10370 Richmond Avenue, Suite 600
Company Perspectives:
As a supplier of land drilling services, our business depends on the level of drilling activity by oil and gas exploration and production companies operating in the geographic markets where we operate. The number of wells they choose to drill is strongly influenced by past trends in oil and gas prices, current prices, and their outlook for future oil and gas prices within those geographic markets. Low oil and gas prices, or the perception among oil and gas companies that future prices are likely to decline, can materially and adversely affect us in many ways, including: our revenues, cash flows and earnings; the fair market value of our rig fleet; our ability to maintain or increase our borrowing capacity; our ability to obtain additional capital to finance our business and make acquisitions, and the cost of that capital; and our ability to retain skilled rig personnel who we would need in the event of a upturn in the demand for our services.
Grey Wolf, Inc., formerly DI Industries, is a Houston-based company that does onshore contract drilling, principally for natural gas. In its domestic operations, it uses a fleet of 120 drilling rigs. For years it operated drilling rigs overseas, but in 1998, in Venezuela, it shut down the last five rigs in its international operations. The company currently concentrates its operations on four regions: South Texas; the Gulf Coast (Louisiana and Texas); Ark-La-Tex (southern Arkansas, northern Louisiana, and northeastern Texas); and southern Mississippi and Alabama. Although reeling from slumping oil and gas prices in the late 1990s, which forced the company to sell off some of its nonessential assets and cut its work force, Grey Wolf has started a strong recovery. The company has also entered a new drilling market, the Rocky Mountains, through a drilling contract with Burlington Resources.
1980–89: Origins, the Oil Bust, and Overseas Opportunities
The company that emerged as Grey Wolf, Inc. in 1997, started out as DI Industries in 1980, an oil and gas exploration and production company founded by Max Dillard. The son of a drilling contractor, Dillard had entered the industry contracting business in 1969 and had worked his way up from the bottom.
In 1985, in response to growing demand for drilling rigs, DI Industries established Drillers, Inc., a subsidiary specializing in oil and gas contract drilling. It was bad timing. The domestic oil industry went into a tailspin at about the same time, compelling DI to make some major adjustments to the depressed market conditions. In 1986, the company only had 16 drilling rigs. Its business had also turned topsy-turvy. Early on, it had generated 90 percent of its revenues from oil and gas drilling and exploration and only ten percent from industrial work; then, all of a sudden, industrial work accounted for 80 percent of its business and all of its profits. To stay alive, DI took on turnkey jobs and diversified. In the process, it bid on some high-risk assignments, including, for example, drilling wells on the Strategic Petroleum Reserve at Choctaw Bayou in Louisiana, which required boring into salt domes, a dangerous enterprise.
DI also started taking contracts for work abroad, in South and Central America, where, over the next few years, it began drilling operations in Argentina, El Salvador, Mexico, Guatemala, and Venezuela. Although there was a general global slowdown in the petroleum industry, most producing areas in the world were not hit as severely as those in the United States.
1990–2000: Tough Times, Restructuring, and Turning the Corner
Times turned ever tougher for DI in the 1990s, a decade in which the whole petroleum industry continued to reel from slumping or static oil prices, although for DI it started out on a positive note. Its revenues in 1990 jumped to $58 million, close to doubling the $32.5 million from the previous year. However, only in 1990 and 1997 did the company record net profits. That of 1990 was minimal ($1.8 million), and that of 1997 ($10.2 million) was tied to the purchase of the Grey Wolf Drilling Company, whose name DI then adopted as its own. The next year, 1998, despite its record-setting revenue production of $241.0 million, the company suffered a net loss of $83.2 million.
Efforts to sustain the company's growth never really abated, however. DI started out the decade with a zero debt service, which encouraged expansion even in the face of the industry's stagnation. In 1990 it was planning to construct a new rig yard to house big-hole drilling equipment it had purchased from Baker-Hughes in 1988. Also, after a public offering raised $15 million in new funds, DI bought a pair of oilfield rig-up supply yards from Rigs-R-Us, paying just over $1 million for the Houston and Odessa, Texas sites. DI wanted the yards to help its Alamo Machine and Tool subsidiary, an oilfield equipment supplier. It also bought the drilling assets of the Michigan-based James Bigard Drilling Co. The equipment, acquired for a little over $5 million in cash, included 12 rigs plus a trucking company with a 26-vehicle fleet, and some casing tools. The purchase pushed DI's rig count to 95.
During the next year, the demand for onshore rigs was again growing. With the industry seemingly on the road to recovery, DI increased its rig count to 100 by acquiring six rigs and some operational equipment from Woolf & McGee Inc. of Tyler, Texas. The price, paid half in cash and half in stock, was $3.4 million.
DI relied on a wider geographic distribution of its rigs to compensate for problems at specific sites, including not just a downturn in demand but such other factors as the weather. For example, in 1991, high rainfall in Louisiana and South Texas caused serious difficulties. DI was able to make up for the slowdowns by securing work-over contracts in Montana and Utah and by increasing its activity in Latin America, where there was a booming energy market in the early 1990s. The company began moving its idle, excess drilling rigs into markets in both Central and South America, including Argentina and Venezuela.
