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 September 30, 1997
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.)
Two Tower Center, Twentieth Floor, East Brunswick, NJ 08816
(Address of Principal executive offices) (ZIP Code)
Registrant's telephone number including area code: (732) 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 since there was a distribution of securities under a plan
confirmed by a court. Yes X No
Common Shares outstanding at November 14, 1997: 18,148,056
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 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities and Use of Proceeds. 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. 22
- 2 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
September 30, June 30,
(Thousands, except share and per share data) 1997 1997
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ASSETS
Current Assets:
Cash $49,276 $41,704
Accounts receivable, net of allowance for
doubtful accounts 64,909 45,230
Inventories 6,421 5,171
Prepaid expenses and other current assets 995 1,228
- ------------------------------------------------------------------------------
Total Current Assets 121,601 93,333
- ------------------------------------------------------------------------------
Oilfield service equipment 301,313 176,326
Oil and gas well drilling equipment 6,658 6,319
Motor vehicles 11,848 10,569
Oil and gas properties and other related equipment, successful
efforts method 25,680 23,622
Furniture and equipment 1,980 1,661
Buildings and land 10,059 8,758
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354,538 227,255
Accumulated depreciation & depletion (23,890) (19,069)
- ------------------------------------------------------------------------------
Net Property and Equipment 330,648 208,186
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Other Assets 45,979 18,576
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Total Assets $501,228 $320,095
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $17,149 $15,339
Other accrued liabilities 20,947 12,507
Accrued interest 273 2,102
Accrued income taxes 3,943 1,664
Deferred tax liability 126 126
Current portion of long-term debt 1,270 1,404
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Total Current Liabilities 43,708 33,142
- ------------------------------------------------------------------------------
Long-term debt, less current portion 263,712 172,763
Non-current accrued expenses 4,015 4,017
Deferred tax liability 61,957 35,738
Minority interest - 1,256
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 25,000,000 shares
authorized, 17,954,672 and 12,297,752 shares issued
and outstanding at September 30, 1997 and June 30,
1997, respectively 1,795 1,230
Additional paid-in capital 104,185 55,031
Retained earnings 21,856 16,918
- ------------------------------------------------------------------------------
Total Stockholders' Equity 127,836 73,179
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Total Liabilities and Stockholders' Equity $501,228 $320,095
==============================================================================
See the accompanying notes which are an integral part of these
Consolidated financial statements.
- 3 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended
September 30,
(Thousands, except per share data) 1997 1996
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REVENUES:
Oilfield services $69,498 $27,311
Oil and gas 2,154 1,525
Oil and gas well drilling 2,823 2,324
Other, net 1,081 302
- ------------------------------------------------------------------------------
75,556 31,462
- ------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 48,239 19,700
Oil and gas 937 513
Oil and gas well drilling 2,263 1,881
Depreciation, depletion and amortization 5,147 2,095
General and administrative 7,701 3,527
Interest 3,438 1,350
- ------------------------------------------------------------------------------
67,725 29,066
- ------------------------------------------------------------------------------
Income before income taxes and minority interest 7,831 2,396
Income tax expense 2,893 784
Minority interest in net income - 58
- ------------------------------------------------------------------------------
NET INCOME $4,938 $1,554
==============================================================================
EARNINGS PER SHARE :
Primary:
Net income $0.32 $0.14
Assuming full dilution:
Net income $0.25 $0.13
==============================================================================
WEIGHTED AVERAGE OUTSTANDING:
Primary 15,665 10,894
Assuming full dilution 20,161 16,974
==============================================================================
See the accompanying notes which are an integral part of these consolidated
financial statements.
- 4 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash
Flows
Three Months Ended
(unaudited)
September 30,
(Thousands) 1997 1996
- -------------------------------------------------------------------------------
Net income $4,938 $1,554
Adjustments to reconcile income from operations to
net cash provided by operations:
Depreciation, depletion and amortization 5,147 2,095
Deferred income taxes 2,893 784
Minority interest in net income - 58
Change in assets and liabilities net of effects
from the acquisitions:
Increase in accounts receivable (6,224) (1,912)
Increase (decrease) in other current assets 1,400 (449)
Decrease in accounts payable and accrued expenses (972) 853
Increase (decrease) in accrued interest (1,829) 664
Other assets and liabilities (1,293) (631)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 4,060 3,016
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Well service operations (6,694) (2,900)
Capital expenditures - Oil and gas operations (2,058) (41)
Capital expenditures - Oil and gas well
drilling operations (339) (323)
Cash received in acquisitions 2,903 -
Acquisitions - well service operations -
net of cash acquired (107,630) -
Acquisitions - oil and gas well drilling operations (14,610) -
Acquisitions - minority partnership interests (3,426) -
Expenditures for oil and gas properties - (281)
- ------------------------------------------------------------------------------
Net cash used in investing activities (131,854) (3,545)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (318) (899)
Repayment of long-term debt (197,000) (35,413)
Borrowings (payments) under line-of-credit 134,000 939
Proceeds from stock options exercised - 58
Proceeds from warrants exercised 4,123 -
Proceeds from long-term debenture - net - 50,440
Proceeds from long-term commercial paper debt - net 194,500 -
Proceeds from other long-term debt 61 -
- ------------------------------------------------------------------------------
Net cash provided by financing activities 135,366 15,125
- ------------------------------------------------------------------------------
Net increase in cash 7,572 14,596
Cash at beginning of period 41,704 4,211
- ------------------------------------------------------------------------------
Cash at end of period $49,276 $18,807
==============================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 5 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company The consolidated financial information in this report includes
the accounts of Key Energy Group, Inc. (the "Company" or "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.
