While the merger of Precision Drilling Trust (PDS) and Grey Wolf Inc. (GW) is dilutive to Precision earnings, Peters & Co. analyst Todd Garman says the deal is still a good one for the Calgary-based energy services firm.
In a note to clients, Mr. Garman said:
First, the deal diversifies Precision’s revenue stream, as it provides an immediate large footprint across the U.S., including operational personnel, and an existing customer base with a large portion under contract.
Second, at the end of the second quarter, Grey Wolf had approximately $315-million in cash on its balance sheet. This will partially offset the $9 a share that Grey Wolf shareholders will be receiving under terms of the merger agreement.
Finally, Mr. Garman says, Precision’s internal processes, supply chain economies of scale and quality of its rig fleet allow it to generate “industry leading” margins.
We expect that when these processes are implemented in Grey Wolf that its operating margins will eventually improve.
Mr. Garman is raising his cash flow per unit estimate to C$4.70 from C$4.55. However his diluted earnings per share estimate is being decreased to C$3.11 from C$3.61, due to a higher effective tax rate and higher depreciation. Still, he has a “sector outperform” recommendation on Precision, and is maintaining his 12-month price target of C$33.50 per unit, based on an enterprise value/EBITDA ration of seven times his 2009 estimates.