UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 18, 2016 (February 17, 2016)
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Maryland | | 001-08038 | | 04-2648081 |
(State or Other Jurisdiction of Incorporation) | | (Commission File Number) | | (IRS Employer Identification No.) |
1301 McKinney Street, Suite 1800
Houston, Texas 77010
(Address of principal executive offices and Zip Code)
713-651-4300
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02 Results of Operations and Financial Condition.
On February 17, 2016, Key Energy Services, Inc., a Maryland corporation (the “Company”) announced its results for the full year ended December 31, 2015. A copy of the press release is attached to this Current Report on Form 8-K as Exhibit 99.1 and is incorporated by reference. The information contained in this Item 2.02 (including the exhibit hereto) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On February 17, 2016 Richard J. Alario, the Company’s current Chief Executive Officer, announced that his retirement from the Company will be effective as of March 1, 2016. On this date, Mr. Alario will resign his position as the Company’s Chief Executive Officer and he will resign from all positions with the Company’s board of directors (the “Board”). In connection with Mr. Alario’s retirement from the Board, the Company has also determined to decrease the number of members of the Board from eleven to ten. On February 17, 2016, the Board approved this decrease in Board membership to be effective as of March 1, 2016.
As previously disclosed, the Company’s Board approved a succession plan on August 24, 2015 that anticipated the appointment of Mr. Robert Drummond as the Company’s President and Chief Executive Officer following Mr. Alario’s retirement. Mr. Drummond has served as the Company’s President and Chief Operating Officer since June 22, 2015. On February 17, 2016 the Board approved the promotion of Mr. Drummond to the Company’s President and Chief Executive Officer position in connection with Mr. Alario’s retirement, also effective as of March 1, 2016 (the “Effective Date”).
Mr. Drummond, age 55, was previously employed for 31 years by Schlumberger Limited (NYSE: SLB), where he served in multiple engineering, marketing, operations, and leadership positions throughout North America. His positions at Schlumberger included President of North America from January 2011 to June 2015; President of North America Offshore & Alaska from May 2010 to December 2010; Vice President and General Manager for the US Gulf of Mexico from May 2009 to May 2010; Vice President of Global Sales from July 2007 to April 2009; Vice President and General Manager for US Land from February 2004 to June 2007; Wireline Operations Manager from October 2003 to January 2004; Vice President and General Manager for Atlantic and Eastern Canada from July 2000 to September 2003; and Oilfield Services Sales Manager from January 1998 to June 2000. Mr. Drummond began his career in 1984 with Schlumberger.
Mr. Drummond is a member of the Society of Petroleum Engineers and serves as a Director of the National Ocean Industries Association and is a member of its Executive Committee. In addition, he serves on the Board of Directors for the Petroleum Equipment Suppliers Association and. Formerly, he served on the Board of Directors for the Greater Houston Partnership and on the Board of Trustees for the Hibernia Platform Employees Organization - Newfoundland; and as an advisory board member for each of the University of Houston Global Energy Management Institute, the Texas Tech University Petroleum Engineers and Memorial University’s Oil and Gas Development Partnership. Mr. Drummond received his Bachelors of Science in Mineral Engineering/Petroleum from the University of Alabama in 1983.
The Company entered into an employment agreement with Mr. Drummond dated June 22, 2015, previously disclosed within a Current Report on Form 8-K dated June 22, 2015. Mr. Drummond’s original employment agreement will continue to govern his employment relationship with the Company following his promotion, although commencing on the Effective Date, the Board will increase Mr. Drummond’s annual base salary to $750,000.
On the Effective Date, Mr. Drummond will receive a promotion bonus in the amount of $750,000 that could become payable to him on March 1, 2018 (the “Vesting Date”) if he has remained continually employed by the Company until the Vesting Date (the “Promotion Bonus”). The Promotion Bonus may be settled in cash or in shares of the Company’s common stock, at the Company’s discretion. In the event that the Company incurs a change in control (as defined within the Promotion Bonus agreement attached to this Form 8-K), and Mr. Drummond is terminated by the Company without cause (as defined within the Promotion Bonus agreement attached to this Form 8-K) within the one year period following the change in control event, the Promotion Bonus will receive accelerated pro-rata vesting. The previous description of the Promotion Bonus is qualified in its entirety by reference to the Promotion Bonus agreement filed herein as Exhibit 10.1, and incorporated into this Current Report on Form 8-K by reference.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
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10.1 | Promotion Bonus Agreement. |
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99.1 | Press release dated February 17, 2016 reporting results for the full year ended December 31, 2015. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| | KEY ENERGY SERVICES, INC. |
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Date: | February 17, 2016 | | | By: | /s/ Katherine I. Hargis
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| | | | | Katherine I. Hargis |
| | | | | Vice President, Chief Legal Officer and Secretary |
Exhibit Index
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Exhibit No. | | Description |
10.1 | | Promotion Bonus Agreement. |
99.1 | | Press release dated February 17, 2016 reporting results for the full year ended December 31, 2015. |
[KEY ENERGY LETTERHEAD]
[DATE]
[NAME AND ADDRESS]
Re: Promotion Bonus
Dear Mr. Drummond:
Key Energy Services, Inc., a Maryland corporation (the “Company”) considers your service and dedication to the Company essential to our success. To induce you to remain employed with the Company following your recent promotion to Chief Executive Officer of the Company, the Company is pleased to offer you (“you” or “Employee”) a promotion bonus, as described in this letter agreement.
