Download Blair Corporation (BL)

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 K
Officers Average Options Exercised 151.5K
Insiders 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
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•
•
•
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 cap
GW- $1.3 Billion
– http://biz.yahoo.com/p/123mktd.html
Financial Ratios
ROE
ROE
(3 yr)
D/E
ROA P/B P/E
(2005)
Industry AVG 25.3%
GW
49.8% 27.06% 17.0%
HP
19.72% 4.75% 12.71%
NBR
29.01% 11.77% 11.14%
PTEN
47.33% 14.61% 33.96%
2.60 10.0
2.65 7.68
1.96 11.18
2.69 9.81
2.69 6.65
1.354
.541
.924
.314
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