Vantage Drilling 10Q 2012 Q1 Quarterly report

Vantage Drilling Inactive 10-Q2012 Q1 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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

For the transition period from to

Commission File Number 001-34094

VANTAGE DRILLING COMPANY

(Exact name of Registrant as specified in its charter)

Cayman Islands

N/A

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

777 Post Oak Boulevard, Suite 800

Houston, TX 77056

(Address of principal executive offices and zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

The number of Vantage Drilling Company ordinary shares outstanding as of April 30, 2012 is 291,884,406.

TABLE OF CONTENTS


		Page
SAFE HARBOR STATEMENT			3
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)
	Consolidated Balance Sheet		5
	Consolidated Statement of Operations – for the three months ended March 31, 2012 and 2011		6
	Consolidated Statement of Cash Flows – for the three months ended March 31, 2012 and 2011		7
	Notes to Unaudited Consolidated Financial Statements		9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3	Quantitative and Qualitative Disclosures about Market Risk		24
Item 4	Controls and Procedures		24
PART II—OTHER INFORMATION
Item 6	Exhibits		25
SIGNATURES			26

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to our plans, goals, strategies, intent, beliefs and current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Items contemplating or making assumptions about our industry, business strategy, goals, expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information also constitute such forward looking statements. You should not place undue reliance on these forward-looking statements. These forward-looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Our actual results could differ materially from those anticipated in these forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties associated with the following:

•

our limited operating history;

•

our small number of customers;

•

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

•

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

•

termination of our customer contracts;

•

oil and natural gas prices;

•

our failure to obtain delivery of drilling units;

•

delays and cost overruns in construction projects;

•

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

•

competition within our industry;

•

limited mobility between geographic regions;

•

operating hazards in the oilfield service industry;

•

the impact of the Macondo well incident on offshore drilling;

•

ability to obtain indemnity from customers;

•

adequacy of insurance coverage in the event of a catastrophic event;

•

operations in international markets;

•

governmental, tax and environmental regulation;

•

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

•

effects of new products and new technology on the market;

•

our substantial level of indebtedness;

•

our ability to incur additional indebtedness;

•

our ability to access the capital markets and to issue additional equity;

•

compliance with restrictions and covenants in our debt agreements;

•

identifying and completing acquisition opportunities;

•

levels of operating and maintenance costs;

•

our dependence on key personnel;

•

availability of workers and the related labor costs;

•

the sufficiency of our internal controls;

•

changes in tax laws, treaties or regulations;

•

any non-compliance with the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws;

•

our obligation to repurchase certain indebtedness upon a change of control;

•

potential conflicts of interest with F3 Capital; and

•

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

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in our filings with the Securities and Exchange Commission (the “SEC”), which may be obtained by contacting us or the SEC. These filings are also available through our website at http://www.vantagedrilling.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (EDGAR) at http://www.sec.gov. The contents of our website are not part of this Quarterly Report.

Unless the context indicates otherwise, all references to “we,” “our” or “us” refer to Vantage Drilling Company and its consolidated subsidiaries.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Vantage Drilling Company

Consolidated Balance Sheet

(In thousands, except par value information)


	March 31,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	56,474		$	110,031
Restricted cash		5,378			7,028
Trade receivables		113,594			100,908
Inventory		25,651			24,376
Prepaid expenses and other current assets		17,358			16,909

Total current assets		218,455			259,252

Property and equipment
Property and equipment		1,920,029			1,913,596
Accumulated depreciation		(124,574	)		(108,521	)

Property and equipment, net		1,795,455			1,805,075

Other assets
Other assets		55,671			58,173

Total other assets		55,671			58,173

Total assets	$	2,069,581		$	2,122,500


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	42,260		$	46,362
Accrued liabilities		57,187			103,809

Total current liabilities		99,447			150,171

Long–term debt, net of discount of $36,635 and $38,572		1,248,365			1,246,428
Other long-term liabilities		24,549			29,755
Commitments and contingencies
Shareholders’ equity
Preferred shares, $0.001 par value, 10,000 shares authorized; none issued or outstanding		—			—
Ordinary shares, $0.001 par value, 400,000 shares authorized; 291,527 and 291,241 shares issued and outstanding		292			291
Additional paid-in capital		862,754			860,502
Accumulated deficit		(165,826	)		(164,647	)

Total shareholders’ equity		697,220			696,146

Total liabilities and shareholders’ equity	$	2,069,581		$	2,122,500

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

Vantage Drilling Company

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2012			2011
Revenues
Contract drilling services	$	104,998		$	86,754
Management fees		2,722			3,966
Reimbursables		24,129			33,911

Total revenues		131,849			124,631

Operating costs and expenses
Operating costs		69,324			77,393
General and administrative		5,260			6,847
Depreciation		16,572			16,112

Total operating costs and expenses		91,156			100,352

Income from operations		40,693			24,279
Other income (expense)
Interest income		12			38
Interest expense and other financing charges		(36,763	)		(41,542	)
Other income		645			1,480

Total other expense		(36,106	)		(40,024	)

Income (loss) before income taxes		4,587			(15,745	)
Income tax provision		5,766			2,909

Net loss	$	(1,179	)	$	(18,654	)

Loss per share
Basic	$	(0.00	)	$	(0.06	)
Diluted	$	(0.00	)	$	(0.06	)

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

Vantage Drilling Company

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,179	)	$	(18,654	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		16,572			16,112
Amortization of debt financing costs		2,374			1,868
Share-based compensation expense		2,253			914
Accretion of long-term debt		—			1,489
Amortization of debt discount		1,937			2,847
Deferred income tax expense (benefit)		598			(252	)
Loss on disposal of assets		3			—
Changes in operating assets and liabilities:
Restricted cash		1,650			1,305
Trade receivables		(12,686	)		(36,727	)
Inventory		(1,276	)		(1,954	)
Prepaid expenses and other current assets		(1,489	)		533
Other assets		610			1,162
Accounts payable		(4,102	)		7,761
Accrued liabilities		(55,455	)		(26,046	)

Net cash used in operating activities		(50,190	)		(49,642	)

