Grey Wolf Q4 2007 Earnings Call Transcript

Grey Wolf Inc. (GW)

Q4 2007 Earnings Call

February 21, 2008 10:00 am ET

Executives

David W. Wehlmann – Executive Vice President, CFO, and Secretary

Thomas P. Richards – Chairman, President, and Chief Executive Officer

David J. Crowley – Executive Vice President and COO

Analysts

Arun Jayaram - Credit Suisse

Ian MacPherson - Simmons & Company

Mike Urban - Deutsche Bank

Todd Garman - Peters & Companey

John Fitzgerald - Raymond James

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Grey Wolf Inc. fourth quarter and year ended 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to David Wehlmann, Executive Vice President and Chief Financial Officer. Please go ahead sir.

David Wehlmann

Thank you and good morning everyone. We released our earnings last night after the market closed. If you need a copy of the release, one is available on our Investor Relations page of our website at 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. Also with us here this morning are Ron Hale, our Senior Vice President of Business Development and Ed Jacob, our Senior Vice President of Operations.

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 forward-looking statements. The 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 term contracts, the future success of turnkey drilling, rig supply and demand, our projected tax rate, interest expense, depreciation and capital expenditures.

The forward-looking statements made in today’s call are subject to a number of risks and uncertainties, many of which are beyond under control. Please refer to our 2006 annual report on Form-10 K filed on February 27, 2007 with the SEC for additional information concerning risk factors that could cause actual results to differ materially from the projection made in today’s conference call. The forward-looking statements herein may be relied upon subject to the previous Safe Harbor statement as of the date of this call and may continue to be used until March 7, 2008.

Now I would like to turn the call over to Tom Richards.

Thomas Richards

Thank you David and good morning to everyone. I will begin by discussing our fourth quarter and year end 2007 results and recap some of the 2007 additions to our rig fleet. David Crowley will provide details on activity in our various markets and David Wehlmann will then review financial information on the company before I conclude with a few remarks on our market outlook prior to the Q&A session.

Net income for the fourth quarter was $0.16 per share compared with $0.24 per share a year ago. Fourth quarter EBITDA totaled $84.4 million with day work generating $77 million and turnkey $7.4 million of that total.

Day work EBITDA per day was $8743 and that is up $364 from the third quarter and last year of $8379 per day. turnkey EBITDA was $11,219 per day and this is down approximately $900 per day from the third quarter of ’07.

An average of seven rigs ran on turnkey contracts during the fourth quarter of last year. turnkey represented approximately 7% of the total days worked and 9% of the EBITDA.

Overall the company averaged 103 rigs working this past quarter compared to 104 in the third quarter of 2007 and 110 in the fourth quarter of ’06.Our utilization remained at a higher level than what we had anticipated in our last conference call.

While Grey Wolf continues to generate strong operating results, the influx of newly built drilling rigs in the market is pressuring Grey Wolf’s year-over-year average rig days worked, contract renewal rates, and mobilization recoveries. In the past several months rates have been flat at $14,000 to $20,000 per day. This is relatively consistent with our last quarterly conference call though we have seen some modest pressure on the day rates for the larger personalities. We are protected somewhat from these market fluctuations by our term contract portfolio which allows us to focus on Grey Wolf’s long-term growth strategy.

I would like to recap the full year results and sum up this year’s events whereby we continued to upgrade our rig fleet.

For 2007 the company delivered net income of $0.79 per share and EBITDA of $376.7 million both of which are the second highest totals in the company’s history, second only behind 2006. In early July we closed on the purchase of two 1,500 horsepower rigs that were built in 2006. The seller in turn executed a three-year term contract for Grey Wolf to operate in East Texas. Additionally we have deployed two newly built SCR rigs on a term contract. One was a 2000 horsepower unit and the other a 1000 horsepower unit.

We also took delivery of all six new 1,500 horsepower rigs that we ordered in 2006 and all are working under long-term contracts.

We entered into new contracts for two new 1,500 horsepower built-for-purpose AC drive rigs under three-year commitments in the Rockies. The rigs will be delivered during the second and third quarters of this year.

Over the past three years Grey Wolf has invested $168 million to upgrade the drilling capacity of our rig fleet along with $120 million for the eight new rigs I just mentioned. Our technically enhanced rig fleet is capable of addressing the challenges our customers face today.

