U.S. Markets open in 44 mins

Edited Transcript of KEG.N earnings conference call or presentation 8-Nov-19 3:00pm GMT

Q3 2019 Key Energy Services Inc Earnings Call

HOUSTON Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Key Energy Services Inc earnings conference call or presentation Friday, November 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* John Matthew Daniel

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Key Energy Services Q3 2019 Earnings Call.

(Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Ms. Katherine Hargis, Senior Vice President, General Counsel and Secretary. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Nicole, and thank you all for joining Key Energy Services for our Third 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 our 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Katherine, and good morning to everyone joining today's call. Before covering our third quarter results, I wanted to touch on our October 31 announcement concerning Key's strategic review and our forbearance agreements. The current challenging market conditions have limited our company's ability to generate sufficient cash to both make our interest payments and support our operations. As a result, we entered into discussions with our lenders, with the goal of realizing a stronger and more sustainable capital structure that would allow us to invest more of the cash that we generate from operations into our equipment and our people.

Our company has made tremendous progress on our safety and environmental stewardship in the last year. We've become a more disciplined organization and our already strong service quality is improving by the day.

On the financial front, we have closed a number of noncore and underperforming yards over the past month in order to concentrate our strengths and more efficiently deploy our people and assets, where they can create the most value. Also, we have reduced our corporate and regional overheads to improve our cost competitiveness and provide our clients better value in this challenging market. I'll provide more color on these moves later.

Beyond the yard closures and organizational streamlining, we expect it to be business as usual for our operations at Key. We remain focused on providing our customers the same safe and efficient services to which they have become accustomed. As we continue our discussions with our lenders, we expect that our employees and vendors will continue to be paid as always.

I know that people would want to know what our capital structure might look like upon completion of this process. However, given the discussions with our lenders are ongoing and not yet finalized, we won't be able to provide any details on this call.

Turning to our third quarter results, I'll say at the outset that we had a very difficult quarter. Our revenues came in at $106.5 million, which represented a decline of $6.4 million from the second quarter. We saw reduced activity across each of our business segments, especially in Rig Services in the Permian Basin, as the E&P industry reined in spending in response to faltering oil prices and growing investor sentiment for financial discipline.

Our net loss for the third quarter was $25.5 million as compared to a net loss of $18.3 million in the second quarter, with an adjusted EBITDA loss of $3.7 million. This represented a decline of $5.3 million from the $1.6 million of adjusted EBITDA generated in the second quarter. The earnings underperformance was largely due to a general falloff in activity in all business segments that was not accompanied by a parallel cost reduction. We did reduce direct head count as it became clear that the market for our services was contracting, but this was largely in arrears to the fall in demand.

Demand has remained generally stable since last - since late September. In fact, October was a better month for us operationally than August or September. For the third quarter, our Rig Services segment generated revenues of $64.5 million as compared to second quarter 2019 revenues of $67.9 million. The quarter-on-quarter revenue decline was driven by activity declines in the Permian Basin, where our rig hours fell 12%. We averaged 156 rigs working in the third quarter versus an average of 172 rigs working in the prior quarter.

Rig hours fell 8% to approximately 142,000 total hours with falloff in the Permian accounting for nearly 80% of the quarter-on-quarter decline. Our 24-hour average rig count fell too to 11 average rigs in the third quarter.

Completion hours comprised about 15% of our total rig hours, flat to the same percentage as in the second quarter. Revenue per rig hour increased 3% to $453 an hour in the third quarter from $441 an hour in the second quarter, largely due to geographic and job mix as overall pricing remains generally stable.

As I mentioned previously, our rig activity fell ahead of the corresponding adjustments to our labor costs, which impacted our margins quarter-on-quarter about 400 basis points. Adjusted EBITDA in this segment was $8.4 million or 13% of revenues for the third quarter as compared to adjusted EBITDA of $11.6 million or 17% of revenues in the second quarter.

Revenues in our Fluid Management Services segment were $18.2 million in the third quarter, down slightly from $18.5 million in the prior quarter. Truck activity increased with our truck hours improving 4% to approximately 145,000 hours in the third quarter. However, the better revenues from trucking activity were offset by lower revenues from our saltwater disposal wells due to lower rates charged for disposal in our Central marketplace.

Adjusted EBITDA for the segment fell to $1.4 million from $1.6 million in the second quarter. Revenue per truck hour fell to $125 per hour in the third quarter compared to $133 an hour in the second quarter on revenue mix and the lower saltwater disposal pricing in our Central marketplace.