In recognition of your service with the Company from March 1, 2016 until March 1, 2018 (the “Retention Period”), the Company is offering you a promotion bonus in the amount (or value, as applicable) of $750,000, less all applicable withholdings and deductions withheld from the amount by the Company as required by law (the “Promotion Bonus”), subject to the satisfaction of the terms and conditions of this letter agreement.
Section 1. Eligibility Criteria
You will be eligible to receive this Promotion Bonus if all of the following criteria are satisfied:
1. You are continually employed by the Company from the date of this letter agreement through the end of the Retention Period, and are employed by the Company on the last day of the Retention Period. The Company will have the sole discretion to determine whether any leave of absence during the Retention Period constitutes a forfeiture of the Promotion Bonus.
2. You have not given notice of your intent to resign from employment on or before the last day of the Retention Period.
Section 2. Change in Control or Certain Terminations of Employment
In the event that a Change in Control (as defined below) occurs at the Company, and you are terminated by the Company for any reason, except for Cause (as defined below) on or within twelve (12) months following such a Change in Control, your Promotion Bonus will vest pro-rata and you will be entitled to receive a settlement of the resulting vested portion of your Promotion Bonus pursuant to Section 3 below. Any pro-rata vesting governed by this Section 2 will be calculated by multiplying your Promotion Bonus by a fraction, the numerator of which shall equal the number of days that have passed between the first day of the Retention Period and the date that your separation from service with the Company occurs, and the denominator of which will be the full number of days within the Retention Period.
For purposes of this letter agreement only, the term “Change in Control” shall be defined as a merger of the Company with another entity, a consolidation involving the Company, or the sale of all or substantially all of the assets of the Company to another entity if, in any such case, the holders of equity securities of the Company immediately prior to such transaction or event do not beneficially own immediately after such transaction or event equity securities of the resulting entity entitled to 50% or more of the votes then eligible to be case in the election of directors generally (or comparable governing body) of the resulting entity in substantially the same proportions that they owned the equity securities of the Company immediately prior to such transaction or event. For purposes of this letter agreement only, the term “Cause” shall mean (1) the willful and continued failure by Employee to substantially perform Employee’s duties hereunder, (2) repeated substandard work performance or repeated unreliability that has not been cured to the Company’s satisfaction after notice of the same as has been provided to Employee; (3) serious workplace misconduct, (4) Employee’s engagement in misconduct that Employee knows or should know reasonably could be injurious to the Company, monetarily or otherwise (including injurious to the reputation of the Company); (5) Employee’s conviction of a felony by a court of competent jurisdiction or a plea of no contest to a felony charge, (6) fraud or other material dishonesty against the Company or any of the Company’s subsidiaries, (7) the breach of any of the provisions hereof, or (8) the violation by Employee of any of the Company’s policies, rules or guidelines as in effect from time to time, including without limitation, the Code of Business Conduct, securities trading policy or anti-trust policy.
Section 3. Payment of Promotion Bonus
If you are eligible to receive the Promotion Bonus pursuant to Section 1, the Promotion Bonus will be paid to you in one lump sum cash payment on the first regularly scheduled pay date after the end of the Retention Period, but in no event later than thirty (30) days following the end of the Retention Period.
In the event that you become eligible to receive the Promotion Bonus pursuant to Section 2, the Promotion Bonus will be paid to you in one lump sum cash payment within thirty (30) days of the consummation of the Change in Control event or your separation from service with the Company, as applicable.
Notwithstanding anything to the contrary in this Section 3 or this letter agreement, the Company shall retain the sole discretion to settle your Promotion Bonus in the form of the Company’s common stock (the “Stock”). In the event that the Company determines to settle your Promotion Bonus in the form of fully vested Stock, the Stock will be granted to you under the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan, as amended. The number of shares of Stock to be granted to you as settlement of your Promotion Bonus shall be determined by dividing the cash amount of the applicable Promotion Bonus (or any applicable portion thereof) by the closing price of the Stock on the date immediately prior to the date that the Promotion Bonus becomes vested and nonforfeitable to you (less any applicable withholding or deduction amounts).
ARTICLE I
Section 4. Miscellaneous Terms
Your employment remains at-will, meaning that you or the Company may terminate the employment relationship at any time, with or without cause.
The Company shall oversee all aspects of the administration of the Promotion Bonus and this letter agreement. The Company shall have complete control and authority to determine your rights with respect to the Promotion Bonus or the rights of any other person having or claiming to have any interest to the Promotion Bonus through you. The Company shall have complete discretion to interpret the provisions of this letter agreement and to decide all matters under this letter agreement, including, without limitation, the right to modify a vesting or forfeiture schedule applicable to the Promotion Bonus. Such interpretation and decision shall be final, conclusive and binding on you and any person claiming under or through you, in the absence of clear and convincing evidence that the Company acted arbitrarily and capriciously. When making
a determination or calculation, the Company shall be entitled to rely on information furnished by you or any Company representative. The Company may correct any defect, supply any omission, or reconcile any inconsistency in this letter agreement in the manner and to the extent it deems necessary or desirable to carry out the intent of this letter agreement, and the Company shall be the sole and final judge of that necessity or desirability.
