Keg

March 18, 2013
KEY ENERGY SERVICES, INC.

KEG/NYSE Continuing Coverage: Customized Solutions the Key to Success
Investment Rating: Market Perform
PRICE: $ 8.53 S &P 500: 1,552.10 DJIA: 14,452.06 RUS S ELL 2000: 947.20
Wall Street's Farm Team
should see growth. Keys focus on increasing utilization rates of its spare asset capacity in the United States should benefit 2013 results. International operations should continue to growpossibly faster than U.S. operations. Our 12-month target price is $10.00.
Valuation EPS P/E CFPS P/CFPS
Market Capitalization
Equity Market Cap (MM): Enterprise Value (MM): Shares Outstanding (MM): Estimated Float (MM): 6-Mo. Avg. Daily Volume:
2012 A $ 0.05 170.6x $ 2.37 3.6x
2013 E $ 0.19 44.0x $ 1.89 4.5x

Stock Data
2014 E $ 0.37 23.1x $ 2.00 4.3x
$ 1,288.93 52-Week Range: $ 2,091.49 12-Month Stock Performance: 151.11 Dividend Yield: 149.71 Book Value Per Share: 2,800,000 Beta:
$5.82 - $15.04 -49.32% Nil $ 8.52 2.31
Company Quick View:

Location: Houston, Texas Industry: Oil & Gas Services Description: Key Energy Services has four primary business segments: Rig Services, Fluid Management Services, Coiled Tubing Services, and Fishing and Rental Services. Key Products & Services: Key Energy Services offers rig services, fluid management services, coiled tubing services, and fishing and rental services. Web Site: http://www.keyenergy.com
Analysts: Nick Curran Na Jiang Jon Murphy Shawn Willis Yaopu Zhu
Investment Research Manager: Larry Hall
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.
BURKENROAD REPORTS
E&P capital expenditures should continue to drive earnings. Rig-services, Keys largest business, and its other business lines
Key Energy Services Inc. (KEG)
BURKENROAD REPORTS (www.burkenroad.org)
March 18, 2013
STOCK PRICE PERFORMANCE Figure 1: 5-year Stock Price Performance
INVESTMENT SUMMARY
We have given Key Energy Services a Market Perform rating and project a 12-month target stock price of $10.00. To determine our target price, we used an average of the Price to Book Value, Enterprise Value to EBITDA, and Enterprise Value to Sales valuation methods. The forecasted price implies an increase of 17.23% compared to the Companys closing price of $8.53 on March 18, 2013. Key Energy Services is an onshore oilfield service company headquartered in Houston, Texas. The Company has more than 8,500 employees and is the largest land-based well services company in the United States. Key operates in the major onshore oil and gas producing regions of the United States as well as internationally in Mexico, Colombia, the Middle East, Canada, and Russia. Key maintains a competitive rig services division that accounted for approximately 38% of its business as of Q4 2012. Rig activity in the United States has remained relatively flat, but rig activity is expected to pick up in Q2 2013. Additionally, as a result of continued investment, Key should see continued growth in its international segment, which accounted for approximately 20% of its total revenue as of Q4 2012. We believe the Company will see year-over-year revenue growth in its coiled tubing and fishing and rental services businesses. Revenues for Keys Fluid Management service fell in Q4 2012, leading us to believe the segment may experience limited growth in 2013. Oilfield service companies rely heavily on the capital spending of E&P companies. Despite depressed natural gas prices and the resulting reduction in natural gas drilling activity in 2012, Key is well-positioned to recover from this downturn because approximately 85% of its revenue is driven by oil related activities. As natural gas demand catches up to supply, and natural gas prices begin to rebound, Key could also benefit from the increased natural gas activity.
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We believe Keys experienced management, strong market position, and healthy balance sheet put the Company in a good position to grow modestly for 2013 and 2014, and Key is well-poised to grow by 2015, if not sooner, as United States rig activity rebounds and Keys international markets grow. PREVIOUS BURKENROAD RATINGS AND PRICES Table 1: Historical Ratings & Prices Date Rating Price* 03/30/12 Market Outperform $19.00 03/30/11 Market Outperform $19.62 04/13/10 Market Perform $11.41 04/03/09 Market Outperform $5.41
*Price at time of report date.
INVESTMENT THESIS
Based on our evaluation of Key Energy Services, we give the Company a Market Perform rating. Keys revenues are heavily dependent on E&P capital expenditures, which we expect to increase marginally in 2013 and increase more significantly in 2014 and 2015. Despite a marginal increase in E&P spending for 2013, Keys business lines should see growth because of the Companys focus on increasing utilization of its spare asset capacity in the United States. Furthermore, Keys international operations should continue to growpossibly faster than its U.S. operations. Oil and natural gas prices will continue to be the leading indicator of Keys business activity. E&P companies will continue to invest in drilling programs as long as prices are high enough to support them. Conversely, these companies will scale back capital spending when prices fall. As a result, Key will likely be directly affected by commodity price fluctuations because its services are dependent upon the number of wells needing service. We anticipate crude oil prices will remain within a relatively tight range throughout 2013 and 2014. OPEC is currently projecting a meager 0.82 mb/d (0.9%) increase in worldwide oil demand for 2013. However, worldwide demand should outpace supply in the long-term as emerging economies continue to industrialize and demand increased amounts of oil and natural gas. Consequently, we should see higher commodity prices in the long term (beyond 2014). But, for 2013 E&P spending is expected to increase only marginally from 2012 levels because of the industrys overall neutral outlook on commodity prices. Therefore, Key should experience a level of business activity similar to that seen in 2012. Alternatively, if global economies remain favorable, and if U.S. oil prices remain in the approximately $85-$90 per barrel range, oilfield service activity in the second half of 2013 could increase more than currently anticipated.
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E&P capital expenditures should continue to drive earnings.
March 18, 2013
Key is a land-based well services company and, therefore, only operates onshore. The United States land-based rig counts are a pivotal representation of anticipated business activity. Many of Keys customers drill horizontal wells, which yield higher volumes of oil and gas production than other drilling methods. Horizontal rig counts are expected to rise in the long term as prices increase and more operators incorporate this recovery method into their operations, which should increase demand for Keys business lines. Additionally, as excess natural gas supply is eradicated in 2014 and 2015, E&P companies should increase natural gas drilling activities, which will lead to more business opportunities for Key. Rig-services, Keys largest business, and its other business lines should see growth. Keys Q1 2013 earnings could be negatively impacted because a large customer unexpectedly decreased its overall oilfield activity in Q4 2012. But, Keys rig services business should rebound in Q2 2013 because the Company intends to redeploy those rigs into the market with other customers. We believe well servicing activity will begin to increase materially beginning in late 2014 and maintain steady growth thereafter. Therefore, well serving activity should maintain its position as the Companys main revenue driver. Keys coiled tubing business, the fourth largest fleet in the United States, had a challenging 2012. However, performance improved in the fourth quarter and should continue holding in 2013 and beyond. Keys fishing and rentals business line should also grow as the Company benefits from investments made in 2012 in drill pipe, pressure control equipment, and frac stacks to satisfy increased demand. Because the fluid management market is currently oversupplied, Keys Fluid Services segment will probably remain flat or possibly decline in activity for another one to two quarters. Also, as water recycling technology begins to enter the market, the Companys Fluid Management business could be negatively impacted. However, Key is committed to taking appropriate steps to remain competitive, if its customers demand water recycling services.
March 18, 2013
Figure 2: Heavy Duty Key Workover Rig in Mexico
Source: Key Energy Service, Investor Presentation Keys focus on increasing utilization rates of its spare asset capacity in the United States should benefit 2013 results. Key Energy Services is focused on organic growth and strategic acquisitions to expand the range of services the Company offers its domestic and international customers. Key has made several acquisitions to expand each of its U.S. businesses over the past several years and continues to focus on acquisitions that create synergies for the Company. For example, the Company has indicated its willingness to acquire water recycling assets if they create strategic advantages for its business. Although acquisitions are an important element of the Companys growth model, management plans to continue to maintain a conservative approach to acquisition opportunities and to focus on building its existing businesses. Key has almost $400 million of available borrowing capacity on its bank credit facility as of December 31, 2012. Following big capital investments in 2011 and 2012, the Company is now focused on benefitting from higher utilization of those incremental assets in its U.S. and international businesses. Additionally, Keys healthy balance sheet enables the Company to continue to grow and to meet future increases in the demand for its services.
March 18, 2013
International operations should continue to grow possibly faster than U.S. operations.
As most estimates indicate, the North American oilfield services industry is expecting minimal growth levels in 2013 and 2014 because of reduced E&P spending estimates and continued low natural gas prices. Consequently, international expansion will provide an important growth opportunity for Key. In 2012, Key saw its international revenues increase approximately 67% from 2011 levels. To capitalize on this trend, the Company has stated that it plans to increase the breadth of services it offers to its existing international customers while continuing to expand into new markets in South American and Middle Eastern countries. Furthermore, the Mexican national oil company PEMEX has increased its business with Key. This relationship should strengthen and generate significant earnings for the Company. Key is planning to continue expansion in the Middle East after starting new operations in Oman during Q3 2012. Middle Eastern expansion could prove to be profitable for Key because the region consists of primarily mature oil fields requiring regular well intervention services to keep production rates steady. However, the Company will have to monitor the potential risks associated with the petroleum industry in that part of the world. OPEC influence, coupled with political and economic unrest, is always a potential threat to business.
VALUATION
We arrived at our 12-month target stock price of $10.00 by taking an average of Price to Book Value (P/BV), Enterprise Value to EBITDA (EV/EBITDA), and Enterprise Value to Sales (EV/Sales) Multiples. We derived the prices from these methods partly by generating the same ratios for Keys peer group, which consists of Basic Energy Services, Superior Energy Services, and Nabors Industries. We evaluated Key Energy Services using other metrics, including a discounted free cash flow model, but did not feel these analyses were a good representation of Keys earnings potential because they were outliers to the other methods we used to value the Company. The valuation generated a P/BV of $8.10, an EV/ EBITDA of $9.25, and an EV/Sales of $12.69.
