UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended June 30, 2008
or
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o
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Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For
the transition period from
to
Commission File Number 1-8226
Grey Wolf, Inc.
(Exact name of registrant as specified in its charter)
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Texas
(State or jurisdiction of
incorporation or organization)
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74-2144774
(I.R.S. Employer
Identification No.)
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10370 Richmond Avenue, Suite 600
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Houston, Texas
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77042
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(713) 435-6100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
The number of shares of the registrants common stock, par value $0.10 per share, outstanding
at July 31, 2008, was 178,926,881.
GREY WOLF, INC. AND SUBSIDIARIES
Table of Contents
-2-
GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except share data)
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June 30,
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December 31,
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2008
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2007
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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313,061
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$
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247,701
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Restricted cash
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867
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847
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Accounts receivable, net of allowance of $2,922 at June 30, 2008 and $3,169 at December 31, 2007
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159,091
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176,466
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Prepaids and other current assets
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12,968
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13,337
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Deferred tax assets
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6,037
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5,145
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Total current assets
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492,024
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443,496
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Property and equipment:
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Land, buildings and improvements
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9,099
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8,534
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Drilling equipment
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1,428,372
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1,331,401
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Furniture and fixtures
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5,815
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5,397
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Total property and equipment
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1,443,286
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1,345,332
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Less: accumulated depreciation
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(661,334
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)
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(607,388
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)
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Net property and equipment
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781,952
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737,944
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Goodwill
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10,377
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10,377
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Other noncurrent assets, net
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20,598
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16,153
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$
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1,304,951
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$
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1,207,970
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable-trade
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$
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74,595
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$
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52,557
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Accrued workers compensation
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5,580
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7,608
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Payroll and related employee costs
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16,311
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15,439
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Accrued interest payable
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1,811
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2,553
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Current income taxes payable
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11,584
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14,705
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Other accrued liabilities
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12,600
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11,830
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Total current liabilities
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122,481
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104,692
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Contingent convertible senior notes
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275,000
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275,000
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Other long-term liabilities
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19,605
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18,126
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Deferred income taxes
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162,349
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150,643
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Commitments and contingent liabilities
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Shareholders equity:
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Series B Junior Participating Preferred stock; $1 par value;
250,000 shares authorized; none outstanding
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Common stock; $0.10 par value;
shares authorized: 500,000,000; shares issued: 198,193,049
at June 30, 2008 and 197,045,996 at December 31, 2007;
shares outstanding: 178,882,637 at June 30, 2008
and 178,345,603 at December 31, 2007
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19,819
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19,704
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Additional paid-in capital
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399,619
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393,894
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Treasury stock, at cost: 19,310,412 shares at June 30, 2008
and 18,700,393 shares at December 31, 2007
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(124,550
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)
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(121,096
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)
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Retained earnings
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430,628
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367,007
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Total shareholders equity
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725,516
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659,509
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$
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1,304,951
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$
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1,207,970
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See
accompanying notes to consolidated financial statements
-3-
GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Contract drilling revenue
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$
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216,707
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$
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227,520
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$
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418,229
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$
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469,533
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Costs and expenses:
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Drilling operations
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129,953
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132,307
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243,461
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253,260
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Depreciation and amortization
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26,994
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22,397
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54,753
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43,811
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General and administrative
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8,221
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7,159
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16,833
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14,558
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(Gain) loss on sale of assets
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12
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(76
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)
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50
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(129
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)
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Total costs and expenses
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165,180
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161,787
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315,097
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311,500
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Operating income
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51,527
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65,733
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103,132
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158,033
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Other income (expense):
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Interest income
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1,991
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3,593
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4,478
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6,752
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Interest expense
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(2,709
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)
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(3,438
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)
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(6,046
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)
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(6,930
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)
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Other income (expense), net
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(718
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)
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155
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(1,568
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)
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(178
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)
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Income before income taxes
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50,809
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65,888
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101,564
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157,855
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Income tax expense:
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Current
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14,001
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17,307
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27,129
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44,287
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Deferred
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4,510
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6,873
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10,814
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13,282
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|
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|
|
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|
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|
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Total income tax expense
|
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|
18,511
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|
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24,180
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|
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37,943
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57,569
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Net income
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$
|
32,298
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|
$
|
41,708
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$
|
63,621
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$
|
100,286
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Net income per common share (Note 2):
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Basic
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$
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0.18
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$
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0.23
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$
|
0.36
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$
|
0.55
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Diluted
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$
|
0.15
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$
|
0.19
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$
|
0.31
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$
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0.46
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Weighted average common shares outstanding:
|
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|
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|
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|
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Basic
|
|
|
176,001
|
|
|
|
183,009
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|
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|
175,886
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183,016
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|
|
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|
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|
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Diluted
|
|
|
220,042
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226,734
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219,687
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|
|
|
226,655
|
|
|
|
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|
|
|
|
|
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See
accompanying notes to consolidated financial statements
-4-
GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity and Comprehensive Income
(Amounts in thousands)
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Common Stock
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Additional
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Treasury Stock
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Number of
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Amount,
|
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Paid-in
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Number of
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Amount,
|
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Retained
|
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|
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Shares
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at $0.10 par value
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Capital
|
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Shares
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at cost
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Earnings
|
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Total
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Balance, December 31, 2006
|
|
|
185,936
|
|
|
$
|
19,523
|
|
|
$
|
383,482
|
|
|
|
9,292
|
|
|
$
|
(65,119
|
)
|
|
$
|
195,908
|
|
|
$
|
533,794
|
|
|
Adjustment for the adoption
of FASB Interpretation
No. (FIN)48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
1,207
|
|
|
Exercise of stock options
|
|
|
802
|
|
|
|
80
|
|
|
|
2,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,865
|
|
|
Tax effect of share-based
payments
|
|
|
|
|
|
|
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749
|
|
|
Issuance of restricted stock,
net of forfeitures
|
|
|
1,016
|
|
|
|
101
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
|
|
|
|
|
|
|
|
6,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,979
|
|
|
Purchase of treasury stock
|
|
|
(9,408
|
)
|
|
|
|
|
|
|
|
|
|
|
9,408
|
|
|
|
(55,977
|
)
|
|
|
|
|
|
|
(55,977
|
)
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,892
|
|
|
|
169,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
178,346
|
|
|
|
19,704
|
|
|
|
393,894
|
|
|
|
18,700
|
|
|
|
(121,096
|
)
|
|
|
367,007
|
|
|
|
659,509
|
|
|
Exercise of stock options
|
|
|
144
|
|
|
|
15
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
752
|
|
|
Tax effect of share-based
payments
|
|
|
|
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(168
|
)
|
|
Issuance of restricted stock,
net of forfeitures
|
|
|
1,003
|
|
|
|
100
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
|
|
|
|
|
|
|
|
5,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,256
|
|
|
Purchase of treasury stock
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
610
|
|
|
|
(3,454
|
)
|
|
|
|
|
|
|
(3,454
|
)
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,621
|
|
|
|
63,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 (unaudited)
|
|
|
178,883
|
|
|
$
|
19,819
|
|
|
$
|
399,619
|
|
|
|
19,310
|
|
|
$
|
(124,550
|
)
|
|
$
|
430,628
|
|
|
$
|
725,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
-5-
GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
63,621
|
|
|
$
|
100,286
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
54,753
|
|
|
|
43,811
|
|
Deferred income taxes
|
|
|
10,814
|
|
|
|
13,282
|
|
(Gain) loss on sale of assets
|
|
|
50
|
|
|
|
(129
|
)
|
Stock-based compensation expense
|
|
|
5,256
|
|
|
|
3,290
|
|
Excess tax benefit of stock option exercises
and vested restricted stock
|
|
|
(58
|
)
|
|
|
(696
|
)
|
Net effect of changes in assets and liabilities
related to operating accounts
|
|
|
37,782
|
|
|
|
30,475
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
172,218
|
|
|
|
190,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(96,077
|
)
|
|
|
(122,842
|
)
|
Deposits for new rig purchases
|
|
|
(5,766
|
)
|
|
|
|
|
Merger activity costs
|
|
|
(4,362
|
)
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
1,991
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(104,214
|
)
|
|
|
(120,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
752
|
|
|
|
2,794
|
|
Excess tax benefit of stock option exercises
and vested restricted stock
|
|
|
58
|
|
|
|
696
|
|
Purchase of treasury stock
|
|
|
(3,454
|
)
|
|
|
(11,504
|
)
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(2,644
|
)
|
|
|
(8,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
65,360
|
|
|
|
61,956
|
|
Cash and cash equivalents, beginning of period
|
|
|
247,701
|
|
|
|
229,773
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
313,061
|
|
|
$
|
291,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,358
|
|
|
$
|
6,505
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
31,096
|
|
|
$
|
43,295
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
-6-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) General
Grey Wolf, Inc. (the Company or Grey Wolf), a Texas corporation formed in 1980, is a
holding company with no independent assets or operations. Through its subsidiaries, Grey Wolf is
engaged in the business of providing onshore contract drilling services to the oil and gas industry
in the United States of America and Mexico.
The accompanying unaudited consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) and include the accounts of the Company and its subsidiaries. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all adjustments, which are of
a normal recurring nature, necessary to present fairly the Companys financial position as of June
30, 2008 and the results of operations and cash flows for the periods indicated. All intercompany
transactions have been eliminated. The results of operations for the three and six months ended
June 30, 2008 are not necessarily indicative of the results for any other period or for the year as
a whole. Additionally, pursuant to the rules and regulations of the Securities and Exchange
Commission, certain information and footnote disclosures normally included in annual financial
statements in accordance with U.S. GAAP have been omitted. Therefore, these consolidated financial
statements should be read in conjunction with the Companys audited consolidated financial
statements and notes thereto included in the Companys annual report on Form 10-K for the year
ended December 31, 2007.
