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Grey Wolf Inc. ( GW )

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

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Grey Wolf Inc. ( GW )

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  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 producersand 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. Q&A

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