Nothing But Dry Holes for Bronco Drilling

• The Company: Bronco Drilling, a supplier of contract land drilling and workover services to oil and natural gas producers.
• The Filing: Form 8-K filed with the SEC on September 10, 2008.
• The Finding: August operational data reveals flat utilization of the Bronco Drilling’s fleet of about 84 percent, with the 11.5% year-on-year increase in average dayrate on operating drillings rigs to $18,138 primarily due to labor costs passed on to customers. Stockholders who voted down a merger proposal from oil service provider Allis-Chalmers are probably wishing they had not heeded the advice of Wexford Capital LLC, an investment fund that beneficially owned 12.8% of the company, and opposed the takeover.

The Upshot: On July 29, 2008 Wexford Capital LLC wrote to Bronco’s board of directors, arguing that the merger was not in the best interests of Bronco and its shareholders:

• We believe the Merger significantly undervalues Bronco. In our view Bronco should be worth $25-30/share, a substantial premium to the approximately $17/share value offered in the Merger.

Wexford Capital based its premium market valuation on its expectation that Bronco’s 2009 EBITDA would approach $150 million, substantially above the consensus estimate of approximately $110 million.

Contrary to the stated opinions of Wexford Capital and other institutional investors, such as Third Avenue Management, recent operating results present mixed evidence — at best — that Bronco is benefiting from the strong natural gas drilling market in the United States.

The Question: Did Wexford Capital and Third Avenue minimize the difficulties and the magnitude of risk –and costs — involved in deep-depth drilling of shale plays?