Grey Wolf Retains a Buy Rec

While Grey Wolf, Inc. (GW) reported in line second-quarter 2008 earnings, the more significant event is the termination of its merger agreement with Basic Energy Services Inc. (BAS - Snapshot Report) due to shareholder rejection. We think that this will bring back the focus to Precision Drilling Trust’s (PDS - Snapshot Report) bid for the company, which overtime may become an attractive alternative.

On the quarterly results front, earnings were down from the year before, but the outlook continues to improve. This is reflected in the company’s ramped-up capital budget. With higher commodity prices and increased demand for domestic land drilling rigs, customer interest in new long-term contracts and renewals continues to strengthen.

During the quarter, gross profit declined nearly 9% year-over-year to $86.8 million, while gross margin declined approximately 180 basis points from the year-ago level to 40%. Grey Wolf’s DD&A expenses increased nearly 21% year-over-year, reflecting the increase in the size of the company's rig fleet.

For the third quarter of 2008, management expects fleet size to average 108 to 111 working rigs, with seven to nine rigs performing turnkey services. Average daywork EBITDA per rig-day is expected to increase by $400-600 in relation to the second-quarter of 2008, reflecting continuous improvement in the company’s markets. The company expects an approximately $0.05 per diluted share pre-tax charge in the third quarter for shareholder vote and termination of the proposed merger with Basic Energy Services.

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