(2) Significant Accounting Policies
Earnings Per Share
Basic earnings per share (EPS) is based on the weighted average number of shares of common
stock outstanding during the applicable period and excludes shares of restricted stock that have
not vested. The computation of diluted earnings per share is based on the weighted average number
of shares of common stock outstanding during the period plus, when their effect is dilutive,
incremental shares consisting of shares subject to stock options, restricted stock and shares
issuable upon conversion of the Floating Rate Contingent Convertible Senior Notes due 2024 (the
Floating Rate Notes) and the 3.75% Contingent Convertible Senior Notes due 2023 (the 3.75%
Notes and together with the Floating Rate Notes, referred to as the Contingent Convertible Senior
Notes).
The Company accounts for the Contingent Convertible Senior Notes using the if converted
method set forth in the Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 128 Earnings Per Share for calculating diluted earnings per
share. Under the if converted method, the after-tax effect of interest expense related to the
Contingent Convertible Senior Notes is added back to net income, and the convertible debt is
assumed to have been converted into common stock at the beginning of the period and is added to
outstanding shares.
-7-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
The following is a reconciliation of the components of the basic and diluted earnings per
share calculations for the applicable periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,298
|
|
|
$
|
41,708
|
|
|
$
|
63,621
|
|
|
$
|
100,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add interest expense on contingent
convertible senior notes,
net of related tax effects
|
|
|
1,558
|
|
|
|
2,059
|
|
|
|
3,451
|
|
|
|
4,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net incomediluted
|
|
$
|
33,856
|
|
|
$
|
43,767
|
|
|
$
|
67,072
|
|
|
$
|
104,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstandingbasic
|
|
|
176,001
|
|
|
|
183,009
|
|
|
|
175,886
|
|
|
|
183,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optionstreasury stock method
|
|
|
716
|
|
|
|
740
|
|
|
|
596
|
|
|
|
715
|
|
Restricted stocktreasury
stock method
|
|
|
868
|
|
|
|
528
|
|
|
|
748
|
|
|
|
467
|
|
Contingent convertible senior notes
|
|
|
42,457
|
|
|
|
42,457
|
|
|
|
42,457
|
|
|
|
42,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstandingdiluted
|
|
|
220,042
|
|
|
|
226,734
|
|
|
|
219,687
|
|
|
|
226,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.19
|
|
|
$
|
0.31
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of securities excluded from the computation of basic and diluted earnings per share
is presented below for the applicable periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
2,870
|
|
|
|
2,166
|
|
|
|
2,706
|
|
|
|
2,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options
|
|
|
918
|
|
|
|
1,301
|
|
|
|
1,400
|
|
|
|
1,288
|
|
Anti-dilutive restricted stock
|
|
|
1
|
|
|
|
1
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anti-dilutive securities excluded from the
computation of diluted earnings per share
|
|
|
919
|
|
|
|
1,302
|
|
|
|
1,598
|
|
|
|
1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-8-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
Share-Based Payment Arrangements
At June 30, 2008, the Company had stock-based compensation plans with amounts outstanding to
employees and directors, which are more fully described in Note 7. The Company records compensation
expense over the requisite service period using the straight-line method as provided in SFAS No.
123(R), Share-Based Payment.
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes-Merton option-valuation model. During the first six months of 2008, 885,590 options
were granted at an average exercise price of $6.43 per share. The key input variables used in
valuing these options under the Black-Scholes-Merton model were: risk-free interest rate based on
three-year Treasury strips of 2.25%; dividend yield of zero; stock price volatility of 34.0% based
on historical volatility of the common stock with consideration given to implied volatilities from
traded options on the common stock; and expected option lives of three years based on historical
stock option exercise data and future expectations. Also during the first six months of 2008, the
Company granted 1,093,680 shares of restricted stock at a weighted-average grant-date fair value of
$6.44 per share.
Recent Accounting Pronouncements
In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion. This FSP requires entities with
cash settled convertibles to bifurcate the securities into a debt component and an equity component
and accrete the debt component to par over the expected life of the convertible. This FSP will be
effective for fiscal year 2009. Early adoption is not permitted, and the FSP must be applied
retrospectively to all instruments. Management does not believe this pronouncement will be
applicable to the Company.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
pronouncement requires most identifiable assets, liabilities, non-controlling interests, and
goodwill acquired in a business combination to be recorded at full fair value. The Statement
applies to all business combinations, including combinations among mutual entities and combinations
by contract alone. Under SFAS No. 141(R), all business combinations will be accounted for by
applying the acquisition method. The Statement is effective for periods beginning on or after
December 15, 2008 and earlier application is prohibited. SFAS No. 141(R) will be applied to
business combinations occurring after the effective date.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115. This pronouncement
permits entities to use the fair value method to measure certain financial assets and liabilities
by electing an irrevocable option to use the fair value method at specified election dates. After
election of the option, subsequent changes in fair value would result in the recognition of
unrealized gains or losses as period costs during the period the change occurred. It also
establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and liabilities.
The Company adopted this standard and it did not have a material impact on the consolidated
financial statements for the six months ended June 30, 2008.
-9-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements
that require or permit fair value measurements and is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In
November 2007, the FASB deferred for one year the application of the fair value measurement
requirements to nonfinancial assets and liabilities that are not required or permitted to be
measured at fair value on a recurring basis. The Company has adopted the provisions of SFAS No. 157
related to financial assets and liabilities. The adoption did not have a material impact on the
consolidated financial statements for the six months ended June 30, 2008. Beginning January 1,
2009, the Company will adopt the provisions for nonfinancial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis, which management does not
expect to have a material impact on the consolidated financial statements.
(3) Accounting for Income Taxes
The Company records deferred taxes utilizing an asset and liability approach. This method
gives consideration to the future tax consequences associated with differences between the
financial accounting and tax basis of assets and liabilities. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company and its domestic subsidiaries file a consolidated federal income tax
return and foreign subsidiaries file returns in the appropriate jurisdictions.
The Company currently believes that it is more likely than not that future earnings and
reversal of deferred tax liabilities will be sufficient to permit the Company to utilize its
domestic deferred tax assets recorded at June 30, 2008. The Company has $2.1 million of net
operating losses (NOLs) related to its Mexico operations. These NOLs are not expected to be
realized due to the level of future taxable income, and as such a valuation allowance has been
applied to the full amount of NOLs.
The Company follows the provisions of FASB Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes. As of June 30, 2008, there were $1.5 million of unrecognized tax
benefits, all of which could have an impact on the effective tax rate, net of federal tax benefits,
if recognized. The Companys policy is to accrue interest and penalties associated with uncertain
tax positions in income tax expense. At June 30, 2008, there was $402,000 of interest and penalties
accrued in connection with uncertain tax positions. The tax years that remain open to examination
by the major taxing jurisdictions to which the Company is subject range from 1996 to 2007. The
Companys major taxing jurisdictions have been identified as the United States, and the states of
Texas, Louisiana and Colorado.
-10-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
(4) Long-Term Debt
Long-term debt consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
3.75% Contingent Convertible
Senior Notes due May 2023
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Floating Rate Contingent Convertible
Senior Notes due April 2024
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
275,000
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
|
|
|
|
|
|
3.75% Notes
The 3.75% Notes bear interest at 3.75% per annum and mature on May 7, 2023. The 3.75% Notes
are general unsecured senior obligations of the Company and are fully and unconditionally
guaranteed, on a joint and several basis, by all domestic wholly-owned subsidiaries of the Company.
Non-guarantor subsidiaries are not significant.
If the average trading price of the 3.75% Notes per $1,000 principal amount for the five
trading day period ending on the third trading day immediately preceding the first day of the
applicable six-month period (as defined below) equals $1,200 or more, the Company would be required
to pay contingent interest. Contingent interest would be payable at a rate equal to 0.50% per
annum during any six-month period, from May 7th to November 6th and from November 7th to May 6th,
with the initial six-month period commencing May 7, 2008. For the period of May 7, 2008 to
November 6, 2008 the 3.75% notes did not trade at or above $1,200 for the time period required and
therefore, no contingent interest is payable.
The Company may redeem in cash some or all of the 3.75% Notes at any time on or after May 14,
2008, at various redemption prices depending upon the date redeemed plus accrued but unpaid
interest, including contingent interest. As of June 30, 2008, the Company has not elected to redeem
any of the 3.75% Notes. Holders may require the Company to repurchase all or a portion of the 3.75%
Notes on May 7, 2013 or May 7, 2018, and upon a change of control, as defined in the indenture
governing the 3.75% Notes, at 100% of the principal amount of the 3.75% Notes, plus accrued but
unpaid interest, including contingent interest, if any, to the date of repurchase, payable in cash.
The 3.75% Notes are convertible into shares of common stock, upon the occurrence of certain
events, at a conversion price of $6.45 per share. As of July 1, 2008, and at any time during the
third quarter of 2008, the 3.75% Notes are convertible into shares of the Companys common stock
because the closing price per share of the Companys common stock exceeded 110% of the conversion
price ($7.10 per share) of the 3.75% Notes for at least 20 trading days in the period of 30
consecutive trading days ended on June 30, 2008. Between July 7, 2008 and July 8, 2008, two note
holders exercised their right to convert $275,000 in principal amount of the notes into
approximately 42,600 shares of the Companys common stock, reducing the aggregate principal amount
of the outstanding 3.75% Notes to $149.7 million. The 3.75% Notes will cease to be convertible
after September 30, 2008, unless the trading price
-11-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
of the Companys common stock again exceeds (as
it did in the second quarter) 110% of the conversion price of the 3.75% Notes for at least 20
trading days in the period of 30 consecutive trading days on the last trading day of the third
quarter of 2008. In that event, the 3.75% Notes would remain convertible through the fourth
quarter of 2008. The 3.75% Notes may also become convertible (or remain convertible) in the fourth
quarter or other future periods if any of the other events that entitle holders to convert the
3.75% Notes occur.
