__________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
255 Livingston Ave., New Brunswick, NJ 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908)247-4822
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
Common Shares outstanding at April 19, 1996: 10,413,513
______________________________________________________________
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities. 19
Item 3. Defaults Upon Senior Securities. 19
Item 4. Submission of Matters to a Vote of Security
Holders. 19
Item 6. Exhibits and Reports on Form 8-K. 19
Signatures. 21
Key Energy Group,Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, June 30,
(Thousands, except share and per share data) 1996 1995
ASSETS
Current Assets:
Cash $1,598 $865
Restricted cash 1,705 410
Restricted marketable securities 267 267
Accounts receivable, net 19,183 8,133
Prepaid expenses 1,793 358
Inventories 1,764 1,257
Total Current Assets 26,310 11,290
Property and Equipment:
Oilfield service equipment 64,091 23,726
Oil and gas well drilling equipment 4,682 2,014
Motor vehicles 1,041 526
Oil and gas properties and other
related equipment,successful efforts 10,270 7,652
Furniture and equipment 1,367 332
Buildings and land 5,026 2,086
86,477 36,336
Accumulated depreciation & depletion (7,334) (4,394)
Net Property and Equipment 79,143 31,942
Other Assets 5,190 2,011
Total Assets $110,643 $45,243
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $9,562 $3,930
Accrued interest 305 145
Other accrued liabilities 9,539 2,612
Accrued income taxes 49 174
Deferred tax liability 118 118
Current portion of long-term debt 4,245 2,249
Total Current Liabilities 23,818 9,228
Long-term debt, less current portion 37,073 13,700
Accrued casualty insurance 4,909 -
Deferred income taxes 3,333 2,204
Minority interest 1,151 -
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 25,000,000
shares authorized, 10,413,513 and 6,913,513 shares
issued and outstanding at March 31, 1996 and
June 30, 1995, respectively 1,041 691
Additional paid-in capital 32,763 15,186
Retained earnings 6,555 4,234
Total Stockholders' Equity 40,359 20,111
Total Liabilities and Stockholders' Equity $110,643 $45,243
See the accompanying notes which are an integral part of these consolidated
financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
March 31, March 31,
(Thousands, except per share data) 1996 1995 1996 1995
REVENUES:
Oilfield services $11,916 $10,145 $31,064 $31,068
Oil and gas revenues 1,016 695 2,743 1,772
Oil and gas well drilling 1,370 - 5,029 -
Other revenues, net - 209 258 171
14,302 11,049 39,094 33,011
COSTS AND EXPENSES
Oilfield services direct costs 8,655 7,784 22,808 24,134
Oil and gas direct costs 316 182 935 613
Oil and gas well drilling 1,151 - 3,886 -
Depreciation and depletion expense 1,146 642 2,940 1,887
General and administrative expense 1,219 1,174 3,609 2,996
Interest expense 571 370 1,448 997
13,058 10,152 35,626 30,627
Income before minority interest and
and income taxes 1,244 897 3,468 2,384
Minority interest 18 - 18 -
Income tax expense 399 266 1,129 742
NET INCOME $827 $631 $2,321 $1,642
EARNINGS PER SHARE :
Primary:
Income before minority interest
and income taxes $0.18 $0.14 $0.50 $0.36
Net income $0.12 $0.10 $0.33 $0.25
Assuming full dilution:
Income before minority interest
and income taxes $0.18 $0.14 $0.50 $0.36
Net income $0.12 $0.10 $0.33 $0.25
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 6,981 6,637 6,981 6,637
Assuming full dilution 6,986 6,637 6,986 6,637
See the accompanying notes which are an integral part of these consolidated
financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
March 31, March 31,
(Thousands) 1996 1995 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $827 $631 $2,321 $1,642
Adjustments to reconcile income
from operations to net cash
provided by operations:
Depreciation, depletion and
amortization 1,146 642 2,940 1,887
Deferred income taxes 399 266 1,129 742
Minority interest net income 18 - 18 -
Change in assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in accounts
receivable 26 (148) (193) (1,108)
(Increase) decrease in other current
assets (184) (654) (94) (725)
Decrease in accounts payable and
accrued expenses 191 107 (616) (1,457)
(Decrease) increase in accrued
interest (1) 27 22 11
(Decrease) increase in accrued
taxes (75) - (125) -
(Increase) decrease in other
assets (75) (1) (84) (1)
Net cash provided by operating
activities 2,272 870 5,318 991
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell
service operations (878) (385) (2,605) (2,284)
Capital expenditures - Oil and
gas operations - (16) (7) (23)
Capital expenditures - Oil and
gas well drilling operations (90) - (450) -
Expenditures for oil and gas
properties (382) (78) (2,532) (1,289)
Net cash used in investing
activities (1,350) (479) (5,594) (3,596)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term
debt (259) (471) (1,677) (1,518)
Cash received from purchase
of WellTech 1,168 - 1,168 -
Borrowings under line-of-credit 41 (1,377) 13 (406)
Proceeds from long-term debt 476 1,310 2,800 4,176
Net cash provided by (used in)
financing activities 1,426 (538) 2,304 2,252
Net increase (decrease) in cash
and restricted cash 2,348 (147) 2,028 (353)
Cash and restricted cash at
beginning of period 955 967 1,275 1,173
Cash and restricted cash at end
of period $3,303 $820 $3,303 $820
Supplemental cash flow disclosures:
Interest paid $434 $343 $1,288 $986
Supplemental schedule of non-cash
investing and financing transactions:
Fair value of Common Stock and Warrants
issued WellTech West Texas $- $- $- $8,647
Fair value of Common Stock issued for
Clint Hurt Drilling $- $23 $- $23
Issuance of note payable in Clint
Hurt Drilling acquisition $- $725 $725 $-
See the accompanying notes which are an integral part of these consolidated
financial statements.