As of November 14, 1997, the Company operated a fleet of approximately 775
well service rigs, 608 fluid hauling and other trucks, and 27 drilling rigs
(including 17 workover rigs, 14 trucks, and six drilling rigs in Argentina). The
Company believes that, as of November 14, 1997, Key's well service and workover
rig fleet and fluid hauling and other truck fleet were the largest active fleets
onshore in the continental United States and the second largest fleet in
Argentina. The Company operates in most onshore oil and natural gas producing
regions of the continental United States and provides a full range of
maintenance and workover services to major and independent oil and gas companies
in all its operating regions. In addition to maintenance and workover services,
Key also provides services which include the completion of newly drilled wells,
the re-completion of existing wells (including horizontal recompletions) and the
plugging and abandonment of wells at the end of their useful lives. Other
services include oil field fluid transportation, storage and disposal services,
frac tank rentals, fishing and rental tools, wire-line services, air drilling
and hot oiling. In addition, the Company is engaged in contract drilling in West
Texas and Argentina and owns and produces oil and natural gas in the Permian
Basin.
The Company conducts its domestic operations primarily through six
wholly-owned subsidiaries: Yale E. Key, Inc. ("Yale E. Key"); WellTech Eastern,
Inc. ("WellTech Eastern"); Key Four Corners, Inc. ("Key Four Corners"); Key
Rocky Mountain, Inc. ("Key Rocky Mountain"); Odessa Exploration Incorporated
("Odessa Exploration"); and Key Energy Drilling, Inc. ("Key Energy Drilling").
In addition, Key operates in Argentina through its indirect wholly-owned
subsidiaries, Servicios WellTech S.A. ("Servicios") and Kenting Drilling
(Argentina) S.A. ("Kenting"). WellTech Eastern operates through three divisions:
WellTech Mid-Continent Division, WellTech Eastern Division and Brooks Well
Servicing Division. Yale E. Key, WellTech Eastern, Key Four Corners, Key Rocky
Mountain, Servicios and Kenting provide oil and gas well services. Odessa
Exploration is engaged in the production of oil and gas, and Key Energy
Drilling, Servicious, Kenting, Brooks Well Servicing Division and Key Four
Corners provide contract oil and gas well drilling services.
Odessa Exploration 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 barrels 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. Odessa Exploration'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.
- 6 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all normal recurring adjustments
necessary to present fairly the financial position as of September 30, 1997, the
statement of cash flows for the three months ended September 30, 1997 and 1996,
and the results of operations for the three month period then ended.
2. BUSINESS AND PROPERTY ACQUISITIONS
Acquisitions Completed after September 30, 1997
The following described acquisitions have been completed since September
30, 1997. The results of operations from these acquisitions are not included in
the Company's results of operations for the three months ended September 30,
1997.
GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy
Well Service, Inc.
On October 3, 1997, the Company acquired certain assets of GSI Trucking
Company, Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc.
("GSI, Kahlden and McCurdy") for approximately $1.6 million in cash. GSI,
Kahlden and McCurdy operate 12 fluid hauling trucks. Upon completion of the
acquisition, the GSI, Kahlden and McCurdy assets are operated by the Brooks Well
Servicing Division of Welltech Eastern out of Bryan, Texas. The acquisition was
accounted for using the purchase method.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.
Effective October 1, 1997, the Company completed the acquisition of
substantially all of the assets of Big A Well Service Co., Sunco Trucking Co.
and Justis Supply Co., Inc. (collectively "Big A/Sunco") for approximately $28
million in cash and 125,000 shares of the Company's comon stock. Big A/Sunco
operates 29 well service rigs, four drilling rigs, 75 fluid hauling and other
trucks, related equipment and a machine shop/supply store in the four corners
region of the Southwestern United States. The acquired Big A/Sunco assets are
operated by Key Four Corners primarily out of Farmington, New Mexico. The
acquisition was accounted for using the purchase method.
Acquisitions Completed During the Three Months Ended September 30, 1997
The following described acquisitions have been completed during the three
months ended September 30, 1997. Except as noted below, the results of
operations from these acquisitions are included in the Company's results of
operations for the three months ended September 30, 1997 (effective as of the
date of completion of the acquisition unless otherwise noted).
Frontier Well Service, Inc.
Effective as of September 30, 1997, the Company completed the acquisition
of Frontier Well Service, Inc. ("Frontier") for approximately $3.5 million in
cash. Frontier operates 12 well service rigs and related equipment in Wyoming.
Frontier is operated by Key Rocky Mountain and is based in Casper, Wyoming. The
operating results of Frontier will be included in the Company's results of
operations effective as of October 1, 1997. The acquisition was accounted for
using the purchase method.
- 7 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
Dunbar Well Service, Inc.
