Key Energy says balance sheet lets it execute growth strategy

By Paul Deckelman

New York, March 6 - Key Energy Services Inc., which made a quick visit to the junk bond market on Monday with an add-on to its existing bonds, believes that it is financially well positioned to execute on its growth strategy. This includes greater participation in the growing market for services to horizontally drilled energy wells and an increase to its international footprint.

"We've got the balance sheet to capitalize on the opportunities in front of us," the Houston-based well servicing contractor's senior vice president and chief financial officer, T.M. "Trey " Whichard, III, told participants at the Raymond James 33rd Annual Institutional Investors Conference on Tuesday in Orlando, Fla.

Key ended 2011 with $35.4 million cash on its balance sheet and $190. 7 million of availability under the senior secured revolving credit agreement, which it entered into in March of last year. That facility - originally $400 million - was increased last July to $550 million, with the debt due in 2016.

As of year-end, Key had $295 million drawn under the facility and another $64.3 million of letters of credit outstanding. The weighted average interest rate on the outstanding borrowings for the year ended Dec. 31 was 2.78%.

Key plans to use the $200 million proceeds from Monday's add-on to its existing $475 million of 6 ¾% notes due 2021 - originally sold in March 2011 - to pay down its revolver borrowings, thus extending the maturity of that portion of its debt for another five years in exchange for paying out a higher interest rate.

The company's total debt at the end of 2011 came to $775.7 million - mostly the original $475 million of the junk bonds and the $295 million of revolver borrowings.

There was also the last $3.5 million outstanding of its original $425 million of 8 3/8% notes due 2014 - the other $421.5 million were taken out a year ago using the proceeds from the 6¾% bond issue - and about $2 million of capital leases. The current portion of the debt came to about $1.6 million.

The company has no maturities due until 2014, with the remainder of the 8 3/8% notes, and after that, not till 2016 when some $95 million comes due on the revolver, pro-forma for the planned paydown of current revolver borrowings using the add-on bonds' proceeds. The bond debt, now totaling $675 million, matures in March 2021 and until then will generate about $45.5 million of annual interest payments.

The year-end balance sheet also showed net property and equipment of $1.21 billion and a like amount of total equity. Net debt as a percentage of total capitalization stood at 37.4%.

The company had previously announced that it intends to focus on reducing that ratio back into the low 30% area by early 2013.

In his presentation, Whichard outlined the growth of horizontal drilling of oil and natural gas wells - a procedure in which the drilling bit, in order to reach oddly or inconveniently located pockets of oil and gas, is guided in a pathway at as much as a 90-degree angle from that of more traditional vertically drilled wells. While the basic concept has been around for decades, it has only become more popular in recent years with the development of equipment and procedures that have made the process quicker and less costly in the past.

According to Key's estimates, nearly 60% of U.S. drilling rigs are now active with horizontal wellbores.

Such wells are considerably more complicated and require considerably more servicing than conventional wells, opening a door of opportunity for companies like Key, which provides various services to oil and natural gas companies actually operating drilling wells, including "fishing" - the recovery of equipment that gets lost or stuck down in a wellbore deep underground.

The CFO also said there were increasing opportunities in the use of coiled-tubing equipment in the natural gas drilling process known as hydraulic fracturing, or "fracking" - an increasingly used process of employing highly pressurized fluids to fracture underground rock formation and drive gas into accessible reservoirs. Increased regulatory scrutiny of the controversial procedure would also create opportunities for Key's services in the safe storage of fracked liquid and cleanup of fracked sites, he said.

Whichard said the company expects a 35% year-over-year increase in consolidated revenue in 2012. It plans about $450 million of capital expenditures for 2012 - a 30% increase over 2011 capex. He said 85% of that is directed toward growth opportunities in the company's core U.S. market and internationally, with 52% of the capex money slated for domestic growth, 20% for international growth and the remaining 28% on maintenance and upgrades on existing equipment in use at oil and gas drilling sites in the U.S.

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