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TheStreet Open House

Key Energy Services, Inc.'s (KEG) CEO Richard J. Alario on Q1 2014 Earnings - Call Transcript

Key Energy Services, Inc. (KEG) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


PARTICIPANTS

Corporate Participants

West Gotcher - Director, Investor Relations & Corporate Development, Key Energy Services

Richard J. Alario - Chairman, President & Chief Executive Officer, Key Energy Services, Inc.

John Marshall Dodson - Senior Vice President and Chief Financial Officer, Key Energy Services, Inc.

Other Participants

Neal D. Dingmann - Analyst, SunTrust Robinson Humphrey

Trey A. Stolz - Analyst, IBERIA Capital Partners LLC

Blake A. Hutchinson - Analyst, Howard Weil, Inc.

Kurt Hallead - Analyst, RBC Capital Markets LLC

John M. Daniel - Analyst, Simmons & Co. International

J. Marshall Adkins - Analyst, Raymond James & Associates, Inc.

Scott J. Levine - Analyst, Imperial Capital LLC

Daniel J. Burke - Analyst, Johnson Rice & Co. LLC

Michael Urban - Analyst, Deutsche Bank Securities, Inc.

MANAGEMENT DISCUSSION SECTION

Operator: Good morning. My name is Jeremy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Services' Q1 2014 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. [Operator Instructions] Thank you.

I would now like to turn the call over to the Director of Investor Relations and Corporate Development, Mr. West Gotcher. You may begin your conference.

West Gotcher, Director, Investor Relations & Corporate Development

Thank you, Jeremy. And thank you, all, for joining Key Energy Services for our first quarter 2014 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 risks factors discussed in our 2013 Form 10-K and other reports most recently filed with the SEC, which are available on our website.

This call may also include references to non-GAAP financial measures. Please refer to 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.

I'm going to turn the call over Dick Alario, Key's Chairman, President, and CEO, who will provide some introductory comments regarding the first quarter and discuss current trends in our businesses. Then Marshall Dodson, our CFO, will review our results and provide some guidance commentary. Dick will return to conclude our prepared remarks and open the call to your questions. Dick?

Richard J. Alario, Chairman, President & Chief Executive Officer

Thank you, West. Good morning, everyone. Let me first point out that Trey Wilson, our COO, is unable to join us on the call this morning. He's currently traveling out of the country on a previously scheduled trip. As a result, our - as West said, our normal call format will change a bit as you heard. So with that I'll get started.

Key generated a consolidated GAAP net loss of $0.08 a share for the first quarter. These results include a $0.01 loss due to severance in Mexico that we had discussed on last quarter's call, yielding a normalized $0.07 loss for the quarter. In the U.S., revenue in the first quarter was essentially flat to the prior quarter. These results fell below our previously guided range of 3% to 5% improvement as what turned out to be the harshest winter in years took a toll on many of Key's principal operating regions and on top of that if you layer in the severe rain events that hit the West Coast which didn't have anything to do with winter, but which had significant impact on our California operations, it's clear that our larger operating regions, and in particular those where our revenues are mostly production service driven were not spared weather disruptions. In total, weather impacts accounted for approximately $0.01 of EPS loss in the first quarter.

On the other hand, our large diameter coiled tubing units, our large well service rigs, and premium drill pipe driven by increased horizontal completion activity performed well in the quarter, but didn't see a full seasonal recovery due to the weather disruptions that I mentioned earlier. Once those issues abated, however, these services experienced improved demand as increased well count and associated completion activity progressed above the pace of typical seasonality in many active unconventional resource plays.

Our two and three-eighths inch coiled tubing units for instance were completely sold out as we exited the first quarter, achieving effectively 100% utilization. Further during Q1, we saw utilization of our two-inch coiled tubing units improve over 1,000 basis points as we captured some additional work where the two inch units brought the same utility to our customers as the two and three-eighths units did. While this is certainly not a trend, it is an encouraging development given that as the number and service intensity of horizontal wells increases incremental coil demand will likely be felt in the resource plays. As such, Key's already in a position to leverage its underutilized asset base to take advantage of that impending market demand, which would yield meaningful top line and margin growth for that business.

To that point, we believe that since these completion-driven businesses have moved beyond the weather disruptions in the first quarter, they should continue to show improved financial results as we move through the year and as the ramp up in unconventional, horizontal completion activity continues.

Our production-driven businesses, including Rig Services and Fluid Management Services, performed slightly below expectations as the seasonally muted first quarter was further burdened by severe weather and changes in regional revenue mix. Demand for production-driven services remains good and should improve as the inventory of aging oil wells continues to grow at a healthy pace, and as legacy oil wells continue to provide excellent returns at $100 a barrel oil.

We have seen the volume of large-scale production-oriented tenders begin to rap in a meaningful way recently. However, we're also seeing that the larger operators approach these projects at a methodical pace in order to identify the right long-term partners. As an example, we were recently awarded a 100-well project in the Bakken for a large independent that is re-completing older, horizontal oil wells, the first project of its kind for this operator.

Not only are we encouraged by the fact that operators are beginning to perform significant work over and re-completion activities on older, horizontal oil shale wells, the Bakken's being the oldest, but we're also pleased that, once the startup efficiencies were addressed on this project, we were able to deliver results approximately 25% faster than what the operator had budgeted. It's these types of results that contribute to be mutually beneficial to long-term partnerships. And it's these types of long-term partnerships that we envision driving production services contracting for larger operators going forward.

Now, I'd like to discuss some regional trends, both in terms of the first quarter as well as our outlook for the second quarter and the remainder of the year. Clearly, the Permian Basin is the region experiencing the most significant increases in activity, as shown by the horizontal drilling rig count in this region, reaching approximately 60% of total operating rigs, as compared to approximately 35% a year ago.

Growth in the Permian horizontal completion market has already allowed Key to increase its relative revenue generation in the Permian by 200 basis points, as compared to the fourth quarter, to where we are now deriving 30% of our U.S. revenues from the Permian Basin. We expect Permian to contribute more relative revenue generation in our U.S. business as the shift to horizontal well development continues there and as we continue to penetrate new customers and expand our business with existing customers.

Looking to the Mid-Continent, including the Mississippian Lime, the SCOOP, Granite Wash, and to some extent, the Haynesville, we've been encouraged by demand there and activity levels over the last quarter or two. We've successfully been able to capture opportunities from multiple service lines in this region. In fact, to this point in April, our Rig Services business in this market has seen the highest hours per workday in more than a year, up 9% compared to our Q1 average.

In addition to unconventional oil shale activity, we've seen a tick-up in gas related activity in this region, both production and completion activities. On the completion side, as an example, we've had an East Texas-based coiled tubing unit that until recently was a nomad, picking up jobs in whatever market it was able. Now, this unit has enough sustainable work to remain home and stay sufficiently utilized, at least for the near term. And we haven't seen that in years.

In addition, on the production side, we've begun to see some operators turn on old gas wells to take advantage of the current commodity price. While we're seeing signs of gas activity, and certainly would be encouraged to see further activity increases, this is not yet a significant driver for our business, but it's worthwhile to note.

During the first quarter, as others recently noted, the California market experienced a number of challenges, including heavy rains, a slow ramp-up in early year activity and, to some degree, well permitting issues in certain areas. Both our top line results and margins were pressured and we're currently assessing opportunities to increase activity to prior levels.

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