For This Texas Oil & Gas Co. There Will Be A Term Loan
April 23, 2008
Paramount Vantage
Investors, are you thirsty for an energy-focused debt milkshake? Get out your long straws. UBS and Goldman Sachs in a few months will issue a $600 million term loan B for Houston-based oil and gas driller Grey Wolf, according to a Grey Wolf spokeswoman. The proceeds from the term loan will help fund the April 21 merger between Grey Wolf and Midland, Texas-based Basic Energy Services. The deal is expected to close early in third quarter, conditional on shareholder and regulatory approval.
Grey Wolf is large provider of contract land drilling in the U.S. It serves oil and gas companies with 121 operations in Texas, the Southeast, the Midwest and Rocky Mountains. Basic Energy is one of the countries largest contractors servicing rigs in more than 11 states. “Grey Wolf’s premium land drilling rig fleet complements Basic Energy Service’s premium land-based well servicing unit,” Grey Wolf CEO Thomas Richards said in a release.
The two companies generated $632 million in Ebidta on sales of almost $1.8 billion in 2007, 53% of which came from contract drilling, 19% from servicing, 15% from fluid services and 13% from completion and remedial services.
The estimated value of the newly-formed company would be approximately $2.9 billion, the company release said.
Grey Wolf shareholders will receive $1.82 in cash and 0.25 in a share of the new company, which will retain the Grey Wolf name, for each share they now own, according to the release. Basic shareholders will receive $6.70 per share in cash and roughly 0.92 in the new company. Grey Wolf shareholders will own 54% of the combined company’s 85 million shares and Basic shareholders 46%.
Basic’s CEO Ken Huseman said in a release that he does not expect integration issues. “We’re not piling everyone into one facility and trying to save money,” he said. “And we have a track record of integrating acquisitions in a way in which the combined entity is more successful than when run separately.”
Standard and Poor’s on April 22 placed the ratings of Grey Wolf and Basic Energy Services on CreditWatch with positive implications. Both companies are rated BB-.
Despite the additional debt, S&P said it expects pro forma leverage to remain relatively modest at below 2.0x on a debt-to-Ebitda basis. Furthermore, the expected free cash flow profile of the combined entity could allow for some debt reduction over the intermediate term.
The positive CreditWatch ratings reflect the potential for a ratings upgrade or affirmation in the near future. Substantially increased operations scale, a broadened product and service offering and moderate pro forma debt leverage could warrant an upgrade, S&P analysts said.
The outlook for the oil and gas industry is expected to remain strong throughout 2008 due to the impact of high commodity prices and a tight supply/demand balance, according to analysts at Fitch Ratings. This is offset by the challenges the industry faces in the form of cost inflation (including high drilling costs), commodity price volatility and resource access and reserve replacement issues, the analysts said in a recent report.
Fitch’s outlook for the drilling sector in particular is stable. Contractors continue to experience robust credit metrics as activity levels remain high.
However, land-based drilling, particularly in North America, is expected to remain weak relative to the market highs of the past few years, Fitch analysts said. While they don’t anticipate a sharp drop-off in drilling levels, the analysts said pricing is expected to remain weak as new rigs continue to enter the market and displace older rigs.
In January, BNP Paribas syndicated a $400 million second-lien term loan priced at Libor plus 500 bps for Linn Energy, another Houston-based driller. While most loans are being issued at steep discounts, Linn’s second lien syndicated with an OID of 99.5. The proceeds from the second lien helped finance the acquisition of oil and gas properties from Lamamco Drilling Company.
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