Price to Book Value We determined the P/BV by first averaging the peer groups Price to Book Values, which equaled $0.92. To derive Keys P/BV, we multiplied the peer average of $0.92 by Keys forecasted Book Value per Share of $8.83 to derive a 12-month target stock price of $8.10. Enterprise Value to The EV/EBITDA valuation was performed by multiplying the peer EBITDA groups average EV/EBITDA of 4.01 by Keys forecasted EBITDA at year end 2013 of $348 million. This was then divided by the total number of shares outstanding to reach a 12-month target stock price of $9.25.
March 18, 2013
Enterprise Value to The EV/Sales valuation was calculated by multiplying Keys 2013 year Sales end revenues of $1,832,183 by the peer groups average EV/Sales of 1.05. By dividing the resulting number by the total number of shares outstanding, we determined the 12-month target stock price to be $12.69. Figure 3: Equity Valuation Methods
$13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 PricetoBookValue EnterpriseValueto EnterpriseValueto EBITDA Sales 12Month TargetPrice: $10.00 Current Price:$8.53
INDUSTRY ANALYSIS
The oilfield service industry encompasses a broad range of activities from performing service oriented jobs, such as drilling or hydraulic fracturing, to selling the raw materials and equipment required to produce, transport, and refine energy products. Many companies have increased their research and development programs to develop new products and technologies for the energy industry such as 3D seismic technology, horizontal drilling, hydraulic fracturing, and in Keys case, proprietary high capability workover rigs equipped with KeyView technologythe Companys patented job data monitoring and safety control system. Going forward, technology will be instrumental in the growth of the industry as companies look to increase their product offerings and to differentiate themselves from the competition.
Industry Drivers Oilfield Service companies rely heavily on the upstream exploration and production sector as the industries main revenue driver. Due to budgetary restrictions, E&P company spending rose by only 4% in 2012 and activity transitioned from prime gas markets to oil markets, severely slowing the oilfield services industry. According to a survey from Barclays, North American E&P capital expenditures are expected to remain essentially flat in 2013, with an estimated growth of only 0.7%. Because of estimates of only minimal growth in E&P capital spending, the oilfield services industry is expecting only minimal growth for 2013.
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The dynamics of supply and demand for oil and gas also influence the demand for oilfield services. Energy prices are dependent on the global supply and demand for the underlying commodity, which is impacted by worldwide economic and political activities. Instability in the oil producing nations of the Middle East often disrupts the supply of crude oil coming out of the region and increases oil prices. For example, The Organization of Petroleum Exporting Countries (OPEC) is the governing body of mostly Middle Eastern oil producing nations that collectively represent 55% of the oil traded internationally and 80% of the worlds total proved reserves. This organization regularly sets supply levels for the world market in order to maximize revenues. Energy prices and production rates also affect the oilfield services industry. As oil and gas prices decrease, the incentive to drill diminishes since producers will more than likely realize lower profits because of the lower commodity prices. Therefore, production rates are likely to fall when oil and gas prices go down. Rig count reports, published weekly by several industry participants, are indicators of future oil and gas production activities. Table 2: Baker Hughes Rig Report
Source: Baker Hughes Threat of New The threat of new companies entering the oilfield service industry is low. Entrants There are several barriers to entry that prevent new companies from capturing market share. Operating in the industry is extremely capital intensive, requiring a large inventory of heavy machinery and vehicles.
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In addition, most of the services provided by an oilfield service company require technical expertise; consequently highly skilled workers must be employed to perform jobs and operate equipment properly. Many oilfield service companies have also built business relationships with their customers. Therefore, experience and reputation will often attract business to existing market participants. Geographic scope is another barrier that can severely limit industry newcomers. With oil and gas activities located throughout many remote regions of the world, logistical challenges can arise for new entrants trying to operate in developing markets without much infrastructure. Bargaining Power The bargaining power of E&P companies is high in the oilfield service of Buyers industry. Many oilfield service companies have traditionally implemented a low-cost structure as their business models. Their intent is to provide products and/or services at the lowest cost possible to maximize profit. Given that so many companies compete for market share, customers have many options when selecting a company to do business with. Unless a solid business relationship has been established with a particular oilfield service company, E&P companies often select a company with the lowest cost because most of the services, raw materials, and equipment an oilfield service provider offers are indistinguishable from other competitors. Although customers view oilfield service companies as being similar, there are some companies, such as Key, that have distinguished themselves by implementing proprietary technology into their products and services. Key, for example, has developed a unique monitoring system, KeyView that serves as the Companys technological competitive edge. As these technology-focused companies continue to diversify their business lines, E&P company customers may be willing to pay for the value delivered, because the net benefits of using a company with more productive results will outweigh those of competitors. Bargaining Power The bargaining power of suppliers is low in the oilfield service industry. of Suppliers Companies such as Key are not dependent on a single particular source for their supplies. In fact, many of the companies that compete in the oilfield service industry purchase different raw materials that are not unique from one another. Therefore companies can shop around for the best prices for these items. Key has an advantage in this area; by manufacturing most of the Companys rigs in-house, Key is able to customize equipment and tailor production to its and its customers needs. Threat of Substitute The availability of substitutes is low in the oilfield service industry. The Products or products and services offered by this industry are highly specialized and Services cannot be easily imitated. Although a major energy company could integrate a well servicing operation into its business segments, it is highly unlikely because of the large capital commitment required.
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Most companies outsource their operations to oilfield service companies to capitalize on price competition and product/service flexibility. Rivalry Among Competition is strong in the oilfield services sector. Capital spending in Existing the oil and gas E&P sector continues to be the main revenue driver for Competitors oilfield service companies. E&P capital expenditures largely depend on the market price or expected market price of crude oil and natural gas. If commodity prices are high, E&P companies generally increase capital spending and require more of the services oilfield service companies provide; the opposite is true when prices decrease. Oilfield service companies have to maintain a fleet of rigs and other equipment to remain competitive, regardless of the fluctuation in E&P capital spending. Along with the strong dependence on E&P capital spending, oilfield service companies must also compete against rival companies that often provide the same or similar services in the same geographic region. Pricing can become an essential factor when many companies compete for the same business. Many companies in the oilfield service sectors are investing heavily in proprietary technologies to increase the accuracy, safety, and efficiency of the services offered. These companies believe that these investments will offer a competitive advantage over those companies that do not invest in these technologies COMPANY DESCRIPTION Key Energy Services, Inc. (KEG/NYSE) is an oilfield service company headquartered in Houston, Texas. Key provides a full range of well services to oil and natural gas production companies of all sizes worldwide. As of 2013, Key has grown to become the largest land-based well services company in the United States with more than 7,500 employees in the United States, plus an additional 2,600 internationally, as of December 31, 2012. Key operates in the United States, as well as internationally in Mexico, Colombia, the Middle East, Russia and Canada.
History Key was originally part of the Yankee Companies, a large holding company formed by Paul Montle in 1977 that held interests in a variety of industries, including banking, environmental services, and energy. In 1988, when that company's board decided to focus solely on energy production, it divested all unrelated assets and restructured the corporation based on its West Texas well servicing division, Yale E. Key. Subsequently, the company restructured and went public in March of 1992 as Key Energy Group and changed its name to Key Energy Services in 1998. With the goal of becoming a total well service provider, Key acquired premier well service contractor Dawson Production Services in 1998, which nearly doubled its assets, and it purchased Q Services Inc. in July 2002, which strengthened its domestic well service operation and added pressure pumping services to its business.
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In 2009, Key gained control of Geostream, a Russian oilfield service company. In October 2010, Key sold its pressure pumping business and its wireline services business. Subsequently, Key bought OFS Energy Services, which substantially added to its coiled tubing services business. Also in 2010, to further expand its Middle Eastern operations, Key formed a joint venture in Dubai with Almansoori Specialized Engineering, a top regional oilfield services provider. More recently, Key added to its pressure rental equipment and services offerings when it acquired Edge Oilfield Services in August 2011. Products and Key provides its customers a wide range of onshore well services. Its Services target markets comprise both national and independent oil and natural gas producers. The Company concentrates its operations around the following core business lines: Rig Services provides workover, well completion and recompletion, specialty drilling, repair and maintenance, and plugging and abandonment services. Most rigs are equipped with the Companys innovative KeyView technology, which is a realtime job data monitoring, recording, and reporting system that also incorporates numerous safety and operating efficiency elements. Fluid Management offers fluid disposal and transportation, storage tank rentals, fresh water supplies, and total fluid logistic management services. Coiled Tubing Services employs 46 coiled tubing units that provide completion services including wellbore cleanouts, millings, plug setting and retrievals, logging and perforating tool deployments, and remedial production treatments. Fishing & Rental Services provides drill pipe and tubing rental, pressure and flow control equipment rental, frac stacks and well testing, and pipe and downhole tool retrieval.
Figures 4 and 5 illustrate Key Energy Services domestic and international operations.
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Figure 4: Keys Domestic Operations
Source: Key Energy Services, Investor Presentation
Figure 5: Keys International Operations
Source: Key Energy Services, Investor Presentation The vast majority of Keys revenues come from U.S. based operations. As of the fourth quarter of 2012, approximately 85% of U.S. revenues and 100% of international revenues were from oil related activity. Also as of the fourth quarter of 2012, approximately 55% of the Companys total revenue was generated from its rig and fluid management services, not including the proportion of these services completed in international markets. As seen in Table 3, Key continues to increase its international revenues by aggressively targeting emerging markets.
