Move Into Pioneer (PDC) (UDRL), Out of Bronco (BRNC) Says Global

Global Hunter Securities downgraded Bronco Drilling (NYSE:BRNC) from "Accumulate" to "Neutral" after receiving a takeover bid from Chesapeake Energy (NYSE:CHK).

Global says, "Last Friday, BRNC announced Chesapeake Energy (NYSE: CHK) is acquiring it for $315 million, or $11 per share. The valuation metrics work out to 1.02x BV, 6.9x and 5.1x our 2011 and 2012 EBITDA estimates, respectively, and -$14.3 million per rig, which implies zero value for Bronco MX or Challenger Ltd. CHK is currently BRNC’s second largest customer, operating three rigs. CHK intends to integrate the 22 rigs into its subsidiary, Nomac Drilling, for which CHK operates 90 of its 95 rigs. We believe that many of these rigs will likely be working for CHK in the Powder River and DJ Basins, after completing their current term contracts, where the company recently inked a joint venture with CNOOC (NYSE:CEO) and in the Mississippian horizontal oil play in the northern Anadarko Basin."

"We do not expect a third party to come in with a higher bid for BRNC. We believe that Helmerich & Payne (NYSE:HP) has no interest in running a rig outside of a FlexRig, and Nabors (NYSE:NBR) and Patterson-UTI (Nasdaq:PTEN) are more likely to spend the incremental $4-5 million to build a rig rather than pay the implied $14.3 million per unit CHK is spending for BRNC. We feel the same way for the smaller-cap drillers and do not believe any other operators have an interest in spending over $300 million to guarantee they have rigs to meet anticipated drilling programs and hedge against rate increases."

"Rotate into Pioneer (NYSE:PDC) and Union (Nasdaq:UDRL). Up nearly 70% and 64% YTD, we think these stocks still have plenty of room to run."

Global Hunter Securities lowered its price target on Bronco from $13.50 to $11.

Chesapeake (CHK) Acquires Bronco (BRNC) for $316 Million

Shares of Bronco Drilling (NASDAQ:BRNC) were up above 6 percent in trading today on the news Chesapeake Energy Corp. (NYSE:CHK) bid $316.8 million to acquire the company in an all-cash deal.

The acquisition will add a minimum of 22 onshore oil rigs to Chesapeake, boosting its oil production as it waits for natural gas prices to rebound.

Chesapeake Chief Executive Officer Aubrey McClendon said his goal is to expand the company's oilfield services business as a way to control costs on the exploration and production side of the business.

Chesapeake will pay $11 a share for all of Bronco's outstanding stock, a 6 percent premium over Thursday's closing price.

The premium was unusually small, but the rigs Bronco operates are not newer ones, probably the reason for the lower bid, which values the rigs at about $13 million to $14 million each.

Chesapeake was trading at $32.73, up $0.08, or 0.25 percent, as of 1:55 PM EDT. Bronco was trading at $10.99, gaining $0.59, or 5.67 percent.