Grey Wolf Inc. GW

1
Grey Wolf Inc. (GW)
Wednesday, November 15th, 2006
2
Background

• Founded In 1978
• Head Quarters In Houston, TX
• Other Locations (Colorado, Wyoming and
  Louisiana)
• Board
• 7 Members (Active w/ company For 5 years or
  longer)
• Board of Directors Staggered
• Executive
• 6 Officers
• CEO Salary/Bonus 1.02 M, Options
  Exercised 4.6 M
• Officers Average Salary/Bonus 301.5 K
• Officers Average Options Exercised 151.5K
• Insiders Hold 14.51

3
Operations

• What is their Business?
• Provide oil and gas land drilling services
• Industry Oil and Gas Drilling and Exploration
• Highly Cyclical, Peaks at severe weather
  conditions
• Overall market demand for natural gas has
  increased

4
Operations

• Divisions
• -Ark-La-Tex
• -Gulf Coast
• -South Texas
• -Rocky Mountain
• -Mid-Continent District

5
Contracts

• Contracts through competitive bidding or as
  result of negotiations with customers
• 3 Major Types
• Day-work - low risk/lower returns
• Footage - middle risk/adequate returns
• Turnkey - high risk/higher returns
• of Revenues
• Day-work 80.41
• Turnkey 19.59
• Early Termination Fees

6
Customers/Suppliers

• Independent producers and major oil and natural
  gas companies.
• No one customer accounts for more than 10
  revenues
• Customer retention ratio/ yearly turnover
• Customer relationships
• Supplier relationships

7
Competitors

• Helmerich Payne Inc. (HP)
• 2.6 Billion Market Cap
• Nabors Industries Ltd. (NBR)
• 9.5 Billion Market Cap
• Patterson-UTI Energy Inc. (PTEN)
• 4.0 Billion Market Cap
• 331.6 total market cap
• GW- 1.3 Billion
• http//biz.yahoo.com/p/123mktd.html

8
Financial Ratios
9
Pros/Cons

• Pros
• Highly experienced management
• 100 Million common stock repo
• Low P/E, P/B multiples
• Cons
• Industry is cyclical/Uncertainty
• Future market demand for natural gas
• Risks associated with business

10
Industry Outlook - Natural Gas

• Market Demand Expectations/Growth
• Short-term factors
• Weather
• Fuel Switching
• US Economy
• Long-term factors
• Residential Demand
• 1.5 growth per year from 2002-2010
• 0.9 growth per year from 2011-2025
• Commercial
• 1.7 growth per year from 2002-2025
• Industrial Demand
• 1.2 growth per year from 2002-2025
• Electric Generation Demand
• 1.8 growth per year from 2002-2025
• Transportation Sector
• 3 of total Natural Gas Market

11
DCF Model Assumptions
12
DCF Model - Calculations

• Discount rate (wacc) 6.42
• DCF(FCFF) 2,272,228,000
• Mkt Value of Debt 363,100,000
• DCF(FCFE) 1,909,128,000
• DCF 9.98/sh
• Current Price 7.10/sh

13
GW Recent Trends

• Overall demand for land drilling services
• Recently increasing shown with increase in rig
  count
• Day rates received for services provided
• Continually increasing
• Higher rates more sustainable with drilling rigs
  1000 HP
• Level of demand for turnkey/footage services
• Historically has been at an all-time low
• Demand for deep versus shallow drilling services
• Deep drilling services prove highly profitable
  over shallow areas
• Record drilling levels in the past few years
• Despite no recent significant increases in
  overall gas production levels

14
Conclusion

• Recommendation Hold
• Company Outlook Neutral
• Risks
• Sales variability (day-rates), uncertainty
• Industry Cyclicality
• Operational Risks
• Minimize cyclical trends
• Improve operational cost margins

15
QA