Transcription
Johnson Rice Energy ConferenceOctober 2, 2013Marshall DodsonSenior Vice President and Chief Financial Officer
Safe Harbor LanguageThis presentation and related commentary may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements as to mattersthat are not of historic fact are forward-looking statements. These forward-looking statements are based on Key's current expectations, estimates and projections about Key, its industry, itsmanagement’s beliefs and certain assumptions made by management, and include statements regarding future operational and activity expectations in the third and fourth quarters of 2013,anticipated financial performance in the third quarter of 2013, expected financial contribution of rigs that are being redeployed due to the decline in customer activity in Mexico, and anticipatedrevenue and margin performance in the third quarter of 2013. No assurance can be given that such expectations, estimates or projections will prove to have been correct. Whenever possible,these “forward-looking statements” are identified by words such as “expects,” “believes,” “anticipates” and similar phrases.Readers and any audience are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptionsthat are difficult to predict, including, but not limited to: risks that Key will be unable to achieve its financial, capital expenditure and operational projections, including quarterly projectionsof revenue and risks that Key’s expectations regarding future activity levels, customer demand, and pricing stability may not materialize (whether for Key as a whole or for geographic regionsand/or business segments individually); risks that fundamentals in the U.S. oil and gas markets may not yield anticipated future growth in Key’s businesses, or could further deteriorate orworsen from the recent market declines, and/or that Key could experience further unexpected declines in activity and demand for its rig service, fluid management service, coiled tubingservice, and fishing and rental service businesses; risks associated with the restructuring of Key’s Fluid Management Services business; risks relating to Key’s ability to implementtechnological developments and enhancements; risks relating to compliance with environmental, health and safety laws and regulations, as well as actions by governmental and regulatoryauthorities; risks affecting Key’s international operations, including customer activity declines in Mexico and Key’s understanding of such customer’s spending plans; risks that Key may not beable to achieve its international growth and mobilization strategy in the foreign countries in which Key operates; risks that Key may be unable to achieve the benefits expected from acquisitionand disposition transactions, and risks associated with integration of the acquired operations into Key’s operations; risks, in responding to changing or declining market conditions, that Keymay not be able to reduce, and could even experience increases in, the costs of labor, fuel, equipment and supplies employed and used in Key's businesses; risks relating to changes in thedemand for or the price of oil and natural gas; risks that Key may not be able to execute its capital expenditure program and/or that any such capital expenditure investments, if made, will notgenerate adequate returns; and other risks affecting Key’s ability to maintain or improve operations, including its ability to maintain prices for services under market pricing pressures, weatherrisks, and the impact of potential increases in general and administrative expenses.Because such statements involve risks and uncertainties, many of which are outside of Key’s control, Key's actual results and performance may differ materially from the results expressed orimplied by such forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Other important riskfactors that may affect Key's business, results of operations and financial position are discussed in its most recently filed Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q,recent Current Reports on Form 8-K and in other Securities and Exchange Commission filings. Unless otherwise required by law, Key also disclaims any obligation to update its view of anysuch risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made here. However, readers should review carefully reports and documentsthat Key files periodically with the Securities and Exchange Commission.2