This letter agreement is intended to comply with, or be exempt from, Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and shall be construed and administered in accordance with Section 409A of the Code and all regulations thereunder. All rights under this letter agreement shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any amounts due hereunder.
This letter agreement contains all of the understandings and representations between the Company and you relating to the Promotion Bonus and supersedes all prior and contemporaneous understandings, discussions, agreements, representations and warranties, both written and oral, with respect to any promotion or retention bonus; provided, however, that this letter agreement shall not prevent the Company from entering into subsequent agreements with you that could modify or amend this letter agreement.
Any payment of cash or Stock under this letter agreement to you, or to your legal representative, heir, legatee or distributee, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Company may require you or your legal representative, heir, legatee or distributee, as a condition precedent to such payment, to execute a release and receipt therefor in such form as it shall determine.
As partial consideration for the granting of the Promotion Bonus, you hereby agree to keep confidential all information and knowledge, except that which has been disclosed in any public filings required by law, that you have relating to the terms and conditions of this letter agreement; provided, however, that such information may be disclosed as required by law and may be given in confidence to your spouse and tax and financial advisors.
This letter agreement, for all purposes, shall be construed in accordance with the laws of Texas without regard to conflicts-of-law principles.
The provisions this letter agreement shall bind and inure to the benefit of the Company and the successors and assigns of the Company, whether as a result of a Change in Control (as defined above) or
otherwise. All references to the “Company within this letter agreement shall refer to the Company and any such successor or assignee of the Company.
If this letter agreement accurately sets forth our understandings and agreements with respect to the subject matter hereof, please execute this letter agreement in the space provided below and send a fully executed copy of this letter agreement to [___________] in the enclosed confidential envelope no later than _____________, 2016. The remaining copy is for your files. If [___________] does not receive a signed copy of this letter agreement on or before _____________, 2016, the terms of this letter agreement will expire and neither Company nor any of its subsidiaries or affiliates will have any obligations hereunder. Should you have any questions, please call ________________ at ( ) ___ - _____.We look forward to your continued employment with us.
[Signature page to follow]
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| Very truly yours,
KEY ENERGY SERVICES, INC. |
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By:________________ [NAME] [TITLE] |
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Agreed to and accepted: | |
_____________________________ ROBERT DRUMMOND _____________________________ Date | |
cc [HUMAN RESOURCES REPRESENTATIVE] |
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| Key Energy Services, Inc. | | February 17, 2016 |
1301 McKinney Street Suite 1800 Houston, TX 77010 | | |
| Contact: West Gotcher 713-757-5539 |
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FOR IMMEDIATE RELEASE
Key Energy Services Reports Fourth Quarter and Full-Year 2015 Earnings
HOUSTON, TX, February 17, 2016 - Key Energy Services, Inc. (NYSE: KEG) reported fourth quarter 2015 consolidated revenues of $150.2 million and a pre-tax GAAP loss of $157.6 million, or $0.97 per share. The results for the fourth quarter include:
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• | pre-tax charges of $62.9 million, or $0.39 per share, related to the loss on sale of and impairment of assets primarily associated with the Company's exit from markets outside North America; |
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• | pre-tax charges of $23.1 million, or $0.14 per share, related to the loss on sale of assets, write-off of certain vendor deposits and a true-up to asset impairments in the third quarter in the Company's U.S. business; |
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• | pre-tax costs of $2.7 million, or $0.02 per share, related to the previously disclosed Foreign Corrupt Practices Act ("FCPA") investigations; |
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• | pre-tax costs of $1.3 million, or $0.01 per share, due to severance; and |
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• | an after-tax charge of $23.5 million, or $0.15 per share of tax expense, related to deferred tax valuation allowances in the markets outside of the U.S. |
Excluding these items, the Company reported a pre-tax loss of $67.6 million, or $0.27 per share. Third quarter 2015 consolidated revenues were $176.9 million with a pre-tax GAAP loss of $765.8 million, or $4.06 per share. The results for the third quarter included pre-tax charges of $618.5 million, or $3.28 per share, related to the impairment of the Company's U.S. goodwill and certain U.S. assets, pre-tax charges of $63.1 million, or $0.33 per share, related to impairment of assets primarily associated with the Company's exit from markets outside North America, pre-tax costs of $4.0 million, or $0.02 per share, due to severance, pre-tax costs of $2.5 million, or $0.01 per share, related to the previously disclosed FCPA investigations and a pre-tax loss of $2.5 million, or $0.01 per share, on foreign currency translation. Excluding these items, the Company reported a pre-tax loss of $75.3 million, or $0.40 per share. Additionally, the Company incurred an after-tax charge of $23.0 million, or $0.15 per share, related to deferred tax valuation allowances in markets outside of the U.S. Excluding this tax-related charge, the Company reported an after-tax loss of $40.0 million, or $0.25 per share.
The Company's consolidated cash balance at December 31, 2015 was $204.4 million as compared to $199.1 million at September 30, 2015. Total liquidity available at December 31, 2015 was $231.5 million as compared to $229.6 million at September 30, 2015.
The following table sets forth summary data for the fourth quarter 2015 and prior comparable quarterly periods.
