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported. Our methodology generally involves the use of significant unobservable inputs, representative of a Level 3 fair value measurement. 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 ofSeptember 30, 2020 . The Company performed a recoverability analysis for the years endedDecember 31, 2022 and 2021, and no impairment loss was recorded. Income Taxes: VDI is aCayman Islands company. TheCayman 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. 53
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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. 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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