Key Energy Services, Inc

The following excerpt is from the company's SEC filing.

February 25, 2019

1301 McKinney Street

Suite 1800

Houston, TX 77010

Contact:

Marshall Dodson

713-651-4403

FOR IMMEDIATE RELEASE

Key Energy Services Reports Fourth Quarter and Full Year 2018 Earnings

HOUSTON, TX, February 25, 2019

- Key Energy Services, Inc. (“Key” or the “Company”) reported fourth quarter 2018 consolidated revenues of $117.2 million and a net loss of $23.1 million, or $(1.14) per share as compared to consolidated revenues of $134.7 million and a net loss of $23.9 million, or $(1.18) per share for the third quarter of 2018. The r esults for the fourth quarter of 2018 include expenses of $1.3 million, or $0.06 per share, associated with certain equity awards, and gains on sale of assets of $2.2 million, or $0.11 per share. Excluding these items, the Company reported a net loss of $24.0 million, or $(1.19) per share for the fourth quarter of 2018. The results for the third quarter of 2018 include expenses of $1.6 million, or $0.08 per share, associated with certain equity awards, gains on sale of assets of $1.9 million, or $0.10 per share, and costs associated with executive changes of $1.2 million, or $0.06 per share. Excluding these items, the Company reported a net loss of $23.0 million, or $(1.14) per share for the third quarter of 2018.

Consolidated revenues for the full year of 2018 increased $85.5 million, or 19.6%, to $521.7 million from full year 2017 revenues of $436.2 million. The Company reduced its net loss by $31.8 million to $88.8 million for the full year of 2018 from $120.6 million for the full year of 2017, with diluted loss per share improving by $1.62 per share to $(4.38) per share for the year ended December 31, 2018 as compared to $(6.00) per share for the full year of 2017. Full year 2018 results include expenses of $5.2 million, or $0.26 per share, associated with certain equity awards, gains on sale of assets of $9.6 million, or $0.47 per share, and costs associated with executive changes of $1.2 million, or $0.06 per share. Adjusted EBITDA for the full year of 2018 improved by $31.2 million to $22.0 million from negative EBITDA of $9.2 million in 2017.

Overview and Outlook

Key’s President and Chief Executive Officer, Rob Saltiel, stated, “Our fourth quarter results were impacted by a general reduction in activity due to the completion of clients’ 2018 budgets, the decline in oil prices from October onward and the seasonal holiday slowdown. This particularly affected our coiled tubing business and our 24-hour completion rigs in the Permian Basin. Despite the decline in activity and revenues, our results benefited from price increases during the fourth quarter and our success in lowering

our cost structure. These factors lessened the impact on our net loss and Adjusted EBITDA from the quarter-to-quarter decline in revenue.”

Saltiel continued, “We ended 2018 with $74.3 million in total liquidity, of which $50.3 million was cash. We expect that we will end 2019 with a total liquidity at least equivalent to our liquidity at the end of 2018. For the first quarter of 2019, we expect our revenues to increase from the fourth quarter of 2018 between 1.0% to 5.0%, with further improvement in the following quarter as we move past seasonal impacts and our clients execute on their 2019 plans.”

Financial Overview

The following tables sets forth summary data for the fourth quarter and twelve months of 2018 and prior comparable periods (in millions except per share amounts, unaudited):

 Three Months Ended

September 30,

December 31, 2017

(unaudited)

 (in millions, except per share amounts)

Revenues

Net loss

Diluted loss per share

Twelve Months Ended

(120.6

Fourth Quarter Segment Results

Fourth quarter 2018 Rig Services revenues were $69.1 million as compared to third quarter 2018 revenues of $77.2 million, with fourth quarter 2018 rig hours of approximately 156,000 hours. The decline in revenues was due to seasonal factors, a lower oil price environment and a reduction in 24-hour completion activity as our clients’ completed their 2018 budgets ahead of year-end. The segment generated operating income of $4.1 million (5.9% of revenues) and Adjusted EBITDA of $11.0 million (16.0% of

revenue) in the fourth quarter of 2018 as compared to operating income of $4.5 million (5.8% of revenue) and Adjusted EBITDA of $11.9 million (15.4% of revenue) in the third quarter of 2018. Cost structure reductions and improved pricing during the fourth quarter benefited margins and partially offset the decline in income due to the lower activity.

