Buy Bronco Drilling on Continental Resources Rig Expansion Plan

Continental Resources (CLR) announced early today a huge expansion in their drilling plans for the Bakken Shale in the Montana and North Dakota area. Forbes.com has some info about the move. Basically CLR had originally expected to end 2009 with 6 rigs working, but now they expect to be using 9 rigs. Then by mid 2010, they expect to be utilizing 23 rigs. Thats 17 more rigs that CLR will be putting to work.

This is just one company operating in the Bakken Shale, not to mention Haynesville or the Marcellus Shale. Its unclear whether Bronco Drilling (BRNC) will benefit directly from this expansion, but it should benefit from the overall capacity utilization in the sector leading to higher day rates and margins.

BRNC just began benefiting from a contract for 6 more rigs in Mexico working on drilling for PEMEX. Also, with the push in the US for more reliance on natural gas, BRNC seems like one of the best plays left. Most natural gas producers have already surged off the bottom along with the bigger drillers. BRNC still trades at a fraction of its highs.

BRNC has a book value of over $14, making the current stock price of $6 very attractive. They are still losing money and will continue to for a few more quarters at leasr, but the market seems to be improving very quickly at this point.

Buy BRNC off the CLR news, but be careful as BRNC announces Q3 earnings tomorrow. The sector isn't jumping today which is surprising, but for us that provides a buying opportunity. We'd suggest buying a half position expecting the guidance going forward to be upbeat.

Disclosure: Long BRNC.

Comments

[Robert D.:]

Would you revise your recommendation after an earnings report like that? $0.37 loss vs est. $0.33 loss doesn't sound as bad as "Utilization for its land drilling in the third quarter was 23 percent, down from 84 percent a year earlier."

i'm also a little confused on the numbers relating to these "possible future contracts" that they might be expecting. Any idea how large?

Nov 06 02:34 PM

[Stone Fox C...:]

haven't been able to listen to the Q yet so I'm not sure. The numbers were just slightly lower then expected and not a big deal b/c it was the trough Q. Q3 utilization was 23% and Sept was 24%. The Mex deal kicks in 6 rigs during Oct/Nov and the market in general such as what CLR is doing is really picking up. So the question is how quickly they get back to the 80% level or at least to breakeven so that the book value is investable? Clearly they didn't say enough on the CC, but the stock did hold up from filling the gap. I'll post more after I listen to the call.

Nov 06 07:56 PM

[Stone Fox C...:]

the report on Oct utilization reminded me that i was suppose to respond back. The 31% confirmed the CC that business is picking up. Of the 45 (now 46) rigs they had, 21 of the them are now working or 45%. Remember that 9 were transferred to the Mex JV. Its a little confusing on how that move impacts the financials, but it should be good that they've double the rigs being used.

Nov 10 04:59 PM