VANTAGE DRILLING CO VTG
July 23, 2010 - 11:20am EST by
perspicar744
2010 2011
Price: 1.09 EPS $0.00 $4.50
Shares Out. (in M): 335 P/E 0.0x 0.0x
Market Cap (in $M): 368 P/FCF 0.0x 4.9x
Net Debt (in $M): 1,066 EBIT 0 0
TEV ($): 1,320 TEV/EBIT 0.0x 0.0x

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Description

 

The stock has been crushed due to worries of a dilutive financing to buy out their majority partner in a 45%/55% JV on a drillship.  Solving the financing need should give the equity a significant boost and the high yield issue offers a fat coupon with strong asset value coverage.  Pricing for the $960m debt & $50m equity package is supposed to be Monday night.  

 

Pro-forma for post-financing:

335m shares out (assumes conversion of a $60m seller's note which needs shareholder approval)

$1.10 stock price

368m market cap

1,066m debt

114m cash

1,320m EV

 

Vantage is an offshore drilling company whose advantage is a brand new fleet of high-specification drilling units contracted out to major national oil companies and well funded independents.  It contracts the drilling units, related equipment, and work crews on a dayrate basis.  It also supervises shipyard construction and manages operations for drilling units owned by others.

 

The fleet consists of four jackups, two drill ships, two semi-submersibles, and one just announced combo Drillship/FPSO:

    Five are owned:

        four 375'Jackups (100% owned each)

        one class 6 drillship (45% owned, the financing need is they're purchasing the other 55%)

 

    Four are managed for other owners (one drillship, two semis, one FPSO)

 

These are best-in-industry assets, made by the best shipyards (Daewoo making the drillships, PPL made the jackups), and have attracted excellent long term contracts with high quality customers.   Innovative new features such as extended reach cantilevers, increased pipe deck and fluids storage capacity, premium drilling packages, and many design improvements allow customers to save time and money with these rigs because they can drill in fewer days, supply with fewer boat runs, and move the rigs to new drilling locations much faster.  Oil major Total is using one of these rigs in their Vietnam joint venture and says their other rigs drill the same wells in 15+ days and take 4 days to move to a new location.  These rigs do the same job in 11 days and take 4 hours to move.  Due to these savings, this state of the art fleet deserves and receives premium dayrates. 

 

The four owned Jackups are deployed and earning their dayrates, having been delivered on or ahead of schedule and operated with 99%+ uptime since.  The owned Platinum Explorer drillship is 98% complete with expected delivery in November.  Only finishing touches and importantly sea trials are ahead, but given the yard's track record not to mention its interest in receiving the remaining $670m of payments mostly due on delivery, the risk of delays at this point are minimal. 

 

The managed vessels are in the yards and due out between Dec 2010 and July 2011.  VTG is paid a 5m construction management fee per vessel while in the yards, which converts to a 13-15m annual operations management fee per vessel once deployed.  These fees are nearly 100% margin because all other costs are pass through to the owner. 

 

The financing need is they are buying out the other 55% of the Platinum Explorer drillship.  To accomplish this they are floating 960m of bonds at 13.5% and issuing 50m of equity.  This capital will refi most of their existing debt and fully satisfy payments to the shipyard and the 55% seller.  

 

The collateral package on the $960m of bonds is three of the jackups and the Platinum Explorer drillship:

3 Jackups   $200m each = $600m

1 drillship                           =  $750m

Total collateral                   = $1350m 

% coverage to 1st Lein      = 141%   (1350m/960m)

70% stressed value          =   98%   (945/960m)

 

A four year old jackup with similar specs was sold in April (in a better financing environ), for $223m.  These far newer vessels are worth more, so I believe that using a value of 200m per jackup is reasonable.

 

The bonds seem a better risk/reward relative to the equity.  Price talk is ~13.5% yield with the bonds coming at ~96 (OID 4%) and a 13% coupon, 5 year paper.  Yield to call is ~15% in 2.5 years and likely will be called since they should be able to refi lower at that time assuming the credit markets are functioning normally... I guess a leap of faith these days.  These bonds should trade above the issue price and demand is high.  If they rallied to a 10% yield they'd be over 120... could easily happen if dayrates rise.

