EX-99.2 2 ex99_2.htm EXHIBIT 99.2 ex99_2.htm
 
WEXFORDSM
 Wexford Capital LLC
 
Wexford Plaza
411 West Putnam Avenue
Greenwich, CT 06830
www.wexford.com
(203) 862-7000
 
Direct Dial: 862-7012
Direct Fax: 862-7312
aamron@wexford.com
 

July 29, 2008


D. Frank Harrison – Chairman, CEO & President
Mike Liddell – Director
David L. Houston – Director
William R. Snipes – Director
Gary C. Hill – Director
 
Bronco Drilling Company
16217 N. May Avenue
Edmond, OK  73013


Gentlemen:

We are writing regarding the proposed merger (the “Merger”) between Bronco Drilling Company (“Bronco” or the “Company”) and Allis-Chalmers Energy, Inc. (“ALY”).  As reflected on the Form 13D we filed on July 25, 2008, investment funds affiliated with Wexford Capital LLC (collectively, “Wexford”) hold approximately 12.85% of the issued and outstanding shares of common stock of the Company.

We have extensive familiarity with the Company, its management team, assets and operations.  Wexford founded Bronco, oversaw the Company’s growth and development, and took it public in 2005.  We also have extensive expertise in the energy industry generally and the drill rig sector specifically.  As a substantial, knowledgeable Bronco shareholder, we have analyzed the proposed Merger and believe that it is not in the best interests of Bronco or its shareholders.  As a result, we intend to vote against the Merger at the upcoming shareholder meeting.

Our view that the Merger is not in the best interests of Bronco and its shareholders is based on numerous facts, including the following:

 
·
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.

 
1
 

 
·
The land rig industry has changed markedly since the ALY transaction was announced.  The ALY Merger was negotiated at a time when land rig market conditions were not as strong, and the Merger fails to recognize the value to Bronco of current market conditions.

 
·
Since the Merger was announced, Bronco has not given earnings guidance and analysts have fallen behind on earnings and EBITDA estimates.  We expect 2009 EBITDA to approach $150 million, substantially above the consensus estimate of approximately $110 million.  The Merger does not reflect this greater value.

 
·
Since the announcement of the ALY transaction, Bronco has significantly underperformed its peers.  We believe that this underperformance is not the result of Bronco’s business or operations, but rather of the low value offered in the ALY proposal.

 
·
In our view the Schlumberger / Saxon Energy Services transaction provides a good market comparable for an acquisition of Bronco.  That transaction valued Saxon at an implied 7x EBITDA multiple.  By contrast the ALY transaction values Bronco at only a 3.5x multiple based on Wexford’s view of 2009 earnings or a multiple of 4.7x based on the consensus estimates.

Enclosed is a more detailed presentation of our analysis of the proposed Merger and explanation for our view that the ALY transaction is not in the best interests of Bronco and its shareholders.

We are not opposed to a sale or merger transaction involving Bronco.  However, we are opposed to the proposed ALY Merger because we believe it significantly undervalues Bronco.  We urge the members of the board of directors, as fiduciaries for the Bronco shareholders to reexamine the ALY transaction in light of current market and industry conditions and to change your recommendation to a recommendation that shareholders vote against the Merger.

If you have questions regarding our analysis, we would be pleased to discuss it with you.


Sincerely,


Arthur H. Amron
Partner & General Counsel
 
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Tuesday, July 29, 2008
Page 1
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Basis for interest
r We founded Bronco in 2001 and understand the underlying values in the land drilling business
r Industry Dynamics - The land rig industry has changed markedly since Allis Chalmers originally
 announced its intentions to acquire Bronco Drilling. The U.S. rig count has increased 10% to
 1950 rigs and utilization is breaching 80% (a pivotal point where pricing power begins)
r Orphaned Stock - Since the deal announcement Bronco’s management team has not been
 able to give guidance and analysts have fallen behind on earnings and EBITDA estimates. We
 believe 2009 EBITDA should approach $150 million; consensus estimates are $110 million
r Valuation - We believe Bronco should be worth $25-$30 per share, which is substantially more
 than the June 2, 2008 revised offer from Allis-Chalmers of ~$17 per share
 
 
 
