Hey all you Wolf "hounds" have you seen this?
From thestreet.com
$10 Store: Grey Wolf
By Mavis Scanlon
Staff Reporter
9/26/97 8:37 PM ET
Editor's Note: This week's $10 Store represents a modest departure into the energy sector. Much of the sector has become tasty to investors, with stock prices reaching lofty heights. While our feature stock here is not cheap by some measures, it is an intriguing small-cap stock in a very hot sector.
Grey Wolf (GW:AMEX) has grown dramatically in the past 18 months through an aggressive acquisition campaign. The company, formerly known as DI Industries, is now the second-largest domestic land driller in the U.S. Since April 1996 the company has acquired 78 rigs in 10 separate purchases and has contracted to acquire 12 more, increasing the size of its fleet to 133 rigs.
Money managers and analysts alike have become increasingly gung-ho about the company, which one year ago traded at 1 1/2 with a market capitalization of $40 million. "We bought it at 2, so we're very pleased," says Annette Geddes, manager of the Victory Special Growth Fund. She should be. Grey Wolf closed Friday at 7 5/16.
(Ed's note: On Monday Grey Wolf filed to sell 25 million shares, some of those shares coming from existing shareholders. This news has put the stock under pressure Monday morning.)
Geddes says she started out buying offshore drillers four years ago because of the low multiples and great prospects. "The sweet spot for the drilling industry occurred first in that area," she says, referring to the doubling of many of the offshore drillers' stock prices in the past two years. "But I always kept my eye of the land drillers," she added. "DI Industries was the first one I bought."
Land drilling companies are indeed on a rebound after a dry spell that lasted throughout the '80s and deep into this decade's bull market. The land-drilling rig market became saturated in the early 1980s as builders flooded the market in anticipation of higher energy prices. But prices remained stagnant and by 1985 demand dropped to nil. The land driller market suffered. Today demand has returned and the number of onshore rigs is much smaller than it was in the mid-1980s.
Once again tight supply is helping the land drillers gain leverage over their exploration and production contractors. Domestic as well as international onshore exploration is on the rise, and the smaller supply of available rigs has pushed up onshore day rates.
"The biggest thing happening in the land-drilling industry is the movement towards replacement economics, or the day rates to justify new construction," says Simon Rose, a partner at Prime Charter Ltd., a New York investment bank, who was buying up shares of Grey Wolf last week. "Land drillers used to be mom-and-pop shops," he says. "Now the top four companies -- Nabors (NBR:NYSE), Patterson (PTEN:Nasdaq), UTI (UTI:AMEX) and now Grey Wolf, control about 60% of the land drilling market. They're getting $10,000 a day for a rig, up from $6,500 one or two years ago. They're having their day now."
Prudential Securities initiated coverage of the company in August with a buy rating, and by early September the company was a featured stock in the brokerage firm's monthly Small/Mid Cap stock report. Matt Conlan, a Pru analyst, sees increasing profits for the company through increasing day rates on the 107 active rigs the company is using, and continued growth through the use of refurbished rigs. Pru has not led underwriting recently for Grey Wolf.
"Over the next three years we should continue to see upward pressure on domestic land day rates: worldwide demand for top-line drilling equipment should easily exceed today's active capacity as well as the potential capacity provided by the easily reactivated fleets of equipment that are primarily controlled by Nabors and DI," Conlan stated in the report.
At the time of Conlan's report, in early September, the stock was trading at 6 11/16. Its Friday close of 7 5/16 is about 22 times estimated 1998 earnings. The market cap is about $1 billion.
Grey Wolf also owes some credit for its success to a new board and senior management team that took the reins a year ago April. They've restructured the company and implemented a turnaround strategy. Operations in Mexico and Argentina were shut down, and international operations are now being concentrated in Venezuela, where recent bids for oil field acreage have topped $2 billion, according to a report released by Bankers Trust Research. (Bankers Trust has done underwriting for Grey Wolf.) Domestically, Grey Wolf's recent acquisitions -- especially the 18 rigs acquired in the Grey Wolf Drilling Co. purchase -- establish the company as the leading onshore driller on the Texas and Louisiana coast and firmly entrench it in two other core markets -- south Texas, and the Arkansas-Louisiana-Texas basin, commonly referred to as ArkLaTex.
The company's second-quarter net income doubled, to $1 million on revenue of $40 million, from the year-earlier period, which saw earnings of $500,000 on $19.2 million. Although second-quarter earnings per share were only 1 cent, and estimates for the year only 20 cents, they go straight up from there. Conlan at Prudential estimates 1998 earnings at 45 cents per share.
Tom DiBella, a portfolio manager at Aeltus Investment Management, a Hartford, Conn., investment firm, has been buying oilfield service stocks since the third quarter of '94 and holds Grey Wolf in two portfolios. (His largest position is in Nabors, which closed Friday at 39 1/4.) He likes Grey Wolf''s prospects for the next several years, saying it could "probably make 99 cents or $1 in '99." He sees Grey Wolf as having tremendous pricing leverage in the industry due to the volume of the rigs it owns.
But there are a couple of flies in this $10 ointment. DiBella has expressed concern about the recent heavy insider selling of shares. "Most of their shares were issued when they went out and bought these smaller companies," he says, explaining that this process didn't leave much in the way of float, which now stands at 60.6 million of the 151.6 million shares outstanding, according to MarketGuide. "In order to sell this story they have to float the stock." The company declined to comment for this story.
On top of that, the company is not exactly debt light. Having gone to the junk bond market to refinance some debt and pay for its most recent acquisition of Grey Wolf Drilling -- the company whose purchase spurred DI's name change -- the company's debt-to-capital ratio is 50%, according to two recent brokerage reports.
Still, Geddes at Victory sees the stock hitting double digits longer term. Rose at Prime Charter sums it up in a nutshell: "You're gonna be very happy two years from now."
The $10 Store stacks its proverbial shelves with stocks that trade under $10 a share, are attracting investor interest and are trading at a discount to annual sales (or are considered a "value" by another accepted measure). The feature runs every Friday. |
