Newsletter Watch: Drilling for value

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Jack Adamo and his research team analyze an average of 645 insider transactions per day filed with the Securities and Exchange Commission in Washington, DC. The raw data are fed into Adamo’s proprietary InsideXpert database system, where the information is corrected, compiled and organized.
 
Each stock that passes the screening process is then reviewed by analysts to determine its suitability as an investment holding in his Jack Adamo’s Insiders Plus newsletter. Notably, Adamo’s picks have had a compounded annualized gain of 16.7% for the six years that his newsletter has been published, versus a compounded gain of 1.7% for the S&P 500 over the same period.
 
The advisor’s latest addition to his buy list – being added to his “speculative” portfolio – is small-cap oil and gas firm Bronco Drilling Company, Inc. (Nasdaq: BRNC). “Although land-based drillers are very out of favor right now, Bronco is on solid ground,” says Adamo.
 
The advisor explains, “The company is an exclusively land-based contract driller of domestic oil and gas wells. The majority of its drilling is for natural gas, which is usually deeper and harder to reach than oil.” Despite, its out-of-favor status, Adamo offers his bullish appraisal.
 
Adamo cites two reasons for the 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,” Adamo says. “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, Adamo contends, 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, he notes, have fallen 12% year-to-date.
 
“As winter approaches, I expect utilization rates to rise, and day rates to follow,” says Adamo. “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, he says, “I don’t believe alternate fuel use will grow quickly enough to rectify this imbalance anytime soon.”
 
What’s more, according to Adamo, “Every day, we see more signs of resource nationalism, where countries are hoarding their energy assets and fighting over what’s available outside their borders. The great investor Richard Rainwater, who used to handle the Bass brothers fortune, predicted this back in 1996. He was dead on, though a bit early.”
 
Adamo recalls, “A couple of years ago we bought a tiny company called Dawson Geophysical Company (Nasdaq: DWSN), which is now up 173%. Bronco reminds me of Dawson. It has been buying up old land rigs and refurbishing them, just as Dawson bought seismic equipment.”
 
Like Dawson, he explains, Bronco is also “financially rock solid, and the stock is dirt cheap.”

“The company has current assets greater than its total long-term debt outstanding,” says Adamo. “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.”
 
In addition, he points out, “The stock is 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, Adamo observes. What’s more, he suggests, the current dip in natural gas is below the long-term trend. He forecasts, “Unless something extraordinary happens, a normalized average should be between $8.50 and $9.00 over the next few years.”
 
As a caveat, Adamo emphasizes, “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.”
 
He continues, “The company founders have great experience, but unlike Dawson, insider ownership at Bronco is not high for a small company. Further, the float is very small. The entire capitalization is less than $400 million.”
 
The advisor concludes, “The stock will be very volatile, and you must only buy it with a limit order. The spread between the bid and ask price could be huge, maybe even 20% on some days. Currently, I rate Bronco Drilling a speculative buy up to $15.50.” On Wednesday, Bronco closed at $14.64.