To Our Shareholders
Grey Wolf delivered positive financial results for the first quarter of 2008. Earnings declined slightly quarter over quarter, reflecting lower dayrates on long-term contract rollovers and reduced rig activity as the U.S. market absorbed the supply of new rigs built in 2007. Given our customers’ confidence in the stability and strength of commodity prices, however, we entered the second quarter with more rigs working and the prospect of higher dayrates as drilling activity and bidding strengthened.
Financial Results
The Company’s net income was $0.15 per diluted share for the quarter ended March 31, 2008, compared to a record $0.27 per share the same quarter a year ago. Revenues were $201.5 million compared with $242.0 million for the first quarter of 2007.
EBITDA totaled $81.9 million with daywork generating $73.6 million and turnkey generating $8.2 million, or about 10% of the total. Daywork EBITDA per day was $8,627, which was down only $116 per day from the fourth quarter of 2007 as our experienced personnel successfully focused on containing costs related to recruiting and maintenance. Turnkey EBITDA was $13,642 per day, up 22% from the fourth quarter of 2007 with an average of 7 rigs running on turnkey contracts both quarters.
U.S. Land Drilling Market Firming
In mid January, we began to see an upward trend in the U.S. land rig count. With the slowing of new and refurbished rigs coming into the market, our average number of rigs working appears to have bottomed in the first quarter at an average of 100 compared to 103 in the fourth quarter of 2007 and 110 in the first quarter a year ago. At this writing, 106 of the Company’s 121 rigs are running. Leading-edge spot market bid rates have moved to a range of $15,000 to $21,000 per day, an increase from the level reported last quarter. With dayrates ticking upward once again, the level of term contract renewals also is up, and there is greater interest in new long-term contracts. We renewed 10 of the 12 long-term contracts that rolled over in the first quarter. The remaining two rigs rolled over onto well-to-well commitments. We have an average of 52 rigs under term contracts for the remaining three quarters of 2008 and an average of 29 rigs committed in 2009, not including any additional term contracts that may be entered into in the future.
Long-Term Contract Portfolio Energizes Growth
The strength of Grey Wolf’s long-term contract portfolio – which reflects the confidence customers have in our equipment and performance -- has smoothed earnings and allowed the Company to strengthen our balance sheet despite the ups and downs of the land drilling industry during the past decade. We also have been able to achieve the highest return on capital employed and the second highest EBITDA per working rig day in our industry, allowing the Company to pursue its long-term growth strategy on several levels.
Upgrading and Expanding the Fleet
We have long believed that technical enhancements to our already strong fleet offer one of the single best means of organic growth for Grey Wolf, whose reputation is staked on providing customers with the premium equipment to assure safe and efficient performance. In addition to the nearly $300 million spent in the past several years on rig upgrades as well as new NOV Ideal rigs and nearly-new IDM Quicksilver rigs, we have invested in our own proprietary built-for-purpose Production and Drilling System Rig (PaDSRigTM). Two of these units will deploy in the Rocky Mountains in the second and third quarters of 2008, providing customers the capability to drill multiple wells from a single pad location and enhance production efficiency. These rigs will bring Grey Wolf’s quality rig fleet to 123.
Establishing New Markets
The second level of our growth strategy has been geographic expansion, and we continue to explore opportunities beyond our core markets. In addition to our entry into Mexico in the past year with two 3,000-horsepower rigs, we recently signed a one-year contract to deploy a rig in the Bakken Shale resource play in North Dakota, a new market for Grey Wolf where we plan to pursue additional opportunities.
Merger with Basic Energy Services, Inc.
The final part of Grey Wolf’s growth strategy as formalized and approved by our Board of Directors last year is to seek acquisitions and/or complementary business models that would increase shareholder value through enhanced scale, broader geographic reach, more balanced commodity exposure, and expanded service offerings. To that end, we announced April 21, 2008, a definitive merger agreement with Basic Energy Services, the summary of which is available by press release on our website. We are excited about the prospects of this “merger of equals” and the opportunity that it presents to Grey Wolf for strategic growth. Basic Energy Services’ premium well servicing equipment complements Grey Wolf’s premium land drilling fleet, and we are highly confident that our valued customers will respond positively to the combined company’s enhanced ability to satisfy their needs.
Market Outlook
The outlook for U.S. land drilling is very positive. At this writing, the 12-month strip for natural gas exceeds $11 per MMBTU – its highest level since January 2006. Oil prices are at historic highs with the 12-month strip above $110 per barrel. It is estimated that natural gas prices at even two thirds of the current level provide attractive returns for our customers, who appear confident in the stability of prices as they expand drilling programs. Increased drilling activity and higher leading edge bid rates reflect the unprecedented strength of commodity prices. U.S. land well permits were up 9% in the first quarter of 2008, while permits in Grey Wolf’s core markets rose 12% in the first quarter of 2008 compared to the end of April 2007. There continues to be moderate pressure on dayrates with approximately 70 newly built rigs anticipated to enter the market this year. This is down dramatically, however, from 250 rigs in 2006 and 190 new rigs last year, so we are very optimistic that the market will continue to strengthen through the end of 2008 and into 2009.
We expect Grey Wolf to achieve solid results by emphasizing its core values of safety, performance excellence and integrity as we expand our fleet and geographic footprint. We are very optimistic about the additional opportunities for growth to be realized through our planned merger with Basic Energy Services, Inc., and we will continue to consider fully every opportunity to enhance shareholder value. We appreciate the support of our employees, business partners and shareholders in this endeavor
Sincerely,
Thomas P. Richards
Chairman, President and Chief Executive Officer
May 1, 2008
Chairman, President and Chief Executive Officer