Key Energy Services Investment Highlights We have a strong reputation as a high value service providerthroughout the well life cycle We are the global leader in onshore, rig-based well services We are well-positioned to benefit from long-term secular trends bothin the U.S. and internationally We have developed a differentiated asset base and havedemonstrated our capital discipline We believe that our assets, differentiated technology and marketposition provide the leverage to deliver substantial value toshareholders3
KEG: A Leader in Energy Production Services 1 billionRevenue by Line of Business1Market capitalization 2 billionEnterprise value 2 billionRevenue in 2012Operating in 8 countriesacross 4 continentsFluidManagement17%International12%U.S. Rigs42%Fishing &RentalCoiled16%Tubing13%Revenue by Commodity-Directed Activity2Gas17%Assets concentrated inprimarily liquids-rich regionsBlue-chip and wellcapitalized customer baseOil83%(1) Revenue from Continuing Operations during Q2 2013. Results from Continuing Operations exclude Key’s Argentina operations which were sold effectiveSeptember 14, 2012.(2) Revenue from Continuing Operations in the U.S. during Q2 2013. Oil includes other liquids. Oil / Gas breakdown based on shale play.4
High Value Service Throughout theWell Life Cycle5
Key’s Suite of Services Throughout the Life of a Well Key Energy Services brings together the equipment and expertise necessary to optimizeproduction safely and efficiently Multiple touch points and continuity of service throughout the well life cycle enhances valueproposition to customers through delivery of improved economies and efficienciesDrilling Rig Services Fishing & ment Rig Services Rig Services Rig Services Rig Services Coiled Tubing Coiled Tubing Coiled Tubing Coiled Tubing Fishing & RentalTools Fishing & RentalTools Fishing & RentalTools Fishing & RentalTools FluidManagementServices FluidManagementServices FluidManagementServices FluidManagementServices6
Rig ServicesBusiness OverviewRegional Presence Rig Services deploys well service rigs that have beenbuilt to increase safety and reliability while reducing thechance of unplanned downtime Services include:‒ Completion of newly-drilled horizontal and verticalwellbores‒ Recompletion of existing wellbores‒ Maintenance of producing wellbores to maintainproduction‒ Workover of existing wellbores to enhanceproduction‒ Plugging and abandonment of wellbores at the endof their productive livesShale PlaysBasinsRevenue by Commodity-Directed Activity & Region1Asset Details 800 rigs worldwide, with 700 located in the U. S. Our rigs encompass various sizes and capabilitiesCommodity‒ Services all types of wells with measured depths ofup to 20,000 feetRegionGas8%Other Oil &Liquids 16%‒ Enhanced service capability via proprietaryKeyView systemOther Gas8% Patented KeyView system delivers cost reductions tocustomers by identifying opportunities for reducingnon-productive time and improving safety andefficiencyWellbore CleanoutCompletionCalifornia 35%Oil92%‒ KeyView system played critical role in winninginitial direct assignment from tionAbandonment(1) Revenue from Continuing Operations in the U.S. during Q2 2013. Oil includes other liquids. Oil / Gas breakdown based on shale play.7
Rig ServicesTrends & Dynamics1 Historical Revenue ( mm)Well servicing has a greater percentage of small,independent service companies than any otheroilfield service segment 789 725 562 510Top 5 companies have 57% of the segment withremaining 43% divided among as many as 200 othercompanies 3352009KeyPositioning1201020112012H1 2013Top 5 CustomersKey has the #1 position in U.S. onshore, rig-based wellservices#119%Other43%#212%#55%Wellbore ventionAbandonment(1) Per Wall Street research, based on rig count.8