However, an increasing debt load, stiffer competition, and diminishing demands continued to take a big toll. After founder and CEO Max Dillard resigned in 1995, the company began cutting free assets that were not producing sufficient income. In the following year, attempting to rebound from 1995's heavy losses, DI Industries entered a complex merger with an unnamed private investment affiliate of New York-based Somerset Capital Partners and R.T. Oliver Inc., Land Rig Acquisition Corp., and two other unnamed parties. Under the terms of the agreement, DI was to issue up to 80 million shares of its common stock, or about two-thirds of its outstanding stock, retaining a 33 percent interest and majority control of the firm. In the deal, DI acquired 14 deep-well drilling rigs from the R.T. Oliver and Land Rig Acquisition.
Starting in 1996, DI also sold off all its oil and gas producing properties in South and Central America except those in Venezuela, and it also withdrew from some domestic, non-core markets, deliberately narrowing its focus. To replace Dillard, DI also brought Thomas P. Richards over from his post as senior vice-president in charge of worldwide operations for Diamond Offshore Drilling, Inc. Richards, a 54 year-old industry veteran, who had started out as a roughneck to help pay college expenses, had won considerable respect for his ability to bring together good management teams. According to Steve Webster, CEO of R&B Falcon Corp., and one involved in the recapitalization of DI, Richards "completely changed the character of the company in a short period of about 18 months."
Some help came in the form of a promising resurgence in the petroleum industry, which again increased demand for rigs. With Richards at the helm, DI began an aggressive expansion program, adding around 100 rigs in its fewer, more concentrated markets. The acquisitions started in 1996. First, in exchange for 5.5 million shares of its common stock, DI got all the south Texas operational assets of Mesa Drilling Inc. These included six diesel electric drilling rigs, three of which were in operation, and three of which were cold stacked but ready to be added to DI's Gulf Coast division. Then, towards the end of the year, for about $26 million, DI purchased all the land rigs and related equipment of Diamond Offshore Drilling Inc.
Early in 1997, DI bought Flournoy Drilling Company, an Alice, Texas-based outfit whose assets included 13 drilling rigs, 17 rig-hauling trucks, and yard and office facilities near Corpus Christi, Texas. The $38.9 million deal included an exchange of 12.4 million shares of DI's common stock plus a $800,000 outlay to retire Flournoy's debt.
A major purchase followed in March of the same year, when, for $61.6 million in cash and 14 million shares of stock, DI acquired Grey Wolf Drilling Co. (GWDC). That company, a Gulf coast drilling contractor, brought both its name and 18 rigs when the two companies merged, and the deal increased DI's domestic rig count to 67. GWDC was nearly 100 years old, having been led since 1978 by James K.B. Nelson, a graduate of Texas A&M University and longtime veteran of the drilling industry. Nelson would retire his positions as president and CEO of GWDC and retain a seat on the board of directors of the newly formed Grey Wolf Inc. The newly configured Grey Wolf continued to be led by CEO and President Richards.
GWDC was DI's fifth acquisition since its reorganization under Richards. The company had spent over $100 million to acquire 65 rigs, bringing its total count to 108 land rigs and five under labor contracts. And the acquisitions continued. In August 1997, it bought six idle land rigs and associated equipment from Cactus Drilling Co., at a cost of $23.7 million. The purchase increased Grey Wolf's total land rig fleet to 121, 29 of which were in its inventory of cold-stacked rigs needing refurbishing.
In 1998, for $56.4 million, the company also bought Murco Drilling Corporation. Murco, a Louisiana company, owned ten rigs operating in Louisiana and adjacent states. However, 1998 was not shaping up as a good year. Oil prices again slumped and the demand for land rigs once more dropped, forcing Grey Wolf to take some new belt-tightening measures. It reduced its work force, sold additional non-core assets, and ended its drilling in Venezuela, its last overseas operation. Still, even in the worst of the industry downswings, Grey Wolf looked for core-focused options that could help it recover from the negative impact of the faltering market.
Although losses continued through most of 2000, a break came in October of that year. The company signed a two-year, $11.6 million contract with Burlington Resources for the use of its ultra-deep drilling rig. That opened a new market for Grey Wolf: the Rocky Mountains. Furthermore, in February 2001, the company reported that in the fourth quarter of 2000, ending in December, it netted $5 million from $82.3 million in revenue. That was a major improvement over the same quarter from 1999, when, with revenues of $51.8 million, Grey Wolf went in the red by $8.1 million, bringing its net loss for the fiscal year to $41.3 million. According to Richards, it was the best quarter in the company's history and represented the upturn that the company had been looking for. The company still recorded a net loss of $9 million for fiscal 2000, but its revenues had climbed a whopping 82.7 percent, up to $269.0 million from $172.4 million in 1998. More important, the hoped for turnaround had started. Richards noted that the whole energy industry would continue to benefit from OPEC's spigot tightening, which between 1986 and 2001 had reduced excess world oil capacity from 14 million to just 8 million barrels. Richards believed 2001 would see the return of Grey Wolf to profitability. With the price of natural gas climbing to record highs through the winter of 2000-2001, it seemed to be a fairly safe prediction, at least in the short run.
Principal Subsidiaries:Drillers Inc.
Principal Divisions:Ark-La-Tex; Gulf Coast; South Texas.
Principal Competitors:Nabors Industries, Inc.; Pride International, Inc.; Rowan Companies, Inc.; Precision Drilling Corporation; Parker Drilling Company.
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