A little more than a month ago, The Marley Group initiated coverage of Bronco Drilling Company with a strong buy rating. After initially rising following our recommendation, shares have since fallen to new all-time lows, closing today at $13.61.
The recent slump in shares is the result of irrational trading decisions in my opinion. There has been no major company related news, the only recent event was a small acquisition that was greeted as a non-event in the trading day following its announcement. Natural gas has come down since the time of our recommendation, however it has not dropped to levels that would warrant a 20% drop in market value over the course of a few weeks.
Assuming the absence of some sort of catastrophic event that has been driving the trading of the past few weeks whilst unbeknown to the general public, this move can only be rationally viewed as an opportunity to accumulate at an even more favorable risk to reward ratio.
Bronco Drilling Company currently has a book value of $12.95 per share. This means that the market is currently valuing Bronco’s business operations at less than $0.67 per share, $0.10 less than they should earn in the current quarter alone. If shares of Bronco Drilling slide much further, the company will be selling for less than their rigs alone are valued at. If this happens, someone could theoretically acquire all of the outstanding shares of the company, disband all operations and sell the rigs, and record a sizable arbitrary capital gain.
This makes the possibility of any further downside in Bronco shares very limited. I reiterate a strong buy rating on Bronco Drilling Company and stand by my previous predictions. The fundamental picture remains very strong and in due time will drive a significant appreciation in the value of this company.
BRNC 1-yr. chart