Bronco Drilling Company, Inc.

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Bronco Drilling Company, Inc.

16217 North May Avenue
Edmond, Oklahoma 73012-8871
U.S.A.
Telephone: (405) 242-4444
Fax: (405) 285-0478
Web site: http://www.broncodrill.com

Public Company
Incorporated: 2001
Employees: 1,400
Sales: $285.5 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: BRNC
NAIC: 213111 Drilling Oil and Gas Wells

FINANCIAL BACKERS ORIGINS IN 1994

NEW CEO: 2005

BIG A DRILLING ACQUIRED: 2006

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

FINANCIAL BACKERS ORIGINS IN 1994

Bronco Drilling was formed by Connecticut-based Wex-ford Capital LLC, a private investment company and hedge fund manager, focusing on the transportation, technology, energy, real estate, and natural resources fields. Wexford was founded in 1994 by Chairman and Chief Investment Officer Charles E. Davidson, a longtime bond trader from Goldman Sachs & Co., and Joseph M. Jacobs, a Bears Stearns veteran who worked on bankruptcies, restructurings, and real estate debt and equity financing. What made contract land-drilling attractive to Wexford at the start of the 21st century was the number of rigs that had gone out of service in the late 1990s when oil and gas prices dropped precipitously, resulting in the curtailment of drilling activities. According to Houston-based Baker Hughes Inc., which for decades had been keeping weekly tabs on the number of drilling rigs in operation across the United States, the high-water mark during the oil boom of 1981 was 4,530. That number reached an all-time low of just 488 in April 1999. When natural gas prices rebounded sharply in 2000, demand soared and exploration companies scrambled to find drilling rigs to cash in while the opportunity was available.

In June 2001 Wexford incorporated Bronco Drilling in Connecticut. Acting as the firm’s point man in Oklahoma City, where the company made its headquarters, and serving as Bronco’s president and chief operation officer was Steven C. Hale. A graduate of the University of Oklahoma with a degree in petroleum land management, Hale was well experienced in the land-drilling business. Prior to the start of Bronco he had served as manager of an Oklahoma contract drilling company, Bison Drilling LLC, from 1995 to 2001. As chairman of the local chapter of the International Association of Drilling Contractors, he was also well connected.

Bronco started out modestly with Hale procuring a 650-horsepower rig from Ram Petroleum for $1.25 million that was then refurbished and put in operation. However, as soon as drilling contractors ramped up operations, natural gas and oil prices dipped, causing well operators to curb their enthusiasm. Drilling contractors were forced to drop their rates in order to keep their equipment in use, and the rig count again began to decline, especially in Oklahoma. Bronco waited out this brief downturn and did not make any further acquisitions until May 2002 when it acquired Hale’s old company, Bison Drilling, and Four Aces Drilling, both of which were subsidiaries of an independent oil and gas exploration company. For $12.5 million, Bronco picked up seven drilling rigs, ranging in size from 400 to 950 horsepower, as well as haul trucks and vehicles, assorted drilling rig structures, spare parts, and other related equipment. Bronco invested another $97,000 in refurbishing the rigs before placing six of them in service. In its first full year in operation, Bronco recorded contract drilling revenues of $3.1 million and a net loss of $1.9 million.

Bronco then took a major leap forward in expanding its fleet in 2003, spending $49 million—$33.5 million in cash and the assumption of $15.5 million in deferred tax liabilities—to acquire privately owned contract driller Elk Hill Drilling, Inc., inactive at the time, and its affiliate, U.S. Rig & Equipment, Inc., which refurbished and reconditioned rigs. The deal brought to Bronco 14 land-drilling rigs and enough components to assemble another eight units. The company then began to refurbish the rigs, spending $2.2 million to upgrade a 1,400-horsepower electric drilling rig that was placed into service in November. Bronco was able to roll out a refurbished rig from this stockpile every three months.

With more drilling rigs at its disposal, Bronco increased revenues to $12.5 million in 2003. Because of additional Elk Hill rigs coming on line in 2004, that number improved to $21.9 million. Although not yet profitable (Bronco lost $1.2 million in 2003 and $2.2 million in 2004) the company had promise.

NEW CEO: 2005

By 2005 Bronco was ready to make further acquisitions to grow the fleet, as the land-drilling business thrived because of high energy prices. Demand for rigs was so high that smaller companies were forced to wait several months before units became available. To take the company to the next level, Wexford installed a chief executive officer, D. Frank Harrison, in May 2005. Like Hale, Harrison was a graduate of an Oklahoma school, namely Oklahoma State University, but his degree was in sociology. Nevertheless, he became involved in the energy field. From 1999 to 2002, he served as president of a small natural gas exploration, drilling, and development company, Harding & Shelton, Inc. He then went to work for Wexford as an agent, scouting out oil and gas properties for Wexford companies to purchase. With Harrison at the helm, Bronco prepared to make an initial public offering (IPO) of stock in order to finance its expansion plans, both in terms of refurbishments and acquisitions. Harrison explained to the Daily Oklahoman that an IPO was “really the only way to expand in the drilling business. It would be very hard to borrow enough to expand. This business is [capital] intensive, and the public market is the place to get that.”

