RBC/Dain on KEG
KEG:O-AA;FISCAL Q2 RESULTS SLIGHTLY BELOW EXPECTATIONS
Key Energy reported fiscal 2Q02 (December) EPS of $0.17 from operations,
slightly below our estimate of $0.20. The results for the quarter were
impacted by a $1.8 million foreign currency transaction lost related to
Argentina. We estimate the after-tax EPS effects of this loss at loss of
about $0.01 per share. EBITDA, excluding the foreign currency loss, was $61
million vs. $76.2 million in the previous quarter. Total hours declined 12.5%
from the previous quarter due to reduced drilling activity and seasonally
weak well servicing hours.
Well servicing revenues were down 12% sequentially to $186.3 million. Total
well servicing hours were 579,000 vs. 654,000 in the previous quarter. The
December quarter is typically the slowest quarter for well servicing as
shorter days and holidays limit the total available hours. Additionally,
reduced well completions due to lower E&P activity have caused a further
decline in hours. Rig rates were down about $5 per hour from the previous
quarter. We do not expect serious price erosion in the well servicing
business for two reasons. First, well servicing rates never really took off
like land rig rates so they do not have a lot of built up price to concede.
Second, consolidation over the past three to four years has left the majority
of the industry's capacity concentrated in the hands of Key Energy and Nabors
Industries, Inc. (AMEX: NBR, Outperform-Average; $29.97). This concentration
of assets results in much greater pricing discipline.
Land drilling revenues declined 24% sequentially to $25.7 million. Total
drilling hours decreased to 62,000 vs. 79,000 in the previous quarter. U.S.
average dayrates were down about 15% and continue to decline as a result of
lower utilization. While we hear reports that rig utilization appears to be
bottoming, dayrates are expected to continue declining over the next two
quarters. Currently, the company is marketing 35 of its rigs.
The company's plan to de-lever the balance sheet made significant progress
over the quarter. Since the September quarter, the company has reduced debt
by about $65 million, $30 million from cash flow and $35 million from the
equity clawback of a portion of its 14% debentures, which was completed in
early January. Total debt to capital now stands at about 41%, and the company
appears on target to meet its goal of a 35% debt-to-capital ratio by mid
year. The much stronger balance should merit a much higher relative valuation
as the cycle recovers, in our opinion.
Due to continued weakness in the drilling and well servicing markets, we
are reducing our fiscal 2002 estimate to $0.66 from $0.89. Our assumptions on
total hours for the next two quarters are at the low end of the company's
guidance due to poor visibility going forward. We are also introducing our
fiscal 2003 EPS estimate of $0.82.
Stock Opinion
Our $13 price target is based on an estimated 6.5x EV/EBITDA multiple for
2003, which is at the low end of the sector's historical trading range.
While we concede that the next couple of quarters will be difficult, we
believe the current valuation offers an attractive entry point for patient
investors. We are reiterating our Outperform-Above Average rating.
Company Description
Key Energy Services, Inc. is an onshore, rig-based well-servicing and
drilling contractor. |