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment		(3,328	)		(19,083	)

Net cash used in investing activities		(3,328	)		(19,083	)

CASH FLOWS FROM FINANCING ACTIVITIES
Debt issuance costs		(39	)		(9	)

Net cash used in financing activities		(39	)		(9	)

Net decrease in cash and cash equivalents		(53,557	)		(68,734	)
Cash and cash equivalents—beginning of period		110,031			120,443

Cash and cash equivalents—end of period	$	56,474		$	51,709

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

Vantage Drilling Company

Consolidated Statement of Cash Flows

Supplemental Information

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2012			2011
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest	$	70,490		$	61,619
Taxes		3,492			2,053
Non-cash investing and financing transactions:
Interest capitalized		(3,627	)		—
Trade-in value on equipment upgrades		(2,956	)		—

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

VANTAGE DRILLING COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Recent Events

Vantage Drilling Company is a holdings company organized under the laws of the Cayman Islands on November 14, 2007 with no significant operations or assets, other than its interests in its subsidiaries. Through its direct and indirect subsidiaries, Vantage Drilling Company is an international offshore drilling contractor for the oil and gas industry focused on operating a fleet of modern, high-specification drilling units.

At March 31, 2012, our operating fleet consisted of one ultra-deepwater drillship and four ultra-premium jackup rigs. Additionally, we have one ultra-deepwater drillship under construction. Our global fleet is currently located in India, the Asia Pacific region and West Africa.

In April 2012, we completed the acquisition of theTitanium Explorer,an ultra-deepwater drillship formerly known as theDragonquest,from Valencia Drilling Corporation (“Valencia”), an affiliate of F3 Capital, our largest shareholder. TheTitanium Exploreris currently undergoing commissioning activities and is expected to commence drilling operations in the third quarter of 2012 in the U.S Gulf of Mexico. Our customer for theTitanium Exploreris currently in the process of obtaining the necessary well permits. While there is no certainty as to when the permits will be obtained, theTitanium Exploreris contracted on an international basis and the customer may direct us to mobilize the vessel to another market.

We funded the acquisition of theTitanium Explorerthrough the issuance of an additional $775.0 million aggregate principal amount of our existing 11 ¹/2% Senior Secured Notes (the “Notes”). These additional Notes were issued at a price equal to 108% of their face value and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries.

2. Basis of Presentation and Significant Accounting Policies

The accompanying interim consolidated financial information as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 has been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and include our accounts and those of our majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The balance sheet at December 31, 2011 is derived from our December 31, 2011 audited financial statements. These interim financial statements should be read in conjunction with the financial statements and the notes thereto, included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current year presentation.

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.

Restricted Cash: Consists of cash and cash equivalents posted as collateral for bid tenders and performance bonds.

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

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

Interest costs related to the financings of our jackups and drillship and the amortization of debt financing costs were capitalized as part of the cost while they were under construction. In June 2011, we made our initial construction payments on theTungsten Explorerand began capitalizing interest for this project. Total interest and amortization costs capitalized for the three months ended March 31, 2012 was $3.6 million. We did not capitalize any interest in the three months ended March 31, 2011.

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 represents the excess of the asset’s carrying value over the estimated fair value.

Debt Financing Costs:Costs incurred with debt financings are deferred and amortized over the term of the related financing facility.

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

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

We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses.

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

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

Earnings per Share: Basic earnings (loss) per share have been based on the weighted average number of ordinary shares outstanding during the applicable period. Diluted earnings (loss) per share has been 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 earnings (loss) per share (“EPS”) computations:


	Three Months Ended March 31,
	2012		2011
	(In thousands)
Weighted average ordinary shares outstanding for basic EPS		291,527		289,724
Options		—		—
Warrants		—		—

Adjusted weighted average ordinary shares outstanding for diluted EPS		291,527		289,724

The calculation of diluted weighted average ordinary shares outstanding excludes 2.5 million and 41.7 million ordinary shares for the three months ended March 31, 2012 and 2011, respectively, issuable pursuant to outstanding warrants or stock options because their effect is anti-dilutive as the exercise price of such securities exceeded the average market price of our shares for the applicable periods.

Concentration of Credit Risk: Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits. Some of our restricted cash is invested in certificates of deposits. Our customers primarily consist of major integrated and independent exploration and production companies and government-owned oil and gas companies. We bill our customers on a monthly basis and monitor outstanding receivables on an ongoing basis.

Share-Based Compensation:We account for employee share-based compensation using the fair value method as prescribed under U.S. GAAP. Restricted share grants are valued based on the market price of our ordinary shares on the date of grant and the fair value attributable to share options is calculated based on the Black-Scholes option pricing model. The fair values are amortized to expense over the service period which is equivalent to the time required to vest the share options and share grants. We recognized approximately $2.3 million and $0.9 million of share-based compensation expense for the three months ended March 31, 2012 and 2011, respectively.

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are appropriate and reasonable, actual results could differ from those estimates.

Fair Value of Financial Instruments: The fair value of our short-term financial assets and liabilities approximates the carrying amounts represented in the balance sheets principally due to the short-term or floating rate nature of these instruments. The fair value of the Notes outstanding at March 31, 2012 was approximately $1.3 billion based on quoted market prices as of April 20, 2012.

We originally valued the $60.0 million promissory note issued to F3 Capital, our largest shareholder, (the “F3 Capital Note”) based on our then weighted average cost of capital, resulting in a discounted present value of $27.8 million. The discount is reported as a direct deduction from the face amount of the note and is being recognized over the life of the note using the effective interest rate method. As of March 31, 2012, if we were to value the F3 Capital Note at our current weighted average cost of capital, the current discounted present value would be approximately $30.2 million.

Derivative Financial Instruments:We may use derivative financial instruments to reduce our exposure to various market risks, primarily interest rate risk. We have documented policies and procedures to monitor and control the use of derivatives. We do not engage in derivative transactions for speculative or trading purposes. We do not currently have any outstanding derivative instruments.

