Continuing with my focus on the stock to buy or avoid in the oil and gas and offshore drilling sector, this article will discuss Vantage Drilling (VTG, Financial) that has a strong long-term outlook, and the stock looks oversold at current levels.
From a stock decline perspective, Vantage Drilling has moved lower by 52% in 2014 and the stock is currently trading at an EV/EBITDA valuation of 6.6, price to sales of 0.35 and a price to book value of 0.54.
I believe that these are attractive levels to gradually consider exposure to the stock and accumulate for the long term. This article will discuss the key factors behind my rationale.
In terms of valuation, Vantage Drilling looks cheap when compared with other offshore drillers with a modern fleet. Seadrill (SDRL, Financial) currently trades at an EV/EBITDA of 9.0, Pacific Drilling trades at an EV/EBITDA of 8.5 and Ocean Rig trades at an EV/EBITDA of 6.6. Therefore, based on average peer valuation, Vantage Drilling certainly looks interesting.
Other than the valuation perspective, the first reason to remain bullish on the company’s growth prospects is the current contract status of the company’s fleet. Vantage Drilling currently has a contract backlog of $2.8 billion and this is the source of revenue and cash flow visibility.
Three of the company’s drillships are contracted through 2015. Platinum Explorer is contracted with a day rate of $590,000. Titanium Explorer is contracted with a day rate of $585,000 and Tungsten Explorer is contracted with a day rate of $641,000. Cobalt Explorer, the company’s most advanced drillship, will be delivered towards the end of 2015, and this means that the rig will provide growth momentum into 2016.
The company also has four jack-ups with one jack-up contract expiring in the fourth quarter of 2014 and the remaining three jack-ups contracts expiring on and after the second quarter of 2015. While one concern might be the re-contracting of the jack-up, the primary revenue drivers are the drillships.
Vantage Drilling has also performed well in terms of results for the first nine months of 2014. For 9M14, the company has reported revenue growth of 33.7% to $660 million as compared to $494 million as of 9M13. For the same period, the company has also reported an EBITDA of $322 million, representing an increase of 38% as compared to the prior year comparable period EBITDA of $234 million. Therefore, aided by the firm contract backlog, Vantage Drilling has performed well and the strong performance is expected to continue into 2015.
Another big positive related to the company is that Vantage Drilling has no major debt maturity coming before 2017. In 2017, the company has nearly $400 million of debt outstanding with the next big debt outstanding only in 2019. Therefore, there is no immediate debt refinancing pressure and Vantage Drilling has been generating strong EBITDA to service the current debt outstanding.
I would be only concerned if one or more than one jack-up is idle for a prolonged period after contract expiration in 2015. However, I believe that this scenario is unlikely as the company has premium jack-ups and the past record is indicative of the strong utilization that is likely to continue for the premium fleet. The company’s jack-ups have achieved a 99% productive time for the first 60 months of operation. While the utilization can potentially decline in difficult markets, the premium jack-ups are likely to be re-contracted.
As mentioned earlier, the company’s most advanced drillship (Cobalt Explorer) will be delivered by the end of 2015 and this will provide growth momentum for the company into 2016. I believe that the delivery of the drillship at the end of 2015 is a good time as there is still more than one year for the offshore markets to recover and I believe that recovery in the offshore markets will start in 2015 and accelerate into 2016. Therefore, the timing of delivery of the new drillship is also positive for Vantage Drilling.
In conclusion, Vantage Drilling might have been beaten down below $1 per share as offshore market sentiments worsen; the stock has strong fundamentals, a good fleet and a robust backlog to sustain in difficult times. Investors who are bullish on the offshore drilling sector con consider exposure to the stock as the upside potential over the next 2-3 years remains strong.