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| | Three Months Ended (unaudited) |
| | December 31, 2015 | | September 30,
2015 | | December 31, 2014 |
| | (in millions, except per share amounts) |
Revenues | | $ | 150.2 |
| | $ | 176.9 |
| | $ | 354.8 |
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Net loss | | (152.5 | ) | | (640.2 | ) | | (52.3 | ) |
Diluted loss per share | | (0.97 | ) | | (4.06 | ) | | (0.34 | ) |
Adjusted EBITDA* | | (6.7 | ) | | (13.3 | ) | | 16.1 |
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* Adjusted EBITDA does not exclude costs incurred in connection with the Company’s on-going FCPA investigations.
For the full-year 2015, consolidated revenues were $792.3 million, down 44.5% compared to $1.43 billion for the full-year 2014. Full-year 2015 GAAP net loss was $917.7 million, or $5.86 per share, compared to full-year 2014 GAAP net loss of $178.6 million, or $1.16 per share.
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| | Twelve Months Ended |
| | December 31, 2015 | | December 31, 2014 |
| | (unaudited) | | |
| | (in millions, except per share amounts) |
Revenues | | $ | 792.3 |
| | $ | 1,427.3 |
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Net loss | | (917.7 | ) | | (178.6 | ) |
Diluted loss per share | | (5.86 | ) | | (1.16 | ) |
Adjusted EBITDA* | | (28.1 | ) | | 124.1 |
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* Adjusted EBITDA does not exclude costs incurred in connection with the Company’s on-going FCPA investigations.
Overview and Outlook
Key's Chief Executive Officer, Dick Alario, stated, "Current commodity prices have left the U.S. oilfield services industry dealing with the most precipitous and sustained activity collapse in multiple decades. Key has aggressively reshaped its organizational structure and resized its cost structure to address the realities of today's market. Key has continued to adopt the mantra of "control what we can control" and took another meaningful component of costs out of the business in the third quarter, which drove normalized G&A expenses down another 14% sequentially. Further, through the continued rationalization of our U.S. businesses, we were able to improve our U.S. normalized operating loss by approximately $3 million sequentially, even as revenue declined approximately $24 million.
Alario continued, "The structural changes implemented over the past several quarters to shift the organizational alignment of Key's U.S. operations have allowed us to maintain our service quality standards while at the same time reduce costs. The flattening of the organization has allowed us to efficiently meet our customers' needs and, thus, compete effectively in a turbulent market environment.
"Though we've taken significant costs out of the Company, we remain diligent in looking for ways to further reduce our cost burden and to preserve capital. Steps we took during the third quarter of 2015 allowed us to maintain our liquidity sequentially and, so
far in the first quarter, we've enacted another meaningful cost reduction effort that should continue to reduce the Company's operating costs. Additionally, Key continues to identify and evaluate additional steps to enhance its liquidity profile.
"Finally, we disclosed in August of last year plans for my retirement from Key Energy Services during 2016 and for Robert Drummond to assume the role of Chief Executive Officer in addition to his current duties as President and Chief Operating Officer. This transition will be effective March 1st. I want to thank Key's Board for effectively and transparently leading this transition and to thank all of Key's employees for their commitment to the Company during my twelve year tenure."
U.S. Results
Fourth quarter 2015 U.S. Rig Services revenues of $77.9 million were down 8.6% as compared to the third quarter of 2015. Fourth quarter operating loss was $6.5 million, or -8.3% of revenue and includes the write-off of certain vendor deposits due to vendor insolvency or cancelled orders, loss on sale of assets and severance of $5.6 million; excluding these losses, normalized operating loss was $0.8 million, or -1.1% of revenue. These results compare to third quarter operating loss, excluding impairments, of $3.9 million, or -4.6% of revenue. Although revenue for this segment was down sequentially, normalized operating loss improved by $3.1 million as organizational cost efficiencies were realized. The U.S. Rig Services operating loss also includes $1.2 million of costs associated with mobilizing rigs from international markets to the U.S. as compared to $1.0 million the third quarter.
Fourth quarter 2015 Fluid Management Services revenues of $27.7 million were down 22.0% as compared to the third quarter of 2015. Fourth quarter operating loss was $16.6 million, or -59.8% of revenue, and includes a loss on the sale of salt-water disposal wells in the Bakken of $10.5 million and severance of $0.2 million; excluding these losses, normalized operating loss was $5.8 million, or -21.1% of revenue. These results compare to third quarter operating loss, excluding impairments, of $3.9 million, or -10.9% of revenue. Seasonal pressure, including fewer daylight hours and holidays as well as customer activity disruptions led to the sequential revenue decline.
Fourth quarter 2015 Coiled Tubing Services revenues of $16.4 million were down 21.3% as compared to the third quarter of 2015. Fourth quarter operating loss, excluding impairments, was $3.6 million, or -22.0% of revenue. These results compare to third quarter operating loss, excluding impairments, of $5.0 million, or -23.9% of revenue. Activity declined sequentially as new-well completion activity continued to contract due to commodity prices.
Fourth quarter 2015 Fishing & Rental Services revenues of $23.4 million were down 15.2% as compared to the third quarter of 2015. Fourth quarter operating loss was $4.7 million, or -20.1% of revenue, and includes a loss on the sale of assets and severance of $0.3 million; excluding these losses, normalized operating loss was $4.4 million, or -18.7% of revenue. These results compare to third quarter operating loss, excluding impairments, of $5.1 million, or -18.5% of revenue.
