Months after the three sisters Katrina, Rita, and Wilma wreaked havoc on major
oil and gas refining facilities on the Gulf Coast, crude oil continues to trade
around $60 per barrel, easily within striking distance of its alltime high.
In spite of a mild winter in the Northeast, concerns of potential supply issues
in Iran and Nigeria have helped keep oil prices near record highs. Think you’ve
missed out on the oil and gas bull market? Think again.
Service companies are perhaps the most attractive play on the oil and gas boom,
as they are a bit more insulated against the daily fluctuations in commodity
prices. These companies are likely to continue to flourish if oil is able to
maintain its trading range of $55 - $65 per barrel. However, we believe that
demand for services in the oil and gas sector will remain strong even in the
event that the price of crude were to fall to $40 per barrel, something that we
believe is unlikely given the rising global demand for black gold.
Our favorite oil and gas play is Bronco Drilling (Nasdaq: BRNC), a pure
play land driller operating in Oklahoma, Texas, and the Rocky Mountains. Bronco
came public in August, raising $81 million in its IPO and an additional $92
million in a secondary offering. In just four years, Bronco drilling has grown
from a one rig company to one of the largest pure-play land drilling service
companies.
With oil and gas prices trading at high prices, demand for land drillers has
also soared. Bronco is in the enviable position of having a total fleet of 64
land rigs as of the end of 2005, including 40 active rigs, with the balance
inventoried or undergoing refurbishment. With the company planning to bring an
additional 24 drilling rigs online in 2006 and 2007, the future looks bright for
Bronco.
Growing demand for land drilling services is not only resulting in Bronco
running at capacity, but also increasing day rates, or the rates the company
charges clients for one day of drilling services. The combination of increasing
capacity by adding new rigs, and increasing day rates is helping to create a
highly profitable, high growth company. The company’s financials reflect this
growth.
Fourth quarter revenues increased 348% from $8.7 million in Q4 2004 to $39
million. Meanwhile net income soared to $6.8 million or $0.31, handily beating
consensus estimates of $0.23 per share. In 2005, revenues increased 229% to $78
million from $23.7 million in 2004.
Even after a blockbuster 2005, the high growth at Bronco Drilling is expected to
continue. Consensus analyst expectations for 2006 look even brighter, with
analysts calling for EPS to increase 232% to $2.06 on revenues of $237 million.
Bronco is a simple story of supply and demand: high oil prices are encouraging
companies to drill new land wells. There is currently a lack of land drillers.
This disparity is creating a situation where Bronco has been successful by
bringing new rigs online, increasing capacity, and increasing the rates the
company charges customers.
We believe Bronco is one of the best bargain growth stocks at this time. The
growth is explosive, and the stock is a true bargain. Shares of Bronco Drilling
currently trade at 42x 2005 EPS estimates, and 13x 2006 EPS estimates. Investors
without exposure to the land drilling sector should consider buying Bronco below
$30. We believe shares could easily trade above $40 in the next year based on
shares trading at a multiple of 20x 2006 EPS. This stock is certainly one of the
most impressive growth stories of the next year, and we would be buyers at the
current share price.
