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  • Q4 estimates for Bronco Drill (BRNC)
    BRNC will likely report 4th quarter and full year 2010 results in early March.  Below are a few back-of-the-envelope estimates of the Q4 numbers.  

    First, a word of caution.  Besides the revenue numbers--which are reported monthly and derived from documents already filed with theSEC --this is speculation.  You shouldn't make investing decisions based on what you read on the internet or based on anticipation of one quarter of decent results.  

    That said, here goes:

    Revenue should be around $37.5 million, based on reported utilization rates, number of rigs operating, and revenue day rates.
    By that measure, Bronco is improving.  Revenues in Q3 were 34.8 million.
    There aren't any assumptions baked into that estimate, it is straight from their reports.  

    Here's where it gets speculative.  A wage increase of $320/day was instituted in October.  IF (a Big IF) it began at the beginning of the month, costs increased about 700,000.  And where do they put that cost?  Since I didn't want to spend a half an hour finding out (laziness), it'll just get added in at the end.  

    Next, owned rigs declined from 34 to 24.  Let's assume that rig depreciation is most of the depreciation charge.  When were these rigs categorized as held for sale?  I don't know.  It matters a lot when trying to figure out depreciation.  I'll assume that all 34 were fully depreciated all throughout Q3.  34 down to 24 is a 30% decrease.  Take 30% off of the Q3 depreciation and amortization number--7.1 million--and you get about 5 million.  So let's say D&A for Q4 will be closer to 5 million than 7 million.  Great!

    I haven't heard of any cost reduction programs this quarter, let's assume that General and Administrative costs hold mostly steady at 3.7 million.  And let's keep Contract Drilling costs the same at 24.6 million.  

    Assume zero impairments, though there may be a small charge.  I haven't heard of anything this quarter so I'm assuming zero.

    Hold interest expense and interest income roughly the same.  1 million and 121,000, respectively.  Remember that the company expects to be debt free by the end of the year, so interest charge should be zero going forward, or very very close.   

    All that seems pretty good.  The trouble is the "change in fair value of warrant" charge.  It will be painful.  The more Bronco's share price increases, the more valuable the warrant is to the holder, and the more costly it is to Bronco.  Bronco is up 101.51% from October 1, 2010 to December 31st, 2010.  Also note that the warrants are now in the money.  Ouch.    

    In summary:
    (in millions)
    37.5  Contract Drilling Revenues
    -25.3 Contract Drilling Expenses
    -5 (ish) Depreciation and Amortization
    -3.7 General and Administrative
    -0 Loss on Bronco MX transaction
    -0 Impairments
    -0 Loss on sale of assets
    -1 Interest Expense
    +121k Interest Income
    -700k The wage increase

    = +1.921 ($1,921,000)

    Expect further losses on the Libya and MX equity partnerships, and a loss on the warrants.  I think I heard that the MX partnership is improving, and the Libya partnership should be bottoming out soon.  But I can't predict the amounts of those charges.  Who knows?

    Bronco may squeak by with a (very) small profit.  Also, I am slightly worried that my Depreciation and Amortization estimate is too low.  If I'm wrong, I'd hope it's at least below 6 million.  Still, things are getting much better and there is lots of reason for optimism in Q1 and Q2 of 2011.  

    Tags: BRNC
    Jan 16 11:46 PM | Link | Comment!
  • Bronco Drilling
    Bronco Drilling is financially sound and cheap--very cheap.  I think the stock could double or triple from here.  Ben Graham would say that the stock is worth book value, or around $12.36 per share.  A potential doubling or tripling of investment dollars does not come without risks.  

    The problem with Bronco is that it is currently unprofitable, and may be unprofitable for awhile longer, as its industry heals.  So an investment in Bronco is a bet that it is worth more and that it will be able to survive long enough to return to profitability.  

    On the product differentiation scale, drilling leans towards the low end.   That is, drilling is an undifferentiated, commodity-type service.  Which means that Bronco can’t specialize and raise prices.  Which means that supply and demand is going to determine how many of their rigs are put to use, and at what profit margin.  In that case, we have good news.  Drilling is on a cyclical upswing--analysts estimate that industry-wide utilization rates are between 50% and 65%.  And Baker Hughes has reported increases in operating rigs every week for the past few months.  Note that pricing power returns to drillers at around 80% aggregate utilization.  

    Since oil and gas prices will increase over the medium- to long-term, and lending conditions are easing, it’s only a matter of time before 80% of rigs are drilling.  It may take a year or two--who knows when--but it will happen.  Eventually.  And when it does, Bronco will surely be profitable.  

    So they will be profitable some day--assuming they can survive long enough.  In that area, there’s more good news.  Management says that it is prudent to take the company through an extended period of deleveraging.  They expect to finish paying down debt and start spending on expansion by the end of this year.  As my old finance professors used to say,  “Low debt allows management to salvage even the most mediocre companies.”  That is, leaving aside judgements of Bronco’s quality, their low levels of debt provide them ample time to fix what needs to be fixed, and wait on the industry to heal.  

    Also, they have positive operating cash flow, and steadily increasing utilization rates.  They’ll survive to see profitability.

    Bronco is cheap, sound, and poised to pop.

    Disclosure: Long 37,000 shares of BRNC.
    Aug 21 11:10 PM | Link | Comment!
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