Basic Energy Reports on June Operations; Gets Flak/Props on Grey Wolf Merger (BAS, GW, PDS, RMG)

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Oilfield services company Basic Energy Services (NYSE:BAS) released its June operations report this morning. The company has increased its rig count by one over May, and thirty since a year ago. Rig utilization stands at 79%, and drilling utilization is down a few points from May, but up from 63% to 83% over June 2007. These are solid numbers, and the company’s president and CEO expects improvements in pricing to offset higher fuel and labor costs.

The interesting news is behind the numbers (as usual). In April, Basic announced a "merger of equals" with Grey Wolf (NYSE:GW), a well driller. The surviving entity will retain the Grey Wolf name and NYSE ticker. Grey Wolf shareholders will receive $1.82 in cash plus one share of stock in the new company in exchange for four shares of existing Grey Wolf stock. Basic stockholders receive $6.70 in cash and 0.91975 shares of stock in the new company for each share of Basic stock. Then, in early June, Canada’s Precision Drilling Trust (NYSE:PDS) made an unsolicited offer of $9.00/share in cash and stock for Grey Wolf. Precision has bumped its offer twice, and it now stands at $10.00/share. Precision, like Grey Wolf, is a drilling company, and the conventional wisdom seems to be that the deal between Precision and Grey Wolf makes more sense than the Grey Wolf/Basic deal because there is little chance for cost-cutting in the Basic merger.

On Monday, RiskMetrics (NYSE:RMG) weighed in with a report questioning the Basic/Grey Wolf merger, and raising questions of conflict of interest on Grey Wolf’s Board. Yesterday, Egan-Jones Proxy Services recommended that Grey Wolf stockholders approve the Basic merger at the special meeting called for July 15th. Grey Wolf issued a press release citing Egan-Jones’ recommendation.

The combination of Precision Drilling and Grey Wolf yields a larger drilling company, but it’s hard to see how there will be significant cost savings. The Basic/Grey Wolf merger gives Grey Wolf some additional drilling capability, plus services such as completion, workovers, and abandonment. Strategically, the latter deal seems to position the merged company better, but it won’t pay off in a quarter or two. To some shareholders, that quick payoff trumps everything else.   

Paul Ausick
July 9, 2008