3. Transactions with F3 Capital and Affiliates

Titanium Explorer Acquisition

In April 2012, we completed the acquisition of theTitanium Explorerpursuant to a purchase agreement we entered into with Valencia on March 20, 2012, to purchase the construction contract with Daewoo Shipbuilding and Marine Engineering Co., Ltd. (“DSME”) for the construction and delivery of theTitanium Explorer, formerly known as theDragonquest(the “Titanium Explorer Acquisition”). The total consideration for the Titanium Explorer Acquisition was approximately $164.0 million comprised of the following; (i) $3.0 million paid to Valencia upon signing of the purchase agreement; (ii) $149.0 million paid upon the closing of the Titanium Explorer Acquisition, which we refer to as the closing payment, and (iii) $12.0 million to be paid within 120 days of the closing. In addition, we paid $5.0 million of Valencia’s costs and expenses related to the Titanium Explorer Acquisition. Approximately $68.6 million of the closing payment was paid to Valencia’s bridge lender in full satisfaction of a bridge loan, the proceeds of which were used to fund certain construction costs related to theTitanium Explorer. Upon full satisfaction of the bridge loan, the bridge lender released its security interest in theTitanium Explorer construction contract and the pledge of shares of our subsidiary, Vantage Deepwater Company (“Vantage Deepwater”), which is the subsidiary that has entered into the eight year drilling contract with Petrobras for the operation of theTitanium Explorer upon its deployment to the U.S. Gulf of Mexico. The closing payment was further reduced by direct payments of approximately $2.8 million to third parties for specific construction costs related to the drillship. We paid DSME $608.2 million for the remaining balance due under theTitanium Explorerconstruction contract and DSME delivered theTitanium Explorer on April 20, 2012 in accordance with the terms of the construction contract.

Pursuant to the terms of the Titanium Explorer Acquisition, the construction management agreement and the management agreement pertaining to theTitanium Explorer, each between Valencia and certain of our subsidiaries, were terminated.

Petrobras Drilling Contract

Vantage Deepwater entered into an eight-year drilling contract with Petrobras Venezuela Investments & Services, B.V. (“Petrobras”), for the chartering of theTitanium Explorer. Petrobras plans to use theTitanium Explorer in the U.S. Gulf of Mexico for an average drilling rate of approximately $551,300 per day, including the achievement of a 12.5% bonus opportunity, but excluding mobilization revenues and revenue escalations included in the drilling contract. In order to align our performance obligations under the drilling contract with the delivery and acceptance of theTitanium Explorer, in April 2012 the drilling contract was amended to provide for an extension of the commencement date deadline for 180 days.

Drillship Construction Supervision Agreement

We had a construction supervision agreement that entitled us to payments for supervising the construction of Hull 3608, an ultra-deepwater drillship. The counterparty to this agreement is an affiliate of F3 Capital. During the construction of Hull 3608,we were entitled to receive a fee of $5.0 million annually, prorated to the extent construction is completed mid-year. In addition to our annual fee, we were to be reimbursed for all direct costs incurred in the performance of construction oversight services. In September 2009, North Pole Drilling Corporation (“North Pole”), an affiliate of F3 Capital, and the shipyard constructing Hull 3608 agreed to suspend construction activities on Hull 3608.Consequently we agreed with North Pole to suspend for a corresponding period of time obligations under our agreement with North Pole to provide construction supervision services. In November 2009, pursuant to the terms of the construction supervision agreement, North Pole cancelled the agreement. The management fee revenue of approximately $3.0 million for construction services rendered by us in 2009 prior to the suspension and cancellation has not been paid as of March 31, 2012, and remains currently due and payable. In May 2011, we issued a demand letter to North Pole regarding payment of the overdue amount. We will continue to pursue all remedies, including legal remedies, to collect this outstanding amount.

F3 Capital Note

As part of the purchase price for the Mandarin Acquisition, we issued a promissory note to F3 Capital. The F3 Capital Note accrues interest at 5% per annum and will mature 90 months from the issue date. The F3 Capital Note contains a preemptive right covenant that provides F3 Capital with the right to purchase a pro-rata portion of any equity or convertible debt that we offer so long as the F3 Capital Note is outstanding. If we do not repay the F3 Capital Note on its scheduled maturity date or upon the occurrence of certain customary default provisions, the interest rate on any amounts outstanding under the F3 Capital Note will rise to 10% per annum.

In connection with the Titanium Explorer Acquisition, F3 Capital entered into a voting agreement and irrevocable proxy pertaining to its ownership of our shares. Under the voting agreement, F3 Capital must vote its shares in favor of an increase in our authorized capital by 100,000,000 shares and, for a period of twelve months after the date of the Titanium Explorer Acquisition, the slate of directors approved by our board of directors. In the event of a breach of the voting agreement by F3 Capital, we have the right to cancel the F3 Capital Note.

4. Construction Supervision Agreements

In addition to the Drillship Construction Supervision Agreement mentioned above, we have entered into other construction management agreements with unaffiliated third parties.

On July 21, 2010, we signed an agreement to supervise and manage the construction and marketing of the ultra-deepwater drillship theDalian Developer. We are receiving management fees and reimbursable costs during the construction phase of the drillship.

5. Debt

Our long-term debt was composed of the following:


	March 31,		December 31,
	2012		2011
	(Unaudited)
	(In thousands)
11 ¹/2% Senior Secured Notes, net of discount of $11,633 and $12,503	$	1,213,367	$	1,212,497
F3 Capital Note, net of discount of $25,002 and $26,069		34,998		33,931

		1,248,365		1,246,428
Less current maturities of long-term debt		—		—

Long-term debt	$	1,248,365	$	1,246,428

11 ¹/2% Senior Secured Notes

On July 30, 2010, Offshore Group Investment Limited, one of our wholly-owned subsidiaries (the “Issuer”), issued $1.0 billion aggregate principal amount of Notes under an indenture. These Notes were issued at a price equal to 96.361% of their face value, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The original issue discount, reported as a direct deduction from the face amount of the Notes, will be recognized over the life of the Notes using the effective interest rate method. The Notes mature on August 1, 2015, and bear interest from the date of their issuance at the rate of 11.5% per year. Interest on outstanding Notes is payable semi-annually in arrears, commencing on February 1, 2011. The net proceeds, after fees and expenses, of approximately $931.9 million were used to acquire thePlatinum Explorer, to retire certain outstanding debt and for general corporate purposes.

