Precision Lands Its Prey

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I believe the expression is "all's well that ends well."

After its shareholders wisely rejected a puzzling merger with Basic Energy Services (NYSE: BAS), Grey Wolf (AMEX: GW) hired some bankers to shop the company around to other prospective buyers. A bit more than a month later, Grey Wolf has run back to thrice-spurned bidder Precision Drilling Trust (NYSE: PDS) with its tail between its legs.

It wasn't mentioned in the press release, but Grey Wolf's Chairman, President, and CEO will serve neither a management nor a board role with the combined company. After losing such a high-profile battle for control of Grey Wolf, there's really no option but to bless the deal and gracefully step aside.

I think shareholders of both companies ought to be pleased. The new Precision is well positioned to increase the value of the franchise on a number of fronts.

First of all, while Precision, a Canadian company, has been making steady inroads into the U.S. market, the company has to basically make cold calls and woo new E&P customers. Grey Wolf, meanwhile, has invaluable long-term relationships with clients like Anadarko Petroleum (NYSE: APC), Devon Energy (NYSE: DVN), and XTO Energy (NYSE: XTO). As far as unconventional resource plays go, the combined company now has a powerful client list and top-notch rig capabilities.

The new Precision is also now better prepared to penetrate international markets. Grey Wolf supplements Precision's highly mobile and flexible directional drill rigs with deeper drilling capacity. That will come in particularly handy in tackling oil opportunities in places like Mexico, South America, and North Africa.

These businesses throw off a lot of free cash, so the short-term debt pile-up is not of much concern. With a notable shift toward more rig-intensive, high decline rate natural gas drilling here in North America, the company's upside appears to outweigh any near-term weakness in commodity prices.