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Key Energy Services, Inc. (KEG)

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Key Energy Services, Inc. (KEG)

Q1 2017 Earnings Conference Call

May 11, 2017 11:00 AM ET

Executives

West Gotcher - Director, IR & Corporate Development

Robert Drummond - President and CEO

Marshall Dodson - CFO

Analysts

John Daniel - Simmons & Co.

Marshall Adkins - Raymond James

Mike Urban - Deutsche Bank

Mark Brown - Seaport Global

Presentation

Operator

Good morning and welcome to the Key Energy Services Q1 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

It’s now my pleasure to hand the conference over to Mr. West Gotcher, Director of Corporate Development and Investor Relations. Please go ahead, sir.

West Gotcher

Thank you, Nicole. And thank you all for joining Key Energy Services for our first quarter 2017 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 2016 Form 10-K and other reports most recently filed with the SEC, which are available on our website.

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.

I'm going to turn the call over to Robert Drummond, Key's President and CEO, who will provide some comments regarding Key and trends he's seeing in the business and in the market. Then, Marshall Dodson, our CFO, will review our financial results. I'll now turn the call over to Robert.

Robert Drummond

Thanks, West. Good morning, everyone. During the first quarter we made significant progress in our efforts to improve the financial performance of the reorganized company. Our focus to recover a portion of the deep discounts extended to our customers during the worst recent downturn has had mixed success to-date. Our fluid management, coiled tubing and fishing & rental businesses benefited from successful discount recovery efforts, especially from our lowest pricey arrangements.

For the first quarter though, the improvements in coiled tubing results were offset by the normal first quarter seasonal gas storage activity stoppage in the northeast. Excluding this seasonal disruption, our coal business improved 7% sequentially. The gas storage work in Northeast is expected to pick back up in the second quarter as usual and the coiled tubing business as a whole is expected to be up 15% to 20% sequentially with incremental margins greater than 100%.

The continued profitability improvement resulting partially from the discount reductions in our fluid management and fishing and rental businesses are apparent in the first quarter results from the business segments and we expect this trend to continue into the rest of the year. Broader market activity for work over rig services did not improve as we expected in the first quarter.

The unexpected oil price dip below $50 per barrel during the quarter was certainly a factor and the potential for sustained oil prices below $50 per barrel continues to weigh on customer sentiment and activity levels. In fact, we saw some customers that ramped up work over activity in Q4 slowed down again in Q1. Our analysis of the returns of our customers can generate from the services we provide shows a significant difference in the population of economic well maintenance candidates, within the $10 band of $40 to $50 oil.

With the economic well maintenance population growing 10% from $40 to $55 per barrel and another 14% from $45 to $50 per barrel. At $50 oil, approximately 65% of the nearly 0.5 million active oil wells in the US are economic for production maintenance work. Therefore, not only is the actual economic set of maintenance candidates materially lower when oil price was in the 40s versus the 50s, but the concern of further deterioration in oil prices can have a material impact on our customers willingness to outlay cash on something that's in the money today if they believe it could possibly be out of the money tomorrow.

The AESC total US work over rig count for the quarter averaged about 1,028, which was flat with the fourth quarter that averaged 1,115 working rigs. This level of rig activity represents approximately 60% of the rigs that would normally be working based on historical working levels at current commodity prices. As a reminder, the work over rig count in 2014 was above 2,000 in the United States.

The stagnant US land workover market during the first quarter somewhat delayed our rig services discount recovery efforts in some areas, but does not continue to add to the existing backlog of well maintenance activity that would drive increased opportunities in the future. As we move into Q2 despite the continued near-term uncertainty in all prices, we are seeing more positive indications of improving well maintenance activity. The overall US work over rig count did increase 3% in March versus February to the highest level since January of 2016. And over the past several weeks, we have received more customer inquiries regarding our rig availability and readiness for work in the second half of the year. In fact, we have just recently seeing customers begin to seek to lock in pricing arrangements for our rigs, which is typically an indicator that operators want to ensure the ability to execute on their plans or they sense tightness for service capacity.

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