Today I’m going to tell you about a stock that I really like…but I had my doubts. I didn’t want to tell you about this company. See, this stock is trading for more than $8.50 a share.
Normally I like to focus on much cheaper stocks. Many of the penny stocks I follow trade for under $5, and a bunch trade for less than $1…but this story was just too good to pass up. So I decided not to hold back.
I figured I’d let you decide.
Now, before I introduce my hot pick of the week, let’s take a second and talk about what’s been happening in the market.
Unless you’ve been roughing it in the wilderness for the last two weeks, you’ve no doubt heard about the peaceful protests in Egypt…and the violence in Libya. You’ve probably also heard about the impact these protests are having on oil prices.
Investors, traders, and oil industry veterans are afraid of the unrest and violence taking place in the Middle East. The fear is that civil unrest will spread from Egypt and Libya, to other oil producing nations like Saudi Arabia or Kuwait.
But the fear isn’t over social unrest. It’s over oil supplies being disrupted, or oil production being compromised!
For the first time in more than 2 years oil traded hands at over $100 a barrel!
As you would imagine, oil companies all around the world are seeing their stock prices jump. The threat of restricted supply signals a big opportunity for Oil & Gas explorers, developers, producers and other businesses supporting oil production.
Many investors are making money hand over fist – but one billionaire investor is laughing all the way to the bank!
Mexican investment guru Carlos Slim currently holds a huge position in a tiny US drilling company…and his shares have been skyrocketing in value.
Who is Carlos Slim and why should we follow what he does?
Carlos has managed to amass a fortune of over $50 billion dollars…And Forbes proclaimed him the richest man in the world in 2010. Carlos made his money through savvy investments and important business decisions.
He holds huge ownership stakes in a number of companies throughout Latin America, Mexico, and the United States. In addition to owning Mexico’s largest telephone company, he also owns a construction conglomerate, and has made investments in retail organizations, and newspapers.
Many investors have found success following in the footsteps of billionaires, and this idea is no exception.
So which Carlos Slim investment am I so focused on?
It’s none other than Bronco Drilling Company (BRNC).
Bronco Drilling is headquartered in Oklahoma and runs a fleet of drilling rigs. Bronco contracts with oil & natural gas exploration companies to do their drilling. The company has 25 drilling rigs and considers their fleet to be “Premium.”
Now, the company description isn’t too exciting.
However, Bronco has developed a number of capabilities not every drilling company can claim. They often drill where others can’t…they have the capability to drill to extreme depths, or even horizontally.
This type of advanced drilling is becoming more commonplace in North America. As a result, Bronco drilling teams are highly sought after. And the company can charge top dollar for their services. More on that in a moment…
The demand for oil seems to be insatiable these days, and as the Wall Street Journal recently noted, “Oil-drilling activity in the U.S. has accelerated to a pace not seen in a generation.”
According to recent research, 818 rigs are drilling in the US right now…more than double the number just a year ago!
This puts Bronco’s services in even more demand!
With oil prices continuing to climb, oil exploration becomes more profitable. That means once unrecoverable deposits become economical. And hard to reach deposits are now being targeted for drilling.
But high oil prices aren’t the only reason drilling activity is accelerating in North America.
With a changing economic landscape comes a changing global landscape. The Middle East is a tinderbox of instability. Who can forget the protests and riots of Tunisia, Egypt, and Libya?
The question of the day seems to be – “Who’s next?”
As a result, demand for safer more secure oil supplies like those in North America become highly sought after. And as demand for drilling climbs, the price Bronco can charge has only one direction to go…UP!
Now, it’s clear that with oil prices high, the demand for drilling services climbs… but what sets Bronco apart from the others?
One key aspect is the focus on refurbishing rigs. Over the last few years the company has been able to acquire and refurbish 25 drilling rigs, and a lot of ancillary equipment.
Their intimate knowledge of how the rigs operate is important.
See, the key to operating a rig is uptime. Bronco really only makes money while they’re drilling. So if a rig breaks or can’t run for some reason, it’s bad news. No surprise there!
Since it’s all about uptime for a drilling rig, repairs and maintenance become vital. Because Bronco does rig refurbishment in-house, they have the knowledge and experience to make repairs.
For example, if a part needs to be repaired, Bronco isn’t relying on a third party supplier (who may or may not be reliable). They make their repairs and maintenance in-house, reducing downtime, and operational issues.