Fourth quarter 2018 Fluid Management Services revenues were $20.8 million as compared to the third quarter 2018 revenues of $21.9 million. The segment generated an operating loss of $1.3 million and Adjusted EBITDA of $1.9 million (9.3% of revenue) in the fourth quarter of 2018 as compared to an operating loss of $2.8 million and Adjusted EBITDA of $1.6 million (7.3% of revenue) in the third quarter of 2018. The quarter on quarter improvement was due largely to lower repair and maintenance costs and the Company’s relocation of assets into markets with better economics.

Fourth quarter 2018 Fishing & Rental Services revenues were $16.9 million as compared to third quarter 2018 revenues of $17.5 million. The segment generated an operating loss of $1.2 million and Adjusted EBITDA of $4.4 million (26.0% of revenue) in the fourth quarter of 2018 as compared to operating loss of $1.4 million and Adjusted EBITDA of $4.5 million (25.7 % of revenue) in the third quarter of 2018. Improvements in pricing partially offset the typical seasonal decline and benefited margins.

Fourth quarter 2018 Coiled Tubing Services revenues were $10.5 million as compared to third quarter 2018 revenues of $18.2 million. Utilization of large diameter coiled tubing units declined during the fourth quarter of 2018 as clients finished their completions schedules ahead of year-end. The segment generated an operating loss of $2.3 million and negative Adjusted EBITDA of $0.9 million ((8.8)% of revenue) in the fourth quarter of 2018 as compared to operating income of $0.4 million and Adjusted EBITDA of $1.8 million (10.1% of revenue) in the third quarter of 2018. During the fourth quarter of 2018, the Company averaged approximately 2.5 large diameter units working as compared to approximately 5 in the prior quarter. Coiled Tubing Services margins declined largely due to the lower activity and associated labor cost inefficiencies.

General and Administrative Expenses

General and Administrative (G&A) expenses were $20.3 million for the fourth quarter of 2018 compared to $23.9 million in the prior quarter. Fourth quarter 2018 G&A expenses included $1.3 million of stock-based compensation expense as compared to $1.6 million of stock-based compensation expense for the third quarter of 2018. G&A expense for the fourth quarter of 2018 benefited largely from cost structure changes implemented during the quarter.

Liquidity

As of December 31, 2018, Key had total liquidity of $74.3 million, consisting of $50.3 million in unrestricted cash and $24 million of borrowing capacity available under the Company’s $100.0 million asset-based loan facility. This compares to total liquidity of $72.8 million at September 30, 2018, consisting of $43.3 million in unrestricted cash and $29.5 million of borrowing capacity available under the Company’s $100.0 million asset-based loan facility. The Company has no outstanding borrowings under its $100.0 million asset-based loan facility. Capital expenditures for the fourth quarter of 2018 were $9.0 million and $37.5 million for the full year of 2018 with $15.4 million in asset sale proceeds for the full year of 2018.

Conference Call Information

As previously announced, Key management will host a conference call to discuss its fourth quarter and full year 2018 financial results on Tuesday, February 26, 2019 at 10:00 a.m. CST. Callers from the U.S. and Canada should dial 888-794-4637 to access the call. International callers should dial 352-204-8973. All callers should ask for the “Key Energy Services Conference Call” or provide the access code 9874648. The conference call will also be available live via the internet. To access the webcast, go to www.keyenergy.com and select “Investor Relations.”

A telephonic replay of the conference call will be available on Tuesday, February 26, 2019, beginning approximately two hours after the completion of the conference call and will remain available for two weeks. To access the replay, call 855-859-2056 or 800-585-8367. The access code for the replay is 9874648. The replay will also be accessible at www.keyenergy.com under “Investor Relations” for a period of at least 90 days.

