Land Driller Grey Wolf a Buy

We are maintaining our Buy recommendation and raising our estimates and price objective for Grey Wolf, Inc. (GW) shares following the board of directors’ refusal of Precision Drilling Trust’s (PDS - Snapshot Report) unsolicited $9.30 per share bid.

We agree with the board’s assessment that the company’s pending merger with Basic Energy Services, Inc. (BAS - Snapshot Report) offers better value for shareholders. Following completion of the merger, the company will be fairly diversified, both in terms of operations as well commodity-price exposure, and enjoy scale economies.

The improving natural gas price outlook has significantly improved the prospects of the land drilling market. Grey Wolf remains well-positioned to capitalize on the improving operating environment given its large idle capacity, which gives it exposure to the rising spot dayrates. In addition, Grey Wolf is buying back $150 million worth of its own stock.

We continue to like Grey Wolf shares for the company’s significant leverage to the improving outlook of the onshore drilling market and its attractive valuation. Despite its recent strength, the stock is still trading at a significant discount to its peers despite its relatively modern and capable fleet. Our unchanged new $11 price objective, raised from $8 before, reflects 2009 P/E, P/CF, and EV/EBITDA multiples still below the peer group’s average, respectively.

Read the full analyst report on GW

Read the full analyst report on GW