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Bronco Drilling

|Includes: Bronco Drilling Company, Inc. (BRNC)
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.