October 3, 2012 / 5:46 PM / 5 years ago

TEXT-S&P revises Vantage Drilling outlook to stable

     -- U.S.-based offshore drilling company Vantage Drilling Co. is
issuing new senior secured debt to partly prefund a payment for a new drillship,
thereby increasing the company's debt leverage. 
     -- We are revising the outlook on Vantage to stable from positive. We are 
affirming the corporate credit rating.
     -- We are assigning a 'B-' issue-level rating and a '3' recovery rating 
to the proposed debt offering. 
     -- The stable outlook reflects our expectation that Vantage will maintain 
adequate liquidity based on its good contract coverage.

Rating Action
On Oct. 3, 2012, Standard & Poor's Ratings Services revised its outlook on 
Houston-based offshore drilling company Vantage Drilling Co. (Vantage) to 
stable from positive. At the same time, we affirmed the 'B-' corporate credit 
rating on the company.

We also assigned a 'B-' issue rating (the same as the corporate credit rating) 
to the proposed senior secured debt offering from Offshore Group Investment 
Ltd. (OGIL), which is a subsidiary of Vantage. We assigned a '3' recovery 
rating to this debt, indicating expectations of meaningful (50% to 70%) 
recovery in the event of a payment default. 

We revised the outlook to stable to reflect Vantage's increased leverage 
following the proposed debt offering, which the company plans to use to repay 
existing debt, fund a delivery payment due next year for its Tungsten Explorer 
drillship, for general corporate purposes, and for fees and other expenses. 
Pro forma for the offering and inclusive of adjustments for operating leases 
and accrued interest, we project that debt will total nearly $3 billion. As a 
result, the company's leverage measures will be very aggressive, averaging 
approximately 7.5x next year and between 6.5x and 7x in 2014. 

The ratings on Vantage reflect Standard & Poor's assessment of the company's 
business risk as "vulnerable" and its financial risk as "highly leveraged". 
The ratings primarily reflect the company's aggressive debt leverage, reliance 
on two of its drillships for a majority of its current cash flows and 
profitability, and participation in the highly cyclical and competitive 
offshore contract drilling industry. The ratings also reflect Vantage's 
relatively young and technologically sophisticated fleet and its decent 
backlog, especially from its drillships. 

We view Vantage's financial risk as highly leveraged. We expect the company to 
generate EBITDA of approximately $125 million for the remainder of 2012, $380 
million next year, and $430 million in 2014, resulting in leverage of 
approximately 7.5x at year-end 2013 and 6.5x to 7x at year end 2014. We 
forecast that funds from operations (FFO) will be more than $30 million for 
the remainder of this year, $150 million in 2013, and $180 million in 2014. We 
project that free operating cash flow will be negligible for the remainder of 
2012, that Vantage will outspend cash flows by $320 million next year 
(primarily due to its payment to take delivery of Tungsten Explorer), and that 
the company will be cash flow positive in 2014.

Our forecast incorporates the following assumptions and expectations:

     -- We have assumed a $550,000 day rate for the Tungsten Explorer 
drillship (which is scheduled for delivery in mid-2013), and a $160,000 day 
rate for its jackups next year and $170,000 day rate thereafter. We have also 
assumed 90% utilization on the company's vessels, with operating and 
maintenance expense on its drillship and jack-ups averaging 40% and 50% of 
revenues, respectively. Our day rate assumptions compare to current bid rates 
for high specification drillships in the $600,000 per day range and for high 
specification jackups near $180,000.
     -- The Titanium Explorer (formerly called the Dragonquest) will operate 
for Petrobras in the fourth quarter, at a day rate near $600,000 (inclusive of 
bonuses) over the life of the contract. At this rate--and assuming at least 
90% utilization and a 60% to 70% EBITDA margin--we project that the vessel 
could contribute between $150 million and $180 million to EBITDA annually.

