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Edited Transcript of KEG.N earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 Key Energy Services Inc Earnings Call

HOUSTON Sep 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Key Energy Services Inc earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Marshall Dodson

Key Energy Services, Inc. - Senior VP, CFO & Treasurer

* Katherine I. Hargis

Key Energy Services, Inc. - Senior VP, General Counsel & Corporate Secretary

* Robert J. Saltiel

Key Energy Services, Inc. - President, CEO & Director

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Conference Call Participants

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* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Services Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

Thank you. Miss Katherine Hargis, Senior Vice President and General Counsel, you may begin your conference.

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Katherine I. Hargis, Key Energy Services, Inc. - Senior VP, General Counsel & Corporate Secretary [2]

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Thank you, Erica, and thank you all for joining Key Energy Services for our second quarter 2019 financial results conference call. This call includes forward-looking statements. A number of factors could cause actual results to differ materially from the expectations expressed in this call including risk factors discussed in our 2018 Form 10-K and other reports most recently filed with the SEC, which are available on our website at www.keyenergy.com.

This call may also include references to non-GAAP financial measures. Please refer to our previously posted earnings release, which can be found on our website for a reconciliation of any non-GAAP financial measures provided in this call to the comparable GAAP financial measures.

For reference, our general investor presentation is available on Key's website at keyenergy.com under the Investor Relations tab.

On the call this morning is Rob Saltiel, Key's President and CEO; and Marshall Dodson, Key's CFO.

I'm now going to turn the call over to Rob.

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Robert J. Saltiel, Key Energy Services, Inc. - President, CEO & Director [3]

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Thank you, Katherine, and good morning to everyone joining today's call. For the second quarter, we generated revenue of $112.9 million, an increase of $3.7 million over the first quarter. Despite inclement weather at the start of the quarter and some customer slowdown near the end of the quarter, we saw revenue increases in our Rigs, Fishing & Rental and Coiled Tubing segments.

Our net loss for the second quarter was $18.3 million as compared to a net loss of $23.4 million in the first quarter with our adjusted EBITDA coming in at $1.6 million, an increase of $0.7 million from the $0.9 million of adjusted EBITDA generated in the first quarter.

Turning now to our reportable segments. Second quarter 2019 revenues in our Rig services segment were $67.9 million as compared to first quarter revenues of $65 million. The quarter-on-quarter revenue improvement was led by improvement in the Bakken where revenues grew 8% quarter-on-quarter and by higher activity in revenue in California.

Revenues in the Permian Basin were fairly flat quarter-on-quarter as weather impacts at the start of the quarter and customer slowdowns as we approach the end of the quarter weighed on our activity. We averaged 172 rigs working in the second quarter versus an average of 168 rigs working in the first quarter, and rig hours increased 2% to approximately 154,000 total hours worked during the quarter.

Our 24-hour average rig count was fairly flat at about 13 average rigs in the second quarter, though overall completion hours fell 3%. Completion hours comprised about 15% of our total rig hours down about 50 basis points from the first quarter. Revenue per rig hour increased 3% to $441 an hour in the second quarter from $430 an hour in the first quarter, largely due to geographic and job mix.

Overall pricing is stable, and we did receive a few low single-digit price increases this quarter. Margins were impacted slightly in the second quarter by low single-digit wage increases with adjusted EBITDA in this segment coming in at $11.6 million or 17% of revenues as compared to adjusted EBITDA of $11.6 million or 17.8% of revenues in the first quarter.

Our Fluid Management Services segment generated revenues of $18.5 million in the second quarter, down approximately $0.5 million from the first quarter, largely due to slower completions activity primarily in the Permian Basin.

Truck hours declined 4% to approximately 139,000 hours in the second quarter. In addition to the impact of lower activity, we also incurred costs associated with repairing some saltwater disposal wells, which impacted our earnings in the second quarter. We expect any saltwater disposal well repair cost to be significantly lower in the third quarter versus the second quarter.

Adjusted EBITDA for the segment fell to $1.6 million from $2.2 million in the first quarter. Revenue per truck hour increased slightly to $133 per hour in the second quarter compared to $131 an hour in the first quarter on revenue mix. Overall, pricing in this segment has been fairly stable, but it remains very competitive business.

Revenues in our Fishing & Rental segment were $14.8 million in the second quarter, up $0.2 million from our first quarter revenues of $14.6 million. Revenue increases in the Bakken and Permian Basin slightly outpaced a decline in revenue from our Central marketplace. Lower margins associated with the lower activity in our Central marketplace were not fully offset by the Permian and Bakken growth resulting in our adjusted EBITDA decline to $2.1 million in the second quarter from $2.7 million in the first quarter. We expect revenues and margins in this segment to be higher in the third quarter with the business activity in the Central picking up over second quarter levels.

