Grey Wolf Inc. (GW)

Wednesday, November 15th, 2006

Background

• Founded In 1978• Head Quarters In Houston, TX

Other Locations (Colorado, Wyoming and Louisiana)• Board

7 Members (Active w/ company For 5 years or longer)

Board of Directors Staggered• Executive 6 Officers CEO Salary/Bonus 1.02 M, Options Exercised 4.6 M

Officers Average Salary/Bonus 301.5 KOfficers Average Options Exercised 151.5KInsiders Hold 14.51%

Operations

• What is their Business?– Provide oil and gas land drilling services

• Industry: Oil and Gas Drilling and Exploration– Highly Cyclical, Peaks at severe weather conditions– Overall market demand for natural gas has increased

Operations

• Divisions

-Ark-La-Tex-Gulf Coast-South Texas-Rocky Mountain-Mid-Continent District

Contracts

• Contracts through competitive bidding or as result of negotiations with customers

• 3 Major Types:• Day-work - low risk/lower returns• Footage - middle risk/adequate returns• Turnkey - high risk/higher returns

• % of Revenues: • Day-work – 80.41%• Turnkey – 19.59%

• Early Termination Fees

Customers/Suppliers

• Independent producers and major oil and natural gas companies.

• No one customer accounts for more than 10% revenues

• Customer retention ratio/ yearly turnover• Customer relationships• Supplier relationships

Competitors

• Helmerich & Payne Inc. (HP)– $2.6 Billion Market Cap

• Nabors Industries Ltd. (NBR)– $9.5 Billion Market Cap

• Patterson-UTI Energy Inc. (PTEN)– $4.0 Billion Market Cap

$331.6 total market capGW- $1.3 Billion– http://biz.yahoo.com/p/123mktd.html

ROEROE

(3 yr)ROA P/B P/E

D/E

(2005)

Industry AVG 25.3% - - 2.60 10.0 -

GW 49.8% 27.06% 17.0% 2.65 7.68 1.354

HP 19.72% 4.75% 12.71% 1.96 11.18 .541

NBR 29.01% 11.77% 11.14% 2.69 9.81 .924

PTEN 47.33% 14.61% 33.96% 2.69 6.65 .314

Financial Ratios

Pros/Cons

• Pros– Highly experienced management– $100 Million common stock repo– Low P/E, P/B multiples

• Cons– Industry is cyclical/Uncertainty– Future market demand for natural gas– Risks associated with business

Industry Outlook - Natural Gas

• Market Demand Expectations/Growth– Short-term factors:

• Weather• Fuel Switching• US Economy

– Long-term factors:• Residential Demand:

– 1.5% growth per year from 2002-2010 – 0.9% growth per year from 2011-2025

• Commercial– 1.7% growth per year from 2002-2025

• Industrial Demand– 1.2% growth per year from 2002-2025

• Electric Generation Demand– 1.8% growth per year from 2002-2025

• Transportation Sector– 3% of total Natural Gas Market

DCF Model – Assumptions

1) Historical revenue growth is normalized and used as a benchmark to forecast future revenue streams

2) Perpetual growth is based on several factors, reliant on long-term natural gas market expected growth is between 0.9-1.8% (2002-2025)

3) Operating Cost Margins have improved historically with improved periods of sales growth & higher day rates & will optimize @ a margin of 53.63%

4) Normalized (high/low) sales growth = 20.29%

5) Depreciation, Gen/Admin, CAPEX, and ΔNWC Margin calculated (historical average 6-yr)

6) Projected sales growth is affected by increasing day rates and new contracts despite changing oil prices

DCF Model - Calculations

• Discount rate (wacc): 6.42%• DCF(FCFF) = $2,272,228,000• Mkt Value of Debt = $363,100,000• DCF(FCFE) = $1,909,128,000

• DCF = $9.98/sh• Current Price = $7.10/sh

GW – Recent Trends

• Overall demand for land drilling services – Recently increasing & shown with increase in rig count

• Day rates received for services provided – Continually increasing– Higher rates more sustainable with drilling rigs 1000+ HP

• Level of demand for turnkey/footage services– Historically has been at an all-time low

• Demand for deep versus shallow drilling services– Deep drilling services prove highly profitable over shallow

areas• Record drilling levels in the past few years

– Despite no recent significant increases in overall gas production levels

Conclusion

• Recommendation: Hold• Company Outlook: Neutral• Risks:

– Sales variability (day-rates), uncertainty– Industry Cyclicality– Operational Risks

• Minimize cyclical trends• Improve operational cost margins

Q&A