Consolidated Statements of Operations (in thousands, except per share amounts, unaudited):

REVENUES

117,253

134,721

116,280

521,695

436,165

COSTS AND EXPENSES:

Direct operating expenses

92,335

106,103

94,351

406,396

332,332

Depreciation and amortization expense

19,758

21,808

21,217

82,639

84,542

General and administrative expenses

20,273

23,925

16,786

91,626

115,284

Impairment expense

Operating loss

(15,113

(17,115

(16,074

(58,966

(96,180

Interest expense, net of amounts capitalized

34,163

31,797

Other income, net

(1,408

(2,354

(7,187

Reorganization items, net

Loss before tax income taxes

(23,469

(25,610

(22,791

(90,775

(122,291

Income tax benefit

NET LOSS

(23,078

(23,860

(22,327

(88,796

(120,589

Loss per share:

Basic and diluted

Weighted average shares outstanding:

20,297

20,252

20,116

20,250

20,105

Segment Revenue and Operating Income (in thousands, except for percentages, unaudited):

69,056

77,153

64,804

296,969

248,830

16,890

17,477

13,364

64,691

59,172

10,500

18,220

14,861

71,013

41,866

20,807

21,871

23,251

89,022

80,726

Consolidated Total

Operating Income (Loss)

19,552

(3,620

(1,170

(1,390

(3,745

(8,653

(2,302

(1,348

(2,832

(2,106

(8,850

(19,532

(4,993

Functional Support

(14,371

(17,776

(10,893

(66,211

(77,172

Operating Income (Loss) % of Revenues

Following is a reconciliation of net loss as presented in accordance with United States generally accepted accounting principles (GAAP) to EBITDA and Adjusted EBITDA as required under Regulation G of the Securities Exchange Act of 1934.

Reconciliations of EBITDA and Adjusted EBITDA to net loss (in thousands, except for percentages, unaudited):

(1,750

(1,979

(1,702

Interest income

25,207

(6,663

    % of revenues

Severance costs

Stock-based compensation

(3,989

Restructuring items, net

Gain on sales of assets

(2,216

(1,935

(9,618

(22,422

Legal settlement

11,562

Gain on sale of business in Russia

(4,677

Restructuring professional fees

Executive changes  

22,042

(9,230

Three Months Ended December 31, 2018

Fishing and Rental Services

Net income (loss)

(1,164

(2,300

(1,341

(22,378

11,755

(13,714

(1,239

11,022

(12,561

Three Months Ended September 30, 2018

(1,378

(2,827

(24,557

12,700

(16,881

(Gain) loss on sales of assets

11,917

(14,267

Twelve Months Ended December 31, 2018

19,689

(8,622

(8,773

(96,292

31,519

23,361

20,091

51,208

14,739

10,425

11,318

(62,483

(3,329

(3,230

(2,348

48,286

14,136

(56,798

“EBITDA” is defined as income or loss attributable to Key before interest, taxes, depreciation, and amortization.

“Adjusted EBITDA” is EBITDA as further adjusted for certain non-recurring or extraordinary items such as impairment expense, severance expense, loss on debt extinguishment, gains or losses on asset sales, asset retirements and impairments, and certain non-recurring transaction or other costs.

EBITDA and Adjusted EBITDA are non-GAAP measures that are used as supplemental financial measures by the Company’s management and directors and by external users of the Company’s financial statements, such as investors, to assess:

The financial performance of the Company’s assets without regard to financing methods, capital structure or historical cost basis;

The ability of the Company’s assets to generate cash sufficient to pay interest on its indebtedness;

The Company’s operating performance and return on invested capital as compared to those of other companies in the well services industry, without regard to financing methods and capital structure; and

The Company’s operating trends underlying the items that tend to be of a non-recurring nature.

