While Grey Wolf, Inc.'s (GW) 2008 first-quarter earnings came in modestly below our estimate ($0.16 vs. $0.15), the more significant event is last week's merger announcement with Basic Energy Services (BAS). Grey Wolf shareholders will own approximately 54% of the combined entity, to be called Grey Wolf.
The resulting company will be fairly diversified, both in terms of operations as well as commodity-price exposure, and enjoy scale economies. The diversification argument is particularly compelling given the addition of Basic Energy's well-servicing expertise to Grey Wolf's primarily land-drilling-focused operations.
The deal is currently awaiting regulatory and shareholder approval, and is expected to close by the third quarter of 2008. The current stockholders of Grey Wolf will own approximately 54% of the combined company, with Basic Energy shareholders owning the rest. Under the terms of the agreement, Grey Wolf investors will exchange each of their shares for $1.82 in cash and 0.25 share of the new company. On the other hand, Basic Energy holders will receive $6.70 in cash and 0.9195 share of the new firm for each share they currently own.
We believe that the transaction will meaningfully broaden Grey Wolf's portfolio of products and services. The combined group will have an enterprise value of about $2.9 billion, supplying diverse energy services to the world's largest energy groups. Grey Wolf, a major land drilling contractor, will get access to Basic Energy's land-based well servicing equipment.
Also, with roughly half of Basic Energy Service's business focused on oil and approximately 95% of Grey Wolf's business focused on natural gas, this deal results in a company with a diversified revenue stream in terms of its exposure to oil and gas opportunities. We rate the stock Buy with a target price of $8.
Read the analyst note on GW.
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