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Edited Transcript of KEGXD.PK earnings conference call or presentation 11-Mar-20 3:00pm GMT

Q4 2019 Key Energy Services Inc Earnings Call

HOUSTON Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Key Energy Services Inc earnings conference call or presentation Wednesday, March 11, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Marshall Dodson

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

* Katherine I. Hargis

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Key Energy Services Q4 2019 Earnings Call. (Operator Instructions) Also please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Katherine Hargis, Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary. Thank you. Please go ahead.

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

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Thank you, Chris, and thank you all for joining Key Energy Services for our fourth quarter and full year 2019 financial results conference call. This call includes forward-looking statements. A number of factors that 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 Marshall Dodson, Key's Interim CEO and CFO. I'm now going to turn the call over to Marshall.

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John Marshall Dodson, Key Energy Services, Inc. - Interim CEO, Senior VP, CFO, Treasurer & Director [3]

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Thanks, Katherine, and good morning to everyone joining today's call. Before covering the fourth quarter results, I want to touch on our recently completed out-of-court restructuring. While a process such as this is never good or easy, I'm pleased with Key's capital structure coming out of it and how all of our stakeholders work constructively through the process. We have significantly reduced Key's leverage and improved our liquidity position and are, I believe, well situated to pursue and achieve our operational and strategic objectives as well as to navigate the uncertainty we and our industry face today.

I would like to thank the employees of Key, who've stuck with us and continue to deliver great and safe service to our customers throughout both our restructuring as well as our internal realignment. I'd also like to thank our customers and vendors who've worked with us, though, it was a difficult time for Key. While the industry is now facing new and difficult challenges, I believe we're well positioned, both financially and the team we have in place to take them along.

Turning to our fourth quarter results. I will say at the outside they are messy, and impacted not only by the financial restructuring we are undergoing but also our internal realignment to improve our cost structure and concentrate Key on those markets where we have the recognitions for financial success. Our revenues for the fourth quarter came in at $85.1 million, down $21.4 million from the third quarter, with about $11.4 million of that decline due to our exit of certain markets. Revenues in the markets where we began 2020 operating in were $81.9 million for the fourth quarter of 2019 as compared to $91.8 million in the third quarter of 2019. Excluding the impacts from realignment, the decline in revenues was due to normal seasonal factors as well as our customers completing their budgets ahead of year-end or slowing their activity in response to market conditions.

Our net loss for the fourth quarter was $30.2 million as compared to net loss of $25.5 million in the third quarter, with an adjusted negative EBITDA loss of $3 million in the fourth quarter of 2019. This represented a decline of $0.7 million from the $3.7 million of negative adjusted EBITDA generated in the third quarter. The negative adjusted EBITDA for the fourth quarter of 2019 is also burdened by a $5 million charge taken in the quarter for ongoing litigation. While this charge resulted in negative EBITDA for the fourth quarter, ahead of it, our results benefited by the actions to reduce our cost structure and concentrate operations in markets with better conditions. Our results in the fourth quarter on the whole also benefited from better labor efficiencies compared to the third quarter from a reduction in R&M costs, some of which will be caught up on in early 2020.

For the fourth quarter, our Rig Services segment generated revenues of $53.2 million as compared to third quarter 2019 revenues of $64.5 million. Of the $11.3 million quarter-on-quarter revenue decline, $6.4 million of it was due to the decline of certain locations, with the remainder of the decline being due to fourth quarter activity reductions due to seasonal factors and customers slowing or stopping programs towards year-end. Revenues from locations that we entered 2020 operating out of were $50.7 million in the fourth quarter of 2019 and $55.5 million in the third quarter of 2019. With an average 132 Rigs working in the fourth quarter versus an average of 156 Rigs working in the third quarter.

Rig hours were approximately 115,000 hours in the fourth quarter of 2019, with completion activity accounting for about 13% of those rig hours. In 24-hour average rig count fell 2.6 to 8.4 average rigs in the fourth quarter as compared to 11 average rigs in the third quarter, most of that 24-hour rig decline count coming from our internal realignment.

Revenue per rig hour increased 2% to $463 an hour in the fourth quarter or $454 an hour in the third quarter, largely due to geographic and job mix as overall pricing was stable in the fourth quarter of 2019. Operating income was $2.8 million with adjusted EBITDA of $8.5 million in the fourth quarter of 2019, as compared to operating income of $2.8 million and adjusted EBITDA of $8.4 million in the third quarter of 2019. Our results benefited from better efficiency with labor and the exit of certain markets. Margins also benefited by about 200 basis points of adjusted EBITDA margin due to the deferral of some recurring maintenance costs. Margins will be impacted in the first quarter of 2020 by the usual unemployment tax impact of around $1.5 million or about 200 basis points of margin. And we also expect around 100 basis points of an impact from R&M as we catch up from Q4.