In June 2011, the Issuer issued $225.0 million aggregate principal amount of additional Notes. The additional Notes were issued at a price equal to 107% of their face value, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The issuance premium, reported as an addition to the face amount of the Notes, will be recognized over the remaining life of the Notes using the effective interest rate method. The net proceeds, after fees and expenses, of approximately $227.8 million were used by the Issuer to purchase from the Company all of the equity interests of P2020 Rig Co., the entity that owns theAquamarine Driller, and the related purchase of our subsidiary that is the party to the drilling contract for theAquamarine Driller.

We used the proceeds to repay and terminate a term loan associated with theAquamarine Driller, make the initial payment to DSME under the construction contract for theTungsten Explorer and for general corporate purposes.

In April 2012, in connection with the Titanium Explorer Acquisition, the Issuer issued $775.0 million aggregate principal amount of additional Notes. These additional Notes were issued at a price equal to 108% of their face value, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The issuance premium, reported as an addition to the face amount of the Notes, will be recognized over the remaining life of the Notes using the effective interest rate method. The net proceeds, after fees and expenses of approximately $820.6 million, were used by the Issuer to fund the Titanium Explorer Acquisition, pay DSME the remaining amounts due under theTitanium Explorerconstruction contract and for general corporate purposes. The average yield on the entire $2.0 billion aggregate principal amount of the Notes is approximately 10.6%.

The Notes may be redeemed, in whole or in part at specified redemption prices plus accrued and unpaid interest on the Notes redeemed. If a change of control, as defined in the indenture, occurs, each holder of Notes will have the right to require the repurchase of all or any part of its Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The indenture governing the Notes, among other things, limits the Issuer and any future restricted subsidiaries’ ability, and in certain cases, our ability to: (i) incur or guarantee additional indebtedness or issue disqualified capital stock; (ii) create or incur liens; (iii) pay dividends, redeem subordinated indebtedness or make other restricted payments; (iv) transfer or sell assets; (v) incur dividend or other payment restrictions affecting restricted subsidiaries; (vi) consummate a merger, consolidation or sale of all or substantially all of our assets or those of the Issuer; (vii) enter into transactions with affiliates; (viii) designate subsidiaries as unrestricted subsidiaries; (ix) engage in businesses other than a business that is the same or similar to our current business and reasonably related businesses; and (x) take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the notes. Our future subsidiaries may become restricted subsidiaries and guarantors under limited circumstances.

6. Shareholders’ Equity

Preferred Shares

In December 2009, our shareholders approved a proposal to amend our Memorandum and Articles of Association to increase our authorized preferred shares from 1,000,000 preferred shares, par value $0.001 per share, to 10,000,000 preferred shares, par value $0.001 per share. As of March 31, 2012, no preferred shares were issued and outstanding.

Ordinary Shares

During the three months ended March 31, 2012, we granted 4,961,130 restricted shares to employees and directors under our 2007 Long-Term Incentive Plan (the “LTIP”). Time-vested restricted share awards issued to employees vest ratably over four years. Performance unit awards may vest over a three-year period based on the attainment of pre-determined criteria. The restricted share awards are amortized to expense over the respective vesting period based on the fair value of the awards at the grant dates, which was approximately $5.1 million, based on an average share price of $1.03 per share. In the three months ended March 31, 2012, 640,912 of the previously granted LTIP share awards vested.

7. Income Taxes

Vantage Drilling is a Cayman Islands entity. The Cayman Islands does not impose corporate income taxes. Consequently, income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted, or in which we or 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. Our operations in these different jurisdictions are taxed on various bases including, (i) actual income before taxes, (ii) deemed profits (which are generally determined by applying a tax rate to revenues rather than profits) and (iii) withholding taxes based on revenue. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each tax jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.

We account for income taxes pursuant to ASC 740,Accounting for Income Taxes, which requires recognition of deferred income tax assets and liabilities 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 using the enacted tax rates which are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

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

Our periodic tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate in accordance with the normal statutes of limitations in the applicable jurisdiction. These examinations may result in assessments of additional taxes that are resolved with the authorities or through the courts. Resolution of these matters involves uncertainties and there are no assurances as to the outcome. Our tax years 2008 through 2010 remain open to examination in many of our jurisdictions. In October 2010 and October 2011, authorities in Thailand commenced an examination for the 2009 and 2010 tax years, respectively. In October 2011, authorities in the Philippines notified us they would begin an examination for the 2010 tax year.

8. Commitments and Contingencies

We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. 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.

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.

9. Supplemental Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:


	March 31,		December 31,
	2012		2011
	(Unaudited)
	(In thousands)
Prepaid insurance	$	6,035	$	8,676
Sales tax receivable		1,814		1,004
Income tax receivable		280		280
Deferred tax asset		2,846		3,887
Other receivables		40		137
Deferred mobilization costs		807		1,152
Other		5,536		1,773

	$	17,358	$	16,909

Property and Equipment

Property and equipment consisted of the following:


	March 31,			December 31,
	2012			2011
	(Unaudited)
	(In thousands)
Drilling equipment	$	1,786,887		$	1,770,172
Assets under construction		122,993			133,369
Leasehold improvements		1,332			1,305
Office and technology equipment		8,817			8,750

		1,920,029			1,913,596
Accumulated depreciation		(124,574	)		(108,521	)

Property and equipment, net	$	1,795,455		$	1,805,075

Interest costs related to the financings of our drillings rigs and the amortization of debt financing costs are capitalized as part of the cost of the rig while it is under construction. We capitalized approximately $3.6 million of interest and amortization costs for the three months ended March 31, 2012 with regards to the construction of theTungsten Explorer.

