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Vantage Drilling A Ground Floor Opportunity

Posted: Sep 21, 2009 11:38 AM by Eric Fox

Tickers in this Article: ESV, RIG, RDC, VTG

Investors with an appetite for risk may want to take a chance on Vantage Drilling Company (NYSE:VTG), a fairly unknown micro cap driller that is down more than 70% from its initial public offering (IPO) two years ago.

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Vantage Drilling Company was born two and a half years ago through an IPO in May 2007. The company raised $240 million through the sale of units consisting of common stock and warrants. The company was a Special Purpose Acquisition Corporation (SPAC) that raised capital to purchase an oil service business.

All Grown-Up
The company now owns four jackup rigs. Two are contracted and working in Southeast Asia and West Africa, while the other two will be delivered to the company from the shipyard in October and December 2009. The company also owns 45% of an entity that owns the Platinum Destroyer, a drillship that can operate in up to 12,000 feet of water. This drillship is under construction as well.

Vantage Drilling Company also manages the construction and will operate two other drillships and two semi-submersibles. The company has contracts for three of its five owned rigs.

A Youthful Glow
The company's main advantage over more established rivals like Rowan (NYSE:RDC) or Ensco International (NYSE:ESV) is the average age of its rig fleet. Rowan Drilling has a 19-year average age while Ensco International's fleet is 23. Deepwater driller Transocean (NYSE:RIG) has an even older fleet at an average age of 26 years. The average age of the worldwide jackup fleet is 23 years.

Vantage Drilling Company will have the lowest average fleet age once the rigs are completed. This will lead to less maintenance cost over the long term. Newer rigs also have better technology, which make them more attractive to operators.

The Downside
One problem is that VTG may be on a perpetual schedule of raising capital, as the company must pay for the construction of its new rig fleet in stages while it is being built. The market usually does not like this type of dilution, leading to extra volatility in the stock.

This month the company raised $70.1 million in net proceeds, in an offering of 48.4 million shares at a price of $1.55 per share. The company also has warrants trading under the symbol VTG.WS. The warrants entitle the holder to purchase one share of stock at a price of $6.00. The warrants expire May 24, 2011.

Another risk for the company is its leverage. Vantage Drilling Company had to make the final payments in late 2009 to its builder for two of its jackup rigs. The company borrowed $100 million on a credit line at 15% and secured a loan from the builder at 12% interest rate to meet its payment schedule. The recent equity capital raise was a requirement of this financing.

The Bottom Line
Vantage Drilling Company is certainly a riskier play than the more established offshore and jackup rig companies, but this company just might be a chance to get in on the ground floor of the next big thing in the oil patch. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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