Tuesday, July 29, 2008
Page 2
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Wexford’s History with Bronco Drilling
r June 2001 - Wexford created Bronco Drilling
r August 2003 - Wexford and Bronco acquired 14 partially refurbished drilling rigs in
 Oklahoma City
r August 2005 - Wexford completed the IPO of Bronco (BRNC) at a price of $17.00 per
 share
r September 2006 - Bronco announced 2 major acquisitions, purchasing 25 rigs and
 related equipment
r 2006 and 2007 - Wexford exited its Bronco position in open market sales
 
 
 
Tuesday, July 29, 2008
Page 3
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
BRNC +11%
GW +57%
PTEN + 35%
PDC +31%
r Fleet wide land-rig utilization is approaching 80%; a pivotal point for pricing leverage
r The peer group has materially outperformed BRNC since the deal announcement
Source: Bloomberg
Why the ALY/BRNC Deal Not Make Sense
 
 
 
Tuesday, July 29, 2008
Page 4
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Source: Starmine Professional
Land Drillers Earnings Estimates Since Jan 2008
r Clearly analysts have not been as
 focused on BRNC as EBITDA
 estimates have not kept pace with
 other drillers despite a booming
 market
r Street is not factoring the potential
 of BRNC rigs coming out of
 inventory
 
 
 
Tuesday, July 29, 2008
Page 5
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Source: Baker Hughes International
Industry Dynamics (Don’t Ask us, Ask the Competition)
r “Utilization fleet-wide rose above 80% in
 June (08’). As a rule of thumb rig pricing
 increases as fleet wide utilization passes
 80% in a rising market”
 Source: The Land Rig Newsletter (June 2008)
r “The board will now continue to consider
 other alternatives to enhance shareholder
 value and it will do so in an environment
 of strong commodity prices, a related
 strengthening in the onshore U.S. lower 48
 drilling market and the potential inherent
 in Grey Wolf’s asset base”
 Source: Grey Wolf, Inc response to shareholder vote
 rejecting a proposed deal w/ Basic Energy July 15, 2008
 
 
 
Tuesday, July 29, 2008
Page 6
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Industry Dynamics (Don’t Ask us, Ask the Competition)
r “Looking ahead, we anticipate continued increases on our rig count throughout the
 balance of the year with average rates up modestly in the third quarter, that balance I
 discussed earlier, and much more significantly in the fourth quarter, and frankly beyond”
 Source: Nabors Industries Q2 Conference Call July 23, 2008
r “These shale plays are really increasingly significant, both in terms of the attractiveness
 of the plays, the need for quality rigs, and ultimately the production of gas in the
 country”
 Source: Nabors Industries Q2 Conference Call July 23, 2008
r “The legacy rigs, which had been contracted at pretty high prices at the peak in 2006
 are coming off contract and coming at lower rates. The rates however are higher than
 we had projected…in addition, we took stacked rigs and put them to work. When you
 add all that together, the good stuff overcame the bad stuff, namely the high price rigs
 rolling off and in the future, you'll get better, and in the fourth quarter materially better,
 and beyond that, even better”
 Source: Nabors Industries Q2 Conference Call July 23, 2008

 
 
 
 
Tuesday, July 29, 2008
Page 7
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
SLB / Saxon Energy Transaction at Much Higher Value
r Schlumberger / Saxon Energy Services
 l April 21, 2008 - SLB and First Reserve agree to acquire Saxon for C$7 per
 share or C$720 million
 l Saxon owns 43 land rigs;
 ○ Consensus estimates have Saxon earning $95 million in EBITDA during 2009
 ○ The proposed merger agreement values Saxon Energy at C$720 million implying
  7.0x EV/EBITDA
 l Wexford believes Bronco should generate about $150 million in EBITDA
 during 2009
 ○  The proposed merger agreement with Allis Chalmers values Bronco Drilling at
  $520 million implying 3.0x EV/EBITDA
 
 
 
Tuesday, July 29, 2008
Page 8
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Source: Wexford Capital LLC Estimates, IBES Estimates
r BRNC is trading at more than a 50%
 discount to Saxon Energy based on
 EV/EBITDA
BRNC compared to SLB / Saxon Energy Transaction
r We would argue that Bronco should
 trade at an absolute premium to Saxon
 given its superior equipment.
r Bronco currently has 11 rigs in the “sweet
 spot” of drilling (1,000-2,000 HP), with a
 further 11 “sweet spot” rigs held in
 inventory
 