Floating Rate Notes
The Floating Rate Notes bear interest at a per annum rate equal to 3-month LIBOR, adjusted
quarterly, minus a spread of 0.05%. The per annum interest rate will never be less than zero or
more than 6.00%. For the three months ended June 30, 2008 and 2007, the interest rate on the
Floating Rate Notes was 2.65% and 5.30%, respectively. These notes mature on April 1, 2024. The
Floating Rate Notes are general unsecured senior obligations of the Company and are fully and
unconditionally guaranteed, on a joint and several basis, by all domestic wholly-owned subsidiaries
of the Company. Non-guarantor subsidiaries are not significant.
The Company may redeem some or all of the Floating Rate Notes at any time on or after April 1,
2014, at a redemption price equal to 100% of the principal amount of the Floating Rate Notes, plus
accrued but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in
cash. Holders may require the Company to repurchase all or a portion of the Floating Rate Notes on
April 1, 2014 or April 1, 2019, and upon a change of control, as defined in the indenture governing
the Floating Rate Notes, at 100% of the principal amount of the Floating Rate Notes, plus accrued
but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash.
The Floating Rate Notes are convertible into shares of common stock, upon the occurrence of
certain events, at a conversion price of $6.51 per share. As of July 1, 2008, and at any time
during the third quarter of 2008, the Floating Rate Notes are convertible into shares of the
Companys common stock because the closing price per share of the Companys common stock exceeded
120% of the conversion price ($7.81 per share) of the Floating Rate Notes for at least 20 trading
days in the period of 30 consecutive trading days ended on June 30, 2008. The Floating Rate Notes
will cease to be convertible after September 30, 2008, unless the trading price of the Companys
common stock again exceeds (as it did in the second quarter) 120% of the conversion price of the
Floating Rate Notes for at least 20 trading days in the period of 30 consecutive trading days on
the last trading day of the third quarter of 2008. In that event, the Floating Rate Notes would
remain convertible through the fourth quarter of 2008. The Floating Rate Notes may also become
convertible (or remain convertible) in the fourth quarter or other future periods if any of the
other events that entitle holders to convert the Floating Rate Notes occur.
CIT Facility
The Companys subsidiary Grey Wolf Drilling Company L.P. has a $100.0 million credit facility
with the CIT Group/Business Credit, Inc. (the CIT Facility) which expires December 31, 2008. The
CIT Facility provides the Company with the ability to borrow up to the lesser of $100.0 million or
50% of the Orderly Liquidation Value (as defined in the agreement) of certain drilling rig
equipment located in the 48 contiguous states of the United States of America. Periodic interest
payments are due at a floating rate based upon the Companys debt service coverage ratio within a
range of either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to 1.50%. The CIT Facility provides
up to $50.0 million available for letters of credit. The Company is required to pay a quarterly
commitment fee ranging from 0.375% to 0.50% per
-12-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
annum on the unused portion of the CIT Facility.
Letters of credit accrue a fee of 1.25% per annum. These amounts are included in interest expense
for the periods presented. The CIT Facility contains affirmative and negative covenants and the
Company is in compliance with these covenants. Substantially all of the Companys assets, including
its drilling equipment, are pledged as collateral under the CIT Facility which is also guaranteed
by the Company and certain of the Companys wholly-owned subsidiaries.
The CIT Facility allows the Company to repurchase shares of its common stock, pay dividends to
its shareholders, and make prepayments on the Contingent Convertible Senior Notes. However, all of
the following conditions must be met to enable the Company to make payments for any of the
above-mentioned reasons: (i) payments may not exceed $150.0 million in the aggregate, (ii) no
Default or Event of Default shall exist at the time of any such payments, (iii) at least $35.0
million of Availability (availability under the CIT Facility plus cash on hand) exists immediately
after any such payments, and (iv) the Company must provide CIT Group/Business Credit, Inc. three
Business Days prior written notice of any such payments. Capitalized terms used in the preceding
sentence but not defined herein are defined in the CIT Facility.
The Company currently has no outstanding balance under the CIT Facility and had $30.9 million
of undrawn, standby letters of credit at June 30, 2008. These standby letters of credit are for the
benefit of various insurance companies as collateral for premiums and losses which may become
payable under the terms of the underlying insurance contracts. Outstanding letters of credit reduce
the amount available for borrowing under the CIT Facility.
(5) Segment Information
The Company manages its business through two reportable segments. The domestic and Mexican
operations are considered separate segments as a result of differences in economic characteristics,
separate regulatory environments, and different types of customers being served. Domestic
operations were aggregated into one reportable segment based on the similarity of economic
characteristics among all markets, including the nature of the services provided and the type of
customers of such services. Intersegment revenue is eliminated in consolidation.
-13-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
The following tables set forth certain financial information with respect to the Companys
reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
209,862
|
|
|
$
|
227,520
|
|
|
$
|
405,463
|
|
|
$
|
469,533
|
|
Mexico
|
|
|
6,845
|
|
|
|
|
|
|
|
12,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
216,707
|
|
|
$
|
227,520
|
|
|
$
|
418,229
|
|
|
$
|
469,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
51,017
|
|
|
$
|
65,733
|
|
|
$
|
101,036
|
|
|
$
|
158,033
|
|
Mexico
|
|
|
510
|
|
|
|
|
|
|
|
2,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
51,527
|
|
|
$
|
65,733
|
|
|
$
|
103,132
|
|
|
$
|
158,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) Contingencies
The Company is involved in litigation incidental to the conduct of its business, none of which
management believes is, individually or in the aggregate, material to the Companys consolidated
financial condition or results of operations.
(7) Capital Stock and Option Plans
The 2003 Incentive Plan (the 2003 Plan) was approved by the Companys shareholders in May
2003. The 2003 Plan authorizes the grant of the following equity-based awards:
|
|
|
incentive stock options;
|
|
|
|
|
non-statutory stock options;
|
|
|
|
|
restricted shares; and
|
|
|
|
|
other stock-based and cash awards.
|
The 2003 Plan replaced the Companys 1996 Employee Stock Option Plan (the 1996 Plan) but all
outstanding awards previously granted under the 1996 Plan will continue to be exercisable subject
to the terms and conditions of such grants. The 1996 Plan allowed for grants of non-statutory
options to purchase shares of common stock, but no further grants of common stock will be made
under the 1996 Plan. The 2003 Plan reserves a maximum of 22.0 million shares of common stock
underlying all equity-based awards, which includes an additional 5.0 million shares that were
approved by shareholders in 2007 and is reduced by the number of shares subject to previous grants
under the 1996 Plan. At June 30, 2008, there were 5.4 million shares of common stock available for
grant under the 2003 Plan until March 2013. Prior to 2003, the Company also granted options under
stock option agreements with its outside directors that are outside of the 1996 Plan and the 2003
Plan. At June 30, 2008, these individuals had options outstanding to purchase an aggregate of
700,500 shares of common stock.
-14-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
The exercise price of stock options approximates the fair market value of the stock at the
time the option is granted. A portion of the outstanding options became exercisable upon issuance
and the remaining become exercisable in varying increments over three to five year periods. The
options expire on the tenth anniversary of the date of grant.
As of June 30, 2008, the Company had 2.8 million shares of restricted stock outstanding under
the 2003 Plan, which vest over periods of three to five years. Each share of restricted stock
entitles the holder to one vote and the shares are only restricted due to time-related vesting
conditions.
As discussed in Note 2, the Company records expense for the value of stock options and
restricted stock on a straight-line basis over the vesting period in accordance with SFAS No.
123(R).
(8) Treasury Stock
On May 25, 2006, the Company announced that its Board of Directors approved a plan authorizing
the repurchase of up to $100.0 million in shares of common stock in open market or in privately
negotiated block-trade transactions. On September 25, 2007, the Company announced that its Board of
Directors authorized a $50.0 million increase in the common stock repurchase program. The number
of shares purchased and the timing of purchases is based on several factors, including the price of
the common stock, general market conditions, available cash and alternate investment opportunities.
The stock repurchase program is subject to termination prior to completion. As of June 30, 2008,
the Company has repurchased 19.0 million shares under this program at a total price of $122.5
million. For the six months ended June 30, 2008, the Company repurchased 399,000 shares at a total
price of $2.1 million.
The Company also has treasury shares that were acquired through the vesting of restricted
stock. The Companys employees may elect to have shares withheld to cover required minimum payroll
tax withholdings incurred when restricted stock vests. The number of shares withheld is based upon
the market price of the common stock at the time of vesting. The Company then pays the taxes on
the employees behalf and records the shares withheld as treasury stock. For the six months ended
June 30, 2008, approximately 211,000 shares were acquired through such treasury share purchases at
a cost of $1.3 million.
(9) Concentrations
The majority of the Companys contract drilling activities are conducted with independent and
major oil and gas companies in the United States. Historically, the Company has not required
collateral or other security to support the related receivables from such customers. However, the
Company has required certain customers to deposit funds in escrow prior to the commencement of
drilling. Actions typically taken by the Company in the event of nonpayment include filing a lien
on the customers producing property and filing a lawsuit against the customer.
For the six months ended June 30, 2008 and 2007, there were no customers representing greater
than 10% of the Companys revenue.
-15-
GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
(Unaudited)
(10) Subsequent Event
On April 21, 2008, the Company announced that its board of directors approved a definitive
agreement with Basic Energy Services, Inc. (Basic) to combine the two businesses in a merger of equals transaction. On July 15,
2008, the Company announced that its proposed merger with Basic did not receive sufficient votes
from its shareholders to approve the transaction at its special meeting of shareholders. As a
result, the merger agreement with Basic was terminated on that day. The Company expects to take a
pre-tax charge to earnings of approximately $17.0 million during the third quarter of 2008 related
to transaction costs incurred in connection with the merger activities. This includes a $5.0
million termination fee payable to Basic and approximately $4.4 million of costs recorded in other
non-current assets at June 30, 2008. Should the Company enter into an agreement of similar nature
with another company within one year of the termination date of the agreement with Basic, the
company may be required to pay Basic an additional $25.0 million fee upon consummation of the
subsequent transaction.
