[AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] 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 SERVICES, 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, 20th 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
---
Common Shares outstanding at February 9, 1999 - 18,293,083
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation 3
PART II. OTHER INFORMATION
Signatures 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
CURRENT AND SUBSEQUENT EVENTS
During the six months ended December 31, 1998, the Company completed the
acquisition of the following well servicing, trucking, drilling and ancillary
equipment companies and businesses:
Colorado Well Service, Inc.
Oilfield service assets of TransTexas Gas Corporation
Dawson Production Services, Inc.
Well servicing assets of Flint Engineering & Construction Co.
Iceberg, S.A.
HSI Group
Corrunna Drilling
These acquisitions (which are more fully described in Note 3 to the unaudited
consolidated financial statements) involve approximately 620 well service rigs
(including four well service rigs in Argentina), 385 trucks and four drilling
rigs. The total purchase price of these acquisitions was approximately $415.4
million including debt, net of cash assumed.
As of February 12, 1999, the Company owned a fleet of approximately 1,421 well
service rigs, 1,131 oilfield trucks, and 74 drilling rigs, including 21 service
rigs, 38 trucks and six drilling rigs in Argentina and three drilling rigs in
Canada. Management believes that the Company's well servicing rig and oilfield
truck fleets are the largest onshore fleets in the world. The Company operates
in all major onshore oil and gas producing regions of the continental United
States and provides a full range of drilling, completion, maintenance, workover
and plugging and abandonment services for the oil and gas industry.
IMPACT OF LOWER CRUDE OIL PRICES
As the result of the prolonged period of historically low oil prices, the
Company's drilling, completion and workover activity has been adversely
affected. Equipment utilization for drilling, completion and workover activity
has continued to decline markedly throughout the last three months of fiscal
1998 and the first six months of fiscal 1999. The demand for these services,
which generate higher margins than maintenance services, will continue to be
adversely affected until oil prices stabilized and/or substantially increase
from their currently depressed levels.
GROWTH STRATEGY
Historically, the domestic well servicing 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 not only on pricing, but also on the
safety
3
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 three years, the Company has been the leading consolidator of the
well servicing industry, completing in excess of 50 acquisitions of well
servicing and drilling operations through December 31, 1998. This consolidation
has led to reduced fragmentation in the market and a more predictable demand for
well services for the Company and its competitors. The Company'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 the Company's recent growth through acquisitions, the Company has
developed a strategy to:
1. Maximize operating efficiencies by focusing on reducing costs;
2. Fully integrate acquisitions into the Company's decentralized
organizational structure and thereby attempt to maximize
operating margins;
3. Expand business lines and services offered by the Company in
existing areas of operations; and
4. Extend the geographic scope and operating environments for the
Company's operations.
If the current decline in the oil prices persists for a protracted period or a
recovery in such prices remains uncertain, the Company may curtail or halt its
growth strategy until such time as prices reach more favorable ranges.
RESULTS OF OPERATIONS
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 unaudited consolidated financial statements and related
notes thereto appearing elsewhere in this report.
QUARTER ENDED DECEMBER 31, 1998 VERSUS THE QUARTER ENDED DECEMBER 31, 1997
NET INCOME
For the quarter ended December 31, 1998, the Company reported a net loss of
$9,797,000 ($(.54) per share - basic) as compared to net income of $7,345,000
($.40 per share - basic) for the quarter ended December 31, 1997, representing a
decrease of $17,142,000, or 233% (235% decrease in basic earnings per share).
One factor causing this decline is the Company's restructuring charge recorded
in the quarter ended December 31, 1998 of $4,354,000 (tax effected) or $(.24)
per share -
4
basic. Not including this non-recurring charge, the Company reported a net
loss of $5,443,000 ($(.30) per share - basic). This one time non-recurring
charge coupled with the Company's decrease in service and drilling rig
utilization rates has caused the decline in net income.
REVENUES
The Company's total revenues for the quarter ended December 31, 1998 increased
by $33,973,000, or 31%, to $143,646,000 compared to $109,673,000 reported for
the quarter ended December 31, 1997. The increase is primarily attributable to
the Company's acquisitions of oilfield service and drilling rig companies over
the past twelve months, offset by the Company's decrease in service and drilling
rig utilization rates.
Oilfield service revenues for the quarter ended December 31, 1998 increased by
$31,707,000, or 34%, to $126,446,000 compared to $94,739,000 reported for the
quarter ended December 31, 1997. The increase is primarily attributable to the
Company's acquisitions of oilfield service companies over the past twelve
months, offset by the Company's decrease in oilfield service rig utilization
rates.