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Table 3: Key 2011 and 2012 Revenue Split

2011 Revenue (in millions) United States Rig Services Fluid Management Services Coiled Tubing Services Fishing & Rental Services $726 $388 $232 $184 42% 22% 13% 11% $789 $354 $216 $269 40% 18% 11% 14% % of Total 2012 Revenue (in millions) % of Total
International
$199
12%
$333
17%
Total Revenue
$1,729
100%
$1,960
100%
Key Energy Services: Investor Presentation Strategy Keys core business strategy is growth in domestic and international business. In the well intervention industry, the Company is improving its operating efficiencies by incorporating new technology such as its KeyView System into new and existing rigs. This proprietary technology, which captures and reports well site operating data, allows customers to improve the monitoring of well site operations and increase efficiency and safety. Key believes the emphasis on technology adds value to the services it offers and further differentiate itself from its competitors. For 2013, Key is focused on capitalizing on investments made in 2011 and 2012 and on improving utilization of existing assets in the United States and internationally. Key believes it can offer value-added services to international markets that are under-served by technologically advanced well intervention services. Competitors There is strong competition in the oilfield service industry. Keys competitors include major players such as Schlumberger, Halliburton and Baker Hughes. Key also competes with companies similar to its size and scopeincluding Nabors Industries, Basic Energy Services, and Superior Energy Services. Key has differentiated itself from its competitors through its innovative technologies and strong market positions in nearly all its business lines. Key is a well servicing industry leader that maintains the second largest fleet of well servicing and workover rigs in the United States with an estimated 25%-30% market share. Latest During the first quarter of 2012, Key recorded a $26.9 million impairment Developments charge related to the plannded sale of its business in Argentina. Key sold this business to Power Infrastructure LTD in September 2012. Keys 2012 results included a $58.2 million loss in 2012 as a result of these discontinued operations.
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Despite the recent boom in oil production, the North American market is becoming increasingly competitive because natural gas market activity has declined more than 60% since 2011. Beginning in the third quarter of 2012, the Company saw a 29% drop in earnings from continuing operations as low commodity prices continued to reduce activity in natural gas markets. Key also dealt with pricing pressures from customer spending reductions as many North American E&P companies dealt with budget restrictions. Barclays estimated that oil and gas producers in the United States spent anywhere from 80% to 85% of their 2012 capital expenditure budgets in the first nine months of the year. This overspending caused many producers to reduce output in the fourth quarter of 2012, leaving less business for Key. Rig count also fell off dramatically in December 2012. According to the Baker Hughes rig count, there were 1,763 rigs working in the United States in December 2012, around 12% lower than December 2011. Many analysts have speculated that oilfield service utilization will not increase within the next two years. Key has tried to deal with the oversupplied U.S. oilfield market by reducing costs, focusing on more active regions, and growing its more profitable international operations to maintain company performance. Keys international revenues grew 67% in 2012, driven mostly by expanding operations in Mexico. In 2012, international operating income margins were nearly 19%, despite the costs of deploying assets and training personnel in those markets. Key believes its international margins could exceed 20% in 2013. In July of 2012, Key expanded its international operations into the Safah Region of Oman. With new large horizontal well projects in the area, Key will look to profit from the 5.5 billion barrels of proved petroleum reserves within the Safah Region. On March 1, 2013, Key entered into an agreement to purchase the remaining 50% of its Russian joint venture OOO Geostream Services Group for $14.6 million. Prior to the purchase, Key owned a 50% controlling indirect interest in the company. After the transaction closes, the operations of the joint venture will remain in Keys international segment as a wholly-owned subsidiary of Key. On March 26, 2013, Key announced the retirement of its senior vice president and chief financial officer T.M. Trey Whichard III and the promotion of J. Marshall Dodson, the Companys vice president and treasurer to the role of senior vice president and chief financial officer effective March 25, 2013. Mr. Whichard will remain available to the Company until June 24, 2013 to provide transitional support.
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PEER ANALYSIS Key Energy Services closest peers are Basic Energy Services, Superior Energy Services, and Nabors Industries. These companies provide similar products and services, operate with similar business goals, and compete for business in many of the same regions. Table 4 lists financial ratios used to compare Keys performance with that of its peers. With the exception of Basic Energy Services, Key has a relatively small market capitalization in comparison to its peers. Table 4: Peer Analysis
Company Basic Energy Services Key Energy Services Superior Energy Services Nabors Industries Ticker Symbol BAS KEG SPN NBR Market Capitalization 520.10M 1.28B 3.93B 4.80B P/E (ttm) 8.48 39.44 10.60 153.15 P/BV (mrq) 1.34 1.04 0.95 0.83 EV/ EBITDA (ttm) 3.46 4.73 5.06 4.28 Debt/ Equity (mrq) 202.66% 71.20% 47.15% 78.97% Div. Yield 0.00% 0.00% 0.00% 0.00% ROE (ttm) 17.25% 9.79% 12.30% 3.43%
Source: Yahoo Finance ttm and mrg as of September 30, 2012
Basic Energy Founded in 1992, Basic Energy Services Inc. is a small cap oilfield Services Inc. service company based in Fort Worth, Texas, that operates solely in the (BAS/NYSE) United States. Basic Energy Services is a primary competitor of Key in the markets of rig-based services, fluid management services, coiled tubing services, and fishing and rental services. Basic Energy Services has a much higher leverage ratio (202.66%) than does Key. However, as a younger company, Basic Energy Services has a much higher ROE (17.25) than does Key (9.79). Basic Energy Services has been expanding its operations through active acquisitions in recent years. The Company has quickly recovered from the economic downturn in 2009, and its successful growth-through-acquisitions strategy has generated large increases in revenue for the Company. Superior Energy Superior Energy Services Inc. is an oilfield service company that mainly Services Inc. operates onshore and offshore in the United States, but, it also offers (SPN/NYSE) services in Europe, South America, Asia Pacific, Africa, and the Middle East. The company was founded in 1989, and is headquartered in Houston, Texas. The companys more than two billion dollars of revenue earned in 2012 came from the companys four main business segments: drilling products and services, onshore completion and workover services, production services, and subsea and well enhancement. Approximately 50% of Superior Energy Services yearly revenue comes from its onshore business. Superior is larger than Key in terms of market share, but the two companies operate in the same onshore regions and compete for the same business. Like Key, Superior Energy Services sees international expansion as a major source of future revenue growth.
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Nabors Founded in 1968, Nabors Industries Ltd. is headquartered in Bermuda and Industries Ltd. has an operational office in Houston, Texas. The Company, formerly (NBR/NYSE) known as the Anglo Company Ltd., operates in North and South America, Africa, Asia, Australia, Europe, and the Middle East. Nabors is the largest onshore drilling company in the United States and second largest well servicing provider, after Key. Nabors competes both onshore and offshore through its varied business segments that offer many of the same services as Key, such as drilling services, well workover services, fluid services, and coiled tubing services. Nabors reported revenues of over $6 billion for 2012. In terms of market share, Nabors is a much larger company than Key, but it has similar debt to equity ratios (Key: 71.20%, Nabors: 78.97%). Despite the larger size of Nabors, Key has recently performed much better than Nabors with a price-to-earnings ratio and return-onequity ratio that is substantially better than Nabors. MANAGEMENT PERFORMANCE AND BACKGROUND Key Energy Services is managed by a highly experienced team of oil and gas industry veterans. Dick Alario, chairman, president, and CEO of the Company has over 30 years experience working in the oilfield services and marine transportation industries. Trey Wilson III, executive vice president and COO, served as vice president of Forest Oil as well as a consultant for various other oil companies. Marshall Dodson, senior vice president and CFO, has served various finance and accounting roles at public energy companies for more than twenty years. Guillermo Capacho, senior vice president of international operations, global business development and technology, has worked in upper management at Halliburton and is currently leading Keys expanding international operations. Additionally, Key has a board of directors comprising members with a broad range of backgrounds and expertise to oversee the Companys management.
ROIC Return on Invested Capital (ROIC) is a common metric used to measure managements effectiveness in allocating capital to profitable investments. ROIC is the ratio of the profit or loss of an investment relative to the amount invested. Table 5 shows the ROIC for Key relative to its peer group average: Basic Energy Services, Superior Energy Services, and Nabors. Key outperformed the peer average in 2010 with a ROIC of 7.49%. In 2011, Key outperformed the peer average again with a ROIC of 7.59%. In 2012, Key underperformed the peer group average with an ROIC of 2.06%.
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Year FY2012 FY2011 FY2010
Table 5: ROIC Comparison Key Energy Services ROIC Peer Average ROIC 2.06% 7.59% 6.03% 6.60%
2.32% 7.49% Source: Thomson ONE, March 18, 2013
Richard J. Chairman, President & CEO (57) Dick Alario Richard Dick Alario has served as Keys chairman, president, and chief executive officer since 2004. Before joining Key, Mr. Alario served as vice president of BJ Services, an oilfield services company that was purchased by Baker Hughes in 2010. Outside of Key, Mr. Alario serves as the vice chairman of the National Ocean Industries Association as well as a director for Kirby Corporation, a North American marine transportation company. Mr. Alario has also served on the board of directors of Seahawk Drilling Inc., and has more than 30 years experience in the oilfield services industry. Mr. Alario received a B.A. from Louisiana State University. Newton W. Executive Vice President and COO (61) Trey Wilson III. Newton Trey Wilson joined Key in 2005 as senior vice president and general counsel before being appointed executive vice president and chief operating officer in June 2008. Mr. Wilson received a BBA from Southern Methodist University as well as a JD from the University of Texas. Prior to joining Key, Mr. Wilson served as senior vice president of Forest Oil and was also an executive for Union Texas Petroleum and Transco Energy Company. Mr. Wilson currently serves as a director for OOO Geostream Services and AlMansoori-Key Energy Services LLC, which are international subsidiaries of Key. J. Marshall Senior Vice President and CFO (41) Dodson. J. Marshall Dodson was appointed senior vice president and chief financial officer on March 25, 2013. Prior to becoming chief financial officer, Mr. Dodson served as vice president and treasurer from 2009 to 2013 and vice president and chief accounting officer from 2005 to 2009. Before joining Key in 2005, Mr. Dodson served in various capacities at Dynegy Inc., an electric energy production and services company. Mr. Dodson received a BBA from the University of Texas at Austin in 1993 and started his career at Arthur Anderson LLP. Kimberly R. Frye Senior Vice President and General Counsel (43) Kimberly Frye joined Key Energy Services in 2002 as an associate general counsel and was promoted to senior vice president and general counsel in 2008. Prior to joining the Company, Ms. Frye maintained a private practice where she focused primarily on corporate and securities law. Ms. Frye received her B.S. from the University of Alabama in 1991 and her J.D. from the University of Houston in 1997.