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information in this report includes
the accounts of Key Energy Group, Inc. ("Key") and its
wholly-owned subsidiaries and was prepared in conformity with
accounting policies used in the Annual Report on Form 10-K
furnished for the preceding fiscal year.
The consolidated financial information in this report includes
the four operating subsidiaries of the Company; Yale E. Key,
Inc. ("Yale E. Key") and WellTech Eastern, Inc. ("WellTech")
(which was acquired in March 1996 after the merger of WellTech,
Inc. "Old WellTech" into Key, see Note 2) which are both
involved in oilwell service operations, Odessa Exploration Inc.
("OEI") which is involved in the production and exploration of
oil and natural gas and Key Energy Drilling, Inc. d/b/a Clint
Hurt Drilling ("Clint Hurt Drilling") which is involved in the
drilling for oil and natural gas. In addition, as a result of
the WellTech merger, (see Note 2) the Company acquired a 63%
ownership in Servicios WellTech, S.A. ("Servicios"), an
Argentinean corporation, which is accounted for using the
consolidation with a minority interest method.
OEI utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method, all costs associated
with productive wells and nonproductive development wells are
capitalized, while nonproductive exploration costs and
geological and geophysical costs (if any) are expensed.
Capitalized costs relating to proved properties are depleted
using the unit-of-production method based on proved reserves
expressed as net equivalent Bbls as reviewed by independent
petroleum engineers. The carrying amounts of properties sold or
otherwise disposed of and the related allowance for depletion
are eliminated from the accounts and any gain/loss is included
in results of operations.
OEI's aggregate oil and gas properties are stated at cost, not
in excess of total estimated future net revenues net of related
income tax effects.
In the opinion of Key, the accompanying unaudited condensed
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position
as of March 31, 1996, the statement of cash flows for the three
and nine months ended March 31, 1996 and 1995, and the results
of operations for the three and nine month periods then ended.
The consolidated financial statements of Key have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principals for complete financial
statements. Operating results for interim periods are not
necessarily indicative of the results that may be expected for
the full year.
2. ACQUISITIONS
WellTech, Inc.
In March 1996, Key acquired, through a merger, Old WellTech.
Key was the surviving entity in the merger. Net consideration
for the merger was 3,500,000 shares of Key Common Stock and
warrants to purchase 500,000 additional shares. In the merger,
Old WellTech stockholders received an aggregate of 4,929,962 shares of Key
Common Stock and warrants to purchase 750,000 shares of Key
Common Stock at $6.75 per share. As part of the merger,
1,429,962 of the 1,635,000 shares of Key Common Stock owned by
Old WellTech and previously issued warrants to purchase 250,000
shares of Key Common Stock at $5.00 per share were cancelled.
WellTech's principal line of business is oil and gas well
servicing and it operates in the Mid-Continent and Northeast
areas of the United States and in Argentina. Until November
1995, Old WellTech also conducted certain operations in Russia.
On March 26, 1996, Key shareholders approved the merger. The
acquisition was accounted for using the purchase method.
Odessa Exploration Properties
In April of 1996, the Company announced that OEI had agreed to
purchase approximately $7.1 million of oil and gas producing
properties from two unrelated companies. The properties to be
acquired include production in 264 gross (79 net) wells with
daily average net production of 240 barrels of oil and 1.5 mmcf
of natural gas. The reserves are approximately equally divided
between oil and natural gas. Financing for the acquisition is
expected to come from bank financing. The acquisition will be
accounted for using the purchase method.
Clint Hurt Drilling
On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA")
entered into an Asset Purchase Agreement pursuant to which CHA
sold to Key all of its assets in West Texas. Such assets mainly
consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, Key paid CHA
$1,725,000, of which $1,000,000 was paid in cash and the balance
in the form of a $725,000 note payable to CHA (the note was paid
in full in July 1995). Mr. Clint Hurt entered into consulting
and noncompetition agreements with Key in consideration for
which Key issued 5,000 shares of Key Common Stock. The
acquisition was accounted for using the purchase method and the
results of operations of Clint Hurt Drilling have been included
in those of Key since April 1, 1995.