Drilling revenues for the quarter ended December 31, 1998 increased by
$3,742,000, or 33%, to $15,234,000 compared to $11,492,000 reported for the
quarter ended December 31, 1997. The increase is primarily attributable to the
Company's drilling rig acquisitions over the past twelve months, offset by the
Company's decrease in drilling rig utilization rates.
COSTS AND EXPENSES AND OPERATING MARGINS
The Company's total costs and expenses for the quarter ended December 31, 1998
increased by $60,600,000, or 62%, to $158,426,000 compared to $97,826,000
reported for the quarter ended December 31, 1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's acquisitions over the past twelve months.
Oilfield service expenses for the quarter ended December 31, 1998 increased by
$24,880,000, or 38%, to $90,862,000 compared to $65,982,000 reported for the
quarter ended December 31, 1997. Oilfield service margins (revenues less direct
costs and expenses) increased for the quarter ended December 31, 1998 by
$6,827,000, or 24%, to $35,584,000 compared to $28,757,000 for the quarter ended
December 31, 1997. Oilfield service margins as a percentage of oilfield service
revenue for the quarters ended December 31, 1998 and 1997 was 28% and 30%,
respectively. In addition, the Company has continued to expand its services,
offering higher margin ancillary services and equipment such as well fishing
tools, blow-out preventers and frac tanks.
The Company's contract drilling costs and expenses for the quarter ended
December 31, 1998 increased by $3,437,000, or 38%, to $12,399,000 compared to
$8,962,000 for the quarter ended December 31, 1997. Oilfield drilling margins
for the Company's drilling operations during the quarter ended December 31, 1998
increased by $305,000, or 12%, to $2,835,000 compared to $2,530,000 for the
quarter ended December 31, 1997. Oilfield drilling margin as a percentage of
oilfield drilling revenue for the quarters ended December 31, 1998 and 1997 was
19% and 22%, respectively. Decreases in oilfield margins are attributable to
the decreases in onshore drilling due to the lower crude oil and natural gas
prices.
5
General and administrative expenses for the quarter ended December 31, 1998
increased by $3,968,000, or 38%, to $14,338,000 compared to $10,370,000 for the
quarter ended December 31, 1997. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenue for the quarters ended December 31,
1997 and 1998 was 10% for each period.
Depreciation, depletion and amortization expense for the quarter ended December
31, 1998 increased by $7,056,000, or 96%, to $14,427,000 compared to $7,371,000
for the quarter ended December 31, 1997. The increase is directly related to
the increase in property and equipment and intangible assets of the Company over
the past twelve months as a result of its acquisitions.
Interest expense for the quarter ended December 31, 1998 increased by
$14,574,000, or 343%, to $18,822,000 compared to $4,248,000 for the quarter
ended December 31, 1997. The increase was primarily the result of increased
indebtedness used to finance the Company's acquisition program.
Income tax expense for the quarter ended December 31, 1998 decreased by
$9,485,000, or 211%, to ($4,983,000) compared to $4,502,000 for the quarter
ended December 31, 1997. The effective tax rate for the quarter ended December
31, 1998 as compared to the quarter ended December 31, 1997 has decreased due to
the loss generated in the quarter ended December 31, 1998. The Company does not
expect to have to pay any income tax provision because of the availability of
accelerated tax depreciation, drilling tax credits, and tax loss carry-forwards.
CASH FLOWS
Net cash provided by operating activities for the quarter ended December 31,
1998 decreased by $(43,988,000) or 598%, to $(36,627,000) compared to $7,361,000
provided for the quarter ended December 31, 1997. The decrease is primarily
attributable to an decreased service and drilling operating margin, and service
and drilling utilization rates.
Net cash used in investing activities for the quarter ended December 31, 1998
decreased by $40,658,000, or 76%, to $12,640,000 compared to $53,298,000 used
for the quarter ended December 31, 1997. This decrease is primarily related to
the decline in acquisitions the Company has made in this quarter as compared to
the past twelve months.
Net cash provided by financing activities for the quarter ended December 31,
1998 decreased by $32,900,000 or 65%, to $17,531,000 compared to $50,431,000
provided during the quarter ended December 31, 1997. The decrease is primarily
the result of decreased borrowings of long-term debt, due to the decline in
acquisitions the Company has made in this quarter as compared to the past twelve
months.
