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Key Energy Services Inc. Message Board

  • messih1 messih1 Sep 27, 2013 12:52 PM Flag

    Understanding NES's Default Risk

    A couple of posters here and on SA have created a lot of fear about NES's potential to trip one (or more) of their debt covenants this quarter with the implication being that, if they do, the company will be bankrupt shortly thereafter. That is not how it works. For better or worse, NES's bank is in bed with the company for the long-term. Should NES trip their Total Debt Leverage ratio, the first (and most likely) step is that NES would go to the bank and get a waiver. As long as the bank sees that the company has the ability to get back in compliance in the future (over the next 3, 6 months or whatever), then they will likely grant the waiver and the problem is no longer a current problem. If they can't get in compliance over the given time period then the waiver can be extended or, a likely second step, is that the bank would restructure the debt -- different rates, repayment schedule, covenants, etc. NES is a long, long way from being bankrupt. If (and it's a big if right now) the company can grow it's operating cash flow in the near-to-mid term, then NES will be fine. If the posters are correct and NES has a flawed business model with declining longer-term prospects then they will not -- it's not all riding on Q3's debt covenants (or potential asset write down for that matter but more on that below).

    To be clear, if they miss their Q3 guidance the stock will be hammered (sub $1?) as management will have lost what little credibility they have left -- but the company will not be bankrupt. My point from this is that your investment decision with regard to NES should be focused on the longer-term prospects for the company and not Q3's possibility of tripping a debt covenant. If they beat on Q3 and raise for Q4 (I would like to say "as I expect them to do" but after their Q1 & Q2 performance who knows), then we will likely never hear from these posters again.

    Sentiment: Buy

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      Cost Analysis

      Below is a summary of the costs associated with the current typical operations for the supply, handling, transportation and storage of water needed for drilling and Fracking operations, as well as the costs for the typical means used to provide well pad protection.Assumptions:Location Size: 300' X 600'Above ground temporary protection: 30 Mil HDPE with Felt BaseFresh Water Requirement: 5.7 Million Gallons Per WellTruck Capacity: 160 Barrels (6,720 Gallons)Trucking Cost: $200/truckFresh water Cost: $0.35/barrel ($.0083/Gallon)Liner Cost: $1.00/Sq. Ft InstalledFelt Cost: $0.50/Sq. Ft InstalledSix (6) wells per pad.5,089 truckloads of water required to drill and Frack six (6) wells on a single pad.The following table illustrates assumed costs currently being incurred using traditional methods for containment and fresh water usage (based on 6 wells per pad):Estimated Site Development Costs using Current Technology(Based on 6 Wells Per Pad)Water Delivery Cost:5,089 trucks @ $200.00 ea. x 6 wells =$1,017,800.00Fresh Water Cost:(5,7M gals @ $.0083 ea.) x 6 wells =$283,860.00Temporary plastic applied on the surface of the well pad:  (90,000 SF @ $1.00/SF to drill each well) x 6 =$540,000.00 (90,000 SF @ $1.00/SF to frack each well) x 6 =$540,000.00Temporary felt applied under the plastic:  (90,000 SF @ $0.50/SF to drill each well) x 6 =$270,000.00 (90,000 SF @ $0.50/SF to drill each well) x 6 =$270,000.00 Total =$2,921,660.00** Total Cost is based on 6 wells per pad. The cost of water and delivery will increase with each additional well required. These figures DO NOT include the cost of on site or centralized impoundments and the associated piping to get water to the site which may be used to currently store fresh water. They also do not include the cost of removing the protective

    • I would also add that the same posters have made a great deal out of the possibility of a write down of the value of the TFI assets. Yes, it is a possibility and a write down of assets is never a good thing but most thoughtful investors (and I know there are many who think NES is short on those) are not going to make their investment decisions based on one-time, non-cash charges that have no effect on current operations. Best of luck to all.

      • 3 Replies to messih1
      • Mess I completely agree I pointed this out and tried to post again but they wouldn't allow me thank you it must have been the format or whatever Yahoo did not like. I will try and find rental day rate now and past and will let you know.
        it is also my experience that the last thing the banks want is for a business to fail (default) they tend to do workouts as long as the business model is still viable a strong customer base and growing are very good signs
        If cash flow is ok then nes should be fine it is a often over look component that is vital to young growing company (think bio tech)

        Fyi I have started and sold several companies and as long as the cash flow remained sufficient there never been a problem Just my experience thanks

      • I 100% agree with you messih1, and I'm the one that wrote the article. So thanks for the input. This isn't a bankruptcy issue or anything like that, just yet, but if the business keeps declining, as I suspect it will (given all the issues discussed), NES will ultimately be in A LOT of trouble.

        So you think that if they miss 3Q this stock goes sub $1? I still think 2H guidance is way too high. Is EBITDA really going to grow from $65 to $80? I don't think so. Anyway, seeing as i'm short, i'd love to see the stock under $1 on a miss. I'd also be comfortable loosing money if they outperform expectations. That's the way the game works!

      • Very reassuring in many ways, messih. Thanks for your work. Cleared up some issues. OTOH, knowing that if we miss in Q3, it could be "pink sheet ville" is still rather frightening. But I think I might take that bet.
        A concern that I have (because it's happened to me before) is an "out of the blue" announcement of a hugely dilutive secondary. If waivers, waiver extensions, renegotiated covenants, restructured debt don't get the co. back on track, is a secondary a possibility? Or by that time will the "writing be on the wall" so clear that a secondary couldn't possibly or in any way helpfully get underwritten?
        An interesting, and I think likely, result for Q3 will be good revs (at least 185M but I'm hoping for better) and good ebitda (something around 40M), but with the impairment charge. What do you think? Will Mr Market focus on the improved earnings/revs or on the impairment? Do you have an opinion on that?
        Again, thanks for some of the best reasoning to come out of the long camp in a while. I'll be anxiously awaiting tex's reply.

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