-16-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere herein and with our audited consolidated financial
statements and accompanying notes included in our annual report on Form 10-K for the year ended
December 31, 2007.
Overview
We are a leading provider of contract oil and gas land drilling services in the United States.
As of July 31, 2008, we had a fleet of 122 rigs. Our customers include independent producers and
major oil and gas companies. We conduct substantially all of our operations through our
subsidiaries. Our business is cyclical and our financial results depend upon several factors. These
factors include the overall demand for land drilling services, the dayrates we receive for our
services, the level of demand for turnkey services, and our success drilling turnkey wells.
We make available free of charge through our website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with the Securities and
Exchange Commission (the SEC). Information on our website is not a part of this report. Our
website address is www.gwdrilling.com.
Termination of Definitive Merger Agreement and Review of Strategic Alternatives
On April 20, 2008, our board of directors approved a definitive merger agreement with Basic
Energy Services, Inc. (Basic), a major well site services provider, to combine the two businesses
in a merger of equals transaction. On July 15, 2008, we announced that our proposed merger with
Basic did not receive sufficient votes from Grey Wolf shareholders to approve the transaction. As
a result, Grey Wolf and Basic terminated their merger agreement on that day. We expect to take a
pre-tax charge to earnings of approximately $17.0 million during the third quarter of 2008 related
to transaction costs incurred in connection with the merger activities. This includes a $5.0
million termination fee paid to Basic and approximately $4.4 million of costs recorded in other
non-current assets at June 30, 2008. Should we enter into an agreement of similar nature with
another company within one year of the termination date of our agreement with Basic, we may be
required to pay Basic an additional $25.0 million fee upon consummation of the subsequent
transaction.
In light of this development, our Board of Directors plans to review alternatives for
enhancing shareholder value. This review will include an update to our existing strategic plan and
will encompass consideration of continued internal growth by remaining independent, acquisitions,
mergers, sale of the Company, strategic alliances, joint ventures and financial alternatives. The
Board has engaged UBS Investment Bank as its independent financial advisor to assist us in
conducting this review. We can give no assurance that the review will result in any specific
transaction and no timetable has been set for its completion. We expect to incur additional costs
in connection with the strategic review, an amount for which is not currently determinable. We do
not intend to disclose developments relating to this review unless and until our Board of Directors
approves a specific agreement or transaction.
New Rig Purchases
In September 2007, we entered into three-year term contracts with two exploration and
production companies to deploy two new 1,500 horsepower built-for-purpose rigs. These rigs are
designed to drill multiple wells from a single well site location. One of these rigs began working
in July 2008 and the remaining rig is expected to be delivered and begin working in the fourth
quarter of 2008. The expected purchase price per rig is approximately $22.2 million, and these rigs
will be deployed in the Rocky Mountain market. The Company expects to recover the majority of the
cost of the capital
-17-
expended
for these rigs over their initial long-term contracts. With the addition of these
rigs, our fleet is expected to total 123 rigs by the end of 2008.
Rig Activity
The land rig count per Baker Hughes has continued to increase from a low in 2007 of 1,610 rigs
to 1,864 rigs on July 25, 2008. The influx of newly-built land drilling rigs during the last two
years created some excess capacity in the land drilling market. This new build activity has
lessened considerably during the first half of 2008. The excess capacity of rigs in the market has
pressured the average number of rigs we have working. Our long-term contract portfolio has
partially protected us from the declines in the land drilling market and bolstered our results. We
have recently seen an increase in our average rigs running, with an
average of 112 rigs for the
week ended July 25, 2008. The table below shows the average number of land rigs working in the
United States according to the Baker Hughes rotary rig count and the average number of our rigs
working.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
2006
|
|
2007
|
|
2008
|
Land Rig
|
|
Full
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full
|
|
|
|
|
|
|
|
|
|
7/1
|
Count
|
|
Year
|
|
Q-1
|
|
Q-2
|
|
Q-3
|
|
Q-4
|
|
Year
|
|
Q-1
|
|
Q-2
|
|
to 7/25
|
Baker Hughes
|
|
|
1,535
|
|
|
|
1,626
|
|
|
|
1,653
|
|
|
|
1,691
|
|
|
|
1,705
|
|
|
|
1,669
|
|
|
|
1,690
|
|
|
|
1,775
|
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grey Wolf
|
|
|
108
|
|
|
|
110
|
|
|
|
104
|
|
|
|
104
|
|
|
|
103
|
|
|
|
105
|
|
|
|
100
|
|
|
|
105
|
|
|
|
109
|
|
Term Contracts
We endeavor to enter into term contracts to provide drilling services on a daywork basis.
Typically, the length of our term contracts ranges from six months to three years. They usually
include a per rig day cancellation fee approximately equal to the dayrate under the contract less
estimated contract drilling operating expenses for the unexpired term of the contract. In addition,
we are able to pass most increases in labor costs on to our customers through our dayrates on all
daywork contracts, including term contracts. We seek term contracts with our customers when we
believe that those contracts may mitigate the financial impact to us of a potential decline in
dayrates during the period in which the term contract is in effect. This provides greater stability
to our business and allows us to plan and manage our business more efficiently. We also have used
term contracts to contractually assure that we receive sufficient cash flow to recover
substantially all of the costs of improvements we make to the rigs under the term contract,
particularly when those improvements are requested by the customer.
During 2008, we have seen greater interest in term contracts from our customers, as evidenced
by the recent increase in our long term contract portfolio. As of the date of this report, we have
14 rigs working under renewed term contracts since the first quarter of 2008. We also have 18 rigs
currently working under term contracts that were working under spot market dayrate contracts prior
to the second quarter of 2008. In addition, we have renewed two term contracts and obtained nine
new term contracts that begin later this year or early in 2009. Only six rigs have moved off of
term contracts since the beginning of 2008. At June 30, 2008, we had approximately 29,500 rig days
contracted under term contracts, as compared with 25,900 rig days under term contract at June 30,
2007. Our rig days under contract at June 30, 2008 are approximately equivalent to an average of 66
rigs working under term contracts for the remaining two quarters in 2008 and an average of 38 rigs
working for 2009. These term contracts are expected to provide revenue of approximately $435.5
million in 2008 and $281.4 million in 2009. At July 31, 2008 we had 66 rigs working under term
contracts, representing 54% of our total rig fleet.
-18-
Drilling Contract Rates
As noted above, the demand for our services has been increasing as shown in the increase in
the land rig count. Following this increase in demand, there has been an upward movement in
leading edge spot market daywork bid rates which now range from $18,000 to $23,500 per rig day,
without fuel or top drives. These rates have increased from $15,000 to $21,000 per rig day in
April 2008. A rig day is defined as a twenty-four hour period in which a rig is under contract and
should be earning revenue.
In addition to our fleet of drilling rigs, we owned 33 top drives at July 31, 2008. Top drive
utilization for the month of July 2008 was 73%. Rates are as much as $3,300 per rig day. These
rates are in addition to the above stated rates for our rigs.
Turnkey Contract Activity
Turnkey work is an important part of our business and operating strategy. Our engineering and
operating expertise allow us to provide this service to our customers and has historically provided
higher revenues and earnings before interest expense, income taxes, depreciation and amortization
(EBITDA) per rig day worked than under daywork contracts (see discussion under
Reconciliation of
Non-GAAP Financial Measures
regarding the use of EBITDA and EBITDA per rig day). However, under
turnkey contracts we are typically required to bear additional operating costs (such as drill bits)
and risk (such as loss of hole) that would otherwise be assumed by the customer under daywork
contracts. For the quarter ended June 30, 2008, our turnkey EBITDA was $16,598 per rig day,
compared to daywork EBITDA of $7,840 per rig day, and our turnkey revenue per rig day was $61,759
compared to $19,819 per rig day for daywork. For the quarter ended June 30, 2008, turnkey work
represented 7% of total days worked compared to 7% in the first quarter of 2008 and 8% in the
second quarter of 2007. Turnkey EBITDA represented 14% of total company EBITDA in the second
quarter of 2008, compared to 10% in both the first quarter of 2008 and the second quarter 2007.
EBITDA generated on turnkey contracts can vary widely based upon a number of factors, including the
location of the contracted work, the depth and level of complexity of the wells drilled and the
ultimate success of drilling the well.
Stock Repurchase Program
We may from time to time make purchases of common stock up to $150.0 million in open market or
in privately negotiated block-trade transactions. As of July 31, 2008, we have repurchased 19.0
million shares at a total cost of $121.9 million, exclusive of other direct costs, under the
program. The number of shares to be purchased and the timing of purchases will be based on a number
of factors: the price of the common stock, general market conditions, available cash and alternate
investment opportunities. We may terminate the stock repurchase program prior to completion.
Financial Outlook
As noted, we are seeing additional demand for our services which should continue to improve
our utilization of working rigs and require us to return some stacked rigs to work. Leading edge
daywork bid rates have improved due to this higher demand and what we believe to be our customers
confidence in commodity prices has sparked more interest in long-term contracts and renewals. The
ability to provide equipment that addresses the challenges of deep, directional or multi-well site
drilling is critical to meeting our customers needs in the most active domestic land drilling
markets. Additionally, our fleet is well suited to these drilling opportunities given the recent
acquisition of new rigs and substantial rig upgrades completed over the past three to four years.
Oil and natural gas prices remain historically strong with the twelve-month strips at $125.58
per barrel and $9.61 per mmbtu at July 31, 2008, respectively. Natural gas decline rates are
steeper than ever in the United States and Canada and we believe it will take more rigs running to
meet the United States long-term natural gas requirements.
-19-
During the third quarter of 2008, we expect to average 108 to 111 rigs working, with seven to
nine of these rigs performing turnkey services. In addition, we expect average daywork EBITDA per
rig day to increase by $400 to $600 due to the continuing improvement in our drilling markets. We
also expect depreciation expense of approximately $27.5 million, interest expense of approximately
$2.7 million and an effective tax rate of approximately 37% for the third quarter of 2008. We also
expect to take a pre-tax charge to earnings of approximately $17.0 million (or approximately $0.05
per diluted share) during the third quarter as a result of the shareholder vote and related
termination on July 15, 2008 of a proposed merger with Basic.
