Frank, This KEG's for you.
From Dain today:
DEMAND FOR WELL SERVICING AND WORKOVER ACTIVITY CONTINUES TO SOAR
Demand for well servicing is relatively inelastic relative to other oilfield
services. It is a simple fact that every successful well needs to be
completed and nearly all completions require a well-service rig. Furthermore,
all wells need repair and maintenance during their life and most require at
least one workover or recompletion during their life. Eventually, every well
could need to be plugged and abandoned. There are more than 900,000 wells in
the United States and more than 1,000 working rigs adding to inventory. As a
result, demand for well servicing and workover activity is soaring. According
to Baker Hughes, the total U.S. workover rig has increased by 16% from this
time last year. Key has approximately 40% of the nation's well-service rigs,
almost twice that of its nearest competitor.
A recent survey by Key of its customers indicates that they plan to
increase spending in West Texas by 30%-50% in 2001. This is likely to result
in long, multiweek backlogs in this market similar to those the company has
seen in the Gulf Coast and MidContinent markets. It is our understanding that
due to excessive demand, no new rigs are currently available until February
of 2001 in most markets. This strong backlog has several benefits for Key.
Due to long waiting lists, customers are attempting to retain control of a
rig and use it for several jobs at once rather than letting it go when a job
is complete. This results in much more efficient use of the well servicing
fleet. Secondly, the supply/demand imbalance is allowing Key to significantly
increase pricing. The combined benefits increasing utilization and pricing
are substantial given the operating leverage in the business. Management
estimates that a 10% increase in rigrates should generate an additional $36.8
million in EBITDA and $0.23 in EPS. Similarly, a 10% increase in rig hours
should generate an additional $11.1 in EBITDA and $0.07 in EPS.
Due to the continued strong outlook for its Argentina operations, Key
recently announced plans to add three additional rigs to its well service
operations in Argentina. The company expects these rigs to be placed into
service during the March 2001 quarter. Key is currently operating at 100%
utilization in this market. The rig count in Argentina has increased by 63%
from year ago levels, indicating that demand for workover and well servicing
should continue to be very strong in this market.
The company continues to work to reduce its debt load and will reduce long-
term debt by approximately $12 million in the December quarter. This debt
reduction is notable at this time because Key has been using most of its free
cash flow to refurbish stacked rigs to meet market demand. As a result of the
decreased leverage, Key was able to repay fixed price term loan debt with
lower cost debt from its revolving credit facility resulting in a 125 basis
point interest rate reduction on $40 million of bank debt. We estimate this
will save the company approximately $500,000 per year in interest expense.
Key is currently trading at 32% discount on price to cash flow basis and a
25% discount on an EV/EBITDA basis to its comp group. We continue to find the
valuation compelling at these levels. Our price target of $18.50 suggests
100% upside from current levels, indicating significant relative as well as
absolute performance potential.Stock Opinion
Our price target on Key remains $18.50, as the discount versus its peer group
should narrow with the deleveraging of the balance sheet. Our price target is
based on a 11x EV/EBITDA for calendar 2001 results. With the peer group of
companies trading at 12.4x 2001 CFPS estimates and 12.3x EV/EBITDA, our
valuation target, in our view, is conservative. Company Description
Key Energy Services, Inc. is the largest onshore, rig-based well servicing
contractor in the world, with approximately 1,400 well service rigs and 1,200
fluid hauling vehicles. |
