SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

 

Date of Report: (Date of earliest event reported): February 17, 2004 (February 17, 2004)

 

KEY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Item 12. Results of Operations and Financial Condition

 

Key Energy Services, Inc. today announced its operating results for the quarter and year ended December 31, 2003.

 

(Dollars in Thousands)		Quarter Ended						Year Ended
		12/31/03			12/31/02			12/31/03			12/31/02
Revenue		$	231,720		$	205,118		$	926,850		$	742,154
Net income		3,976			1,134			7,298			(14,865		)
Net cash provided by operating activities		45,312			49,717			118,219			132,759
Adjusted EBITDA (1)		44,995			39,147			177,440			122,975
Income (Loss) before income taxes		6,543			1,959			25,883			(18,768		)
Earnings (Loss) per diluted share (2)		$	0.03		$	0.01		$	0.11		$	(0.10	)

 

(1)     A reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure is presented at the end of this current report.

(2)     Earnings (Loss) per diluted share is before discontinued operations and the cumulative effective of a change in accounting principle, net of tax.

 

The foregoing results are subject to completion of the Company’s 2003 audit.

 

Rig hours for the December 2003 quarter totaled approximately 576,520, representing a 5.0% increase over total rig hours of approximately 548,974 for the December 2002 quarter while trucking hours for the December quarter totaled approximately 718,632, representing a 5.6% increase over total truck hours of approximately 680,222 for the December 2002 quarter.  As anticipated, activity levels for the December 2003 quarter were down from the September 2003 quarter due to the impact of fewer working days, holidays and daylight hours.  For the year ended December 31, 2003, revenue and earnings from continuing operations improved significantly as activity levels and pricing strengthened from 2002 levels.   Additionally, the Company generated significant free cash flow during 2003 which was used to retire high cost debt.

 

Activity levels in 2004 have strengthened further.  Rig hours through the first six weeks of 2004 are approximately 4.5% higher than the same period for the prior year and are expected to improve from their current levels.  Recently, inquiries for all of Key’s product lines have increased, particularly in Key’s pressure pumping and rental tool operations.  Furthermore, during the March 2004 quarter, the Company expanded its well servicing and drilling operations by introducing several well service rigs and one drilling rig to the North Texas market, marking the first time the Company has provided well service rigs to this market.  The

 

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Company anticipates operating a minimum of six well service rigs and two drilling rigs in that region during 2004.  Additionally, the Company has recently remanufactured three well service rigs which will be sent to Argentina, where the Company is currently running at full utilization.

 

Assuming activity levels continue to improve, the Company is currently forecasting the following operating results:

 

		Quarter Ended				Year Ended
		3/31/04		6/30/04		12/31/04
Working Days		64		63		253
Rig hours (in thousands)		615 - 630		635 - 650		2,500 - 2,550
Revenue (in millions)		$240 - $246		$245 - $255		$990 - $1,040
Loss on retirement of the 14% Notes (in millions)		$14.0		$0.0		$14.0
Earnings per diluted share excluding loss on retirement of the 14% Notes		$0.04 - $0.06		$0.07 - $0.09		$0.35 - $0.46

 

This guidance assumes that oil and natural gas prices remain above $28.00 and $4.50, respectively, during 2004.  Management currently believes that with these commodity prices, capital spending by the Company’s customers should improve approximately 5% to 10% during 2004.  In addition, this guidance assumes limited impact with respect to Key’s composite hourly rates and a 2004 capital expenditure budget of approximately $85 million.  A substantial variance in commodity prices could result in a significant variance in the Company’s actual operating results.

 

Francis D. John, Chairman and CEO, stated, “Over the past year, Key has demonstrated substantial operating improvements and is prepared for what we believe will be a prolonged period of stable activity levels in the North American oil and natural gas markets.  During the past twelve months, Key (i) introduced its proprietary KeyView^TM system, a significant technological advancement in the well servicing industry, (ii) remanufactured 76 well service rigs; (iii) retired the remaining $97.5 million of 14% Notes, thereby reducing annual interest costs from the previous run rate by over $13 million annually; (iv) significantly improved its safety performance which resulted in declines in both its workers compensation and general liability costs in 2003 and expects further improvement in 2004; and (v) expanded its U.S. rental tool, pressure pumping and trucking operations through several niche acquisitions.”

 

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Mr. John continued, “In addition to all the improvements made during 2003, we are especially well positioned for 2004.  Based on announcements made by many of our customers with regard to their capital spending plans, activity levels should continue to improve.  Already through mid-February, Key’s activity levels are higher than our original expectations despite a modest decline in the Baker Hughes land drilling rig count during the month of January.  Based on current activity levels, as well as our expectations for increased drilling and workover activity later this year, we believe that earnings per diluted share for 2004 will total between $0.35 and $0.46, excluding debt retirement costs.”

