"Although land-based drillers are very out of favor right now, Bronco Drilling is on solid ground," says Jack Adamo's Insiders Plus of Bronco Drilling Company Inc. (NASDAQ: BRNC). The advisor explains, "There are two reasons for the land drilling sector being out of favor.
"First, the biggest finds are now under the sea. Particularly in the U.S., most of the big, accessible deposits on land are played out. Still, there are plenty of pockets of economically viable deposits to be found, especially in natural gas.
"The second reason these drillers are out of favor now is that natural gas prices are low, and some producers, mostly the smaller ones, are holding off on new drilling until pricing firms. Day rates have fallen 12% year-to-date.
"As winter approaches, I expect utilization rates to rise, and day rates to follow. If we have a bad hurricane or two in the Gulf of Mexico, things could really kick into high gear, as producers look inland while submersible platforms are repaired.
"Further, the growth in energy demand is now outpacing the growth in supply, and I don't believe alternate fuel use will grow quickly enough to rectify this imbalance anytime soon.
"Bronco has been buying up old land rigs and refurbishing them. The company is financially rock solid, and the stock is dirt cheap. The company has current assets greater than its total long-term debt outstanding. It has almost no 'goodwill' on the balance sheet, and the stock is selling for very close to tangible book value; that is, the value of its property and equipment alone.
"It's also selling at less than 10-times earnings. Analysts that cover the company expect 2008 profits to be 25% higher than their 2007 estimates of $1.52; so, not only is the stock cheap, growth is excellent. With the current P/E so low and book value so high, we have a big safety net.
"The shares are also more than 50% off their all-time high. What's more, the current dip in natural gas is below the long-term trend. Unless something extraordinary happens, a normalized average should be between $8.50 and $9.00 over the next few years.
"Despite all the things I love about Bronco, I'm forced to give it a speculative rating. The company has only been public for two years, and had periodic losses prior to that, as was typical in the industry. The stock will also be very volatile, and you must only buy it with a limit order. Currently, I rate Bronco a speculative buy up to $15.50."
Each day, Steven Halpern's TheStockAdvisors.com features the latest investment commentary and favorite stocks of the nation's leading financial newsletter advisors.
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