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Key Energy Services, Inc. (KEG)

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Key Energy Services, Inc. (KEG)

Q4 2017 Earnings Call

February 27, 2018 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

Presentation

Operator

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Services' Q4 and Full-Year 2017 Earnings Call. (00:00:13-00:00:35) Corporate Development and Investor Relations, you may begin your conference.

West P. Gotcher - Key Energy Services, Inc.

Thank you, Heidi, and thank you all for joining Key Energy Services for our fourth quarter and full-year 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, 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 Wayne Drummond - Key Energy Services, Inc.

Thank you, West, and good morning, everyone. We delivered another quarter of progress with revenue growth in the fourth quarter of 2017. In our U.S. Rig Services and Fluid Management segments. we buffed the typical seasonality trend with revenue up 4.6% and 12.3%, respectively. We also generated another quarter of strong revenue growth in our Coiled Tubing segment, as we continue to deploy our fleet of large diameter coiled units.

Before covering the fourth quarter results, I want to touch on our progress for the full year in 2017. Year-on-year revenues in our U.S. segments improved by $29 million or about 7%. And on that limited revenue growth, we improved our adjusted EBITDA about $42 million or a 144% incremental margin. This is a result of the numerous steps we've taken to (00:02:43-00:04:12) 18.9% or $2.4 million. We have numerous additional opportunities in this business. We deployed three more 2 3/8 units during the quarter and expect to do the same thing again in Q1, which would take our total deployed large coiled tubing units to 12.

Due to the number of opportunities and the improving oil pricing environment, we decided to deploy additional capacity during the quarter in all of our business segments. The associated upfront hiring and equipment make-ready expenses impacted our Q4 margins by $1.8 million, as we added a net of 108 people in the fourth quarter. We're doing the same thing in Q1, as we further pursue new opportunities to increase activity. We are currently reducing the discounts applied to our services to offset these costs and improve incremental margins in the coming quarters. I believe that we will see the full benefit of this in Q2, if the activity stays on the current expected track.

On our last call, I spoke about the momentum that we had as we exited the third quarter. And I'm pleased to say, we've maintained that momentum into the first quarter. We exited December with our highest monthly average rig count of the year, and we grew our fourth quarter rig hours per work day 5% (00:05:44-00:06:08) I expect additional growth opportunities as we move into March, particularly with oil prices consistently over $55 a barrel.

From the end of the second quarter of 2017 through year-end, we added the equivalent of about 25 net rig crews. During our last call, I mentioned this ramp-up in crews which temporarily yielded startup inefficiencies, as we trained and deployed these employees. Key has a strong reputation for recruiting and training crews that provide premium service at the well site, and we hold ourselves to that standard as we continue to add crews. Equipment-related costs also weighed on margins. And combined with the onboarding of new crews, our fourth quarter margins were negatively impacted.

And as I previously mentioned, we added 108 net new employees in the fourth quarter. And thus far in 2018, we've added another 184 net new employee (00:07:14-00:08:09) We are, however, currently in discussions with our customers to recover discounts that we extended to them when oil prices were nearly half of what they are today. And while some customer transition will occur, I am confident there is sufficient demand in the market for our crews and assets at a price that will ultimately enable additional rigs to be crewed and deployed into the market as needed.

Given the time it takes to work through these pricing customer changes, we only expect to realize a slight benefit to Q1 rig revenues, but expect double-digit improvement in the second quarter. With a supportive oil price driving demand, I anticipate that further price increases will likely be realized as we move through 2018. Otherwise, I believe it's unlikely that the industry will have enough well servicing capacity to meet the needs of our customers going forward.

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