There's driller drama brewing in the Great White North, and now it's time for shareholders to play their part. If you've missed the twists and turns thus far, here's a recap.

Back in April, Grey Wolf (AMEX:GW) announced a "merger of equals" with Basic Energy Services (NYSE:BAS), though the proposed retention of the name "Grey Wolf" for the combined entity tells you who's in the driver's seat there. Shares of Grey Wolf dropped on the news.

Earlier this month, Canadian driller and well-servicer Precision Drilling Trust (NYSE:PDS) crashed the party with a $9-per-share takeover bid for Grey Wolf. The latter firm rejected the offer, as well as a follow-up bid that was just a smidge higher. Precision then took a less tentative step with its third and ostensibly final offer of $10/share.

But cagey Grey Wolf remains an elusive quarry. The company rejected bid no. 3 today, providing an extensive justification for doing so. Having dubbed the initial pairing of Grey Wolf and Basic "puzzling," you know where I stand. It's more important that all you Grey Wolf shareholders consider the latest arguments, since your votes at the upcoming special meeting will help decide this driller dance-off.

Grey Wolf conveniently broke out its opposition to the bid in easy-to-digest segments, and I'll structure my rebuttals in the same format.

Undervaluing of (and insufficient premium for) Grey Wolf

  • The $10 offer undervalues Grey Wolf? Plenty of disappointed investors seem to disagree, given that Grey Wolf is today trading below even the initial bid of $9.
  • The company notes that Precision's offer values the company at "only" a 12-times multiple of 2009 earnings. That may sound low to shareowners of less cyclical businesses, but oil and gas is notoriously volatile. For this reason, even industry stalwart ExxonMobil (NYSE:XOM) trades at less than nine times the average 2009 analyst earnings estimate.
  • Grey Wolf notes that Precision's usage of the trading price the day before its initial bid isn't an "unaffected" price, because Grey Wolf shares were "temporarily depressed" by the Basic merger plan. As Grey Wolf doggedly (lupinely?) pursues its preferred merger, that depression is looking less and less temporary.

Uncertainty in long-term value of Precision's trust units
This point plays off the Canadian government's decision to torpedo the tax benefits of the income trust structure employed by Precision, Penn West Energy (NYSE:PWE), and many other high-yielding players. The effects of that event, which presented a fat pitch for cool-headed Fools, have long been priced into the shares of these so-called CanRoys. The matter is a complete red herring.

Outlook for Canadian drilling and well-service markets

  • Sure, the drilling business was looking dismal for a while, but even with a more restrictive tax regime, it's amazing what 70% higher natural gas prices can do for a sector. The Baker Hughes (NYSE:BHI) Canadian rig count for May was up 26% over last year. That's off a low base, but things are turning positive very quickly.
  • On a related note, if things are so grim on the service side, why did Calfrac more than double its capital budget?
  • Grey Wolf rattles off a list of seven resource plays in the United States, as if we have a monopoly on oil- and natural gas-bearing shales. The Bakken is indeed rich in North Dakota, but the formation extends up into Saskatchewan and Manitoba as well. And while EnCana's (NYSE:ECA) excited about the Haynesville, the firm's sitting on serious gas up in its British Columbia-based Horn River and Montney plays.
  • The Grey Wolf team also fails to point out Precision's ongoing southerly rig migration.

Risk of substantial pressure on trust unit price
Perhaps the best point the company makes is that Precision and Grey Wolf shareholders have different expectations regarding payouts. Precision pays out a high amount of cash flow to unitholders on a monthly basis, while Grey Wolf retains cash flow for reinvestment. Grey Wolf shareholders might thus be inclined to sell units of the combined entity to avoid receiving those pesky distributions.

But if Grey Wolf shareholders are so fixated on capital gains, why take on extra debt to pay out a one-time cash dividend in consummating the Basic merger? Maybe Grey Wolf investors are receptive to receiving cash after all.

Possible future under investment
Save for the ongoing cash payout commitment, pretty much everything in this section could be said for the combined Grey Wolf and Basic. If things turn down in the industry, growth capital with take a back seat to debt service and/or paydowns. I don't think a combined Precision and Grey Wolf would be any nimbler financially.

I think I've said enough on the subject for now. If you're a Grey Wolf shareholder, I'd love to hear which way you're planning to vote, and why.