International Segment
Fourth quarter 2015 International revenues were $4.8 million, down 37.3% as compared to third quarter 2015 revenues of $7.7 million. Fourth quarter operating loss was $71.9 million, or -1,492.0% of revenues, include a loss on asset sales of $39.9 million, a loss on the impairment of certain assets of $23.0 million and severance of $0.1 million; excluding these losses, normalized operating loss was $8.9 million, or -185.1% of revenue. These results compare to third quarter operating loss, excluding impairments, of $12.9 million, or -167.2% of revenues.
General and Administrative Expenses
General and Administrative (G&A) expenses were $39.0 million for the fourth quarter compared to $45.3 million in the prior quarter. Fourth quarter G&A expenses included $2.7 million in costs associated with the FCPA investigations and $0.7 million in severance compared to third quarter G&A expenses that included $2.5 million in costs associated with the FCPA investigations and $1.6 million in severance. Excluding these items, G&A expense in the fourth quarter was $35.6 million as compared to $41.2 million in the third quarter.
Capital Expenditures and Balance Sheet
Capital expenditures were $1.9 million during the fourth quarter 2015 and $40.8 for the full-year 2015. Key's consolidated cash balance at December 31, 2015 was $204.4 million compared to $199.1 million at September 30, 2015. Total debt at December 31, 2015 was $964.9 million compared to total debt of $964.7 million at September 30, 2015. The Company had $231.5 of total liquidity available at December 31, 2015.
Conference Call Information
As previously announced, Key management will host a conference call to discuss its fourth quarter and full-year 2015 financial results on Thursday, February 18, 2016 at 10:00 a.m. CST. Callers from the U.S. and Canada should dial 888-794-4637 to access the call. International callers should dial 660-422-4879. All callers should ask for the "Key Energy Services Conference Call" or provide the access code 34233710. The conference call will also be available live via the internet. To access the webcast, go to www.keyenergy.com and select "Investor Relations."
A telephonic replay of the conference call will be available on Thursday, February 18, 2016, beginning approximately two hours after the completion of the conference call and will remain available for one week. To access the replay, call 855-859-2056 or 800-585-8367. The access code for the replay is 34233710. The replay will also be accessible at www.keyenergy.com under "Investor Relations" for a period of at least 90 days.
Consolidated Statements of Operations (in thousands, except per share amounts, unaudited):
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| | Three Months Ended | | Twelve Months Ended |
| | December 31, 2015 | | September 30,
2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 |
REVENUES | | $ | 150,174 |
| | $ | 176,857 |
| | $ | 354,802 |
| | $ | 792,326 |
| | $ | 1,427,336 |
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COSTS AND EXPENSES: | | | | | | | | | | |
Direct operating expenses | | 176,761 |
| | 174,505 |
| | 266,354 |
| | 714,637 |
| | 1,059,651 |
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Depreciation and amortization expense | | 41,894 |
| | 45,270 |
| | 46,535 |
| | 180,271 |
| | 200,738 |
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General and administrative expenses | | 38,963 |
| | 45,314 |
| | 73,675 |
| | 202,631 |
| | 249,646 |
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Impairment expense | | 29,100 |
| | 649,944 |
| | 31,697 |
| | 722,096 |
| | 121,176 |
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Operating loss | | (136,544 | ) | | (738,176 | ) | | (63,459 | ) | | (1,027,309 | ) | | (203,875 | ) |
Interest expense, net of amounts capitalized | | 21,743 |
| | 21,704 |
| | 13,830 |
| | 73,847 |
| | 54,227 |
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Other (income) loss, net | | (705 | ) | | 5,915 |
| | 3,463 |
| | 9,394 |
| | 1,009 |
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Loss before tax income taxes | | (157,582 | ) | | (765,795 | ) | | (80,752 | ) | | (1,110,550 | ) | | (259,111 | ) |
Income tax benefit | | 5,097 |
| | 125,634 |
| | 28,448 |
| | 192,849 |
| | 80,483 |
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NET LOSS | | $ | (152,485 | ) | | $ | (640,161 | ) | | $ | (52,304 | ) | | $ | (917,701 | ) | | $ | (178,628 | ) |
Loss per share: | | | | | | | | | | |
Basic and diluted | | $ | (0.97 | ) | | $ | (4.06 | ) | | $ | (0.34 | ) | | $ | (5.86 | ) | | $ | (1.16 | ) |
Weighted average shares outstanding: | | | | | | | | | | |
Basic and diluted | | 157,585 |
| | 157,605 |
| | 153,501 |
| | 156,598 |
| | 153,371 |
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Condensed Consolidated Balance Sheets (in thousands):