Bronco’s secret sauce…
As I mentioned earlier, Bronco drilling teams have unique experience when it comes to drilling at extreme depths, or even doing horizontal drilling. This is a key selling feature for customers.
Often, Bronco is able to sign longer term drilling contracts with customers who need their experience. Some contracts can extend out for a year or more! This is a great steady stream of revenue for the company.
Bronco’s other ventures…
While the majority of Bronco’s business is based in the US, the company also has a 40% ownership stake in a Mexican drilling company, and a 25% stake in an international drilling company.
Given these market conditions, there couldn’t be a better time to invest in domestic oil drilling. And Bronco is positioned perfectly to benefit from the rising market.
Now, let’s take a look at the numbers…
Because oil prices have been down over the last few years, Bronco has struggled to show significant financial gains.
However, don’t let this throw you off the story.
The latest news from the company is looking very strong. In early February they announced a rig utilization rate of 96%! Remember, utilization rates are a key factor in determining how much revenue the company can generate.
The company also noted the “day rate” – or amount they can charge for operating a rig – increased to $17,529.
The numbers are significantly better than what the company witnessed in the third quarter of 2010…back then their utilization rate was only 64% and their day rate was just over $16,600.
Remember, as oil prices continue to climb, demand for drilling services will increase… and Bronco can then charge more for their services!
Right now, almost 20% of their fleet is under long term contract extending into 2012.
Now, the most recent financial data available is from the third quarter of 2010.
Revenue from drilling was a robust $34.8 million, and the company showed a loss from operations of just over $1 million – after adjusting for one time charges.
Knowing utilization rates and rig “day rates” are both up, I’d expect the company to see some serious improvement in the fourth quarter.
While the company hasn’t provided guidance, various estimates call for the company to generate just over $147 million in revenue…an 18.7% increase. Of course stronger revenue numbers lead to stronger earning estimates, with initial 2011 EPS estimates hitting $0.04 per share.
The best part is, all of these 2011 estimates are low enough for the company to blow them out of the water… and we all know upside surprises can really drive a stock higher!
Fourth quarter and year end numbers are set to be released on March 4…I’ll be watching those very closely.
So, Bronco is operating in a very exciting industry where demand is growing. The company is well managed, and looks to be turning things around financially. Their utilization rates and day rates are moving higher, and profitability is on the horizon.
It’s a great story but how does the stock look?
ANALYSIS OF BRNC STOCK
Bronco is selling for about $8.79 per share. We’re well off the lows set last June of $3.25.
Don’t let the recent price jump scare you…back in late 2008 when oil prices were trading well above $100 a barrel, BRNC traded over $18 per share!
Chart courtesy of StockCharts.com
Now, as you recall, Billionaire investor Carlos Slim has a large holding in Bronco…but he’s not the only one. BlackRock recently started acquiring shares, and as of the latest reports, they own just over 2.2% of the company.
In case you didn’t know, BlackRock is a major player in institutional investments. They manage over $3.4 Trillion Dollars.
Clearly the smart money owns this stock.
Now, let me toss out one more important fact.
Bronco’s book value per share is $10.85. With a current price of $8.79, the stock is selling at a 19% discount! Value investors rejoice!
But that’s just peanuts compared to what it could trade for.
Remember when oil prices were sky-high, demand for their drilling services went through the roof. The company’s margins improved, and so did their profitability. Back in 2006 Bronco made $2.43 a share, and their EBITDA was over $129 million!
Given the importance of the oil & gas industry, Bronco’s unique position in the market, recent improvements in utilization and billing rates, and the acquisition of shares by major “smart money” investors, I see lots of value in this company.
I think BRNC could be trading over $18 a share in the next few months. And if the market really takes off, we could see gains of 127% or more!
Bronco is riding an upward trend in share price. Take advantage of this awesome opportunity while you still can!
ACTION TO TAKE
If you like what you’ve read, do your own research…then Buy BRNC up to $9.05 a share.
Prices as of January 31, 2011
The “Recommended Price” is as of the date and time of the recommendation (adjusted for splits and dividends), you may pay more or less. “Buy-up-to” means don’t pay more than this price for the stock. If you can get it cheaper, then great! “Hold” means hold if you own it, but don’t buy it if you don’t. “Sell” means sell. Remember to consult your investing professional before making any trade or investment. And remember all investments have some risk.