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Kim B. Clarke Senior Vice President, Administration and Chief People Officer (56) Kim Clarke joined Key in 2004 as vice president of human resources. In 2006 she was appointed senior vice president and chief people officer. Before joining Key, Ms. Clarke served as vice president of human resources for GC Services from 1999 to 2004. From 1987 to 1999, Ms. Clarke held a variety of HR roles at Browning Ferris Industries (BFI), where she was vice president of human resources at the time the company was acquired by Waste Management. Ms. Clarke received a B.S. from the University of Houston. Board of Directors Key Energy Services has a ten member board of directors who come from a variety of professional backgrounds. The members of the board are selected by the shareholders and serve three-year terms. The board is divided into three classes that are staggered so that one class will be up for re-election each year. Under NYSE rules a director is independent if he or she is determined by a companys board to have no direct or indirect material relationship with the company. With the exception of Mr. Alario, each of Keys current directors is independent. Five of the nine independent directors have served on the board for ten or more years. The long tenure of a majority of the boards membership provides stability for the Company. Table 6 shows the composition of the board of directors as of February 21, 2013. Table 6: Key Energy Services Board of Directors
Name Richard J. Alario Kevin P. Collins William D. Fertig Ralph S. Michael Robert K. Reeves W. Phillip Marcum J. Robinson West William Owens Lynn Coleman Arlene Yocum Position and Background Chairman, President & CEO Director, corporate finance, management consulting Director, investment advisory Director, banking Director, E&P and law Director, oilfield service Director, energy advisory services and government Director, consulting and government Director, law and government Director, finance, investment management Year Appointed to the Board 2004 1996 2000 2003 2007 1996 2001 2007 2007 2007
Source: Key Energy Services, February 21, 2013 Key periodically sets goals and standards relating to employee compensation. Managements compensation is partially determined by how well an employee has performed in meeting those goals and standards. The Company maintains an incentive based compensation program which is limited to 4,000,000 shares of common stock, of which no single employee can receive more than 500,000 shares.
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The Board maintains an audit and compensation committee to govern company compensation policies and manage possible problems or conflicts of interest. SHAREHOLDER ANALYSIS Key Energy Services, per the 2012 10K, as of February 15, 2013, has 152,320,915 shares of common stock outstanding. Of these shares, 95.78% are held by institutions. Individual investors hold another 1.84%. Of the total amount of outstanding shares, 149.7 million are publicly available on the stock market, which gives a 98% free float. Table 7 presents the top-ten institutional shareholders for Key Energy Services. As of March 18, 2013, 359 institutions held shares in Key. The top-ten institutional shareholders represent 39.89% of the total shares outstanding. Table 8: Top-Ten Shareholders
Holder MHR Fund Management LLC BlackRock Institutional Trust Company N.A. The Vanguard Group Inc. Franklin Advisers Inc. State Street Global Advisors (U.S.) DNB Asset Management AS TimesSquare Capital Management LLC Wells Capital Management Inc. Encompass Capital Advisors LLC Champlain Investment Partners LLC Position 17,474,343 8,227,974 7,758,822 5,658,558 4,204,945 4,131,690 3,474,250 3,428,837 3,380,783 3,066,080 % Ownership 11.47% 5.40% 5.09% 3.71% 2.76% 2.71% 2.28% 2.25% 2.21% 2.01%
Source: Thomson ONE, March 18, 2013 As Table 8 shows, Richard Alario, Keys majority insider shareholder, holds 0.82% of the total amount of shares outstanding. Out of Keys topten inside shareholders, each has increased his or her direct holdings over the past year.
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Table 8: Top-Ten Insider Shareholders

Holder Richard J. Alario Newton W. Wilson Kim B. Clarke Kimberly R. Frye J. Marshall Dodson W. Phillip Marcum William D. Fertig Guillermo A. Capacho Jeffrey S. Skelly Ralph S. Michael III Relationship Chief Executive Officer Chief Operating Officer Chief People Officer General Counsel Chief Financial Officer Director Director Officer Officer % of Shares Outstanding 0.82% 0.35% 0.22% 0.18% 0.11% 0.11% 0.09% 0.08% 0.08% Direct Holdings 1,224,698 536,754 328,925 279,121 170,767 162,012 134,926 127,407 118,736 105,809
Director 0.07% Source: Thomson ONE, March 30, 2013
RISK ANALYSIS AND INVESTMENT CAVEATS
Key Energy Services operates in an industry with many different types of internal and external risks. The operational, environmental, and financial risks that Key faces can affect the financial performance of the Company and may cause negative shareholder value.
Operational Risks Keys performance is heavily dependent on commodity prices. When supply exceeds demand for energy products, prices usually decline and the Companys customers reduce their capital expenditures and wait for prices to increase. As a result, they do not require the services of oilfield service companies as much as when prices are higher. Table 9 illustrates the year-over-year change between 2012 E&P capital expenditures and the expected 2013 capital expenditures for different regions across the globe. According to Barclays, capital expenditures are expected to remain flat in 2013 in the United States and Canada, but are expected to grow 15% in Mexico, which is Keys largest international market. Although this increase is material, international revenues are still considered small in comparison to those realized domestically and could be offset if commodity prices in the United States plummet.
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Table 9: E&P Capital Expenditures

($ in Millions) North America U.S. Spending Canada Spending Total North America International Super majors (Int'l Spending) North American Independents (Int'l Spending) Latin America India, Asia & Australia Middle East Russia Europe Africa FSU/CIS Other Total International Worldwide Spending $93,844 21,192 63,263 93,318 26,936 47,109 45,102 23,586 1,063 5,715 $421,038 $604,186 Source: Barclays Research $102,210 20,083 72,819 103,620 29,826 50,346 47,670 24,639 1,201 7,213 $459,627 $643,957 8.9% -5.2% 15.1% 11.0% 10.7% 6.9% 5.9% 4.5% 13.0% 26.2% 9.2% 6.6% $138,718 44,431 $183,149 $139,634 44,696 $184,330 0.7% 0.6% 0.6% 2012A 2013E % Change
Table 10 shows the natural gas price threshold that must be reached for companies to increase their capital spending. Natural gas prices would have to reach $4.68 for companies to increase their capital expenditure budgets and fall to $2.85 for them to cut back on their spending. If the projection that natural gas prices will remain below $3.50 for 2013 remain true and if crude oil prices trend downward in the next several periods, Key may realize lower than expected earnings. If commodity prices fall dramatically and drilling programs are scaled back significantly, Key could realize much lower earnings and face greater risks of potentially defaulting on its short-term and long-term debt.
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Table 10: 2013 U.S. Gas Budget Thresholds
Source: Barclays Research
Labor Risks To operate efficiently, Key must maintain a workforce of highly skilled workers. Many oilfield service companies compete with each other to attract talented workers. Key risks losing personnel if its competitors offer more attractive wages and incentives. The Companys employee turnover rate has historically floated around 30%. Management has citied its working conditions as the main cause of the turnover rate. Due to the physically demanding nature of its operations, some employees may opt to leave the industry for jobs with more attractive working environments. A shortage of highly skilled workers could result in the Companys inability to perform its services and maintain profitability. Employees of Key are protected under the Fair Labor Standards Act, which establishes regulations on minimum wages, overtime, and working conditions. Additionally, the Company has entered into a collective bargaining agreement with its Mexican employees. A change in the Fair Labor Standards Act, or labor disputes in Mexico, could result in higher labor costs for Key. Environmental and Key is subject to various changes in laws based on safety and Regulatory Risks environmental regulations. The Company continues to closely monitor federal acts controlling air emissions and climate change. Key also faces environmental risks associated with its fluid management segment. As part of its operations, the Company routinely transports and disposes hazardous waste. In the event it experiences a spill, leak, or other contaminating accident, Key may become exposed to penalties and permit revocation. Laws prohibiting hydraulic fracturing could also be a potential risk for Key and the industry. As of May 2012, Vermont became the first state to ban the use of hydraulic fracturing.