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| | | December 31, 2015 | | December 31, 2014 |
| | | (unaudited) | | |
ASSETS | | | | |
Current assets: | | | | |
| Cash and cash equivalents | | $ | 204,354 |
| | $ | 27,304 |
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| Other current assets | | 216,072 |
| | 406,491 |
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Total current assets | | 420,426 |
| | 433,795 |
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Property and equipment, net | | 880,032 |
| | 1,235,258 |
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Goodwill | | — |
| | 582,739 |
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Other assets, net | | 27,340 |
| | 70,971 |
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TOTAL ASSETS | | $ | 1,327,798 |
| | $ | 2,322,763 |
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LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
| Accounts payable | | $ | 30,740 |
| | $ | 77,631 |
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| Current portion of long-term debt | | 3,150 |
| | — |
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| Other current liabilities | | 120,593 |
| | 164,227 |
|
Total current liabilities | | 154,483 |
| | 241,858 |
|
Long-term debt | | 961,700 |
| | 737,691 |
|
Other non-current liabilities | | 71,325 |
| | 285,151 |
|
Equity | | 140,290 |
| | 1,058,063 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 1,327,798 |
| | $ | 2,322,763 |
|
Consolidated Cash Flow Data (in thousands, unaudited):
|
| | | | | | | | |
| | Twelve Months Ended |
| | December 31, 2015 | | December 31, 2014 |
Net cash provided by (used in) operating activities | | $ | (22,386 | ) | | $ | 164,168 |
|
Net cash used in investing activities | | (19,403 | ) | | (146,840 | ) |
Net cash provided by (used in) financing activities | | 218,729 |
| | (22,058 | ) |
Effect of exchange rates on cash | | 110 |
| | 3,728 |
|
Net increase (decrease) in cash and cash equivalents | | 177,050 |
| | (1,002 | ) |
Cash and cash equivalents, beginning of period | | 27,304 |
| | 28,306 |
|
Cash and cash equivalents, end of period | | $ | 204,354 |
| | $ | 27,304 |
|
Segment Revenue and Operating Income (in thousands, except for percentages, unaudited):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Twelve Months Ended |
| | December 31, 2015 | | September 30,
2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 |
Revenues | | | | | | | | | | |
U.S. Rig Services | | $ | 77,856 |
| | $ | 85,200 |
| | $ | 166,095 |
| | $ | 377,131 |
| | $ | 679,045 |
|
Fluid Management Services | | 27,701 |
| | 35,519 |
| | 62,096 |
| | 153,153 |
| | 249,589 |
|
Coiled Tubing Services | | 16,377 |
| | 20,820 |
| | 43,452 |
| | 89,823 |
| | 173,364 |
|
Fishing & Rental Services | | 23,422 |
| | 27,629 |
| | 54,546 |
| | 121,883 |
| | 212,598 |
|
International | | 4,818 |
| | 7,689 |
| | 28,613 |
| | 50,336 |
| | 112,740 |
|
Consolidated Total | | $ | 150,174 |
| | $ | 176,857 |
| | $ | 354,802 |
| | $ | 792,326 |
| | $ | 1,427,336 |
|
| | | | | | | | | | |
Operating Income (Loss) | | | | | | | | | | |
U.S. Rig Services | | $ | (6,473 | ) | | $ | (305,334 | ) | | $ | 20,947 |
| | $ | (307,939 | ) | | $ | 96,387 |
|
Fluid Management Services | | (16,565 | ) | | (28,336 | ) | | 164 |
| | (43,484 | ) | | 3,327 |
|
Coiled Tubing Services | | (10,691 | ) | | (116,572 | ) | | (16,391 | ) | | (155,168 | ) | | (10,819 | ) |
Fishing & Rental Services | | (4,704 | ) | | (186,078 | ) | | (7,162 | ) | | (197,412 | ) | | (58,944 | ) |
International | | (71,886 | ) | | (72,168 | ) | | (8,839 | ) | | (182,536 | ) | | (65,432 | ) |
Functional Support | | (26,225 | ) | | (29,688 | ) | | (52,178 | ) | | (140,770 | ) | | (168,394 | ) |
Consolidated Total | | $ | (136,544 | ) | | $ | (738,176 | ) | | $ | (63,459 | ) | | $ | (1,027,309 | ) | | $ | (203,875 | ) |
| | | | | | | | | | |
Operating Income (Loss) % of Revenues | | | | | | | | | | |
U.S. Rig Services | | (8.3 | )% | | (358.4 | )% | | 12.6 | % | | (81.7 | )% | | 14.2 | % |
Fluid Management Services | | (59.8 | )% | | (79.8 | )% | | 0.3 | % | | (28.4 | )% | | 1.3 | % |
Coiled Tubing Services | | (65.3 | )% | | (559.9 | )% | | (37.7 | )% | | (172.7 | )% | | (6.2 | )% |
Fishing & Rental Services | | (20.1 | )% | | (673.5 | )% | | (13.1 | )% | | (162.0 | )% | | (27.7 | )% |
International | | (1,492.0 | )% | | (938.6 | )% | | (30.9 | )% | | (362.6 | )% | | (58.0 | )% |
Consolidated Total | | (90.9 | )% | | (417.4 | )% | | (17.9 | )% | | (129.7 | )% | | (14.3 | )% |
Following is a reconciliation of net loss as presented in accordance with United States generally accepted accounting principles (GAAP) to EBITDA and Adjusted EBITDA as required under Regulation G of the Securities Exchange Act of 1934.