 

Mr. John concluded, “With our 2004 objectives set, we intend to benefit from our strong operating leverage.  We will continue to rollout the KeyView system with a goal of having 250 rigs equipped with the technology by year end and will maintain our rig remanufacturing program.  We will seek opportunities to expand our rental tool operations domestically and we will continue to develop our international operations.  As always, we will continue to focus on free cash flow.  With respect to the balance sheet, having just retired our 14% Notes, we now turn our attention to Key’s $275 million of 8 3/8% Notes which are callable on March 1, 2005.  Assuming no material change in interest rates, we anticipate calling those Notes which will generate additional annual interest savings of over $10 million annually.  This, along with all of our other ongoing cost reduction initiatives and the prospect of a prolonged upcycle due to the strong North American gas markets, should make for a meaningful improvement in results into 2005.”

 

Key Energy Services, Inc. is the world’s largest rig-based, onshore well service company and owns and/or operates approximately 1,498 well service rigs, 2,448 oilfield service vehicles, as well as 76 drilling rigs.  The Company provides diversified energy operations including well servicing, contract drilling, pressure pumping, fishing and rental tool services and other oilfield services.  The Company has operations in all major onshore oil and gas producing regions of the continental United States and internationally in Argentina and Egypt.

 

Certain comments contained in this news release concerning the business outlook and anticipated financial results of the Company constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor created by that act.  Whenever possible, the Company has identified these “forward-looking statements” by words such as “expects”, “believes”, “anticipates” and similar phrases.  The forward-looking statements are based upon management’s expectations and beliefs and, although these statements are based upon reasonable assumptions, there can be no assurances that the financial results or components will be as estimated.  The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

 

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		Three Months Ended December 31,						Twelve Months Ended December 31,
(Thousands, except per share data)		2003			2002			2003			2002
REVENUES:
Well servicing		$	213,614		$	187,093		$	856,993		$	681,545
Contract drilling		17,980			17,044			69,905			58,535
Other		126			981			(48		)	2,074
TOTAL REVENUES		231,720			205,118			926,850			742,154
COSTS AND EXPENSES:
Well servicing		149,725			132,694			605,370			498,647
Contract drilling		13,440			12,029			51,453			43,999
Depreciation, depletion and amortization		25,643			25,012			101,603			89,155
General and administrative		23,561			21,951			93,809			78,054
Interest		12,808			11,481			48,748			43,029
Foreign currency transaction gain, Argentina		—			—			—			(401		)
(Gain) loss on retirement of debt		—			(8		)	(16		)	8,439
TOTAL COSTS AND EXPENSES		225,177			203,159			900,967			760,922
Income (loss) before income taxes		6,543			1,959			25,883			(18,768		)
Income tax (expense) benefit		(2,727		)	(963		)	(10,879		)	7,288
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS		3,816			996			15,004			(11,480		)
Discontinued operations including loss on sale of $7,804, net of tax		160			138			(7,706		)	(512		)
Cumulative effect on prior years of a change in accounting principle, net of tax		—			—			—			(2,873		)
NET INCOME (LOSS)		$	3,976		$	1,134		$	7,298		$	(14,865	)
EARNINGS (LOSS) PER SHARE:
Net income (loss) before discontinued operations and cumulative effect of a change in accounting principle, net of tax:
Basic		$	0.03		$	0.01		$	0.12		$	(0.10	)
Diluted		$	0.03		$	0.01		$	0.11		$	(0.10	)
Discontinued operations
Basic		$	0.00		$	0.00		$	(0.06	)	$	(0.00	)
Diluted		$	0.00		$	0.00		$	(0.06	)	$	(0.00	)
Cumulative effect
Basic		$	0.00		$	0.00		$	0.00		$	(0.02	)
Diluted		$	0.00		$	0.00		$	0.00		$	(0.02	)
Net income (loss)
Basic		$	0.03		$	0.01		$	0.06		$	(0.12	)
Diluted		$	0.03		$	0.01		$	0.05		$	(0.12	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		130,539			128,259			129,459			117,380
Diluted		131,979			129,294			131,252			117,380

 

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ADDITIONAL SELECTED FINANCIAL AND OPERATING DATA (UNAUDITED)

 

		As of and for the Three Months Ended
		December 31, 2003			September 30, 2003			December 31, 2002
Rig Hours:
Daylight rigs		434,981			474,830			435,088
24-hour rigs		88,848			90,124			65,937
Drilling rigs		52,691			53,450			47,948
Trucking Hours:		718,632			755,816			680,222
Selected Balance Sheet Data (dollars in thousands):
Cash and cash equivalents		$	102,771		$	89,427		$	9,044
Total assets		$	1,587,212		$	1,567,601		$	1,502,002
Net funded debt		$	453,585		$	467,748		$	484,521
Total capitalization		$	1,183,071		$	1,186,117		$	1,180,889
Net funded debt / total capitalization (1)		38.3		%	39.4		%	41.0		%
Capital expenditures		$	20,373		$	21,834		$	24,904
(1)     A reconciliation of net funded debt to total capitalization to its most directly comparable GAAP measure is presented at the end of this current report.