And now I would like to turn the call over to David Crowley to discuss activity in each of our markets.

David Crowley

Thanks Tom and good morning to everyone. Grey Wolf is marketing 121 rigs with 102 under contract today. Of these 53 are under term day work contracts, 44 are in the spot market, and five are working under turnkey contracts.

Turning to the supply side of the equation we are aware of 24 announced new builds that will enter the market in 2009 though we expect that number could more than double before the year is out. This compares with 370 new builds that entered the market in 2006 and 280 in 2007. The tapering off of market entrance is just as pronounced in the reactivation market. Older rigs put back into service totaled 130 in 2006, 52 in 2007, and we expect just a handful to enter the market in 2008.

On the demand side, we’ve seen a healthy 24% increase in total well permitting in the past month compared to the previous month. While this overall number is down a few percentage points from the same period last year, in Grey Wolf’s core markets we’ve seen an 18% year-to-date 2008 increase in permits compared to 2007. This should bode well for second quarter rig demand.

Our sales team continues to maintain utilization premium to our peers aided by the steady performance of our operations team and their relationships with our key clients.

Of the 23 term contracts that rolled off in Q4, 24 were renewed with the same client of which half were renewed on term and half were renewed on a well-to-well basis. Of the 14 term contracts that we expect to roll off in Q1, we expect all of them to roll over again half on term and half on well-to-well.

As for the Grey Wolf fleet we expect to average 52 rigs under term contacts for the first quarter and an average of 37 rigs under term contracts for the full year 2008. These figures do not include any term contracts that we may sign in the future.

There has been a recent increase in the enquiry level for term contracts as customers with visible drilling programs look to potentially lock in current market day rates. Of note, we have recently signed a new one-year contract in the Rockies for one of our idled units. This work is scheduled to commence in March.

As mentioned previously, we currently have five rigs working on turnkey contracts. We expect to have up to eight turnkey rigs working going into the second quarter on the back of a recent uptick in bidding activities for this segment.

Talk drives also continue to add additional value at the well site. These units are commanding a premium of up to $3000 per day in addition to day rates. We currently have a total of 24 units deployed.

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 in the press release distributed today. You can also go to our website to see a complete list of rigs.

Turning to -- in the Ark-La-Tex market, the company averaged 25 rigs running in the third and fourth quarters of 2007. We are marketing 29 rigs in this region with 25 currently under contract. This market area has seen one of the highest concentrations of term contract demand and activity with 13 of the 25 working on term contracts.

In the Gulf Coast region, we have 25 rigs marketed. We averaged 22 rigs running in both of the last two quarters of 2007. There are 24 rigs currently contracted. Four of these rigs are working turnkey in this market area and another eight rigs are under term contracts.

In our South Texas division, we have 31 marketed rigs. We averaged 28 rigs running in the fourth quarter as well as in the third quarter of 2007. There are 26 rigs working this morning with one of these drilling under a turnkey contract. We have seen a recent slowdown in this market area in both turnkey and day work which has intensified competition. The pricing pressure has been biased towards rig mobilization recoveries as opposed to the day rates for the time being. We have 11 of our rigs in this market working under term contracts.

In the Rocky Mountains, our fleet totaled 16 rigs and we averaged 13 rigs working in the fourth quarter of 2007 compared with 14 rigs running in the third quarter, 11 are at work today. Of the 11 rigs working today, nine are under term contracts. With the commissioning of the Rockies Express West Pipeline last month, our clients have realized a reduction in the basis differential from over $2 a year ago to $0.71 today. This factor coupled with the continued interest in Bakken oil play in North Dakota makes Grey Wolf cautiously optimistic on our ability to play some idle capacity in the second quarter.

As Tom mentioned earlier our two built-for-purpose PaDS rigs that are scheduled to be delivered in the second and third quarters of this year will be deployed in this market under three-year term contracts.

The Mid-Continent market area encompasses West Texas, Oklahoma, New Mexico, and the Barnett Shale area in North Texas. We have 18 marketed rigs in this division. We averaged 13 rigs in the fourth quarter compared with 14 running in the third quarter, 14 are currently at work. We have ten rigs working under term contracts in this market.

Turning to international. In the southern portion of Mexico, two rigs commenced operations in the third quarter of this year, in 2007. Both of these rigs are from our fleet of 3,000 horsepower units and they are under three-year term contracts. We are actively pursuing opportunities to deploy more units into the northern and central areas of Mexico either directly with PEMEX or through established mega service integrators.