Reconciliations of EBITDA and Adjusted EBITDA to net loss (in thousands, except for percentages, unaudited):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Twelve Months Ended |
| | December 31, 2015 | | September 30,
2015 | | December 31, 2014 | | December 31, 2015 | | December 31, 2014 |
Net loss | | $ | (152,485 | ) | | $ | (640,161 | ) | | $ | (52,304 | ) | | $ | (917,701 | ) | | $ | (178,628 | ) |
Income tax benefit | | (5,097 | ) | | (125,634 | ) | | (28,448 | ) | | (192,849 | ) | | (80,483 | ) |
Interest expense, net of amounts capitalized | | 21,743 |
| | 21,704 |
| | 13,830 |
| | 73,847 |
| | 54,227 |
|
Interest income | | (58 | ) | | (61 | ) | | (19 | ) | | (159 | ) | | (81 | ) |
Depreciation and amortization | | 41,894 |
| | 45,270 |
| | 46,535 |
| | 180,271 |
| | 200,738 |
|
EBITDA | | $ | (94,003 | ) | | $ | (698,882 | ) | | $ | (20,406 | ) | | $ | (856,591 | ) | | $ | (4,227 | ) |
% of revenues | | (62.6 | )% | | (395.2 | )% | | (5.8 | )% | | (108.1 | )% | | (0.3 | )% |
| | | | | | | | | | |
Severance costs | | 1,340 |
| | 3,988 |
| | 1,086 |
| | 9,718 |
| | 3,413 |
|
Impairment expense | | 29,100 |
| | 649,944 |
| | 31,697 |
| | 722,096 |
| | 121,176 |
|
Allowance for collectibility of notes receivable | | — |
| | 3,755 |
| | — |
| | 7,705 |
| | — |
|
Loss on assets destroyed in Mexico | | — |
| | — |
| | — |
| | 2,160 |
| | — |
|
Loss on sales of assets | | 50,907 |
| | — |
| | 3,700 |
| | 53,034 |
| | 3,700 |
|
Bad debt expense - International | | — |
| | 18,537 |
| | — |
| | 18,537 |
| | — |
|
Other write-offs | | 5,937 |
| | 3,729 |
| | — |
| | 9,666 |
| | — |
|
Sales tax accrual | | — |
| | 5,600 |
| | — |
| | 5,600 |
| | — |
|
Adjusted EBITDA* | | $ | (6,719 | ) | | $ | (13,329 | ) | | $ | 16,077 |
| | $ | (28,075 | ) | | $ | 124,062 |
|
% of revenues | | (4.5 | )% | | (7.5 | )% | | 4.5 | % | | (3.5 | )% | | 8.7 | % |
| | | | | | | | | | |
Revenues | | $ | 150,174 |
| | $ | 176,857 |
| | $ | 354,802 |
| | $ | 792,326 |
| | $ | 1,427,336 |
|
* Adjusted EBITDA does not exclude costs incurred in connection with the Company’s on-going FCPA investigations.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2015 |
| U.S. Rig Services | | Fluid Management Services | | Coiled Tubing Services | | Fishing and Rental Services | | International | | Functional Support | | Total |
Net income (loss) | $ | (6,491 | ) | | $ | (16,564 | ) | | $ | (10,690 | ) | | $ | (4,741 | ) | | $ | (94,598 | ) | | $ | (19,401 | ) | | $ | (152,485 | ) |
Income tax benefit | — |
| | — |
| | — |
| | — |
| | 23,250 |
| | (28,347 | ) | | (5,097 | ) |
Interest expense, net of amounts capitalized | — |
| | — |
| | — |
| | — |
| | 41 |
| | 21,702 |
| | 21,743 |
|
Interest income | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (42 | ) | | (58 | ) |
Depreciation and amortization | 14,954 |
| | 7,273 |
| | 4,314 |
| | 8,155 |
| | 4,300 |
| | 2,898 |
| | 41,894 |
|
EBITDA | $ | 8,463 |
| | $ | (9,291 | ) | | $ | (6,376 | ) | | $ | 3,414 |
| | $ | (67,023 | ) | | $ | (23,190 | ) | | $ | (94,003 | ) |
% of revenues | 10.9 | % | | (33.5 | )% | | (38.9 | )% | | 14.6 | % | | (1,391.1 | )% | | — | % | | (62.6 | )% |
|
| |
| |
| |
| |
| |
| |
|
Severance costs | 335 |
| | 168 |
| | 80 |
| | 96 |
| | 91 |
| | 570 |
| | 1,340 |
|
Impairment expense | — |
| | — |
| | 6,100 |
| | — |
| | 23,000 |
| | — |
| | 29,100 |
|
Loss on sale of assets | 316 |
| | 10,544 |
| | (56 | ) | | 226 |
| | 39,877 |
| | — |
| | 50,907 |
|
Other write-offs | 4,977 |
| | — |
| | 960 |
| | — |
| | — |
| | — |
| | 5,937 |
|
Adjusted EBITDA* | $ | 14,091 |
| | $ | 1,421 |
| | $ | 708 |
| | $ | 3,736 |
| | $ | (4,055 | ) | | $ | (22,620 | ) | | $ | (6,719 | ) |
% of revenues | 18.1 | % | | 5.1 | % | | 4.3 | % | | 16.0 | % | | (84.2 | )% | | — | % | | (4.5 | )% |
|
| |
| |
| |
| |
| |
| |
|
Revenues | $ | 77,856 |
| | $ | 27,701 |
| | $ | 16,377 |
| | $ | 23,422 |
| | $ | 4,818 |
| | $ | — |
| | $ | 150,174 |
|
* Adjusted EBITDA does not exclude costs incurred in connection with the Company’s on-going FCPA investigations.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2015 |
| U.S. Rig Services | | Fluid Management Services | | Coiled Tubing Services | | Fishing and Rental Services | | International | | Functional Support | | Total |
Net income (loss) | $ | (306,069 | ) | | $ | (46,340 | ) | | $ | (154,685 | ) | | $ | (196,685 | ) | | $ | (229,002 | ) | | $ | 15,080 |
| | $ | (917,701 | ) |
Income tax benefit | — |
| | — |
| | — |
| | — |
| | 43,698 |
| | (236,547 | ) | | (192,849 | ) |
Interest expense, net of amounts capitalized | — |
| | — |
| | — |
| | — |
| | 57 |
| | 73,790 |
| | 73,847 |
|
Interest income | — |
| | — |
| | — |
| | — |
| | (70 | ) | | (89 | ) | | (159 | ) |
Depreciation and amortization | 59,515 |
| | 28,138 |
| | 21,593 |
| | 34,662 |
| | 23,872 |
| | 12,491 |
| | 180,271 |
|
EBITDA | $ | (246,554 | ) | | $ | (18,202 | ) | | $ | (133,092 | ) | | $ | (162,023 | ) | | $ | (161,445 | ) | | $ | (135,275 | ) | | $ | (856,591 | ) |
% of revenues | (65.4 | )% | | (11.9 | )% | | (148.2 | )% | | (132.9 | )% | | (320.7 | )% | | — | % | | (108.1 | )% |
|
| |
| |
