Is Vantage Drilling Company a Value Buy?

Vantage Drilling (NYSEMKT: VTG  ) announced stellar results for the first quarter of 2014 with revenue and EBITDA surging by 58% and 91% respectively. With a strong order backlog of $0.28 billion, robust growth is likely to be sustained. This article discusses why the company, which has one of the most modern fleets in the offshore drilling industry, is a value buy.

Why Vantage Drilling is undervalued
Let's compare Vantage Drilling to its closest peers, Pacific Drilling (NYSE: PACD  ) and Ocean Rig (NASDAQ: ORIG  ) . The peers have been chosen on the basis of their fleet age and capability. 

Source: Pacific Drilling (December 2013 Presentation)

Vantage Drilling is currently trading at a trailing twelve month EV/EBITDA of 7.9 as compared to an EV/EBITDA of 11.2 for Pacific Drilling and an EV/EBITDA of 10.2 for Ocean Rig. Clearly, the company is available at a discount as compared to peers, despite its robust growth prospects.

Strong growth ahead
The growth exhibited by Vantage Drilling in the first quarter is likely to continue. This conviction comes from the fact that the company has a firm order backlog of $2.8 billion as of March 2014.

The company's ultra-deepwater fleet is fully contracted through 2015, while the jack-up fleet is 98% contracted for 2014 and 30% for 2015. These firm contracts ensure cash inflow and sustenance of growth momentum.

Cobalt Explorer, the company's most advanced ultra-deepwater drillship, is also scheduled for delivery in 4Q 2015. This fleet addition will provide revenue upside in 2016. The point here is that Vantage Drilling has revenue and EBITDA upside triggers lined up for the next two years.

A healthy leverage profile
For high growth companies in a capital intensive business, leverage is an important factor to investigate. As of December 2013, Vantage Drilling has a debt of $2.8 billion and an adjusted EBITDA of $365 million. This translates into a debt to EBITDA of 7.8.

While leverage seems high, the EBITDA interest coverage for 2013 was 1.5 and this implies that debt servicing is not a concern. More importantly, considering EBITDA of $122 million for 1Q 2014, the leverage is likely to decline significantly this year.

The fact that there is no significant debt maturity until 2017 is also advantageous for the company. The company expects to cover all debt service from operating cash flows through 2018. I would therefore conclude that the company's debt profile is comfortable and should not hinder its growth plans in the foreseeable future.

In terms of leverage, I must also mention that Pacific Drilling and Ocean Rig have a debt-to-EBITDA multiple of 6.7 and 7.3 respectively. Therefore, the company's leverage is in line with peers.

The bottom line
Considering the factors discussed, Vantage Drilling is a high growth company available to investors at a discount. With 100% contract coverage for 2014, the growth exhibited in the first quarter is likely to continue for the rest of the year. This can potentially make valuations even more attractive. I consider Vantage Drilling a strong buy at these levels.

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