Lastly I would like to address cost control. Through the efforts of our line managers we were able to reduce operating cost, Q3 to Q4 by $160 per day by improving recruiting practices and tightening repair and maintenance. Our sales team’s ability to maintain a steady 103 units working in the last quarter was also a contributing factor. There will be a continued emphasis on cost control at Grey Wolf.

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

David Wehlmann

Thanks David. I will start off with the income statement.

As Tom mentioned, net income for the fourth quarter of 2007 was $34 million or $0.16 per share compared with net income of $52.5 million or $0.24 per share from the fourth quarter of 2006. Net income for the third quarter of 2007 was $35.6 million or $0.17 per share.

EBITDA for the fourth quarter of 2007 totaled $84.4 million compared with $83.7 million for the third quarter of 2007. EBITDA for the fourth quarter of 2006 was $105 million. Fourth quarter day work EBITDA was $77 million compared with $73.6 million in the third quarter. Day work EBITDA per rig day was $8743 compared with $8379 in the third quarter. This increase is mainly due to the cost cutting that David just mentioned plus we were able to realize a one-time change in our taxing jurisdiction for our ad valorem taxes which reduced our operating cost in the fourth quarter by $340. That $340 coupled with the $160 that David mentioned -- it gave a reduction of about -- just right at $500 in our operating expenses in fourth quarter.

Turnkey EBITDA per rig day was $11,219. Please see our press release for disclosure on EBITDA per day for day work and turnkey and a reconciliation of EBITDA to net income.

Now turning to our balance sheet which is the strongest it has been in the company’s history. We had cash of $247 million and working capital of $338.8 million at the end of the year and our debt to total capitalization ratio was down again to 29.4%. Our long-term debt is $275 million and the current interest rate on our $125 million of floating rate convertible notes in this first quarter is 4.7% per annum. With the recent drop in the interest rates we expect this also to drop by at least 100 basis points in the second quarter.

$69 million of our $100 million credit line remains available with the difference being outstanding letters of credit for insurance purposes, total assets for $1.2 billion, and stockholders’ equity was $659.5 million at the end of the year. Under our previously announced plan that authorizes the repurchase of up to $150 million of Grey Wolf common stock, the company has purchased 19 million shares and spent approximately $122 million of that authorization of this program. This represents approximately 10% of the common shares outstanding when we started this program back in 2006.

We were particularly aggressive in the fourth quarter of 2007 spending $33.7 million and we have spent an additional $2.1 million to date under this plan in the first quarter.

Our fourth quarter capital expenditures were $30.1 million and for the entire year were $220.2 million in 2007.

Looking ahead now to 2008 for CapEx, the company is expecting to spend approximately $150 to $160 million on CapEx and this total includes $34.5 million for the remaining payments on the two new rigs that David and Tom have talked about and another $41 million for the continuing upgrade of our fleet on top of the $168 million that we have spent over the last three years upgrading our fleet that Tom mentioned.

We currently have 53 rigs working under term contracts and to give you a little detail behind the rest of the year, we will average 52 rigs working under term for the first quarter this year, 37 in the second, 31 rigs in the third, and 29 in the fourth quarter of this year.

For 2009, we have 18 rig years locked up under term contracts. When you look at it in terms of days, this translates into 4,700 rig days contracted for the first quarter of 2008, 13,600 days committed for the full year of ’08, and 6,500 rig days in 2009. As David mentioned, this is a point-in-time measurement and if additional term contracts are added or renewed these totals will increase.

Now looking forward to the first quarter of 2008, we expect to average somewhere between 99 and 102 rigs working with five to seven of these working under turnkey contracts. Our average day work EBITDA per rig day is expected to decrease by $700 to $800 in relation to the fourth quarter. About half of this decline is related to operating cost as compared to the fourth quarter. Now please remember as I have just mentioned that our fourth quarter included $340 of a one-time deal when we were able to reduce our ad valorem taxes by moving the jurisdiction out of Harris County. So we are not expecting operating cost to go up on an apples-to-apples basis. In fact, as David mentioned, they are down 160 in the fourth quarter from the third. And so if you look at it, if you were to compare the third quarter of ’07 to the first quarter of ’08, we would expect it to be down to $150 to $200 that David mentioned.