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Although it is unlikely that many other states will outlaw hydraulic fracturing, stricter regulations under the Clean Water Act could follow and further increase compliance costs for oilfield service companies. Financial Risks Key is subject to internal and external financial risks associated with its financial health. The debt-to-equity ratio (D/E), current ratio, quick ratio, and interest coverage ratio are common metrics that are used to evaluate the financial health of a company. Liquidity Risk Key has a D/E of 0.7. The D/E measures the extent to which a company uses debt to finance its assets. The lower the ratio, the lower the financial risk. Keys D/E of 0.7 compares favorably to its peers and is only slightly above the industry average. Keys D/E, indicates that the Company is in good financial health and has very little risk associated with its current capital structure. Key has a current ratio of 2, which is at or above that of its peers and in line with the industry average. The current ratio is a good indication of a companys ability to meet its current obligations. Keys current ratio indicates that it maintains sufficient liquidity to meet its current obligations. The quick ratio is similar to the current ratio except that it excludes inventory from a companys current assets. Keys quick ratio is 1.9, which is at or above its peers and well above the industry average. Key has an interest coverage ratio of 5.4 which is higher than all but one of its peers (Superior Energy Services), but well below the industry average of 17.4. Keys income is sufficient to cover the interest costs associated with its outstanding debt. Table 11: Financial Health
Ratios Debt/Equity Current Ratio Quick Ratio Interest Coverage Key Energy Services 0.7 2.0 1.9 5.4 Basic Energy Services 2.0 2.5 2.3 Superior Energy Services 0.5 1.9 1.7 Nabors Industries 0.8 2.8 2.5 Peer Average 1.1 2.4 2.2 3.9 Industry Average 0.6 1.8 1.1 17.4
2.7 6.9 2.0 Source: MSN Money, February 14, 2013
Credit Risk During the year ended December 31, 2012, the Mexican national oil company, Pemex, accounted for 12% of Keys consolidated revenue, and Occidental Petroleum Corporation accounted for 10% of Keys consolidated revenue. No other customer accounted for more than 10% of Keys consolidated revenue in 2012. Key is susceptible to external credit risks in the event that its customers are unable to pay for the services rendered.
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Interest Rate Risk Key has $675.0 million of 2021 Notes and $3.6 million of 2014 Notes outstanding. Because these notes have fixed rates, they do not subject the Company to risks associated with changes in interest rates. However, borrowings under the Companys credit facility and capital leases are subject to a variable interest rate. As of December 31, 2012, Key had borrowing of $165 million and $54.1 million in letters of credit. The weighted average interest rate on the Companys outstanding variablerate debt obligations was 2.70%. Therefore, should the rate associated with those obligations increase by 10%, the annual interest expense on those obligations would increase by $0.4 million. Exchange Rate Risk With the exception of Russian operations, Key uses the U.S. dollar as the functional currency for its international business. As a result, the Company is only subject to exchange rate risks for its Russian business, which represents a small portion of its international business. Should the average value of the U.S. dollar relative to the local currency used for the Companys Russian operations decrease by 10%, Key Energy Services net income would increase by less than $0.1 million. Altman Z-Score The Z-Score is a measure used to determine a companys risk of going Analysis bankrupt within two years. This test was developed by Edward Altman, a professor of finance at New York University. The score takes into account the following formula, where A is (working capital/total assets); B is (retained earnings/total assets); C is (EBIT/total assets); D is (market value of equity/book value of total liabilities); and E is (sales/total assets): Z-Score = 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1(E) A score below 1.80 indicates that a company is financially distressed and is in danger of going bankrupt within two years. A score between 1.80 and 2.99 is considered the grey zone for companies, and they have a marginal risk for going bankrupt within two years. A Z-Score above 2.99 indicates a company is financially sound and is in no danger of approaching bankruptcy. Table 12 illustrates Keys Z-Scores over the past six years. Key is lingering just above the 1.80 threshold, which puts the Company barely in the grey zone. Key was in the distressed zone from 2008-2009, most likely as a result of low market activity and depressed commodity prices that resulted from the 2008 financial crisis. Keys Z-Score of 2.20 in 2011 fell to 1.88 in 2012 because of a decrease in the Companys market capitalization
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Although the Z-Score decreased in 2012, the share price as of February 21, 2012 was $8.41. The change in share price from $7.00 to $8.41 increases the market capitalization of Key and, thus, improves its ZScore. We believe that the Company will continue to improve its performance in the future and is safe from bankruptcy. Table 12: Key Energy Services Z Score 2007 2008 2009 2010 2011 Z Score 2.94 1.78 1.25 1.93 2.20
2012 1.88
FINANCIAL PERFORMANCE AND PROJECTIONS
Our $10.00 12-month target price for Key Energy Services was derived from assumptions made about the Companys future operating, financial, and investing activities. Many of these assumptions were facilitated by management guidance, past financial performance, and independent industry research.
Operating To project out revenues for Key, we used a regression model for the first Activities two years of projections and a steady growth rate thereafter. Our Projection regression model namely accounted for two different variables: Total U.S. land-based rig count and a combination of PP&E, Intangibles, and Goodwill (PP&E+Intangibles+Goodwill). Seasonality was also included as a variable because the fourth quarter proved to be significant in our data set, and it has historically led to lower earnings for the Company. We believe these variables are sufficient to project revenues because they account for both internal and external drivers affecting the Companys performance. Keys business volume is reflected in the amount of drilling activity the market demands. When the number of drilling rigs being used increases, the Company is more than likely to experience an uptick in business and realize higher earnings. Conversely, as rig counts decline Key is more likely to see a fall in business activity, possibly leading to lower earnings. We made the assumption that total U.S. land-based rig count will remain relatively flat in 2013 in comparison to 2012, and increase slightly in 2014. To account for seasonality, our rig count estimates are higher in Q1 and Q2 and lower in Q3 and Q4. PP&E+Intangibles+Goodwill is an adequate revenue predictor because the Company generates revenue from the utilization of its fixed assets. As Key increases the size of its fixed assets, higher earnings are likely to follow because increased PP&E reflects a higher demand for the Companys services. Intangibles and goodwill reflect any future acquisitions that would contribute to higher revenues for Key.
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Beyond 2014, we assigned a steady revenue growth rate of 6% in an effort to remain conservative. Because Key reports its earnings split between its domestic and international markets, we assigned a 80/20% split in 2013 per management guidance and increased international revenues by 1% each year (capping out at 25%) to reflect the Companys growing international business. Investing Activities Capital expenditures are the largest investing activity Key incurs. Projection Management informed us that 2013 CAPEX is expected to be $210 million. To project capital expenditures for 2014-2022, we took into account the Companys CAPEX to Sales ratio from past periods to find a growth rate that fell in line with past performance. Given that we anticipate Keys earnings will increase significantly in the long run, we attributed a 10% growth rate in CAPEX to support this rise in revenue. Financing We assumed that Key will extinguish all of its long term-debt listed in its Activities 2012 10K as scheduled during the 2013-2022 time period. We did not Projection forecast anticipated borrowings in the future and have assumed that the Company will pay off its debt and support its future growth with its incoming cash flow. SITE VISIT The Key Energy Services analyst team, consisting of Na Jiang, Yaopu Zhu, Nick Curran, Jon Murphy, Shawn Willis, and investment research manager Larry Hall, visited Keys corporate headquarters on February 22, 2013. We arrived at Keys office at approximately 10:00 A.M. and began our two-hour meeting with members of the Key management team. Joining us in the conference room were Gary Russell, vice president of investor relations, Marshall Dodson, who has since been promoted to CFO, Guillermo Capacho, senior vice president of international operations, global business development and technology. Dick Alario, Keys CEO, joined us towards the end of the meeting. At the beginning of the meeting, each executive introduced himself to us and described his educational and professional background and managerial role at Key. Mr. Dodson started an investor presentation in which he described the Companys individual business segmentsRig Services, Fluid Management Services, Coiled Tubing Services and Fishing & Rental Services. He also discussed Keys current presence in the United States and abroad and the Companys business projections for 2013. Mr. Dodson emphasized the importance of safety to the Company and described it as the Companys number one priority. After Mr. Dodsons presentation, Mr. Capacho, who is in charge of the Companys international operations, U.S. and international business development and technology, highlighted Keys investments in technology. Mr. Capacho also described the integrated, customizable solutions Key provides its customers.
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Following the presentation, we engaged Mr. Russell, Mr. Dodson, and Mr. Capacho in a question and answer session to gain a better understanding of the Company. We asked about managements guidance concerning the Companys future performance and discussed the longterm goals of the Company. Overall, the Companys management was helpful, hospitable, and receptive to our questions. The site visit was extremely helpful and provided good guidance for this report.
INDEPENDENT OUTSIDE RESEARCH
Our team used several resources to conduct research on both Key Energy Services and the oilfield service industry. The majority of our outside financial data has been accessed from Bloomberg, Thomson Reuters Eikon, Yahoo! Finance, and Thomson One Banker. In addition, we generated several rig count reports from Baker Hughess interactive website. Internal information and financial data on Key and its competitors were obtained from the Companies SEC filings, including annual and quarterly financial results. On February 22, 2013 we traveled to Houston to visit with Key executives. During the visit we received management guidance for 2013 and gained valuable insight into the Companys operations. Additionally, we have spoken with several analysts covering Key Energy Services. Among these analysts, there was a general outlook that lower commodity prices expected for 2013 will continue to push Key towards further international expansion. We have also reached out to several customers of Key, all of whom have expressed satisfaction with Keys services.
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WWBD?
What Would Ben (Graham) Do?
BEN GRAHAM ANALYSIS
(slightly modified)
Benjamin Graham was an American economist, professor, and investor who is considered by many people to be the first proponent of value investing. Graham used eight criteria to evaluate whether or not a companys stock was trading below its intrinsic value. The first six criteria are used to determine if a companys stock is undervalued, and the remaining two criteria evaluate a companys growth. If a company meets at least four of the eight criteria, Graham would consider the company a potentially attractive investment. Graham would not consider investing in Key Energy Services at this time because it meets only two of the eight listed criteria. Based on the criteria, Keys P/E ratio is too high and its earnings yield is too low. Also, the Company has not reached the 7% earnings growth target over a five-year period, and it has seen volatile earnings over the past five years. Key does not pay a dividend, which causes the Company to fail this criterion. On the positive side, Key has a current ratio of 1.93, which nearly reaches the 2.0 or better threshold. The Companys stock price is less than 150% of its book value, and Key has total debt that is less than its book value. Although Graham would not consider investing in Key at this time, the Company is sufficiently well capitalized to achieve future growth. Key fails to meet many of the criteria because the criteria are geared to favor companies with steady growth over several years. Because of the uncertain economy and the low commodity prices in 2012, Key was unable to satisfy many of these criteria. Therefore, we are not concerned with the results of this analysis. (See the following table for complete Ben Graham Analysis.)