SIX MONTHS ENDED DECEMBER 31, 1998 VERSUS THE SIX MONTHS ENDED DECEMBER 31, 1997
NET INCOME
For the six months ended December 31, 1998, the Company reported a net loss of
$7,960,000 ($(.44) per share - basic) as compared to net income of $11,456,000
($.71 per share - basic) for the
6
six months ended December 31, 1997, representing a decrease of $19,416,000,
or 170% (162% decrease in basic earnings per share). One factor causing this
decline is the Company's restructuring charge recorded in the quarter ended
December 31, 1998 of $4,354,000 (tax effected) or $(.24) per share - basic.
Not including this non-recurring charge, the Company reported a net loss of
$3,606,000 ($(.20) per share - basic). This one time non-recurring charge
coupled with the Company's decrease in service and drilling rig utilization
rates has caused the decline in net income.
REVENUES
The Company's total revenues for the six months ended December 31, 1998
increased by $74,161,000, or 40%, to $259,233,000 compared to $185,072,000
reported for the six months ended December 31, 1997. The increase is primarily
attributable to the Company's acquisitions of oilfield service and drilling rig
companies over the past twelve months, offset by the Company's decrease in
service and drilling rig utilization rates.
Oilfield service revenues for the six months ended December 31, 1998 increased
by $61,134,000, or 38%, to $222,939,000 compared to $161,805,000 reported for
the six months ended December 31, 1997. The increase is primarily attributable
to the Company's acquisitions of oilfield service companies over the past twelve
months, offset by the Company's decrease in oilfield service rig utilization
rates.
Drilling revenues for the six months ended December 31, 1998 increased by
$15,403,000, or 92%, to $32,150,000 compared to $16,747,000 reported for the six
months ended December 31, 1997. The increase is primarily attributable to the
Company's drilling rig acquisitions over the past twelve months, offset by the
Company's decrease in drilling rig utilization rates.
COSTS AND EXPENSES AND OPERATING MARGINS
The Company's total costs and expenses for the six months ended December 31,
1998 increased by $104,149,000, or 62%, to $270,856,000 compared to $166,707,000
reported for the six months ended December 31, 1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's acquisitions over the past twelve months.
Oilfield service expenses for the six months ended December 31, 1998 increased
by $46,097,000, or 41%, to $158,267,000 compared to $112,170,000 reported for
the six months ended December 31, 1997. Oilfield service margins (revenues less
direct costs and expenses) increased for the six months ended December 31, 1998
by $15,037,000, or 30%, to $64,672,000 compared to $49,635,000 for the six
months ended December 31, 1997. Oilfield service margins as a percentage of
oilfield service revenue for the six months ended December 31, 1998 and 1997 was
29% and 30%, respectively. In addition, the Company has continued to expand its
services, offering higher margin ancillary services and equipment such as well
fishing tools, blow-out preventers and frac tanks.
Drilling costs and expenses for the six months ended March 31, 1998 increased by
$12,743,000, or 96%, to $26,019,000 compared to $13,276,000 for the six months
ended December 31, 1997. Drilling margins during the six months ended December
31, 1998 increased by $2,660,000, or
7
77%, to $6,131,000 compared to $3,471,000 for the six months ended December
31, 1997. Oilfield drilling margin as a percentage of oilfield drilling
revenue for the six months ended December 31, 1998 and 1997 was 19% and 21%,
respectively. Decreases in oilfield margins are attributable to the decreases
in onshore drilling due to the lower crude oil and natural gas prices.
There was no significant change in oil and gas production costs and expenses for
nine months ended March 31, 1998 as compared to the nine months ended March 31,
1997.
General and administrative expenses for the six months ended December 31, 1998
increased by $7,728,000, or 43%, to $25,776,000 compared to $18,048,000 for six
months ended December 31, 1997. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenues for the six months ended December 31,
1998 and 1997 were both 10%.
Depreciation, depletion and amortization expense for the six months ended
December 31, 1998 increased by $12,621,000, or 101%, to $25,130,000 compared to
$12,509,000 for six months ended December 31, 1997. The increase is directly
related to the increase in property and equipment and long-term debt issuance
costs incurred by the Company over the past eighteen months in conjunction with
its acquisitions.
Interest expense for the six months ended December 31, 1998 increased by
$18,319,000, or 203%, to $27,327,000 compared to $9,008,000 for the six months
ended December 31, 1997. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisitions.