Effective as of September 29, 1997, the Company completed the acquisition
of Dunbar Well Service, Inc. ("Dunbar") for approximately $11.8 million in cash.
Dunbar operates 38 well service rigs and related equipment in Wyoming. Dunbar is
operated by Key Rocky Mountain and is based in Casper, Wyoming. The operating
results of Dunbar will be included in the Company's results of operations
effective as of October 1, 1997. The acquisition was accounted for using the
purchase method.
BRW Drilling, Inc.
Effective as of September 25, 1997, the Company completed its acquisition
of BRW Drilling, Inc. ("BRW") for approximately $14.6 million in cash. BRW
operates seven drilling rigs and related equipment in the Permian Basin. The
Company plans to combine the BRW operations with the Key Energy Drilling
operations in the Permian Basin to form a thirteen rig shallow drilling
operation. The operating results of BRW will be included in the Company's
results of operations effective as of October 1, 1997. The acquisition was
accounted for using the purchase method.
Waco Oil & Gas Co., Inc.
Effective as of September 1, 1997, the Company completed its acquisition of
certain assets of Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0
million in cash. The Waco assets included 12 well service rigs, three drilling
rigs, 33 fluid hauling trucks and other trucks operated out of Glenville, West
Virginia. Following the consummation of the acquisition, the three drilling rigs
acquired from Waco were sold to an independent third party for $2.3 million in
cash. No gain or loss was recognized in this transaction. The Waco assets are
operated by the WellTech Eastern Division of WellTech Eastern. The operating
results of Waco are included in the Company's results of operations effective
September 23, 1997. The acquisition was accounted for using the purchase method.
Landmark Fishing & Rental, Inc.
Effective as of September 16, 1997, the Company completed the acquisition
of Landmark Fishing & Rental, Inc. ("Landmark") for approximately $3.3 million
in cash. Landmark operates a rental tool business in Western Oklahoma and the
Texas Panhandle. Landmark is operated by the WellTech Mid-Continent Division of
WellTech Eastern. The operating results of Landmark are included in the
Company's results of operations effective September 16, 1997. The acquisition
was accounted for using the purchase method.
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
Effective as of September 1, 1997, the Company completed the acquisition of
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for
$21.5 million in cash. Ram/Rowland operates 17 well service rigs, 93 fluid
hauling and other trucks, 290 frac tanks, three disposal and brine wells, and
dirt construction equipment in West Texas and Southeast New Mexico. Ram/Rowland
is operated by Company's by Yale E. Key, Inc. The operating results of
Ram/Rowland are included in the Company's results of operations effective
September 1, 1997. The acquisition was accounted for using the purchase method.
- 8 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
Mosley Well Service, Inc.
Effective as of August 22, 1997, the Company completed the acquisition of
Mosley Well Service, Inc., ("Mosley") which operates thirty-six well service
rigs and related equipment in East Texas, Northern Louisiana and Arkansas for
approximately $16.2 million in cash. The Company plans to integrate the Mosley
operations with the Brooks Well Servicing Division of WellTech Eastern. The
operating results of Mosley are included in the Company's results of operations
effective September 1, 1997. The acquisition was accounted for using the
purchase method.
Kenting Holdings (Argentina) S.A.
Effective as of July 30, 1997, the Company completed the acquisition of
Kenting Holdings (Argentina) S.A. ("Kenting") for approximately $10.1 million in
cash. Kenting is the sole shareholder of Kenting Driling (Argentina) S.A. which
operates six well service rigs, three drilling rigs and related equipment in
Argentina. The operating results of Kenting are included in the Company's
results of operations effective August 1, 1997. The acquisition was accounted
for using the purchase method.
Patrick Well Service, Inc.
Effective as of July 17, 1997, the Company completed the acquisition of
Patrick Well Service, Inc. ("Patrick") for $7.0 million in cash. Patrick
operates 29 well service rigs and related equipment in Southwest Kansas,
Oklahoma and Southeast Colorado. Patrick is operated by the WellTech
Mid-Continent Division of WellTech Eastern. The operating results of Patrick are
included in the Company's results of operations effective August 1, 1997. The
acquisition was accounted for using the purchase method.
Servicios WellTech S.A. Minority Interest
Effective as of July 1, 1997, the Company purchased the remaining 37%
interest in Servicios from two unrelated parties for approximately $3.4 million
in cash. As a result of the purchase, the Company now owns 100% of Servicios.
Pending Acquisition
J.W. Gibson Well Service Company
Effective as of July 31, 1997, the Company entered into a definitive
agreement for the acquisition of J.W. Gibson Well Service Company ("Gibson") for
cash, stock and warrants with an estimated value at that time of approximately
$25.0 million. Gibson operates 74 well service rigs and related equipment in
eight states. Since July 31, 1997, the Company, through Key Rocky Mountain, has
managed the operations of Gibson pursuant to an interim operations agreement
under which Key Rocky Mountain receives a management fee equal to the net income
from Gibson's operations less $25,000 per month. In addition, Key Rocky Mountain
received a one-time management fee of $300,000 for the three months ended
September 30, 1997. These management fees are included in the Company's results
of operations for the three months ended September 30, 1997. On October 10,
1997, the Company entered into an amendment to the definative agreement, which
amendment provided for, among other things, an extension of the closing and the
interim operating agreement to January 1998.