Other Assets

Other assets consisted of the following:


	March 31,		December 31,
	2012		2011
	(Unaudited)
	(In thousands)
Deferred financing costs, net	$	31,697	$	34,032
Performance bond collateral		19,483		19,472
Deposits		1,425		1,330
Deferred income taxes		687		245
Deferred mobilization costs		1,551		2,109
Deferred survey fees		828		985

	$	55,671	$	58,173

Accrued Liabilities

Accrued liabilities consisted of the following:


	March 31,		December 31,
	2012		2011
	(Unaudited)
	(In thousands)
Interest	$	28,717	$	63,127
Compensation		14,921		21,161
Insurance premiums		4,841		8,070
Unearned income		—		379
Deferred revenue		2,140		6,321
Property, service and franchise taxes		1,610		1,610
Income taxes		4,178		2,570
Other		780		571

	$	57,187	$	103,809

10. Business Segment Information

Our business activities relate to the international operations of our offshore drilling units, both jackup rigs and drillship, and providing construction supervision services in China for drilling units owned by others.

For the three months ended March 31, 2012 and 2011, all of our revenue was from countries outside of the United States. Consequently, we are exposed to the risk of changes in economic, political and social conditions inherent in foreign operations. Three customers accounted for approximately 40%, 24%, and 14% of consolidated revenues for the three months ended March 31, 2012. Three customers accounted for approximately 40%, 19% and 11% of consolidated revenues for the three months ended March 31, 2011.

11. Supplemental Condensed Consolidating Financial Information

In July 2010, the Issuer issued $1.0 billion aggregate principal amount of its Notes under an indenture. In June 2011, the Issuer issued $225.0 million aggregate principal amount of additional Notes under the existing indenture. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by us and certain of our subsidiaries (the “Subsidiary Guarantors”). None of our other currently existing subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) have guaranteed or pledged assets to secure the Notes.

The following tables present the condensed, consolidating financial information as of March 31, 2012 and 2011 and for the three months ended March 31, 2012 and 2011 of (i) us, (ii) the Issuer, (iii) the Subsidiary Guarantors, (iv) the Non-Guarantor Subsidiaries and (v) consolidating and elimination entries representing adjustments to eliminate (a) investments in our subsidiaries and (b) intercompany transactions.

Condensed Consolidating Balance Sheet (in thousands)


	As of March 31, 2012
	Parent			Issuer			Subsidiary Guarantors		Non- Guarantors		Eliminations			Consolidated
Cash and cash equivalents	$	7,267		$	120		$	46,628	$	2,459	$	—		$	56,474
Other current assets		3,165			228			111,144		47,444		—			161,981

Total current assets		10,432			348			157,772		49,903		—			218,455
Property and equipment, net		—			—			1,667,279		128,176		—			1,795,455
Investment in and advances to subsidiaries		644,594			480,632			1,836		100,112		(1,227,174	)		—
Other assets		—			31,697			22,334		1,640		—			55,671

Total assets	$	655,026		$	512,677		$	1,849,221	$	279,831	$	(1,227,174	)	$	2,069,581


Accounts payable and accrued liabilities	$	10,918		$	23,479		$	29,767	$	35,283	$	—		$	99,447
Intercompany (receivable) payable		(174,036	)		(1,020,663	)		1,134,606		60,093		—			—

Total current liabilities		(163,118	)		(997,184	)		1,164,373		95,376		—			99,447
Long-term debt		34,998			1,213,367			—		—		—			1,248,365
Other long term liabilities		—			—			20,684		3,865		—			24,549
Shareholders’ equity (deficit)		783,146			296,494			664,164		180,590		(1,227,174	)		697,220

Total liabilities and shareholders’ equity	$	655,026		$	512,677		$	1,849,221	$	279,831	$	(1,227,174	)	$	2,069,581

Condensed Consolidating Statement of Operations (in thousands)


	Three Months Ended March 31, 2012
	Parent			Issuer			Subsidiary Guarantors		Non- Guarantors		Consolidated
Revenues	$	—		$	—		$	107,726	$	24,123	$	131,849
Operating costs and expenses		2,927			—			66,229		22,000		91,156

Income (loss) from operations		(2,927	)		—			41,497		2,123		40,693
Other income (expense)		(1,915	)		(34,835	)		481		163		(36,106	)

Income (loss) before income taxes		(4,842	)		(34,835	)		41,978		2,286		4,587
Income tax provision		—			—			5,252		514		5,766

Net income (loss)	$	(4,842	)	$	(34,835	)	$	36,726	$	1,772	$	(1,179	)

Condensed Consolidating Statement of Cash Flows (in thousands)


	Three Months Ended March 31, 2012
	Parent			Issuer			Subsidiary Guarantors			Non- Guarantors			Consolidated
Net cash provided by (used in) operating activities	$	(10,519	)	$	(70,667	)	$	42,234		$	(11,238	)	$	(50,190	)
Net cash provided by (used in) investing activities		(22	)		—			(183	)		(3,123	)		(3,328	)
Net cash provided by (used in) financing activities		2,859			70,777			(86,320	)		12,645			(39	)

Net increase in cash and cash equivalents		(7,682	)		110			(44,269	)		(1,716	)		(53,557	)
Cash and cash equivalents—beginning of period		14,949			10			90,897			4,175			110,031

Cash and cash equivalents—end of period	$	7,267		$	120		$	46,628		$	2,459		$	56,474

Condensed Consolidating Balance Sheet (in thousands)


	As of March 31, 2011
	Parent			Issuer			Subsidiary Guarantors		Non- Guarantors		Eliminations			Consolidated
Cash and cash equivalents	$	22,221		$	339		$	26,165	$	2,984	$	—		$	51,709
Other current assets		630			—			129,908		16,732		—			147,270

Total current assets		22,851			339			156,073		19,716		—			198,979
Property and equipment, net		865			—			1,717,608		2,629		—			1,721,102
Investment in and advances to subsidiaries		488,230			424,451			2,605		63,974		(979,260	)		—
Other assets		—			27,662			22,273		1,489		—			51,424

Total assets	$	511,946		$	452,452		$	1,898,559	$	87,808	$	(979,260	)	$	1,971,505

Accounts payable and accrued liabilities	$	10,751		$	19,167		$	27,191	$	41,682	$	—		$	98,791
Intercompany (receivable) payable		(327,568	)		(976,656	)		1,271,570		32,654		—			—

