From Dain Rauscher on KEG:
KEG:SB-Spec;REITERATE STRONG BUY-SPECULATIVE RATING ON KEY ENERGY
Relative to Pride Internation, Inc. (NYSE: PDE; SB-Agg; $24.75) and R&B
Falcon Corporation (NYSE: FLC; Neutral; $23), both companies with debt-to-
capitalization ratios above 65% and both companies in the operationally
leveraged rig/dayrate business, Key Energy Services Inc. (KEG) is trading at
a 31% discount their 2000 respective average.
||
||We have been using $250-$280 million for an EBITDA range based on KEG's
current asset base, which compares very favorably to the $168 million in
EBITDA estimated for 2001. Using replacement cost economics, the day or
hourly rate required to provide a sufficient return to add capacity, KEG's
EBITDA run rate would be in excess of $325 million on an annual basis. Since
most investors are now looking at replacement dayrate economics and
discounting back to the present, the upside to KEG is much higher than our
current 2001-2002 forecast that provides our $14-$16 price target.
||
||The Independent Petroleum Association of America (IPAA) said recently that
the workover rig count should be 40% higher than current levels given the
commodity price outlook. We are already starting to see confidence in oil
prices push the oil drilling rig count up and we expect the workover rig
count to move up to meet or exceed the IPAA's expectations.
||
||Concerns exist about the shortage of personnel and the concern is valid,
but it should not slow down the fundamental improvement of companies in the
industry, including KEG. In fact, it should help it. The industry is always
short hands in the cyclical upturn. Rig hands that were laid off last cycle
would rather see the stability of working at McDonalds than the roller
coaster of the oil business. Yet every cycle, we recruit people. The shortage
of skilled people, a constant complaint in the technology field, has not
stymied growth there. Dayrates move up in advance of increased people cost,
not visa versa. Lack of availability to an oil company can be either the lack
of a rig or lack of hands, but either way results in reduced availability.
Oil companies offer more money. Equipment is shuffled to take advantage of
higher pricing and more aggressive hiring at higher levels is undertaken. But
dayrates move up in advance of higher costs. It is the nature of the business
and is what forces rates higher.
Stock Opinion
Our near-term price target on KEG shares is $14 per share based on the strong
cash flow generation capability of the company and the ability and
willingness to de-leverage the balance sheet from operating cash flows. At
10x our calendar 2001 cash flow estimate of $1.40 per share, still a discount
to the peer group valuation, we expect the stock to continue its recent
momentum and trade up further as pricing, utilization, and results improve.
||
||Key Energy currently has an existing asset base that can generate at least
$250 million in EBITDA without any further acquisitions, but well before any
concerns about replacement-level day rates. Our current forecast for FY2001
is only $159 million. At the current Enterprise Value/EBITDA multiple, the
EBITDA target would imply a stock price of $17.50. Assuming that level of
cash flow would be reached in two years, discounted back, we get a price
target of $14 per share. Clearly, reaching that level earlier pushes our
price target higher.
||
||Since the company continues to reduce debt, lowering its risk profile, we
should see multiple expansion. The higher operating margins and accelerating
growth argue for multiple expansion as well.
Company Description
Key Energy is the world's largest rig-based well servicing firm, owning
approximately 1,400 well service rigs and 1,200 oilfield trucks, as well as
73 drilling rigs. The company provides diversified energy operations
including well servicing, contract drilling, and other oilfield services and
oil and natural gas production. The company has operations in all major
onshore oil and gas producing regions of the continental United States and in
Argentina and Ontario, Canada. |