3. LONG-TERM DEBT
In January 1996, prior to the completed merger described in Note
2, Key, Yale E. Key, Clint Hurt and Old WellTech entered into
new separate credit facilities with The C.I.T. Group/Credit
Finance, Inc. ("C.I.T.) totaling approximately $35 million (the
combined maximum credit limit). As a result of the new separate
credit facilities, the interest rate for Yale E. Key was lowered
from two and one-half to one and one-quarter percent over the
stated prime rate (8.25% at March 31, 1996). In addition, the
interest rate for the Old WellTech debt was lowered from an
aggregate of three and one-half percent to one and one-quarter
percent over the stated prime rate (8.25% at March 31, 1996).
Each of the C.I.T. term notes require principal and interest
payments, due the first day of each month beginning February 1,
1996, plus a final payment of the unpaid balance of the note due
December 31, 1998. The expiration of each of the lines of
credit are December 31,1998. The proceeds of the initial
borrowings were used to repay substantially all of the debt of
Key (other than that of OEI) and Old WellTech. Key believes
that such a facility will provide sufficient funds to finance
its operating and capital expenditure needs for the foreseeable
future. The indebtedness, which is currently being modified to
reflect the Welltech merger, will be the obligation of Key and
Key's subsidiaries, Yale E. Key, Clint Hurt and WellTech. At
March 31, 1996, the Company (on a combined basis) had approximately
$2 million in term and credit-line availability.
The Yale E. Key C.I.T. term note, ($9,885,000 approximate
principal balance at March 31, 1996), as amended, requires
monthly principal payments of approximately $119,000, plus
interest, while the Yale E. Key C.I.T. line of credit,
($2,792,000 approximate principal balance at March 31, 1996),as
amended, requires monthly payments of interest. The note is
collateralized by all of the assets (including equipment and
inventory) of Yale E. Key, while the line of credit is
collateralized by the accounts receivable of Yale E. Key. Both
the term note and the line of credit will be guaranteed by Key.
At March 31, 1996, there was approximately $500,000 of credit
line availability.
The Clint Hurt Drilling C.I.T. term note, ($1,208,000
approximate principal balance at March 31, 1996), requires
monthly principal payments of approximately $14,643, plus
interest, while the Clint Hurt Drilling C.I.T. line of credit,
($588,000 approximate principal balance at March 31, 1996),as
amended, requires monthly payments of interest The note is
collateralized by all of the assets (including equipment and
inventory) of Clint Hurt Drilling while the line of credit is
collateralized by the accounts receivable of Clint Hurt
Drilling. Both the term note and the line of credit will be
guaranteed Key. At March 31, 1996, there was no credit line
availability.
The WellTech C.I.T. term note, ($12,125,000 approximate
principal balance at March 31, 1996), as amended, requires
monthly principal payments of approximately $141,000, plus
interest, while the WellTech C.I.T. line of credit, ($5,121,000
approximate principal balance at March 31, 1996),as amended,
requires monthly payments of interest. The note is
collateralized by all of the assets (including equipment and
inventory) of WellTech while the line of credit is
collateralized by the accounts receivable of WellTech. Both the
term note and the line of credit will be guaranteed by Key. At
March 31, 1996, there was no credit line availability.
The agreement with C.I.T. includes certain restrictive and
financial covenants, which include, though not limited to;
certain financial ratios, annual capital expenditure maximums,
and restrictions on cash distributions and declarations of
dividends on common stock.
The OEI loan agreement, as amended, with Norwest Bank Texas,
N.A. ("Norwest") provides for a $7.5 million revolving line of
credit note subject to a borrowing base limitation
(approximately $7.0 million at March 31, 1996). The borrowing
base is redetermined on at least a semi-annual basis. The
borrowing base is reduced by approximately $60,000 per month
through October 1997; the maturity of the note. The note's
interest rate is Norwest's prime rate (8.5% at March 31, 1996)
plus one-half percent. The note is secured by substantially all
of the oil and gas properties of OEI. The note is also guaranteed by Key.
The loan agreement contains various restrictive covenants and
compliance requirements, including covenants which (a) prohibit
OEI from declaring or paying dividends on OEI's common stock,
(b) limit the incurrence of additional indebtedness by OEI and,
(c) limit the disposition of assets and various other financial
covenants.
4. CASH FLOW DISCLOSURES OF WELLTECH ACQUISITION
During March 1994, Key completed an acquisition of WellTech (see
Note 2). The acquisition of WellTech,accounted for using the
purchase method, resulted in the following noncash investing
activities(in thousands):
Recorded amounts of assets acquired,
including cash acuired of $1,168 ............ $ 58,829
Liabilities assumed .......................... (40,902)
----------
Fair value of Key Common Stock issued........... $ 17,927
=====
The liabilities assumed include amounts recorded for litigation
and certain other preacquisition contingencies of WellTech.
5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of
business are pending against Key and its subsidiaries.
Management does not believe that the disposition of any of
these suits or claims will result in a material adverse impact
on the consolidated financial position of Key.
During August 1995, Key entered into employment agreements with
certain of its officers. These employment agreements generally
run to June 30, 1998, but will automatically be extended on a
yearly basis unless terminated by Key or the applicable officer.
