Precision bets on natural gas with Grey Wolf bid

CALGARY, Alberta (Reuters) - Precision Drilling Trust (PD_u.TO), Canada's biggest oil and gas rig operator, will buy U.S.-based Grey Wolf Inc GW.A in a $2 billion deal aimed at locking up business in hot unconventional prospects from southern Texas to northeastern British Columbia.

The value of the friendly cash-and-stock offer is less than an offer Precision made for Grey Wolf in June, but natural gas prices have fallen more than 40 percent since then.

Precision, which operates about a quarter of Canada's land rigs, has been stalking Grey Wolf as a way to accelerate its U.S. expansion without flooding the market with new rigs.

The deal's success will ride on a recovery in gas prices, which will drive oil companies to boost spending on plays like Louisiana's Haynesville shale and British Columbia's Horn River shale, Pritchard Capital Partners analyst Mark Brown said.

"The stocks of these companies are highly dependent on natural gas prices and shareholder acceptance of this deal will be predicated on what the valuations look like depending on how that changes," Brown said. "It's going to be a huge driver."

Precision units sank nearly 5 percent to C$21.17 on the Toronto Stock Exchange. Grey Wolf shares were off 8 cents at $8.51 on the American Stock Exchange.

New York Mercantile Exchange gas was selling for $7.65 per million British thermal units on Monday, down from $13.35 at the end of June, when Grey Wolf spurned an unsolicited $10-per-share offer from Precision in hopes of proceeding with its own takeover of Basic Energy Services Inc (BAS.N).

Grey Wolf shareholders subsequently rejected that deal.

Under the new offer, Precision will pay $5.00 in cash and 0.1883 of one of its trust units for each Grey Wolf share.

That values each Grey Wolf share at $9.02, a 5 percent premium to Friday's closing price.

ABOUT-FACE FOR PRECISION

The U.S. firm's shareholders would own about 25 percent of the combined entity, and three Grey Wolf directors would be added to Calgary-based Precision's board.

Precision Chief Executive Kevin Neveu told a conference call he had no plans to reduce staff numbers.

The deal is an about-face for Precision, which sold most of its non-Canadian operations three years ago before becoming an income trust.

The government announced the next year that it would remove by 2011 the tax advantages that drove the growth of trusts.

Neveu expressed confidence that current weak gas prices were a blip and that demand for specialized oil field operations for unconventional plays, and rig rates, would remain high.

Such prospects are known for large reserves but require prolific drilling and rock fracturing techniques to keep output rising gradually. It takes more rigs to maintain output.

"None of us are basing this deal on the price of gas in August," he said.

"Long-term, we're very bullish on the tightness of the gas supply, and despite some relatively good response in the last few months on natural gas drilling in the U.S., unconventional gas has very aggressive decline rates."

The number of rigs searching for oil and gas onshore in North America rose by 11 percent in July from a year earlier to 2,276, according to data released by drill operator Baker Hughes.

The merged company would have a combined fleet of 371 drilling rigs and 229 service rigs as well as providing camp and catering, procurement, rig manufacturing and repair, wastewater treatment and a turnkey drilling business.

Neveu said he expected the transaction would boost Precision's cash flow per share by 11 percent to 13 percent in 2009.

The deal is subject to customary regulatory and Grey Wolf shareholder approvals, and is expected to close by December.

Deutsche Bank Securities and RBC Capital Markets were financial advisers to Precision on the transaction, and UBS Investment Bank advised Grey Wolf.

(Additional reporting by Matt Daily in New York and Anna Driver in Houston; Editing by Ted Kerr)