Revenues increased 10% in our Coiled Tubing Services segment to $11.7 million from $10.7 million in the first quarter. Our average number of working large units was flat at approximately 2.5 large diameter units per day with the revenue increase due to geographic and job mix. We experienced low to single mid digit -- low to mid-single-digit price erosion in this segment due to competitive factors in the second quarter of 2019, which impacted our margins. Our adjusted EBITDA improved to a negative $0.3 million in the second quarter from a negative $0.8 million in the first quarter.

Since the 4th of July holiday period, we have seen better utilization of our large units averaging 3.5 units in July, a 10-month high for us, and we expect this to continue through the third quarter. With this improved utilization, we expect to see margins rise as well.

In addition to the higher activity for the large units, we have also been seeing an increase in demand for our 1.25-inch units for production work, largely for clean-outs of wellbores to increase production. Not surprisingly, the third quarter began slowly as the 4th of July holiday had many of our customers not resuming activity until after the holiday week was over. However, we exited July at higher levels of activity than we had at the end of June. And while difficult to predict at this point, we expect our third quarter revenues for the company to exceed those of the second quarter.

Marshall will now provide a few more details on the financials before I return for some closing comments. Marshall?

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [4]

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Thanks, Rob. Our second quarter 2019 consolidated revenues improved $3.7 million to $112.9 million from $109.3 million in the first quarter of 2019. Our consolidated operating loss improved from the loss of $15.3 million in the first quarter of 2019 to a loss of $14.4 million in the second quarter of 2019. I won't go back to what Bob's already covered.

So on a consolidated basis, G&A for the second quarter of 2019 was $22.5 million as compared to $22.1 million in the first quarter of 2019. G&A for the second quarter included a $2.2 million fee associated with the onetime project to receive a tax refund, which we have received. Excluding this fee, G&A was down in the second quarter on lower incentive compensation and the passing of the Q1 unemployment tax impact.

Also included in G&A for the second quarter was $1.3 million of equity-based compensation expense as compared to $0.7 million of equity-based compensation expense in the first quarter of 2019. Currently, our G&A run rate is around $22 million to $23 million a quarter inclusive of about $1 million in equity-based compensation expense.

Depreciation expense was $14.3 million in the second quarter of 2019, flat to the $14.3 million in the first quarter of 2019. We expect depreciation expense of between $14 million to $15 million a quarter in 2019.

Interest expense in the second quarter of 2019 was $8.5 million as compared to the $9.2 million in the first quarter of 2019. While we continue to fully provision any income tax benefit and do not envision being a cash taxpayer for some time with our NOLs, we have received tax refunds for prior periods and recorded a benefit in the second quarter of 2019 to reflect this. We do not expect to record an income tax benefit in coming quarters.

Cash flow used in operations was close to nil at $21,000 in the second quarter of 2019 and $11.4 million in the 6 months ended June 2019. Capital expenditures were $7.3 million for the second quarter of 2019 and $12.4 million for the 6 months ended in June 2019. We also had $2.4 million in proceeds from asset sales in the second quarter and $4.8 million of proceeds over the first half of 2019.

Our capital expenditures net of asset sales were $7.6 million for the first half of 2019. On a gross basis, we still expect around $20 million of capital expenditures in 2019 and about $13 million from asset sales for a net use of cash of around $7 million. We're continually assessing our capital spend relative to both our nonoperating cash inflows and the time frame of the benefits form that CapEx spending.

At the end of June, our total liquidity was $50.4 million as compared to $57.3 million at the end of the first quarter of 2019. Cash at the end of the second quarter was $29.3 million, and we had $21.1 million available under our ABL credit facility, which remains undrawn. Based on our current outlook and plans, we expect our liquidity to be around $40 million at the end of the next quarter as well as at the end of 2019. We continue to control those things we can, proactively managing our working capital, evaluating alternatives and pursuing options to increase cash flows in our liquidity.

The asset coverage ratio under our term loan stood at 1.79x at the end of the second quarter of 2019 as compared to the minimum required of 1.35x.

I'll now turn it back over to Rob.

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Robert J. Saltiel, Key Energy Services, Inc. - President, CEO & Director [5]

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Yes. Thanks, Marshall. We recognized that Key's financial performance has been disappointing, and improving this is the primary focus for this management team and for our Board. We operate in a very competitive space in every geography and in all 4 lines of our business. Demand for our services remains uneven and hard to predict with many of our E&P clients managing their spending on a monthly and quarterly basis to deliver on free cash flow objectives. We expect this to be the norm rather than the exception over the next 18 to 24 months given investor expectations for our customers to exercise increased financial discipline, coupled with concerns around macroeconomic headwinds and uncertainties regarding future commodity prices.

With this backdrop in mind, we've been reviewing and assessing all aspects of how we conduct our business to determine how to best operate in today's market. We have a number of initiatives underway, some aimed at increasing revenues while others are cost-focused to improve the cash we generate from our operations. We expect to see the impact from these initiatives on our financial performance starting in the fourth quarter.

