KEY ENERGY SERVICES, INC. OVERVIEW
Key Energy Services, Inc. , and its wholly owned subsidiaries provide a full range of well services to major and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continentalUnited States . An important component of the Company's growth strategy is to make acquisitions that will strengthen its core services or presence in selected markets, and the Company also makes strategic divestitures from time to time. The Company expects that the industry in which it operates will experience consolidation, and the Company expects to explore opportunities and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or further dispositions or other transactions, although there can be no assurance that any such activities will be consummated. The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of and for the three and nine months endedSeptember 30, 2020 and 2019, included elsewhere herein, and the audited consolidated financial statements and notes thereto included in the 2019 Form 10-K, Q1 2020 Form 10-Q and the Q2 2020 Form 10-Q. We provide information regarding four business segments: Rig Services, Fishing and Rental Services, Coiled Tubing Services and Fluid Management Services. We also have a "Functional Support" segment associated with overhead and other costs in support of our reportable segments. See "Note 16. Segment Information" in "Item 1. Financial Statements" of Part I of this report for a summary of our business segments.
Restructuring and Reverse Stock Split
OnMarch 6, 2020 , we closed the previously announced restructuring of our capital structure and indebtedness (the "Restructuring") pursuant to the Restructuring Support Agreement, dated as ofJanuary 24, 2020 (the "RSA"), with lenders under our Prior Term Loan Facility (as defined below) collectively holding over 99.5% (the "Supporting Term Lenders") of the principal amount of the Company's then outstanding term loans. Pursuant to the RSA and the Restructuring contemplated thereby, among other things we effected the following transactions and changes to our capital structure and governance:
pursuant to exchange agreements entered into at the closing of the
Restructuring, we exchanged approximately
principal of our term loans (together with accrued interest thereon) held by
Supporting Term Lenders under our Prior Term Loan Facility into
? (i) approximately 13.4 million newly issued shares of common stock representing
97% of the Company's outstanding shares after giving effect to such issuance
(and without giving effect to dilution by the New Warrants and MIP (each as
defined below)) and (ii)
term loan facility (the "New Term Loan Facility"), each on a pro rata basis
based on their holdings of term loans under the Prior Term Loan Facility;
completed a 1-for-50 reverse stock split of our outstanding common stock. All
? pre-Restructuring shares prices, including shares outstanding and earnings per
share, have been adjusted to reflect the 1-for-50 reverse stock split;
? distributed to our common stockholders of record as of
series of warrants (the "New Warrants");
entered into the
was funded at closing of the Restructuring with new cash proceeds from the
Supporting Term Lenders and
? held by the Supporting Term Lenders under the Prior Term Loan Facility as
described above and (ii) an approximate
loan tranche in respect of term loans held by lenders under the Prior Term Loan
Facility who were not Supporting Term Lenders;
? entered into the New ABL Facility (as defined below);
30--------------------------------------------------------------------------------
Table of Contents
adopted a new management incentive plan (the "MIP") representing up to 9% of
? the Company's outstanding shares after giving effect to the issuance of shares
described above; and
made certain changes to the Company's governance, including changes to our
? Board of Directors (the "Board"), amendments to our governing documents and
entry into the Stockholders Agreement (as defined below) with the Supporting
Term Lenders.
In accordance with the RSA at the closing of the Restructuring, the Company amended and restated its certificate of incorporation and entered into a stockholders agreement (the "Stockholders Agreement") with the Supporting Term Lenders in order to, among other things, provide for a Board of seven members. Pursuant to the Stockholders Agreement, our Board consists of our chief executive officer and six other members appointed by various Supporting Term Lenders. Specifically, pursuant to the Stockholders Agreement, Supporting Term Lenders who hold more than 25% of the Company's outstanding shares as of the closing of the Restructuring are entitled to nominate two directors and Supporting Term Lenders who hold between 10% and 25% of the Company's outstanding shares as of the closing of the Restructuring are entitled to nominate one director. All appointees or nominees of Supporting Term Lenders, other than any director appointed or nominated bySoter Capital LLC ("Soter"), must meet the "independent director" requirements set forth in Section 303A of the NYSE Listed Company Manual. In addition, pursuant to the Stockholders Agreement, Supporting Term Lenders are entitled to appoint a non-voting board observer subject to specified ownership thresholds. In accordance with the RSA and following the closing of the Restructuring, the Company distributed to stockholders of record as ofFebruary 18, 2020 the New Warrants. The New Warrants were issued in two series, each with a four-year exercise period. The first series entitles the holders to purchase in the aggregate 1,669,730 newly issued shares of common stock, representing 10% of the Company's common shares at the closing of the Restructuring on an as-exercised basis (after giving effect to the exercise of all New Warrants, but subject to dilution by issuances under the MIP). The aggregate exercise price of the first series of New Warrants is$19.23 and was determined based on the aggregate outstanding principal amount of term loans under the Prior Term Loan Facility plus accrued interest thereon at the default rate as of the closing of the Restructuring. The second series of New Warrants entitles the holders to purchase in the aggregate 1,252,297 newly issued shares of common stock, representing 7.5% of the Company's common shares at the closing of the Restructuring on an as-exercised basis (after giving effect to the exercise of all New Warrants, but subject to dilution by issuances under the MIP). The aggregate strike price of the second series of New Warrants is$28.85 and was determined based on the product of (i) the aggregate outstanding principal amount of term loans under the Prior Term Loan Facility plus accrued interest thereon at the default rate as of the closing of the Restructuring, multiplied by (ii) 1.50. For more information on our New Term Loan Facility and New ABL Facility entered into in connection with the Restructuring, see "Note 7. Debt" in Part I, Item 1 of this report. PERFORMANCE MEASURES In assessing overall activity in theU.S. onshore oilfield service industry in which we operate, we believe that the Baker HughesU.S. land drilling rig count, which is publicly available on a weekly basis, is the best available barometer of exploration and production ("E&P") companies' capital spending and resulting activity levels. Historically, our activity levels have been highly correlated withU.S. onshore capital spending by our E&P company customers as a group. Average Baker Average AESC Well NYMEX Henry Hughes U.S. Land Service Active Rig WTI Cushing Oil(1) Hub Natural Gas(1) Drilling Rigs(2) Count(3) 2020: First Quarter $ 41.00 $ 1.90 764 978 Second Quarter $ 27.96 $ 1.70 378 498 Third Quarter $ 40.89 $ 2.00 241 677 2019: First Quarter $ 54.82 $ 2.92 1,023 1,295 Second Quarter $ 59.88 $ 2.57 967 1,311 Third Quarter $ 56.34 $ 2.38 894 1,263 Fourth Quarter $ 56.82 $ 2.40 797 1,143