In addition to providing a base salary for each officer, the
employment agreements provide for severance payments for each
officer varying from 12 to 36 months of the officer's base
salary. The current annual base salaries for the officers
covered under such employment agreements total approximately
$800,000.
KEY ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
QUARTER ENDED MARCH 31, 1996 VERSUS QUARTER ENDED MARCH 31, 1995
Overview
The following discussion provides information to assist in the
understanding of Key Energy Group, Inc.'s ("Key") financial
condition and results of operations. It should be read in
conjunction with the financial statements and related notes
appearing elsewhere in this report.
Operating results for the three and nine months ended March 31,
1996 include Key's oilfield well service operations conducted by
its wholly-owned subsidiaries, Yale E. Key, Inc. ("Yale E.
Key"), its oil and natural gas exploration and production
operations conducted by its wholly-owned subsidiary, Odessa
Exploration Inc. ("OEI") and Key Energy Drilling, Inc. d/b/a
Clint Hurt Drilling ("Clint Hurt Drilling") which is engaged in
oil and natural gas well contract drilling and was acquired in
March 1995. Also included are the operating results of WellTech,
Inc. ("WellTech") for the period of March 26, 1996 (the date of
the merger, see Note 2) to March 31, 1996.
Historically, fluctuations in oilfield well service operations
and oil and gas well contract drilling activity have been
closely linked to fluctuations in crude oil and natural gas
prices. However, Key, through acquisitions, customer alliances
and agreements, and diversification of services, seeks to
minimize the effects of such fluctuations on Key's results of
operations and financial condition.
Results of Operations
The Company or Key
Revenues of Key for the three months ended March 31, 1996
increased $3,253,000 or 29% to $14,302,000 from $11,049,000 for
the comparable fiscal 1995 quarter, while net income of $827,000
increased $196,000 or 31% from the comparable fiscal 1995
quarter total of $631,000. The increase in revenues was
primarily due to the addition of Clint Hurt Drilling on April 1,
1995, whose operations were not included in the comparable 1995
quarter results, increased oil and gas revenues from OEI,
increased oilwell service equipment utilization and the
acquisition of WellTech (see Note 2). The improvement in
quarterly net income is partially attributable to the inclusion
of Clint Hurt Drilling, but is also a result of an increase in
oilwell service equipment utilization and a decrease in total
consolidated Key costs and expenses as a percent of total
revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key and WellTech.
Yale E. Key conducts oilfield services primarily in West Texas,
while WellTech conducts oilfield services in the Mid-Continent
region of the United States (primarily in Oklahoma) through its
operating division; WellTech Mid-Con, and in the Northeastern
United States (primarily in Michigan, Pennsylvania and West
Virginia) through its operating division; WellTech Eastern. In
addition, WellTech conducts oilfield services in Argentina
through its 63% ownership in Servicios WellTech, S.A.
("Servicios"), an Argentinean corporation.
Oilfield service revenues for the quarter ended March 31, 1996
increased $1,771,000 or 17% from $10,145,000 for the quarter
ended March 31, 1995 to $11,916,000 for the current quarter
ending March 31, 1996. The increase in revenues is primarily
attributable to higher equipment utilization as the result of an
increase in demand for oilfield services and the acquisition of
WellTech whose operating results are included for the period of
March 26, 1996 (the date of the merger, see Note 2) to March 31,
1996. Yale E. Key averaged a 90% equipment utilization for the
current quarter compared to 81% for the comparable quarter of
last year. In addition, Yale E. Key continues the
diversification of oilfield services into higher margin business
segments such as oilfield frac tanks, oilfield fishing tools and
trucking operations.
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production operations are
performed by Odessa Exploration Inc. Revenues from oil and gas
activities increased $321,000 or 46% from $695,000 during the
quarter ended March 31, 1995 to $1,016,000 for the current
quarter. The increase in revenues was primarily the result of
increased production of oil and natural gas as several oil and
natural gas wells which were drilled began production during the
1996 quarter as well as higher oil and natural gas prices for
the quarter.
Of the total $1,016,000 of revenues for the quarter ended March
31, 1996, approximately $820,000 was from the sale of oil and
gas - 21,826 barrels of oil at an average price of $20.28 per
barrel and 232,049 MCF of natural gas at an average price of
$1.63 per MCF. The remaining $196,000 of revenues represented
primarily administrative fee income and other miscellaneous
income.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by
Clint Hurt Drilling which was acquired in March 1995.
Comparable numbers for the prior years quarter are, therefore,
not available. Revenues for the quarter ended March 31, 1996
were $1,370,000.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased $504,000 or 79% from $642,000 to $1,146,000 during the
three months ended March 31, 1996 as compared with the prior
period. The increase is primarily due to oilfield service
depreciation expense, which is the result of increased capital
expenditures for the current quarter versus the prior quarter
ended March 31, 1995, and the addition of Clint Hurt Drilling
and WellTech (see Note 2). In addition, depletion expense
generated by OEI increased for the current quarter due to the
increase in the production of oil and natural gas.
