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

To: Post_Patrol who wrote (73203)	9/12/2000 7:34:58 PM
From: Big Dog	Read Replies (2) \| Respond to of 95453

To the Keggers of the world... keep the faith. KEG:SB-Spec;KEY ENERGY DEBT UPGRADED: ACTIVITY INCREASING IN THE SEPTEMBER QUARTER Key Energy has significantly reduced its debt load following its recent offering, repaying more than $100 million of long-term debt and bringing the net debt to capital ratio to approximately 59% at the end of the most recent quarter, down from nearly 70%. As a result of record drilling activity in the United States and a robust market for its services in Argentina, the company is generating strong free cash flow, which we expect will be used to further reduce the debt load. The are several positive implications of this debt reduction for investors. Last week, Moody's upgraded the company's debt. S&P followed by raising their rating outlook to positive. Key's lower debt levels and improved credit rating should allow it negotiate more favorable terms under its existing credit facilities, resulting in an expected $2-$3 million per year savings in interest expense. We believe, however, the most significant benefit to investors is the likely multiple expansion associated with the reduced risk profile. Key has historically traded at a substantial discount to its peer group. We believe the high risk profile associated with the high debt levels to be the primary reason for this discount. As the balance sheet becomes stronger, we should see higher relative valuations. Demand for Key's services continues to surge as domestic drilling activity has surged to all-time highs. The company is now operating at more than 55 thousand hours per week. This compares with an average of 49 thousand hours per week in the June quarter and approximately 46 thousand hours per week in the March quarter. There is a multiple-week backlog in several regions, particularly the Gulf Coast and Mid-Continent regions. Several E&P companies have recently told us of instances where they can not get a rig for up to six weeks. Additionally, Key's South American operations in Argentina are running at 100% utilization. Due to the strong demand for well servicing, we believe the company will have no difficulty fully implementing the 5%-8% price increases they began in mid July. In addition to increases from pricing and utilization, Key has significant additional capacity that could be brought to market. Currently, the company has more than 300 well service and drilling rigs that can be deployed as pricing dictates. The company currently has nearly 40 rigs being refurbished and plans to increase their rig count by 75-80 rigs during the next year. We believe the combination of strong absolute performance resulting from the operating leverage inherent in Key's business and improving relative valuations in the form of higher multiples of EBITDA and cash flow offers investors significant upside potential. We reiterate our Strong Buy- Speculative rating. 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 20% discount to its peer group 2001 CFPS valuation, indicating significant relative as well as absolute performance potential.