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Key Energy Services, Inc. (KEG)

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Key Energy Services, Inc. (KEG)

Q3 2018 Earnings Call

November 07, 2018 11:00 am ET

Executives

Katherine I. Hargis - Key Energy Services, Inc.

Robert Wayne Drummond - Key Energy Services, Inc.

John Marshall Dodson - Key Energy Services, Inc.

Presentation

Operator

Good morning. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Services Quarter Three 2018 Earnings Conference 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.

I'll now turn today's conference over to Katherine Hargis, Senior Vice President and General Counsel. Please go ahead, ma'am.

Katherine I. Hargis - Key Energy Services, Inc.

Thank you, Holly, and thank you all for joining Key Energy Services for our third quarter 2018 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 2017 Form 10-K, our first quarter 2018 10-Q, 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 Rob Saltiel, Key's President; and CEO and Marshall Dodson, Key's CFO.

I'm going to turn the call over to Rob.

Robert Wayne Drummond - Key Energy Services, Inc.

Thank you, Katherine and good morning to everyone joining today's call. During my first three months at Key, I've spent a lot of time in the field visiting our facilities, meeting our clients and getting to know our people. I've been very impressed with the Key employees I've met. Despite our company's challenges over the past few years, we've retained a very capable and dedicated base that will lead us into better times.

I've also been impressed with the scale and quality of our equipment, the rigor of our training programs and our strong safety culture. Each of these elements differentiates us from our competitors and I've heard our clients say these advantages as reasons why they select Key for their well services. With our distinctive capabilities and supportive market fundamentals, I'm excited about the opportunities ahead for our company.

Turning now to our financials. Our revenues for the third quarter were $134.7 million or $9.7 million lower than the second quarter. This decline is largely attributable to the loss of market share in our California Rig Services business and lower utilization of our large diameter coiled tubing units. This lower activity drove a decline in our adjusted EBITDA which came in at $5.6 million for the quarter.

I will now address the performance of each of our four business segments. In our Rig Services segment, our quarterly revenue came in at $77.2 million, down about 4% from second quarter as the lost business in California was not offset with growth elsewhere. Despite the quarterly dip, Rig Services revenue for the company is up more than 24% from year-ago levels. We expect this general upward trend to continue into 2019 for both production related and completions related work in our other basins.

Quarter-on-quarter, our completion rig hours increased 15%, led by activity in the Permian and the Bakken as we averaged around 17 rigs doing 24-hour work, the bulk of which was for completions. We also had over 30 rigs participate in the 24-hour completion market last quarter and we continue to feel request today from our clients for additional rigs.

Looking forward to 2019 for our Rig Services segment, we expect to see higher onshore CapEx budgets from the E&P operators, buoyed by strong oil prices and improving netbacks in the Permian Basin as additional pipeline takeaway capacity comes online. This should spur clients to increase workover and well maintenance activities to maintain their growing inventory of horizontal wells and to take advantage of high return, short cycle investments.

In addition, the number of drilled uncompleted wells or DUCs continues to rise especially in the Permian, and this should increase completions work using service rigs in 2019. One of our industry's principal challenges will be to meet the growing demand with sufficient numbers of qualified and well-trained crews. We have multiple initiatives at Key underway to ensure that we can attract, train and deploy new people to our rigs. However, skilled labor will continue to be tight, so higher prices will be required to allocate demand for our services.

Our Fishing & Rental segment consists of services and equipment rentals that accompany well completions and workover services. These services may be complimentary to Key's own well service rig offerings or be combined with rigs provided by our competitors. Segment revenues increased to $17.5 million for Fishing & Rental, a 6% increase over the second quarter and we saw continued improvement in our EBITDA margins. The revenue and margin gains were driven by higher production related well workover and maintenance activity as well as deployment of rental assets into completions.

Today, our Fishing & Rental segment is running on average 35 well service rig completion packages daily on Key or competitors' rigs, which is close to 80% of our workable fleet. These completions-oriented assets have seen very high utilization and we expect to see further growth of our capability by approximately 25% by mid-year 2019.

Read the rest of this transcript on seekingalpha.com