--------------------------------------------------------------------------------
(1) Represents the average of the daily average prices for each of the periods
presented. Source: EIA
31
--------------------------------------------------------------------------------
Table of Contents
(2) Represents the average of the weekly average prices for each of the periods
presented. Source: www.bakerhughes.com
(3) Represents the average of the monthly average prices for each of the periods
presented.
Internally, we measure activity levels for our well servicing operations
primarily through our rig and trucking hours. Generally, as capital spending by
E&P companies increases, demand for our services also rises, resulting in
increased rig and trucking services and more hours worked. Conversely, when
activity levels decline due to lower spending by E&P companies, we generally
provide fewer rig and trucking services, which results in fewer hours worked.
Rig activity occurs primarily on weekdays during daylight hours. Accordingly, we
track rig activity on a "per working day" basis. Key's working days per quarter,
which exclude national holidays, are indicated in the table below. Our trucking
activity tends to occur on a 24/7 basis. Accordingly, we track our trucking
activity on a "per calendar day" basis. The following table presents our
quarterly rig and trucking hours from 2019 through the third quarter of 2020:
Key's
Rig Hours Trucking Hours Working Days(1)
2020:
First Quarter 101,341 106,786 64
Second Quarter 43,526 71,007 63
Third Quarter 65,376 68,875 64
Total 2020 210,243 246,668 191
2019:
First Quarter 151,309 150,740 63
Second Quarter 154,017 144,996 63
Third Quarter 142,151 150,518 64
Fourth Quarter 114,727 121,152 62
Total 2019 562,204 567,406 252
--------------------------------------------------------------------------------
(1) Key's working days are the number of weekdays during the quarter minus
national holidays.
MARKET AND BUSINESS CONDITIONS AND OUTLOOK
The outbreak of COVID-19 has caused an unprecedented global health crisis and significant economic disruption. National, state and local governments have instituted various measures including quarantining, stay-at-home orders and travel restrictions designed to slow the spread of COVID-19 and protect their populations and economies, including in the areas in which the Company operates. These actions have significantly curtailed economic activity, disrupted global supply chains and materially reduced demand for oil and natural gas, creating a supply and demand imbalance that has negatively impacted commodity prices. The decline in the demand and pricing for oil and natural gas has negatively impacted our customers and the demand for and pricing we receive for our services. Production cuts, other voluntary production curtailments and reduced new well drilling have helped to bring supply and demand closer to balance and stabilized commodity prices. However, US and international crude stocks remain at historically high levels and there remains a high degree of uncertainty regarding the timing and extent of any recovery in economic activity and energy demand. Although commodity prices have recovered from the lows ofApril 2020 , pricing remains depressed compared to 2019 levels. Additionally, recent increases in COVID-19 infections have resulted in the re-implementation of travel and other restrictions on economic activity that were recently relaxed, which could further delay any improvement in energy demand. COVID-19 has also impacted how we conduct our business. While we have taken steps to keep our employees safe by supporting those affected, permitting employees or employees with family members with higher susceptibility to COVID-19 to work from home, and monitoring those who cannot do so and are required to be at work, our ability to serve our customers and execute our business could be adversely affected should a significant number of our employees contract COVID-19 and require quarantine. The extent to which our future results are affected by the COVID-19 pandemic and related economic downturn will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic, our ability to continue to staff our operations and the speed and effectiveness of responses to combat the virus. COVID-19 may also adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business. For additional detail, please refer to Risk Factors in our 2019 Form 10-K and our Q1 2020 Form 10-Q. 32
--------------------------------------------------------------------------------
Table of Contents
We experienced a downturn in demand for our services in 2019, and this decline has increased in 2020 for the reasons discussed above. The macroeconomic events that began inMarch 2020 resulted in significant revisions to our customers' capital spending programs for 2020. We expect reduced demand for our services and pricing pressure to continue for the foreseeable future, particularly as compared to the previous year. While activity levels have improved to 89 average well service rigs working inSeptember 2020 as compared to 47 average well service rigs working inMay 2020 , as of the date of this filing, we have limited visibility into whether our customers will continue to resume their production maintenance activities, the timing of any increase in activity, or the extent of any improvement in demand for our services. However, as oil supply adjusts to demand and commodity prices stabilize, we expect demand for our services to increase as our customers begin to bring shut-in wells back on line and resume normal well maintenance work. We initiated a number of actions in the fourth quarter 2019 aimed at conserving cash and protecting our liquidity, and these actions have continued into the third quarter of 2020, including: completing the refinancing of our capital structure, internally realigning our operations, exiting operations and areas to focus on certain markets where we had the best competitive positions, and reducing our overhead costs, including suspension of our 401K match, given the reduced operating footprint. We remain focused on maximizing our current equipment fleet, but we may further reduce our planned expenditures and defer acquisition of new equipment or maintenance if market conditions decline further. Given the dynamic nature of the macroeconomic events discussed above, we are unable to reasonably estimate the period of time that these market conditions will exist, the extent of the impact they will have on our business, liquidity, results of operations, financial condition, or the timing of any subsequent recovery.