These projections are forward-looking statements and, while we believe our estimates are
reasonable, we can give no assurance that such expectations or the assumptions that underlie such
expectations will prove to be correct.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires our management to make subjective estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
However, these estimates, judgments and assumptions concern matters that are inherently uncertain.
Accordingly, actual amounts and results could differ from these estimates made by management,
sometimes materially. Critical accounting policies and estimates are defined as those that are both
most important to the portrayal of our financial condition and operating results and require
managements most subjective judgments. The accounting policies that we believe are critical relate
to property and equipment, impairment of long-lived assets, goodwill, revenue recognition,
insurance accruals, and income taxes.
Property and Equipment
Property and equipment, including betterments and improvements, are stated at cost with
depreciation calculated using the straight-line method over the estimated useful lives of the
assets. We make estimates with respect to the useful lives that we believe are reasonable. However,
the cyclical nature of our business or the introduction of new technology in the industry could
cause us to change our estimates, thus impacting the future calculation of depreciation. When any
asset is tested for recoverability, we also review the remaining useful life of the asset. Any
changes to the estimated useful life resulting from that review are made prospectively. We estimate
that the useful lives of our assets are between three and 20 years. We expense our maintenance and
repair costs as incurred.
Impairment of Long-Lived Assets
We assess the impairment of our long-lived assets under the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Such indicators include changes in our business
plans, a change in the physical condition of a long-lived asset or the extent or manner in which it
is being used, or a severe or sustained downturn in the oil and gas industry. If we determine that
a triggering event, such as those described previously, has occurred, we perform a review of our
rigs and rig equipment. Our review is performed by comparing the carrying value of each rig, plus
the estimated cost to refurbish or reactivate (if any), to the estimated undiscounted future net
cash flows for that rig. If the carrying value plus estimated refurbishment and reactivation cost
of any rig is more than the estimated undiscounted future net cash flows expected to result from
the use of the rig, a write-down of the rig to estimated fair market value must be made. The
estimated fair market value is the amount at which an asset could be bought or sold in a current
transaction between willing parties. Quoted market prices in active markets are the best estimate
of fair market value; however, quoted market prices are generally not available. As a result, fair
value must be determined based upon other valuation techniques. This could include appraisals or
present
-20-
value calculations. The calculation of undiscounted future net cash flows and fair market value is
based on our estimates and projections.
The demand for land drilling services is cyclical and has historically resulted in
fluctuations in rig utilization and we believe these fluctuations will continue in the future. The
likelihood of an asset impairment increases during extended periods of low rig utilization.
Each year we evaluate our rigs available for refurbishment, if any, and determine our
intentions for their future use. This evaluation takes into consideration, among other things, the
physical condition and marketability of the rig, and projected reactivation or refurbishment cost.
To the extent that our estimates of refurbishment and reactivation cost, undiscounted future net
cash flows or fair market value change or there is a deterioration in the physical condition of the
rigs available for refurbishment, we could be required under SFAS No. 144 to record an impairment
charge. During the first six months of 2008, no impairment of our long-lived assets was recorded as
no change in circumstances indicated that the carrying value of the assets was not recoverable.
Goodwill
During 2004, we completed the acquisition of New Patriot Drilling Corp., which was accounted
for as a business combination in accordance with SFAS No. 141, Business Combinations. In
conjunction with the purchase price allocation for this acquisition, we recorded goodwill of $10.4
million.
Goodwill represents the excess of costs over the fair value of assets of businesses acquired.
None of the goodwill resulting from this acquisition is deductible for tax purposes. We follow the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142,
goodwill and intangible assets acquired in a purchase business combination and determined to have
an indefinite useful life are not amortized, but instead are tested for impairment at least
annually in accordance with the provisions of this statement. During the first six months of 2008,
no impairment of our goodwill was recorded.
Revenue Recognition
Revenues are earned under daywork and turnkey contracts. Revenue from daywork contracts is
recognized when it is realized or realizable and earned. On daywork contracts, revenue is
recognized based on the number of days completed at fixed rates stipulated by the contract. For
certain contracts, we receive lump-sum fees for mobilization of equipment. Mobilization fees and
the related costs are deferred and amortized over the contract term. Revenue from turnkey drilling
contracts is recognized using the percentage-of-completion method based upon costs incurred to date
compared to our estimate of the total contract costs. Under the percentage-of-completion method, we
make estimates of the total contract costs to be incurred, and to the extent these estimates
change, the amount of revenue recognized could be affected. The significance of the accrued turnkey
revenue varies from period to period depending on the timing of our turnkey projects, the overall
level of demand for our services and the portion of that demand that is for turnkey services. At
June 30, 2008, there were eight turnkey wells in progress versus 11 wells at June 30, 2007, with
accrued revenue of $17.6 million and $24.6 million, respectively at such dates. Anticipated losses,
if any, on uncompleted contracts are recorded at the time our estimated costs exceed the contract
revenue.
Insurance Accruals
We maintain insurance coverage related to workers compensation and general liability claims
up to $1.0 million per occurrence with an aggregate of $2.0 million for general liability claims.
These policies include deductibles of $500,000 per occurrence for workers compensation coverage
and $250,000 per occurrence for general liability coverage. If losses should exceed the workers
compensation and general liability policy amounts, we have excess liability coverage up to a
maximum of
-21-
$100.0 million. At June 30, 2008 and December 31, 2007, we had $21.9 million and $19.9 million,
respectively, accrued for losses incurred within the deductible amounts for workers compensation,
general liability claims and for uninsured claims. These amounts are included in current accrued
workers compensation and other long-term liabilities on the balance sheet.
The amount accrued for the provision for losses incurred varies depending on the number and
nature of the claims outstanding at the balance sheet dates. In addition, the accrual includes
managements estimate of the future cost to settle each claim such as future changes in the
severity of the claim and increases in medical costs. We use third parties to assist us in
developing our estimate of the ultimate costs to settle each claim, which is based upon historical
experience associated with the type of each claim and specific information related to each claim.
The specific circumstances of each claim may change over time prior to settlement and as a result,
our estimates made on the balance sheet dates may change.
Income Taxes
We are subject to income and other similar taxes in all areas in which we operate. When
recording income tax expense, certain estimates are required because: (a) income tax returns are
generally filed months after the close of our annual accounting period; (b) tax returns are subject
to audit by taxing authorities and audits can often take years to complete and settle; and (c)
future events often impact the timing of when we recognize income tax expenses and benefits. We
have deferred tax assets mostly relating to workers compensation liabilities and stock-based
compensation awards. We routinely evaluate all deferred tax assets to determine the likelihood of
their realization.
We follow the provisions of FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes. As of June 30, 2008, we had $1.5 million of unrecognized tax benefits, all of which
could have an impact on the effective tax rate, net of federal tax benefits, if recognized. Our
policy is to accrue interest and penalties associated with uncertain tax positions in income tax
expense. At June 30, 2008, there was $402,000 of interest and penalties accrued in connection with
uncertain tax positions. The tax years that remain open to examination by the major taxing
jurisdictions to which we are subject range from 1996 to 2007. We have identified our major taxing
jurisdictions as the United States, and the states of Texas and Louisiana.
-22-
Financial Condition and Liquidity
The following table summarizes our financial condition as of June 30, 2008 and December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Working capital
|
|
$
|
369,543
|
|
|
|
31
|
|
|
$
|
338,804
|
|
|
|
31
|
|
Property and equipment, net
|
|
|
781,952
|
|
|
|
66
|
|
|
|
737,944
|
|
|
|
67
|
|
Goodwill
|
|
|
10,377
|
|
|
|
1
|
|
|
|
10,377
|
|
|
|
1
|
|
Other noncurrent assets, net
|
|
|
20,598
|
|
|
|
2
|
|
|
|
16,153
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,182,470
|
|
|
|
100
|
|
|
$
|
1,103,278
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
275,000
|
|
|
|
23
|
|
|
$
|
275,000
|
|
|
|
25
|
|
Other long-term liabilities
|
|
|
181,954
|
|
|
|
15
|
|
|
|
168,769
|
|
|
|
15
|
|
Shareholders equity
|
|
|
725,516
|
|
|
|
62
|
|
|
|
659,509
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,182,470
|
|
|
|
100
|
|
|
$
|
1,103,278
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Changes in Financial Condition
The significant changes in our financial condition from December 31, 2007 to June 30, 2008 are
an increase in working capital of $30.7 million, an increase in net property and equipment of $44.0
million, and an increase in shareholders equity of $66.0 million.
The increase in working capital is primarily the result of higher balances in cash and cash
equivalents being partially offset by an increase in trade accounts payable and a decrease in
accounts receivable. The increase in cash and cash equivalents is due primarily to net income for
the first six months of 2008. The increase in accounts payable is primarily due to the timing of
payments made for capital expenditures and operating costs. The decrease in accounts receivable is
due to the timing of collections.
The increase in net property and equipment is primarily due to capital expenditures made
during 2008. Capital expenditures of $96.1 million in 2008 included costs for betterments and
improvements to our rigs, new rig purchases, the acquisition of drill pipe and drill collars, top
drive purchases, and other capital items. The increase in shareholders equity is primarily due to
net income for the period.
Long-Term Debt
As of June 30, 2008, our $275.0 million of long-term debt consists of $150.0 million of 3.75%
Contingent Convertible Senior Notes due 2023 (the 3.75% Notes) and $125.0 million of Floating
Rate Contingent Convertible Senior Notes due 2024 (the Floating Rate Notes). Our subsidiary, Grey
Wolf Drilling Company L.P., has a $100.0 million credit facility with the CIT Group/Business
Credit, Inc. (the CIT Facility) which expires on December 31, 2008.
