Grey Wolf Is Sent to the Doghouse

Last night, Grey Wolf (GW) announced that the number of its shareholders electing to be paid in cash (rather than Precision Drilling Trust shares) has “substantially exceeded” the amount of cash available for cash elections. Razor’s Edge readers will recall our August 25th, 2008 article (Grey Wolf Shareholders Should Hold Out for Better Offer!) which laid out the case for shareholders to reject the PDS offer based upon valuations. Naturally, the decline in oil and oil infrastructure stocks had already begun in earnest, so it is not unreasonable that management would try to push the deal through despite the fact that there was a better offer earlier from Basic Energy Services (BAS). Interestingly, despite a wild ride up and down over the last several months, the price of GW shares on the merger announcement date of August 25th was $6.61 per share and as of Friday, (before Monday’s collapse of the stock) the price per share was $6.36. With cash payment off the table for a large portion of institutional holders, the alternative of being given Precision Trust shares, which have fallen 60% since the merger announcement was not received well. Shares plunged Monday on the news as these institutions realized that they were getting a lump of coal instead of cash this year. Grey Wolf’s shares fell $3.22, or 50 percent to $3.14 on the American Stock Exchange.

This is a sad development for Grey Wolf as it breathes its last breath as an independent company in the coming days. It had a great opportunity on a shareholder value basis to make it through this painful downturn or to seek a better offer. At this point, however, it appears that it is all over.

Not that it matters, but Moody’s also dropped a ratings cut on Precision Drilling yesterday as well…

The negative outlook reflects that Precision will remain exposed to potentially higher interest rates, fees and discounts on all of the secured debt as the syndication of the revolver and Term Loan A continues. Precision’s Ba2 CFR reflects its pro-forma size and scale, reasonable pro-forma leverage and history of conservative fiscal management, good operating margins, and the geographic diversity of its pro-forma drilling rig fleet throughout North America. - MOODY’s RATINGS SERVICE

While we maintain our undervalued rating on Grey Wolf, that will cease to exist very quickly as the stock stops trading. The ratios look good, but that only further demonstrates how externalities must be taken into consideration. PDS also gets an undervalued rating at the moment, but with our patented “sticky note of death” attached. So proceed with great caution.

Comments

[Jake Berzon:]

"Shares plunged Monday on the news as these institutions realized that they were getting a lump of coal instead of cash this year. Grey Wolf’s shares fell $3.22, or 50 percent to $3.14 on the American Stock Exchange."

Your analysis is a bit "puzzling," but I like the cartoons...

After the election deadline passed, GW shares fell to slightly above their expected value equivalent of 0.4225 of PDS share per share of GW.

Prior to the deadline, they were trading at a slight discount to their expected blended value equivalent based on $5 plus 0.188 PDS shares per share of GW.

This is efficient markets at work. What happened is exactly what should have happened based on facts well known far ahead of time and had nothing to do with any institutional realizations.

We are also in great disagreement as far as PDS's future, which I believe to be much better than for many larger drillers. PDS has very efficient equipment for land drilling and low operating costs. They do not participate in offshore drilling, which is riskier, more expensive and even unprofitable, when oil prices are low. They were also smart to acquire GW, because getting oil out in Texas is much cheaper than in Alberta.

There is, of course, the issue of PDS paying more than GW was worth at the currently depressed driller market values and paying for this acquisition with rather expensive debt, but I believe PDS has the strength to overcome these issues. I wrote extensively about PDS last Thursday seekingalpha.com/artic... and also a year ago stockvalues.org/new-in...

2008 Dec 23 04:36 PM