The KeyView System The KeyView system is a proprietary technologythat provides equipment-verified data to achieveenhanced operational IQ60 Patented system with job activity monitoring,recording capabilities and automated controls thatprovides operators with an “intelligent” rig that canmeaningfully improve job safety, quality andefficiencySafety incidents reduced by as much as 56%‒Job quality improved by as much as 63%‒Efficiency improved by as much as 50% Real-time analytics and advanced benchmarkingyield actionable efficiency gain opportunitiesPipe TrippingTransition40Hours / Job‒50Workover ActivityWell ControlStand-by30MobilizationCrew Break20BOP/TAC/PKROther10 Growing database of 50,000 jobs allows forhistorical and peer comparisonSafety0Typical PermianBasin JobTypical BakkenShale JobSource: Key Energy Services, Inc.9
Coiled Tubing ServicesBusiness OverviewRegional Presence Key’s Coiled Tubing Services delivers value andtime savings by minimizing downtime and reducingtime to completion Services include:‒Completion of newly drilled horizontal wellborespre and post hydraulic fracturing‒Maintenance of producing wellbores‒Plugging and abandonment of depletedwellbores at the end of their productive livesShale PlaysBasinsFleet Status1Revenue by Commodity-Directed Activity & Region2CommodityTotal Units in U.S. fleet: 47RegionHaynesville10%OtherGas8%Gas31%2" or Greaterin Diameter60%Less than 2"in Diameter40%Marcellus13%Wellbore CleanoutOther Oil &Liquids nterventionAbandonment(1) As of June 2013.(2) Revenue from Continuing Operations in the U.S. during Q2 2013. Oil includes other liquids. Oil / Gas breakdown based on shale play.10
Coiled Tubing ServicesHistorical Revenue ( mm)1Trends & Dynamics Industry demand for large diameter coiled tubing isgrowing rapidly to service longer lateral horizontalwells Growth is highly correlated to well count, bothhorizontal and vertical Beneficiary of evolution to multi-stage frac jobs andpad drilling which creates more efficient andpredictable job planning 255 216 104 70N/A2009KeyPositioning2201020112012H1 2013Top 5 CustomersKey has the fourth (tied) largest fleet of coiled tubingunits in the United States#310%#212%#4-Tie8% #4-Tie8%Wellbore InterventionAbandonment(1) Meaningfully entered coiled tubing market in 2010 via acquisiton.(2) Per Intervention & Coiled Tubing Association.11
Fishing and Rental ServicesBusiness OverviewRegional Presence Rental equipment used in the drilling and completion ofwellbores including drill pipe, blowout preventers, fracstacks and well-testing equipment and services Rental equipment used in the maintenance and workoverof producing wellbores including tubing and tubinghandling tools, Key’s Hydra-Walk units, and pressurecontrol equipment Onshore and offshore, including deepwater, fishingservices used in the drilling or workover of a wellbore torecover lost or stuck downhole equipment Serving both Majors and independent E&Ps, Key'sDeepwater Fishing Services offers expert solutionsthroughout the Gulf of MexicoShale PlaysBasinsRevenue by Commodity-Directed Activity & Region 1Asset Details Extensive array of rental equipment and services,including pipe, rods and blowout preventers‒SmartTong rod connection services‒Hydra-Walk pipe handling system‒Sand-X system785 blowout preventers, 135 Hydra-Walk systems, 20,000joints of pipe and 29,000 joints of tubing out of 12locations Fishing tools include a wide range of equipment, fromwhipstocks and mills to Johnston JarsCompletionOther DeepwaterOffshore 6%Gas3%Other Oil &Liquids 29%Oil85%Each is available with ancillary equipment, dependingon situation and site needsDrillingRegionHaynesville12%Gas15% Ford33%Abandonment(1) Revenue from Continuing Operations in the U.S. during Q2 2013. Oil includes other liquids. Oil / Gas breakdown based on shale play.(2) Excludes Deepwater Offshore.12
Fishing and Rental ServicesTrends & Dynamics1 Historical Revenue ( mm)Strong demand driven by growth of complexwellbores and increased need for specialtydownhole services such as fishing and holepreparation for directional drilling 287 196 As longer lateral wellbores are drilled on multi-wellpads, the demand for more complex wellheadmanifolding and more sophisticated flowback andwell-testing services will grow as service intensityincreases 136 84 632009KeyPositioning1201020112012H1 2013Top 5 CustomersKey has the #7 position in Fishing and Rental Services#310%#48%#5 #66% 4%#73%Others28%#219%Wellbore ionAbandonment(1) Per Spears & Associates April 2013 Oilfield Market Report.13