- 9 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
3. LONG-TERM DEBT
As of September 30, 1997, the Company had three major components of
long-term debt which are more fully described below.
7% Convertible Subordinated Debentures
In July 1996, the Company completed the offering of $52,000,000 of 7%
Convertible Subordinated Debentures due 2003 (the"7% Debentures"). The offering
was a private offering pursuant to Rule 144A under the Securities Act. As the
result of the conversion of a significant portion of the 7% Debentures into the
Company's common stock as more fully described below, the remaining principal
balance at September 30, 1997 was $4,600,000. The remaining 7% Debentures mature
on July 1, 2003 and remain convertible at any time before maturity, unless
previously redeemed, into shares of the Company's common stock at a conversion
price of $9 3/4 per share, subject to adjustment in certain events. In addition,
the remaining holders of the Debentures who convert prior to July 1, 1999 will
be entitled to receive, in addition to the Company's common stock, a payment
equal to 50% of the interest otherwise payable on the converted Debentures from
the date of conversion through July 1, 1999, payable in cash or common stock, at
the Company's option. Interest on the remaining 7% Debentures is payable
semi-annually on January 1 and July 1 of each year. The Company has made
interest payments on the 7% Debentures on January 1, 1996 and July 1, 1997.
As of September 30, 1997, $47,400,000 in principal amount of the 7%
Debentures had been converted into the Company's common stock. The conversion
was at the option of the holders. The Debentures converted into 5,062,369 shares
of the Company's common stock. The conversion included 200,831 shares in excess
of the number of shares issuable at the conversion price of $9.75 per share.
Such additional consideration will be accounted for as an increase to the
Company's equity. In addition, the proportional amount of debt issuance costs
associated with the converted Debentures will be accounted for as a decrease to
the Company's equity.
PNC Credit Agreement
On June 6, 1997, the Company entered into an agreement (the"PNC Credit
Agreement") with PNC Bank, N.A., as administrative agent, Norwest Bank Texas,
N.A. , as collateral agent, Lehman Commercial Paper, Inc., as advisor, arranger
and syndication agent and the lenders named therein pursuant to which the
lenders provided a $255 million credit facility, consisting of a $120 million
seven-year term loan and a $135 million five-year revolver. The interest rate on
the term loan was LIBOR plus 2.75 percent. The interest rate on the revolver
varied based on the LIBOR and the level of the Company's indebtedness and at
September 30, 1997 was LIBOR plus 2.25 percent. The credit facility contained
certain restrictive covenants and requires the Company to maintain certain
financial ratios. At September 30, 1997, the principal balance of the PNC Credit
Agreement revolver was $57 million and there was approximately $78 million in
unused credit line facilities.
On September 25, 1997, the Company repaid the term loan and a portion of
the amount then outstanding under the revolver using the proceeds from the
initial closing of the Company's private placement of the 5% Notes, (discussed
below). On October 7, 1997, the Company again prepaid a portion of the amount
then outstanding under the revolver using the proceeds from the second closing
of the Company's private placement of the 5% Notes (discussed below). Effective
as of November 6, 1997, the Company completed the re-negotiation of the
- 10 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
PNC Credit Agreement by entering into an amended and restated PNC Credit
Agreement providing for, among other things, an increase in borrowing
availability under the revolver from $135 million to $200 million and a decrease
in the revolver's interest rate from LIBOR plus 2.25 percent to LIBOR plus 1.25
percent.
5% Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its
private placement of $200 million of 5% Convertible Subordinated Notes due 2004
(the "5% Notes"). On October 7, 1997, the Company completed a second closing of
its private placement of an additional $16 million of the 5% Notes pursuant to
the exercise of the remaining portion of an over-allotment option granted to the
initial purchasers of the 5% Notes. The placement was a private offering
pursuant to Rule 144A under the Securities Act. The 5% Notes bear interest at a
5% coupon rate and are convertible into shares of the Company's common stock at
a conversion price of $38.50 per share at the holder's option on the earlier of
(i) the date that the registration statement on Form S-3 required to be filed
with the Securities and Exchange Commission (the "Commission") covering resales
of the 5% Notes and the underlying common stock by the holders thereof is
declared effective by the Commission and (ii) 270 days from the date of
issuance. Interest is payable on March 15 and September 15, commencing March 15,
1998. The 5% Notes are redeemable at the Company's option on or after September
15, 2000, in whole or part, together with accrued and unpaid interest. Proceeds
from the private placement of the 5% Notes were used to repay the outstanding
balances under the Company's revolving credit facility and term loan facility
(see above).
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128 - Earnings per Share
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effective for periods ending on or after December 15, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted EPS.
Management believes the adoption of SFAS 128 will not have a material effect on
its financial position or results of operations of the Company.
Statement of Financial Accounting Standards No. 130 - Reporting
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130") -
Reporting Comprehensive Income, is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
for the fiscal year ended June 30, 1999. Management believes the adoption of
SFAS 130 will not have a material effect on its financial position or results of
operations of the Company.