Interest Expense
Interest expense for Key increased $201,000 or 54% from $370,000
during the three months ended March 31, 1995 to $571,000 for
the current quarter. The increase is primarily the result of
the Clint Hurt and WellTech acquisitions (see Note 2) and the
addition of certain oil and gas properties purchased by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, WellTech, OEI and Clint Hurt Drilling. These
expenses increased $45,000 or 32% from $1,174,000 for the
quarter ending March 31, 1995 to $1,219,000 for the current quarter. The
increase can be primarily attributed to the acquisition and
subsequent inclusion of Clint Hurt Drilling's and WellTech's
general and administrative expenses.
Income Tax Expense
Income tax expense for Key for the three months ended March 31,
1996 and 1995 was $399,000 and $266,000 respectively.
Minority Interest
The minority interest of $18,000 is that portion of net income
from Servicios WellTech attributable to the minority
shareholders (37%) for the period of acquisition until March 31,
1996 (see Note 2).
Net Income
Net income before minority interest and income taxes was
$1,244,000 for the three months ended March 31, 1996, which was
an increase of $347,000 or 39% over the comparable quarter
ending March 31, 1995 amount of $897,000. The increase in net
income before minority interest and income taxes was primarily
due to the addition of Clint Hurt Drilling and WellTech (see
Note 2), increased oil and gas revenues and higher oilfield
service equipment utilization. Net income for the three months
ended March 31, 1996 was $827,000, which was a $196,000 or 31%
increase from $631,000 for the three months ended March 31, 1995.
Cash Flow
Net cash provided by operations increased $1,402,000 from
$870,000 during the three months ended March 31, 1995 to
$2,272,000 in net cash provided by operations for the current
quarter. The increase is attributable primarily to lower
increase in other assets and accrued expenses and higher net
income and depreciation expense over the same period last year.
Net cash used in investing activities increased $871,000 from
$479,000 for the three months ended March 31, 1995 to $1,350,000
for the current quarter. The increase is primarily the result
of increased expenditures for oil and gas properties and oilwell
service operations. In addition, net cash used in investing
activities for the current quarter included $90,000 used in the
oil and gas well drilling operations.
Net cash provided by financing activities was $1,426,000 for the
three months ended March 31, 1996 as compared to $538,000 in net
cash used by financing activities for the comparable quarter.
The increase is primarily the result of net cash received from
the WellTech purchase (see Note 2) during the current quarter
and a decrease in proceeds from long-term debt during the
current quarter. Such proceeds were primarily used for the oil
and natural gas drilling program conducted by OEI.
Cash increased $2,348,000 for the three months ended March 31,
1996, as compared to a net decrease in cash of $147,000 for the
three months ended March 31, 1995.
NINE MONTHS ENDED MARCH 31, 1996 VERSUS NINE MONTHS ENDED MARCH 31, 1995
Results of Operations
The Company or Key
Revenues of Key for the nine months ended March 31, 1996
increased $6,083,000 or 18% to $39,094,000 from $33,011,000 for
the comparable fiscal 1995 period, while net income increased
$679,000 or 41% to $2,321,000 from $1,642,000 for the comparable
fiscal 1995 nine month total of $1,642,000. The increase in
revenues was primarily due to the addition of Clint Hurt
Drilling on April 1, 1995, whose operations were not included in
the prior year results, the increase in oil and gas revenues and
the acquisition of WellTech (see Note 2). The improvement in
net income is partially attributable to the inclusion of Clint
Hurt Drilling, but is also a result of an increase in oil and
gas revenues, the addition of WellTech (see Note 2) and a
decrease in total consolidated Key costs and expenses as a
percent of total revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key and WellTech.
Oilfield service revenue declined $4,000 from $31,068,000 for
the prior nine month period ending March 31, 1995 to $31,064,000
for the current nine month period ending March 31, 1996. The
decline is primarily attributable to curtailed equipment
utilization as the result of adverse weather conditions and a
slight decline in demand during the first and second quarters of
the Company's fiscal year. This decline in oilfield service
revenues is largely offset by an increase in oilfield service
revenues during the current quarter ended March 31, 1996. Yale
E. Key averaged an 86% equipment utilization for the nine
months; and due to lower expenses, the continued
diversification of services into higher margin business segments
such as oilfield frac tanks, oilfield fishing tools and trucking
operations, the gross margin increased from 21% to 24% of
revenues for the nine months ended March 31, 1996.
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production are performed by
Odessa Exploration, Inc. Revenues from oil and gas activities
increased $971,000 or 55% from $1,772,000 in the 1995 period to
$2,743,000 for the current nine month period despite relatively
constant crude oil and lower natural gas prices during the first
and second quarters of the fiscal year. The increase in revenues
was primarily the result of increased production of oil
and natural gas as several oil and natural gas wells which were
drilled began production during the 1996 period.