While January started slow as expected, February was affected by weather. Activity was picking up in March. Too soon at this point to say, with the impact of the recent decline in oil prices will have on the remainder of Q1 or 2020. Revenues in our Fluid Management Services segment were $15.2 million in the fourth quarter, down from $18.2 million in the third quarter, with a little over half of that decline coming from our internal realignment. Our truck hours fell to 116,900 hours in the fourth quarter of 2019. Operating income was $0.5 million, and adjusted EBITDA was $2.2 million in the fourth quarter of 2019 as compared to an operating loss of $0.4 million and adjusted EBITDA of $1.4 million in the third quarter of 2019.

The quarter-on-quarter improvement was due largely due to the internal realignment and the deferral of certain repair and maintenance activities from the seasonally slow fourth quarter into the first quarter. Revenue per truck hour was $130 per hour in the fourth quarter compared to $125 an hour in the third quarter. Revenues in our Fishing & Rental segment were $11 million as compared to third quarter 2019 revenues of $14.1 million, lower completion activity in our central marketplace and in the Permian Basin made up most of the quarter-on-quarter revenue decline. The operating loss increased to $2.8 million as compared to the operating loss of $1.7 million in the third quarter, largely a result of losses on asset sales. However, adjusted EBITDA of $1.4 million in the fourth quarter was pretty flat as compared to adjusted EBITDA of $1.6 million in the third quarter of 2019 due to a reduction in labor costs and R&M spending.

Our Fishing & Rental footprint was largely unchanged with the operational realignment that we undertook in the fourth quarter. Our Coiled Tubing Services segment generated revenues of $5.8 million as compared to $9.7 million in the third quarter. Our average number of working large units fell to 0.9 from 2.5 average units in the third quarter as we realign our business as well as the overall softness in completion activity in the fourth quarter. Operating income improved to $1.3 million in the fourth quarter, with adjusted EBITDA of $0.8 million as compared to an operating loss of $1.5 million, and negative adjusted EBITDA of $0.3 million as a result of the reduction in labor costs and improved labor efficiency due to the operational realignment.

G&A for the third quarter of 2019 was $25.3 million as compared to $21.4 million in the third quarter of 2019. G&A for the fourth quarter of 2019 included a gain of $2.7 million on reversal of equity-based compensation, $3.5 million in severance costs and $4 million in costs associated with the company's restructuring notes. G&A for the fourth quarter also includes a charge of $5 million associated with ongoing litigation. Excluding these items, G&A for the fourth quarter was $15.5 million. G&A for the third quarter of 2019 was $21.4 million, including $1.2 million of equity-based compensation. Our G&A run rate today is around $16 million a quarter. Depreciation expense was $13.8 million in the fourth quarter of 2019 as compared to $14.6 million in the third quarter of 2019.

We expect depreciation expense to be around $10 million a quarter in 2020. Interest expense for the fourth quarter of 2019 was $9.4 million as compared to the $8.4 million in the third quarter of 2019. As we announced on October 31, we did not make our scheduled $7.8 million October interest payments to our term loan lenders, and also did not make the $9.1 million interest payment due in January. With the completion of our restructuring, the company's term loan debt was reduced from $243.1 million to $51.2 million today, with an interest rate of LIBOR plus 10.25% if we pay in cash or if we elect to pay [kind] over the first 2 years of the [warrant]. Our interest cost is LIBOR plus 12.25%. Given the uncertainty of the market today, I expect that we'll elect to pick the interest for 2020.

Cash flow used in operations was $12.3 million in the fourth quarter of 2019 and $29 million for the full year of 2019. Capital expenditures were $1.8 million for the fourth quarter of 2019 and $18.3 million for the full year 2019. We also had $6.2 million of proceeds from asset sales in the fourth quarter and $14.6 million over the full year of 2019. Our capital expenditures net asset sales were $3.7 million for the full year of 2019. We also entered into financing leases of $1.8 million for light-duty vehicles in 2019. Our capital spending for 2020 is still under review, and I expect that we'll seek to minimize our CapEx and keep it as minimal as possible. As of December 31, 2019, Key has unrestricted cash of $14.4 million, this compares to total liquidity at September 30, 2019, of $38.5 million, consisting of $22.6 million in unrestricted cash and $15.9 million of borrowing capacity at that time under the ABL facility.

On March 6, 2020, the close of our restructuring transactions, we had unrestricted cash of $31.6 million, with availability under the company's ABL Facility of $13.6 million for total liquidity of $45.2 million. In connection with the restructuring, we reduced the size of our ABL facility down to $70 million. Our new term loan contains one financial maintenance covenant requiring that we maintain a minimum liquidity of $10 million. With our restructuring behind us as well as our internal realignment, I believe that we are well positioned to navigate what will be a more challenging market in the months to come. Today, the outlook for oil demand, prices and spending by our customers as more unknowns than in all but a handful of times in the past.

Too early now to say what all the impacts will be. But with our restructured balance sheet, experienced leaders and our team of great employees working hard to deliver safe and adequate service to our customers, we're going to meet and overcome the challenges ahead.

Operator, this concludes our prepared remarks. Thank you.

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Operator [4]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.