Market Overview

Key Energy Services Reports Third Quarter 2019 Earnings

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HOUSTON, Nov. 07, 2019 (GLOBE NEWSWIRE) -- Key Energy Services, Inc. ("Key" or the "Company") reported third quarter 2019 consolidated revenues of $106.5 million and a net loss of $25.5 million, or $(1.25) per share as compared to consolidated revenues of $112.9 million and a net loss of $18.3 million, or $(0.90) per share, for the second quarter of 2019. The results for the third quarter of 2019 include an expense of $1.2 million, or $0.06 per share, associated with certain equity awards, and gains on the sale of assets of $2.3 million, or $0.11 per share. Excluding these items, the Company reported a net loss of $26.6 million, or $(1.30) per share for the third quarter of 2019. The results for the second quarter of 2019 include an expense of $2.2 million, or $0.11 per share, as a one-time fee associated with a one-time tax refund, an expense of $1.3 million, or $0.07 per share, associated with certain equity awards, and gains on the sale of assets of $1.8 million, or $0.09 per share. Excluding these items, the Company reported a net loss of $16.6 million, or $(0.81) per share for the second quarter of 2019.

Overview and Outlook

Key's President and Chief Executive Officer, Rob Saltiel, stated, "As previously announced, Key has entered into a forbearance agreement with our lenders. Our Board and management are working constructively with our lenders to address the Company's capital structure, and if we reach an agreement with our lenders, we expect that agreement will significantly reduce the Company's debt.

"Regarding our third quarter financial results, our revenues were impacted by activity declines as our clients adjusted their spending plans to manage their cash flows in today's uncertain environment. Our efforts to reduce staffing levels were not made in time to fully offset the reduced activity, and this impacted our bottom line.  In addition, early in the fourth quarter, we implemented plans to optimize our geographic footprint. We exited a number of non-core and underperforming locations and reduced our regional and corporate overhead costs. We expect to see the full benefit of these changes in our financial results in the first quarter of 2020."

Saltiel continued, "I am confident that the steps we are taking today, supported by our talented and hardworking employees and our strong client base, will position Key for success in the future."

Financial Overview

The following table sets forth summary data for the third of quarter 2019 and prior comparable quarterly periods (in millions, except per share amounts, unaudited):

  Three Months Ended
  September 30, 2019   June 30, 2019   September 30, 2018
Revenues $ 106.5     $ 112.9     $ 134.7  
Net loss (25.5 )   (18.3 )   (23.9 )
Diluted loss per share (1.25 )   (0.90 )   (1.18 )
Adjusted EBITDA (3.7 )   1.6     5.6  
                 

Third Quarter Segment Results

Third quarter 2019 Rig Services revenues were $64.5 million as compared to second quarter 2019 revenues of $67.9 million, with third quarter 2019 rig hours of approximately 142,151 hours, a decrease of 7.8% over the prior quarter. Completion activity, which declined approximately 9.0 percent quarter on quarter, remained flat quarter on quarter at approximately 15% of total rig hours. Completion activity in the Permian Basin declined 19.4% quarter on quarter with the overall rig hour decline in the Permian Basin accounting for approximately 77.9% of the quarter on quarter decline in rig hours.  The segment generated operating income of $2.8 million (4.3% of revenues) and Adjusted EBITDA of $8.3 million (13.0% of revenue) in the third quarter of 2019, as compared to operating income of $5.9 million (8.7% of revenues) and Adjusted EBITDA of $11.6 million (17.0% of revenue) in the second quarter of 2019. Higher cost of labor, as activity declined ahead of reductions in labor, resulted in the decline in margins quarter on quarter.

Third quarter 2019 Fluid Management Services revenues decreased to $18.2 million, as compared to the second quarter 2019 revenues of $18.5 million. The segment generated operating loss of $0.4 million ((2.3)% of revenue) and Adjusted EBITDA of $1.4 million (7.7% of revenue) in the third quarter of 2019, as compared to operating income of $0.2 million (1.1% of revenue) and Adjusted EBITDA of $1.6 million (8.6% of revenue) in the second quarter of 2019. Truck hours increased in the third quarter of 2019 to 145,290 from 139,475 in the second quarter of 2019, however the higher activity in the Permian Basin and Gulf Coast regions did not offset lower pricing in the Central marketplace, which resulted in lower margins quarter on quarter.

Third quarter 2019 Fishing & Rental Services revenues were $14.1 million, as compared to second quarter 2019 revenues of $14.8 million. The segment generated an operating loss of $1.7 million ((12.1)% of revenue) and Adjusted EBITDA of $1.6 million (11.1% of revenue) in the third quarter of 2019, as compared to an operating loss of $1.8 million ((12.3)% of revenue) and Adjusted EBITDA of $2.1 million (14.2% of revenue) in the second quarter of 2019. The decline in revenues was due to lower activity in the Permian Basin where activity declined ahead of labor cost reductions, reducing margins quarter on quarter.