 

In the proposed transaction, the seller is Nobu Su, who runs Taiwan Maritime Transportation (aka Today Makes Tomorrow, aka TMT).  He's got a fleet of 55 vessels (tankers, dry bulkers, LNG carriers, and offshore drilling platforms), and is known to be a levered, pedal to the metal type of operator.  He owns 39% of VTG equity and through his F3 Capital subsidiary owns the 55% of the Platinum Explorer drillship that is being sold to VTG.  As part of the transaction, he's taking a 60m sellers note which will be convertible into equity at the deal price upon a required shareholder vote.   The worry over a non-arms length transaction is the cause of most of the controversy over this company.

 

Nobu Su also owns the other drillship under construction, the DragonQuest due in July 2011, which is among VTG's managed assets.  Some people worry that he won't have the cash to pay the yard and we'll be back in the same position with another dilutive financing.  However, I think that will not be the case because he's planned from the outset to keep the DragonQuest for himself, and thus it's a managed asset.  It is contracted to Petrobras for 8 years at a dayrate of $551,300... $1.6B of gross contract value.

 

 

                                 Value case

Assets                   low         likely      age                         Dayrate/Customer/duration+option                       EBITDA

 Emerald              170m     200m     Dec08                    171k to Pearl through Jan11                                          35m

 Sapphire             170m     200m     July09                    120k to Vaalco/Foxtrot through Sep11                          20m

 Topaz                 170m     200m     Dec09                    107k to Total's Vietnam JV through Dect10                   15m

 Acquamarine      170m     200m     Sep09                    120k to Nido through May12*                                       20m

 Platinum Expl      700m     850m     Nov10                   590k to ONGC begin Jan11- Dec15                              150m

 Managed rigs                                    Dec10-July11                                                                                           52m**

Total                  1380m   1650m                                                                                                                 293m

Implied share pr   1.27     2.08                                                                                                EV/EBITDA          4.5x

% upside***          14%    87%                                                                                                Debt/EBITDA     3.6x

                                                                                                                                               EBITDA/Int exp   2.0x

                                                                                                                                                 FCF                 ~75m

*reprices at market July11, continues to May12

** once deployed, 20m during construction, 3 deliveries by mid 2011, one delivery TBD

*** Oil bulls might consider an upside case at $220m per jackup which is closest to recent transactions, implying equity value of $2.32 per share (+ 109%).

Additional info: http://www.vantagedrilling.com/presentations/

 

The Jackup contracts currently average 130k/day and if rebid now I believe would avg 140k or better.   Backlog on the owned rigs is in excess of $1.3B with strong payers.    Two of the managed rigs are contracted to Petrobras and Pemex for delivery in 2011.  The others are on spot with the first one out of the yard in Q2 2011.

 

There is some question whether the financing package will be completed given the size, the hurry, the hair on it, and the current market.  If the deal is called off, they'll only own 45% of the Platinum Explorer and be right back where they were before this mess... with the stock in the 1.40's. 

 

However, with a 5 year $590,500 a day contact to ONGC (US$57B market cap with net cash, Moody's A2 rated), the Platinum Explorer drillship WILL get financed... by somebody...   Nobu Su will either self finance by selling off some of his other shipping assets or find an undertaker...  If ONGC has sense (and they historically don't) they might plunk down some cash and own this thing for the next 40 years rather than pay $1.1B of gross contract value to rent it for only the next five.  Or, a firm like Fredriksen's Seadrill might like these assets at a decent price,... or there are various asset investors who could step up.  And I'd like to be part of that group so contact me if this ship runs aground.

 

Due to the quality fleet with strong contracts, VTG is also a takeout candidate from any of the better financed drilling companies who can pay the 'likely' case or better and still create savings because they'll have approximately $75m lower interest expense since they're able to finance at 6-7%, rather than 13.5%.

The equity financing should price around $1.00. Books for both stock & bonds close Monday.

Catalyst

 Catalysts are:
  • - Financing problem gets solved, stock rises
  • - Financing problem doesn't get solved, stock rises on lack of dilution
  • - Bonds likely at better risk/reward and yield ~15 to a likely call in 2.5 yrs.
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