Fluid Management ServicesBusiness OverviewRegional Presence Transportation of fluids, including sourcing of brineand fresh water, used in the drilling and completionprocess Transportation of frac flowback and produced waterfrom completed or producing wellbores Temporary on-site fluids storage via frac tankrentals Disposal of flowback and produced water insaltwater disposal wellsShale PlaysBasinsAsset DetailsTop 5 Customers Approximately 50 service locations 1,000 fluid trucks and 4,000 frac tanks Own and lease permitted disposal wells for thedisposal of saltwater and other fluid byproducts‒Over 75 saltwater disposal wells‒Strategy is to locate wells in close relation to ourcustomers' producing wellsDrillingCompletionWellbore CleanoutProductionInterventionAbandonment14
Fluid Management ServicesTrends & DynamicsHistorical Revenue ( mm) Performance correlated to unconventional activity 388 Relatively low barriers to entry due to the nature ofthe asset base creates fragmented market 354 Competitive environment remains fierce whichpressures pricing 228 169 1402009Key Positioning2010Revenue by Region & Key holds significant positions in the Permian,Midcontinent, Gulf Coast, Marcellus/Utica andBakken2011Commodity Key’s strong operational performance provides acompetitive erOil &Liquids EagleBakken23%Ford 9%10%Oil73%CompletionH1 2013RegionGas27% Large footprint and size of fleet gives Keyadvantages in large markets like the Permian basinDrilling2012Commodity1Abandonment(1) Revenue from Continuing Operations in the U.S. during Q2 2013. Oil includes other liquids. Oil / Gas breakdown based on shale play.15
Financial Performance16
Key’s Performance Through Market CyclesKey demonstratedrelative stabilitythrough the steepcyclical downturn of200930 %Consolidated Operating Income Margin1In cyclical upturn, Keydemonstrated superiorperformance20 %10 %0.0 %13.0 %2009A2010A(2.2)%(0.8)%Q22013AReturn on Capital Employed2008AQ12012A(10)%KEGQ422011A9.1 %2012A6.4 18.68.27.47.610.1(30)%KEGBASSPNPESFESSource: Bloomberg1. Represents Consolidated Operating Income Margin from Continuing Operations.2. Source: Wall Street Research.17
Balance Sheet & Liquidity Overview( in millions)As ofJune 30, 2013Cash & cash equivalents 24.7 679.33.6185.00.0867.8Total debt, including current portion6.750% Senior Notes due 2021 (1)8.375% Senior Notes due 2014Senior Secured Credit Facility due 2016Capital lease obligationsTotal debtShareholder's EquityTotal equity attributable to KeyNoncontrolling InterestTotal Shareholder's Equity 1,267.62.11,269.7Total Capitalization 2,137.5Total Liquidity (2) 195.2Consolidated Leverage RatiosTotal Debt / Book CapitalizationTotal Debt / TTM EBITDA 40.6%2.7x(1) Reflects 675.0 million of principal notes plus 4.3 million of unamortized bond premium.(2) Defined as total cash plus remaining credit facility capacity, less Letters of Credit outstanding. Revolver capacity available for borrowing herein has beenadjusted to reflect a maximum Total Debt / Book Capitalization ratio of 45.0%.18
Key’s Capital DisciplineKey’s capital discipline has provided flexibility and the ability to target modest leverage levels through market cycles10.0 x9.4 x 5005.0 x4.9 x 447 450 4004.0 x3.6 x 367 359 370 350 mm3.0 x2.7 x2.5 x2.8 x 247 250 219 2001.8 x 210 185 1802.0 x 188Debt / EBITDA 300 500 450 400 350 300 250 200 150 100 50 03.0 x3.3 x2.0 x1.8 x 150 1002008A 130 1281.5 x2009A2010A2011A2012A1.0 x2013E 50 00.0 x2008A2009AOperating Cash Flow2010ACapex2011AKey YE Debt / LTM EBITDA2012A2013E1Peer Median YE Debt / LTM EBITDANote: 2013E operating cash flow based on IBES consensus forecast. 2013E capex based on Key guidance.1. Peer group composed of BAS, SPN, PES, and FES.19
Operating Leverage Yields Upside OpportunityRevenue upside without meaningful expenditure via potential for increased asset utilization500 250400 200 150200 100100 50900 120750 100600 80450 60300 40150 20Revenues ( in millions)300Trucking Hours (in thousands)U.S. Trucking Hours & Fluid Management RevenuesRevenues ( in millions)Rig Hours (in thousands)U.S. Rig Hours & Rig Services RevenuesWellbore Cleanout - 20102011Hours2012U.S. Rig Revenues201320102011Hours20122013U.S. Fluid Management Revenues20