RESULTS OF OPERATIONS
The following table shows our consolidated results of operations for the three
and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
REVENUES $ 42,911 $ 106,523 $ 152,969 $ 328,739
COSTS AND EXPENSES:
Direct operating expenses 33,556 87,956 125,121 266,714
Depreciation and amortization expense 7,107 14,584 25,387 43,142
General and administrative expenses 12,269 21,375 41,159 66,014
Impairment expense - - 41,242 -
Operating loss (10,021) (17,392) (79,940) (47,131)
Gain on debt restructuring - - (170,648) -
Interest expense, net of amounts capitalized 2,238 8,411 12,525 26,164
Other income, net (8,362) (351) (8,762) (1,732)
Income (loss) before income taxes (3,897) (25,452) 86,945 (71,563)
Income tax benefit (expense) 1 (37) (972) 4,330
NET INCOME (LOSS) $ (3,896) $ (25,489) $ 85,973 $ (67,233) Consolidated Results of Operations - Three Months Ended
Revenues Our revenues for the three months endedSeptember 30, 2020 decreased$63.6 million , or 59.7%, to$42.9 million from$106.5 million for the three months endedSeptember 30, 2019 , due to lower customer spending and activity as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations. See "Segment Operating Results - Three Months EndedSeptember 30, 2020 and 2019" below for a more detailed discussion of the change in our revenues. 33
--------------------------------------------------------------------------------
Table of Contents
Direct Operating Expenses
Our direct operating expenses decreased$54.4 million , to$33.6 million (78.2% of revenues), for the three months endedSeptember 30, 2020 , compared to$88.0 million (82.6% of revenues) for the three months endedSeptember 30, 2019 . This decrease is primarily a result of a decrease in employee headcount and related compensation costs, fuel expense and repair and maintenance expense due to the decrease in activity levels discussed above.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased$7.5 million , or 51.3%, to$7.1 million during the three months endedSeptember 30, 2020 , compared to$14.6 million for the three months endedSeptember 30, 2019 . This decrease is primarily due to certain assets becoming fully depreciated in December of 2019 and the$41.2 million impairment of certain assets in the first quarter of 2020 that reduced their depreciable base for future periods.
General and Administrative Expenses
General and administrative expenses decreased$9.1 million , or 42.6%, to$12.3 million (28.6% of revenues), for the three months endedSeptember 30, 2020 , compared to$21.4 million (20.1% of revenues) for the three months endedSeptember 30, 2019 . The decrease is primarily due to lower employee compensation costs of$6.0 million due to reduced staffing levels and a$0.9 million decrease in professional fees.
Interest Expense, Net of Amounts Capitalized
Interest expense decrease$6.2 million , or 73.4%, to$2.2 million for the three months endedSeptember 30, 2020 , compared to$8.4 million for the same period in 2019. This decrease is primarily related to theMarch 2020 restructuring that reduced debt balances by approximately$190.7 million and the related decrease in interest expense under the New Term Loan Facility.
Other Income, Net
During the quarter endedSeptember 30, 2020 , we recognized other income, net, of$8.4 million , compared to other income, net, of$0.4 million for the quarter endedSeptember 30, 2019 . This increase is primarily related to an$8.0 million gain on the settlement of a legal matter.
The following table summarizes the components of other income, net for the periods indicated (in thousands):
Three Months Ended
September 30,
2020 2019
Interest income $ (2) $ (122)
Gain on settlement of a legal matter (8,005) -
Other (355) (229)
Total $ (8,362) $ (351)
Income Tax Benefit (Expense)
We recorded an income tax benefit of less than $0.1 million on a pre-tax loss of
$3.9 million in the three months ended September 30, 2020 , compared to an income
tax expense of less than $0.1 million on a pre-tax loss of $25.5 million in the
three months ended September 30, 2019 . Our effective tax rate was 0.02% for the
three months ended September 30, 2020 , compared to (0.1%) for the three months
ended September 30, 2019 . The variance between our effective rate and the U.S.
statutory rate is due to the impact of permanent differences and other tax
adjustments, such as valuation allowances against deferred tax assets, and a
true-up adjustment to income tax receivable.
