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Key Energy Services, Inc. (KEG)

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Key Energy Services, Inc. (KEG)

Q3 2017 Earnings Call

November 09, 2017 11:00 am ET

Executives

West P. Gotcher - Key Energy Services, Inc.

Robert Wayne Drummond - Key Energy Services, Inc.

John Marshall Dodson - Key Energy Services, Inc.

Analysts

Mike Urban - Seaport Global Securities LLC

John Daniel - Simmons & Company International

Daniel J. Burke - Johnson Rice & Co. LLC

Presentation

Operator

Good morning. Thank you for standing by. At this time, we'd like to welcome everyone to the Key Energy Services Third Quarter 2017 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session.

I'd now like to turn today's conference over to West Gotcher, Vice President, Corporate Development, Investor Relations. Please go ahead.

West P. Gotcher - Key Energy Services, Inc.

Thank you, Holly, and thank you all for joining Key Energy Services for our third 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 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.

I'm now 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 Wayne Drummond - Key Energy Services, Inc.

Thank you, West, and good morning, everyone. We continue to make progress in our efforts to instill a P&L focused culture at Key and to position the company to take advantage of improving demand for production-related services while capitalizing on the growth in our services exposed to the completion-related spending. We've seen evidence of these efforts as last quarter, we crossed into breakeven adjusted EBITDA excluding our International. And this quarter, I am pleased that our U.S. operations began to generate adjusted EBITDA beyond breakeven and, in fact, was the best financial result we posted in six quarters.

I expect our results to continue to improve going forward driven by our growth initiatives and improving macro market conditions for production services. This quarter, we saw our revenues in the U.S. increase by 3.5% or 5% if you exclude the revenues from our frac stack and well testing businesses sold in the second quarter.

We also experienced a loss of about $1 million from Hurricane Harvey with about three-quarters of that impact felt within our Coiled Tubing business. Growth, though, in Coiled Tubing still provided most of the revenue improvement quarter-on-quarter, and revenue from our completion-related services across all of our (03:06) has continued to grow throughout the year and represented over 25% of our total revenue in the third quarter.

While revenue and our Rig Services segment was flat, we exited the quarter on a revenue per workday basis about 8% higher than the first month of the quarter. Some customers slightly increased their production services activity on the improving oil price outlook, and we experienced some increasing demand for our drilling and completion services ,which made up 17% of our hours in Q3 compared to 15% in Q2 and 13% in Q1.

Hours per workday were up 3% using the same two bookends. And we expect this momentum to carry into the fourth quarter with our average working rig count over the past few weeks running higher than we have seen in almost two years. With the growing demand for larger well services rigs in the market today, the Association of Energy Services Companies, otherwise known as the AESC, an industry organization that tracks the well servicing rig count, recently published some updated guidelines for rig classification to ensure consistency in classification across the industry. And under their definition, the Class IV and particularly the Class V are the rigs that are fit for purpose for most horizontal well applications. Between the Class IV and Class V rigs under the new AESC definition, the difference is the hook load or how much weight the derrick is actually ready to lift safely.

With the extended length of the lateral sections of today's horizontal wells, operators want to ensure that their rig they call out can meet any of the potential demands of the job. Working in the horizontal section of the well greatly increases the potential load the rig has to handle. And under the new AESC classification definitions, we believe that we have the industry's largest fleet of fit-for-purpose Class IV and Class V rigs with 147 Class V and 199 Class IV rigs.

Our spare rig capacity is available to meet the future needs of our clients. And to help put this in perspective, this fleet generated 1.4 million billable hours in 2014, which is over twice our current annualized run rate. And given our streamlined cost structure, as we return to that level of activity, we believe that our adjusted EBITDA generation will be superior to what was generated in that period.

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