We've been very public in our acknowledgment of the need for consolidation in our industry. It is simply the most efficient way to increase scale and reduce cost, both operating expenses and capital expenses, both corporate and in the field and to create value for investors. Every business line we compete in is very price-sensitive, so only the lowest-cost players can thrive through the cycle. An increasing scale for consolidation is an excellent way to reduce service cost to our clients, but it takes 2 willing Boards and shareholder bases to make consolidation happen, and so far, we have seen our industry stand on the sidelines in hope of a better tomorrow.

Looking at the share prices, it has not really worked out very well for any of us. While we continue to pursue attractive consolidation opportunities, we will also be improving our organization's focus and effectiveness to yield better financial performance and position Key to take advantage of the eventual recovery in our industry.

Erica, this concludes our prepared comments. So we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Mike Urban with Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

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Rob, I think at this point in the cycle, you guys ought to be pretty lean. So I'd be interested in where you think you can pull some additional cost out. And then I think you also said some of the initiatives that you have underway are also targeted at generating additional revenue, I was just wondering if you could give us a little bit of color on what exactly you're trying to do that -- to drive these improved results that, I guess, you have to start seeing in Q4.

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Robert J. Saltiel, Key Energy Services, Inc. - President, CEO & Director [3]

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Sure. Well, great question. Let me start with the cost side. And I think we just have to acknowledge that as 2019 certainly hasn't turned out to be the year that we hoped for a year ago and as the outlook for 2020 is certainly cloudy, we have to take a look at all of our costs again and again. And whereas we would certainly maintain that we are running a much leaner organization than we did before. I think we have to be honest about it and say that our tolerance for any unnecessary costs or costs that may be in reserve or potential growth that may not come, those have to be sacrificed and eliminated from our structure.

So again, I think this is something we've undertaken consistently quarter-to-quarter. But again, where we are today with the outlook that we've got, we feel that it is prudent to take a harder look at these costs, and some of those obviously will be corporate costs, some will be fuel costs, but we're going to take a very clean sheet of paper approach to our entire structure.

On the revenue side, I think we have to acknowledge as a company that Key Energy Services is really built to serve larger clients, clients who are more process-driven, focused on safety, focused on service quality, and as a company, we've -- we haven't always specialized our service as much as we can toward those clients. And we are taking a real good look about how we manage everything from our service delivery to our sales force to ensure that we've got what we need to serve those clients that ultimately are going to give us higher utilization in a lot of cases, higher margins than we would get from some of our smaller clients.

So those are some of the things that we're working on. And as we said in the prepared comments, some of these initiatives are still on early stages, but we're accelerating them to the point where they'll reflect in our financials starting in the fourth quarter.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

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That's helpful. And recognizing there, I'm sure there's very limited visibility at this point into Q4. So some of those benefits show up. From an activity standpoint, it seems like in the second quarter, the production services-related businesses probably did a little better, completions businesses maybe declined a little bit, which makes sense. How do you see the rest of the year playing out, again, given the preponderance of your businesses in production services? Those -- will those be more reflective of normal seasonality as you go through the rest of the year? And then the completions businesses, you'll see a little bit bigger hit on budget exhaustion, and then to what extent do you think you can offset that with some of these initiatives that are underway?

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Robert J. Saltiel, Key Energy Services, Inc. - President, CEO & Director [5]

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Well, we said in our prepared remarks comments, we do see the third quarter likely coming ahead of the second quarter. So we are in an upward trend. Seasonally, the fourth quarter tends to be slower than the third quarter. But look, a lot of this has to do with oil prices and outlook. And I think if we've learned anything in this business over the last 6 to 9 months, there's just a very low degree of predictability of where oil prices are going to go. And the fact is that our clients now manage their budgets on a quarterly, if not monthly basis, whereas before it was more of an annual basis. So we would talk about budget exhaustion coming towards the end of the year. Now we see some evidence of that coming within at the end of quarters, and in some cases, end of months. So very difficult to predict where that's going to head going forward, but we do see an upward swing in activity. Obviously, the question about completions where that will go from here is also tied to outlook, and of course, our fortunes in our completions-related work will be linked to that outlook on pricing and the activity that takes place.

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Operator [6]

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And there are no further questions at this time. I'll turn the call back over to management now.

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Katherine I. Hargis, Key Energy Services, Inc. - Senior VP, General Counsel & Corporate Secretary [7]

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Thank you, Erica. This concludes our call. A replay of this call can be accessed on our website at keyenergy.com under the Investor Relations tab. Also under the Investor Relations tab, we have posted a schedule of our quarterly rig and truck hours. Thank you for joining us today.

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Operator [8]

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Thank you. This does conclude today's conference call. You may now disconnect.