No group has been hammered worse since the beginning of 2007 than oil services, and no sub-group worse than the drillers. So why did I buy Bronco Drilling (NASDAQ:BRNC) Thursday at $13.72? A few reasons:
First, the stock has become so oversold that a bounce is long overdue. At the same time the decline looks like it has reached a nadir.
Second, although the chart might not reflect it, Bronco is highly profitable. Last quarter it earned $.70 per share, fully diluted. I think those numbers will come down a bit in light of the recent plummet in crude and natural gas, but I don't think the numbers even come close to turning negative (current estimates per Yahoo! expect $2.78 consensus for FY07 with a low estimate of $1.87). At the same time, I realize I am no expert in this area so I will keep a keen eye on the Baker Hughes rig count. If it plunges, I'll head for the exits.
Third, the company carries a fairly small debt load of $64.32 million. That number may increase slightly as the result of Bronco's purchase of Eagle Well Services, but it should still be quite manageable. Note that the purchase will be immediately accretive, and will help begin to diversify Bronco's revenue.
Fourth, stock sales by major shareholder Wexford Capital appear to have stopped. The last sale indicated was on December 11, 2006 at $18.95. If they begin to sell again, I probably will too.
Fifth, the best long-range weather forecaster in my opinion, Joe Bastardi of Accuweather.com, is predicting a major cold snap which could be supportive of energy prices and oil service stocks.
The stock dropped a bit further after my purchases Thursday afternoon, but put in a positive day Friday. I think shares can hit $16.50 on a bounce, and if natural gas and oil stabilize or recover, Bronco could trade closer to $20.
Update: While I knew that the compelling value it presented would eventually gather attention. I just didn't think it would happen in a matter of days.
[Scott] Black: Bronco Drilling [BRNC] is a land-rig company -- another controversial sector. It came public in August '05 and was selling for 14.56 a share a Friday. It has 24.9 million fully diluted shares, a $362 million market cap. There is no dividend. Stated book is $13.71 a share. Tangible book is $12.72. Trailing-four-quarter return on equity is 22%. Net debt to equity is 0.18. With their cash generation, they'll soon be out of the banks completely, and have a debt-free balance sheet. Bronco has 52 land rigs operating in Oklahoma, Texas, the Rocky Mountains. Half its customers are publicly traded companies like XTO Energy [XTO], Chesapeake Energy [CHK] and Devon Energy [DVN]. The other 50% are large independents. Their average contract is about 8½ months. Some contracts rolling off were made at lower rates of $16,000- $17,000 a day. The going rate now is $19,000 a day. Their land rigs are not high-end; most are not 2,500 horsepower. They're between 1,200 and 1,300. The company is going to add three more rigs this year.
[John] Neff: I thought it's hard to find low-P/E stocks.
Black: It is increasingly difficult, except for micro caps. What happens if rates tank by $1,000 a day? That would cost Bronco 50 cents a share after taxes. If they drop to $17,000 a day, it would take them down by a buck. They would still have $2.35 a share in earnings. On a break-up-value calculation -- you want to have asset protection, as well -- we get to $25.86 a share. With rates at $19,000 a day, Bronco has cash flow of $138 million. It will generate about $106 million of free cash. The company discounts all its projects at a 12% to 13% after-tax hurdle rate. The risk here is there may be a glut of land rigs. There is a glut of gas in the U.S. because of the warm weather, but the companies we own are still making quite a bit of money at $6 per mcf. The stock is selling below its IPO price of 17 a share, though it has been over 30. It is in the bargain basement.
[Meryl] Witmer: It sounds great.
I couldn't agree more.
Disclosure: Author is long BRNC and has no position in XTO, DVN or CHK..