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Executives

David W. Wehlmann – EVP, CFO and Secretary

Thomas P. Richards – Chairman, President and CEO

David J. Crowley – EVP and COO

Ed Jacob- SVP, Operations.

Ron Hale - SVP, Business Development

Analysts

Jim M. Rollyson – Raymond James & Associates, Inc.

James West – Berkley Capital

John Daniel – Simmons and Company

Mike Clark – SIR Capital

[Assad Raja] – Canaccord Adams

Grey Wolf, Inc. (GW) Q3 2008 Earnings Call October 30, 2008 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Grey Wolf, Inc. third quarter 2008 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, October 30, 2008.

It is now my pleasure to turn the conference over to David Wehlmann, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

David W. Wehlmann

Thank you. Good morning, everyone. I'd also like to welcome you to our third quarter earnings conference call and webcast. We released earnings yesterday after the market closed and if you need a copy of that release, it's available on our website at www.gwdrilling.com.

Participating with me today on the call are Tom Richards, our Chairman, President and Chief Executive Officer; and David Crowley, our Executive Vice President and Chief Operating Officer; Ed Jacob, our Senior Vice President of Operations; and Ron Hale, our Senior Vice President of Business Development are also with us here this morning.

We believe that it is in the best interest of our shareholders and the investing community for us to make forward-looking statements in our press releases and in today's call. All statements made today that are not statements of historical fact are in fact forward-looking statements. These specific forward-looking statements cover our expectations and projections regarding day rates, average day work revenue and EBITDA per day, rig activity, expected new rig delivery schedules and cost, availability of our term contracts, the future success of turnkey drilling, rig supply and demand, projected tax rate, interest expense, depreciation, capital expenditures, and the anticipated completion of the merger with Precision Drilling Trust.

The forward-looking statements made in today's call are subject to a number of risks and uncertainties, many of which are beyond our control. Please refer to our recent reports filed with the Securities and Exchange Commission for additional information concerning risk factors that could cause Grey Wolf’s actual financial results to differ materially from the projections made in today's conference call.

Now I'd now like to turn the call over to Tom Richards.

Thomas P. Richards

Thank you, David, and good morning to everyone. I will begin by discussing our third quarter 2008 results as well as recent trends in the U.S. land drilling market. David Crowley will elaborate on those trends and provide details on activity in our various markets. David Wehlmann will then provide more detail on Grey Wolf's quarterly financial results, and I will conclude with a few remarks on our market outlook in our anticipated merger with Precision prior to the Q&A session.

At $0.12 per diluted share, Grey Wolf’s net income for the third quarter of this year compared with $0.15 in the second quarter of the year and $0.17 per share in the third quarter of 2007. The latest quarterly results reflect in after tax reduction and earnings of approximately $0.05 per diluted share related to the termination in July of our proposed merger with Basic Energy Services as well as the ongoing cost related to entering into a definitive merger agreement with Precision Drilling Trust in August.

The company's operating performance for the quarter was solid. Grey Wolf achieved the highest quarterly rig count in its history averaging a 112 rigs working up from an average of about 105 rigs working in Q2.

Third quarter EBITDA totaled 68.4 million. Day work generated $6,504 per rig day while our turnkey business generated $85, $84 per rig day. Turnkey totaled of 6.2 million which is 9% of total EBITDA for the quarter. The $18.3 million of merger-related cost also reduced reported EBITDA for this quarter. An average of 8 rigs running on turnkey contracts during Q3 and turnkey represented approximately 7% of the total day's work.

As we enter the fourth quarter, day rates range from $18,500 to $24,000 per day without fuel or top drives. This is up about $500 from rates we reported last quarter. This increase is primarily related to the wage increase that went effect in August.

Fourth quarter to date, we are averaging 114 rigs running. We have a strong portfolio of long-term contracts now and through the end of 2009 which will help moderate the impact of any near term market fluctuations. Nevertheless, we are aware of 2009 budget reductions announced by a number of our customers.

Grey Wolf's equipment fleet has a horsepower deep drilling bias suited to technically challenging resource place and we are participating strongly in these markets. We will continue to focus on providing highly trained crews in premium rigs that address our customers' need for a safe and efficient operation.

