I started a position in GW (Grey Wolf) this morning. The drilling business is so cyclical it’s hard for me to put a reasonable growth expectation on it, but I am reassured by the numerous support points on the chart at the mid $6 range. There was a lot of selling in July, falling some 24% since late June. I’m betting that the weak hands are out and that all the negativity about softness and over-capacity problems are priced in. Margins have shown a nice steady improvement over 5 years and now NPM is almost 22% ROE over 37%. On price/sales and price/cash flow, GW is among the best/lowest.
Company: GW
Date: 10/4/2007
Next year's expected earnings: $0.66 (vs. .68 ave.)
EPS growth rate used for estimate: 5% (vs. 18% ave.)
Multiple Graham used for estimate: 8.5
Graham Fair Value: $8.60
Current Price: $6.55
$ difference: $2.05
Percent Growth to Fair Value: 31.23%
Others have posted about GW’s higher-quality rigs and its solid balance sheet:
[Grey Wolf's poor trading] multiple does not reflect the solid track record of revenue growth and the company's open mind about placing rigs in South America (and in the Gulf of Mexico). That, together with Grey Wolf's use of refurbished rigs and great fleet mobility, makes for a very possible multiple snap back. Grey Wolf's management has proven to be a very shrewd bunch. And they've been defending those great margins for years.
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So was Grey Wolf foolish to expand at a time like this? Not at all, because land rigs aren't homogeneous, and Grey Wolf is adding the right kind of rigs.
The overcrowded part of the market is in old, lower-horsepower mechanical rigs. Newer high-tech rigs are more useful in deep, directional, and horizontal drilling applications. These rigs are less commoditized and command better rates. On its recent call, Devon Energy noted that newer rigs reduced drilling time by 10% in the Barnett Shale and helped keep costs under control. With more and more activity focused on horizontal shale plays, I see Grey Wolf's purchases of newer rigs as a wise use of shareholder capital. Not only is Grey Wolf buying the right sort of rig, but it's also locking in very long-term contracts for them.
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SAN FRANCISCO, Sept 25 (Reuters) - Oil and gas land drilling services company Grey Wolf Inc said on Tuesday it will deploy two new 1,500-horsepower drilling rigs for two exploration and production companies in the second and third quarters next year under three-year contracts.
Grey Wolf also said directors approved a $50 million increase in its common stock repurchase program for purchases of common shares up to $150 million.
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RJ Energy Group: Grey Wolf is unique in that relative to many of its peers, Grey Wolf is better positioned over the short term, as it has a large amount of term contracts for its rigs in 2007 (with 58/123 under contract) and into 2008. In addition, Grey Wolf's rig fleet is centered towards the higher-end of the industry in terms of size and capabilities. This marks a short-term positive as the current market softness appears to be greatest at the low-end of the rig fleet.
Weekly chart showing support around $6.20 - $6.60:
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