Vantage Drilling Company, Inc. (VTG) is an offshore drilling contractor with a fleet of four jackup rigs and three drillships. While this company is smaller compared with many of the well-known offshore drilling companies, it has a lot going for it. Because it is not as well-known or as large, few analysts cover the company and many investors have either overlooked the company, or maybe just figure why bother getting involved with a stock trading for about a buck. Companies that are misunderstood, or overlooked and have stocks that have been beaten-down, often have tremendous potential. We are going to dig deeper and uncover some of the many positives that this company has to offer investors.
First let's take a look at the management team at Vantage, which shows this company is run by a highly experienced and successful group of executives. Much of the management team at Vantage came from other major offshore drilling companies, and this is just a partial list:
Paul A. Bragg is CEO, who formerly was CEO of Pride International (NYSE:PDE) and held other high-level positions at the company from 1993 to 2005.
Douglas Halkett is COO, who was formerly a division manager and operations manager at Transocean (RIG).
Douglas G. Smith is CFO, had formerly served as VP of Financial Projects, Controller, and Chief Accounting Officer at Pride International.
Don Munro, VP Operations, was formerly General Manager of Operations in India at Transocean between 1973-2008.
A recent investor presentation includes many positive facts: Vantage has a contract backlog worth about $3 billion (including the managed fleet). The company does business with some of the top oil companies, like Total (TOT), Petrobras (PBR), Petronas, Vaalco Energy, Inc. (EGY), Petrovietnam, and many others. The jackup rigs and drillships owned by Vantage are world-class and it has one of the newest and most advanced fleets available. Many major drilling contractors have rigs with an average age of well over 20 years, and older equipment is more prone to downtime, higher maintenance expenses, and lower performance. Vantage is able to command higher rates and keeps a consistent backlog because of their premium quality fleet.
Financially, the company is making impressive progress, and revenues have surged in 2011, as new equipment and contracts came into play. This has allowed the company to greatly narrow losses, and Vantage is now close to earning profits. Improving dayrates should have a further positive impact on the results in 2012. Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) nearly doubled in 2011 when compared with 2010 results. According to the Vantage presentation, the peer average (drilling company) currently trades at about 8.5 times EBITDA. With Vantage at a $250 million annual EBITDA level, the stock should be valued at $3.44, if it begins to trade at the same 8.5 times EBITDA as its peers. As EBITDA grows to $300 million, the shares could trade at $4.90 per share, and at $350 million EBITDA the stock would potentially be worth $6.36 per share. This is very important because it shows that Vantage shares are deeply undervalued and that means the upside potential appears to be significant. This valuation disparity shows that it would make sense for a major drilling that is trading for the average 8.5 times EBITDA, to acquire Vantage.
Not only is Vantage looking cheap based on EBITDA, but it is also undervalued based on book value. Vantage shares have a current book value of $2.42 per share. Book value is the theoretical value that shareholders would receive in liquidation because it is based on the current value of all assets, less all liabilities. That means the stock is trading at less than half the book value right now. The peer group average trades at about 113% of book value, and Vantage trades at about 48% of book value.
Another major plus is that Vantage has one of the highest insider ownership levels of any drilling company. In fact, just a handful of insiders own about one-third of the company. This level of ownership is rare and it shows that management is aligned with shareholders. One insider alone purchased over 1 million shares in 2011.
Takeover potential: Vantage appears to be an attractive target at current levels. Some of the major drillers need to either build or acquire newer rigs and the opportunity to buy the nearly new fleet at Vantage could be too good to pass up. The Gulf of Mexico is seeing increased drilling activity and long term trend shows that oil will keep rising and demand for deepwater drilling will follow. I would also not be surprised to see a major oil company buy Vantage in order to have the increased flexibility of owning some of the world's youngest rigs. Whether another driller or a major oil company were to acquire Vantage, either one could refinance the debt at lower rates and see a sudden boost in EBITDA.
Short squeeze potential: Vantage has a fair amount of shorts that have been pushing the stock lower. According to Shortsqueeze.com, there are currently over 9.1 million shares short. Since Vantage has an average daily volume of about 2.3 million shares, it could take about 4 days worth of volume for shorts to cover. This means that any good news could give this stock an extra lift from short covering.
Debt load: While Vantage has more leverage than most drillers, the debt load appears manageable and if refinanced, there would be significant savings which would flow straight to the bottom line. Again, if a major driller or oil company were to acquire Vantage, it could refinance the debt at much lower rates and this alone could squeeze out significant profits. Vantage might also be able to refinance at lower rates in the future, thanks to significant improvements in the revenues and cash flow.
Vantage is the type of overlooked stock that could suddenly jump 30% to 50% based solely on increased investor interest and understanding of the potential this company has. It could more than double in a single day if a takeover deal is announced. I doubt current management would accept less than $2.50 per share in the event of a buyout. The main point is that it won't take much to ignite this stock from the very depressed levels it trades at now.
