grey wolf inc. (gw) wednesday, november 15 th, 2006
TRANSCRIPT
Grey Wolf Inc. (GW)
Wednesday, November 15th, 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 6 Officers CEO Salary/Bonus 1.02 M, Options Exercised 4.6 M
Officers Average Salary/Bonus 301.5 KOfficers Average Options Exercised 151.5KInsiders Hold 14.51%
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
Operations
• Divisions
-Ark-La-Tex-Gulf Coast-South Texas-Rocky Mountain-Mid-Continent District
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
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
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 capGW- $1.3 Billion– http://biz.yahoo.com/p/123mktd.html
ROEROE
(3 yr)ROA P/B P/E
D/E
(2005)
Industry AVG 25.3% - - 2.60 10.0 -
GW 49.8% 27.06% 17.0% 2.65 7.68 1.354
HP 19.72% 4.75% 12.71% 1.96 11.18 .541
NBR 29.01% 11.77% 11.14% 2.69 9.81 .924
PTEN 47.33% 14.61% 33.96% 2.69 6.65 .314
Financial Ratios
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
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
DCF Model – Assumptions
1) Historical revenue growth is normalized and used as a benchmark to forecast future revenue streams
2) Perpetual growth is based on several factors, reliant on long-term natural gas market expected growth is between 0.9-1.8% (2002-2025)
3) Operating Cost Margins have improved historically with improved periods of sales growth & higher day rates & will optimize @ a margin of 53.63%
4) Normalized (high/low) sales growth = 20.29%
5) Depreciation, Gen/Admin, CAPEX, and ΔNWC Margin calculated (historical average 6-yr)
6) Projected sales growth is affected by increasing day rates and new contracts despite changing oil prices
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
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
Conclusion
• Recommendation: Hold• Company Outlook: Neutral• Risks:
– Sales variability (day-rates), uncertainty– Industry Cyclicality– Operational Risks
• Minimize cyclical trends• Improve operational cost margins
Q&A