The other half of the decline that we are expecting in EBITDA per day in the first quarter is related to pricing pressure on contract renewals; David mentioned the contracts come up for renewal and mobilization recoveries.

Depreciation expense is expected to be approximately $26.2 million, interest expense of $3.3 million, and an effective tax rate of just under 37%, all expected in the first quarter of ’08.

I will now turn this call back over to Tom for some closing remarks.

Thomas Richards

In closing, as David mentioned, additional new rigs are still coming into the market though the pace has slowed significantly. For industry sources, there are over 300 idle rigs in the market today.

As you are aware, when there is an excess supply of rigs, there will be continued pressure on the revenue side of our business. We expect this pressure to remain modest however as it has been over the past several months.

In the meantime the commodities outlook remains strong. In fact, the natural gas outlook has improved significantly over the past month. The 12-month strip for natural gas is over $9.25 per million Btu and oil is at historic highs with the 12-month stripped over $98 per barrel.

We can't predict the short-term fluctuations in natural gas prices but we strongly believe in the long-term future of the commodities. Given our long-term belief in the commodities we also believe in the future of our business. We believe that is very good and will get even brighter as the excess supply of rigs is absorbed into the market.

We appreciate your participation on this call and now we would like to open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Arun Jayaram with Credit Suisse. Please proceed with your question.

Arun Jayaram - Credit Suisse

Good morning guys.

Arun Jayaram - Credit Suisse

Hey, Tom I was wondered if you could comment a little bit on some of the efficiency you are seeing from the NOV new builds that you have deployed so far?

Thomas Richards

I will let David field that question.

David Wehlmann

Arun, I would say it’s early days as far as mobilization time, you know the time between wells were still tweaking that with national but certainly the downtime in the first 100 days and the efficiency at the well site, we are getting very good feedback from our clients on it.

Arun Jayaram - Credit Suisse

Okay, and are you looking at deploying additional new builds in 2008 based on what have you seen so far?

Tom Richards

Well, that would depend upon the market for term contracts. We have had a history of not build anything on speculative basis Arun, so really we are out in the market looking for other opportunities and to add new equipment but only based upon the back of a strong term contact.

Arun Jayaram - Credit Suisse

That’s fair. David or Tom, can you also -- I just want to understand in terms of the mobilization recoveries. Are you getting any sort of moving rate any more and how does that change in terms of what the operators are paying you for the mobilization?

David Wehlmann

We are getting a moving rate HA. It’s typically been 80% of the day rate when moving. We are getting some pressure on that percentage right now and also we are looking at capping days in some of the markets where we have as in South Texas where we have a lot tighter competition.

Arun Jayaram - Credit Suisse

Okay and last question, David. I wondering if for what you set in 2007, I think that was $220 million, could you give us a breakdown on what that was maintenance CapEx upgrades, pipes, and etcetera?

David Wehlmann

Sure can. Bear with me a second while I find the right page. On new builds, our new rigs that’s $86 million, $28 million on the acquisition of the two rigs that we bought in July, upgrades was $12 million, drill pipe is right at $16 million, and then other things like the vehicles for our trucking division and so forth was about $13.5 million, and then maintenance was $64.6 million.

Arun Jayaram - Credit Suisse

Okay. Thanks a lot guys.

Thomas Richards

Thank you.

David Wehlmann

Thank you.

Operator

Our next question comes from the line of Ian MacPherson with Simmons & Company. Please proceed with your question.

Ian MacPherson - Simmons & Company

Hi, good morning.

Tom Richards

Good morning, Ian.

Ian MacPherson - Simmons & Company

My question is not intended to be cute in anyway and I recognize that there were some maybe some one-off issues driving the cash margins in the fourth quarter but it seems like you are fairly new to guidance for the first quarter is reminiscing of what you guided last quarter and I wonder if there is any potential for a positive surprise with results pretty much relative to what you see today?

David Wehlmann

When we gave you the projection for the first quarter, we had really expected our rig count to drop from 103 down to 98 and that would when you start spreading some of these fixed costs and overhead over fewer rigs working, we expected our margins to decline. Now Ron and David and their teams have done a great job, we have kept that 103 rigs working during the quarter, and if you look at our average revenue per day, it was actually up about $100 even with that. That’s a combination of more recoveries as well as day rates and renewals. The $300 to $400 that I'm projecting going down from the revenue side has to do with about, about $350 of that is related to the term contracts that we know that are rolling over and they are -- some of those are going to lower rates, some of those were signed two years ago when they were at pretty high rates. The other -- over $100 plus or minus is related to mobilization recoveries that we have talked about here. So we feel like it’s a pretty fair projection of what we see coming forward.

