To Our Shareholders
Grey Wolf achieved level quarterly sequential results in the second quarter of 2008 as our industry entered into a period of increasing demand for U.S. land drilling rigs. Our business is improving significantly as drilling activity intensifies and the recent influx of newly built and re-commissioned rigs is absorbed. In the second quarter, we returned a number of stacked rigs to work, signed additional long-term contracts and experienced continuing increases in leading edge dayrates.
Financial Results
At $0.15 per diluted share, Grey Wolf’s net income for the second quarter of 2008 was level with results for the first quarter of the year and down from $0.19 per share a year ago. The year-over-year decline was anticipated and reflects a dip in dayrates in the past year as rig supply temporarily overtook demand. Net income totaled $32.3 million on revenues of $216.7 million for the quarter, compared to net income of $41.7 million on revenues of $227.5 million for the second quarter of 2007.
For the six months ended June 30, 2008, Grey Wolf reported net income of $63.6 million, or $0.31 per share on a diluted basis, on revenues of $418.2 million. This compares to net income of $100.3 million, or $0.46 per share on a diluted basis, on revenues of $469.5 million for the same period a year ago.
Second quarter EBITDA totaled $80.5 million compared to $81.9 million for the previous quarter and $91.7 million for the second quarter of 2007. Daywork generated $69.5 million of that total, while our turnkey business generated $11.0 million that represents 14% of total EBITDA, which is a meaningful quarter-over-quarter increase. As anticipated, higher costs associated with returning stacked rigs to work and reductions in average dayrates on daywork contract renewals pressured EBITDA.
Drilling Activity Intensifies
Grey Wolf’s average number of rigs running increased in the second quarter to 105 compared to an average of 100 rigs running in the first quarter. At this writing Grey Wolf is averaging 109 rigs working.
A steady uptrend in the U.S. land rig count since mid-January has coupled with a decline in the rate of newly built and refurbished rigs entering the U.S. land drilling market to improve market conditions. The number of new entries in the lower 48 states is expected to be approximately 100 additional rigs in 2008.
In this environment, dayrates are climbing, so we believe we have seen the bottom of the recent earnings dip. Leading edge dayrates are $18,000 to $23,500 a day without fuel and top drives, which is up significantly from a range of $15,000 to $21,000 a day three months ago.
Interest in Long-Term Contracts Heightens
Given solid commodity prices and our customers’ heightened interest in unconventional resource plays, our contract renewal and new long-term contract levels are increasing. Of the 15 term contracts that rolled off in the second quarter, we renewed 11 on term contracts. The remainder renewed on well-to-well commitments. The Company currently markets 122 rigs with 114 under contract at this writing. Of those, 66 are on long-term daywork contracts, 40 are in the spot market on well-to-well contracts and 8 are working under turnkey contracts. With half of its premium fleet potentially available for long-term contracts, Grey Wolf is solidly positioned to take advantage of customers’ heightened interest in locking up rig commitments in an environment of climbing dayrates.
New & Upgraded Rigs Deploying
Rig 109, our new built-for-purpose Production and Drilling System Rig (PaDSRigTM), which can drill multiple wells on a single site, just began work in the Piceance Basin in Colorado on a three-year contract. Rig 110, our second rig in this design series, will be delivered during the fourth quarter, bringing our total rig fleet to 123 rigs. Rig 110 is committed to drill in the Pinedale Anticline resource play in Wyoming.
In addition, we are significantly upgrading at a total cost of approximately $27 million, two 1,500 horsepower rigs currently assigned to our South Texas and Gulf Coast divisions. These rigs will deploy on two-year contracts to drill in the Bakken shale play in North Dakota. By year end, we expect to have four rigs in the Bakken, a new market for Grey Wolf that we targeted this year.
In our Mid-Continent Division, which encompasses West Texas, Oklahoma, New Mexico and the Barnett Shale area of North Texas, we recently signed four new term contracts assigning rigs to the Ft. Stockton area of the Permian Basin.
In addition to its rigs under contract, Grey Wolf owns 33 top drive units that also continue to add additional value at the well site. These units, which speed power to the drill bit, are commanding a premium of up to $3,300 per rig day on top of a rig’s dayrate. The Company has three new top drive units on order for delivery later this year.
Performance Standards Upheld
As Grey Wolf’s rig utilization climbs to 93%, our operating teams continued to focus on maintaining and improving key performance indicators. Although costs associated with goods and services increased, our drilling operations expenses were lower in the first half of 2008. Year to date in 2008, rig downtime improved 30% and we experienced a 22% improvement in attrition despite the tightening labor market for qualified rig personnel. Moreover, we realized a significant 44% improvement in the Company’s total recordable incident rate as we continue to elevate safety as our first operating priority.
Positive Market Outlook
The outlook for U.S. land drilling is excellent. Solid commodity prices as well as heightened interest in unconventional resource plays make it likely that rig counts will continue to trend upward in the second half of 2008 and well into 2009.
At this writing, the 12-month strip for natural gas exceeds $9.50 per MMBTU, while the 12-month strip for oil is above $125 per barrel. These prices are at historically attractive levels, providing our customers with significant cash flow to fund drilling programs.
Reflecting our customers’ confidence, U.S. land well permitting activity has reached its highest level since 1990 with a 21% second quarter increase compared to the first quarter. In Grey Wolf’s core markets, there has been a 16% year-to-date increase in permits compared to the same period in 2007. Given this trend, we could see as many as 200 incremental U.S. land rigs at work by the second quarter of 2009.
As customers target resource plays requiring the high horsepower equipment that is the hallmark of Grey Wolf’s fleet, we anticipate outstanding opportunities for growth. We appreciate the support and hard work of our employees and business partners as we pursue these opportunities.
Sincerely,
Thomas P. Richards
Chairman, President and Chief Executive Officer
August 1, 2008
Chairman, President and Chief Executive Officer