- 11 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
Statement of Financial Accounting Standards No. 131 - Disclosures about
Segments of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") -
Disclosures about Segments of an Enterprise and Related Information, is
effective for financial statements for periods beginning after December 15,
1997. SFAS 131 need not be applied to interim financial statements in the
initial year of its application. However, comparative information for interim
periods in the initial year of application is to be reported in the financial
statements for interim periods in the second year of application. The Company
will adopt SFAS 131 for the fiscal year ended June 30, 1999. Management believes
the adoption of SFAS 131 will not have a material effect on its financial
position or results of operations of the Company.
5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are
pending against the Company. Management does not believe that the disposition of
any of these items will result in a material adverse impact to the consolidated
financial position of the Company.
- 12 -
KEY ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The following discussion and analysis should be read in conjunction with
the Company's audited Form 10-K for the year ended June 30, 1997.
Current and Subsequent Events
During the three month interval beginning July 1, 1997, and ending
September 30, 1997, the Company purchased the remaining 37% interest in
Servicios WellTech Argentina and completed the acquisition of six well servicing
and trucking companies: Patrick Well Service, Kenting Holdings (Argentina) S.A.,
Mosley Well Service, Ram/Rowland Oil Well Service, Landmark Fishing and Rental
and Waco Oil and Gas. These acquisitions, (which are more fully described in
Note 2), collectively operate 97 well service rigs (including six in Argentina),
108 fluid hauling and other trucks and six drilling rigs, including three in
Argentina.
Subsequent to September 30, 1997, the Company has announced or completed
the acquisition of six well service companies and two contract drilling
companies which, collectively, operate 164 well service rigs, 17 drilling rigs
and 118 fluid hauling and other trucks. These eight announced or completed
acquisitions, (which are more fully described in Note 2), have allowed the
Company to expand its operating presence into markets it previously did not
serve, including the Rocky Mountains and the Four Corners area. Assuming
completion of the pending acquisitions, Key's operations will include 790 well
service and workover rigs, 623 fluid hauling and other trucks, 33 drilling rigs
and numerous ancillary operations. Based upon the number of active well service
rigs and fluid hauling and other trucks that the Company would operate assuming
the completion of all announced acquisitions, the Company believes that Key
Energy Group, Inc. will be the largest onshore well service provider within the
continental United States and the second largest well service provider in
Argentina.
Future Growth Strategy
Historically, the domestic well service rig and production service industry
has been highly fragmented, characterized by a large number of smaller companies
which have competed effectively on a local basis in terms of pricing and the
quality of services offered. In recent years, however, many major and
independent oil and gas companies have placed increasing emphasis upon not only
pricing, but also on safety records and quality management systems of, and the
breadth of services offered by, their vendors, including well servicing
contractors. This market environment, which requires significant expenditures by
smaller companies to meet these increasingly rigorous standards, has forced many
smaller well servicing companies to sell their operations to larger competitors.
As a result, the industry has seen high levels of consolidation among the
competing contractors.
Over the past eighteen months, Key has been the leading consolidator of
this industry, completing twenty-six acquisitions of well servicing operations
(32, including pending transactions and transaction completed subsequent
to September 30, 1997). This consolidation has led to reduced fragmentation in
the market and has led to more predictable demand for well services for the
Company and its competitors. Key's management structure is decentralized, which
allows for rapid integration of acquisitions and the retention of strong local
identities of many of the acquired businesses. As a result of these and other
factors, the Company has developed a growth strategy to: (i) identify, negotiate
and consummate additional acquisitions of complementary well servicing
operations, including rigs, trucking and
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other ancillary services; (ii) fully-integrate acquisitions into the
Company's decentralized organizational structure and thereby attempt to maximize
operating margins; (iii) expand business lines and services offered by the
Company in existing areas of operations; and (iv) extend the geographic scope
and operating environments for the Company's operations.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 VERSUS QUARTER ENDED SEPTEMBER 30, 1996
The following discussion provides information to assist in the
understanding of the Company's 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 Income
The Company
Revenues of the Company for the quarter ended September 30, 1997 increased
$44,094,000, or 140%, from $31,462,000 for the quarter ended September 30, 1996
to $75,556,000 for the current quarter. Net income for the quarter ended
increased $3,384,000, or 218%, from $1,554,000 for the quarter ended September
30, 1996 to $4,938,000 for the current quarter. The increase in revenues and net
income was primarily due to the completed acquisitions of well service
operations (see Note 2), increased oil and gas revenues from Odessa Exploration,
and a general increase in oil-well service equipment utilization.
Oilfield Services
Oilfield service revenues increased $42,187,000, or 154%, from $27,311,000
for the quarter ended September 30, 1996, to $69,498,000 for the current
quarter. The increase in revenues is primarily attributable to acquisitions as
well as higher equipment use and pricing resulting from an increase in demand
for oilfield services.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $629,000, or 41%, from
$1,525,000 for the quarter ended September 30, 1996, to $2,154,000 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 during fiscal 1997 began production and higher oil and natural gas
prices for the current period. Of the total $2,154,000 of revenues for the
quarter ended September 30, 1997, approximately $1,852,000 was from the sale of
oil and natural gas with the remainder of $302,000 representing primarily
administrative fee income.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling revenues increased $499,000, or 22%, from
$2,324,000 for the quarter ended September 30, 1996 to $2,823,000 for the
current quarter. The increase in revenues is primarily attributable to higher
equipment utilization and an increase in pricing.