3.75% Notes
The 3.75% Notes bear interest at 3.75% per annum and mature on May 7, 2023. The 3.75% Notes
are general unsecured senior obligations and are fully and unconditionally guaranteed, on a joint
and
-23-
several basis, by all of our domestic wholly-owned subsidiaries. Non-guarantor subsidiaries are not
significant.
If the average trading price of the 3.75% Notes per $1,000 principal amount for the five
trading day period ending on the third trading day immediately preceding the first day of the
applicable six-month period (as defined below) equals $1,200 or more, we would be required to pay
contingent interest. Contingent interest would be payable at a rate equal to 0.50% per annum
during any six-month period, from May 7th to November 6th and from November 7th to May 6th, with
the initial six-month period commencing May 7, 2008. For the period of May 7, 2008 to November 6,
2008 the 3.75% notes did not trade at or above $1,200 for the time period required and therefore,
no contingent interest is payable.
We may redeem in cash some or all of the 3.75% Notes at any time on or after May 14, 2008, at
various redemption prices depending upon the date redeemed plus accrued but unpaid interest,
including contingent interest. As of the date of this report, we have not elected to redeem any of
the 3.75% Notes. Holders may require us to repurchase all or a portion of their 3.75% Notes on May
7, 2013 or May 7, 2018, and upon a change of control, as defined in the indenture governing the
3.75% Notes, at 100% of the principal amount of the 3.75% Notes, plus accrued but unpaid interest,
including contingent interest, if any, to the date of repurchase, payable in cash.
The 3.75% Notes are convertible into shares of our common stock, upon the occurrence of
certain events, at a conversion price of $6.45 per share. As of July 1, 2008, and at any time
during the third quarter of 2008, the 3.75% Notes are convertible into shares of our common stock
because the closing price per share of our common stock exceeded 110% of the conversion price
($7.10 per share) of the 3.75% Notes for at least 20 trading days in the period of 30 consecutive
trading days ended on June 30, 2008. Between July 7, 2008 and July 8, 2008, two note holders
exercised their right to convert $275,000 in principal amount of the notes into approximately
42,600 shares of our common stock, reducing the aggregate principal amount of the outstanding 3.75%
Notes to $149.7 million. The 3.75% Notes will cease to be convertible after September 30, 2008,
unless the trading price of our common stock again exceeds (as it did in the second quarter) 110%
of the conversion price of the 3.75% Notes for at least 20 trading days in the period of 30
consecutive trading days on the last trading day of the third quarter of 2008. In that event, the
3.75% Notes would remain convertible through the fourth quarter of 2008. The 3.75% Notes may also
become convertible (or remain convertible) in the fourth quarter or other future periods if any of
the other events that entitle holders to convert the 3.75% Notes occur.
Floating Rate Notes
The Floating Rate Notes bear interest at a per annum rate equal to 3-month LIBOR, adjusted
quarterly, minus a spread of 0.05% but will never be less than zero or more than 6.00%. For the
three months ended June 30, 2008 and 2007, the interest rate on the Floating Rate Notes was 2.65%
and 5.30%, respectively. For the third quarter of 2008, the interest rate has been set at 2.74%.
These notes mature on April 1, 2024. The Floating Rate Notes are general unsecured senior
obligations and are fully and unconditionally guaranteed, on a joint and several basis, by all of
our domestic wholly-owned subsidiaries. Non-guarantor subsidiaries are not significant.
We may redeem some or all of the Floating Rate Notes at any time on or after April 1, 2014, at
a redemption price equal to 100% of the principal amount of the Floating Rate Notes, plus accrued
but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash.
Holders may require us to repurchase all or a portion of the Floating Rate Notes on April 1, 2014
or April 1, 2019, and upon a change of control, as defined in the indenture governing the Floating
Rate Notes, at 100% of the principal amount of the Floating Rate Notes, plus accrued but unpaid
interest and liquidated damages, if any, to the date of repurchase, payable in cash.
The Floating Rate Notes are convertible into shares of our common stock, upon the occurrence
of certain events, at a conversion price of $6.51 per share. As of July 1, 2008, and at any time
during the
-24-
third quarter of 2008, the Floating Rate Notes are convertible into shares of our common stock
because the closing price per share of our common stock exceeded 120% of the conversion price
($7.81 per share) of the Floating Rate Notes for at least 20 trading days in the period of 30
consecutive trading days ended on June 30, 2008. As of the date of this report, none of the note
holders had exercised their right to convert the Floating Rate Notes into shares of our common
stock. The Floating Rate Notes will cease to be convertible after September 30, 2008, unless the
trading price of our common stock again exceeds (as it did in the second quarter) 120% of the
conversion price of the Floating Rate Notes for at least 20 trading days in the period of 30
consecutive trading days on the last trading day of the third quarter of 2008. In that event, the
Floating Rate Notes would remain convertible through the fourth quarter of 2008. The Floating Rate
Notes may also become convertible (or remain convertible) in the fourth quarter or other future
periods if any of the other events that entitle holders to convert the Floating Rate Notes occur.
CIT Facility
The CIT Facility provides us with the ability to borrow up to the lesser of $100.0 million or
50% of the Orderly Liquidation Value (as defined in the agreement) of certain drilling rig
equipment located in the 48 contiguous states of the United States of America. Periodic interest
payments are due at a floating rate based upon our debt service coverage ratio within a range of
either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to 1.50%. The CIT Facility provides up to
$50.0 million available for letters of credit. We are required to pay a quarterly commitment fee
ranging from 0.375% to 0.50% per annum on the unused portion of the CIT Facility. Letters of credit
accrue a fee of 1.25% per annum. These amounts are included in interest expense for the periods
presented. The CIT Facility contains affirmative and negative covenants and we are in compliance
with these covenants. Substantially all of our assets, including our drilling equipment, are
pledged as collateral under the CIT Facility which is also secured by a guarantee of Grey Wolf,
Inc. and guarantees of certain of our wholly-owned subsidiaries.
The CIT Facility allows us to repurchase shares of our common stock, pay dividends to our
shareholders, and make prepayments on the 3.75% Notes and the Floating Rate Notes. However, all of
the following conditions must be met to enable us to make payments for any of the above-mentioned
reasons: (i) payments may not exceed $150.0 million in the aggregate, (ii) no Default or Event of
Default shall exist at the time of any such payments, (iii) at least $35.0 million of Availability
(availability under the CIT Facility plus cash on hand) exists immediately after any such payments,
and (iv) we must provide CIT Group/Business Credit, Inc. three Business Days prior written notice
of any such payments. Capitalized terms used in the preceding sentence but not defined herein are
defined in the CIT Facility.
As of the date of this report, we did not have an outstanding balance under the CIT Facility
and had $30.9 million of undrawn standby letters of credit. These standby letters of credit are for
the benefit of various insurance companies as collateral for premiums and losses which may become
payable under the terms of the underlying insurance contracts. Outstanding letters of credit reduce
the amount available for borrowing under the CIT Facility.
-25-
Cash Flow
The net cash provided by or used in our operating, investing and financing activities is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
172,218
|
|
|
$
|
190,319
|
|
Investing activities
|
|
|
(104,214
|
)
|
|
|
(120,349
|
)
|
Financing activities
|
|
|
(2,644
|
)
|
|
|
(8,014
|
)
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
65,360
|
|
|
$
|
61,956
|
|
|
|
|
|
|
|
|
Our cash flows from operating activities are affected by a number of factors including the
number of rigs working under contract, whether the contracts are daywork or turnkey, and the rate
received for these services. Our cash flow from operating activities were $18.1 million lower for
the first six months of 2008 compared to the same period in 2007. This decrease is due primarily
to lower net income period over period.
Cash flow used in investing activities for the six months ended June 30, 2008 consisted of
$96.1 million of capital expenditures compared to $122.8 million of capital expenditures for the
six months ended June 30, 2007. Capital expenditures in 2008 and 2007 included betterments and
improvements to our rigs, the purchase of new rigs, the acquisition of drill pipe and collars, the
purchase of top drives and other capital items.
Cash flow used in financing activities for the six months ended June 30, 2008 consisted
primarily of $3.5 million in treasury stock purchases compared to $11.5 million in treasury stock
purchases for the six months ended June 30, 2007.
Projected Cash Sources and Uses
We expect to use cash generated from operations to meet our cash requirements, including debt
service on the 3.75% Notes and Floating Rate Notes, capital expenditures in 2008, tax payments, and
common stock repurchases. We will make quarterly interest payments on the Floating Rate Notes on
January 1, April 1, July 1 and October 1 of each year and semi-annual interest payments of $2.8
million on the 3.75% Notes on May 7 and November 7 of each year as long as those notes are
outstanding. We believe that we will have sufficient cash from operations to meet these
requirements. In future periods, we will continue to make interest payments on our Floating Rate
Notes and 3.75% Notes through the maturity dates. Since 2004, we have generated sufficient earnings
to cover debt related fixed charges, including interest. To the extent that we are unable to
generate sufficient cash from operations, we would be required to use cash on hand or draw on our
CIT Facility. In addition, under our previously announced stock repurchase program, we have the
ability to repurchase $28.1 million in common stock as of July 31, 2008, representing the remaining
amount approved under the plan.
-26-
Capital expenditures for 2008 are projected to be between $160 million and $170 million. This
includes approximately $34.6 million, net of $9.8 million of deposits made in 2007, for the
purchase of two new built-for-purpose rigs. We have obtained long-term contracts on each of these
rigs which, in the aggregate, are expected to generate revenue of approximately $47.4 million over
the term of the contracts. One of the new rigs began drilling in July of 2008, while the other is
expected to begin drilling in the fourth quarter of 2008.
In addition, our projected capital expenditures for the remainder of 2008 include costs for
betterments and improvements to our rigs, the acquisition of drill pipe and drill collars, the
purchase of top drives, and other capital items.
