Chesapeake Energy ended the years-long struggles of Bronco Energy Friday by agreeing to buy the onshore drilling services company for $315 million.
The Oklahoma City-based producer said it had the agreement of Bronco's largest shareholders to buy the Edmunds, Oklahoma drilling firm and its 22 rigs for $11/share, while assuming Bronco's debts.
Chesapeake has for years been a top contractor for Bronco's services. The driller has struggled since natural gas prices plunged in the second half of 2008, forcing producers to cut back on drilling. Its revenues followed, dropping from $285 million in 2008 to $103 million in 2009. Bronco laid off 38% of its work force in 2009 as contracts for its then 43 rigs dropped from 83% to less than 50%.
The 22 remaining Bronco rigs, most located in the Bakken Shale and Anadarko Basin, will be added to Chesapeake's 95 rigs and will be operating by Nomac Drilling, Chesapeake's drilling subsidiary.
Chesapeake said it owns or leases 160 rigs and the 22 Bronco rigs will help it close on its target of having 200 rigs under its control by 2012.
Chesapeake, which is looking to further integrate itself vertically and gain more control over production by owning fracking compounds, completion crews and rigs, said the Bronco purchase will allow it to meet its rig requirements through 2012.
"The acquisition of Bronco is a great additional step in our vertical integration strategy and increases confidence in our plan to ramp up drilling activities in highly lucrative liquids-rich unconventional resource plays," Chesapeake CEO Aubrey McClendon said in a statement.
Analysts at energy investment bank Tudor Pickering Holt said the 22 rigs include three mechanical and 19 SCR rigs "but nothing state of the art." SCR stands for silicon-controlled rectifier, which converts alternating current power to direct current power.
Jefferies & Company oil services analyst Judson Bailey said he believes the sale is a sign that rig availability may tightening up.
"It suggests that the largest US land rig operator [Chesapeake] is moving to secure rig availability to accommodate its aggressive drilling program," Bailey said.
"We would also add that, historically, Chesapeake has been good at timing the land rig market -- purchasing a 25% stake in Pioneer Drilling in 2003 at $3.75/share and selling its stake in 2006 at $20.63/share and building up its Nomac drilling division ahead of a large run up in rig rates," Bailey added.
Investors rushed into Bronco's stock Friday with more than 25 times the normal volume of shares changing hands and share prices gaining 6% to close on the $11/share purchase price.
