We are reiterating our recommendation, target price and EPS estimates for Grey Wolf, Inc. (GW) shares, though our 2009 EPS estimate may be on the lower side. The improving natural gas price outlook, following a favorable heating season, has significantly improved the prospects of the land drilling market. Grey Wolf is the third largest land driller in the country and trades at a significant discount to its peers. While aggressive capacity additions may cap near-term dayrate gains, the medium to long-term dayrate outlook remains favorable. Current leading edge dayrates remain above historical replacement cost levels.
Grey Wolf is securing multi-year contracts for its new-builds. Grey Wolf is buying back $150 million worth of its own stock, of which more than 81% has been completed. While we expect the ongoing land drilling weakness to remain in place at least through this year, we expect steady improvements in fundamentals going forward. The turnaround in natural gas prices following a favorable heating season has prompted many operators, both public as well as private, to increase their capital budgets. This augurs well for the land drillers, particularly for Grey Wolf, which in our view enjoys a very strong leverage to this expected turnaround.
We continue to like Grey Wolf shares for its significant leverage to the improving outlook of the onshore drilling market and its attractive valuation. Despite some recent gains, the stock is still down approximately 22% from its mid-June highs, and is trading at a significant discount to its peers. Given GW's still compelling valuation and the continued strength in underlying fundamentals, we are maintaining our Buy recommendation. Our unchanged $8 target price reflects 2008 P/E, P/CF, and EV/EBITDA multiples still below the peer group's average, respectively.
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