Key Energy Services says restatement progressing, anticipates refinancing on better terms

By Paul Deckelman

New York, May 23 - Key Energy Services Inc. is continuing with its previously announced restatement of its 2003 results - and says that once that housekeeping chore is out of the way it plans to go back into talks with its lenders to obtain more favorable terms on its present loans and gain more financial flexibility as it seeks to grow its business.

In the meantime, the Midland, Tex.-based oilfield service company on Tuesday reported what its chairman and chief executive officer, Richard J. Alario, termed "record results" for the 2006 first quarter ended March 31, in terms of revenues, and announced that it was upping its revenue guidance for the year.

Alario also told analysts on a conference call following the release of the numbers that it would be raising the prices on many of the services it provides effective July 1, and said that some of those price increases would be "significant." He did not elaborate as to which services would be raised upon, or by how much. The company - which claims to be the world's largest rig-based well service company - provides such oilfield services as well servicing, contract drilling and pressure pumping, among others, in all major onshore oil and gas producing regions of the continental United States and internationally, in Argentina.

On an unaudited basis, the company reported that total revenues in the first quarter rose to $346.301 million, up 28% from $269.583 million in the year-earlier quarter, and sequentially up 10% from the 2005 fourth quarter ended Dec. 31. Key did not report any actual earnings data.

It has been in the process of restating its 2003 earnings following the discovery in early 2004 of accounting problems that prevented the timely filing of that report with the Securities and Exchange Commission as usual that year. That problem, in turn, has prevented the filing of subsequent quarterly and annual reports, forcing the company to repeatedly obtain waivers of financial reporting requirements and deadline extensions from its lenders and leading to the de-listing last year by the New York Stock Exchange of its shares, which are now traded on the Pink Sheets electronic quotation service. In the interim, Key Energy Services has been reporting what it terms "selected" financial data on a quarterly basis - unaudited information about revenues, debt levels and various statistics about its operations.

Sees filing 2003 report in June

Alario and the company's chief financial officer, William M. Austin, said that the company is making progress on the restatement process and is now anticipating filing the 2003 report during the last week in June. On its February conference call, the executives had projected that the '03 10-K would be filed sometime during the current quarter.

Austin said on Tuesday's conference call that while he had hoped to be able to finally finish off the 2003 restatement during the quarter, as previously projected, "the fact is this process is very complicated, very tedious and quite extensive." While declaring "I still feel good about our work plan to finish this quarter," he said that an end-of-quarter filing was now more likely - and that projection "assumes that we don't hit any major bumps in the road. While we continue to have an active and productive dialogue with KPMG," the independent auditor overseeing the restatement process, there could be no assurance the auditors would not have any additional comments or reservations that might further extend the process.

Debt declines

Austin said that the company's balance sheet "is strong," with outstanding term loan borrowings as of the end of the quarter totaling $399 million, and total debt, including capitalized leases, was $425 million versus a cash and short-term investments position of $115 million.

The debt level was well down from a year ago, when total debt stood at about $486 million. In the interim, the company engaged in several financial transactions, including the redemption in November of all $275 million of its then-outstanding 8 3/8% senior notes due 2008 and, in October, the payment of all $150 million of its 6 3/8% senior notes due 2013, using bank debt borrowings for both.

Key Energy Services said in its announcement of the partial quarterly results that it had no outstanding borrowings under its revolving credit facility as of May 19.

While the debt picture is certainly improved versus a year ago - interest costs for the quarter were about $9.8 million versus $14 million in the year-earlier period - Austin indicated that there is room for improvement. He said that the all-in effective interest rate on the company's term loan is about 8.4%, of which $250 million is fixed.

Aims to cut 'high' interest rate

"I believe our current interest rate is high, given our strong credit statistics," he said. "One thing we will likely do once our '03 10-K is filed is to evaluate opportunities to refinance this term loan in order to reduce our interest costs and to in fact provide more flexibility to grow the company."

During the question-and-answer portion of the conference call following the official company presentation, Austin told an analyst said that "we expect to go back and re-look at the entire term loan" in negotiations with the lenders for more favorable interest rates, "and the letters of credit and what have you."

Besides seeing more favorable rates, he said, the company would seek more flexibility in the covenants attached to the $547.25 million senior credit facility. Under the current set-up, agreed to back in November, the company was limited to $175 million of allowable annual capital expenditures for 2005 and $200 million for 2006, although those limits were raised by the lenders from the previous $150 million limit for each year. Austin said that the $150 million cap would be in effect in 2007, if not raised. Alario said that the lenders had approved the spending of that $150 million for "long lead-time items" that would likely be delivered in 2007, but said that the company's projected capital budget for '07 would likely be "somewhat north of that," assuming the lenders could relax the capex cap.

Alario said that the company is "doing a good job of taking advantage of a great marketplace," with the oilfield services sector benefiting from high activity drilling activity levels related to much higher than a year ago oil and natural gas prices.

Anticipating more revenues after its price increases go into effect, Austin said that the company was upping its full-year revenue projection to between $1.45 billion and $1.5 billion, from its previous estimate around $1.4 billion.

"The driver for this will be the timing and success of our price increases - and obviously this assumes no slowdown in activity."

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