Revenues in our Fishing & Rental segment were $14.1 million in the third quarter as compared to second quarter revenues of $14.8 million. Lower activity in the Permian, where revenues declined 12% quarter-on-quarter, were not offset by the improved revenues in our Central and Gulf Coast markets. The revenue decline in the Permian Basin and the associated impact on margins resulted in adjusted EBITDA decline to $1.6 million in the third quarter from $2.1 million in the prior quarter.

Our Coiled Tubing Services segment generated revenues of $9.7 million, down from $11.7 million in the second quarter. Our average number of working large units was flat at approximately 2.5 large diameter units per day, with the revenue decrease due to geographic and job mix and another quarter of low to mid-single-digit price erosion.

Our adjusted EBITDA remained fairly flat to our second quarter result at negative $0.3 million. We have recently implemented significant changes to our staffing and labor cost structure in the Coiled Tubing Services segment, and we've exited multiple locations where we could not maintain steady utilization to cover our labor and repair and maintenance costs between jobs.

As I said at the outset, we've undertaken a detailed review of our operations presence that we believe will strengthen Key for the future. This has led us to exit those locations where, due to low levels of demand and intense price competition, it has become very difficult to see a path to consistent profitability.

In all, we have closed 23 districts across all of our service lines, primarily in East Texas and Oklahoma in our Central marketplace and in our Gulf Coast marketplace. These locations in aggregate contributed about 13% of our third quarter revenues, about 9% of our operating loss and $0.5 million in EBITDA in the third quarter of 2019. Exiting these locations has facilitated further reductions in our overhead costs, and we expect these savings to be between $8 million and $10 million a year on an annual basis. So the net effect should be an improvement of $6 million to $8 million in EBITDA annually.

With the yard closures, we have freed up a large number of assets to redeploy to healthier markets, and we expect this will reduce our capital expenditure needs in 2020 and beyond. We expect severance and other closure-related costs of around $2 million in the fourth quarter, and we should see the majority of the savings from these changes benefit us in December with the first quarter of 2020 getting the full effect.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rob. Our third quarter 2019 consolidated revenues fell $6.2 million to $106.5 million from the $112.9 million in the second quarter of 2019. Our consolidated operating loss increased, with a loss of $17.4 million in the third quarter of 2019 as compared to a loss of $14.4 million in the second quarter of 2019. I'm not going to go back over what Rob covered on the segments. So on a consolidated basis, G&A for the [third quarter of] 2019 was $21.4 million as compared to $22.5 million in the second quarter of 2019.

G&A for the third quarter of 2019 included $1.2 million of equity-based compensation as compared to $1.3 million in the second quarter of 2019. G&A in the second quarter of 2019 also includes a $2.2 million fee associated with the onetime project to receive a tax refund. Excluding this fee in the equity comp, G&A was $20.2 million in the third quarter of 2019 as compared to $19 million in the second quarter of 2019, with the increase being due to the timing of the legal settlement and some increase in our bad debt expense.

Our G&A run rate for Q4 before the impact of the reductions Rob mentioned is around $21 million, inclusive of approximately $1 million in quarterly equity-based compensation. We will see some benefit in Q4 from the cost reduction measures we've taken and expect a full benefit in 2020.

Depreciation expense was $14.6 million in the third quarter of 2019, slightly up from the $14.3 million in the second quarter of 2019. We expect depreciation expense to be fairly flat in the fourth quarter to the prior quarter. Interest expense for the third quarter of 2019 was $8.4 million as compared to the $8.5 million in the second quarter of 2019.

As we announced on October 31, we did not make our scheduled $7.8 million October interest payment to our term loan lenders. Cash flow used in operations was $5.4 million in the third quarter of 2019 and $16.8 million for the 9 months ended September 2019.

Capital expenditures were $4.1 million for the third quarter of 2019 and $16.5 million for the 9 months. We also had $3.6 million of proceeds from asset sales in the third quarter and $8.4 million of proceeds from asset sales over the 9 months ended September. Our capital expenditures net of the asset sales were $8.1 million for the 9 months ended September 2019.