34--------------------------------------------------------------------------------
Table of Contents
Segment Operating Results - Three Months Ended
The following table shows operating results for each of our segments for the
three months ended
For the three months ended
Fishing and Coiled Fluid
Rental Tubing Management Functional
Rig Services Services
Services Services Support Total
Revenues from external customers
1,714$ 7,514 $ -$ 42,911 Operating expenses 27,686 4,518 3,031 7,516 10,181 52,932 Operating income (loss) 1,912 (433) (1,317) (2) (10,181) (10,021)
For the three months ended
Fishing and Coiled Fluid
Rental Tubing Management Functional
Rig Services Services
Services Services Support Total
Revenues from external customers
9,714$ 18,209 $ -$ 106,523 Operating expenses 61,713 15,852 11,259 18,632 16,459 123,915 Operating income (loss) 2,752 (1,717) (1,545) (423) (16,459) (17,392) Rig Services Revenues for our Rig Services segment decreased$34.9 million , or 54.1%, to$29.6 million for the three months endedSeptember 30, 2020 , compared to$64.5 million for the three months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower customer activity and spending as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations which represented$6.8 million of revenue in the corresponding 2019 period that did not re-occur in 2020. Operating expenses for our Rig Services segment were$27.7 million during the three months endedSeptember 30, 2020 , which represented a decrease of$34.0 million , or 55.1%, compared to$61.7 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, lower equipment expense due to a decrease in activity levels and a decrease in depreciation expense of due to certain assets becoming fully depreciated in December of 2019.
Fishing and Rental Services
Revenues for our Fishing and Rental Services segment decreased$10.0 million , or 71.1%, to$4.1 million for the three months endedSeptember 30, 2020 , compared to$14.1 million for the three months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower customer activity and spending as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Operating expenses for our Fishing and Rental Services segment were$4.5 million during the three months endedSeptember 30, 2020 , which represented a decrease of$11.4 million , or 71.5%, compared to$15.9 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, lower equipment expense due to a decrease in activity levels, and a decrease in depreciation expense due to certain assets becoming fully depreciated in December of 2019 and the impairment of certain assets in the first quarter of 2020 that reduced their depreciable base for future periods.
Coiled Tubing Services
Revenues for our Coiled Tubing Services segment decreased$8.0 million , or 82.4%, to$1.7 million for the three months endedSeptember 30, 2020 , compared to$9.7 million for the three months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower spending from our customers on drilling and completions as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. These market conditions also reduced the price we received for our services. 35
--------------------------------------------------------------------------------
Table of Contents
Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations which represented$3.5 million of revenue in the corresponding 2019 period. Operating expenses for our Coiled Tubing Services segment were$3.0 million during the three months endedSeptember 30, 2020 , which represented a decrease of$8.3 million , or 73.1%, compared to$11.3 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, fuel expense and repair and maintenance expense due to lower activity levels. Fluid Management Services Revenues for our Fluid Management Services segment decreased$10.7 million , or 58.7%, to$7.5 million for the three months endedSeptember 30, 2020 , compared to$18.2 million for the three months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower spending from our customers on drilling and completions as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations which represented$2.1 million of revenue in the corresponding 2019 period that did not re-occur in 2020. Operating expenses for our Fluid Management Services segment were$7.5 million during the three months endedSeptember 30, 2020 , which represented a decrease of$11.1 million , or 59.7%, compared to$18.6 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, fuel expense and repair and maintenance expense due to lower activity levels and a decrease in depreciation expense due to certain assets becoming fully depreciated in December of 2019 and the impairment of certain assets in the first quarter of 2020 that reduced their depreciable base for future periods. Functional Support Operating expenses for Functional Support, which represent expenses associated with managing our reporting segments, decreased$6.3 million , or 38.1%, to$10.2 million (23.7% of consolidated revenues) for the three months endedSeptember 30, 2020 compared to$16.5 million (15.5% of consolidated revenues) for the same period in 2019. The decrease is primarily due to lower employee compensation costs of$4.3 million due to reduced staffing levels and a$0.9 million decrease in professional fees.
Consolidated Results of Operations - Nine Months Ended
Revenues Our revenues for the nine months endedSeptember 30, 2020 decreased$175.7 million , or 53.5%, to$153.0 million from$328.7 million for the nine months endedSeptember 30, 2019 , due to lower customer activity and spending as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations. See "Segment Operating Results - Nine Months EndedSeptember 30, 2020 and 2019" below for a more detailed discussion of the change in our revenues.
Direct Operating Expenses
Our direct operating expenses decreased$141.6 million , to$125.1 million (81.8% of revenues), for the nine months endedSeptember 30, 2020 , compared to$266.7 million (81.1% of revenues) for the nine months endedSeptember 30, 2019 . This decrease is primarily a result of a decrease in employee headcount and related compensation costs, fuel expense and repair and maintenance expense due to lower activity levels as compared to the corresponding 2019 period.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased$17.7 million , or 41.2%, to$25.4 million during the nine months endedSeptember 30, 2020 , compared to$43.1 million for the nine months endedSeptember 30, 2019 . This decrease is primarily due to certain assets becoming fully depreciated in December of 2019 and the$41.2 million impairment of certain assets in the first quarter of 2020 that reduced their depreciable base for future periods. 36
--------------------------------------------------------------------------------
Table of Contents
General and Administrative Expenses
General and administrative expenses decreased$24.8 million , or 37.7%, to$41.2 million (26.9% of revenues), for the nine months endedSeptember 30, 2020 , compared to$66.0 million (20.1% of revenues) for the nine months endedSeptember 30, 2019 . The decrease is primarily due to lower employee compensation costs of$11.8 million due to reduced staffing levels and a$14.5 million decrease in professional fees.