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KEY ENERGY SERVICES INC. (KEG) Be n Graham Analysis Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year T reasury Earnings per share (ttm) Earnings to Price Yield 10 Year T reasury (2X) No Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs P/E ratio as of P/E ratio as of P/E ratio as of P/E ratio as of P/E ratio as of 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 No Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year T reasury Dividends per share (ttm) Dividend Yield 1/2 Yield on 10 Year T reasury No Hurdle # 4: A Stock Price less than 1.5 BV Stock Price Book Value per share as of 150% of book Value per share as of 12/31/12 12/31/12 Ye s Hurdle # 5: T otal Debt less than Book Value Interest-bearing debt as of Book value as of 12/31/12 12/31/12 Ye s Hurdle # 6: Current Ratio of T wo or More Current assets as of Current liabilities as of Current ratio as of 12/31/12 12/31/12 12/31/12 No Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years EPS for year ended EPS for year ended EPS for year ended EPS for year ended EPS for year ended 12/31/12 12/31/11 12/31/10 12/31/09 12/31/08 No Hurdle # 8: Stability in Growth of Earnings EPS for year ended EPS for year ended EPS for year ended EPS for year ended EPS for year ended 12/31/12 12/31/11 12/31/10 12/31/09 12/31/08 No
St o ck p rice d at a as o f M arch 18 , 2 0 13
0.05
Price:
8.53 0.59% 3.44%
6.6 (6.8) 22.8 22.4 139.0 170.6
Current P/E Ratio
Price:
8.53 0.00% 0.86%
$ $ $
8.53 8.30 12.45
$ $
848,503 1,253,828
$ $
589,794,000 305,096,000 1.93
$ $ $ $ $
0.05 0.69 0.57 (1.29) 0.67
$ $ $ $ $
0.05 0.69 0.57 (1.29) 0.67
-93% 21% -144% -293%
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March 18, 2013
KEY ENERGY SERVICES INC. (KEG)
Annual and Quarterly Earnings
For the period ended $ 961,244 192,440 835,012 137,047 198,271 41,959 1,197,083 169,604 238,068 42,543 46,451 (5,818) 1,687,931 158,952 (58,297) 100,655 421,407 6,236 (2,245) 3,991 1,784,126 48,057 (17,300) 30,756 458,159 18,119 (6,523) 11,596 457,418 14,581 (5,249) 9,332 473,150 18,312 (6,592) 11,719 432,151 8,928 (3,214) 5,714 491,100 25,655 (9,236) 16,419 491,117 25,621 (9,224) 16,397 1,308,845 213,783 230,496 53,566 290,797 61,441 55,594 13,576 320,959 61,524 61,360 13,575 334,194 61,492 63,890 13,574 299,934 61,304 57,340 13,573 1,245,884 245,761 238,184 54,297 323,869 58,809 61,916 13,565 351,393 58,978 67,178 13,550 351,382 59,025 67,176 13,535 $ 1,530,087 316,796 $ 1,626,768 333,302 $ 342,114 85,529 $ 377,599 94,400 $ 393,169 98,292 $ 352,864 88,216 $ 1,465,746 366,437 $ 376,260 100,018 $ 408,236 108,519 $ 408,223 108,515 $
2010 A
2011 A
2012 A
31-Mar E
2013 E 30-Jun E 30-Sep E 31-Dec E 2013 E 31-Mar E 31-Dec E 384,039 102,086 330,565 58,903 63,196 13,520
2014 E 30-Jun E 30-Sep E
2014 E $ 1,576,758 419,138 1,357,210 235,715 259,467 54,169
In thousands ,5 Revenues: Domestic International Costs and expenses: Direct operating expenses Depreciation and amortization expense General and administrative expenses Interest expense, net of amounts capitalized Loss on early extinguishment of debt Other, net Total costs and expenses, net Income before income taxes and noncontrolling interest Income tax expense Net (Loss) Income from continuing operations Discontinued operations, net of tax (expense) benefit Net (Loss) Income 466,184 19,941 (7,179) 12,762 (2,697) 1,209,592 (55,908) 20,512 (35,396) 105,745 70,349 3,146 $ 73,495 $ 100,655 806 101,461 3,991 (372) 3,619 $ 9,332 (372) 8,960 $ 11,719 (372) 11,348 $ 5,714 (372) 5,342 $ 30,756 (1,487) 29,269 $ 11,596 (372) 11,224 $ (6,649) 1,800,041 160,029 (57,352) 102,677 (93,568) 9,109 (1,487) $ 7,622 $ 16,419 (372) 16,048 $ 16,397 (372) 16,026 $
1,906,560 89,336 (32,161) 57,175
Noncontrolling interest (Loss) Income Attributable to Common Stockholders
12,762 (372) 12,391 $
57,175 (1,487) 55,688
(0.25) $ (0.25) $ 0.57 0.57 0.55 0.57 129,368 129,368 145,909 146,217 151,106 151,125 151,106 151,125 151,106 151,125 151,106 151,125 151,106 151,125 $ $ 0.89 0.92 $ $ 0.02 0.05 $ $ 0.02 0.02 $ $ 0.06 0.06 $ $ 0.08 0.08 $ $ 0.04 0.04 $ $ $ $ 0.70 0.69 $ $ 0.05 0.05 $ $ 0.02 0.02 $ $ 0.06 0.06 $ $ 0.08 0.08 $ $ 0.04 0.04 $ $ 0.19 0.19 0.19 0.19 151,106 151,125 $ $ $ $
0.70 0.69
$ $
0.67 0.67
$ $
0.02 0.03
$ $
0.06 0.06
$ $
0.08 0.08
$ $
0.04 0.04
$ $
0.19 0.20
$ $
0.07 0.08 0.07 0.07 0.07 0.07 151,106 151,125
$ $ $ $ $ $
0.11 0.11 0.11 0.11 0.11 0.11 151,106 151,125
$ $ $ $ $ $
0.11 0.11 0.11 0.11 0.11 0.11 151,106 151,125
$ $ $ $ $ $
0.08 0.08 0.08 0.08 0.08 0.08 151,106 151,125
$ $ $ $ $ $
0.37 0.38 0.37 0.37 0.37 0.37 151,106 151,125
Income per common share from continuing operations excluding loss from debt extinguishment: Basic $ Diluted $ Net income per common share Basic $ Diluted $ Net income per common share excluding non-recurring items Basic $ Diluted $ Weighted average common shares outstanding: Basic Diluted SELECTED COMMON-SIZE AMOUNTS (% of total revenues unless otherwise noted) Costs and expenses: Direct operating expenses Depreciation and amortization expense General and administrative expenses Total costs and expenses, net (Loss) Income Attributable to Common Stockholders SELECTED YEAR TO YEAR CHANGES 72.38% 11.88% 17.19% 104.85% 6.37% 64.82% 9.18% 12.89% 91.39% 5.49% 66.78% 10.91% 11.76% 91.84% 0.39% 68.00% 14.37% 13.00% 98.54% 0.85% 68.00% 13.03% 13.00% 96.91% 1.90% 68.00% 12.51% 13.00% 96.27% 2.31% 68.00% 13.90% 13.00% 97.98% 1.21% 68.00% 13.41% 13.00% 97.38% 1.60% 20.72% 23.53% -8.17% 15.18% 6.48% 6.77% -147.08% 43.36% 23.76% 20.07% 1.39% 39.55% 38.05% 9.34% 26.05% -3.18% 25.91% 6.64% -92.49% -6.65% 20.03% -8.74% 14.25% -3.00% 64.18% 60.09% 6.13% -12.14% -8.53% -6.70% 17.30% 5.65% -1.13% -2.03% -68.97% 0.12% -0.48% 16.14% 19.27% -2.78% 4.05% -130.35% -5.44% -5.55% 7.18% -1.02% -2.99% -2.66% -61.66% -6.52% -4.81% 14.96% 3.34% 1.37% -0.88% 284.01%
68.00% 12.35% 13.00% 96.20% 2.36%
68.00% 11.41% 13.00% 95.04% 3.11%
68.00% 11.42% 13.00% 95.04% 3.10%
68.00% 12.12% 13.00% 95.90% 2.55%
68.00% 11.81% 13.00% 95.52% 2.79%
Total revenues Costs and expenses: Direct operating expenses Depreciation and amortization expense General and administrative expenses Interest expense, net of amounts capitalized Total costs and expenses, net (Loss) Income Attributable to Common Stockholders
11.37% 11.37% -4.28% 11.37% -0.08% 8.72% 210.14%
9.48% 9.48% -4.14% 9.48% -0.18% 7.36% 79.10%
5.14% 5.14% -4.01% 5.14% -0.29% 3.80% 41.22%
10.21% 10.21% -3.92% 10.21% -0.39% 7.88% 131.94%
8.94% 8.94% -4.09% 8.94% -0.24% 6.86% 90.26%
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30-Dec-12 A $ 45,949 404,390 38,622 $ 89,587 371,863 31,608 $ 95,064 410,434 34,887 $ 111,283 427,358 36,325 $ 139,039 383,547 32,602 $ 139,039 383,547 32,602 $ 153,531 414,155 35,203 $ 161,701 449,352 38,195 $ 181,173 449,338 38,194 $ 208,257 422,718 35,931 $ 31-Mar E 2013 E 30-Jun E 30-Sep E 31-Dec E 30-Dec-13 E 31-Mar E 31-Dec E 2014 E 30-Jun E 30-Sep E 30-Dec-14 E 208,257 422,718 35,931
Annual and Quarterly Balance Sheets
In thousands
100,833 589,794 2,528,578 (1,091,904) 1,436,674 626,481 60,905 16,628 966 30,140 $ 2,761,588 $
100,833 593,892 2,519,043 (1,091,547) 1,427,496 626,481 56,143 15,948 966 30,140 2,751,065 $
100,833 641,218 2,522,723 (1,091,488) 1,431,234 626,481 51,380 15,268 966 30,140 2,796,687 $