Vantage's vulnerable business risk profile incorporates the company's limited 
operating diversity. We base our assessment of Vantage's business risk profile 
on the small scale of its current fleet, which limits its asset and revenue 
diversity, and the risk that it could encounter unplanned downtime at any of 
its rigs. Currently, more than 50% of cash flows come from the company's 
Platinum Explorer, but going forward, we expect that the Titanium Explorer and 
Tungsten Explorer will reduce this concentration risk. In addition, we expect 
the company to continue operating in what we consider to be politically 
unstable regions (it currently operates in West Africa and Malaysia), and 
thus, it will remain vulnerable to geopolitical unrest.

Vantage provides contract drilling services, primarily to international oil 
and natural gas companies. Its active fleet of six rigs consists of two 
high-margin, ultra-deepwater rigs (Platinum Explorer and Titanium Explorer) 
and four ultra-premium jackups (Emerald, Sapphire, Topaz, and Aquamarine). In 
general, Vantage's relatively new and technologically sophisticated fleet 
(which features high hookload capacity, deep drilling capabilities, and 
extended cantilever reach) is well-suited for drilling complex wells and 
operating in harsh environments. Vantage also has a construction and operating 
management business that contributes modestly to its profitability.

The company's high-specification drillship, the Tungsten Explorer, is 
currently under construction and is scheduled to be delivered in mid-2013. 
(More than $400 million will be due at delivery.) Although the drillship is 
uncontracted, we expect that demand for deepwater drilling rigs will remain 
robust. As a result, we think the company will contract it at a favorable day 
rate prior to delivery. 

Vantage's four jackup rigs are contracted at least into the first quarter of 
2013. The large number of uncontracted newbuild jackups scheduled to enter the 
market through 2013 could pressure day rates and utilization levels. However, 
the company has been successful in extending its contracts with existing 
customers and has been able to command higher day rates, as a result of the 
highly sophisticated nature of the fleet. The Platinum Explorer is contracted 
through 2015 at a favorable $590,000 day rate, and the Titanium Explorer is 
contracted to Petrobras for eight years at a day rate of $589,000, inclusive 
of bonuses.

We assess Vantage's liquidity as "adequate", incorporating the following 
expectations and assumptions:
     -- As of June 30, 2012, the company had a cash balance of $124 million 
and full availability on its $25 million revolver maturing in 2015. We expect 
that the proposed offering will leave liquidity in excess of $600 million.
     -- Fixed expenses are substantial, as the company will have approximately 
$200 million of cash interest expense annually pro forma for the proposed 
offering. We also expect the company to make a final payment of more than $400 
million for the Tungsten Explorer in 2013.
     -- We think maintenance spending will average approximately $20 million 
     -- We expect Vantage's sources of liquidity to cover its anticipated uses 
by more than 1.2x over the next 12 months.
     -- The company has no near-term debt maturities.
     -- Our liquidity assessment incorporates our expectation that Vantage 
will continue to recontract its jackups at favorable day rates and that it 
will contract its Tungsten Explorer drillship before mid-2013. 

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Vantage Drilling Co., to be published on RatingsDirect following this release.

The outlook is stable. We expect that Vantage will continue to successfully 
recontract its jackup rigs at favorable market rates and that it will contract 
its Tungsten Explorer drillship prior to its delivery in mid-2013. We expect 
that Vantage will add additional rigs going forward, but the current outlook 
reflects our view that it will maintain adequate liquidity. We could downgrade 
the company if liquidity deteriorates, which could occur if its rigs encounter 
unexpected downtime or if day rates weaken significantly. An upgrade to 'B' 
will require run rate leverage below 6x. Given Vantage's very aggressive debt 
balance, we do not expect to raise the rating in the near future. 

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011.
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008.

Ratings List
Ratings Affirmed; Outlook Revised To Stable
                                        To                 From
Vantage Drilling Co.
 Corporate Credit Rating                B-/Stable/--       B-/Positive/--

Offshore Group Investment Ltd.
 Senior Secured                         B-                 
  Recovery Rating                       3              

New Rating

Offshore Group Investment Ltd.
 Senior Secured
  US$1.5 bil nts due 11/01/2019         B-                 
   Recovery Rating                      3                  
  US$800 mil nts due 11/01/2022         B-                 
   Recovery Rating                      3                  

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 

Our Standards:The Thomson Reuters Trust Principles.
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