Rig 109, our trademark new built production and drilling system is a great example of this commitment, able to drill multiple wells on a single site, the unit has been providing positive drilling results for almost three months now in Colorado. Rig 110, assist rig in this series, will be delivered during the fourth quarter and it is also committed to drill in the Rocky Mountains under its regular-term contract.

And now, I'd like to turn the call over to David Crowley to discuss more specific market activity.

David J. Crowley

Thanks, Tom, and good morning to everyone. Grey Wolf is marketing 122 rigs with 114 working today. Of those, 71 are under term day work contracts, 34 in the spot market, and nine are under term turnkey contracts. Although supply site pressure on our business is easing its fewer extent of the market, demand going forward is an uncertainty as Tom has noted.

While well-permitting activity in the nation's core natural gas market has reached its highest level since 1990, that activity trended downward in the third quarter. Despite the potential softness and contract drilling, our marketing team backed by the performance of our rig crews has done an outstanding job achieving 93% marked utilization. All three term contracts that rolled off in the third quarter were renewed and in addition, we added 10 new term contracts during the third quarter.

In the fourth quarter, we will have 18 term contracts up for renewal of which two have already been renewed and we have signed an additional seven new term contracts that will start before year end. The average rigs working under term contracts for the fourth quarter is 68 which does not include any new term contracts that may be signed in the future. As mentioned previously, we currently have nine rigs working on turnkey contracts. We expect to have seven to nine rigs working in the fourth quarter of 2008.

Top drives also continue to add additional value at the well site. These units are commanding a premium of up to $3,300 per day in addition to day rates. We currently own a total of 33 units and we have an additional three units on order expected to be delivered before year end. Before I recap activity in our various markets, I want to point out that you can see the breakdown of average rigs running by market area and the press release distributed today. You may also go to our website to see a complete list of rigs.

In the Ark-La-Tex market, the company averaged 24 rigs running in the third quarter. We are marketing 27 rigs in the Ark-La-Tex and 25 are currently contracted with 17 under term contracts. We have one rig under a turnkey contract and two rigs working in the Haynesville shale play in Louisiana. In the Gulf Coast region, we have 26 rigs marketed. We averaged 24 rigs running in the third quarter of 2008. There are 25 rigs currently contracted. Five of these rigs are working under turnkey contracts and nine rigs are under term contracts.

In our South Texas division, we have 31 marketed rigs. We averaged 28 rigs running in the third quarter. There are 29 rigs working today with three of these working under turnkey and 15 rigs working on term contracts. The Rocky Mountains, our fleet total is 17 rigs. We averaged 16 rigs working in the third quarter of 2008, and 15 are working today. Of the 15 rigs working, 13 are under term contracts. As Tom had noted previously, our built-for-purpose PaDSRig 109 is drilling in the Piceance Basin. PaDSRig 110 will be deployed in the Pinedale Anticline in Wyoming in the fourth quarter, also under a three-year term contract.

In addition, we have signed two-year contracts to move three additional 1,500-horse power rigs to the Bachchan Oil Play, in North Dakota. This includes two rigs that are currently being upgraded and reactivated at our Alice, Texas facility. We expect to have four units working in the Bachchan in early next year. The Mid-continent market area encompasses West Texas, Oklahoma, and the Barnett Shale area in North Texas.

We have 19-marketed rigs in this division; we averaged 18 rigs working in the third quarter, and 18 are working today. We have 15 rigs working under term contracts in this market.

Turning to Mexico, in the Southern portion, we have two, 3,000 horsepower rigs drilling under three-year term contracts. We are actively pursuing opportunities to deploy our smaller units in the northern and central areas of Mexico, and our deep-drilling units into the southern area, either directly with PMX, or through established mega-service integrators.

Lastly, I’d like to recognize our line managers, and their disciplined teams in the field, at our division level, and at our headquarters, for delivering consistent and approved results when comparing our year-to-date performance metrics through the first three quarters of this year, to our 2007 figures.

Our safety metric of total recordable incident rate has improved by 45%, to 2.0 incident rate. Our attrition levels improved by 30%. Our down time has improved by 36% to 1.4% of operating hours. And finally, our standardized operating costs and maintenance CapEx have been held in check, with 1.5% and 7% reductions respectively. Of note are safety attrition, and down time numbers represent the lowest in Gray Wolf’s history.

