Vantage Drilling Company is a high risk, but potentially high reward stock

Today we would like to bring to your attention a high risk, but potentially high reward stock: Vantage Drilling Company (NYSEAMEX:VTG). Vantage Drilling is an international offshore drilling company focused on operating a fleet of modern, high specification drilling units, through which they provide offshore contract drilling services to major, national and independent oil and natural gas companies, focused primarily on international markets.

Their principal business is to contract drilling units, related equipment and work crews to drill oil and natural gas wells on behalf of their customers. While four of Vantage Drilling’s rigs are designed to operate in waters of around 375 feet maximum, they also have three ultra deepwater drill-ships (one of which is under construction) capable of drilling in waters of up to 12,000 feet in depth. They also provide construction supervision services for, and will operate and manage, drilling units owned by others.

Oil and gas, not milk and honey

First, let’s look at some of the uglies. Vantage Drilling is a small-ish player in an international industry. They are highly leveraged with heavy debt service requirements; they are subject to all kinds of international political, regulatory, economic and social uncertainties – along with the effects of actual and expected changes in the prices of, and demand for, oil and natural gas. Their rigs could be the victims of terrorism, piracy, war, tropical storms and other adverse events for which insurance may be inadequate and/or unavailable. The company has significant transactions with a major shareholder (almost 40% ownership) and its affiliates, whose interests may not be aligned with Vantage Drilling.

Promising outlook

On the positive side, the outlook for the industry in 2012 is promising and industry stock prices are generally low after a slow 2011. Vantage Drilling’s stock, which has been trading in the $1.00 to $1.25 range over the past month, has traded at $2.25 within the past 52 weeks (which was a fairly low point for the industry) and over 8 dollars per share in the past four years. The leverage factor that we noted as a negative risk above also offers the opportunity for exceptional upside gains.

Vantage has one of the youngest, most modern fleets in the industry and a significant backlog of business. (Some $3 billion per the company, which is over 8 times annualized revenues based on the company’s latest 10-Q.) As Vantage Drilling’s market valuation of around $350 million is comparable to the price of some individual rigs, its modern fleet and business backlog seem to make it an attractive acquisition candidate. And if not acquired, it has one of the most experienced and successful management teams in the business which bode well for Vantage Drilling as a stand-alone company.

Small size advantage

We also noted above the company’s relatively small size as a potential negative. But because Vantage Drilling is not that large or well known, few analysts cover the company and many investors aren’t aware of it. Companies whose stock price suffers from a lack of exposure often offer exceptional upside potential. We believe this could be particularly true in the case of Vantage Drilling as its small market cap make it an easily digestible acquisition target.

Financially the company’s market cap is around 50% of book values and only a couple of times Vantage Drilling’s apparent annualized EBITDA through September 2011.

Buy now, sell later

So for readers looking for a speculative investment with big upside potential within the next few years, we recommend you take a look at Vantage Drilling. Investors in VTG must be prepared to lose their entire investment and willing to hold their investment for a year or more (although a short-term price spike could present opportunities for a quick profit).

Always remember to do your own due diligence, checking up company filings and consulting with an investment professional. Additionally, remember our disclaimer.