Total current liabilities		(316,817	)		(957,489	)		1,298,761		74,336		—			98,791
Long-term debt		30,706			968,487			108,623		—		—			1,107,816
Other long term liabilities		—			—			9,496		2,990		—			12,486
Shareholders’ equity (deficit)		798,057			441,454			481,679		10,482		(979,260	)		752,412

Total liabilities and shareholders’ equity	$	511,946		$	452,452		$	1,898,559	$	87,808	$	(979,260	)	$	1,971,505

Condensed Consolidating Statement of Operations (in thousands)


	Three Months Ended March 31, 2011
	Parent			Issuer			Subsidiary Guarantors			Non- Guarantors			Consolidated
Revenues	$	—		$	—		$	78,650		$	45,981		$	124,631
Operating costs and expenses		4,605			1			61,175			34,571			100,352

Income (loss) from operations		(4,605	)		(1	)		17,475			11,410			24,279
Other income (expense)		(1,856	)		(32,137	)		(6,731	)		700			(40,024	)

Income (loss) before income taxes		(6,461	)		(32,138	)		10,744			12,110			(15,745	)
Income tax provision		576			—			2,550			(217	)		2,909

Net income (loss)	$	(7,037	)	$	(32,138	)	$	8,194		$	12,327		$	(18,654	)

Condensed Consolidating Statement of Cash Flows (in thousands)


	Three Months Ended March 31, 2011
	Parent			Issuer			Subsidiary Guarantors			Non- Guarantors			Consolidated
Net cash provided by (used in) operating activities	$	(5,549	)	$	(57,833	)	$	4,787		$	8,953		$	(49,642	)
Net cash provided by (used in) investing activities		(73	)		—			(19,017	)		7			(19,083	)
Net cash provided by (used in) financing activities		(67,441	)		57,037			20,433			(10,038	)		(9	)

Net increase in cash and cash equivalents		(73,063	)		(796	)		6,203			(1,078	)		(68,734	)
Cash and cash equivalents—beginning of period		95,284			1,135			19,962			4,062			120,443

Cash and cash equivalents—end of period	$	22,221		$	339		$	26,165		$	2,984		$	51,709

Item 2.

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

The following discussion is intended to assist you in understanding our financial position at March 31, 2012 and our results of operations for the three months ended March 31, 2012 and 2011. The discussion should be read in conjunction with the financial statements and notes thereto, included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current year presentation.

Overview

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

The following table sets forth certain information concerning our owned offshore drilling fleet.


Name	Ownership			Year Built/ Expected Delivery		Water Depth Rating (feet)		Drilling Depth Capacity (feet)		Status
Jackups
Emerald Driller		100	%		2008		375		30,000	Operating
Sapphire Driller		100	%		2009		375		30,000	Operating
Aquamarine Driller		100	%		2009		375		30,000	Operating
Topaz Driller		100	%		2009		375		30,000	Operating
Drillships
Platinum Explorer (1)		100	%		2010		12,000		40,000	Operating
Titanium Explorer (1) (2)		100	%		2012		12,000		40,000	Commissioning
Tungsten Explorer		100	%		2013		12,000		40,000	Under construction

(1)	ThePlatinum Explorer and theTitanium Explorerare designed to drill in up to 12,000 feet of water, but are currently equipped to drill in 10,000 feet of water.

(2)	TheTitanium Explorer was formerly known as theDragonquest. We have an eight-year contract with Petrobras to operate this vessel upon completion of commissioning.

Business Outlook

The current outlook for global demand for oil and gas remains favorable as global economic activity continues to increase at a moderate pace. We believe the market for jackups continues to improve as operators are developing oil and natural gas reserves in response to improved oil prices. The current worldwide jackup fleet is primarily comprised of older, inefficient rigs, with approximately two-thirds of the fleet being at least 25 years old. Demand from operators for more high-specification jackups is increasing, which could lead to higher contract rates and utilization. The continued improvement in the demand for modern, high specification jackup rigs is subject to several factors including the future deliveries of newbuild premium jackup rigs and the possible re-activation of older, less efficient rigs by our competitors.

Deepwater and ultra-deepwater projects are typically more expensive and longer in duration than shallow-water drilling programs, which reduces the volatility of dayrates and utilization to short-term fluctuations in oil and natural gas prices and general economic conditions. Deepwater operators tend to take a longer-term view of the global economy and oil and natural gas prices. We believe the long-term fundamentals for demand for oil and natural gas support a significant increase in deepwater and ultra-deepwater development. This development is further supported by significant oilfield discoveries offshore Brazil and continued deepwater field development offshore West Africa and India. With the current high oil prices, we believe oil and gas companies are now planning to increase their upstream capital spending.

As of April 2012, we estimate there are approximately 31 deepwater and ultra-deepwater rigs scheduled for delivery through 2013, 19 of which are not yet contracted to customers. Although deepwater exploration is a relatively young, rapidly growing market and the ultra-deepwater rig supply is significantly increasing, we believe that demand is likely to exceed rig supply despite newbuilds.

Following the Macondo well incident in April 2010, the U.S. government undertook a complete regulatory review of domestic offshore drilling operations with the intention of strengthening the regulatory environment. Additionally, oil and gas companies have taken a more conservative approach to drilling, required more testing of rig equipment, review of maintenance procedures and have upgraded equipment in some instances. These additional measures have resulted in increased operating costs. Recent studies have indicated that deepwater production is recovering after the drilling moratorium following Macondo was lifted and could potentially triple by 2020.

In April 2012, we completed the acquisition of theTitanium Explorer. TheTitanium Exploreris currently undergoing commissioning activities and is expected to commence drilling operations in the third quarter of 2012 in the U.S Gulf of Mexico. Our customer for theTitanium Exploreris currently in the process of obtaining the necessary well permits. While there is no certainty as to when the permits will be obtained, theTitanium Exploreris contracted on an international basis and the customer may direct us to mobilize the vessel to another market.