Impairment Expense
During the nine months endedSeptember 30, 2020 , the Company recognized an asset impairment of$41.2 million . It was determined that the fair value of the assets of Fluid Management Services and Fishing & Rental Services was less than the carrying value of those respective segment's assets. As a result, we recorded an impairment of$23.7 million and$17.6 million at those segments, respectively.
Gain on debt restructuring
During the nine months endedSeptember 30, 2020 the Company recognized a gain of$170.6 million related to the recent restructuring of corporate debt. For more information on our New Term Loan Facility and New ABL Facility entered into in connection with the Restructuring, see "Note 1. General" and "Note 7. Debt."
Interest Expense, Net of Amounts Capitalized
Interest expense decreased$13.7 million , or 52.1%, to$12.5 million for the nine months endedSeptember 30, 2020 , compared to$26.2 million for the same period in 2019. This decrease is primarily related to theMarch 2020 restructuring that reduced debt balances by approximately$190.7 million and the related decrease in interest expense under the New Term Loan Facility.
Other Income, Net
During the nine months endedSeptember 30, 2020 , we recognized other income, net, of$8.8 million , compared to other income, net, of$1.7 million for the nine months endedSeptember 30, 2019 . This increase is primarily related to an$8.0 million gain on the settlement of a legal matter.
The following table summarizes the components of other income, net for the periods indicated (in thousands):
Nine Months Ended
September 30,
2020 2019
Interest income $ (84) $ (639)
Gain on settlement of a legal matter (8,005) -
Other (673) (1,093)
Total $ (8,762) $ (1,732)
Income Tax Benefit (Expense)
We recorded an income tax expense of $1.0 million on pre-tax income of $86.9
million for the nine months ended September 30, 2020 , compared to an income tax
benefit of $4.3 million on a pre-tax loss of $71.6 million for the same period
in 2019. Our effective tax rate was 1.1% for the nine months ended September 30,
2020 , compared to 6.1% for the nine months ended September 30, 2019 . Our
variance between our effective rate and the U.S. statutory rate is due to the
impact of permanent differences, and other tax adjustments, such as valuation
allowances against deferred tax assets and a true-up adjustment to an income tax
receivable.
37
--------------------------------------------------------------------------------
Table of Contents
Segment Operating Results - Nine Months Ended
The following table shows operating results for each of our segments for the
nine months ended
For the nine months ended
Fishing and Coiled Fluid
Rental Tubing Management Functional
Rig Services Services
Services Services Support Total
Revenues from external customers
8,418$ 28,571 $ -$ 152,969 Operating expenses 95,399 39,549 12,509 52,324 33,128 232,909 Operating income (loss) 2,933 (21,901) (4,091) (23,753) (33,128) (79,940)
For the nine months ended
Fishing and Coiled Fluid
Rental Tubing Management Functional
Rig Services Services
Services Services Support Total
Revenues from external customers
32,134$ 55,696 $ -$ 328,739 Operating expenses 184,285 48,196 37,266 55,811 50,312 375,870 Operating income (loss) 13,090 (4,662) (5,132) (115) (50,312) (47,131) Rig Services Revenues for our Rig Services segment decreased$99.1 million , or 50.2%, to$98.3 million for the nine months endedSeptember 30, 2020 , compared to$197.4 million for the nine months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower customer activity and spending as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations which represented$24.1 million of revenue in the corresponding 2019 period that did not re-occur in 2020. Operating expenses for our Rig Services segment were$95.4 million for the nine months endedSeptember 30, 2020 , which represented a decrease of$88.9 million , or 48.2%, as compared to$184.3 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, lower equipment expense due to a decrease in activity levels and a decrease in depreciation expense due to certain assets becoming fully depreciated in December of 2019.
Fishing and Rental Services
Revenues for our Fishing and Rental Services segment decreased$25.9 million , or 59.5%, to$17.6 million for the nine months endedSeptember 30, 2020 , compared to$43.5 million for the nine months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower customer activity and spending on drilling and completions as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Operating expenses for our Fishing and Rental Services segment were$39.5 million for the nine months endedSeptember 30, 2020 , which represented a decrease of$8.6 million , or 17.9% compared to$48.2 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs due to a decrease in activity levels, a decrease in depreciation expense due to certain assets becoming fully depreciated in December of 2019 and the impairment of certain assets in the first quarter of 2020 that reduced their depreciable base for future periods and a decrease in repair and maintenance expense due to lower activity levels. This decrease was partially offset by a$17.6 million impairment of assets in the first quarter of 2020. Coiled Tubing Services Revenues for our Coiled Tubing Services segment decreased$23.7 million , or 73.8%, to$8.4 million for the nine months endedSeptember 30, 2020 , compared to$32.1 million for the nine months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower spending from our customers on drilling and completions as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. These market conditions also reduced the price we received for our services. 38
--------------------------------------------------------------------------------
Table of Contents
Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations which represented$10.2 million of revenue in the corresponding 2019 period that did not re-occur in 2020. Operating expenses for our Coiled Tubing Services segment were$12.5 million for the nine months endedSeptember 30, 2020 , which represented a decrease of$24.8 million , or 66.4%, compared to$37.3 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, fuel expense and repair and maintenance expense due to lower activity levels as compared to the prior year.