Inflation and Changing Prices
Contract drilling revenues do not necessarily track the changes in general inflation as they
tend to respond to the level of activity on the part of the oil and gas industry in combination
with the supply of equipment and the number of competing companies. Capital and operating costs are
influenced to a larger extent by specific price changes in the oil and natural gas industry, demand
for drilling services and to a lesser extent by changes in general inflation. Our daywork contracts
allow us to pass most wage increases, the most significant component of our operating costs, on to
our daywork customers in the form of higher dayrates.
Results of Operations
Our drilling contracts generally provide compensation on either a daywork or turnkey basis.
Successfully completed turnkey contracts generally result in higher revenues per rig day worked
than under daywork contracts. EBITDA per rig day worked on successful turnkey jobs are also
generally greater than under daywork contracts, although we are typically required to bear
additional operating costs (such as drill bits) and risk (such as loss of hole) that would
otherwise be assumed by the customer under a daywork contract. Contract drilling revenues and
EBITDA on turnkey contracts are affected by a number of variables, which include location of the
contracted work, the depth of the well, geological complexities and the actual difficulties
encountered in drilling the well.
Reconciliation of Non-GAAP Financial Measures
In the following discussion of the results of our operations and elsewhere in this filing, we
use EBITDA and EBITDA per rig day. EBITDA and EBITDA per rig day are non-GAAP financial measures
under the rules and regulations of the SEC. We believe that our disclosure of EBITDA and EBITDA per
rig day as a measure of our operating performance allows investors to make a direct comparison
between us and our competitors, without regard to differences in capital structure or to
differences in the cost basis of our rigs and those of our competitors. Investors should be aware,
however, that there are limitations inherent in using these performance measures as a measure of
overall company profitability because they exclude significant expense items such as depreciation
expense and interest expense. An improving trend in EBITDA or EBITDA per rig day may not be
indicative of an improvement in our overall profitability. To compensate for the limitations in
utilizing EBITDA and EBITDA per rig day as operating measures, our management also uses GAAP
measures of performance including operating income and net income to evaluate performance but only
with respect to the company as a whole and not on a per rig basis. In accordance with SEC rules, we
have included below a reconciliation of EBITDA to net income, which is the nearest comparable GAAP
financial measure.
-27-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Earnings before interest expense, income taxes,
depreciation and amortization
|
|
$
|
80,512
|
|
|
$
|
91,723
|
|
|
$
|
162,363
|
|
|
$
|
208,596
|
|
Depreciation and amortization
|
|
|
(26,994
|
)
|
|
|
(22,397
|
)
|
|
|
(54,753
|
)
|
|
|
(43,811
|
)
|
Interest expense
|
|
|
(2,709
|
)
|
|
|
(3,438
|
)
|
|
|
(6,046
|
)
|
|
|
(6,930
|
)
|
Total income tax expense
|
|
|
(18,511
|
)
|
|
|
(24,180
|
)
|
|
|
(37,943
|
)
|
|
|
(57,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
32,298
|
|
|
$
|
41,708
|
|
|
$
|
63,621
|
|
|
$
|
100,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended June 30, 2008 and 2007
The following table highlights rig days worked, contract drilling revenues, and EBITDA for our
daywork and turnkey operations for the three months ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
Daywork
|
|
|
Turnkey
|
|
|
|
|
|
|
Daywork
|
|
|
Turnkey
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
|
(Dollars in thousands except averages per rig day worked)
|
|
|
|
(Unaudited)
|
|
Rig days worked
|
|
|
8,862
|
|
|
|
665
|
|
|
|
9,527
|
|
|
|
8,715
|
|
|
|
761
|
|
|
|
9,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling revenues
|
|
$
|
175,637
|
|
|
$
|
41,070
|
|
|
$
|
216,707
|
|
|
$
|
186,225
|
|
|
$
|
41,295
|
|
|
$
|
227,520
|
|
Drilling operations expenses
|
|
|
(100,280
|
)
|
|
|
(29,673
|
)
|
|
|
(129,953
|
)
|
|
|
(100,762
|
)
|
|
|
(31,545
|
)
|
|
|
(132,307
|
)
|
General and administrative
expenses
|
|
|
(7,731
|
)
|
|
|
(490
|
)
|
|
|
(8,221
|
)
|
|
|
(6,659
|
)
|
|
|
(500
|
)
|
|
|
(7,159
|
)
|
Interest income
|
|
|
1,860
|
|
|
|
131
|
|
|
|
1,991
|
|
|
|
3,303
|
|
|
|
290
|
|
|
|
3,593
|
|
Gain (loss) on sale of assets
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
72
|
|
|
|
4
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
69,474
|
|
|
$
|
11,038
|
|
|
$
|
80,512
|
|
|
$
|
82,179
|
|
|
$
|
9,544
|
|
|
$
|
91,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average per rig day worked:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling revenues
|
|
$
|
19,819
|
|
|
$
|
61,759
|
|
|
$
|
22,747
|
|
|
$
|
21,368
|
|
|
$
|
54,264
|
|
|
$
|
24,010
|
|
EBITDA
|
|
$
|
7,840
|
|
|
$
|
16,598
|
|
|
$
|
8,451
|
|
|
$
|
9,430
|
|
|
$
|
12,541
|
|
|
$
|
9,680
|
|
Our EBITDA decreased by $11.2 million, or 12%, to $80.5 million for the quarter ended June 30,
2008 compared with the same period in 2007. The decrease resulted from a $12.7 million decrease in
EBITDA from daywork operations being partially offset by a $1.5 million increase in EBITDA from
turnkey operations. On a per rig day basis, our EBITDA decreased by $1,229 per rig day, or 13%, to
$8,451 in the second quarter of 2008 from $9,680 for the same period in 2007. This decrease
included a $1,590 per rig day decrease from daywork operations offset by a $4,057 per rig day
increase from turnkey operations. Total general and administrative expenses increased by $1.1
million due primarily to higher costs for stock-based compensation and higher payroll costs. Total
interest income decreased by $1.6 million due to lower interest rates during the second quarter of
2008 compared with the same period in 2007.
-28-
Daywork Operations
Despite the slight increase in rig days worked, the decrease in daywork EBITDA discussed above
was due primarily to lower dayrates in the second quarter of 2008 versus the same period in 2007.
Contract drilling revenue per rig day decreased $1,549, or 7% due to declining dayrates as a result
of the excess capacity of land rigs in the industry that began in 2007. Our rig days worked
increased 147 days, or 2%, for the second quarter of 2008 compared with the same period in 2007 as
a result of the recent increase in demand for our services.
Turnkey Operations
Turnkey EBITDA was higher in the second quarter of 2008 compared to the second quarter of 2007
primarily due to the success of the wells drilled period over period. The complexity and success
of the wells drilled are contributing factors to EBITDA and EBITDA per rig day fluctuations.
Other
Depreciation and amortization expense increased by $4.6 million, or 21%, to $27.0 million for
the three months ended June 30, 2008, compared to the same period in 2007. The increase in
depreciation and amortization expense was due to capital expenditures made during 2007 and 2008,
including the cost to purchase and construct new rigs.
Interest expense decreased by $729,000, or 21%, to $2.7 million for the three months ended
June 30, 2008 from $3.4 million for the same period in 2007. This decrease is due primarily to a
lower average interest rate on our Floating Rate Notes during the three months ended June 30, 2008
as compared to the three months ended June 30, 2007. There has been no change in our debt balance
that would have impacted interest expense for either period.
Our income tax expense decreased by $5.7 million to $18.5 million for second quarter of 2008
compared to the same period in 2007. The decrease is primarily due to the lower level of income for
the second quarter of 2008.
-29-
Comparison of the Six Months Ended June 30, 2008 and 2007
The following tables highlight rig days worked, contract drilling revenue and EBITDA for our
daywork and turnkey operations for the six months ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
Daywork
|
|
|
Turnkey
|
|
|
|
|
|
|
Daywork
|
|
|
Turnkey
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
|
(Dollars in thousands except averages per rig day worked)
|
|
|
|
(Unaudited)
|
|
Rig days worked
|
|
|
17,395
|
|
|
|
1,269
|
|
|
|
18,664
|
|
|
|
18,017
|
|
|
|
1,380
|
|
|
|
19,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling revenues
|
|
$
|
347,981
|
|
|
$
|
70,248
|
|
|
$
|
418,229
|
|
|
$
|
393,589
|
|
|
$
|
75,944
|
|
|
$
|
469,533
|
|
Drilling operations expenses
|
|
|
(193,180
|
)
|
|
|
(50,281
|
)
|
|
|
(243,461
|
)
|
|
|
(200,625
|
)
|
|
|
(52,635
|
)
|
|
|
(253,260
|
)
|
General and administrative
expenses
|
|
|
(15,850
|
)
|
|
|
(983
|
)
|
|
|
(16,833
|
)
|
|
|
(13,617
|
)
|
|
|
(941
|
)
|
|
|
(14,558
|
)
|
Interest income
|
|
|
4,182
|
|
|
|
296
|
|
|
|
4,478
|
|
|
|
6,264
|
|
|
|
488
|
|
|
|
6,752
|
|
Gain on sale of assets
|
|
|
(48
|
)
|
|
|
(2
|
)
|
|
|
(50
|
)
|
|
|
110
|
|
|
|
19
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
143,085
|
|
|
$
|
19,278
|
|
|
$
|
162,363
|
|
|
$
|
185,721
|
|
|
$
|
22,875
|
|
|
$
|
208,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average per rig day worked:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling
revenues
|
|
$
|
20,005
|
|
|
$
|
55,357
|
|
|
$
|
22,408
|
|
|
$
|
21,845
|
|
|
$
|
55,032
|
|
|
$
|
24,206
|
|
EBITDA
|
|
$
|
8,226
|
|
|
$
|
15,191
|
|
|
$
|
8,699
|
|
|
$
|
10,308
|
|
|
$
|
16,576
|
|
|
$
|
10,754
|
|
Our EBITDA decreased by $46.2 million, or 22%, to $162.4 million for the six months ended June
30, 2008 compared to the same period in 2007. The decrease resulted from a $42.6 million decrease
in EBITDA from daywork operations and a $3.6 million decrease in EBITDA from turnkey operations. On
a per rig day basis, our total EBITDA decreased by $2,055 per rig day, or 19% to $8,699 for the
first six months of 2008 from $10,754 for the same period in 2007. This decrease included a $2,082
per rig day decrease from daywork operations and a $1,385 per rig day decrease from turnkey
operations. Total general and administrative expenses increased by $2.3 million due primarily to
higher costs for stock-based compensation and higher payroll costs. Total interest income decreased
by $2.3 million due to lower interest rates during the first six months of 2008 compared with the
same period in 2007.
