The Microcap Speculator

One of my favorite energy stocks, Bronco Drilling [[BRNC]] agreed to be bought out by Allis Chalmers Energy [[ALY]] for $437.8 million in cash and stock. That should come as no surprise to readers of this blog. Over a year ago, Bronco Drilling was highlighted here as a compelling value.
According to Allis Chalmers’ press release, the deal:

• will create a more diversified international oilfield services provider with critical mass in the U.S.;
• will enhance domestic and international growth opportunities;
• will facilitate relocation of newly acquired and certain underutilized drilling and workover rigs of Bronco Drilling to Latin America and North African markets;
• will be “strongly accretive” to Allis Chalmers’ earnings per share.

My take: Allis Chalmers took advantage of a depressed market to get solid assets on the cheap. Even after putting in a hefty premium, the deal priced at considerably less than the stock traded when I sold out my position last April. That’s a good indication that Allis Chalmers is a savvy operator, so while I am removing BRNC from my watch list, I will add ALY.

DISCLOSURE: No position.

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On January 12, after picking up shares at $13.72, I stated that Bronco Drilling (BRNC)  should hit $16.50 on a bounce and perhaps up to $20 with a strong recovery in natural gas. Since then, we got the bounce in the stock, and some lift in the underlying commodity.

That said, natural gas is nowhere near recent highs, and BRNC is a bit extended. I have happily banked my profits and will watch Bronco Drilling from the sidelines for now.

DISCLOSURE: I have no position in BRNC. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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If you are trading microcaps without tracking the movements of insiders and institutions, you are trading blind. Fortunately, there are many great tools available to allow you to follow in their footsteps. Here are two I highly recommend:

Stockpickr: Stockpickr, the brainchild of TheStreet.com writer James Altucher, takes the basic information that institutional investors are required to file with the SEC and puts it on steroids. Stockpickr plugs the top holdings from hedge funds, mutual funds, and activist investors into a relational database so you can not only see their holdings but see other investors and institutions who hold those stocks, and also other stocks that they tend to hold. Its easiest to explain by example. Take this listing of the top holdings for the four star Royce Microcap Fund. Stockpickr shows that the top holding, CMGI, is also owned by the Powershares Private Equity ETF and Jim Simons’ Renaissance Technologies hedge fund fund. It also shows that people who own CMGI tend to own ADPT, AXP, and LFUS (among others). Its a brilliantly simple concept, and well executed.

J3SG: J3SG may not be well known, but it is heads and shoulders above the insider trading areas of Yahoo! Finance, or Bloomberg for that matter. Take for example the company report on Bronco Drilling (BRNC). It shows that the Bronco Drilling LLC owned by Wexford Capital has unfortunately begun selling in recent days. The report lists each insider transaction and allows you to access the raw SEC filings with a single click. The roster tab details the insider holdings. Sign up (free) and you get access to even more powerful tools. The screening tool is second to none for analyzing institutional and insider transactions (screenshot to the right). You can also sign up for an email report recapping the key insider transactions each trading day.

Stockpickr and J3SG are not just the best free services–but among the best available at any cost. Here are some other resources I use to track insiders and institutions:

• Yahoo! Finance: Solid basic information on insiders and institutions.
• InsiderCow: The free section of this mostly-for-pay service has a nice screen of “clumped” insider buys, showing stocks with three or more insider buys within a specific period of time.
• SECForm4: Good analysis of overall insider selling plus promising lists of microcap insider buys and top insider buys and sales.
• Form4Oracle: type any stock into the ticker box and get a well-organized depiction of insider trading.

(This is the second in a series of articles on the tools I use for my research and trading. The first installment, on finding microcaps with dividends, can be found here)

DISCLOSURE: I am long BRNC. I have no position in any of the other stocks mentioned here. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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When I bought shares of Bronco Drilling (BRNC) and wrote about the stock earlier this week, I knew that the compelling value it presented would eventually gather attention. I just didn’t think it would happen in a matter of days.

In Barron’s Roundtable, famed value investor Scott Black gave the stock a nod:

How about another name?[Scott] Black: Bronco Drilling [BRNC] is a land-rig company — another controversial sector. It came public in August ‘05 and was selling for 14.56 a share a Friday. It has 24.9 million fully diluted shares, a $362 million market cap. There is no dividend. Stated book is $13.71 a share. Tangible book is $12.72. Trailing-four-quarter return on equity is 22%. Net debt to equity is 0.18. With their cash generation, they’ll soon be out of the banks completely, and have a debt-free balance sheet. Bronco has 52 land rigs operating in Oklahoma, Texas, the Rocky Mountains. Half its customers are publicly traded companies like XTO Energy [XTO], Chesapeake Energy [CHK] and Devon Energy [DVN]. The other 50% are large independents. Their average contract is about 8½ months. Some contracts rolling off were made at lower rates of $16,000- $17,000 a day. The going rate now is $19,000 a day. Their land rigs are not high-end; most are not 2,500 horsepower. They’re between 1,200 and 1,300. The company is going to add three more rigs this year.

[Mario] Gabelli: These are shallow gas?

Black: Not terribly shallow. They can go down 10,000 to 15,000 feet. They supply the crews, as well. My estimates are conservative. Fifty-four rigs, on average, at $19,000 a day for 365 days gets you to $375 million of revenue. Operating expenses roughly run 49%. Depreciation, depletion and amortization runs $34 million and general and administrative expenses are $20 million. So, you have operating income of $137 million. Interest expense of $4 million gets you to $133 million, fully taxed at 37%. They will make about $84 million, or $3.35 a share on 25 million shares. Divide 14.56 a share by $3.35 and you get 4.3 times earnings.

Black: You can do much better in small- and mid-caps.

[John] Neff: I thought it’s hard to find low-P/E stocks.

Black: It is increasingly difficult, except for micro caps. What happens if rates tank by $1,000 a day? That would cost Bronco 50 cents a share after taxes. If they drop to $17,000 a day, it would take them down by a buck. They would still have $2.35 a share in earnings. On a break-up-value calculation — you want to have asset protection, as well — we get to $25.86 a share. With rates at $19,000 a day, Bronco has cash flow of $138 million. It will generate about $106 million of free cash. The company discounts all its projects at a 12% to 13% after-tax hurdle rate. The risk here is there may be a glut of land rigs. There is a glut of gas in the U.S. because of the warm weather, but the companies we own are still making quite a bit of money at $6 per mcf. The stock is selling below its IPO price of 17 a share, though it has been over 30. It is in the bargain basement.

[Meryl] Witmer: It sounds great.

I couldn’t agree more.

DISCLOSURE: I am long BRNC. I have no position in XTO, DVN or CHK. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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