Fluid Management Services
Revenues for our Fluid Management Services segment decreased$27.1 million , or 48.7%, to$28.6 million for the nine months endedSeptember 30, 2020 , compared to$55.7 million for the nine months endedSeptember 30, 2019 . The decrease for this segment is primarily due to lower spending from our customers on drilling and completions as a result of lower oil prices and the negative impact the COVID-19 pandemic has had on the economy. Additionally, in the fourth quarter of 2019, the Company strategically exited a number of non-core and underperforming locations which represented$6.7 million of revenue in the corresponding 2019 period that did not re-occur in 2020. Operating expenses for our Fluid Management Services segment were$52.3 million for the nine months endedSeptember 30, 2020 , which represented a decrease of$3.5 million , or 6.2%, compared to$55.8 million for the same period in 2019. This decrease is primarily a result of a decrease in employee headcount and related compensation costs, fuel expense and repair and maintenance expense due to lower activity levels versus the prior year and a decrease in depreciation expense due to certain assets becoming fully depreciated in December of 2019 and the impairment of certain assets in the first quarter of 2020 that reduced their depreciable base for future periods. This decrease was substantially offset by a$23.7 million impairment of assets recorded in the first quarter of 2020.
Functional Support
Operating expenses for Functional Support, which represent expenses associated with managing our reporting segments, decreased$17.2 million , or 34.2%, to$33.1 million (21.7% of consolidated revenues) for the nine months endedSeptember 30, 2020 compared to$50.3 million (15.3% of consolidated revenues) for the same period in 2019. The decrease is primarily related to a credit of$4.3 million recorded inMarch 2020 related to a restructuring related concession on accrued professional fees, lower employee compensation costs of$7.5 due to reduced staffing levels and a$14.5 million decrease in professional fees, partially offset by an increase in insurance claims of$5.1 million .
LIQUIDITY AND CAPITAL RESOURCES
Effective as ofMarch 6, 2020 , we completed the Restructuring of our capital structure and indebtedness and, among other things, reduced our outstanding debt from$241.9 million as ofDecember 31, 2019 to$51.2 million as of the closing of the Restructuring. For more information on the Restructuring, see "--Restructuring and Reverse Stock Split" above. We require capital to fund our ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives, investments and acquisitions, our debt service payments and our other obligations. We expect to utilize our internally generated cash flows from operations, current reserves of cash, availability under the New ABL Facility and proceeds from the sale of assets to finance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations. The conditions and events discussed in "Note 1. General-Market Conditions and COVID-19" in "Item 1. Financial Statements" and in "Market and Business Conditions and Outlook" above have adversely affected the demand for oil and natural gas, as well as for our services. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, coupled with oil oversupply, has had, and is reasonably likely to continue to have, a material adverse impact on the demand for our services and the prices we can charge for our services. The decline in our customers' demand for our services has had, and is likely to continue to have, a material adverse impact on our financial condition, results of operations and cash flows. The decrease in oil and natural gas prices has adversely affected our customers and resulted in a decrease in the creditworthiness of some of our customers. While we historically have not experienced significant losses related to customer creditworthiness, our 39
--------------------------------------------------------------------------------
Table of Contents
allowance for doubtful accounts as a percentage of accounts receivable has increased and if current conditions persist, there is no assurance that we will not experience losses in the future or delays in collecting our receivables.
Beginning in the fourth quarter of 2019, we have focused on cost control measures related to operational and general and administrative expenses to reduce cash costs during this time period with the goal of preserving margins and improving working capital until our customers increase spending.
Current Financial Condition and Liquidity
As ofSeptember 30, 2020 , we had total liquidity of$13.2 million which consisted of$4.5 million cash and cash equivalents and$8.7 million of borrowing capacity available under our ABL Facility. As ofDecember 31, 2019 , prior to the Restructuring, we had$14.4 million of cash and cash equivalents and, although we had$11.9 million of borrowing capacity available, we were unable to borrow any amounts under the ABL Facility. Our working capital was($6.5) million as ofSeptember 30, 2020 , compared to$(0.7) million as ofDecember 31, 2019 . Our working capital decreased from the prior year end primarily as a result of a decreases in cash and cash equivalents, accounts receivable and prepaid assets partially offset by decreases in accrued interest, accrued payroll and other accrued expenses. As ofSeptember 30, 2020 , we had no borrowings outstanding,$36.3 million of letters of credit outstanding,$27.4 million of cash posted as cash collateral recorded in deposits on our balance sheet and$8.7 million of borrowing capacity available under our ABL Facility. The additional collateral is required to support our outstanding letters of credit and to maintain compliance with the minimum borrowing capacity covenant under our New ABL Facility.