 

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RECONCILIATIONS OF NON-GAAP TO GAAP FINANCIAL MEASURES

 

In compliance with Regulation G, set forth below is a reconciliation of the non-GAAP financial measures presented in this current report to their most directly comparable financial measures calculated in accordance with GAAP.

 

Adjusted EBITDA: Adjusted EBITDA is a non-GAAP financial measure that represents the Company’s earnings before interest expense, taxes, depreciation, depletion and amortization, bad debt expense, (gains) losses on retirement of debt, foreign currency transaction (gains) losses, discontinued operations and cumulative effect for the period indicated.  Management considers Adjusted EBITDA to be a measure of both performance and liquidity.  In addition, management believes that Adjusted EBITDA is sometimes useful to compare the operating results of companies within an industry due to the fact that it eliminates certain financing decisions.  However, Adjusted EBITDA should not be considered as an alternative to GAAP measures of performance, such as net income or cash flow.  The term “GAAP” refers to generally accepted accounting principles.

 

		For the Quarter Ended						For the Year Ended
(in thousands)		December 31, 2003			December 31, 2002			December 31, 2003			December 31, 2002
Reconciliation of Adjusted EBITDA to Net Cash Flows from Operating Activities:
Net cash provided by operating activities		$	45,312		$	49,717		$	118,219		$	132,759
Interest expense, net of amortization of deferred costs		11,983			10,294			45,422			39,592
Current income tax expense (benefit)		3,756			33			4,728			(4,767		)
Loss on sales of fixed assets		(618		)	(332		)	(659		)	(639		)
Discontinued operations, net of tax		(160		)	(569		)	6,538			(1,765		)
Increase (decrease) in accounts receivable, net of bad debt expense		(8,458		)	4,364			15,969			(19,224		)
Increase (decrease) in other current assets		6,136			(2,620		)	6,987			(5,742		)
(Increase) decrease in current liabilities, excluding current portion of long-term debt and capital lease obligations		(10,200		)	(17,684		)	(9,492		)	(3,724		)
Other assets and liabilities		(2,756		)	(4,056		)	(10,272		)	(13,515		)
Adjusted EBITDA		$	44,995		$	39,147		$	177,440		$	122,975
Reconciliation of Adjusted EBITDA to Net Income (Loss):
Net income (loss)		$	3,976		$	1,134		$	7,298		$	(14,865	)
Interest		12,808			11,481			48,748			43,029
Income tax expense (benefit)		2,727			963			10,879			(7,288		)
Depreciation, depletion and amortization		25,643			25,012			101,603			89,155
Bad debt expense		1			703			1,222			1,521
(Gain) / loss on retirement of debt		—			(8		)	(16		)	8,439
Foreign currency transaction gain, Argentina		—			—			—			(401		)
Discontinued operations, net of tax		(160		)	(138		)	7,706			512
Cumulative effect on prior years of a change in accounting principle, net of tax		—			—			—			2,873
Adjusted EBITDA		$	44,995		$	39,147		$	177,440		$	122,975

 

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RECONCILIATIONS OF NON-GAAP TO GAAP FINANCIAL MEASURES

 

Net Funded Debt to Total Capitalization: Net funded debt to total capitalization is a non-GAAP financial measure that represents total debt (including capital leases) less cash and cash equivalents over total capitalization, which consists of total debt (including capital leases) less cash and cash equivalents plus stockholders’ equity.   Management considers net funded debt to total capitalization to be a measure of liquidity and believes that it is a more useful measure than total debt to total capitalization since the cash on hand can be used to retire outstanding debt.

 

		As of and for the Three Months Ended
(in thousands)		December 31, 2003			September 30, 2003			December 31, 2002
Net funded debt:
Total debt (including capital leases)		$	556,356		$	557,175		$	493,565
Less:  Cash and cash equivalents		102,771			89,427			9,044
Net funded debt		$	453,585		$	467,748		$	484,521
Total capitalization:
Net funded debt		$	453,585		$	467,748		$	484,521
Stockholders’ equity		729,486			718,369			696,368
Total capitalization		$	1,183,071		$	1,186,117		$	1,180,889
Net funded debt / total capitalization		38.3		%	39.4		%	41.0		%

 

The information contained in this Form 8-K (including the exhibit hereto) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

 

 

[Signature Page Follows]

 

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SIGNATURE

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant duly caused this report to be signed by the undersigned hereunto duly authorized.

 

Date:   February 17, 2004	KEY ENERGY SERVICES, INC.
	By:	/s/ Francis D. John
		Francis D. John, Chief Executive Officer

 

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