On a gross basis, we still expect around $20 million of capital expenditures in 2019. At the end of September, our total liquidity was $38.5 million, with cash at the end of the third quarter of 2019 of $22.6 million. As detailed in our October 31, 2019, release, which I would refer you to, we have entered into forbearance agreements with our term loan lenders and ABL lenders as the company elected to not make that October term loan interest payment. As a result, we are unable to borrow under our ABL facility.

As Rob mentioned, discussions with our lenders continue. And at this time, we're unable to discuss this topic further.

I'll now turn it back to Rob. Rob?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Thanks, Marshall. This is clearly a challenging time for our industry, with uncertainty over future oil prices, intense competition among well servicing players and E&P companies, who are facing their own headwinds on free cash flow generation and investor sentiment. Our company has made excellent strides over the past year, as I mentioned, in improving our safety, our service quality and our client focus. While our progress has been promising, profitability has been elusive for us and our cash flows have been severely impaired by significantly quarterly interest payments on our debt.

We believe that narrowing our focus to markets where we can generate consistent service activity is the right call. It has allowed us to reduce our overhead, concentrate our best assets and people, and it will ultimately improve our financial returns. The process of restructuring our balance sheet and gaining forbearance from our lenders has obviously been very difficult for our equity investors. However, we believe that the expected resulting capital structure for Key Energy Services will be more sustainable across industry cycles and free up capital for investment in our people and our equipment. The road ahead will likely not be smooth nor easy, but I'm confident that we're positioning Key for future success.

Nicole, this concludes our prepared remarks. So we'll open the call up now for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) First, we have John Daniel with Simmons Energy.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Guys, I'll avoid the debt questions. Rob, I don't know if you would -- if you can answer this, but I'm going to ask that you give it a shot. The -- all of the facility rationalization that you guys are doing, can you walk us through sort of where the major -- or quantify the number of yards you've got in terms of the Rig business and Coiled business? I'm trying to understand like how the scale has changed from maybe 2, 3 years ago, where it is today?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Just to give you rough numbers, and we didn't disclose all the areas where we've made changes and we're not going to do that on this call. But to give you a rough idea, we've gone from slightly over 80 districts to something in the high 50s now with the changes that we've made. We have closed yards really across all lines of business for the most part. As I mentioned in the prepared comments, the Coiled business, we really refocused that to where we think we can be successful, got out of some areas, frankly, that were more gas-oriented markets that, frankly, hasn't been good for a while and where there's still intense price competition.

On the Rig side, there were some select areas, again, more gas-oriented areas where the activity just wasn't really sufficient to have scale in the Rigs line of business. So clearly when you look at this company's strengths, you have to start with really the Permian, the Bakken and the West Coast when it comes to our Rigs business, and these closures and concentration of people and assets really allow us to focus on those and really to use those as springboards for growth and profitability going forward.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. And John, I'll add a couple of things. Just -- we kind of gave that the overall percentage of Q3 revenue that this represented and just kind of taking it down to the segment, so it was around 15% for Coiled, 60% of that was Rigs and 24% was Fluid and about 1% was Fishing & Rental. And I'll also add that I think in those areas where the market remains strong, you haven't really seen that much of a change, particularly through this in the density of service coverage. And in many cases, we tend to operate satellite yards today, where we maintain a facility, but it won't have the same levels of overhead staffing as kind of the main district that we operate out of. But to your point, the footprint has changed over the past many years, but there's kind of core Permian, Bakken, California area, some parts of the Gulf Coast, we maintain -- still maintain a good strong presence.

--------------------------------------------------------------------------------

John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [5]

--------------------------------------------------------------------------------

Okay, fair enough. Ashamedly, I got distracted during the call. Marshall, did you provide any type of revenue guidance for Q4, just given the moving parts?

--------------------------------------------------------------------------------

J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [6]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [7]

--------------------------------------------------------------------------------

And if not, hazard -- would you be willing to hazard a guess?

--------------------------------------------------------------------------------

J. Marshall Dodson, Key Energy Services, Inc. - Senior VP, CFO & Treasurer [8]

--------------------------------------------------------------------------------

It's really tough to know. Down there so much uncertainty right now around what's going to happen in the fourth quarter on the completion side. Obviously, that impacts a lot of our businesses and the seasonal effect, I think we -- October is up, as it should be, given that that's historically the best, if not, one of the best months of the year, given the workdays and the weather. But as we go into Q4, broadly speaking, I would expect more than a seasonal downturn given the uncertainty around completion activity.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) We are showing no further audio questions at this time. (Operator Instructions) We show no further audio questions. This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.