Riding the Bronco

While the market feels a lot like a bucking bronco right now, I am not talking in such broad metaphors here. This entry is about one of my new stock stars: Bronco Energy. Over the past six years, I have followed the oil sands development pretty closely, just from reading the local papers. Almost two years ago, I ended up becoming much more acquainted with the oil sands business researching a report I wrote on Upgrader impacts to the municipality I work for. Okay, if you're really interested, you can find the report here. (And for my co-workers that just clicked on that: ha, made you do work stuff!)

But learning about the oil sands business and how heavy oil is produced and marketed, really gave me insight into the oil sands runaway train. Is it sustainable? I really don't think so. Definitely not environmentally, very likely not growth-wise or financially in the long-term. There's just not the labour to do it or the infrastructure. So something will need to be addressed. But in the meantime, there are those companies that are already out there with completed projects, and quite a few more that are coming on stream soon or are just starting to produce.

Right around the time that I worked on that Upgrader report, I thought that I would start investing in the oil sands by buying some of the producers or small up-and-comers. I bought Canadian Natural Resources(CNQ.to, CNQ) solely because I thought the way they managed their labour force was brilliant. They built their own airstrips so they wouldn't have to use the strained Ft. Mac airport. They hired labour from Asia. They provided their own on-site housing camps. In this tight Alberta labour market, they were saying all the right things to me. They did piss off a lot of unions, etc., through their actions, but in the long run I think they did a great job controlling costs in the insane Alberta boom.

My second pick was a smaller venture: Connacher Oil & Gas (CLL.to). I liked Connacher because they were thinking very holistically to me: they had a refinery in Montana making a small profit and some conventional oil wells to help bring in cash, and they had some proven management. Unfortunately for me, they also had some awesome pumpers on the various stock discussion boards. So once I fell for Connacher, I got swept up in the frenzy and bought too high. And then the bubble burst, and it plummeted. I hung on for a long time, and even averaged down by purchasing more every once in awhile when I was sure that it bottomed (yeah, right!). I was intent on holding on to Connacher as well as Canadian Natural, because I really liked the stories behind them.

However, all that changed when Premier Stelmach ordered the royalty review last fall. Canadian Natural, which also has a huge natural gas component, was set to be really hurt by the royalty review. Connacher, a smaller company with lots of capital costs mounting, seemed really risky when nobody knew how big of a hit the new royalty scheme would be. So I ended up bailing from both. At a loss no less. That being said, I may look at CNQ again, given their exposure to natural gas.

Okay, so by now you are thinking... wait, wasn't she going to talk about Bronco Energy?

You see, once Stelmach rained on the Alberta oil sands fiesta, I started hunting for other options. I found that Saskatchewan has Oil Sands Quest (BQI), with it's freakin' huge oil sands property. And I'm not just being funny here, it really is freakin' huge. So just on resource value alone, that's not a bad option. Plus, Saskatchewan has lower royalties, good labour, and their stock price is not too bad with the dollar at par (since it's listed only in the US). On the downside, it's a long way from production. I think the company is thinking 2012 for start-up, but that still seems a little optimistic to me. Plus, I don't see how they have addressed the transport issue of the heavy oil yet (as Saskatchewan doesn't have the huge network of pipelines that Alberta does). I do have a small amount of BQI, but I mostly own it from pure speculation.

So, my second find, and the one that I think has more immediate upside, is Bronco Energy (BCF.to). Ta da! We actually made it to the discussion of Bronco.

The reason I like Bronco? It has all of the upside of the oil sands: good location between Edmonton and Ft. Mac, good access to labour and infrastructure (as strained as it is), and a supportive business environment. It also has strong management, with a CEO that has brought heavy oil projects into production in the past, and a lot of the key players have worked with Canadian Natural getting the Horizon project off the ground. But it's also got the added bonus of no royalty review problems. That's right, our little Bronco is on First Nations land. It's under Federal jurisdiction, boys and girls... not Alberta! And it's also a small company for the oil sands, at a market cap of a mere $500 million (and a few months ago it was only $350 million or so). Compare that to say, a Suncor Energy ($48 billion), Canadian Natural ($41 billion) or Canadian Oil Sands Trust ($21 billion), then we're talking really small potatoes. So that means growth potential.

And that's the best part about Bronco, it's just starting it's growth spurt. It's just pulling out of it's capital heavy development stage, which is that hardest part of the game for oil sands, as the amount of capital expenditure needed to get the projects going is staggering. So with the production starting up, the riskiest time for Bronco Energy is over. Bronco's Annual Report (pdf link) was released on April 1, 2008, which sets the production target at the end of Q2 2008 at 4,000 to 6,000 bopd.

But one other good thing about Bronco is that it has two facets to the company: the oil sands projects and it's wholly owned Bronco Drilling subsidiary. The small drilling business gives Bronco the ability to schedule their own drilling, without the need to wait for rigs during peak use times. But it also gives Bronco the opportunity to lease out the rigs for profit when they are not in use, maximizing their capital outlay. Recently Bronco's been drilling on their own lands, proving up resources (and doing a great job at that). As discussed in the previous entry on Precision Drilling, rigs were not in high demand in Western Canada for years due to soft natural gas prices. So this was a great time for Bronco to be purchasing and utilizing their own rigs. With natural gas on the rise now, those rigs could be leased for more cash if the company needs it. It's a fantastic little security net for a company in the volatile oil sector.

With oil prices at an all-time high, Bronco's had a nice run up in the past few months (probably about 40% from where I bought in). But I think that Bronco is still relatively little-known in the investment world, with no first-call analysts following it. So as (or if!) oil prices start to come down, I may try to add more to my position if the stock has weak days. With production coming on though, I'm hoping that there won't be too many of these in the near-term.