Dear Subscriber to TheStreet.com Stocks Under $10,
The model portfolio has lacked direct exposure to the energy patch for some time, but today we are adding Vantage Drilling (VTG:Amex).
After you receive this Alert, we will purchase 1,750 shares of Vantage here around $1.64, equal to 2.4% of the model portfolio. This leaves us the room to buy another 750 shares .
The company is an offshore driller with three rigs currently in operation and another one expected to come online in the coming weeks. Even though energy commodity prices have rebounded in 2009, it's been a difficult year for the drillers, as oversupply has hurt contract pricing.
That said, during the third quarter Vantage's two rigs respectively operated at 98% and 99% productivity, and we believe the entire industry is reaching an inflection point. The company's projects are spread out across the globe, with sites in the Gulf of Mexico, Africa and Southeast Asia, among others. A third unit, the Aquamarine Driller, began drilling in November.
There are risks to the story, including the fact that Vantage is a relatively new firm. The company's first rig started generating revenue in the first quarter of 2009. Additionally, Vantage is admittedly a broken initial public offering (IPO) -- having come public in May 2007 at $8 a share -- but we believe there is real value in the rubble.
With a relatively new firm like this, gauging the strength of the management team is important. We believe that Vantage measures well on this test, as its three top executives have 76 years of combined experience, including time at major drillers like Transocean (RIG:NYSE) and Pride International (PDE:NYSE).
With a fleet consisting of only newly built ships, the company also believes that it has a strategic advantage, as more than 70% of the jackup rigs currently in the market are at least 25 years old.
This is a capital-intensive business, which means that the company carries a lot of debt on its balance sheet. At the end of the third quarter, Vantage had $265 million in total debt, compared with just $40.7 million in cash.
Just last week the company announced a proposed debt offering of $135 million, which it primarily plans to use for financing the remaining construction on its new rig, the Topaz Driller. Upon delivery, the rig is expected to begin operating in January. The key is that market demand continues to improve, and we believe that all of the company's rigs will see little downtime in 2010.