Key Energy Services Generated Third Quarter 2011 Earnings of $0.31 Per Diluted Share, Excluding Edge Transaction Costs

HOUSTON, Oct. 27, 2011 /PRNewswire/ -- Key Energy Services, Inc. (NYSE: KEG) generated third quarter 2011 income of $46.3 million, or $0.31 per share, excluding pre-tax transaction costs of $3.3 million, or $0.01 per share, related to the acquisition of Edge Oilfield Services.  This result compares to second quarter 2011 income of $33.0 million, or $0.23 per share, excluding a pre-tax gain of $4.8 million, or $0.02 per share, related to the sale of the Company's equity interest in IROC Energy Services Corp.  Third quarter 2011 GAAP income was $44.2 million, or $0.30 per share.

Consolidated revenue for the quarter was $501.3 million, up 12.6% compared to second quarter 2011 revenue of $445.4 million.  Edge contributed $20.7 million of revenue for two months of the third quarter, and Edge revenue is reflected within Key's Fishing & Rental Services business.

The following table sets forth summary data from continuing operations for the quarter ended September 30, 2011 and prior comparable quarterly periods:

U.S. Segment

Third quarter 2011 U.S. revenue was $411.8 million, up 12.1% compared to the second quarter 2011.  Operating income was $106.2 million, or 25.8% of revenue, reflecting sequential incremental operating income margins of 45%.  Rig Services revenue increased 8% sequentially from favorable work mix and pricing.  Intervention Services and Fishing & Rental Services revenue also increased due to improved pricing and activity.  

International Segment

International revenue was $89.5 million during the quarter, up 14.9% from the second quarter 2011.  Operating income was $11.8 million, or 13.1% of revenue, up 490 basis points compared to the second quarter 2011, generating sequential incremental operating income margins of 46%.  Revenue improvement was driven by activity increases in all international markets.

General and Administrative Expenses

Total general and administrative expenses were $62.9 million, or 12.6% of revenue, in the third quarter 2011 compared to $55.0 million, or 12.3% of revenue, in the second quarter.  Third quarter general and administrative expense includes $3.3 million of Edge transaction costs.  

Capital Expenditures and Liquidity

Capital expenditures were $67.8 million during the third quarter 2011 and $245.9 million through the first nine months of the year.  Key's consolidated cash balance was $19.3 million, and total debt was $746.6 million as of September 30, 2011, compared to $14.6 million cash and $572.6 million total debt as of June 30, 2011.  As of September 30, 2011, there was $324.5 million utilized under the Company's $550 million senior secured credit facility.  Subsequent to the third quarter, Key reduced borrowings by $25.0 million, and the Company currently has $250 million available under its credit facility.

Edge Acquisition

On August 5, 2011, Key completed its previously announced acquisition of Edge Oilfield Services, LLC and Summit Oilfield Services, LLC (collectively, "Edge") for total consideration of $307.6 million, consisting of approximately 7.5 million shares of Key common stock and $189.7 million cash.  

Overview and Outlook

Commenting on the results, Key's Chairman, President and Chief Executive Officer, Dick Alario, stated, "In addition to activity increases from our participation in the growing horizontal shale well markets, we experienced an increase in traditional well repair and workover activity in our core markets.  

"Our international business continues to strengthen.  We were recently awarded another 2-1/2 year, $90 million contract with PEMEX, and we intend to deliver at least six additional rigs to Mexico during the fourth quarter 2011 to support this contract. We have seen strong evidence of increased customer demand for our services in certain foreign markets in the Middle East and Latin America."

Alario continued, "For the fourth quarter 2011, we anticipate that results from operations will be roughly flat sequentially, as a full quarter of Edge results essentially offset typical seasonal declines.  While it is still early in our customers' budgeting process, based on recent discussions with our largest customers, we expect both domestic and international activity to remain strong in 2012."

Conference Call Information

Key management will host a conference call to discuss its third quarter 2011 financial results on Friday, October 28, 2011 at 10:00 a.m. CDT.  To access the call in the U.S. and Canada dial 888-794-4637.  International callers should dial 660-422-4879.  All callers should ask for the "Key Energy Services Conference Call" or provide the access code 14042906. The conference call will also be available live via the internet.  To access the webcast, go to www.keyenergy.com and select "Investor Relations."  A telephonic replay of the conference call will be available on Friday, October 28, 2011, beginning two hours after the completion of the conference call and will remain available for one week.  To access the replay, call 855-859-2056 or 800-585-8367.  The access code for the replay is 14042906.  The replay will also be accessible at www.keyenergy.com under "Investor Relations" for a period of at least 90 days.