Normalized operating loss is a non-GAAP financial measure and is defined as operating loss plus or minus certain items such as impairment expense, severance expense, FCPA settlement costs and FCPA investigation costs. Normalized operating loss is used as a supplemental financial measure by the Company’s management and directors and by external users of the Company’s financial statements, such as investors, primarily to compare the Company’s core operating and financial performance from period to period without regard to the many non-cash accounting charges or unusual expenses that have impacted the Company’s GAAP operating income and net income due to the severe downturn in the company’s business.

EBITDA, Adjusted EBITDA and normalized operating income have limitations as analytical tools and should not be considered an alternative to net income, operating income, cash flow from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA, Adjusted EBITDA and normalized operating income exclude some, but not all, items that affect net income and operating income and these measures may vary among other companies. Limitations in

using normalized operating loss as an analytical tool include that normalized operating loss excludes certain cash costs and losses actually incurred by the Company. Limitations to using EBITDA and Adjusted EBITDA as an analytical tool include:

EBITDA and Adjusted EBITDA do not reflect Key’s current or future requirements for capital expenditures or capital commitments;

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements necessary to service, interest or principal payments on Key’s debt;

EBITDA and Adjusted EBITDA do not reflect income taxes;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

Other companies in Key’s industry may calculate EBITDA and Adjusted EBITDA differently than Key does, limiting their usefulness as a comparative measure; and

EBITDA and Adjusted EBITDA are a different calculation from earnings before interest, taxes, depreciation and amortization as defined for purposes of the financial covenants in the Company’s senior secured credit facility, and therefore should not be relied upon for assessing compliance with covenants.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These forward-looking statements are based on Key’s current expectations, estimates and projections and its management’s beliefs and assumptions concerning future events and financial trends affecting its financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “predicts,” “expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties and are not guarantees of performance. Future actions, events and conditions and future results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in “Item 1A. Risk Factors,” in Key’s Annual Report on Form 10-K for the year ended December 31, 2017 and in other reports Key files with the Securities and Exchange Commission.

Key undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this press release except as required by law. All of Key’s written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

Important factors that may affect Key’s expectations, estimates or projections include, but are not limited to, the following: conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies; volatility in oil and natural gas prices; Key’s ability to implement price increases or maintain pricing on its core services; risks that Key may not be able to reduce, and could even experience increases in, the costs of labor, fuel, equipment and supplies employed in its businesses; industry capacity; asset impairments or other charges; the periodic low demand for Key’s services and resulting operating losses and negative cash flows; Key’s highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that its insurance may not be adequate to cover all of its losses or liabilities; significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations, specifically those relating to hydraulic fracturing, as well as climate change legislation or initiatives; Key’s historically high employee turnover rate and its ability to replace or add workers, including executive officers and skilled workers; Key’s ability to incur debt or long-term lease obligations; Key’s ability to implement technological developments and enhancements; severe weather impacts on Key’s business, including hurricane activity; Key’s ability to successfully identify, make and integrate acquisitions and its ability to finance future growth of its operations or future acquisitions; Key’s ability to achieve the benefits expected from disposition transactions; the loss of one or more of Key’s larger customers; Key’s ability to generate sufficient cash flow to meet debt service obligations; the amount of Key’s debt and the limitations imposed by the covenants in the agreements governing its debt, including its ability to comply with covenants under its current debt agreements; an increase in Key’s debt service obligations due to variable rate indebtedness; Key’s inability to achieve its financial, capital expenditure and operational projections, including quarterly and annual projections of revenue and/or operating income and its inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Key as a whole or for geographic regions and/or business segments individually); Key’s ability to respond to changing or declining market conditions, including Key’s ability to reduce the costs of labor, fuel, equipment and supplies employed and used in its businesses; Key’s ability to maintain sufficient liquidity; the adverse impact of litigation; and other factors affecting Key’s business described in “Item 1A. Risk Factors” in its Annual Report on Form 10-K for the year ended December 31, 2017, and other reports Key files with the Securities and Exchange Commission.

About Key Energy Services

Key Energy Services is the largest onshore, rig-based well servicing contractor based on the number of rigs owned. Key provides a complete range of well intervention services and has operations in all major onshore oil and gas producing regions of the continental United States.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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