Of the total $2,743,000 of revenues for the nine months ended
March 31, 1996, approximately $2,313,000 was from the sale of
oil and gas - 66,177 barrels of oil at an average price of
$17.54 per barrel and 711,198 MCF of natural gas at an average
price of $1.62 per MCF. The remaining $430,000 of revenues
represented primarily administrative fee income and other
miscellaneous income.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by
Clint Hurt Drilling which was acquired in March 1995. Comparable
numbers for the prior nine month period ending March 31, 1995
are, therefore, not available. Revenues for the nine months
ended March 31, 1996 were $5,029,000.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased $1,053,000 or 56% from $1,887,000 to $2,940,000 during
the nine months ended March 31, 1996 as compared with the prior
fiscal 1995 nine month period. The increase is primarily due to
oilfield service depreciation expense, which is the result of
increased oilfield service capital expenditures for the current
period versus the prior period and the addition of WellTech and
Clint Hurt Drilling (see Note 2). In addition, depletion
expense generated by OEI increased for the period due to the
increase in the production of oil and natural gas.
Interest Expense
Interest expense for Key increased $451,000 or 45% from $997,000
during the nine months ended March 31, 1995 to $1,448,000 for
the current period. The increase is primarily the result of
acquisitions and the addition of certain oil and gas properties
by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, WellTech, OEI and Clint Hurt Drilling. These
expenses increased $613,000 or 20% to $3,609,000 during the nine
months ended March 31, 1996 as compared to $2,996,000 for the
nine months ended March 31, 1995. The increase can be primarily
attributed to the acquisition and subsequent inclusion of Clint
Hurt Drilling's general and administrative expenses as well as
the acquisition of WellTech (see Note 2).
Income Tax Expense
Income tax expense for Key for the nine months ended March 31,
1996 and 1995 was $1,129,000 and $742,000 respectively.
Minority Interest
The minority interest of $18,000 is that portion of net income
from Servicios WellTech attributable to the minority
shareholders (37%) for the period of acquisition until March 31,
1996 (see Note 2).
Net Income
Net income before minority interest and income taxes was
$3,468,000 for the nine months ended March 31, 1996, which was
an increase of $1,084,000 or 45% over the comparable period of
$2,384,000. The increase in net income before minority interest
and income taxes was primarily due to the addition of Clint Hurt
Drilling and other oilwell service acquisitions (see Note 2),
increased oilfield service equipment utilization during the
third quarter of fiscal 1996 and increased oil and gas revenues.
Net income for the nine months ended March 31, 1996 was
$2,321,000, which was a $679,000 or 41% increase from $1,642,000
for the nine months ended March 31, 1995.
Cash Flow
Net cash provided by operations increased $4,327,000 from
$991,000 during the nine months ended March 31, 1995 to
$5,318,000 for the current period. The increase is attributable
primarily to lower decrease in accounts payable and accrued
expenses and higher net income and depreciation expense over
the same period last year.
Net cash used in investing activities increased $1,998,000 from
$3,596,000 for the nine months ended March 31, 1995 to
$5,594,000 for the current period. The increase is primarily
the result of increased expenditures for oil and gas properties.
In addition, net cash used in investing activities for the
current period included $450,000 used in the oil and gas well
drilling operations.
Net cash provided by financing activities was $2,304,000, a
$52,000 increase, for the nine months ended March 31, 1996 as
compared to $2,252,000 for the comparable period. The increase
is primarily the result of cash received from the purchase of
WellTech during the current period, which is partially offset by
a decrease in proceeds from long-term debt during the current
quarter. Such proceeds were primarily used for the oil and
natural gas drilling program conducted by OEI.
Cash increased $2,028,000 for the nine months ended March 31,
1996, as compared to a net decrease in cash of $353,000 for the
nine months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, Key had $3,303,000 in cash and restricted
cash as compared to $1,275,000 in cash and restricted cash at
June 30, 1995.
Yale E. Key has projected $3.0 million for oilwell service
capital expenditures over the 1996 fiscal year as compared to
$2.8 million for the fiscal year ended June 30, 1995. Capital
expenditures are expected to be primarily capitalized
improvement costs (totaling over $5,000) to existing equipment
and machinery. Financing of capital expenditures is expected
to come from the operating cash flows of Yale E. Key. Capital
expenditures were $2,605,000 for the nine months ended March 31,
1996.
OEI has forecasted approximately $3 million in oil and gas
property acquisitions for fiscal 1996 as compared to $2.8
million during fiscal 1995 (which does not include the
acquisition described in Note 2). Financing of oil and gas
acquisitions is expected to come from borrowings. Oil and gas
acquisitions were $2,532,000 for the nine months ended March 31,
1996. Financing of oil and gas acquisitions is expected to be
obtained from bank financing and/or private investors.
Bank Financing
In January 1996, prior to the completed merger described in Note
2, Key, Yale E. Key, Clint Hurt and Old WellTech entered into
new separate credit facilities with The C.I.T. Group/Credit
Finance, Inc. ("C.I.T.) totaling approximately $35 million (the
combined maximum credit limit). As a result of the new separate
credit facilities, the interest rate for Yale E. Key was lowered
from two and one-half to one and one-quarter percent over the
stated prime rate (8.25% at March 31, 1996). In addition, the
interest rate for the Old WellTech debt was lowered from an
aggregate of three and one-half percent to one and one-quarter
percent over the stated prime rate (8.25% at March 31, 1996).