Below is a reconciliation of income or loss from continuing operations attributable to Key as presented in accordance with United States generally accepted accounting principles (GAAP) to Adjusted EBITDA from continuing operations (a non-GAAP measure) as required under Regulation G of the Securities Exchange Act of 1934.

"Adjusted EBITDA from continuing operations" is defined as income or loss from continuing operations attributable to Key before interest, taxes, depreciation and amortization.  In some periods, Adjusted EBITDA from continuing operations may also add back certain non-recurring items such as asset retirements and impairments, loss on debt extinguishment, and certain other gains or losses.  Adjusted EBITDA from continuing operations is a non-GAAP measure that is used as a supplemental financial measure by the Company's management and directors and by external users of the Company's financial statements, such as investors, to assess:

• The financial performance of the Company's assets without regard to financing methods, capital structure or historical cost basis;
• The ability of the Company's assets to generate cash sufficient to pay interest on its indebtedness; and
• The Company's operating performance and return on invested capital as compared to those of other companies in the well services industry, without regard to financing methods and capital structure.

Adjusted EBITDA from continuing operations has limitations as an analytical tool and should not be considered an alternative to net income, operating income, cash flow from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.  Adjusted EBITDA from continuing operations excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies.  Limitations to using Adjusted EBITDA from continuing operations as an analytical tool include:

• Adjusted EBITDA from continuing operations does not reflect Key's current or future requirements for capital expenditures or capital commitments;
• Adjusted EBITDA from continuing operations does not reflect changes in, or cash requirements necessary to service interest or principal payments on Key's debt;
• Adjusted EBITDA from continuing operations does not reflect income taxes;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements;
• Other companies in Key's industry may calculate Adjusted EBITDA from continuing operations differently than Key does, limiting its usefulness as a comparative measure; and
• Adjusted EBITDA from continuing operations is a different calculation from earnings before interest, taxes, depreciation and amortization as defined for purposes of the financial covenants in the Company's senior secured credit facility, and therefore should not be relied upon for assessing compliance with covenants.

About Key Energy Services

Key Energy Services is the largest onshore, rig-based well servicing contractor based on the number of rigs owned.  Key provides a complete range of well intervention services and has operations in all major onshore oil and gas producing regions of the continental United States and internationally in Mexico, Colombia, the Middle East, Russia and Argentina.  

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any matters that are not of historic fact are forward-looking statements. These forward-looking statements are based on Key's current expectations, estimates and projections about Key, its industry, its management's beliefs and certain assumptions made by management, and include statements regarding expected increases in activity, the mobilization of rigs into service, and anticipated financial performance in 2011.  No assurance can be given that such expectations, estimates or projections will prove to have been correct. Whenever possible, these "forward-looking statements" are identified by words such as "expects," "believes," "anticipates" and similar phrases.

Readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict, including, but not limited to:  risks affecting activity levels for Key's services, including the possibility that the perceived cyclical recovery or future growth opportunities in Key's industry may not materialize and may not result in activity increases; risks that Key's customers may not increase, or may even decrease, their activity levels; risks relating to changes in the demand for or the price of oil and natural gas; risks relating to increases in costs of labor, fuel, equipment and supplies employed and used in Key's businesses; risks relating to compliance with environmental, health and safety laws and regulations, as well as actions by governmental and regulatory authorities; risks associated with the recently completed transaction with Edge, including risks that Key may be unable to achieve the benefits contemplated under this transaction, and risks associated with integration of the acquired operations into Key's operations; risks associated with achieving the financial performance anticipated by the Edge acquisitions; risks affecting Key's foreign operations, including risks related to activity levels in Mexico, other risks affecting Key's operations in Argentina and Russia, risks associated with expanding operations in Colombia and Bahrain, and risks that Key may not be able to achieve its overall international growth and mobilization strategy; risks that Key may not be able to execute its capital expenditure program and/or that any such capital expenditure investments, if made, will not generate adequate returns; and other risks affecting Key's ability to maintain or improve operations, including its ability to maintain prices for services under market pricing pressures, weather risks, and the impact of potential increases in general and administrative expenses.

Because such statements involve risks and uncertainties, Key's actual results and performance may differ materially from the results expressed or implied by such forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Other important risk factors that may affect Key's business, results of operations and financial position are discussed in its most recently filed Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K and in other Securities and Exchange Commission filings.  Unless otherwise required by law, Key also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made here.  However, readers should review carefully reports and documents that Key files periodically with the Securities and Exchange Commission.

Contact: Gary Russell
713-651-4434

SOURCE Key Energy Services, Inc.