Status Report: Grey Wolf - Basic Energy Services

In light of the consistent consolidation in the drilling/drilling services sector over the last few years, the combination of Grey Wolf, Inc. (GW) and Basic Energy Services (BAS) makes perfectly good sense and was probably anticipated from within the industry. This drilling services industry has evolved to the point where second-tier players such as GW have little chance for survival, so deals like this are essentially necessary to maintain competition among the smaller number of larger players.

In other words, this transaction will almost certainly benefit from the previous drilling mergers with respect to regulatory timing and the companies should have very little difficulty completing the deal in the standard four-month time frame common in these situations, if not sooner.

For the record, the companies are competitors in a very broad sense with both offering a variety of oil/gas drilling services in the U.S. GW's operations, however, are confined to the onshore Gulf of Mexico area, while BAS's operations are more national in scope and far more diverse. BAS states the following regarding its primary competitors in the company's latest annual report:

Our two largest competitors, Key Energy Services, Inc. and Nabors Well Services Co., combined own approximately 53% of the U.S. marketable well servicing rigs.

Nabors' current market share is estimated at just above 30%; Key's is just below 20%; and BAS trails both with just over 10%, according to various sources. This alone supports the concept above that this type of transaction is actually a positive in terms of overall competition and this would be the case even if the companies had significant geographical/service overlaps. Thus, the HSR review will not be a timing factor as it marginally was in the Grant Prideco - National-Oilwell Varco (NOV) transaction.

The last four deals in this sector have escaped the lengthy SEC proxy reviews which occasionally present major timing issues in energy-related mergers. This can be viewed as a positive as in indication of relative SEC disinterest recently, or as a negative in that this may be the next deal the SEC pulls for review. It has become an apparent random event in energy deals when the SEC takes this sort of action, so there continues to be no real means of accurately predicting when a merger proxy will be subject to a lengthy (+60 days) review. However, it must be pointed out that GW has encountered no difficulties with the SEC in more than three years, which must be considered a generally positive with respect to the proxy review in this case.

Assuming the SEC does not intervene, this transaction should be successfully completed in a late-July / early-August time frame.

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