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Operating Expenses
Oilfield Services
Oilfield service expenses increased $28,539,000, or 145%, from $19,700,000
for the quarter ended September 30, 1996 to $48,239,000 for the current quarter.
The increase was due primarily to acquisitions and the increased demand for
oilfield services. In addition, the Company has continued to expand its
services, offering ancillary services and equipment such as well fishing tools,
blow-out preventers and well frac tanks.
Oil and natural Gas Exploration and Production
Expenses related to oil and gas activities increased $424,000, or 83%, from
$513,000 for the quarter ended September 30, 1996 to $937,000 for current
quarter. The increase in expenses was primarily the result of increased
production of oil and natural gas as several oil and natural gas wells, which
were drilled during fiscal 1997, began production during the quarter.
Oil and Natural Gas Well Drilling
Expenses related to oil and natural gas well drilling activities increased
$382,000, or 20%, from $1,881,000 for the quarter ended September 30, 1996
$2,263,000 for current quarter. The increase in expenses is attributable to
higher equipment utilization and increased revenues.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $3,052,000, or
146%, from $2,095,000 for the quarter ended September 30, 1996 to $5,147,000 for
the current quarter. 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 acquisitions
of oilfield service assets.
General and Administrative Expenses
General and administrative expenses increased $4,174,000, or 118%, from
$3,527,000 for the quarter ended September 30, 1996 to $7,701,000 for the
current quarter. The increase was primarily attributable to the Company's recent
acquisitions and expanded services.
Interest Expense
Interest expense increased $2,088,000, or 155%, from $1,350,000 for the
quarter ended September 30, 1996 to $3,438,000 for the current quarter. The
increase was primarily the result of increased indebtedness as a result of the
Company's acquisition program.
Income Taxes
Income tax expense increased $2,109,000, or 269%, from $784,000 for the
quarter ended September 30, 1996, to $2,893,000 for the current quarter. The
increase in income taxes is primarily due to the increases in operating income
and a higher effective tax rate. However, the Company does not expect to be
required to remit the total amount of the $2,893,000 in total federal income tax
expense for the quarter ended September 30, 1997, because of the availability of
net operating loss carryforwards, accelerated tax depreciation and oil and
natural gas drilling tax attributes.
- 15 -
Cash Flow
Net cash provided by operating activities increased $1,044,000, or 35%,
from $3,016,000 during the quarter ended September 30, 1996, to $4,060,000 for
the current quarter. The increase is attributable primarily to increases in net
income and depreciation, depletion and amortization which was largely off-set by
a decrease in accounts receivable.
Net cash used in investing activities increased $128,309,000, or 362%, from
$3,545,000 during the quarter ended September 30, 1996, $131,854,000 for the
current quarter. The increase is primarily the result of increased capital
expenditures for well service operations as well as the Company's recent
acquisitions.
Net cash provided by financing activities increased $120,241,000, or 795%,
from $15,125,000 during the quarter ended September 30, 1996, to $135,366,000
for the current quarter. The increase is primarily the result of the proceeds
from long-term commercial paper and borrowings under line-of-credit, and the
issuance of the Company's 5% Notes (see Note 2) which are partially off-set by
the repayment of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash increased by $7.6 million for the quarter ended
September 30, 1997 from $41.7 as of June 30, 1997 to $49.3 million.
The Company has projected $40 million for capital expenditures for fiscal
1998, as compared to $24.8 million for fiscal 1997. Oilfield service capital
expenditures for the three months ended September 30, 1997 were $6.7 million
compared to $2.9 million during the same quarter last year. Of the total $40.0
million in capital expenditures the Company is projecting for fiscal 1998,
approximately $30 million is expected to be attributable to oilfield service
operations. Capital expenditures are expected to be primarily capitalized
improvement costs to existing equipment and machinery. The Company expects to
finance these capital expenditures utilizing the operating cash flows of the
Company.
The Company's oil and natural gas exploration and development operations
are forecasting outlays of approximately $8.0 million in development costs for
fiscal 1998, as compared to $8.2 million during fiscal 1997. For the quarter
ended September 30, 1997, these outlays totaled $2.1 million as compared to none
for the quarter ended September 30, 1996. Financing is expected to come from
operations and available credit facilities.
The Company's oil and natural gas well drilling operations have forecast
approximately $2.0 million in oil and natural gas drilling capital expenditures
for fiscal 1998, as compared to $1.5 million during fiscal 1997. Capital
expenditures are primarily for improvements to existing equipment and machinery.
For the quarter ended September 30, 1997, capital expenditures totaled $339,000
as compared to $323,000 for the quarter ended September 30, 1996. Financing is
expected to come from existing cash flow.