The following table summarizes our cash flows for the nine months ended
Nine Months Ended
September 30,
2020 2019
Net cash used in operating activities $ (41,666) $ (16,785)
Cash paid for capital expenditures (1,220) (16,483)
Proceeds received from sale of fixed assets 5,002 8,362 Proceeds from long-term debt 30,000 - Repayments of long-term debt (6) (1,875) Repayments of finance lease obligations (601)
(59)
Payment of deferred financing costs (1,385)
(828)
Other financing activities, net (8)
(37)
Net decrease in cash, cash equivalents and restricted cash
$ (27,705) Cash used in operating activities was$41.7 million for the nine months endedSeptember 30, 2020 compared to cash used in operating activities of$16.8 million for the nine months endedSeptember 30, 2019 . Cash used in operating activities for the nine months endedSeptember 30, 2020 was primarily related to net income adjusted for noncash items and a decrease in accrued interest and other accrued liabilities partially offset by a decrease in accounts receivables. Cash used in operating activities for the nine months endedSeptember 30, 2019 was primarily related to net losses adjusted for noncash items. Cash provided by investing activities was$3.8 million for the nine months endedSeptember 30, 2020 which consisted of$5.0 million in proceeds from sales of assets, partially offset by$1.2 million of capital expenditures. Cash used in investing activities of$8.1 million for the nine months endedSeptember 30, 2019 consisted of$16.5 million of capital expenditures, partially offset by$8.4 million in proceeds from sales of assets. Our capital expenditures are primarily related to the ongoing maintenance of our existing equipment and the addition of new equipment. Cash provided by financing activities was$28.0 million for the nine months endedSeptember 30, 2020 compared to cash used in financing activities of$2.8 million for the nine months endedSeptember 30, 2019 . Financing cash inflows for the nine months endedSeptember 30, 2020 primarily relate to proceeds from long-term debt related to theMarch 2020 refinancing. Financing cash outflows for the nine months endedSeptember 30, 2019 primarily relate to the repayment of long-term debt. 40
--------------------------------------------------------------------------------
Table of Contents
Debt Service
As of
Year Principal Payments Remainder of 2020 $ 4 2021 1,200 2022 - 2023 - 2024 - 2025 50,000 Total principal payments $ 51,204 New ABL Facility OnMarch 6, 2020 , the Company andKey Energy Services, LLC , as borrowers (the "ABL Borrowers"), entered into Amendment No. 3 to the Company's existing ABL facility, dated as ofDecember 15, 2016 (as amended, the "New ABL Facility") with the financial institutions party thereto from time to time as lenders (the "ABL Lenders") andBank of America, N.A ., as administrative agent and collateral agent (the "ABL Agent") for the ABL Lenders. The New ABL Facility provided for aggregate commitments from the ABL Lenders of$70 million and matures on the earlier of (x)April 5, 2024 and (y) 181 days prior to the scheduled maturity date of the Company's term loan facility or the scheduled maturity date of the Company's other material debt in an aggregate principal amount exceeding$15 million . The New ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x)$30 million and (y) 25% of the commitments. The amount that may be borrowed under the New ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the New ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the New ABL Facility. Borrowings under the New ABL Facility bear interest, at the ABL Borrowers' option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.75% to 3.25% depending on the ABL Borrowers' fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR plus 1.0% plus (b) an applicable margin that varies from 1.75% to 2.25% depending on the ABL Borrowers' fixed charge coverage ratio at such time. The New ABL Facility provides that, in the event LIBOR becomes unascertainable for the requested interest period or otherwise becomes unavailable or replaced by other benchmark interest rates, then the Company and the ABL Agent may amend the New ABL Facility for the purpose of replacing LIBOR with one or more SOFR-based rates or another alternate benchmark rate giving consideration to the general practice in similarU.S. dollar denominated syndicated credit facilities. In addition, the New ABL Facility provides for unused line fees of 0.5% to 0.375% per year, depending on utilization, letter of credit fees and certain other factors. The New ABL Facility may in the future be guaranteed by certain of the Company's existing and future subsidiaries (the "ABL Guarantors," and together with the ABL Borrowers, the "ABL Loan Parties"). To secure their obligations under the New ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the ABL Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the "ABL Priority Collateral"). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under "New Term Loan Facility"). The revolving loans under the New ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs. The New ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale 41
--------------------------------------------------------------------------------
Table of Contents
of assets. The New ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods, with a fixed charge coverage ratio of at least 1.00 to 1.00. As ofSeptember 30, 2020 , we have no borrowings outstanding,$36.3 million of letters of credit,$27.4 million posted as additional collateral recorded in deposits on our balance sheet and$8.7 million of borrowing capacity available under our ABL Facility. The additional collateral is required to maintain compliance with the current minimum borrowing capacity availability requirement of$7.5 million under our New ABL Facility. OnMay 20, 2020 , the ABL Borrowers, the ABL Lenders and Administrative Agent, entered into Amendment No. 4 to the New ABL Facility. Pursuant to the Fourth Amendment, the parties agreed, among other things, to (i) reduce the Lenders' aggregate commitments to make revolving loans to$50 million , (ii) increase the applicable interest rate margin by 100 basis points to 375-425 basis points for LIBOR borrowings (with a 1.00% LIBOR floor) and 275-325 basis points for base rate borrowings (with a 2.00% base rate floor), in each case depending on the fixed charge coverage ratio at the time of determination, (iii) lower the availability thresholds for triggering certain covenants and (iv) add certain reporting requirements. OnAugust 28, 2020 , the ABL Borrowers, the ABL Lenders and the Administrative Agent, entered into Amendment No. 5 to the New ABL Facility to, among other things, permit the ABL Borrowers to undertake sale and leaseback transactions with an aggregate fair market value of up to$5 million during the term of the New ABL Agreement.
