When it comes to establishing a long-term position in one particular company, a stronger-than-expected quarter can weigh quite heavily on one's decision to move forward with that particular investment. With that said, I not only wanted to examine Vantage Drilling's (NYSEMKT:VTG) solid fourth quarter but also take a closer look at a few reasons why I'm staying fairly bullish on its shares.
Headquartered in Houston, Texas, Vantage Drilling Company, a Cayman Islands exempted company, is an offshore drilling contractor, with an owned fleet of three ultra-deepwater drill ships, the Platinum Explorer, the Titanium Explorer and the Tungsten Explorer, as well as an additional ultra-deepwater drillship, the Cobalt Explorer, now under construction, and four Baker Marine Pacific Class 375 ultra-premium jack-up drilling rigs. Vantage's primary business is to contract drilling units, related equipment and work crews primarily on a day rate basis to drill oil and natural gas wells. Vantage also provides construction supervision services for, and will operate and manage, drilling units owned by others.
Recent Performance & Trend Behavior
On Friday, shares of VTG, which currently possess a market cap of $530.53 million, a forward P/E ratio of 5.34, and a gross margin of 54.10, settled at a price of $1.75/share. Based on its closing price of $1.75/share, shares of VTG are trading 3.80% above their 20-day simple moving average, 1.09% below their 50-day simple moving average, and 3.29% below their 200-day simple moving average. It should be noted that these numbers indicate a short-term uptrend and a mid-to-long-term downtrend for the stock, which generally translates into a moderate buying mode for most near-term traders and somewhat of a holding pattern for most long-term investors.
A Record-Setting Fourth Quarter for Vantage
On Friday, and after all three major indexes closed mixed on the session, Vantage Drilling reported the results of a very solid fourth quarter. Analysts had been expecting the company to earn $0.07/share on revenue of $222.26 million; however, VTG impressed both investors and analysts when the company reported earnings of $0.09/share on revenue of $238.53 million. One of the things that stood out the most in terms of the company's quarterly performance was clearly its record net income of $30.3 million versus the net loss of $11.5 million the company demonstrated during the fourth quarter of 2012.
If the company can continue to demonstrate significant increases in its net income as was the case in both its fourth quarter and full year results, there's a very good chance Vantage could surpass not only Q1 estimates (which are calling for VTG to earn $0.08/share on revenue of $218.06 million) but full-year 2014 estimates (which are calling for VTG to earn $0.32/share on revenue of $876.87 million) as well.
Comparative Ratios Set VTG Apart From Several Of Its Peers
Even though the above referenced numbers indicate a long-term holding pattern for the stock, I actually think the company's current share price of $1.75/share offers investors a considerable point of entry; especially since shares are trading at a much better forward P/E ratio than a number of its sector-based peers. For example, VTG's forward P/E ratio was 5.34 based on its Mar. 3 intraday behavior, whereas the forward P/E ratios of Pacific Drilling S.A. (NYSE:PACD) (forward P/E ratio of 8.10 as of 3/3) and Atwood Oceanics (NYSE:ATW) (forward P/E ratio of 6.32 as of 3/3) were both considerably higher.
Certain Risk Factors To Consider (Most Recent 10-K)
According to VTG's most recent 10-K, there are a number of risk factors investors should consider before establishing a position. These risk factors include but are not limited to:
#1 - The company's jackup drilling contracts are generally short-term, and it could experience reduced profitability if customers reduce activity levels, terminate or seek to renegotiate drilling contracts with Vantage, or if market conditions dictate whether or not the company enters into contracts that provide for payment based on a footage or turnkey basis, rather than on a dayrate basis.
#2 - Construction projects are subject to risks, including delays and cost overruns, which could have an adverse impact on the company's liquidity as well as its results of operations.
#3 - The company's offshore drilling operations could be adversely impacted by changes in regulation of offshore oil and gas exploration and development activity.
For those of you who may be considering a position in Vantage Drilling, there are a number of things I'd keep a close eye on over the next several months. For example, I strongly recommend keeping a close eye on the company's near-term trend behavior given the affordability level of shares moving forward. With that said, I'd also pay close attention to the ongoing construction of the company's Colbalt Explorer rig, which when completed could play a key role in the company's ongoing performance and operating results.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VTG over 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.