Income tax expense for the six months ended December 31, 1998 decreased by
$10,572,000, or 153%, to ($3,663,000) compared to $6,909,000 for the six months
ended December 31, 1997. The effective tax rate for the quarter ended December
31, 1998 as compared to the quarter ended December 31, 1997 has decreased due to
the loss generated in the six months ended December 31, 1998. The Company does
not expect to have to pay any income tax provision because of the availability
of accelerated tax depreciation, drilling tax credits, and tax loss
carry-forwards.
CASH FLOWS
Net cash provided by operating activities for the six months ended December 31,
1998 decreased by $35,640,000 or 312%, to $(24,219,000) compared to $11,421,000
for six months ended December 31, 1997. The decrease is primarily attributable
to a decreased service and drilling operating margin, and service and drilling
utilization rates.
Net cash used in investing activities for the six months ended December 31, 1998
increased by $81,895,000, or 44%, to $267,047,000 compared to $185,152,000 used
for the six months ended December 31, 1997. This increase is primarily related
to the Company's recent acquisitions.
Net cash provided by financing activities for the six months ended December 31,
1998 increased by $88,385,000, or 48%, to $274,182,000 compared to $185,797,000
provided during the six months ended December 31, 1997. The increase is
primarily the result of the proceeds from long-term debt (see Note 3 to
consolidated financial statements), partially offset by the repayment of debt.
8
LIQUIDITY, CAPITAL COMMITMENTS AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash of $8.2 million compared to $25.3
million at June 30, 1998 and $53.8 million at December 31, 1997. At December
31, 1998, the Company had working capital of $92.2 million compared to $79.5
million at June 30, 1998 and $99.1 million at December 31, 1997.
For fiscal 1999, the Company has projected approximately $26 million of capital
expenditures for improvements of existing service and drilling rig machinery and
equipment, a decrease of approximately $26.1 million from the $52.1 million
expended during fiscal 1998. The Company expects to finance these capital
expenditures through internally generated operating cash flows. Capital
expenditures for service and drilling rig improvements for the six months ended
December 31, 1998 and 1997 were $16.0 million and $20.6 million, respectively.
The Company has projected approximately $2.0 million of capital expenditures for
oil and gas exploration for fiscal 1999 as compared to $7.8 million expended for
fiscal 1998. Financing of these costs is expected to come from operations and
available credit facilities. For the six months ended December 31, 1998 and
1997, the Company expended $3.4 million and $4.0 million, respectively.
The Company's primary capital resources are net cash provided by operations and
proceeds from certain long-term debt facilities.
YEAR 2000 ISSUE
The Company is currently implementing a new integrated management information
system along with updated hardware that will replace most of our current
systems. The implementation of the new management information system, which will
be year 2000 compliant for our systems as well as for those of our past and
future acquisitions, began July 1998 and is scheduled to be substantially
completed by June 1999. The new management information systems do not currently
cover the Company's Argentine operations, but Argentine operations have
established a separate system, which is year 2000 compliant, that will be
implemented in late 1999.
The Company has not yet developed a plan to formally communicate with
significant suppliers and customers to determine if those parties have
appropriate plans to remedy year 2000 issues when their systems interface with
the Company's systems or may otherwise have an impact operations. The Company
does not anticipate that this will have a material impact on operations.
However, there can be no assurance that the systems of other companies on which
the Company rely will be timely converted, or that failure to successfully
convert by another company, or conversion that is incompatible with the
Company's systems, would not have an impact on operations. The Company currently
does not have a contingency plan to cover any unforeseen problems encountered
that relate to the year 2000, but intends to produce one before the end of the
current fiscal year.
The cost of the new management information system, (a large part of which
management expects will be capitalized) is not expected to have a material
impact on the Company's business,
9
operations or results thereof, financial condition, liquidity or capital
resources. Although the Company is not aware of any material operational
issues or costs associated with preparing its internal systems for the year
2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems
and changes to address the year 2000.
If the Company is unable to adequately address the year 2000 issue in a timely
manner, the worst case scenario would be that the Company could suffer
significant computer downtime, and billings, payments and collections would
revert to manual accounting records. In addition, the inability of principal
suppliers and major customers to be year 2000 compliant could result in delays
in product deliveries from those suppliers and collections of accounts
receivable.
10
SIGNATURES
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 SERVICES, INC.
(Registrant)
By: /s/ Francis D. John
-----------------------------------------
Dated: April 30, 1999 President and Chief Executive Officer
By: /s/ Stephen E. McGregor
-----------------------------------------
Dated: April 30, 1999 Executive Vice President, Chief Financial Officer
and Treasurer
11