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

Q1 2019 Key Energy Services Inc Earnings Call

HOUSTON May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Key Energy Services Inc earnings conference call or presentation Thursday, May 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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* Daniel Joseph Burke

Johnson Rice & Company, L.L.C., Research Division - Senior Analyst

* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

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Presentation

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Operator [1]

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Good morning. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2019 earnings results conference call. (Operator Instructions) Please note that today's conference is being recorded. Thank you. Ms. 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, Katherine, and thank you all for joining Key Energy Services for our first 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 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. We generated first quarter revenue of $109.3 million, down $8 million from the fourth quarter of 2018. The sequential decline is due in large part to some particularly difficult weather in the Rockies, California and the Permian Basin that limited our working days, coupled with a slow start to wells completions activity in 2019.

Our first quarter 2019 operating loss was $15.3 million, with our adjusted EBITDA coming in at $0.9 million, down from the $3.9 million of adjusted EBITDA generated in the fourth quarter of 2018.

As we highlighted in our press release, we incurred the majority of our 2019 employment-related taxes in the first quarter in the amount of $1.7 million. We expect this line item to be de minimis in future quarters.

Before going into our segment results, I want to say a few words about our team. I've been with Key for 8 months now and our employees have really embraced our new core values, the first of which is safety is our obligation. We're off to an excellent start in 2019 with our safety performance and this has been aided by our new work plan tools, which emphasize employee engagement to identify safety hazards and prevent injuries.

Our service quality continues to improve as our operations teams work hand-in-hand with our sales representatives to ensure that our clients' needs are fully met. We have modernized our employee training programs and we have greatly expanded our Key-certified coach programs for mentoring new arrivals to Key.

Workplace morale is excellent, aided in part by the reinstatement of our matching 401(k) program in 2019 and our field attrition levels continue to decline.

Our biggest challenge remains growing our field workforce in a full employment economy, especially in our Rigs and Fluid Management Services segments, a subject I will revisit in my closing comments.

Turning now to our reportable business segments.

In our Rig Services segment, first quarter 2019 revenues were $65 million as compared to fourth quarter 2018 revenues of $69.1 million. Inclement weather, particularly late in the quarter in the Rockies, California and the Permian, impacted our operations and drove the decline quarter-on-quarter. With the weather impacts, we averaged 168 rigs working versus an average of 180 rigs working in the prior quarter with approximately 240 discrete rigs working in each quarter.

During the first quarter, our 24-hour activity averaged slightly up at about 13 average rigs as compared to about 11 average rigs in the fourth quarter of 2018. We had around 45 rigs that participated in the 24-hour market last quarter and today are capable of building over 30 rigs with full completion packages. Obviously, not all of these work 24 hours consistently as crew availability can be a factor along with choppiness of completion schedules. But we continue to increase our capabilities in this growing and profitable aspect of our business by adding additional ancillary assets to complete our industry-leading -- to complement our industry-leading fleet of Class IV and V well service rigs.

We experienced a 4% quarter-on-quarter decline on revenue per rig hour, primarily as a result of the changing geographic revenue mix due to the weather impacts. However, we did benefit from price increases with some of our more significant clients.

Our Rig Services segment margins improved in the first quarter 2019 as compared to the fourth quarter of 2018 on the better pricing as well as from our continual cost management efforts. As a result, our adjusted EBITDA in the segment came in at $11.6 million or 17.8% of revenues as compared to adjusted EBITDA of $11 million or 16% of revenues in the prior quarter.

Our Fluid Management Services segment generated revenues of $19 million in the first quarter, down approximately $1.8 million from the fourth quarter, largely due to weather and slower completions activity. Truck hours declined 16% from 179,000 hours in the fourth quarter of 2018 to 151,000 hours in the first quarter of 2019. Some of this decline is due to our continued efforts to reposition our assets to areas of higher utilization and/or margins.

Today, this transition is largely complete with our truck activity down 70% compared to the prior year in the markets where we have reduced our exposure. We saw the benefits of the strategy in the bottom line in the first quarter with adjusted EBITDA in the first quarter improving to $2.2 million from $1.9 million in the prior quarter even as revenues declined 9%. Margins also benefited from better pricing primarily in the Permian Basin where we saw low single-digit price improvement.

Turning now to our Fishing & Rental Services segment. Revenues came in at $14.6 million, down $2.3 million from our fourth quarter 2018 revenues. Weather in a slow-completions market drove the decline quarter-on-quarter and also weighed on margins as our adjusted EBITDA declined to $2.7 million from $4.4 million in the previous quarter. This segment is heavily dependent on strong completions-related services such as frac plug, drill outs, pump downs and toe preps. This activity can be lumpy in the best of times due to shifting pressure pumping schedules, but was particularly slow growing in the first quarter. This segment is not constrained by crew employment and we expect revenues and margins to recover as we move through 2019 due to better weather and increased completions activity versus first quarter levels.

