Vantage Drilling (NYSEMKT: VTG) is one of the more interesting offshore drilling contractors in the industry. The company owns one of the most modern fleets in the industry. The only company that has a similarly modern fleet is Pacific Drilling (PACD +0.00%). This gives it a strong competitive advantage, especially given that what demand exists today is nearly exclusively for modern drilling units. The company is also very highly indebted, which adds a certain degree of risk to the investment. However, should Vantage manage to pay down this debt as it certainly has a chance to, then an investment in the company could certainly pay off down the road.
Modern and varied fleet
Vantage Drilling's rig fleet consists of eight drilling rigs that are owned by Vantage Drilling outright as well as two rigs which the company manages for another owner. For our purposes today, though, we will only focus on the rigs that Vantage owns outright because these are the rigs that are responsible for most of the firm's revenue and cash flow.
The company's owned rigs are evenly split between drillships, which operate in ultra-deepwater environments such as off of the coast of Brazil or in the Gulf of Mexico, and high-specification jack-ups, which operate in shallow waters such as those off of the islands of Southeast Asia or in the Persian Gulf. This fleet gives Vantage Drilling the capability to operate in any environment that its customers may require except for the Arctic and other harsh environments. This also gives Vantage Drilling an advantage that Pacific Drilling does not have as the latter company does not have any shallow water capability.
As mentioned earlier, the company's rig fleet is quite new; all of the rigs have been built over the past few years. As the company's rigs were completed and left the shipyard, they began to work on their respective contracts from their customers. These customers are typically giant oil and gas companies that need the rigs to drill exploration or development wells for them. Due to their size and financial strength, there is relatively low risk that a company that hires the rig will fail to pay Vantage. Thus, the addition of each rig increases Vantage Drilling's revenue and cash flow once it leaves the shipyard.
Very rapid historical growth
This process has resulted in a remarkably fast growth rate for Vantage Drilling over the years. Vantage only had $111 million in revenue just five short years ago, in 2009. In 2013, Vantage Drilling had $732.1 million in revenue. This gives the company a growth rate of 556% over the past five years.
Vantage Drilling has, by extension, enjoyed significant income and EBITDA growth over the same period. Vantage Drilling's income from operations has grown from $18.4 million in 2009 to $256.9 million last year. The company has also grown its EBITDA from $30.2 million in 2009 to $363.5 million last year. This gives Vantage growth rates of 1,296% and 1,104% in the two figures respectively over the past five years .
Source: Vantage Drilling
Strong forward growth potential
Vantage Drilling's growth story has not ended yet. This is because its eighth rig, an ultra-deepwater drillship named the Cobalt Explorer, is still under construction and is not expected to be finished until 2016. Once the construction of this rig is complete and it leaves the shipyard to begin work on its first contract, Vantage should see its revenue and earnings receive a significant bump . Investors may not even need to wait that long to see growth, however.
This chart shows all of the rigs that are in Vantage Drilling's fleet, as well as the revenue that Vantage receives for each day that the rig operates:
Source: Vantage Drilling
As the chart shows, there are a couple rigs in the company's fleet that saw their per day revenue increase in 2013. These rigs include the Emerald Driller, Sapphire Driller, and Aquamarine Driller. Although these rigs started producing revenue at the higher rate in 2013, 2014 will be the first year during which the rigs will generate that higher revenue throughout the whole year. This collection of higher revenue for the entire year should result in Vantage Drilling enjoying higher revenue in 2014 than it had in 2013. That higher revenue should also translate into income and EBITDA growth.
High debt presents some risk, but Vantage is managing it well
Vantage Drilling had to take on an enormous amount of debt to finance all of this growth, particularly because offshore drilling rigs are not cheap to construct. At the end of 2013, the company's long-term debt-to-EBITDA ratio stood at 7.8. Fortunately, the company has made some intelligent moves to manage it.
Basically, Vantage has made sure that all of this debt has long and staggered maturities. The first large tranche of debt comes due in 2017. This is well after the Cobalt Explorer will begin operating, so the company will have more money coming in to pay off this debt than it does today. This should result in Vantage generating sufficient operating cash flow to cover all of its debt servicing operations until 2018. This increased cash flow could thus be enough for it to begin paying down its debt .
Final thoughts
In conclusion, Vantage Drilling is a rapidly growing company that could offer an opportunity for outsized profits. Its high debt does present some risks, but Vantage appears to be aware of the situation and is actively taking steps to manage it appropriately. The presence of this debt has put a heavy weight on the company's stock price, but this could also present a very promising opportunity for an investor that is willing to take on the risk. Investors who are not willing to take on this risk may find Pacific Drilling more appealing as it has a lower debt load.
