Sector Valuation for Driller is 2- 4x that given to VTG
Using EBITDA to market capitalization as a measure of how Wall Street is currently valuing drillers, one finds a huge disparity in the valuation of VTG.
A basket of drillers, including high debt ones (NATDF and SDRL), young small UDW focused players (ORIG and PACD), and established drillers have significant legacy equipment that is over 10-20yr aged (ESV, DO, RIG, NE), EBITDA/Cap ratio ranges from 4 to 10.
For VTG, using the 2014 projection of EBITDA, the ratio is 1.
The issue is of course the debt, but all drillers carry debt. As another comparison which includes the debt burden, Ive examined the EBITDA to Enterprise Value (Market Cap plus Debt) ratios.
For that same basket of drillers, the ratio ranges from 8 to 14.
For VTG, using the 2014 projection of EBITDA, the ratio is about 6.
These are quite robust metrics for inter comparison, and whether one includes or excludes the debt, it is clear that VTG trades at a valuation several times less than any of its competitors.
None of this even considers the fact that the VTG fleet is the youngest in the sector, and thus secures superior contracts, has less downtime, and little docking, maintenance, and inspection costs in the foreseeable future.
Many of the other drillers are facing a replacement cycle for their aged fleets.
This disparity in valuations will almost certainly diminish as VTG begins to show its full earnings potential based on Q4 and 2014 and beyond.
Metrics look good but thats why vtg has always been a value trap. The bigger problem is confidence, constantly diluting any forward progress, bad business deals by Bragg, and obviously holding $3B ib debt in a rising rate environment. Metrics looks good but wallstreet invests with people they trust and management that know how create value. Bragg was let go from Pride because of fowl play and shady deals and he has failed miserably in growing vantage while creating shareholder value along the way. As a result, it would be ill advised to model vtg using industry metrics. You need to apply a significant disount for mgt.
Just a forward look....for CY 2016, assuming Cobalt delivers by end of 2015, a reasonable EBITDA estimate for VTG's fleet of 4 Jackups and 4 UDW will be ~$650M.
If we take management guidance that their immediate priority will be to reduce debt, it is plausible that for 2014, 2015, and 2016 that the company will reduce the existing debt by about $600M ($200M annual reduction in each yr.
Thus, using their 300M share count, and the existing $1.77/ sh price, implies an EV at the end of 2016 of about $2.3B. Their EBITDA/EV ratio would be about 3.5.
Applying the ratios currently afforded the driller fleet (a range from 8 to 14), would indicate that VTG share price could reasonable range between $4.50/sh to $7/sh.
If we further take management guidance that they intend to subsequently return capital to shareholders, then simply returning 20% of EBITDA (beginning in late 2016) would imply a 0.40/sh annual dividend. That would equate to a reasonable range in yield on shares of 6% to 9%.