Results of Operations

The first of our jackup rigs was delivered in December 2008 and began operations under its initial contract in February 2009. Our second jackup rig began operating under its first contract in August 2009 and our third jackup rig commenced operations in January 2010. Our fourth jackup rig was delivered in December 2009 and began operating in March 2010. Our drillship, thePlatinum Explorer, was delivered in November 2010 and commenced operations in December 2010.

The following table sets forth selected contract drilling operational information for the periods indicated:


	Three Months Ended March 31,
	2012			2011
Jackups
Operating rigs, end of period		4			4
Available days (1)		364			360
Utilization (2)		100.0	%		85.8	%
Average daily revenues (3)	$	144,543		$	120,281
*Platinum Explorer*
Available days (1)		91			90
Utilization (2)		98.8	%		93.5	%
Average daily revenues (3)	$	582,454		$	588,563

(1)	Available days are the total number of rig calendar days in the period. Newbuild rigs are included upon acceptance by the client.

(2)	Utilization is calculated as a percentage of the actual number of revenue earning days divided by the available days in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.

(3)	Average daily revenues are based on contract drilling revenues divided by revenue earning days. Average daily revenue will differ from average contract dayrate due to billing adjustments for any non-productive time, mobilization fees and demobilization fees.

The following table is an analysis of our operating results for the three months ended March 31, 2012 and 2011.


	Three Months Ended March 31,
	2012			2011			Change
	(In thousands)
Contract drilling services	$	104,998		$	86,754		$	18,244
Management fees		2,722			3,966			(1,244	)
Reimbursables		24,129			33,911			(9,782	)

		131,849			124,631			7,218
Operating costs		69,324			77,393			8,069
General and administrative		5,260			6,847			1,587
Depreciation		16,572			16,112			(460	)

Operating income		40,693			24,279			16,414
Other income (expense)
Interest income		12			38			(26	)
Interest expense		(36,763	)		(41,542	)		4,779
Other income		645			1,480			(835	)
Income tax provision (benefit)		5,766			2,909			(2,857	)

Net income (loss)	$	(1,179	)	$	(18,654	)	$	17,475

Revenue: Total revenue for the three months ended March 31, 2012 was $131.8 million compared to $124.6 million for the three months ended March 31, 2011, an increase of $7.2 million, or 6%. Contract drilling revenue totaled $105.0 million for the three months ended March 31, 2012 compared to $86.8 million for the same period in 2011, an increase of $18.2 million, or 21%. These increases were primarily due to the improved operational performance by our drillship thePlatinum Explorerin 2012 and full utilization on our jackup fleet in the quarter ended March 31, 2012

The jackup fleet recorded utilization of 100% for the three months ended March 31, 2012, compared to utilization of 85.8% for the three months ended March 31, 2011. Utilization in the first quarter of 2011 was negatively impacted by out of service time for theSapphire Driller due to the force majeure postponement of a contract in West Africa. ThePlatinum Explorer achieved utilization of 98.8% for the three months ended March 31, 2012 as compared to utilization of 93.5% for the comparable quarter of 2011.

We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses. For the three months ended March 31, 2012, reimbursable revenue was $24.1 million as compared to $33.9 million for the three months ended March 31, 2011, a decrease of $9.8 million or 29%. This decrease was primarily due to reduced construction supervision activities in 2012.

Operating expenses: Operating expenses for the three months ended March 31, 2012 were $69.3 million compared to $77.4 million for the three months ended March 31, 2011, a decrease of $8.1 million, or approximately 10%. This decrease was due primarily to reduced reimbursable costs resulting from decreased construction oversight activities in 2012.

General and administrative expenses: General and administrative expenses for the three months ended March 31, 2012 were $5.3 million compared to $6.8 million for the three months ending March 31, 2011, a decrease of $1.6 million. This decrease is primarily due to reduced company expenditures related to information technology projects and legal expenses in the three months ended March 31, 2012 as compared to the comparable quarter in 2011.

Depreciation expense:Depreciation expense for the three months ended March 31, 2012 was $16.6 million compared to $16.1 million for the three months ended March 31, 2011. The increase was primarily due to the depreciation of capital upgrades on theTopaz Driller and theAquamarine Driller. These upgrades were done at the customers’ request and expense pursuant to the current drilling contracts these drilling units are operating under.

Interest expense and financing charges:Interest expense and financing charges for the three months ended March 31, 2012 was $36.8 million compared to $41.5 million for the three months ended March 31, 2011, a decrease of $4.8 million. The decrease was primarily due to the refinancing of higher interest rate debt in 2011. Additionally, we incurred $2.0 million in fees related to an amendment of a term loan associated with the construction of theAquamarine Driller in the first quarter of 2011.

We capitalized $3.6 million of interest and amortization costs in the three months ended March 31, 2012. We did not capitalize any interest expense in the first quarter of 2011.

Income tax expense:Income tax expense for the three months ended March 31, 2012 was $5.8 million compared to $2.9 million for the three months ended March 31, 2011. The increase was primarily due to increased revenues in 2012 in certain higher tax jurisdictions and in jurisdictions where we are subject to deemed profit tax regimes that determine taxes based on specified percentages of revenue rather than profit or loss before tax.

Liquidity and Capital Resources

As of March 31, 2012, we had working capital of approximately $119.0 million. Included in working capital is approximately $56.5 million of cash available for general corporate purposes, including the August 1, 2012 semi-annual interest payment on our 11¹/2% Senior Secured Notes (the “Notes”). Additionally, we have posted $5.4 million cash as collateral for bid tenders and performance bonds. For the remainder of 2012, we anticipate spending approximately $11.5 million on sustaining capital expenditures and $14.5 million, excluding capitalized interest, on theTungsten Explorer, which will be financed from our available working capital.

In April 2012, in connection with the acquisition of theTitanium Explorer,we issued an additional $775.0 million aggregate principal amount of our existing Notes. These additional Notes were issued at a price equal to 108% of their face value

and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The issuance premium, reported as an addition to the face amount of the Notes, will be recognized over the remaining life of the Notes using the effective interest rate method. The net proceeds, after fees and expenses, of approximately $820.6 million were used by the Issuer to fund the purchase price of the Titanium Explorer Acquisition of approximately $169.0 million, including repayment of certain of the seller’s expenses, and pay DSME the remaining amounts due under theTitanium Explorerconstruction contract of approximately $608.2 million. The remaining proceeds will be used to complete the outfitting and mobilization of theTitanium Explorerto the U.S. Gulf of Mexico, pay a portion of the August 2012 interest payment on the Notes and for general corporate purposes.