Ian MacPherson - Simmons & Company

Okay, thanks David. And then maybe a question for Tom or either David with respect to how business unfold in the second quarter or in the back half of the year given the capacity overhang of over 300 rigs. How much of that excess capacity would you believe needs to be used up before you really see the possibility of a positive pricing stimulus? I don’t think that you would -- the number would be 300 but can you bracket it in any sort of range based on your prior experience with these types of cycles?

Tom Richards

Yes, I would be happy to, Ian. In the past and always predict the future but I have seen a number of these cycles over the 40 some years I have been in this business. I would characterize a 300 or so rigs that are out of today as being the excess capacity of rigs and if they all went to work it would at 100% utilization effectively. Anytime in the past where the utilization has begun to start moving up above 85%, then contractors become more aggressive in the pricing. As for where we would expect for the balance of the year, we are very encouraged by the strength of the commodity prices as I mentioned earlier and really gas prices are plenty high right now, to sustain higher levels of drilling activity than what we are seeing. They don’t need to get higher but what needs to happen is customers need to gain confidence and confidence in the sustainability of those pricing. So we think that in the second quarter, there will continue to be pressure on the pricing but we think the things based upon what we see now which could change tomorrow, we expect to see them stabilize and to starting to improve in the second half of the year.

Ian MacPherson - Simmons & Company

Okay, thank you.

Tom Richards

Thank you.

Operator

Our next question comes from the line of Mike Urban with Deutsche Bank. Please proceed with your question.

Mike Urban - Deutsche Bank

Thanks, good morning.

Thomas Richards

Good morning, Mike.

Mike Urban - Deutsche Bank

So overall it seems like you do see demand continue to rise there, just supply continue to come in at a faster rate to kind of oversimplify that the crux of your view.

Tom Richards

You say the supply is coming in at a faster rate?

Mike Urban - Deutsche Bank

Right. I mean it sounds like you are actually reasonably optimistic on the demand side just as you expect to see --

Tom Richards

No, I -- the supply as David mentioned is definitely slowing down. I mean I got to remember those numbers, it’s is close to 300 rigs in each of the last couple of years and there is only 24 announced this year and we would expect that to grow modestly from that point but so that the incremental supply of rigs is declining, I mean the rate of increase. So we would expect to see as some of those rigs will continue to be redeployed overseas. Unfortunately some of them will be destroyed by the fire and weather and in addition to that, commodity prices if they stay in this range and customers continue to gain confidence, I think we would see -- we would start to see an increase in the demand for rigs.

Mike Urban - Deutsche Bank

And you mentioned some kind of general stability out there right now, some pressure on the bigger rigs. Is that something that’s been new or ongoing or and if -- either way, what do you think is causing that relative to where you have been recently?

Tom Richards

Just the overall supply of rigs relative to the demand.

Mike Urban - Deutsche Bank

And that’s been something more recent or that’s been an ongoing trend?

Tom Richards

Oh, I think it’s mainly started to kind of manifest itself over the last couple of months.

Mike Urban - Deutsche Bank

Okay. And then on the international side, you did mention you think there were some additional opportunities in Mexico. Potentially how many rigs could we be looking at for -- in terms of incremental demand in Mexico, specific to Grey Wolf?

David Wehlmann

Specific to Grey Wolf. Let me answer the easier question first. I would say that if PEMEX goes ahead with their plans for Burgos and Chicontepec and some of the outlying reservoirs. We could see -- an incremental demand of 20 to 30 rigs by the end of 2009. The harder question is where we participate in that and the biggest factor will be if PEMEX decide to build rigs for themselves or get into some lease/purchase arrangements with the few internationals. If they opt to do as they have done offshore is to rely on the international drilling contract just to commit and satisfy the incremental demand then, we could pick up a third of that work if we get our ducks in a row.

Mike Urban - Deutsche Bank

Okay, that’s all for me. Thank you.

Tom Richards

Okay, thank you, Mike.

Operator

(Operator Instructions) Our next question comes from the line of John Fitzgerald with Raymond James. Please proceed with your questions.