COMPANY PERSPECTIVES

We believe our premium rig fleet, rig inventory and experienced crews position us to benefit from the strong natural gas drilling activity in our core operating areas.

Bronco had an immediate need for funds. In July 2005 it paid $20 million for Strata Drilling, L.L.C., and Strata Property, L.L.C., picking up two operating rigs and another refurbished rig, plus spare parts and related structures. In addition, Bronco received a much needed 16-acre yard and machine shop where refurbishments of inventoried rigs and repairs could be completed. The IPO, underwritten by Johnson Rice & Co. and Jefferies & Co., was well received when management made the mandatory road show to tout the stock. According to Oil and Gas Investor, Bronco had several major advantages: the high price of hydrocarbon, driving drilling activity; a high demand for land rigs “due to an increasing focus by operators on unconventional gas-resource plays”; an organic growth rate higher than its competitors; and not only a large number of rigs in operation, but also a reserve inventory ready to be refurbished and deployed.

Nevertheless, Bronco was in no hurry to come to the market, willing to wait to make sure that industry conditions were more solid than those of 2001 when demand for drilling rigs ebbed and flowed dramatically. The company had planned to issue 4.7 million shares at $14 to $16 a share in order to net as much as $75 million, but patience paid off and in the end the price was raised to $17; more than five million shares were sold, raising $89 million for Bronco when it finally came to market in August. Shares began trading on the NASDAQ, and on the first day increased in value 8.7 percent to $18.47.

With cash on hand and common stock at its disposal, Bronco looked to make further acquisitions and become one of the consolidators in the contract drilling field, as well as to diversify into other areas in well servicing. It would do so without Hale, however. After the IPO, he resigned as president, and the post was taken over by Harrison. According to the terms of his employment agreement, Hale received a $2 million payment plus shares worth $2 million, based on the IPO price. In turn, he was barred from competing against Bronco for one year, nor could he disclose any confidential information for five years.

In October 2005 Bronco completed a pair of major acquisitions. At a cost of $50 million it acquired Norman, Oklahoma-based Eagle Drilling LLC, adding a dozen drilling rigs while expanding the scope of Bronco’s operations. Five of the rigs were operating in Texas in the Barnett Shale trend, one was being refurbished, and the remaining six were inventoried. Bronco also closed on the $68 million purchase of Duncan, Oklahoma-based Thomas Drilling Co., which added another 13 drilling rigs: nine in operation, two under construction, and two inventoried. These units were also operating in the Barnett Shale trends as well as another new area, the Palo Duro Basin in west Texas. Moreover, these acquisitions also brought an experienced refurbishment supervisor and crew, who could help quicken the pace of refurbishments from three months to two. All told, Bronco’s rig fleet numbered 62, 30 in the field and the rest being refurbished or held in inventory.

To help pay down debt incurred in these latest deals, Bronco tapped the equity market a second time in November 2005, selling about four million shares of common stock at $23 per share to raise about $87 million. When the year came to a close, Bronco recorded revenues of $77.9 million, more than double the previous year’s amount, and the company posted the first profit in its history, netting $5.1 million. Not only did the company have more drilling rigs in service, it benefited from higher use and increased day rates, which averaged $13,453 in 2005, compared to $7,919 in 2004.

BIG A DRILLING ACQUIRED: 2006

At the end of 2005, Bronco agreed to the terms of another acquisition, which closed in January 2006. At the cost of $18.15 million in cash and stock, Bronco acquired Big A Drilling Co., adding six operating lower-horsepower rigs, averaging 450 horsepower, as well as rig equipment, spare parts, and heavy-haul trucks. Three of the units were in service in Oklahoma, two in Kansas, and one in Texas. Key members of Big A’s management were also retained, and a lease arrangement was made with a Big A affiliate for a rig refurbishment yard in Woodward, Oklahoma. It included an option to buy, which Bronco would exercise for $200,000 in February 2007.

Revenues soared to $285.8 million in 2006, and Bronco’s net income increased to more than $59.8 million. Again, the company benefited from increases in the number of rigs in operation, high usage rates, and day rates that continued to rise. In 2006 the average day rate increased 29 percent to $17,385. Yet as all contract drilling companies knew full well, rates that go up eventually come down. Although energy prices remained high in 2007 and demand for drilling units stayed strong, Bronco took an important step early in 2007 to achieve diversity by acquiring a well servicing company, Eagle Well Service Inc., and related subsidiaries for a total of $33.2 million. Bronco received 31 workover rigs, 24 in service in Oklahoma, Texas, Kansas, and New Mexico. In a letter to shareholders, Harrison explained, “This was the first step in our diversification strategy and our initial entrée into the production services industry. This acquisition gives us the opportunity to capture more of the cash flows from the complete life cycle of a well.”