As of
New Term Loan Facility OnMarch 6, 2020 , the Company entered into an amendment and restatement agreement with theSupporting Term Lenders andCortland Capital Market Services LLC andCortland Products Corp. , as agent (the "Term Agent"), which amended and restated the Prior Term Loan Facility, among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as lenders and the Term Agent (as amended and restated by the amendment and restatement agreement, the "New Term Loan Facility"). Prior to the closing of the Restructuring, there was approximately$243.1 million aggregate principal amount of term loans outstanding under the Prior Term Loan Facility. Following the closing of the Restructuring, the New Term Loan Facility is comprised of (i)$30 million new money term loans funded by the Supporting Term Lenders and$20 million new term loans excluding new money issued in exchange for existing term loans held by the Supporting Term Lenders (collectively, the "New Term Loans") and (ii) an approximate$1.2 million senior secured term loan tranche in respect of the existing term loans held by lenders who are not Supporting Term Lenders (the "Continuing Term Loans"). As ofSeptember 30, 2020 , there was$54.6 million outstanding under the New Term Loan Facility including interest in kind. The New Term Loan Facility will mature onAugust 28, 2025 , with respect to the New Term Loans, and onDecember 15, 2021 with respect to the Continuing Term Loans. Such maturity date may, at the Company's request, be extended by one or more of the term loan lenders pursuant to the terms of the New Term Loan Facility. The New Term Loans will bear interest at a per annum rate equal to LIBOR for six months, plus 10.25%. The Company has the option to pay interest in kind at an annual rate of LIBOR plus 12.25% on the outstanding principal amount of the New Term Loans for the first two years following the closing of the Restructuring. The Continuing Term Loans will bear interest at a per annum rate equal to LIBOR for one, two, three, six or, with the consent of all term loan lenders, up to 12 months, and the Company has the option to pay interest in kind of up to 100 basis points of the per annum interest due on the Continuing Term Loans. The New Term Loan Facility is guaranteed by certain of the Company's existing and future subsidiaries (the "Term Loan Guarantors," and together with the Company, the "Term Loan Parties"). To ensure their obligations under the New Term Loan Facility, each of the Term Loan Parties has granted to the Term Agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of eachTerm Loan Party's assets other than certain excluded assets and the ABL Priority Collateral (the "Term Priority Collateral"). In addition, the obligations of the Term Loan Parties under the New Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under "ABL Facility"). The New Term Loans may be prepaid at the Company's option, subject to the payment of a prepayment premium (which may be waived by lenders holding New Term Loans under the New Term Loan Facility representing at least two-thirds of the aggregate outstanding principal amount of the New Term Loans) in certain circumstances as provided in the New Term Loan Facility. If a prepayment is made prior to the first anniversary of the closing of the Restructuring, such prepayment premium is equal to 3% of the principal amount of the New Term Loans prepaid; if a prepayment is made from the first anniversary to the second anniversary of the closing of the Restructuring, the prepayment premium is equal to 2% of the principal amount of the New Term Loans prepaid; if a 42
--------------------------------------------------------------------------------
Table of Contents
prepayment is made from the second anniversary to the third anniversary of the
closing of the Restructuring, the prepayment premium is equal to 1% of the
principal amount of the New Term Loans prepaid; and there is no prepayment
premium thereafter. The Company is required to make principal payments in
respect of the Continuing Term Loans in the amount of
In addition, pursuant to the New Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, receipt of extraordinary cash proceeds (e.g., tax and insurance) and upon certain change of control transactions, subject in each case to certain exceptions. The New Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The New Term Loan Facility also contains a financial covenant requiring that the Company maintain Liquidity (as defined in the New Term Loan Facility) of not less than$10 million as of the last day of any fiscal quarter, subject to certain exceptions and cure rights. OnAugust 26, 2020 , the Company as borrower,Key Energy LLC , certain lenders party thereto and the Term Agent entered into Amendment No. 1 to the New Term Loan Facility to, among other things, permit the Company andKey Energy LLC to undertake sale and leaseback transactions with an aggregate fair market value of up to$5 million during the term of the New Term Loan Facility.
As of
Capital Expenditures During the nine months endedSeptember 30, 2020 , our capital expenditures totaled$1.2 million . In light of the decline in planned E&P capital spending, reduced activity by our customers and consequent reduced demand for our services we, reduced our capital expenditure plan for 2020 from the original amount of$15 to$20 million to the current amount of approximately$3 million These capital expenditures are primarily related to the ongoing maintenance of our equipment and addition of new equipment. Our capital expenditure program for 2020 is subject to market conditions, including activity levels, commodity prices, industry capacity and specific customer needs as well as cash flows, including cash generated from asset sales. Our focus for 2020 will be the maximization of our current equipment fleet. We may also further reduce our planned expenditures, defer acquisition of new equipment or maintenance and dispose of noncore assets if market conditions decline further. Should our operating cash flows or activity levels prove to be insufficient to fund our currently planned capital spending levels, management expects it will adjust our capital spending plans accordingly.
Off-Balance Sheet Arrangements
AtSeptember 30, 2020 we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
© Edgar Online, source
