In his previous articles, "Value Digger" author has predicted the bankruptcies of Hercules (HERO), American Eagle (AMZG), Saratoga (SARA), Quicksilver (KWK). So he will most likely be right with KEG too....
The B3 Corporate Family Rating reflects Key Energy's very high financial leverage, exposure to the highly cyclical drilling and oilfield services (OFS) industry which is in the midst of a severe downturn, and declining equipment utilization, margins and cash flow trends. The rating is also constrained by the additional costs we expect the company will incur in resolving the FCPA violation charges. With proforma leverage rising near 7x as of March 31, 2015 (after backing out FCPA expenses), the company will have limited balance sheet capacity to weather a prolonged downturn. The B3 CFR is supported by Key Energy's leading industry position in the well servicing rig segment, diversified well-site service offerings and meaningful market share in a number of service segments, long standing operating relationships with many highly rated upstream customers and wider geographic reach compared to smaller, regional oilfield services competitors. Key Energy's core businesses are focused on maintenance and enhancement of production from existing wells which tends to be less volatile than services that are geared towards new well drilling and completion.
The structurally superior position of the senior secured ABL and term loan credit facilities relative to the company's senior unsecured notes causes the notes to be rated Caa1, one-notch below the B3 CFR, under Moody's Loss Given Default Methodology.
Global Credit Research - 02 Jun 2015
Approximately $675 million of senior notes affected
New York, June 02, 2015 -- Moody's Investors Service (Moody's) downgraded Key Energy Services, Inc.'s Corporate Family Rating (CFR) to B3 from B1, senior unsecured notes rating to Caa1 from B2 and affirmed its SGL-3 Speculative Grade Liquidity Rating. The rating outlook remains negative.
"The downgrade reflects a sharp increase in Key Energy's leverage caused by recent weak operating performance and a 24% increase in debt following its refinancing transaction announced on June 1, 2015 that will push leverage and debt service costs to a very high level in a challenging industry environment," said Sajjad Alam, Moody's Assistant Vice President-Analyst. "Moody's expects low oil and natural gas prices to keep upstream customer demand at depressed levels limiting Key Energy's cash flow generation and deleveraging through 2016."
The negative outlook reflects significant ongoing cash expenditures (~$59 million as of Q1-2015) associated with the ongoing Foreign Corrupt Practices Act (FCPA) investigations, the uncertainty around final resolution of these legal matters and the severity of any potential penalties or fines that could further pressure liquidity and credit metrics. The negative outlook also captures the near term risks of further deterioration in operating performance.
Your target of $40-50M in adj EBITDA in 2015 is very optimistic. Even if they hit this target, they can't serve their debt. They burn cash, and they keep borrowing money from the bank, see their CF statement in Q1.
They made only $600K in adj EBITDA in Q1 and they bring all the international rigs back home in Q2. Be forward-thinker. The US drilling market is a weak market. KEG can't make more than $30M - $35M adj EBITDA in 2015 at best. Even if they make $50M in adj EBITDA in 2015 (highly unlikely because they made only $600K in Q1), they can't serve a debt that is 15 times higher than their EBITDA.