This achievement during a year best described as tumultuous, with a backdrop of pending M & A opportunities, is a testimony to the focus, discipline and pride that our employees have in the daily work that they provide for our valued customers.

We are confident that this culture, based on goal orientation and results, will continue to differentiate Grey Wolf drilling rigs throughout the cycles.

That completes my remarks, and I would now like to turn it over to David Wehlmann for a financial review.

David W. Wehlmann

Thanks David. Starting with the income statement, Grey Wolf had net income for the third quarter of $24.3 million, or $0.12 per share, compared with net income of $35.6 million or $0.17 per share for the third quarter of 2007. Net income for the second quarter of 2008 was $32.3 million, or $0.15 per share.

As Tom noted, the company incurred pre-tax expenses of approximately $18.3 million, which translates into an after-tax amount of $0.05 per share during the third quarter, as a result of the termination of the proposed merger with basic energy services, and the on-going expenses related to the announced merger agreement with Precision. Evened off in the third quarter of 2008 totaled $68.4 million, compared with $80.5 million for the second quarter, and $83.7 million for the third quarter of last year.

The third quarter day work EBITDA was $62.2 million, and that compares with $69.5 million for the second quarter. Day work EBITDA per rig day was 6,504 in the third quarter, and was 7,840 in the second quarter of 2008.

Turnkey EBITDA for the third quarter was $6.2 million, compared with $11 million, and the per rig day amount was 8,584, compared with 16,598 for the previous quarter. All of the third quarter, 2008 EBITDA and EBITDA per day amounts were reduced by the $18.3 million in merger related expenses.

As you can see our press release for disclosure on EBITDA per day for day work and turnkey, and a reconciliation of EBITDA to net income.

Turning now to the balance sheet, we had cash of $290 million, and working capital of $382 million at September 30, 2008, and our debt-to-total cap was 26.7%, and you can see that our balance sheet remains very strong, and as a matter of fact, today we have cash of a little over $300 million.

Our total long-term debt is $274.7 million, and the fourth quarter current interest rate on our $125 million dollars of floating rate convertible notes is 3.8% per annum.

Our line of credit remains viable and available, and we have $69 million of the $100 million there for us, with the difference being used for outstanding letters of credit for our insurance purposes. Total assets were $1.3 billion, and stockholders equity was $753 million at the end of the quarter.

Our capital expenditures were $35.9 million for the third quarter, and for all of 2008, we’re expecting to spend somewhere between $160 and 170 million for capital expenditures.

Just to break down our term contracts a little bit more, we obviously have a very strong portfolio of those. We currently have 71 rigs working under term. On average, we will have approximately 68 rigs working during the fourth quarter under term, and for 2009, we have 44 rig years locked up under term, and 9 rig years in 2010. This translates into 6,300 days contracted for the remaining quarters of 2008, 16,100 rig days in 2009 and 3,200 rig days in 2010. As these guys have mentioned, this is a point-in-time measurement, and if we sign additional term contracts and then renew some, these totals will increase. As a matter of fact, in our second quarter call, we reported 38 rig years under term for 2009, and as I just reported, we have a 44, so we’ve increased six rig years in just this short period of time since our last quarterly call.

Now, looking forward into this fourth quarter of 2008, we expect to average somewhere between 108 and 112 rigs working, with 7 to 9 of those working under turnkey. Our average day work EBITDA per rig day is expected to remain relatively consistent, or flat, with the third quarter, before the effect of any merger related expenses.

Depreciation expense of approximately $28.2 million, interest expense of approximately $3 million, and our effective tax rate is expected to be around 37% during this fourth quarter.

I’d now like to turn it back over to Tom for some closing remarks.

Thomas P. Richards

Thank you David. It’s no surprise that the current outlook for land drilling has deteriorated in the past several months. Given the global financial crisis and economic uncertainty, commodity prices have declined dramatically from their second quarter peak. The 12-month strip for natural gas has declined to a little over $7.00 per million Btu, while a 12-month strip for oil is right at $71.00 per barrel, reflecting the markets high level of uncertainty about future demand given the global banking crisis that has clouded the economic forecast. However, we have often noted that we cannot predict short-term fluctuations in commodity prices, but we do believe the long-term prospects for drilling are very good, not only in North America, but worldwide as well. Oil and natural gas are limited commodities that will play a significant role in fueling our nation and economic growth well into the future despite the current setbacks.

