Precision Drilling Snaps Up Grey Wolf: A Smart Acquisition and Good Income Too

If you're like me, you appreciate a smart acquisition by a publicly-traded company. I like the oil services sector a lot, and I especially like the ones that pay fat dividends to shareholders.

It's just been announced that Precision Drilling Trust (PDS) which provides contract drilling, and completion and production services to oil and natural gas exploration and production companies in Canada and the United States, will acquire Grey Wolf (GW) in a cash and stock deal worth more than $2 billion, apparently ending an extended fight for control of the Houston gas driller.

Interestingly, both stocks were down on the announcement as if this wasn't a good deal for all. The new offer involves less cash, but would give Grey Wolf shareholders a larger stake in the new company through a more generous share offering.

Thanks to Yahoo! Finance we can see the one year chart below on PDS along with its 200-day moving average. Looks like a decent entry point to me!

Let's hope PDS breaks above their 200-day moving average.

Though the combined price comes out nearly a dollar less than the $10 per-share that Precision had offered earlier, the deal gives Grey Wolf shareholders a 25 percent stake in the new company, which will be one of the biggest operators in North America.

Precision gets access to land operations in virtually every oil and gas basin in the lower 48 United States and Canada, and an emerging presence in Mexico. It also will be good for Precision's ability to generate the revenue necessary to continue its generous payout to unit holders.

Kevin Neveu, Precision's chief executive, called the deal a perfect strategic fit for both companies.

"Grey Wolf's customer base, experienced employees and rig fleet will be enhanced by Precision's high performance systems and Super Series rig technology," Neveu said in a statement. "Together we can deliver high value services that will provide significant value to our customers, employees and security-holders."

Grey Wolf shareholders have previously pushed away offers by both Precision and Basic Energy Services (BAS), saying their prior offers undervalued access to natural gas in the United States, and industry that is booming.

In April, Basic Energy offered Grey Wolf $1.82 in cash and 0.25 share of the new company for each of their shares.

Precision followed this summer with three unsolicited takeover bids for Grey Wolf, which drills land-based oil and gas wells. Grey Wolf's board rejected the first two offers but agreed to review Precision's third bid.

Under the Precision deal, Grey Wolf shareholders will receive $5 cash and 0.1883 newly issued Precision trust units for each Grey Wolf common share held. That is a 4.5 percent increase in shares from Precision's earlier offer.

"Grey Wolf's Board of Directors believes this improved offer from Precision is in the best interests of Grey Wolf shareholders, customers, and employees and we are pleased we have been able to reach this agreement," Thomas P. Richards, Grey Wolf's chairman, president and chief executive, said in a statement.

Precision Drilling Trust will maintain its headquarters in Calgary, Alberta, but will base U.S. operations in Houston.

David Crowley, Grey Wolf's executive vice president and chief operating officer, will become president of Precision's U.S. operations, leading executives from both companies' management teams, Precision said.

PDS operates in two segments, Contract Drilling Services, and Completion and Production Services.They have a trailing-twelve-month profit margin of over 30% and operating margins over 31%.

Up to now they have had very little debt and their Return-on-Equity has been nearly 22%. Our sources tell us this acquisition should be accretive to the new company's earnings and quarterly revenue growth.

This acquisition is exciting and motivates yours truly to want to start nibbling on PDS, which now will be a new and improved company and one of the biggest operators in North America.

With its dreamy 7% dividend yield, this will be a potentially profitable investment that will pay for us to watch it grow. My caveat is that it will take some time to integrate their operations and maximize the synergy potential that is inherent.

Much will depend upon the cooperation of the leadership and the ability to utilize the economies of scale that a takeover like this offers. If handled prudently, the whole could be greater than the sum of its parts.

Disclosure: None

Comments

[notsosmart:]

i hope this messing about doesnt affect the yield.

2008 Aug 26 06:25 PM