Debt
7% Convertible Subordinated Debentures
In July 1996, the Company completed the offering of $52,000,000 of 7%
Convertible Subordinated Debentures due 2003 (the "7% Debentures"). The offering
was a private offering pursuant to Rule 144A under the Securities Act. As the
result of the conversion of a significant portion of the 7% Debentures into the
Company's common stock as more fully described below, the remaining principal
balance at September 30,
- 16 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
1997 was $4,600,000. The remaining 7% Debentures mature on July 1, 2003 and
remain convertible at any time before maturity, unless previously redeemed, into
shares of the Company's common stock at a conversion price of $9 3/4 per share,
subject to adjustment in certain events. In addition, the remaining holders of
the Debentures who convert prior to July 1, 1999 will be entitled to receive, in
addition to the Company's common stock, a payment equal to 50% of the interest
otherwise payable on the converted Debentures from the date of conversion
through July 1, 1999, payable in cash or common stock, at the Company's option.
Interest on the remaining 7% Debentures is payable semi-annually on January 1
and July 1 of each year. The Company has made interest payments on the 7%
Debentures on January 1, 1996 and July 1, 1997.
As of September 30, 1997, $47,400,000 in principal amount of the 7%
Debentures had been converted into the Company's common stock. The conversion
was at the option of the holders. The Debentures converted into 5,062,369 shares
of the Company's common stock. The conversion included 200,831 shares in excess
of the number of shares issuable at the conversion price of $9.75 per share.
Such additional consideration will be accounted for as an increase to the
Company's equity. In addition, the proportional amount of debt issuance costs
associated with the converted Debentures will be accounted for as a decrease to
the Company's equity.
PNC Credit Agreement
On June 6, 1997, the Company entered into an agreement (the "PNC Credit
Agreement") with PNC Bank, N.A., as administrative agent, Norwest Bank Texas,
N.A. , as collateral agent, Lehman Commercial Paper, Inc., as advisor, arranger
and syndication agent and the lenders named therein pursuant to which the
lenders provided a $255 million credit facility, consisting of a $120 million
seven-year term loan and a $135 million five-year revolver. The interest rate on
the term loan was LIBOR plus 2.75 percent. The interest rate on the revolver
varied based on the LIBOR and the level of the Company's indebtedness and at
September 30, 1997 was LIBOR plus 2.25 percent. The credit facility contained
certain restrictive covenants and requires the Company to maintain certain
financial ratios. At September 30, 1997, the principal balance of the PNC Credit
Agreement revolver was $57 million and there was approximately $78 million in
unused credit line facilities.
On September 25, 1997, the Company repaid the term loan and a portion of
the amount then outstanding under the revolver using the proceeds from the
initial closing of the Company's private placement of the 5% Notes, (discussed
below). On October 7, 1997, the Company again prepaid a portion of the amount
then outstanding under the revolver using the proceeds from the second closing
of the Company's private placement of the 5% Notes (discussed below). Effective
as of November 6, 1997, the Company completed the re-negotiation of the PNC
Credit Agreement by entering into an amended and restated PNC Credit Agreement
providing for, among other things, an increase in borrowing availability under
the revolver from $135 million to $200 million and a decrease in the revolver's
interest rate from LIBOR plus 2.25 percent to LIBOR plus 1.25 percent.
5% Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its
private placement of $200 million of 5% Convertible Subordinated Notes due 2004
(the "5% Notes"). On October 7, 1997, the Company completed a second closing of
its private placement of an additional $16 million of the 5% Notes pursuant to
the exercise of the remaining portion of an over-allotment option granted to the
initial purchasers of the 5% Notes. The placement was a private offering
pursuant to Rule 144A under the Securities Act. The 5% Notes bear interest
- 17 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
at a 5% coupon rate and are convertible into shares of the Company's common
stock at a conversion price of $38.50 per share at the holder's option on the
earlier of (i) the date that the registration statement on Form S-3 required to
be filed with the Securities and Exchange Commission (the "Commission") covering
resales of the 5% Notes and the underlying common stock by the holders thereof
is declared effective by the Commission and (ii) 270 days from the date of
issuance. Interest is payable on March 15 and September 15, commencing March 15,
1998. The 5% Notes are redeemable at the Company's option on or after September
15, 2000, in whole or part, together with accrued and unpaid interest. Proceeds
from the private placement of the 5% Notes were used to repay the outstanding
balances under the Company's revolving credit facility and term loan facility
(see above).
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 128 - Earnings per Share
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effective for periods ending on or after December 15, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted EPS.
Management believes the adoption of SFAS 128 will not have a material effect on
its financial position or results of operations of the Company.
Statement of Financial Accounting Standards No. 130 - Reporting
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130") -
Reporting Comprehensive Income, is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
for the fiscal year ended June 30, 1999. Management believes the adoption of
SFAS 130 will not have a material effect on its financial position or results of
operations of the Company
Statement of Financial Accounting Standards No. 131 - Disclosures about
Segments of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") -
Disclosures about Segments of an Enterprise and Related Information, is
effective for financial statements for periods beginning after December 15,
1997. SFAS 131 need not be applied to interim financial statements in the
initial year of its application. However, comparative information for interim
periods in the initial year of application is to be reported in the financial
statements for interim periods in the second year of application. The Company
will adopt SFAS 131 for the fiscal year ended June 30, 1999. Management believes
the adoption of SFAS 131 will not have a material effect on its financial
position or results of operations of the Company Impact of Inflation on
Operations
Although in our complex environment it is extremely difficult to make an
accurate assessment of the impact of inflation on the Company's operations,
management is of the opinion that inflation has not had a significant impact on
its business.
