Description

Vantage Drilling (VTDRF) is another post-bankruptcy offshore driller. It’s a very cheap vehicle to play the recovery in day rates and there's a catalyst to boot. At current prices, the shares trade at <2x 2025 EBITDA and FCF.

So what’s the catch? The fleet is subscale and the shares are illiquid. However, you can source stock. It trades OTC and brokers send out quotes. Some funds are sitting on large gains or liquidating so there is volume if you’re patient. The end game is a takeover by any one of the larger players looking to consolidate the space (e.g. Seadrill buying Aquadrill). For more evidence of the game plan, look no further than the recently issued 9.5% high yield bonds which have a special 105 call in the event of a takeover within a year of issuance (i.e. before February 2024).

As others have noted on VIC (including lpartners on Seadrill), the offshore drilling backdrop is very favorable. Demand is increasing and supply has been rationalized in recent years. The order book is at historic lows as no one is building new vessels (absent jackups per captive fleets at NOCs). The industry is more rational now due to new ownership per bankruptcies and consolidation, yard capacity is limited and new build costs are elevated (estimated $1 billion / $250-$300 million for drillship / jackup). Even if new vessels are built, the economics required are well-above current day rates. Still, it’s the ESG backdrop which provides a far stronger and durable cap on new supply IMO. Historically supply kills a cycle…

Vantage’s owned fleet consists of 2 jackups (Topaz Driller – circa 2009 / Soehanah – 2007) and 2 floaters (Tungsten Explorer* – 2013 / Platinum Explorer** – 2010). The jackups are premium – Baker Marine Pacific Class and the drillships are 6th generation. All were built at reputable yards (DSME and PPL) in Korea and Singapore. The fleet is modern and relatively young with an average age of 13 years. Additionally, Vantage manages 2 drillships and 1 semi-submersible for Aquadrill and supports a fleet of 3 vessels sold to ADES. The management and support agreements should last to mid-late-2024 and mid-2025.

*Tungsten upgraded w/ MPD system; able to drill in Namibia where others cannot due to deepwater requiring stronger thrusters and hook load

**Acquired 6-ram BOP for $26 million (held in storage currently)

The capital structure is straightforward. As noted, Vantage issued $200 million of 9.5% secured notes due 2028. Pro forma cash is $85 million for net debt of $115 million. The market capitalization is $236 million for an EV of $353 million. Guidance for 2023 is $74 million (4.8x implied multiple) but this reflects legacy day rates.

As mentioned above, the backdrop is solid. E&P spending is projected to increase over the next several years, a key driver for offshore drilling activity. More specifically, offshore capital expenditures are expected to grow 20%, 9% and 5% in 2023-2025. This is a function of recent low investment spending, a supportive price environment and heightened concern over supply considering the geopolitical backdrop. Approximately 80% of undeveloped offshore projects are economic at $60 or lower. Jackup demand is more tied to production and workovers with 70% of work from NOCs so it’s not as sensitive to exploration spending as floaters, but demand for both is expected to increase at healthy rates in 2023-2025.

Due to supply rationalization and cold stacking of rigs, marketed utilization is now 90%+ which is supportive for continued day rate increases. Compared to 2014, current floater supply is 50%+ lower. Even if I include stacked vessels likely to return and ships on order, supply is off 40%+. While not down as much, jackup supply is off 14% from 2014 (7%+ with stacked + likely to return and new builds), but the fleet is far older and should see retirements in the coming years with 1/3 of vessels >35 years old. Combining the reduced supply with demand growth results in limited rig availability. This has caused day rates to increase and should lead to further strength and contract term. 

As it relates to Vantage, the jackups are chartered until 3Q 2023 and the drillship contracts go to 4Q 2023 and through 4Q 2024 assuming the options are exercised. As these contracts reset to leading edge day rates, EBITDA and FCF should grow significantly. Leading edge day rates are ~$150k for jackups and $425-$450k+ for drillships. Using $135k and $375k (as the company recently outlined in a presentation) results in EBITDA of $194 million* or roughly $145 million of FCF. Since the management and support agreements expire, this figure does not capture the $23 million of FCF expected in 2023. At these rates, the shares trade at 1.8x EBITDA and 1.6x FCF (including corporate costs of $26 million).

*This assumes 90% utilization which is probably conservative at those day rates.

 *The drillship opex assumption of $125k looks high considering the Platinum opex is <$100k

Since I expect day rates to increase beyond these levels, my estimates are higher for 2025. Using my figures, the shares are even cheaper at 1.6x EBITDA and 1.4x FCF. Additionally, some percentage of corporate costs would also go away in a transaction. Using 2025 estimates and assuming M&A synergies, the creation value for a buyer at these levels is <2x EBITDA assuming a 30% premium. This compares to the sector which trades at 4x-7x – average of 4.5x 2024 EBITDA. While not a perfect comparable, Tidewater’s recent purchase of Solstad occurred at 5x EBITDA. More appropriate is Seadrill’s purchase of Aquadrill. This was announced in December so it was before the big move in day rates but using today’s implied purchase price, the multiples are 3.2x and 2.3x 2024E and 2025E EBITDA. At 2x my 2025 estimates, I calculate an implied price of $24/sh (or $27/sh with synergies). 

Besides the provision in the HY indenture and management’s recent commentary at conferences suggesting they wanted to be part of consolidation, the stockholders list is another signal. Holders include GoldenTree, Knighthead, Cross Ocean, Anchorage, Whitebox and others. Furthermore, with the exception of Transocean, all competitors have clean post-bankruptcy balance sheets. All agreed at a recent Clarkson’s conference that the industry is likely to consolidate. But who is the natural buyer? Really anyone since it is fairly small. Maybe Seadrill since they already bought Aquadrill (which Vantage manages 3 rigs) but several others are possible buyers too.

Even if an M&A transaction doesn’t occur near-term, the company is well-managed and should generate meaningful cash in the coming years to the point where by the end of 2025, Vantage should have >80% of its share price in net cash.

Catalyst

-Takeout

-Day rate progression 

-FCF generation