Balanced Approach to Capital Allocation & RigorousExpense ManagementCommentary Rationalize or RedeployUnderutilized Assets Discipline in Process,Accountability, Cost andComplianceOverall Aim to Deploy Capital toAchieve Best Possible Return forShareholdersExpanded presence in Southern Mexico and opened operation inEcuador as part of redeployment of rigs idled in the Northern regionof MexicoRestructured Fluid Management business to eliminate costs anddeploy assets into most advantageous marketsStrategic disposition of pressure pumping and Argentinabusinesses illustrative of commitment to shedding non-core assets Reduced headcount in all general and administrative areas Initiated systematic process to identify and redeploy underutilizedassets Improved procurement processes to reduce costs and increasecontrols and visibility Commitment to reducing and maintaining debt levels at statedtargeted leverage profile Have repurchased 156 mm of shares since beginning of 2008( 12% of current market cap) Opportunistically deploy organic growth capitalKey constantly evaluates the best uses of capital to enhance shareholder value21
Key Energy’s Differentiated Platformand Opportunities22
Key Energy’s Differentiated Platform TechnologyDevelopment Center Well ServicingWorkoverDrilling & CompletionFluid ManagementCoiled TubingFishing & RentalWell ServicingWorkover & CompletionReservoir EngineeringDrilling Services Well Servicing Workover & Completion Well ServicingWorkover & CompletionCoiled TubingIntegrated Solutions Well Servicing Workover & Completion89 % U.S.Rig Distributionby Region89 % U.S.1% MENA1% Russia9% LatAm89% U.S.International11%23
International Markets Offer Significant Growth Opportunity Strong, international brandrecognition and highly capablelocal teamsCapabilities unique to localmarkets to optimize maturingoilfieldsDiversifying customer base andgeographic presence:– Colombia– South Region of Mexico– Ecuador– Eastern Hemisphere Historical International Revenue Growth* 400 350 33355% CAGR2008 - 2012 300In Millions 250 199 200 150 129 101 100 57 50 12 0200720082009201020112012Source: Key Energy Services, Inc.*Excluding Argentina for all periods.Key's Argentina operations were sold in September 2012.Upside potential from reneweddemand in existing marketsKey is well positioned to serve emerging international markets24
U.S. Market Trends: A Changing Landscape Horizontal drilling technologymatures, the impacts of which arenow being felt across the industry2,2505.20Total U.S. Onshore2,0005.101,7505.00 Operators have achievedmeaningful efficiency gainsthrough the optimization ofhorizontal drilling techniques andpad drilling1,5004.901,2504.801,0004.70750 Net effect of drilling efficiencygains is a reduction in the numberof rigs necessary to complete agiven drilling re Drilling Rig Count9/201212/2012Horizontal Rig Count3/20136/2013Onshore Wells / Drilling RigNote: Rig and well count data per Baker Hughes as of 6/28/2013. Total U.S. onshore wells / rig of 4.71 in Q1 2012 and 5.15 in Q2 2013.25
Positioned to Benefit from Long-Term Secular Trends U.S. onshore shale development isentering the “manufacturing”phase of the cycle Sophisticated pad drillingprograms aimed at speed andefficiency will be the industrymodel Relatively young horizontal wellswill age and the complexity ofthese wellbores will require ahigher level of service intensitythan traditional wells Tempered growth in the U.S.onshore rig count is NOT aread-through for Key activity60,0002,500Total U.S. 8Vertical Wells DrilledHorizontal Wells DrilledHistorical Rig CountRig Count ForecastNote: Historical rig count data per Baker Hughes as of 6/28/2013. Historical and forecasted well counts and forecasted rig count per Spears & Associates.26
Key Energy: The Path Forward Key will continue to carry out the actions necessary to thrive intoday’s service market: Leverage an asset base that has sufficient capacity to achievemeaningful growth Execute business development effort to broaden target customerbase, targeting those operators most receptive to the Key valueproposition Continue to utilize technological differentiation as a competitiveadvantage Capitalize on incremental cost reduction opportunities27
