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28thNovember

Bronco Drilling Coverage Initiated With Strong Buy Rating

Bronco Drilling

Strong Buy
12 Month Target $42.00

Every so often, a tremendous growth stock can be accumulated at prices attractive to a value investor. These companies make for some of the best investments. Bronco Drilling (BRNC) is one of those companies.

Bronco Drilling Company provides contract land drilling services to oil and natural gas exploration and production companies. They own a fleet of 64 land drilling rigs, of which 50 are currently operating, 4 are in the process of being refurbished and 10 are held in inventory.

By many common valuation metrics, Bronco is very cheap. They are trading at a trailing P/E of 8.5 and a forward P/E of only 5.73, based on today’s closing price of $17.70. The current price/ book value ratio for Bronco is only 1.37. They are trading at a trailing P/EBITDA of 4.

Ratios as low as these would catch the eye of most any value investor. A company trading at these ratios would normally be a mature or even deteriorating business. Bronco Drilling is far from being either of these. In the past 12 months, they reported revenue of $242.3 million, a more than 500% year over year improvement on the $47.6 million they reported in the prior 12 month period. Earnings have grown at a similar clip. Earnings per share for FY 2006 are expected to come in at $2.54. Analysts are also looking for $3.09 in earnings per share for FY 2007. Yahoo! Finance shows Bronco as having a PEG ratio of 0.13, an extremely low figure.

We believe Bronco is well positioned to beat these current estimates to the upside, something this company has consistently done since their IPO a little more than a year ago. Based on management’s expectations of ending Q1 2007 with 55 rigs in operation (compared to 50 at the end of the most recent quarter), and assuming day rates increase at a rate consistent with historical increases, Bronco’s earnings should increase by at least $0.10 per share to $0.80, above analysts current estimates for the quarter of $0.79. This $0.10 improvement is based solely on a 10% increase in operating rigs and modest increases in day rates, something that management expects pointing out that three contracts that will be renewed in the current quarter will be renewed at higher daily rates. As the rig refurbishing program slows, spending will as well, giving further potential upside to the aforementioned $0.10 improvement. Given this knowledge we are looking for Bronco to earn $0.82 per share in Q1 2007 and $3.52 for FY 2007.

The shares of most companies throughout the Oil and Gas Exploration Services industry have had a rough year, following a decline in natural gas prices. The fear of further declines in natural gas prices is overdone in our opinion, and expectations of a warm winter are already factored into current natural gas futures prices. We feel this overreaction to the year’s declines in natural gas prices is evidenced by the fact that companies throughout the industry are trading at steep discounts to historical prices based on current P/E and P/EBITDA ratios. A reversion to the mean is anticipated therefore we are looking for P/E ratios to expand throughout the industry. Bronco currently trades at a trailing P/E of 8.5, we view a P/E of 10 as fair value for a company in Bronco’s sector. Given Bronco’s strong growth rates, they deserve to trade at a slight premium to their peers, making a P/E of 12 justifiable for this company. By applying this multiple to our estimate of FY 2007 earnings of $3.52, we arrive at a fair value of $42.00 for shares of Bronco Drilling Company. Also supporting our Strong Buy recommendation is a downside limited by their very low Price/ Book Value ratio relative to their peers and their strong balance sheet. A strong technical base was recently built at $17.00, a figure that we view as a bottom in Bronco’s share price. Bronco Drilling represents one of the markets most compelling investments based on our perceived risk to reward ratios.

Disclosure: Joseph Urgo has a long position in Bronco Drilling Company.

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8 Comments

Nick says 1st December @ 1:51

Yes, the stock is incredibly cheap, but they’re not growing cash, and their long-term debt has been rising. Their total cash per share is a measley $.13. I looked at this one a couple weeks ago, and think there are much better ways to play the energy sector.

Joseph Urgo says 1st December @ 10:36

You are right to mention the fact that they have not been adding cash to the balance sheet, something that I noticed as well. This doesn’t concern me though, as the reason for this is their refurbishing program. I feel that this was cash incredibly well invested, as it is what has drove growth at the company to the tune of over 500% in the past year alone. Once the refurbishing program slows, as management has hinted at possibly happening as soon as Q1 2007, debt will be paid down and cash will start to stockpile on the balance sheet.

Eric_Cheshier says 4th December @ 18:39

I think this is a good find - I noticed it on my stock screen recently but didn’t have time to research it. As far as their cash position - I would rather see a company investing their cash into the business rather than stockpiling it. Joseph is right, in due time they will pay off debt but they need to build their infrastructure first.

Nickt says 6th February @ 16:25

I’ve been holding Bronco since mid 14s now, and it looks like to me the Wexford overhang has been considerably affecting the pps. Bronco in the mid 15s is a very attractive but it appears as if without a catalyst the stock’s not going anywhere for a while.

What are your thoughts?

Cheers

Joseph Urgo says 7th February @ 13:30

I agree with you that the Wexford overhang has been a provider of downward pressure lately, but if you look at the SEC filings the past few days, you can see that he has sold almost 75% of his original position already, so the overhang is nearly gone. I am still expecting very strong earnings from Bronco this quarter, which are a catalyst in themselves. Bronco is very cheap here and can move up at any time based solely on fundamentals.

NickT says 7th February @ 23:11

I agree with you Joseph on all counts. Every way you slice it, Bronco’s attractive. I’ve building a position here for the past 3 weeks and prior to that i looked at all of their 8k fillings and the 10k report as well as listen to a couple of archived conf. calls on earnings.com. One thing that becomes immediately clear, is that this appears to be a well run company and with a knack of making good strategic acquisitions. I as well believe Bronco will report very strong earnings. I’ve been paying particular attention at the Baker-Hughes Rig reports published weekly. If you analyze the reports and look at the Gas rigs what you will find is that the number grew on the avg. 16% YoY for the Numbers don’t lie and what they tell me is that Nat. Gas is doing quite well.

Looking at Wexford’s reports they had approx. 11mil shares. If my calculations are correct they should now hold around 3.7-3.8mil.

Indeed Bronco’s cheap right here which presents a good opportunity.

Cheers

NickT says 7th February @ 23:57

Here are some interesting info from yesterday’s filling…

Offer to sell (actually resale) 4,070,390 shares. As of Jan. 30th Wexford held 16.3% of common stock. That transales to around 4.3mil shares. In the Eagle services acquisition Bronco issued 1,070,390 shares to Kim Snell (owner of Eagle). After this is done Wexford will control 4.8% of stock which is around 1.2mil shares.

But what struck me was the following from the filling, which makes me wonder if Bronco’s an acquisition candidate…They cerntainly hint it.

“Wexford Capital LLC, or Wexford, through Bronco Drilling Holdings, L.L.C., beneficially owned approximately 16.3% of our common stock as of January 30, 2007. As a result, Wexford is able to exercise significant influence over matters requiring stockholder approval, including the election of directors, changes to our charter documents and significant corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business. The interests of Wexford with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. Wexford’s continued concentrated ownership may have the effect of delaying or preventing a change of control of us, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. Bronco Drilling Holdings is one of the selling stockholders and will own 4.8% of our common stock after this offering assuming all of its shares included in this prospectus are sold and no other shares are acquired by Bronco Drilling Holdings or issued by us. ”

I’d like to hear your thoughts here

Joseph Urgo says 27th February @ 1:45

Bronco could potentially be a acquisition target, especially considering they are trading for just slightly over book value. If they decide to pay down debt once they suspend their refurbishment program at the end of Q1, cleaning up their balance sheet in the process, they will become even more attractive in the eyes of potential bidder. However, Bronco is managed well enough to survive and grow on their own without being acquired.

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