Long-term Debt: Our long-term debt was composed of the following:


	March 31, 2012		December 31, 2011
	(Unaudited)
	(In thousands)
11¹/2% Senior Secured Notes, net of discount of $11,633 and $12,503	$	1,213,367	$	1,212,497
F3 Capital Note, net of discount of $25,002 and $26,069		34,998		33,931

		1,248,365		1,246,428
Less current maturities of long-term debt		—		—

Long-term debt	$	1,248,365	$	1,246,428

11¹/2% Senior Secured Notes

On July 30, 2010, Offshore Group Investment Limited, one of our wholly-owned subsidiary (the “Issuer”), issued $1.0 billion aggregate principal amount of Notes under an indenture. These Notes were issued at a price equal to 96.361% of their face value, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The original issue discount, reported as a direct deduction from the face amount of the Notes, will be recognized over the life of the Notes using the effective interest rate method. The Notes mature on August 1, 2015, and bear interest from the date of their issuance at the rate of 11.5% per year. Interest on outstanding Notes is payable semi-annually in arrears, commencing on February 1, 2011. The net proceeds, after fees and expenses, of approximately $931.9 million were used to acquire thePlatinum Explorer,retire certain outstanding debt and for general corporate purposes.

In June 2011, the Issuer issued $225.0 million aggregate principal amount of additional Notes. The additional Notes were issued at a price equal to 107% of their face value, and are fully and unconditionally guaranteed, on a senior secured basis, by us and certain of our subsidiaries. The issuance premium, reported as an addition to the face amount of the Notes, will be recognized over the remaining life of the Notes using the effective interest rate method. The net proceeds, after fees and expenses, of approximately $228.1 million were used by the Issuer to purchase from the Company all of the equity interests of P2020 Rig Co., the entity that owns theAquamarine Driller, and the related purchase of our subsidiary that is the party to the drilling contract for theAquamarine Driller.

We used the proceeds to repay and terminate the Aquamarine Term Loan, make the initial payment to DSME under the construction contract for theTungsten Explorer and for general corporate purposes.

F3 Capital Note

convertible debt that we offer so long as the F3 Capital Note is outstanding. If we do not repay the F3 Capital Note on its scheduled maturity date or upon the occurrence of certain customary default provisions, the interest rate on any amounts outstanding under the F3 Capital Note will rise to 10% per annum.

Contingent Obligations

Critical Accounting Policies and Accounting Estimates

The preparation of financial statements and related disclosures in accordance with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have identified the policies below as critical to our business operations and the understanding of our financial operations. The impact of these policies and associated risks are discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

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

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

We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our rigs operate in various international locations, and thus are sometimes subject to foreign exchange risk. We may from time to time also be exposed to certain commodity price risk, equity price risk and risks related to other market driven rates or prices. The risks associated with foreign exchange rates, commodity prices and equity prices have not been significant in the first three months of 2012 as all of our drilling contracts thus far have been denominated in U.S. dollars. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk: As of March 31, 2012, we did not have any variable rate debt outstanding.

Foreign Currency Exchange Rate Risk. As we operate in international areas, we are exposed to foreign exchange risk. Our primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both U.S. dollars, which is our functional currency, and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements over the contract term. Due to various factors, including customer acceptance, local banking laws, other statutory requirements, local currency convertibility and the impact of inflation on local costs, actual foreign exchange needs may vary from those anticipated in the customer contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign currencies have not had a material impact on our overall results. If we find ourselves in situations where payments of local currency do not equal local currency requirements, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, may be used to mitigate foreign currency risk. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. We do not enter into derivative transactions for speculative purposes. As of March 31, 2012, we did not have any open foreign exchange derivative contracts or material foreign currency exposure risk.

Item 4.

Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported, within the time periods specified by the SEC rules and forms.

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 report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2012 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.

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

PART II—OTHER INFORMATION

Item 6.

Exhibits


Exhibit No.		Description

4.1		Third Supplemental Indenture dated as of June 29, 2011 among Offshore Group Investment Limited, Vantage Drilling Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2012)

4.2		Fourth Supplemental Indenture dated as of April 2, 2012 among Offshore Group Investment Limited, Vantage Drilling Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2012)

4.3		Fifth Supplemental Indenture dated as of April 20, 2012 among Offshore Group Investment Limited, Vantage Drilling Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2012)

10.1		Purchase Agreement by and among Dragonquest Holdings Company, Vantage Drilling Company and Valencia Drilling Corporation dated March 20, 2012 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2012)

10.2		Voting Agreement and Irrevocable Proxy by and among Vantage Drilling Company, F3 Capital and Hsin-Chi Su dated March 20, 2012 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2012)

10.3		Undertaking Letter of Vantage Drilling Company addressed to F3 Capital dated March 20, 2012 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2012)

10.4		Registration Rights Agreement dated as of April 2, 2012, by and among Offshore Group Investment Limited, the guarantors party thereto and Jefferies & Company, Inc., as representative of the initial purchasers (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 11, 2012)

31.1		Certification of Principal Executive Officer Pursuant to Section 302*

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

32.1		Certification of Principal Executive Officer Pursuant to Section 906*

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

101.INS		— XBRL Instance Document **

101.SCH		— XBRL Schema Document **

101.CAL		— XBRL Calculation Document **

101.LAB		— XBRL Label Linkbase Document **

101.PRE		— XBRL Presentation Linkbase Document **

*	Filed herewith.

**	Furnished with this Form 10-Q

SIGNATURES

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


VANTAGE DRILLING COMPANY
By:		/S/ DOUGLAS G. SMITH
		Douglas G. Smith
		*Chief Financial Officer and Treasurer*
		*(Principal Financial and Accounting Officer)*

Date: May 10, 2012

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company