Key Energy Services Investment Highlights We have a strong reputation as a high value service providerthroughout the well life cycle We are the global leader in onshore, rig-based well services We are well-positioned to benefit from long-term secular trends bothin the U.S. and internationally We have developed a differentiated asset base and havedemonstrated our capital discipline We believe that our assets, differentiated technology and marketposition provide the leverage to deliver substantial value toshareholders28
Appendix29
Appendix – U. S. Market TrendsUS Commodity Price DynamicsOil and Gas Rig Count1,500 8.002,250Total U.S. Onshore 7.001,250 6.001,0002,000 5.00750 4.001,750 3.00500 2.002501,500 1.000 0.001,2501,000Gas-Directed Rig CountHenry Hub Natural Gas Price1,500 1201,250 1001,000 80750 60500 40250 2075050025000 0Oil-Directed Rig CountOil-Directed Rig CountGas-Directed Rig CountTotal U.S. Onshore Rig CountWTI Oil Price30
Appendix – Adjusted EBITDA ReconciliationTwelve Months Ended December 31,2012Income (loss) from continuing operations 2011102,677 Income tax (benefit) expense(Income) loss attributable to noncontrollinginterest, excluding depreciation andamortization57,352Interest expense, net of amounts capitalized53,566EBITDA (437)40,8492009(24,404) 26)(130)---Asset retirements and impairmentsDepreciation and amortization111,336 64,117(3,648)Interest 23,684 382,785 135,789 117,273Loss on debt extinguishment-46,451--Gain on IROC sale-(4,783)--G&A restructuring costs-4,120--Transaction & legal costs-3,3075,600-Annual bonus and associated expense--18,800-423,684 431,880 Adjusted EBITDA 160,189 117,273Note: Represents results from continuing operations."EBITDA" is defined as income or loss from continuing operations attributable to Key before interest, taxes, depreciation, and amortization."Adjusted EBITDA" is EBITDA as further adjusted for certain non-recurring or extraordinary items such as loss on debt extinguishment, certain other gains or losses, asset retirements and impairments, and certain non-recurringtransaction or other costs.EBITDA and Adjusted EBITDA are non-GAAP measures that are used as supplemental financial measures by the Company's management and directors and by external users of the Company's financial statements, such as investors, toassess: The financial performance of the Company's assets without regard to financing methods, capital structure or historical cost basis; The ability of the Company's assets to generate cash sufficient to pay interest on its indebtedness; The Company's operating performance and return on invested capital as compared to those of other companies in the well services industry, without regard to financing methods and capital structure; and The Company's operating trends underlying the items that tend to be of a non-recurring nature.EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered an alternative to net income, operating income, cash flow from operating activities, or any other measure of financial performance or liquiditypresented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income and operating income and these measures may vary among other companies. Limitations to using EBITDA andAdjusted EBITDA as an analytical tool include: EBITDA and Adjusted EBITDA do not reflect Key's current or future requirements for capital expenditures or capital commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements necessary to service, interest or principal payments on Key's debt; EBITDA and Adjusted EBITDA do not reflect income taxes; Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for suchreplacements; Other companies in Key's industry may calculate EBITDA and Adjusted EBITDA differently than Key does, limiting their usefulness as a comparative measure; and EBITDA and Adjusted EBITDA are a different calculation from earnings before interest, taxes, depreciation and amortization as defined for purposes of the financial covenants in the Company's senior secured credit facility, andtherefore should not be relied upon for assessing compliance with covenants.31
Johnson Rice Energy Conference October 2, 2013 Marshall Dodson Senior Vice President and Chief Financial Officer. 2 Safe Harbor Language This presentation and related commentary may contain "forward-looking statements . Key Energy Services Investment Highlights