Grey Wolf is competitively positioned with the equipment, the people, the strong portfolio of term-contracts, and a strong balance sheet to weather and near-term decline in drilling activity.

As you probably are aware, our board of directors, in August, approved entering into a merger agreement in which the company will be acquired by Precision Drilling Trust, the leading Canadian drilling contractor. The combined Precision and Grey Wolf will have land-running operations in virtually every conventional and unconventional oil and gas basin in the lower 48 and Canada, and with an emerging presence in Mexico.

Precision shares Grey Wolf’s core values, including safety, performance and integrity, and we are confident that the combination of our deep-drilling capabilities and Precisions high-performance systems and technology provides a foundation for international expansion, to pursue global drilling opportunities.

The merger process is moving forward as planned, with a successful completion of several key steps. We have obtained all government and regulatory approvals and we are now mailing a final proxy. The special meeting of Grey Wolf shareholders is scheduled for December 9th in Houston.

We look forward with anticipation to that meeting and we appreciate your participation on this call. And we’ll now be happy to try to answer any further questions that you might have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And our first question comes from the line of Jim M. Rollyson at Raymond James. Please proceed.

Jim M. Rollyson – Raymond James

Hey, good morning guys. Tommy, you talked a little bit about, I guess expecting things to maybe slow down here as you go into 2009, is that at this point just something you’re kind of expecting by reading the currents or you actually seeing that happen yet?

Thomas P. Richards

I don’t think we’re seeing that happening. I mean, we’re actually predicting a healthy recount for us, I think 108 to 112 average in the fourth quarter, but, you and I have been around long enough to know Jim that if there’s a decline in the commodity prices there’s less cash flow for our customers and that usually translates into a lower level of rig activity. So, we’re basing that not so much on what we’re seeing on what’s today, but we anticipate for commodity prices in the near term.

I might had, however, that none others at this time, probably that almost call the day expected U.S. prices to be as robust for most of this year and I don’t think there’s anybody that has any really good visibility that they’re going to be in the tank for all of 2009 either.

Jim M. Rollyson – Raymond James

Sure. Are you still seeing people willing to commit to term contracts or even new builds at this stage?

Thomas P. Richards

Well, we have an interest in that. We see that and I think as David mentioned earlier, we have 18 renewals up in the fourth quarter and two of those have already been renewed.

Jim M. Rollyson – Raymond James

Okay. It’s not all that bad so far. When you –

Thomas P. Richards

I’ve seen it, you know, in relative terms $7.00 gas and $7.00 oil, I’d say that in the 40 to something years I’ve been in this business, I’m—I’m—that’s a pretty good scenario to work under.

Jim M. Rollyson – Raymond James

Are you guys still pursuing opportunities outside the U.S. such as Mexico or you kind of unhold doing too much there until you complete the Precision merger?

David J. Crowley

No Jim, we’re continuing to pursue particularly in Mexico, the Chicontepec bids as you’re aware, let’s say over with for the time being. We do expect in the next four quarters, at least three more tranches of Chicontepec bids and two Borgo tranches, which should be about six to eight rigs per tranche.

But we’re also looking at some renewed interest in the deep drilling rigs as I know that during the call in the Southern via Hermosa regions, where we have 2,000 or about 3,000 horse powers now. So we’d certainly like to build some more mass down there.

Jim M. Rollyson - Raymond James

Well said. Thanks guys. Good luck with the vote.

David J. Crowley

Thank you, Jim.

Operator

(Operator instructions) And our next question comes from the line of James West at Berkeley Capital. Please proceed.

James West – Berkley Capital

Hey, good morning guys. Tom, a quick question on this term contracts that you renewed or you renewed in the third quarter and that are up for renewal in the near term, what are you seeing in terms of day rates or pricing relative to your term of payments that would have been signed earlier this year? Has there been a decline in pricing yet?

Thomas P. Richards

Thank you for that question James. I will let David Crowley, who’s handling that on a daily basis answer that for you.

