Grey Wolf a Buy on Precision

Grey Wolf, Inc. (GW) has agreed to be acquired by Precision Drilling Trust (PDS - Snapshot Report) in a cash and stock valued at approximately $2 billion. Grey Wolf shareholders will own approximately 25% of the combined entity, to be called Precision Drilling.

In particular, the GWPDS merger creates a North American land drilling powerhouse with 371 drilling rigs. In addition to getting the significant cash payout, GW shareholders benefit from Precision’s high-tech systems and technology. While we expect GW shares to essentially track PDS from here onwards, we are keeping our Buy recommendation and price objective unchanged.

The company remains well positioned to capitalize on the improving operating environment given its large idle capacity, which gives it exposure to the rising spot dayrates. Grey Wolf is buying back $150 million worth of its own stock, of which more than 81% has been completed.

Grey Wolf currently markets 122 rigs with 114 rigs under contract. Higher commodity prices encouraged Grey Wolf to expand and upgrade its fleet. Rig 109, a new built-for-purpose Production and Drilling System Rig (PaDSRig) started working recently in Colorado under a three-year term contract. Rig 110, another rig in this category, is expected to be delivered during the fourth quarter of this year.

In addition, the company has signed two-year term contracts for its two mechanical rigs to move to the Bakken Shale play in North Dakota. Under daywork term contracts, Grey Wolf has approximately 12,200 days or an average of 66 rigs contracted for the remaining six months of 2008, and 13,700 days or an average of 38 rigs committed in 2009. Current leading edge bid rates range from $18,000 to $23,500 per day without fuel or top drives.

Read the full analyst report on GW

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