TPS Trade Alert – November 12, 2014
November 12, 2014
Recommendation:
Buy Vantage Drilling (AMEX: VTG) up to $1.15 per share.
Trade Rationale:
One of the biggest surprise developments of 2014 has been the plunging price of crude oil. The price of West Texas crude has basically plummeted over the last two months.
The most interesting part of the plunge is it’s basically due to supply. That is, there’s more production going on than demand. Remember all those folks who thought oil would be $200 per barrel by now?
Here’s the thing…
The impact of oil trading below $80 per barrel is huge, both for individuals and businesses.
Yes, for you and me, lower oil prices means cheaper gas – and that’s generally a good thing. On the other hand, for many oil production companies, cheaper oil is very bad news.
That’s especially true for shale oil drillers and deep sea drillers.
You see, those companies have much higher production costs for oil than say, a standard onshore driller. The breakeven point for most of these types of companies is in the $70-$80 range.
In other words, some companies out there are already losing money. Others may have to shut down entirely until the price of oil climbs. It’s no wonder so many drillers have been getting smashed in the stock market lately.
However, for investors with a long-term time horizon, this plunge in oil could be the (black) golden age.
Several perfectly healthy companies are getting crushed because of crude’s price. Those same businesses will be fine once the price of oil returns above $80. And, as much as I hate to say it as a driver, oil isn’t going to remain cheap forever.
It’s still a dwindling resource. It’s also a necessary component of the global economy. Eventually, oil’s price will rise… along with the drillers.
That’s why it’s a perfect time to invest in Vantage Drilling (AMEX: VTG).
VTG provides offshore drilling services to oil and natural gas companies. The company offers drilling units, equipment, and work crews for drilling sites.
Vantage owns a fleet of seven drilling units, with one more under construction. The company has three ultra-deepwater drillships and four ultra-premium jackup rigs (drilling platforms).
There’s not much else to know about what the company does… they drill. So, let’s move on to the financials.
With 7 operational assets, the company has shown strong growth in revenue, income from operations, and adjusted EBITDA. VTG also has a massive customer backlog of $2.8 billion.
Basically, from a revenue/EBITDA perspective, the company is in great shape. The only real concern is, you guessed it, the price of oil.
Basically, the company needs the additional profit from higher oil prices to pay down its massive debt. Keep in mind, most drillers carry a hefty amount of debt – consider it a barrier to entry.
Now, VTG does have $81 million in cash to help service its $2.8 billion in debt. Moreover, the company paid down $53 million in debt just this last quarter. As long as management continues to make debt retirement a priority, the long-term health of the company will be fine.
However, VTG shares have gotten beat up with the rest of the industry as crude oil continues its plunge. As such, the stock is trading at just 4.3x earnings and 4.7x projected earnings.
That’s a cheap valuation in any industry. But, it’s especially low for drillers, who could see huge profits in a short period with changes in the price of oil. Remember, commodities are notoriously volatile. This time next year, we could easily be complaining about how expensive oil is!
Let’s grab shares of VTG here.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Vantage Drilling |
| Ticker: | VTG |
| Recent Price: | $0.98 |
| Market Cap: | $302 million |
| Avg. Daily Volume: | 1,848,170 shares |
Chart:
Category: TPS Trade Alert