Third quarter 2019 Coiled Tubing Services revenues were $9.7 million, as compared to second quarter 2019 revenues of $11.7 million. Utilization of large diameter coiled tubing units remained flat quarter on quarter, averaging approximately 2.5 units. The segment generated an operating loss of $1.5 million ((15.9)% of revenue) and negative Adjusted EBITDA of $0.3 million ((3.2)% of revenue) in the third quarter of 2019, as compared to an operating loss of $1.4 million ((12.3)% of revenue) and negative Adjusted EBITDA of $0.3 million ((2.4)% of revenue) in the second quarter of 2019.  Revenues declined quarter on quarter due to lower realized pricing, primarily in the Central region on both large and small units as well a geographic mix of revenues.

General and Administrative Expenses

General and Administrative (G&A) expenses were $21.4 million for the third quarter of 2019, compared to $22.5 million in the prior quarter. The decrease quarter on quarter was primarily due to a one-time fee associated with a one-time tax refund partially during the second quarter of 2019. Third quarter 2019 G&A expenses included $1.2 million of stock-based compensation expense, as compared to $1.3 million of stock-based compensation expense for the second quarter of 2019.

Liquidity

As previously announced, the Company elected not to make a scheduled interest payment due October 18, 2019 under the Term Loan and Security Agreement dated as of December 15, 2016 (the "Term Loan Agreement"), by and among Key, Cortland Products Corp., as agent, and the lenders party thereto (the "Term Loan Lenders") relating to the Company's senior secured term loan.  The Company's failure to make the October interest payment resulted in a default under the Term Loan Agreement and a cross default under the Loan and Security Agreement, dated as of April 5, 2019 (the "ABL Credit Agreement") by and among Key, as borrower, the Lenders party thereto (the "ABL Lenders" and, collectively with the Term Loan Lenders, the "Lenders") and Bank of America, N.A. as Administrative Agent and Sole Collateral Agent (such defaults, the "Specified Defaults").

On October 29, 2019, the Company entered into forbearance agreements with each of the Term Loan Lenders collectively holding over 99.5% of the principal amount of the outstanding term loans (the "Term Loan Forbearance Agreement") and all of the ABL Lenders (the "ABL Forbearance Agreement" and, collectively, the "Forbearance Agreements").  Pursuant to the Forbearance Agreements, the Lenders party thereto have agreed that, until the earlier of December 6, 2019 or the occurrence of certain specified early termination events, such Lenders will forbear from exercising any default-related rights and remedies with respect to the Specified Defaults.  The Forbearance Agreements contain certain representations and warranties of the Company and covenants with which the Company must comply during the forbearance period, including a requirement to maintain aggregate bank and book cash balances of at least $10 million as measured on a weekly basis.  The failure to comply with such covenants, among other things, would result in the early termination of the forbearance period. The Specified Defaults and related matters including the Company's level of debt raise substantial doubt as to the ability of the Company to continue as a going concern. The Company is in active discussions with the Lenders regarding the Company's capital structure and the potential to reduce its debt level, however an agreement with the Lenders has not been reached as of the today. The Company believes that it is probable that if such an agreement is reached, it will alleviate the substantial doubt as to the Company's ability to continue as a going concern.

Due to the Specified Defaults, the Company is currently unable to borrow any amounts under the ABL Credit Agreement. As of September 30, 2019, Key had total liquidity of $38.5 million, consisting of $22.6 million in unrestricted cash and $15.9 million of borrowing capacity at that time under the ABL Credit Agreement. This compares to total liquidity at June 30, 2019 of $50.4 million, consisting of $29.3 million in unrestricted cash and $21.1 million of borrowing capacity available under the ABL Credit Agreement. Capital expenditures for the third quarter of 2019 were $4.1 million with $3.6 million in asset sale proceeds for the same period. Capital expenditures for the first nine months of 2019 were $16.5 million, with $8.4 million in asset sale proceeds for the same period.

Conference Call Information

As previously announced, Key management will host a conference call to discuss its third quarter 2019 financial results on Friday, November 8, 2019 at 9:00 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 8485968. 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 Friday, November 8, 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 8485968. 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):

  Three Months Ended   Nine Months Ended
  September 30, 2019   June 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018
REVENUES $ 106,523     $ 112,943     $ 134,721     $ 328,739     $ 404,442  
COSTS AND EXPENSES:                  
Direct operating expenses 87,956     90,564     106,103     266,714     314,061  
Depreciation and amortization expense 14,584     14,262     21,808     43,142     62,881  
General and administrative expenses 21,375     22,544     23,925     66,014     71,353  
Operating loss (17,392 )   (14,427 )   (17,115 )   (47,131 )   (43,853 )
Interest expense, net of amounts capitalized 8,411     8,520     8,708     26,164     25,425  
Other income, net (351 )   (239 )   (213 )   (1,732 )   (1,972 )
Loss before income taxes (25,452 )   (22,708 )   (25,610 )   (71,563 )   (67,306 )
Income tax (expense) benefit (80 )   4,405     1,750     4,287     1,588  
NET LOSS $ (25,532 )   $ (18,303 )   $ (23,860 )   $ (67,276 )   $ (65,718 )
Loss per share:          
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