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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Jeffrey Beckman who wrote (71312)	8/21/2000 6:24:28 PM
From: Big Dog	Read Replies (1) \| Respond to of 95453

Dain on KEG: KEG:SB-Spec;KEY ENERGY REPORTS STRONG QUARTER; EBITDA AHEAD OF EXPECTATIONS Key Energy reported an excellent quarter with EBITDA of $34.8 million, slightly exceeding our expectations. This represents a 130% improvement over the same quarter last year and an 11% sequential improvement. Revenues increased 7% sequentially to $169.9 million. Well service margins increased to 31% from 29.8% last quarter. Drilling margins improved to 17.7% from 14.3%. Overall EBITDA margin improved to 20.5% from 18.8%, approximately the same level as 1997 on about 2/3 the revenue level. \|\| \|\|The company has continued to reduce its debt, paying off approximately $100 million of long-term debt with proceeds from the recent offering. During June and July the company has repaid an additional $16.7 million in debt, bringing the net debt to capital ratio to approximately 59%, down from nearly 70%. The company is generating strong free cash flow, which we expect will be used to further reduce the debt load. \|\| \|\|The outlook for the company for the remainder of the year is extremely positive as demand for Key's services is extremely strong. In the June quarter, the company averaged 49k hours per week for its workover rig fleet, up from approximately 46k-46.5k hours per week for the March quarter. Since early July, however, we have seen a step-change in hours worked averaging more than 52k hours through this quarter. Last week, the company hit 53k hours worked for the first for rigs in many operating areas. There is a multiple-week backlog in several time. As a result, utilization is very high with customers on the waiting list regions, particularly the Gulf Coast and Mid-Continent regions. Utilization is running 100% in Argentina. \|\| \|\|As a natural progression of this, we are seeing rates increase. The company has implemented price increases of 5% - 8%, beginning July 15, that are being phased in through September. Current pricing levels are almost 100% below replacement cost economics, indicating substantial room for further pricing increases. We expect the company will increase prices at least an additional 5% once the current price increase has been fully implemented. \|\| \|\|In addition to increases from pricing and utilization, Key has significant additional capacity that could be brought to market. Currently, the company has over 300 well service and drilling rigs that can be deployed as pricing dictates. We are already seeing evidence of this trend. In the last month and half alone, the number of well-servicing rigs have increased from around 980 to about 1,010, drilling rigs have increased from 42 to 44, and the number of trucks have increased to 945-950 from 930. The company currently has 38 rigs being refurbished and plans to increase their rig count by 75-80 rigs over the next year. \|\| \|\|Since the secondary offering in June, the stock has lagged, probably as a result of some investors who played the deal and then sold the stock when it and the OSX didn't immediately rush to new highs. It still seems to be shaking off some of the technical effects of that drop. Today's earnings report should act as a catalyst for stock. We expect that our Sept. quarter estimate will be low but are leaving it unchanged at this time. We continue to reiterate our Strong Buy-Aggressive recommendation. Stock Opinion Our price target on KEG remains at $15.50, as the discount versus its peer group should narrow with the deleveraging of the balance sheet and dropping debt from approximately $857 million in 1999 to approximately $575 million post-deal. Our $15.50 price target is based on a 12x enterprise/EBITDA multiple for calendar 2001 results. With the peer group of companies trading at 11x 2001 CFPS estimates and 11x enterprise value/EBITDA, our valuation target is reasonable, in our view. KEG shares are currently trading at a 35% discount to its peer group 2001 CFPS valuation, indicating significant relative as well as absolute performance potential.