Each of the C.I.T. term notes require principal and interest
payments, due the first day of each month beginning February 1,
1996, plus a final payment of the unpaid balance of the note due
December 31, 1998. The expiration of each of the lines of
credit are December 31,1998. The proceeds of the initial
borrowings were used to repay substantially all of the debt of
Key (other than that of OEI) and Old WellTech. Key believes
that such a facility will provide sufficient funds to finance
its operating and capital expenditure needs for the foreseeable
future. The indebtedness, which is currently being modified to
reflect the Welltech merger, will be the obligation of Key and
Key's subsidiaries, Yale E. Key, Clint Hurt and WellTech. At
March 31, 1996, the Company (on a combined basis) had approximately
$2 million in term and credit-line availability.
Acquisitions
WellTech, Inc.
In March 1996, Key acquired, through a merger, Old WellTech.
Key was the surviving entity in the merger. Net consideration
for the merger was 3,500,000 shares of Key Common Stock and
warrants to purchase 500,000 additional shares. In the merger, Old WellTech
stockholders received an aggregate of 4,929,962 shares of Key
Common Stock and warrants to purchase 750,000 shares of Key
Common Stock at $6.75 per share. As part of the merger,
1,429,962 of the 1,635,000 shares of Key Common Stock owned by
Old WellTech and previously issued warrants to purchase 250,000
shares of Key Common Stock at $5.00 per share were cancelled.
WellTech's principal line of business is oil and gas well
servicing and it operates in the Mid-Continent and Northeast
areas of the United States and in Argentina. Until November
1995, Old WellTech also conducted certain operations in Russia.
On March 26, 1996, Key shareholders approved the merger. The
acquisition was accounted for using the purchase method.
Odessa Exploration Properties
In April of 1996, the Company announced that OEI had agreed to
purchase approximately $7.1 million of oil and gas producing
properties from two unrelated companies. The properties to be
acquired include production in 264 gross (79 net) wells with
daily average net production of 240 barrels of oil and 1.5 mmcf
of natural gas. The reserves are approximately equally divided
between oil and natural gas. Financing for the acquisition is
expected to come from bank financing. The acquisition will be
accounted for using the purchase method.
Clint Hurt Drilling
On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA")
entered into an Asset Purchase Agreement pursuant to which CHA
sold to Key all of its assets in West Texas. Such assets mainly
consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, Key paid CHA
$1,725,000, of which $1,000,000 was paid in cash and the balance
in the form of a $725,000 note payable to CHA (the note was paid
in full in July 1995). Mr. Clint Hurt entered into consulting
and noncompetition agreements with Key in consideration for
which Key issued 5,000 shares of Key Common Stock. The
acquisition was accounted for using the purchase method and the
results of operations of Clint Hurt Drilling have been included
in those of Key since April 1, 1995.
Impact of SFAS 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121") regarding the impairment of long-lived assets,
identifiable intangibles and goodwill related to those assets.
SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is
encouraged. The application of SFAS 121 will require periodic
determination of whether the book value of long-lived assets
exceeds the future cash flows expected to result from the use of
such assets and, if so, will require reduction of the carrying
amount of the "impaired" assets to their estimated fair values.
Key estimates that the implementation of SFAS 121 will not have
a material effect on Key's financial position. Key will adopt
SFAS 121 for the fiscal year beginning July 1, 1996.
Impact of Inflation on Operations
Although in a complex environment it is extremely difficult to
make an accurate assessment of the impact of inflation on Key's
operations, management is of the opinion that inflation has not
had a significant impact on it business.
Cautionary Statement for Purposes of The "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
Key desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of
1995. Key's Report on Form 10-Q contains statements which may
be considered "forward-looking statements" including statements
concerning projections, plans, objectives, future events or
performance and underlying assumptions and other statements
which are other than statements of historical fact. Key wishes
to caution readers that the following important factors, among
others, may have affected and could in the future affect Key's
actual results and could cause Key's actual results for
subsequent periods to differ materially from those expressed in
any forward-looking statement made by or on behalf of Key:
Occurrences affecting the need for, timing and extent of Key's
capital expenditures or affecting Key's ability to obtain funds
from operations, borrowings or investments to finance needed
capital expenditures;
Key's ability successfully to identify and finance oil and gas
property acquisitions and its ability successfully to operate
existing and any subsequently acquired properties;
The availability of adequate funds under Key's credit facility
to fund operations for the foreseeable future, or if such funds
are inadequate, the ability of Key to obtain new or additional
financing or to generate adequate funds from operations;
Key is highly leveraged due to the substantial indebtedness Key
has incurred and Welltech, prior to its merger into Key, had
incurred;
Key's ability to enter into and retain profitable oilfield
servicing and drilling contracts with customers which make
timely payments for such services;
The demand for oilfield services, drilling services and for oil
and gas, and the supply of and demand for drilling and servicing
rigs, all of which are subject to fluctuations which could adversely
affect Key's operations;
Key's ability to integrate the management of and operations of
WellTech into the ongoing management and operations of Key;
The existence on many competitors in all of Key's operations,
many of which have financial and other resources greatly in
excess of those available to Key;
The amount and rate of growth in Key's general and
administrative expense, including, but not limited to, the
costs of integrating WellTech's operations into Key.;
The effect of regulations and changes in regulations, including
environmental regulations with which Key must comply, the cost
of such compliance and the potentially material adverse effects
if Key were not in substantial compliance either currently or
in the future;
Key's relationship with its employees and the potential adverse
effect if labor disputes or grievances were to occur;
Uncertainties related to operations and investments outside the
United States;
The costs and other effects of legal and administrative cases
and proceedings and/or settlements, including
but not limited to environmental and workers compensation cases;
The effect of changes in accounting policies and practices or
of changes in Key's organization, compensation and benefit plan,
or of changes in Key's material
agreements of understandings with third parties.