- 18 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities:
The Company effected the following unregistered sales of its securities
during the three months ended September 30, 1997. Each of the following
issuance's by the Company of the securities sold in the transactions referred to
below were not registered under the Securities Act of 1933, as amended, pursuant
to the exemption provided under Section 4(2) thereof for transactions not
involving a public offering:
Effective as of September 25, 1997, the Company issued $200 million of its
5% Convertible Subordinated Notes due 2004 to McMahan Securities Co. LP. and
Lehman Brothers Inc., as intitial purchasers, in connection with the Company's
private placement of the 5% Notes.
Effective as of October 7, 1997, the Company issued $16 million of its 5%
Convertible Subordinated Notes due 2004 to McMahan Securities Co. LP. and Lehman
Brothers Inc., as intitial purchasers, in connection with the Company's private
placement of the 5% Notes.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of the Form 10-Q:
Number Description
10(a) Stock Purchase Agreement between WellTech
Eastern, Inc. and Monty D.
Elmore dated as of July 17, 1997.
10(b) Stock Purchase Agreement between WellTech Eastern,
Inc. and Kenting
Energy Services, Inc. dated as of July 30, 1997.
10(c) Stock Purchase Agreement by and among Nabors
Acquisition Corp. IV,
as Seller, Key Rocky Mountain, Inc., as Buyer, and
Key Energy Group, Inc. dated as of
July 31, 1997.("Gibson Stock Purchase Agreement")
- 19 -
10(d) Amendment One to the Gibson Stock Purchase Agreement
Stock Purchase Agreement dated
as of October 10, 1997.
10(e) Stock Purchase Agreement among WellTech
Eastern, Inc., Robert E.
Mosley, Jr., Thelma Scoggin Mosley, Thomas A. Mosley,
Nancy Evans Mosley, James R.
Mosley, Dennis W. Mosley and Melanie Ostrum Mosley
dated as of August 22, 1997.
10(f) Stock Purchase Agreement (Ram Oil Well Service, Inc.)
by and among, Yale E. Key, Inc. and Robert D. Calhoon
dated as of September 1, 1997 (ncorporated by
reference to Exhibit 2.2 of the Company's Report on
Form 8-K dated September 1, 1997, File No. 1-8038).
10(g) Stock Purchase Agreement (Rowland Trucking
Co.) by and among, Yale
E. Key, Inc. and Robert D. Calhoon dated as of
September 1, 1997 (incorporated by
reference to Exhibit 2.1 of the Company's
Report on Form 8-K dated September 1, 1997,
File No. 1-8038).
10(h) Asset Purchase Agreement among WellTech
Eastern, Inc., Waco Oil &
Gas Co., Inc. and I.L. Morris dated as of
September 1, 1997.
10(i) Asset Purchase Agreement among Key Four
Corners, Inc., Key Energy
Group,Inc., Coleman Oil & Gas Co., Big A Well
Service Co., Sunco Trucking Co.,
Justis Supply Co., Inc. and George E.
Coleman dated as of September 2, 1997
(incorporated by reference to Exhibit 2.1 of the
Company's Report on Form 8-K dated
October 1, 1997, File No. 1-8038).
10(j) Stock Purchase Agreement between WellTech
Eastern, Inc. and William
Gregory Wines dated as of September 16, 1997.
10(k) Stock Purchase Agreement among, Key Energy
Drilling, Inc. and S.K.
Rogers, Joe Dee Brooks, Lynn E. Waters
and Donnie Roberts dated as of September 25, 1997.
10(l) Indenture dated as of September 25, 1997, among
Key Energy Group, Inc.
and American Stock Transfer and Trust Company.
10(m) Stock Purchase Agreement among Key Rocky
Mountain, Inc., Joseph R.Dunbar and Janice N.
Dunbar dated as of September 29, 1997.
10(n) Stock Purchase Agreement among Key Rocky
Mountain, Inc., Bruce L.
Bummer, Jack Hartnett, Diane Hartnett
and Bruce Bummer 7/14/82 Family Trust
dated as of September 30, 1997.
11(a) Statement - Computation of per share earnings.
27(a) Statement - Financial Data Schedule
- 20 -
(b) The following reports on Form 8-K were filed during the
quarter ended September 30, 1997:
The Company's Report on Form 8-K dated June 25, 1997, File No. 1-8038, as
amended by the Company's report on Form 8-K/A dated June 25, 1997, File No.
1-8038. The Report on Form 8-K concerned the Company's acquisition of Well-Co.
The Company's Report on Form 8-K dated September 1, 1997, File No. 1-8038.
The Report on Form 8-K concerned the Company's acquisition of Ram Oil Well
Service, Inc. and Rowland Trucking Co., Inc.
The Company's Report on Form 8-K dated September 25, 1997, File No. 1-8038,
as amended by the Company's report on Form 8-K/A dated September 25, 1997, File
No. 1-8038. The Report on Form 8-K concerned the private placement of the
Company's 5% Notes.
- 21 -
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
Dated: November 14, 1997 President and Chief Executive Officer
By /s/ Stephen E. McGregor
Dated: November 14, 1997 Chief Financial Officer
By /s/ Danny R. Evatt
Dated: November 14, 1997 Chief Accounting Officer
- 22 -