Vantage Drilling Company (VTG) – NYSEDecember 1, 2014 Business Model
Vantage is an offshore drilling contractor, with an owned fleet of three ultra-deepwater drillships, 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 jackup drilling rigs. Vantage's primary business is to contract drilling units, related equipment and work crews primarily on a dayrate 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. Through its fleet of seven owned drilling units, Vantage is a provider of offshore contract drilling services globally to major, national and large independent oil and natural gas companies.
Vantage has been retiring debt substantially all year with $53 million payed down in the most recently reported quarter ending September 30, 2014 alone. In this report, the company noted that it currently has a high level of contracted backlog.
The Company had previously announced that it had a targeted debt retirement goal of $175.0 million for 2014. Management guidance provided that this goal would be achieved by $53.5 million of scheduled debt maturities and a combination of discretionary pre-payments on the Company's outstanding Term Loans and open market purchases of the Company's Senior Notes. Current market conditions have resulted in the opportunity to repurchase Convertible Notes on terms that the Company believes are attractive, as well.
It is very possible that this stock has been beaten down unfairly along with the rest of the oil stocks, specifically drillers and even more specifically, small outfits. This is because 2015 has been written off by investors as a horrible year for drillers, all of which has been more than priced into these stocks. For VTG, the last quarter was break even for them simple because of an increase in taxes. The company has increased shareholder equity in each of the last four quarters.
The stock has some ridiculously low valuations, and being a listed issue with an enterprise value close to $3 billion, the company has more than a handful of analysts following it. Trailing P/E is 3.87, forward P/E is 3.43, price to sales is at 0.27, price to book value is 0.42. The company has $81 million in cash on hand or $0.26 per share. Book value per share is at $1.76, more than twice the current stock price.
Instead of panicking, this company has been taking advantage of the stock trading at half of book value by buying up and retiring debt thereby reducing future dilution. This means that with the current float of 158 million shares not in danger of increasing substantially in the future, there seems to be quite a bit missing in the stock price.
Part of the missing value may have to do with some fairly massive short selling that has occurred over the last month or two. As of November 14, almost 12 million shares were sold short, or 7.7% of the float.
Despite a seemingly large cushion built into this value play, many risks are still involved. One risk specific to the stock is the danger of being delisted from the NYSE if the stock continues to stay below a dollar for months and months. Another risk to be aware of is the fact that an investment in off shore oil drillers puts your money out in the middle of the ocean, where all kinds of risks are lurking.
Our Trading Strategy
We believe there may currently be a major inefficiency in the price of this stock, and see more than just a quick bottom play or dead cat bounce. The stock may bounce quickly by 20-50%, however a crawl back to more suitable valuations pricing the stock at $2-3 may take some time. A short squeeze may play a part in both of these scenarios. Overall, we believe this is simply a case of a stock that is way undervalued for what is actually occurring, and what can occur in the oil markets, which have been known to surprise in the past. There are just too many reasons for the stock to eventually return to a much higher price. A simple buy and wait strategy with a stop loss around $0.50 should suffice.