?The drop in gas prices during the past several months could suggest that the U.S. land-rig count will peak in the fourth quarter, says Pritchard Capital Partners LLC senior analyst Mark Brown. It could also signal the start of a wave of mergers and acquisitions.
“We believe that a number of factors suggest that there is the potential for renewed M&A activity among land drillers,” Brown says. If a peak is reached in the fourth quarter, “we believe that this could cause valuations to come down to levels that could trigger M&A activity.”
The recent $2-billion acquisition of Grey Wolf Inc. by Precision Drilling Trust may not be the last such event among land drillers.
Under the terms of the agreement, Precision will pay US$5 in cash and 0.1883 newly issued Precision unit per Grey Wolf share for a total of US$1.12 billion in cash and 42 million units. The purchase price represents approximately a 4.5% increase in the number of units offered since Precision’s last announcement of its intention to acquire Grey Wolf. Grey Wolf shareholders will hold approximately 25% of the combined entity.
“Further, we believe that long-term onshore drilling fundamentals are sufficiently strong to compel such additional takeout attempts,” Brown says. He adds that Land Rig Newsletter has noted how changes in commodity prices typically affect the rig count after a 90-day lag.
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