Daywork Operations
The decrease in daywork EBITDA discussed above was due primarily to lower dayrates and
decreased rig activity in the first six months of 2008 versus the same period in 2007. Contract
drilling revenue per rig day decreased $1,840, or 8% due to declining dayrates as a result of the
excess capacity of land rigs in the industry that began in 2007. Our rig days worked declined 622
days, or 3%, for the first six months of 2008 compared with the same period in 2007 due to the
excess rig capacity.
Turnkey Operations
Turnkey EBITDA was lower for the six months ended June 30, 2008 due to a decrease in rig days
worked and lower revenues on turnkey contracts. Rig days worked decreased by 111 days, or 8% for
the six months ended June 30, 2008 compared to the same period in 2007. Also, differences in the
complexity and success of the wells drilled between the two periods contributed to the decreased
EBITDA and EBITDA per rig day.
-30-
Other
Depreciation and amortization expense increased by $10.9 million, or 25%, to $54.8 million for
the six months ended June 30, 2008 compared to the same period in 2007. Depreciation and
amortization expense is higher due to capital expenditures made during 2007 and 2008, including the
cost to purchase and construct new rigs.
Interest expense decreased by $884,000, or 13%, to $6.0 million for the six months ended June
30, 2008 from $6.9 million for the same period in 2007. This decrease is due primarily to a lower
average interest rate on our Floating Rate Notes during the six months ended June 30, 2008 as
compared to the six months ended June 30, 2007. There has been no change in our debt balance that
would have impacted interest expense for either period.
Our income taxes decreased by $19.6 million to $37.9 million for the six months ended June 30,
2008 compared to the same period in 2007. The decrease is primarily due to the lower level of
income.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates on the Floating
Rate Notes and the CIT Facility. The Floating Rate Notes bear interest at a per annum rate which is
equal to 3-month LIBOR, adjusted quarterly, minus a spread of 0.05%. We had $125.0 million of the
Floating Rate Notes outstanding at June 30, 2008. A 1% change in the interest rate on the Floating
Rate Notes would change our interest expense by $1.3 million on an annual basis. However, the
annual interest on the Floating Rate Notes will never be below zero or more than 6.00%, which could
yield interest expense ranging from zero to $7.5 million on an annual basis. Interest on borrowings
under the CIT Facility accrues at a variable rate, using either the prime rate plus 0.25% to 1.50%
or LIBOR plus 1.75% to 3.50%, depending upon our debt service coverage ratio for the trailing 12
month period. We have no outstanding balance under the CIT Facility at July 31, 2008 and as such
have no exposure under this facility to a change in interest rates.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2008, under the supervision, and with participation, of management,
including our Chief Executive Officer and Chief Financial Officer. Our disclosure controls and
procedures are designed to ensure that the information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to
the issuers management including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that these controls and
procedures are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
-31-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in litigation incidental to the conduct of our business, none of which
management believes is, individually or in the aggregate, material to our consolidated financial
condition or results of operations. See Note 6 Contingencies in Notes to Consolidated Financial
Statements.
Item 1a. Risk Factors
There have been no material changes to our risk factors, except as noted below, since we last
reported under Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 31,
2007.
We have incurred significant transaction costs in connection with the terminated merger with Basic
Energy Services, Inc. (Basic).
We expect to pay significant transaction costs in connection with the activities of the
terminated merger. These transaction costs include investment banking, legal and accounting fees
and expenses, expenses associated with the financing of the merger, governmental filing fees,
printing expenses, mailing expenses and other related charges. We expect to take a pre-tax charge
to earnings of approximately $17.0 million during the third quarter of 2008 related to these
transaction costs, including a $5.0 million termination fee paid to Basic. Should we enter into an
agreement of similar nature with another company within one year of the termination date of the
agreement with Basic, we may be required to pay Basic an additional $25.0 million fee upon
consummation of the subsequent transaction.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information relating to Grey Wolfs repurchase of common stock
during the three months ended June 30, 2008 (in thousands, except average price paid per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Dollar Value of
|
|
|
|
|
|
|
Purchased as
|
|
Shares that May
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
Yet be Purchased
|
|
|
of Shares
|
|
Price Paid per
|
|
Announced
|
|
Under the
|
Period
|
|
Purchased
(1)
|
|
Share
|
|
Program
|
|
Program
(2)
|
April 1, 2008 to April 30, 2008
|
|
|
3
|
|
|
$
|
7.09
|
|
|
|
|
$
|
28,070
|
|
May 1, 2008 to May 31, 2008
|
|
|
4
|
|
|
$
|
7.82
|
|
|
|
|
$
|
28,070
|
|
June 1, 2008 to June 30, 2008
|
|
|
1
|
|
|
$
|
9.38
|
|
|
|
|
$
|
28,070
|
|
|
|
|
(1)
|
|
Our employees may elect to have shares of stock withheld to cover payroll taxes when
shares of restricted stock vest. We then pay the taxes on their behalf and hold the shares
withheld as treasury stock. We had approximately 8,000 of such treasury share purchases
during the three months ended June 30, 2008. These share repurchases are not covered under
a publicly announced program.
|
|
(2)
|
|
On May 25, 2006, we announced that our Board of Directors approved a plan authorizing
the repurchase of up to $100.0 million of Grey Wolf common stock in open market or in
privately negotiated block-trade transactions. On September 25, 2007, we announced that our
Board of Directors authorized a $50.0 million increase in our common stock repurchase
program for a total of $150.0 million. The number of shares to be purchased and the timing
of purchases will be based on several factors, including the price of the common stock,
general market conditions, available cash and alternate investment opportunities. The stock
repurchase program is subject to termination prior to completion.
|
-32-
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical facts included in this
report are forward-looking statements, including statements regarding the following:
|
|
|
business strategy;
|
|
|
|
|
demand for our services;
|
|
|
|
|
spending by our customers;
|
|
|
|
|
projected rig activity;
|
|
|
|
|
increases in rig supply and its effects on us;
|
|
|
|
|
projected dayrates;
|
|
|
|
|
projected interest expense;
|
|
|
|
|
projected tax rate;
|
|
|
|
|
rigs expected to be engaged in turnkey operations;
|
|
|
|
|
cost of building new rigs, delivery times and deployment destinations of these rigs;
|
|
|
|
|
the ability to recover the purchase price of rigs from term contracts;
|
|
|
|
|
the availability and financial terms of term contracts;
|
|
|
|
|
wage rates and retention of employees;
|
|
|
|
|
sufficiency of our capital resources and liquidity;
|
|
|
|
|
projected depreciation and capital expenditures;
|
|
|
|
|
future common stock repurchases by us;
|
|
|
|
|
projected sources and uses of cash; and
|
|
|
|
|
matters discussed in Item 2 under the caption Financial Outlook.
|
Although we believe the forward-looking statements are reasonable, we cannot assure you that
these statements will prove to be correct. We have based these statements on assumptions and
analyses in light of our experience and perception of historical trends, current conditions,
expected future developments and other factors we believe are appropriate when the statements are
made. Important factors that could cause actual results to differ materially from our expectations
include:
|
|
|
fluctuations in prices and demand for oil and natural gas;
|
|
|
|
|
fluctuations in levels of oil and natural gas exploration and development
activities;
|
|
|
|
|
fluctuations in demand for contract land drilling services;
|
|
|
|
|
fluctuations in interest rates;
|
|
|
|
|
the existence and competitive responses of our competitors;
|
|
|
|
|
uninsured or underinsured casualty losses;
|
|
|
|
|
technological changes and developments in the industry;
|
|
|
|
|
the existence of operating risks inherent in the contract land drilling industry;
|
|
|
|
|
U.S. and global economic conditions;
|
|
|
|
|
the availability and terms of insurance coverage;
|
|
|
|
|
the ability to attract and retain qualified personnel;
|
|
|
|
|
unforeseen operating costs such as cost for environmental remediation and turnkey
cost overruns; and
|
|
|
|
|
weather conditions.
|
-33-
Our forward-looking statements speak only as of the date specified in such statements or, if
no date is stated, as of the date of this report. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statement contained
in this report to reflect any change in our expectations or with regard to any change in events,
conditions or circumstances on which our forward-looking statements are based. Please refer to our
Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and
Exchange Commission for additional information concerning risk factors that could cause actual
results to differ from the forward-looking statements.
-34-
Item 6. Exhibits
|
3.1
|
|
Amended and Restated Articles of Incorporation of Grey Wolf, Inc. (incorporated
herein by reference to Exhibit 3.1 to Form 8-K filed May 21, 2007).
|
|
|
3.2
|
|
By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).
|
|
|
4.1
|
|
Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).
|
|
|
4.2
|
|
Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan
Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).
|
|
|
4.3
|
|
Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).
|
|
|
4.4
|
|
Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent
Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan
Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).
|
|
|
4.5
|
|
Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf,
Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent
Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).
|
|
|
4.6
|
|
Second Supplemental Indenture, dated as of March 31, 2004, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors,
and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by
reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).
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*31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
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*31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
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**32.1
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Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President
and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief
Financial Officer.
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*
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Filed herewith
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**
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Furnished, not filed, in accordance with Item 601(b)(32) of Regulation S-K.
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-35-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GREY WOLF, INC.
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Date: August 6, 2008
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By:
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/s/ David W. Wehlmann
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David W. Wehlmann
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Executive Vice President and
Chief Financial Officer
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-36-
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