John Fitzgerald - Raymond James

Good morning guys.

Tom Richards

Good morning, John.

John Fitzgerald - Raymond James

I noticed that your depreciation and amortization expense was up meaningfully in the fourth quarter and then you guided back down for first quarter of next year. Can you just give some color on that on kind of like why is the -- or increase in wide spread back off…

Tom Richards

Part of the increase has to do with the new rigs and the capital that we have spent over the last several months. The six new rigs went to work relatively late in the year -- in the middle of the year forward. There is also some depreciation for some assets that we placed in service in prior periods.

John Fitzgerald - Raymond James

Okay, and then with the two new built rigs or two new wells in the second and third quarter, would you think it would kind of step back up from the $26 million after the first quarter?

Tom Richards

Yeah, as we put assets in place, depreciation will continue to increase. We spent $30 million in capital in the fourth quarter and if you think about that -- average depreciable life on that is probably nine to ten years. When you look across our class of actions, so you can do the math. So as we add additional capital in excess of depreciation, our depreciation expense will continue to increase.

John Fitzgerald - Raymond James

Okay, thanks it helped. And then you have the convertible notes I think 3.75% and those were redeemable I think May of this year. Are you guys planning on redeeming those notes?

Tom Richards

John, what we continue to look at always and we discuss with our Board on an ongoing basis is the investments that we are going to make whether that’s investments in our common stock due to the repurchase program or investments in new assets or moving assets to international locations and this will just be one of the other things that we look at that will depend on the circumstances as we get closer to that time.

John Fitzgerald - Raymond James

Okay, thanks a lot.

David Wehlmann

I would just say those 3.75% interest is pretty cheap I think. We can do better with their money than that they probably need to put in a different management team in place.

John Fitzgerald - Raymond James

Okay, thank you.

Tom Richards

Thank you, John.

Operator

Our next question comes from the line of Todd Garman with Peters & Co. Please proceed with your question.

Todd Garman - Peters & Co.

Good morning. What are the well construction challenges that you referred to in the press release that your clients are facing and how do you expect those to change in the coming months and years?

Tom Richards

Todd, the well construction challenges are really on the drilling side, I would say it was just we push into development work where they go into directional and horizontal, and deeper wells. That’s been particularly true in the Barnett. The Balkan area, we are hearing a call from much deeper wells not necessarily vertical depth but a long haul with a horizontal outreach and places like the Marcellus shale in Northern Appalachia. So we see a more of a continued trend towards that deeper drilling and then of course the other well construction issue that our clients deal with is more about just the fracing of the tight plays but that would play more into the other service companies.

Todd Garman - Peters & Co.

So what does that mean from an equipment standpoint do you think or drilling contractors?

Tom Richards

It certainly means power swivels, top drive would just be a condition of employment and horse power is certainly greater than 1,000 and in some of the areas, I have just mentioned, we probably when move up to some of those areas without a 1,500 horsepower unit. So basically higher horsepower, higher pumping capacity to keep the circulated densities at the level our clients need, and somebody’s extended reach wells and the end power swivels would be a must.

David Wehlmann

And then I would just add to that; that’s particularly good for Grey Wolf because as you know the balance of our fleet is towards the larger horsepower, more sophisticated equipment with a strong hydraulics that we can deliver. So that’s a very favorable development for Grey Wolf.

Todd Garman - Peters & Co

Alright, and then just the second question. The mobilization -- you get a percentage of your day rate for -- while your equipment is moving. Is that area specific, is it just in South Texas or is it in other areas as well?

David Wehlmann

Let me try to answer that. I mean we don’t want to be too specific lest we educate our competitors but on the spot market, every job that comes up as a competitive situation. From our standpoint, we are trying to get as much as we can but when you get an oversupply of rigs, the competition shows up in other areas other than just the day rate price. One is the recovery for the truck and the other one is recovery for the rig time and then in addition to that there is always some negotiation about the contractual terms with regard to downtime and things like that. So each situation is different, it’s not any -- it’s not unique to one area or another.

Todd Garman - Peters & Co.

Okay, thanks.

David Wehlmann

Thank you.

Operator

Mr. Wehlman, there are no further questions at this time. I will turn the call back to you.

David Wehlmann

Thank you Operator. If there are no further questions, I would like to hope that each and everyone of you have a very good day and thank you for calling in today and we will be back to work to try to improve the value of your investment. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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