 
 
Tuesday, July 29, 2008
Page 9
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Source: Wexford Capital LLC Estimates
Bronco NAV analysis
r It’s not hard for us to get $25-$30 per share in value using a basic NAV approach
 
 
 
Tuesday, July 29, 2008
Page 10
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
r Based on Avg Group multiples of P/E and EBITDA we believe BRNC
    should trade at $30 per share
r We derive EPS of $2.48 in 2009 vs. street estimates of $1.66
r We derive EBITDA of $150mm in 2009 vs. street estimates of $110mm
Source: Bronco Estimates are generated from Wexford Capital LLC; The “group” estimates are IBES
BRNC Comparables Analysis - Multiples
 
 
 
Tuesday, July 29, 2008
Page 11
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Source: Wexford Capital LLC Estimates
Bronco Drilling Overview
r Three Segments
 l Land Rigs
 ○ 45 Marketed Rigs
 ○ 11 Rigs held in Inventory
 l Workover Rigs
 ○ 54 Market Rigs
 ○ 5 Rigs held in Inventory
 l Challenger JV
 ○ 33 Rigs operating in Libya
 –10 Land Rigs
 –14 Water Well Rigs
 –9 Workover Rigs
 
 
 
Tuesday, July 29, 2008
Page 12
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
r We believe 5 inventoried
 rigs will be available at the
 beginning of 2009 at a cost
 of $9mm per rig
r We believe dayrates will
 average $20,000 in 2009 as
 larger rigs contribute to mix
r We assume cash margins
 will expand $1,000 per day
 in 2009
r We derive segment EBITDA
 of $132mm
Source: Wexford Capital LLC Estimates
Bronco Land Rig Segment
 
 
 
Tuesday, July 29, 2008
Page 13
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Source: Wexford Capital LLC Estimates
r We assume the workover
 segment adds 5 rigs in
 2009
r We conservatively
 model utilization is
 expected to stay
 relatively flat at 83%
r We conservatively
 model pricing staying
 flat
r We derive segment
 EBITDA of $15mm
Bronco Workover Rig Segment
 
 
 
Tuesday, July 29, 2008
Page 14
Why Wexford is Voting Against the Bronco/Allis Chalmers Merger
Please read the important notes attached hereto
Notes
r Except as described below, all information about Bronco Drilling Company, Inc. (“Bronco” or the “Company”) is
 based upon the Company’s public filings and/or upon information obtained from publicly available third party
 sources and through independent market research (collectively, “Third Party Information”). Wexford has not made
 any independent verification of any such information. In addition, certain information contained herein, including
 projections, has been calculated by Wexford as result of or based upon its analysis of the Third Party Information. All
 statements, information and projections contained herein are presented as of the date hereof and are subject to
 change without notice.
r Wexford makes no guarantee as to the accuracy or reliability of any information included herein and has no liability
 based upon the use of such information. Wexford makes no representation that the information contained herein
 includes all material facts or does not omit a material fact necessary to make the statements therein not misleading.
 All readers of any portion of information contained herein should not view such information as legal, tax, accounting
 or investment advice. Past performance is never indicative of future results and readers should perform their own due
 diligence, including consulting with a licensed, qualified investment professional or analyst, before making any
 investment or share voting decision. This document is not a solicitation to purchase, hold, dispose of, or vote shares,
 warrants, options or other securities of Bronco.
r Forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are statements
 regarding expectations and projections. All statements that do not concern historical facts are forward-looking
 statements. Any statement that expresses or involves a prediction, expectation, belief, plan, projection, objective,
 goal, assumption or future events or performance is a forward looking statement. Forward looking statements may be
 identified through the use of words such as "expects", "will", "anticipates", "estimates", "believes", or that by statements
 indicating certain actions "may", "could", “should” or "might" occur, this by no means is a complete list of words used in
 respect to forward looking statements. Forward looking statements are inherently uncertain, and actual results may
 differ, and may differ materially, from the expectations expressed in forward looking statements. Forward looking
 statements are based on expectations, estimates and projections at the time the statements are made that involve a
 number of risks and uncertainties which could cause actual results or events to differ materially from those presently
 anticipated. Any such statement involves risks, uncertainties, changes, conditions, and unforeseen acts, which may
 materially and adversely alter those expectations.