100,833 675,799 2,521,319 (1,091,315) 1,430,005 626,481 46,618 14,588 966 30,140 2,824,596 $
100,833 656,021 2,512,948 (1,090,985) 1,421,963 626,481 41,855 13,908 966 30,140 2,791,334 $
100,833 656,021 2,512,948 (1,090,985) 1,421,963 626,481 41,855 13,908 966 30,140 2,791,334 $
100,833 703,722 2,506,552 (1,090,699) 1,415,853 626,481 39,443 13,228 966 30,140 2,829,833 $
100,833 750,081 2,514,072 (1,090,728) 1,423,344 626,481 37,032 12,548 966 30,140 2,880,592 $
100,833 769,537 2,516,125 (1,090,632) 1,425,493 626,481 34,620 11,868 966 30,140 2,899,105 $
100,833 767,739 2,510,717 (1,090,369) 1,420,348 626,481 32,208 11,188 966 30,140 2,889,070 $
100,833 767,739 2,510,717 (1,090,369) 1,420,348 626,481 32,208 11,188 966 30,140 2,889,070
104,073 200,630 393 305,096 848,110 33,676 259,453 27,921 1,169,160 1,474,256 848,056 31,175 261,502 31,175 1,171,909 1,456,342 848,002 34,409 257,519 34,409 1,174,338 1,488,233 847,948 35,828 253,597 35,828 1,173,200 1,500,022 847,894 32,155 251,085 32,155 1,163,288 1,456,646 847,894 32,155 251,085 32,155 1,163,288 1,456,646 393 284,433 393 313,895 393 326,822 393 293,358 393 293,358
86,598 197,443
95,580 217,922
99,521 226,908
89,319 203,646
89,319 203,646
96,446 219,897 393 316,737 846,947 34,721 247,024 34,721 1,163,412 1,480,149
104,643 238,586 447 343,676 845,946 37,671 245,124 37,671 1,166,413 1,510,088
104,640 238,578 555 343,773 844,890 37,670 243,800 37,670 1,164,031 1,507,804
98,440 224,444 717 323,601 843,781 35,439 242,347 35,439 1,157,005 1,480,607
98,440 224,444 717 323,601 843,781 35,439 242,347 35,439 1,157,005 1,480,607
15,108 15,111 15,111 15,111 15,111 15,111 15,111 15,111 15,111 15,111 15,111 925,132 928,529 932,929 937,329 941,729 941,729 945,129 949,529 953,929 958,329 958,329 (6,148) (6,148) (6,148) (6,148) (6,148) (6,148) (6,148) (6,148) (6,148) (6,148) (6,148) 319,736 323,355 332,315 343,663 349,005 349,005 360,229 376,277 392,303 404,693 404,693 33,504 33,876 34,248 34,619 34,991 34,991 35,363 35,735 36,106 36,478 36,478 1,287,332 1,294,723 1,308,455 1,324,574 1,334,688 1,334,688 1,349,684 1,370,504 1,391,301 1,408,463 1,408,463 $ 2,761,588 $ 2,751,065 $ 2,796,687 $ 2,824,596 $ 2,791,334 $ 2,791,334 $ 2,829,833 $ 2,880,592 $ 2,899,105 $ 2,889,070 $ 2,889,070 20.63% 1.97% 0.00% 73.30% 5.31% 10.24% 1.42% 21.36% 52.02% 22.69% 11.05% 0.00% 9.40% 46.62% 21.59% 51.89% 22.77% 10.34% 0.00% 9.51% 47.06% 86.96% 7.39% 0.00% 333.81% 20.25% 46.17% 7.29% 86.96% 7.39% 0.00% 303.23% 20.25% 46.17% 7.29% 22.93% 51.18% 22.40% 11.22% 0.00% 9.21% 46.79% 86.96% 7.39% 0.00% 290.97% 20.25% 46.17% 7.29% 23.93% 50.63% 22.18% 11.57% 0.00% 8.98% 46.89% 86.96% 7.39% 0.00% 322.38% 20.25% 46.17% 7.29% 23.50% 50.94% 22.44% 10.51% 0.00% 9.00% 47.82% 20.93% 1.78% 0.00% 77.61% 4.87% 11.11% 1.75% 23.50% 50.94% 22.44% 10.51% 0.00% 9.00% 47.82% 86.96% 7.39% 0.00% 297.27% 20.25% 46.17% 7.29% 24.87% 50.03% 22.14% 11.19% 0.00% 8.73% 47.69% 86.96% 7.39% 0.00% 275.44% 20.25% 46.17% 7.29% 26.04% 49.41% 21.75% 11.93% 0.00% 8.51% 47.58% 86.96% 7.39% 0.00% 275.86% 20.25% 46.17% 7.29% 26.54% 49.17% 21.61% 11.86% 0.00% 8.41% 47.99% 86.96% 7.39% 0.00% 292.18% 20.25% 46.17% 7.29% 26.57% 49.16% 21.68% 11.20% 0.00% 8.39% 48.75% 21.18% 1.80% 0.00% 71.16% 4.93% 11.25% 1.78% 26.57% 49.16% 21.68% 11.20% 0.00% 8.39% 48.75%
As of 31-Dec-10 A 31-Dec-11 A ASSETS Cash and cash equivalents $ 56,628 $ 35,443 Accounts receivable, net of allowance 261,818 421,215 Inventories 23,516 33,986 Prepaid expenses 20,478 25,528 Deferred tax assets 32,046 57,100 Income taxes receivable 847 Other current assets 18,687 27,291 Total current assets 414,020 600,563 Property and equipment, gross 1,832,443 2,224,102 Accumulated depreciation (895,699) (1,013,805) Property and equipment, net 936,744 1,210,297 Goodwill 447,609 623,434 Other intangible assets, net 58,151 81,867 Deferred financing costs, net 7,806 14,771 Equity method investments 5,940 918 Other assets 22,666 67,270 Total assets $ 1,892,936 $ 2,599,120 Liabilities and stockholders equity Current liabilities: Accounts payable $ 56,310 $ 78,837 Accrued liabilities 217,249 198,102 Accrued interest 4,097 10,870 Current portion of capital leases and other long-term debt 3,979 1,694 Total current liabilities 281,635 289,503 Capital lease obligations, less current portion 402 Capital leases, notes payable and long-term debt 427,121 773,975 Workers' compensation, vehicular, health and other insurance claims 30,110 30,854 Deferred tax liabilities 144,309 261,072 Other non-current accrued liabilities 27,958 29,085 Total long-term liabilities 629,498 1,094,986 Total liabilities 911,133 1,384,489 Stockholders' equity: Common stock 14,166 15,073 Additional paid-in capital 775,601 915,400 Accumulated other comprehensive loss (51,334) (58,231) Retained earnings 210,653 312,114 Noncontrolling interest 32,717 30,275 Total stockholders' equity 981,803 1,214,631 Total liabilities and stockholders' equity $ 1,892,936 $ 2,599,120 SELECTED COMMON SIZE BALANCE SHEET AMOUNTS (as a % of total revenues) Accounts receivable, net of allowance 22.69% 22.81% Inventories 2.04% 1.84% Prepaid expenses 1.78% 1.38% Property and equipment, net 81.20% 65.53% Accounts payable 4.88% 4.27% Accrued liabilities 18.83% 10.73% Other non-current accrued liabilities 2.42% 1.57% SELECTED COMMON SIZE BALANCE SHEET AMOUNTS (as a % of total assets) Total current assets 21.87% 23.11% Property and equipment, net 49.49% 46.57% Goodwill 23.65% 23.99% Total current liabilities 14.88% 11.14% Long-term debt, less current portion 0.00% 0.00% Deferred tax liabilities 7.62% 10.04% Total stockholders' equity 51.87% 46.73%
31
March 18, 2013

For the period ended $ 143,805 3,849 526 (396) 2,615 (12,370) (3,789) (153,822) 12,111 (2,069) (26,448) 36,731 61,671 1,297 (4,255) 129,805 90,692 (47,000) (60,000) (55,000) (48,000) (210,000) 65,531 71,272 75,810 303,306 65,226 (49,787) (180,310) 258,202 (86,688) (676) 165 (8,631) (520,090) (428,709) (47,000) (60,000) (55,000) (6,970) (87,813) (8,493) (54) (54) (54) (405,000) 205,000 275,000 (1,959) (48,000) (210,000) (49,787) (893) (63,558) (893) (58,262) (893) (50,846) (893) (222,453) (3,573) (187,058) 11,965 (359,097) 14,100 (447,160) 17,127 2,000 (152,771) (22,110) 3,720 385 (48,964) 188,305 (15,409) (42,558) 60,665 1,555 6,734 369,660 32,043 7,014 (19,909) 400 (39,104) (3,278) 35,928 400 (17,480) (1,439) 15,765 400 43,312 3,724 (40,809) 400 18,772 6,020 (9,026) 1,600 (31,146) (2,602) 28,511 400 13,306 (4,085) 3,000 4,000 4,000 4,000 15,000 3,000 4,000 2,664 35,998 (1,314) 1,661 680 2,049 (500) 680 (3,984) (500) 680 (3,922) (500) 680 (2,512) (500) 2,720 (8,368) (2,000) 680 (4,060) (500) 680 (1,900) (500) 680 (1,324) (500) 483 534 556 499 2,071 538 584 584 169,604 61,441 61,524 61,492 61,304 245,761 58,809 58,978 59,025 58,903 550 70,349 $ 100,655 $ 9,109 $ 3,991 $ 9,332 $ 11,719 $ 5,714 $ 30,756 $ 11,596 $ 16,419 $ 16,397 $ 12,762 $ 2010 A 2011 A 2012 A 31-Mar E 2013 E 30-Jun E 30-Sep E 31-Dec E 2013 E 31-Mar E 31-Dec E 2014 E 30-Jun E 30-Sep E 2014 E 57,175 235,715 2,256
Annual and Quarterly Statements of Cash Flows
In thousands
213,783 84,732 1,299 594 926
680 (1,453) (500)
2,720 (8,737) (2,000)
2,559 594 (266) (4,783) 2,150 85,792 (1,735) (3,726) 46,451 15,609 (4,859) 4,000 (35,782) (2,992) 32,786 400 72,675 (63,558) (570) 1 (13) 400 78,680 (58,262)
4,000
15,000
26,071 2,263 (24,797) 400 78,878 (50,846)