James West – Berkley Capital

Okay.

David J. Crowley

James, we haven’t seen that yet although keep in mind we’ve only renewed two of the 18 in the fourth quarter. Third quarter was very strong. It more or less, we accelerated out of the second quarter and we hit some very good numbers on term typically at the spot market or better. So its—for fourth quarter, I have to say is to be determined.

James West – Berkley Capital

Okay and then as the two of the 18, I guess the other, there are 16 that have not been renewed, have there been delays in those discussions at all or your customers are pushing that back a little bit to see how the market shakes out or try to think about their needs for next year, or its just, you were just going moving forward right now.

David J. Crowley

I don’t think it’s any different than the buyer profile in the third quarter really James. Our plant base will typically wait until two to three weeks before the end of a contract to keep their options open and visibility and I think laid on top of there right now we have, obviously the background on the global markets, but also its budget time. So it’s the most awkward part of the year, time of the year for visibility.

Thomas P. Richards

And James, let me just add a further comment to that. You know, our expectations for the fourth quarter that we gave awhile ago is that we would average pretty much the same rig count in Q4 that we’ve had in Q3. So, in respect of how these contracts worked out. We don’t expect that to affect our rig count in the Q4 and I think David has estimated that the margins would be essentially the same, so we look for Q4 to be a good quarter and we as a matter of practice don’t look out any further than the coming quarter.

James West – Berkley Capital

Okay, understood. That’s very helpful. Thanks guys.

Thomas P. Richards

Thanks James.

Operator

And our next question comes from the line of John Daniel at Simmons and Company. Please proceed.

John Daniel – Simmons and Company

I guess this one is for David. Can you remind me how many rigs were contracted in late 2006 as you guys entered ’07?

David W. Wehlmann

Late 2006. Let’s see here. I don’t know if I have that information in here. We averaged–I think our highest year in the term contract was ’07, but I don’t think I have that information here. I’m sorry.

John Daniel – Simmons and Company

Okay. That’s it for me.

Operator

(Operator instructions). And I saw no further questions at this time Mr. Wehlmann. So I turn the call back– Just one moment someone has just queued out. That would be Mike Clark from SIR Capital. Please go ahead sir.

Mike Clark – SIR Capital

Good morning gentlemen. Hi David, just want to ask how much revenue you got locked up next year under those term deals?

David W. Wehlmann

Yes. I do have that information. We have 342 million locked up under the 44 rig years that we’ve talked about.

Mike Clark – SIR Capital

Do you have the numbers in front of you, how those, now that we’re getting closer to have those 44 years you distributed throughout ’09?

David W. Wehlmann

Yes, I do. In the first quarter, we have 60 rig years, excuse me, or 60 rigs working on average under term, in the second quarter 49, in the third quarter 41, and in the fourth quarter 28.

Mike Clark – SIR Capital

Thank you and good luck.

David W. Wehlmann

Thank you, Mike.

Operator

And our next question comes from the line of Assad Raja (ph 00:34:15) at Canaccord Adams. Please proceed.

[Assad Raja] – Canaccord Adams

Good morning gentlemen. Sequent questions for you, just wondering on the date of show of the vote is December 9th as announced. Just a quick one question on that, things go low as per the vote, I mean is the transaction supposed to close shortly I mean, do you expect it to be mid-December or more like towards the end of the year?

Thomas P. Richards

Now the merger agreement requires or calls for the closing to be one day after the votes, so with the positive vote on the 9th, we would expect to close the merger on the 10th.

[Assad Raja] – Canaccord Adams

Excellent, that’s it. That’s all I had.

Thomas P. Richards

Thank you.

Operator

And I saw no further questions, Mr. Wehlmann, I turn it back to you.

David W. Wehlmann

If there’s no further questions, I’d like to thank each every once again for joining us on this call and your participation and your confidence in the company. And we’re excited about this pending merger with Precision. We think it’s going to be good for our shareholders and good for our employees. And with that I wish to each of you a very pleasant and nice day. Thank you.

Operator

Ladies and gentlemen, that just concludes the conference call for the day. We thank you for your participation and we ask if you please disconnect your line. Thank you everyone and have a good day.

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