From Dain on KEG:
KEG:SB-Spec;CURRENT QUARTER UPDATE
During the December quarter, total hours worked numbered approximately
680,000, essentially flat on a quarter-to-quarter basis. The lack of an
increase was due to the loss of approximately 10 days of activity at the end
of December as a result of extreme ice and snow conditions in Texas,
Oklahoma, and Arkansas. On their last conference call, Key's management
estimated that total hours for the March quarter would be between 690,000 and
710,000. We conservatively modeled near the low end of this range. However,
there have been no weather related delays of consequence in the quarter thus
far and we believe the company has added an additional 10-15 rigs to the
market. This leads us to believe that the total hours worked for the quarter
will likely be at the high end or above the range of management's guidance,
suggesting possible upside to our estimates.
In order to maintain favorable pricing trends, Key has added relatively few
additional work-over rigs to the market. Despite a remaining fleet of more
than 350 additional rigs that can be refurbished, Key has added relatively
little additional capacity to the marketplace. During the last quarter, Key
added 10 well service rigs and we expect approximately the same number of
additions in the current quarter. We agree with Key's strategy of pushing
pricing over adding more rigs to the market. While it is tempting to put as
many rigs as possible to work in periods of strong demand, we believe that
sustained pricing increases provide significantly greater long-term benefits
to the industry. We are confident that the recently consolidated nature of
the industry, with approximately 60% of the market now controlled by Key
Energy and Nabors Industries, Inc. (NYSE: NBR; SB-Avg; $54.30), should allow
for sustained price increases unlike past up cycles.
Due to the continued strong outlook for its Argentina operations, Key
announced late in 2000, plans to add three additional rigs to its well
service operations in Argentina. One of these rigs is already working in
Argentina, while the other two are currently in route and should be there by
the end of the quarter. Key is currently operating at 100% utilization in
this market. The land rig count in Argentina has increased by 75% from year-
ago levels, indicating that demand for work-over and well servicing should
continue to be very strong in this market.
Overall, it appears that strong trends in pricing and activity levels are
continuing in the March quarter. Consequently, we are highly confident that
Key is on track to meet or exceed the current estimates. Continued strong
results coupled with the continued focus on improving the balance sheet, as
evidenced by the recent debt offering used to retire the term debt, should,
in our opinion, result in excellent share price performance through the
remainder of the year. We are reiterating our Strong Buy-Speculative rating.
Stock Opinion
Our price target on Key Energy of $22 is based on an 11 EV/EBITDA multiple
for 2001, which is in line with its contract land. With the focus of the
company to reduce debt and eventually win an investment grade debt rating,
and its demonstrated progress in reaching those targets, we believe the
current discount versus its peer group should narrow.
Not only does the price target represent almost 85% upside from current
levels, in our opinion, we continue to believe that our price target
derivation multiple as well as our forward forecasts are 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. |
