No Gusher at Grey Wolf

It's official. Short-term investors have put Grey Wolf (AMEX: GW) in the doghouse. I expect the land driller -- no domesticated dog -- to claw its way out eventually. However, a look at the latest quarterly results and forward guidance reveals a business that's hardly howling.

Contract drilling dayrates have slowly eroded, with leading edge rates now in the somewhat meager range of $14,000 to $22,000 per day. Significantly higher turnkey rates, which absorb more project risk than simple day work, helped prop up average fleet-wide rates at $23,300/day, down 5% from last year. Excluding the turnkey business drops the quarter's dayrate by 13%. Because many drillers turn their nose up at turnkey drilling, I expect Grey Wolf to report one of the highest fleet-wide rates of any lower-48 land driller.

The picture deteriorates some when we move down to average EBITDA per rig-day, which fell 21% from last year and 10% from last quarter. Aside from lower rates, fewer rigs working also weighs on profitability, because overhead costs are spread over a smaller fleet. With 104 rigs working in the quarter, versus 107 last year, operating expenses per rig-day rose 7%.

Management didn't have anything too sunny to say about near-term prospects, except that rig additions through both newbuilds and refurbishment are tapering off. The top five U.S. land drillers, which includes Patterson-UTI (Nasdaq: PTEN), Nabors Industries (NYSE: NBR), and Unit Corp. (NYSE: UNT), account for roughly three-quarters of total footage drilled, so it's not too difficult to get a quick bead on industry build-out.

Granted, a fair amount of newbuilds will be hitting the market well into next year, which will pressure new contract rates and renewals alike. But in an industry with painfully little visibility, it is relatively clear that today's greatest pressures can be expected to subside.