Vantage Drilling (VTG, Financial) has seen steady-to-robust growth in the last five years. This article discusses the company’s growth, reasons for further growth and the rationale for considering this stock as a buy at current levels.
Vantage Drilling’s revenue has increased from $112 million in 2009 to $732 million in 2013. Further, considering the first half 2014 revenue of $452 million, Vantage Drilling’s revenue for 2014 should be nearly $900 million.
The company’s EBITDA has increased from $30 million in 2009 to $364 million in 2013. Further, considering the first half 2014 EBITDA of $236 million, the company’s EBITDA for 2014 should be nearly $472 million.
Therefore, strong revenue and EBITDA growth is likely to continue for Vantage Drilling in 2014. Strong growth is likely in the second half of 2014 as well because Vantage Drilling has an order backlog of $2.8 billion, and this ensures that revenue will keep flowing. This is the first reason for considering Vantage Drilling at these levels.
The second reason for considering Vantage Drilling at these levels is the expected growth over the next two years. Cobalt Explorer, the company’s most advanced drillship, is expected to be delivered in 2015 and will significantly impact growth in 2016.
The third important reason to consider Vantage Drilling is the company’s valuation. Currently, Vantage Drilling is trading at an EV/EBITDA of 7.3 and a forward PE (December 2015) of 6.6. These valuations are attractive when compared to Seadrill (SDRL, Financial), which is trading at a current EV/EBITDA of 11.9 and a forward PE (December 2015) of 10.3. Atwood Oceanics (ATW, Financial), which has a relative less modern fleet as compared to Vantage Drilling is also trading at an EV/EBITDA of 8.4 and a forward (December 2015) PE of 6.8. This makes Vantage Drilling very attractive as compared to peers, and the stock is likely to have strong upside considering the current undervaluation.
Another reason for considering Vantage Drilling is the fact that Vantage Drilling is a small player in the industry with a market capitalization of just $550 million. A low market capitalization and undervaluation as compared to peers makes Vantage Drilling a juice acquisition target. If Vantage Drilling is acquired by any of the larger players, the stock is likely to move higher according to the premium paid for the acquisition.
I also like Vantage Drilling for the company’s focus on reducing debt and increasing the ROCE. For the year ended December 2013, Vantage Drilling had a debt to EBITDA of 7.8. While this is high, the company intends to reduce the debt to EBITDA to 5.0 by the end of 2014. This is entirely likely with strong results for the first half of 2014 where the company’s revenue increased by a robust 42% to $452 million.
I would also like to mention that the company’s return on capital employed was 8% in 2013 and is likely to increase to 11% in 2014. The company’s ROCE would therefore be higher than companies like Transocean (RIG, Financial) and Ensco (ESV, Financial).
Another major highlight of the 1H14 results was the company’s operating cash flow. For 1H14 the company’s operating cash flow was $140 million as compared to a negative operating cash flow of $97 million for 1H13. Strong operating cash flows are positive for debt servicing as well as debt reduction. Vantage Drilling’s major debt maturity comes in 2017, 2019 and 2023 and this factor ensures that debt repayment is not an immediate concern.
In conclusion, Vantage Drilling remains undervalued even with strong growth in the first half of 2014 and strong expected growth in the second half of 2014. Further, strong revenue and EBITDA growth is also expected in 2016 when the new drillship, Cobalt Explorer, completes one full year of operations. Investors can therefore consider exposure to this undervalued stock for the medium to long-term.