Our Coiled Tubing Services segment was fairly flat quarter-on-quarter with revenues in the first quarter coming in at $10.7 million as compared to $10.5 million in the prior quarter with similar operating margins. Our average work in large units was flat as well at an average of approximately 2.5 large diameter units per day in both the first quarter and the fourth quarter of 2018. We've experienced low- to mid-single digit price erosion in this segment in the first quarter as competition intensified in the face of reduced completions activity.

We expect that our coil tubing activity will pick up in the second quarter with a pickup in completions activity while pricing will likely remain flat to slightly lower. Even without higher pricing, the margins in this segment are respectable on a per job level, but the intermittent nature of the activity and the largely fixed cost of labor between jobs has weighed on our margins in the prior 2 quarters. We expect completion activity to improve over the next 2 quarters, allowing for more consistent utilization of our large diameter units, and with it, improved margins.

I will return with some closing comments after Marshall provides some more details on the financials. Marshall?

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

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Thanks, Rob. As Rob mentioned, in the first quarter of 2019, consolidated revenues fell $8 million to $109.2 million. Our consolidated operating loss was fairly flat from a loss of $15.1 million in the fourth quarter of 2018 to a loss of $15.3 million in the first quarter of 2019. I won't go back over for what Rob has already covered.

So on a consolidated basis, our G&A for the first quarter of 2019 was $22.1 million as compared to $20.3 million in the fourth quarter of 2018. And in the first quarter of 2019, it included the impacts of unemployment taxes, incentive comp, the 401(k) matching that Rob mentioned and the timing of some spend. Also included in the G&A for the first quarter of 2019 was $0.7 million of equity-based compensation as compared to $1.3 million of equity-based compensation in the fourth quarter of 2018. We expect our G&A for the balance of 2019 to be around $23 million a quarter, inclusive of approximately $1 million a quarter in equity-based compensation.

Depreciation expense was $14.3 million in the first quarter of 2019 as compared to $19.8 million in the fourth quarter of 2018 as a number of assets reached the end of their booked depreciable lives in 2018. We expect depreciation expense of around $15 million a quarter in 2019.

Interest expense in the fourth quarter of 2018 was $9.2 million -- oops sorry, in the first quarter was $9.2 million. And we expect this to be around $8 million to $9 million a quarter for the rest of 2019.

Cash flow used in operations was $11.3 million in the first quarter of 2019 with capital expenditures of $5 million. We also had $2.4 million in proceeds from asset sales, resulting in a net outflow of $2.7 million.

We continue to invest in high-return, short payback opportunities beyond just maintenance spending. And by short, I mean a payback of less than 12 months and in many cases, half that. These are generally items that we ran on a stand-alone basis, or as we prefer, packaged with our service rigs. We've identified a few additional opportunities like this and expect to increase our CapEx spending by around $2 million in 2019 to take advantage of these opportunities.

So on a gross basis, we're looking at around $19 million to $20 million of expenditures in 2019 and around $12 million to $13 million of asset sales for a net use of cash of around $7 million.

At the end of March, cash stood at $35.7 million and we had $21.6 million available under our ABL credit facility which is undrawn. This combines for a total liquidity of $57.3 million at the end of the first quarter of 2019. We expect our liquidity to be similar at the end of the next quarter and then expect improvement over the back half of the year in 2019 with -- in line with our 2018 exit. And at this time, we do not foresee any debt compliance issues in 2019.

In April, we amended our ABL facility, which in addition to providing us more flexibility, also lowered the cost of the facility by around $1 million on an annual basis.

The asset coverage ratio under our term loan stood at 1.9x at the end of the first quarter of 2019 as compared to the minimum required of 1.35x.

I will now turn it back to Rob. Rob?

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

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Thanks, Marshall. I'll conclude with a few points before opening for questions.

We remain committed to growing both our top and bottom line in Key despite a slow start in 2019 and we're disappointed that we weren't able to overcome the weather impacts to a greater degree in this first quarter. Our 2 largest segments by revenue, Rig Services and Fluid Management Services, remain constrained by a shortage of competent labor. We have plenty of available assets that can be deployed and we have support from a number of our core clients who wish to increase their activity with Key. As a result, we are investing significant time and effort on the recruitment of experienced field personnel as well as newcomers to our industry to join the Key team. We believe our recruiting efforts will be successful and, coupled with our continuous focus on engagement and retention of our people, we will achieve significant net growth for our field workforce in support of these 2 important segments.