Key undertakes no obligation to release publicly the result of
any revisions to any forward-looking statements which may be
made to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 26, 1996, a meeting of the holders of Common Stock,
par value $.10 per share, was held to approve the purchase
of WellTech, Inc. and other related matters. Only holders of
record as of the close of business on March 16, 1996 were
entitled to notice of and to vote at the meeting and at any
adjournment thereof. On the Record Date, the outstanding
number of shares entitled to vote consisted of 6,914,513
shares of Common Stock. The results of the voting were as
follows:
For Against Abstain
Proposal 1
(WellTech Merger) 4,923,496 (71%) 4,752 * 5,399 *
Proposal 2
(Charter Amendment) 4,746,427 (69%) 180,751 (3%) 6,469 *
Proposal 3
(Board of Directors)** 4,759,353 (69%) 174,294 (3%) --
Proposal 4
(1995 Stock
Option Plan) 4,752,583 (69%) 175,010 (3%) 6,054 *
Proposal 5
(Outside Directors
Stock Option Plan) 4,884,489 (71%) 36,257 (1%) 12,901 *
* Less than 1%
** All Directors received the identical votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of the Form
10-Q:
Exhibit
Number Item
* 1.1 Amendment to Merger Agreement dated as of March 21,
1996
* 3.1 Amended and Restated Articles of Incorporation of Key
3.2 Amended and Restated By-Laws of Key. Incorporated
by reference to Amendment No. 2 to Key's Form S-4
Registration Statement (No.333-369).
* 4.1 Common Stock Purchase Warrant to purchase Shares of
Key Common Stock issued in connection with the merger of
WellTech, Inc. ("WellTech") into Key and supplemental
information required by Item 601(a)(4) of Regulation S-K.
4.2 Common Stock Purchase Warrant to purchase 75,000
shares of Key Common Stock issued to CIT Group/Credit
Finance, Inc. ("CIT") In corporated by reference to
Amendment No. 2 to Key's Form S-4 Registration Statement
(No. 333-369).
* 4.3 Form of Registration Rights Agreement between Key
and Certain Holders of Key Common Stock.
4.4 Registration Rights Agreement dated as of January
19, 1996 between Key and CIT. Incorporated by reference
to Amendment No. 2 to Key's Form S-4 Registration
Statement (No. 333-369).
10.1 Second Amended and Restated Loan Agreement and
Security Agreement between Key, Yale E. Key, Inc., Key
Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint
Hurt") and CIT. Incorporated by reference to Amendment No.2
to Key's Form S-4 Registration Statement (No. 333-369).
10.2 Cross-Guaranty and Cross-Collateralization Agreement between Key,
Yale E. Key, Inc., Clint Hurt, Welltech and CIT. Incorporated
by reference to Amendment No. 2 to Key's Form S-4
Registration Statement (No. 333-369).
10.3 Key 1995 Stock Option Plan. Incorporated by reference to
Amendment No. 2 to Key's Form S-4 Registration
Statement (No.333-369).
10.4 Key Outside Directors Stock Option Plan. Incorporated by
reference to Amendment No. 2 to Key's Form S-4
Registration Statement (No.333-369).
* 11 Statement - Computation of per share earnings
* 27(a) Statement - Financial Data Schedule
* Filed herewith as part of the Condensed Consolidated
Financial Statements.
(b) Key filed a report on Form 8-K during the quarter ended
March 31, 1996 which was dated March 26, 1996 relating to the
consummation of the merger of WellTech with Key. The
Form 8-K incorporated by reference the financial statements
of WellTech included in Key's Form S-4 Registration Statement
(No.333-369) as well as the pro-forma financial information
included therein.
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 thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. John_________
President, Chief Executive Officer
Dated: May 3, 1996 and Chief Financial Officer
By /s/ Danny R. Evatt_________
Dated: May 3, 1996 Vice President and Chief Accounting
Officer