| |
| |
| |
| |
|
Severance costs | 1,383 |
| | 485 |
| | 197 |
| | 412 |
| | 3,804 |
| | 3,437 |
| | 9,718 |
|
Impairment expense | 297,719 |
| | 24,479 |
| | 133,795 |
| | 180,974 |
| | 85,129 |
| | — |
| | 722,096 |
|
Allowance for collectibility of notes receivable | — |
| | — |
| | — |
| | — |
| | — |
| | 7,705 |
| | 7,705 |
|
Loss on assets destroyed in Mexico | — |
| | — |
| | — |
| | — |
| | 2,160 |
| | — |
| | 2,160 |
|
Loss on sales of assets | 2,471 |
| | 10,042 |
| | (66 | ) | | 697 |
| | 39,890 |
| | — |
| | 53,034 |
|
Bad debt expense | — |
| | — |
| | — |
| | — |
| | 18,537 |
| | — |
| | 18,537 |
|
Other write-offs | 8,706 |
| | — |
| | 960 |
| | — |
| | — |
| | — |
| | 9,666 |
|
Sales tax accrual | — |
| | — |
| | 5,600 |
| | — |
| | — |
| | — |
| | 5,600 |
|
Adjusted EBITDA* | $ | 63,725 |
| | $ | 16,804 |
| | $ | 7,394 |
| | $ | 20,060 |
| | $ | (11,925 | ) | | $ | (124,133 | ) | | $ | (28,075 | ) |
% of revenues | 16.9 | % | | 11.0 | % | | 8.2 | % | | 16.5 | % | | (23.7 | )% | | — | % | | (3.5 | )% |
|
| |
| |
| |
| |
| |
| |
|
Revenues | $ | 377,131 |
| | $ | 153,153 |
| | $ | 89,823 |
| | $ | 121,883 |
| | $ | 50,336 |
| | $ | — |
| | $ | 792,326 |
|
* Adjusted EBITDA does not exclude costs incurred in connection with the Company’s on-going FCPA investigations.
“EBITDA” is defined as income or loss 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-recurring transaction 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, to assess:
| |
• | 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 liquidity presented 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 and Adjusted 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 such replacements; |
| |
• | 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, and therefore should not be relied upon for assessing compliance with covenants. |
Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements as to matters that 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, its management's beliefs and certain assumptions made by management, and include statements regarding future oil and natural gas prices, anticipated cost savings from our cost saving initiatives, available liquidity and steps to enhance our liquidity, estimated capital expenditures, future operational and activity expectations, and anticipated financial performance. 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 are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that 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 and annual projections of revenue and/or operating income 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 regions and/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 or worsen 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 tubing service, and fishing and rental service businesses; risks relating to Key's ability to implement technological developments and enhancements; risks relating to compliance with environmental, health and safety laws and regulations, as well as actions by governmental and regulatory authorities; risks relating to compliance with the FCPA and anti-corruption laws, including risks related to increased costs in connection with FCPA investigations; risks regarding the timing or conclusion of the FCPA investigations, including the risk of fines or penalties imposed by government agencies for violations of the FCPA; risks affecting Key's international operations, including risks affecting Key's ability to execute its plans to withdraw from its international markets outside North America; risks that Key may be unable to achieve the benefits expected from acquisition and 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 Key may 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 the demand 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 not generate adequate returns; risks relating to Key's ability to satisfy listing requirements for its equity securities; risks that Key may not have sufficient liquidity and may not be successful in achieving steps to enhance its liquidity profile; risks relating to Key's ability to comply with covenants under its current credit facilities rendering the liquidity provided by those facilities unavailable and resulting in an event of default; and other risks affecting Key's ability to maintain or improve operations, including its ability to maintain prices for services under market pricing pressures, weather risks, 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 or implied 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 risk factors 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 any such 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 documents that Key files periodically with the Securities and Exchange Commission.
About Key Energy Services
Key Energy Services is the largest onshore, rig-based well servicing contractor based on the number of rigs owned. Key provides a complete range of well intervention services and has operations in all major onshore oil and gas producing regions of the continental United States and internationally in Mexico and Russia.