While the first quarter had the dual challenges of severe weather and a slow start for our clients' well completion activities, we continue to execute our efforts to improve the safety and quality of our services for our clients, drive unnecessary costs out of our businesses and seek better pricing where market conditions warrant. The fundamentals for the second quarter are certainly improved over a quarter ago with WTI oil prices stabilizing north of $60 per barrel and lower basis differentials for Permian oil production. As a result, we expect to see better top line and bottom line improvement in the second quarter as we benefit from more daylight hours, better weather and greater completions activity as our clients execute on their 2019 budgets.

Operator, this concludes our prepared remarks and 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 the line of John Daniel with Simmons.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [2]

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Marshall, you kind of went quickly and I got confused on one of the -- you said -- what do you expect to exit 2019 as of 2018? The balance sheet?

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [3]

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Yes, we expect liquidity at the end of 2019 to be in line with where we ended 2018 still.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [4]

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Okay. Got it. And then just thoughts on revenue progression. Any -- are you willing to engage in any guidance for Q2 in terms of -- I know it's going to be better, but just where the better improvements are expected? Magnitude? Just anything along that line? From a top line perspective?

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [5]

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Yes. So I think we expect at a minimum to benefit from improved seasonality. We had some really tough weather, particularly in March with the storms in the Permian and the high winds and the blizzards in North Dakota. That typically is behind us as we move into the second quarter, particularly as we exit the second quarter. So between that, the longer work hours, we would expect to see at least a seasonal uptick in the top line. And we're working, as Rob said, for many initiatives to try to beat that.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [6]

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Do you have a proxy for like, I guess, for how -- what the weather impact was in March from a revenue perspective?

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [7]

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Yes. It was a substantial portion of the change in rigs quarter-over-quarter.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [8]

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Okay. Got it. And then safe to assume that April was better than March from the top line?

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [9]

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Yes. We still had some weather lingering into April. And we expect that as we move through the quarter, things will get better.

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Operator [10]

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Your next question comes from the line of Daniel Burke with Johnson Rice.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [11]

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On the wells service side and maybe on the trucking side as well, you've all had some opportunity in pushing for some net pricing in sort of the second half of '18. And given how tight labor markets remain, I don't see mention of pricing today in the press release or the comments. But is that still part of an effort under way? Or has the commodity price pressures we've seen in the last quarter or so put a damper on any of those type of efforts?

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Robert J. Saltiel, Key Energy Services, Inc. - President, CEO & Director [12]

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Yes. Daniel, we're always looking for opportunities to improve our pricing. Obviously, that's going to be a function of the fundamentals of the commodity environment as well as the competitive space in which we compete. And we really think that right now we want to focus on activity increases. We want to get our rig count back up to where it has been in previous quarters. As we've mentioned, we repositioned a lot of our trucking assets to support Fluid Management Services. So we want to make sure we're getting fuller utilization of that. We've got ample capacity to grow our business. We really feel that there's tremendous opportunity in growth at the top and bottom line by putting to work what we have available right now. And what we don't want to do is we don't want to push price to the point where we potentially sacrifice on picking up on that activity gain. So our first priority is going to be to increase activity. And then, obviously as the fundamentals permit, we'll be looking to push price. But it's in that order as we look at the second and probably third quarter.

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [13]

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Yes. I'll just add that with the EBITDA margins where they are in Rigs, I think the focus now is growing that top line, as Rob said. That said, in the markets and in the situations where it tightens, we'll look to do pricing as needed. But right now, it's not the priority.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [14]

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Got it. Okay, guys, that's helpful. And then maybe visit Q2, just one other way, Marshall, I think I heard you say you'd expect liquidity will still be flat sequentially in Q2. And we're playing with pretty small numbers here. But on the CapEx side, I mean, is Q2 on a net basis ratable? Is Q2 going to run $5 million in net CapEx in Q2? Or is it going to be -- any reason to think it's a larger or smaller figure here in the second quarter?

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [15]

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So we had a lot of items -- we had items that were slated for 2018 that came into the first quarter. I think our remaining CapEx is more back half of the year weighted.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [16]

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Okay. It is. Okay. So -- all right. That's helpful. And then just, Rob, one last straightforward one in. So have you guys observed higher activity in large diameter coil to date in Q2? Or is that still somewhat expectational?

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Robert J. Saltiel, Key Energy Services, Inc. - President, CEO & Director [17]

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Yes, we have. We -- as we mentioned the first quarter was flat on fourth quarter. But we've definitely seen a pickup as we moved into the second quarter. And we expect that to continue and hopefully ramp north from where it is today as we move through the quarter.

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J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [18]

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Yes. We've had some of our better days in a long time so far. That can all change, depending on the completion schedules and obviously we come behind fracking. So we're kind of at the tail end of that process.

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Operator [19]

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(Operator Instructions) And there are no further audio questions at this time.

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Katherine I. Hargis, Key Energy Services, Inc. - Senior VP, General Counsel & Corporate Secretary [20]

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Thank you, Katherine. 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 [21]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.