Why Vantage Shares Might Not Have Reached Bottom Yet

Mar. 8.13 | About: Vantage Drilling (VTG)

Vantage Drilling Company, Inc. (NYSEMKT:VTG) shares were trading for about $1.90 in February, but the stock has been trending lower ever since, and it might not have reached bottom yet. Vantage shares are now trading for about $1.62 and the decline seems to have been exacerbated by the recent quarterly results, in which the company reported more losses for both the fourth quarter and the full-year of 2012.

Vantage was started a few years ago and it provides offshore drilling rigs to oil and gas companies. Since it is a relatively new company for this industry, it has the benefit of owning fairly modern equipment. That is a plus since newer equipment is less prone to mechanical failure and it typically commands higher rates.

Vantage bulls seem to be lured by the prospects of buying a stock for just over a buck, however, this stock has been far from rewarding for many investors as the stock now trades significantly below the IPO price. Even years after the 2008 financial crisis, the stock has languished. Hope springs eternal for some investors, but a closer and more skeptical look at the debt load and other factors might make some investors understand why this stock has attracted some short-sellers.

Vantage has posted losses in recent years and it has a significant debt load of about $2.74 billion and just around $503 million in cash. Even if the company manages this debt load without any missteps, the problem for shareholders is that this debt might be why this company has been unable to post profits on a regular basis. When a company owes a lot of money, the interest payments on the loans can eat up a significant portion or even all of the profits to the point where little or nothing is left for shareholders. In addition, the debt load appears out of scale when compared to the annual revenues for this company which are nearly $500 million. With that level of revenues, it can be very difficult to service a multi-billion debt load and still have any profits for shareholders.

Vantage has posted significant losses in the past couple of years even as revenues increased. That is a worrisome trend for shareholders and it has eroded the book value. Even though the stock is below recent highs, it still does not appear to be pricing in the risk factors that the debt load presents. Furthermore, as mentioned before, even if this debt is properly managed, it might be so significant that it will be difficult for this company to report profits and generate returns for shareholders. So far, the debt load and the interest expense for servicing it has made it tough to achieve profits and it is hard to see what will change this in the future. I have followed this stock for a few years and it seems that some investors always believe that "next year" will be the year that this company produces profits, but that hope appears elusive even with higher revenues.

Because of this, the stock might continue to trend lower as some investors have seemingly lost patience after the latest financial results and as more come to realize that any company with a major debt load may be chronically challenged in terms of profits. Investors who are still tempted to get involved here may want to consider waiting for a "capitulation" event whereby the stock sees a heavy volume sell-off. In early 2012, Vantage shares experienced this type of decline and it took the stock down to about $1.02. I would not be surprised to see the shares drop to that level again and it might be a more appropriate valuation considering the history of losses and the ongoing challenges to profitability that the debt load seemingly presents.

Key Data Points For Vantage From Yahoo Finance:
Current Share Price: $1.62
52-Week Range: $1.32 to $1.95
Dividend: none

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.