Investment thesis
- Modern and Young fleet provides competitive advantage to Vantage drilling
- High revenue visibility with strong contract backlog of $2.8 billion and strong customer backlog
- Long term debt load should not be much of a concern as the cash flow of the company is expected to increase which would cover the debt
- Attractive valuations based on EV/EBITDA and forecasted earnings
Vantage Drilling Company (VTG, Financial) is a small offshore drilling company with a market cap of $590 million. The company provides drilling services to oil and gas companies in United States and internationally. Vantage drilling owns a fleet of eight drilling units comprising of four ultra deepwater drillships and four jackups. Seven rigs are currently under operating with Cobalt Explorer still under construction.
Modern and Young Fleet
Vantage Drilling has one of the most modern and young fleet operating in the industry. For an industry like drilling, companies with lower average age of fleet have a competitive advantage over others. Vantage drilling with average fleet age of less than one year can command a higher price from its customers contrary to peers like Diamond Offshore (DO, Financial) and Transocean (RIG, Financial).
For similar reasons companies like Pacific Drilling (PACD, Financial) and Ocean Rig (ORIG, Financial) also command an average day rate of $563K and $574K respectively, as compared to Vantage drilling’s $359. Reason for lower average day rate for Vantage is that the company’s fleet is split up into a lower day rate jackups and a stronger day rates of drillships.
However, with the commencement of the operation of Cobalt Explorer (drillships) average day rates of the company is expected to be in line with Pacific Drilling and Ocean Rig.
Souce: Pacific Drilling Presentation
Revenue Visibility for 2014
Next section deals with the expected revenue for Vantage Drilling in fiscal year 2014. Following are the assumptions for the below calculations.
- Based on the company’s 1Q14 results, I have assumed that jackups would continue to operate with 99% efficiency and drillships with 95% efficiency.
- EBITDA margin of 50% is considered based on the last year’s result
| Jackups | Dayrate | Efficiency | Number of days | Revenue in $million |
| Emerald Driller | 156000 | 99% | 365 | 56.4 |
| Sapphire Driller | 183000 | 99% | 365 | 66.1 |
| Aquamarine Driller | 155000 | 99% | 330 | 50.6 |
| Topaz Driller | 155000 | 99% | 310 | 47.6 |
| Drillships | ||||
| Platinum Explorer | 590000 | 95% | 365 | 204.6 |
| Titanium Explorer | 585000 | 95% | 365 | 202.8 |
| Tungsten Explorer | 641000 | 95% | 330 | 200.9 |
| Total | 829.1 | |||
| Growth in revenue | 13% | |||
| EBITDA (EBITDA Margin 50%) | 414.5 | |||
| EBITDA Growth | 14% |
Based on the above calculation, Vantage is expected to witness 13% growth in its revenue for fiscal 2014. However, the operation of new drillship has not been considered yet which if added would further boost the company’s revenue. Also, considering an EBITDA margin of 50%, the company would witness 14% rise in the EBITDA.
Hence, Vantage Drilling would continue to perform well with its existing contract backlog of $2.8 billion. A strong customer backlog of Petrobras and Total also reduces the downside risk of the company. It would ensure a stable and safe cash flow for the company.
Debt Should Not Be A Concern
As of March 2014, the company has a debt of $2.8 billion. For a small company like Vantage Drilling this seems to be a high. However, if we look at the company’s interest coverage ratio, the company seems to be stable. Vantage has generated an EBITDA of $122 million with interest paid of $16 million for 1Q14, bringing the interest coverage ratio to 7.5.
The number looks impressive and suggests that the company has been able to generate enough cash to meet its current interest on debt. Moreover, there is no significant debt maturity before 2017 and hence the company has enough time to generate cash with the inclusion of Cobalt Explorer drillship to cover the current debt load.
Source: Company Presentation
Valuations
Currently, Vantage Drilling is trading at a discount to peers Pacific Drilling and Ocean Rig. At an EV/EBITDA of 8.1 Vantage Drilling is much more attractive than Pacific Drilling’s 11.7 and Ocean Rig’s 10.4. Also, analysts estimate a growth of 500% for the fiscal year 2014, with the industry growth of only 13.2%. Hence, considering the current price of $1.9 and a boost in growth for 2014, Vantage is trading at a highly discounted valuation. I would thus recommend this undervalued stock as a good pick.
Take Away
Debt might be a concern for few investors, but Vantage has a fleet portfolio which is fully contracted for fiscal 2014. Also, a contract backlog of $2.8billion provides cash flow visibility. At current undervaluation and enticing price of $1.9, Vantage Drilling could be a good entry point.