Now let's take a closer look at Vantage and some of the other top oil drilling stocks in order to compare values:
Transocean shares are trading at $41.81. Transocean is a major offshore drilling company. These shares have traded in a range between $38.21 to $85.98 in the last 52 weeks. The 50-day moving average is $43.51 and the 200-day moving average is $56.73. Earnings estimates indicate a profit of $1.53 per share for 2011, and $3.10 for 2012. Transocean shares offer a dividend of $3.16 which provides a yield of 7.8%, the problem is that this dividend does not appear to be sustainable and it is likely to be cut soon. Transocean has faced a number of challenges including liability issues from the BP oil spill, weaker than expected earnings, and debt load concerns, which appear to be the catalysts for a recent capital raise near the 52 week lows. I think the shares have downside pressure when a probable dividend cut is announced. Transocean has some older equipment but based on current challenges, I don't see this company making acquisitions soon.
Diamond Offshore (DO) shares are trading at $60.51. Diamond is an offshore drilling company. These shares have traded in a range between $51.16 to $81.19 in the last 52 weeks. The 50-day moving average is $61.08 and the 200-day moving average is $65.41. Earnings estimates indicate a profit of $6.54 per share for 2011 and $4.75 for 2012. Diamond pays a dividend of 50 cents per share, which is equivalent to a .8% yield. Book value is $30.65, so this stock is trading at about 200% of book, whereas Vantage is at only about 48%. Diamond has a strong balance sheet and is in a position to make acquisitions. Diamond has an older fleet and recently ordered a new rig valued at about $300 million. The semi-submersible rig will be called the "Ocean Onyx". When you consider that a single rig ordered by Diamond is expected to cost about $300 million, and yet the current market capitalization of Vantage is only about $296 million, it's easy to see the undervaluation. This shows why a larger company could find acquiring Vantage with four modern jackup rigs and three drillships, to be a very attractive deal.
Parker Drilling (PKD) shares are trading at $6.26. Parker provides mostly land and barge drilling services, and is based in Texas. The shares have traded in a range between $3.60 to $7.62 in the past 52 weeks. The 50-day moving average is $6.83 and the 200-day moving average is $6.08. Earnings estimates for PKD are 52 cents per share in 2011, and 75 cents for 2012. The book value is $5.44, so this stock trades at a premium as well. This stock has been dropping in the past few days, and looks attractive on dips to $6 or less.
Hercules Offshore (HERO) is trading around $3.91. Hercules is a offshore drilling company. These shares have traded in a range between $2.25 to $6.99 in the last 52 weeks. The 50-day moving average is $4.02 and the 200-day moving average is $4.53. HERO is estimated to lose about 55 cents per share in 2011, and lose 39 cents for 2012. The book value is stated at $6.74. Hercules purchased 20 jackup rigs from Seahawk Drilling which shows that mergers and acquisitions make sense in this sector. Based on the history of losses and the current valuation, Hercules stock makes Vantage look undervalued.
Ensco PLC (ESV) shares are trading at $50.01. Ensco is a leading offshore drilling company, based in London. This company has a fleet of about 76 rigs. The shares have traded in a range between $37.39 to $60.39 in the past 52 weeks. The 50-day moving average is $49.38 and the 200-day moving average is $50.30. Earnings estimates for ESV are $3.11 per share in 2011, and $5.92 for 2012. Ensco pays a dividend of $1.40 per share, which is equivalent to a 2.9% yield. The book value is $46.46, so the stock trades at a slight premium. This company has a solid balance sheet and has the strength to acquire a company like Vantage. This stock also looks like a good value on dips to about $47 or less.
Noble Drilling Corp. (NE) shares are trading at $33.13. Noble is a leading offshore drilling company. These shares have traded in a range between $27.33 to $46.72 in the last 52 weeks. The 50-day moving average is $33.33 and the 200-day moving average is $35.82. Earnings estimates indicate a profit of $1.37 per share for 2011, and $3.66 for 2012. Noble shares offer a dividend of 52 cents which provides a yield of 1.6%. The book value is $29.03 and this stock looks attractive on dips to about $30 per share. Noble has a good balance sheet and it could easily acquire a smaller company like Vantage.
Vantage Drilling shares are trading at $1.03. Vantage is an offshore drilling company, with a premium fleet. These shares have traded in a range between 99 cents to $2.25 in the last 52 weeks. The 50-day moving average is $1.14 and the 200-day moving average is $1.48. Vantage is estimated to lose about 17 cents per share in 2011, and lose only 4 cents for 2012. The book value is stated at $2.42. With revenues jumping based on new equipment and higher dayrates, this stock looks likely to rebound from recent lows and possibly even be the target of a takeover. Out of all the companies mentioned here, I believe Diamond Offshore is the most likely to buy Vantage because it has the need for newer equipment and it also has the balance sheet strength to buy Vantage.
Overall, this sector is trading below the historical average and most of these stocks have upside potential. My top picks are Noble Drilling and Ensco on dips, and Vantage looks like a great buy now, and it is the only drilling stock that appears poised to double in 2012.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I am long (VTG).