Key Energy Services 'comfortable' with current debt levels but eyes paying down some debt in 2014

By Paul Deckelman

New York, Dec. 12 - Key Energy Services Inc. is "comfortable" with its current debt levels and ratios, but its chief executive officer said Thursday that the company - essentially absent from the capital markets for most of the past two years - will likely look to repay some outstanding debt next year.

"In terms of the balance sheet, [we have] no issues here," Richard J. "Dick" Alario declared during his presentation at the Capital One Securities, Inc. 8th Annual Energy Conference, taking place this week in New Orleans.

"We are comfortable with the debt level where it is," said Alario, who also serves as the chairman and president of Key Energy, a Houston-based oilfield services provider.

"We have ample liquidity to run the business, and we have no near-term maturities or debt-repayment obligations."

As of the end of its 2013 third quarter on Sept. 30, the company's balance sheet showed $837 million of outstanding debt. Most of this was in the form of some $675 million of outstanding 6¾% senior notes due 2021 that it had sold in two tranches: $475 million in January of 2011 and $200 million as an add-on in March of 2012.

The company also had $3.6 million of 8 3/8% senior notes due 2014 - the last piece remaining outstanding from the $425 million of the notes that it originally sold in November of 2007.

And it had $150 million of borrowings outstanding under its senior secured revolving credit facility due 2016 that it entered into in March of 2011. The original $400 million commitment was expanded to $550 million in July of 2011. The initial interest rate on the facility was 250 basis points over Libor; the margin ranges from 225 bps to 300 bps, depending on leverage.

Alario noted that the company's board of directors "is comfortable in this range of debt - but I can tell you that I'd like to get it below 35% net debt-to-cap[italization]."

According to the company's Oct. 30 announcement of third-quarter earnings, its ratio of net debt to total capitalization at the end of the quarter was 36.7%, versus 39.4% in the second quarter.

According to additional data provided by the company for investor use at another conference presentation earlier this month, its ratio of total debt to book capitalization stood at 39.7% at Sept. 30 - inside the 45% maximum allowed under the credit facility's covenants.

The company also showed a leverage ratio of total debt as a multiple of trailing 12-month EBITDA of 2.8 times.

"As we generate free cash next year, I would think the first thing we'll do is pay down a little bit of that debt to get below that [35% debt-to-capitalization ratio] ratio," Alario said.

Key Energy had liquidity of $64.6 million of cash and equivalents at Sept. 30, the company said, with $345.9 million of unused capacity under the revolver; besides the outstanding borrowings, revolver availability was further reduced by $54.1 million of outstanding letters of credit.

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