(41,427) (3,329) 36,487 1,600 295,460 (222,453)
(460,509) 475,000 295,000 (4,016) (16,485)
(54)
(216)
(54)
(54)
(54)
(54)
(216)
(3,098) 4,100 2,069 (100,205) (1,735) 19,234 37,394 56,628 43,638 45,949 89,587 (54) (54) 5,477 89,587 95,064
Cash flows from operating activities: Net Income (loss) Adjustments: Depreciation and amortization expense Asset retirements and impairments Bad debt expense Accretion of asset retirement obligations Loss (income) from equity-method investments Gain on sale of equity method investment Amortization of deferred financing costs and discount Deferred income tax (benefit) expense Capitalized interest Loss (gain) on sale of assets, net Loss on early extinguishment of debt Share-based compensation Excess tax benefits from share-based compensation Changes in working capital: Accounts receivable Other current assets Accounts payable, accrued interest and accrued expenses Share-based compensation liability awards Other assets and liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from sale of fixed assets Proceeds from sale of assets held for sale Acquisitions, net of cash acquired Proceeds from sale of equity method investments Investment in Wilayat Key Energy, LLC Dividend from equity-method investments Net cash provided by (used in) investing activities Cash flows from financing activities Repayments of long-term debt Proceeds from long-term debt Borrowings under revolving credit facility, net or repayments Repayments of capital lease obligations Debt issuance costs Payment of deferred financing costs Repurchases of common stock Proceeds from exercise of stock options Excess tax benefits from stock-based compensation Other Financing Activities Net cash provided by financing activities Effect of changes in exchange rates on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period (5,681) 8,000 4,859 9,916 306,084 4,516 (21,185) 56,628 35,443 (4,597) (7,519) 901 4,085 8,035 73,946 (4,391) 10,506 35,443 45,949 (54) 16,218 95,064 111,283 (54) 27,756 111,283 139,039 (216) 93,090 45,949 139,039 (947) 14,492 139,039 153,531 (947) 8,170 153,531 161,701 (947) 19,471 161,701 181,173 (947) 27,085 181,173 208,257
(3,789) 69,218 139,039 208,257
Operating cash flow per share excluding working capital changes Operating cash flow per share including working capital changes $ $ 1.00 $ 1.29 $ 2.45 $ 0.47 $ 2.80 $ 2.37 $
0.47 0.60
$ $
0.47 0.43
$ $
0.49 0.47
$ $
0.46 0.50
$ $
1.89 2.01
$ $
0.46 0.43
$ $
0.52 0.48
$ $
0.52 0.52
$ $
0.50 0.52
$ $
2.00 1.96
32
March 18, 2013
Ratios
2010 A 4.27 31.58 7.06 1.33 0.65 83 10 117 1.47 1.13 1.13 0.46 132,385 2.07 1.58 1.58 0.65 311,060 1.93 1.48 1.48 1.21 284,698 2.09 1.62 1.62 0.32 309,458 2.04 1.61 1.61 0.21 327,323 2.07 1.65 1.65 0.22 348,977 2.24 1.78 1.78 0.26 362,663 2.24 1.78 1.78 1.03 362,663 2.22 1.79 1.79 0.21 386,985 2.18 1.78 1.78 0.21 406,406 2.24 1.83 1.83 0.23 425,764 5.14 41.64 8.33 1.72 0.82 83 10 86 4.82 36.05 6.58 1.48 0.73 75 11 87 1.10 8.28 1.44 0.30 0.16 80 10 92 1.21 9.65 1.48 0.33 0.17 80 10 92 1.17 9.39 1.45 0.34 0.17 80 10 92 1.09 8.70 1.24 0.31 0.16 80 10 92 4.65 34.99 5.66 1.28 0.66 76 10 88 1.19 9.55 1.27 0.34 0.17 80 10 92 1.20 9.58 1.30 0.36 0.18 80 10 92 1.15 9.20 1.24 0.36 0.18 80 10 92 1.11 8.92 1.12 0.34 0.17 80 10 92 2.37 1.95 1.95 0.24 444,138 2011 A 2012 A 31-Mar E 2013 E 30-Jun E 30-Sep E 31-Dec E 2013 E 31-Mar E 31-Dec E 2014 E 30-Jun E 30-Sep E 2014 E 4.95 39.61 4.95 1.40 0.70 77 10 89 2.37 1.95 1.95 0.91 444,138
For the period ended
Productivity Ratios Receivables turnover Inventory turnover Working capital turnover Net fixed asset turnover Total asset turnover # of days Sales in A/R # of days Cost of Sales in Inventory # of days cash-based expenses in payables
Liquidity Measures Current ratio Quick ratio Cash ratio Cash flow from operations ratio Working capital
Financial Risk (Leverage) Ratios Total debt/equity ratio Total debt ratio 0.44 0.23 0.64 0.30 0.66 0.31 0.66 0.31 0.65 0.30 0.64 0.30 0.64 0.30 0.64 0.30
0.63 0.30
0.62 0.29
0.61 0.29
0.60 0.29
0.60 0.29
Profitability/Valuation Measures Gross profit margin Operating profit margin Return on assets Return on equity Return on investment Earnings before interest margin EBITDA margin EBITDA/Assets 27.62% -1.44% 4.13% 8.52% 8.52% -2.99% 10.67% 7.30% 35.18% 13.11% 4.52% 9.24% 9.24% 14.07% 20.09% 16.52% 33.22% 10.56% 0.28% 0.61% 0.61% 13.82% 21.80% 15.94% 32.00% 4.63% 0.13% 0.28% 0.28% 5.16% 19.00% 2.95% 32.00% 5.97% 0.32% 0.69% 0.69% 7.08% 19.00% 3.23% 32.00% 6.49% 0.40% 0.86% 0.86% 7.83% 19.00% 3.32% 32.00% 5.10% 0.19% 0.40% 0.40% 5.83% 19.00% 2.98%
32.00% 5.59% 1.05% 2.23% 2.23% 6.53% 19.00% 12.54%
32.00% 6.65% 0.40% 0.84% 0.84% 8.02% 19.00% 3.22%
32.00% 7.59% 0.56% 1.18% 1.18% 9.37% 19.00% 3.44%
32.00% 7.58% 0.55% 1.16% 1.16% 9.36% 19.00% 3.40%
32.00% 6.88% 0.43% 0.89% 0.89% 8.36% 19.00% 3.19%
32.00% 7.19% 1.96% 4.06% 4.06% 8.80% 19.00% 13.35%
33
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BURKENROAD REPORTS RATING SYSTEM MARKET OUTPERFORM: This rating indicates that we believe forces are in place that would enable this company's stock to produce returns in excess of the stock market averages over the next 12 months. MARKET PERFORM: This rating indicates that we believe the investment returns from this company's stock will be in line with those produced by the stock market averages over the next 12 months. MARKET UNDERPERFORM: This rating indicates that while this investment may have positive attributes, we believe an investment in this company will produce subpar returns over the next 12 months. BURKENROAD REPORTS CALCULATIONS CPFS is calculated using operating cash flows excluding working capital changes. All amounts are as of the date of the report as reported by Bloomberg or Yahoo Finance unless otherwise noted. Betas are collected from Bloomberg. Enterprise value is based on the equity market cap as of the report date, adjusted for long-term debt, cash, and short-term investments reported on the most recent quarterly report date. 12-month Stock Performance is calculated using an ending price as of the report date. The stock performance includes the 12-month dividend yield. 2012-2013 COVERAGE UNIVERSE AFC Enterprises Inc. (AFCE) Amerisafe Inc. (AMSF) Bristow Group Inc. (BRS) CalIon Petroleum Company (CPE) Cal-Maine Foods Inc. (CALM) Carbo Ceramics Inc. (CRR) Cash America International Inc. (CSH) CLECO Corporation (CNL) Conn's Inc. (CONN) Conrad Industries Inc. (CNRD) Crown Crafts Inc. (CRWS) Cyberonics Incorporated (CYBX) Denbury Resources Inc. (DNR) EastGroup Properties Inc. (EGP) EPL Oil & Gas Inc. (EPL) Evolution Petroleum Corp. (EPM) Gulf Island Fabrication Inc. (GIFI) Hibbett Sports (HIBB) Hornbeck Offshore Services Inc. (HOS) Houston Wire & Cable Company (HWCC) IBERIABANK Corp. (IBKC) ION Geophysical Corp. (IO) Key Energy Services (KEG) Marine Products Corp. (MPX) MidSouth Bancorp Inc. (MSL) PetroQuest Energy Inc. (PQ) Pool Corporation (POOL) Powell Industries Inc. (POWL) Rollins Incorporated (ROL) RPC Incorporated (RES) Sanderson Farms Inc. (SAFM) SEACOR Holdings Inc. (CKH) Sharps Compliance Inc. (SMED) Stone Energy Corp. (SGY) Superior Energy Services Inc. (SPN) Susser Holdings Corp. (SUSS) Susser Petroleum Partners (SUSP) Team Incorporated (TISI) Teche Holding Company (TSH) Willbros Group Inc. (WG)
PETER RICCHIUTI
Director of Research Founder of Burkenroad Reports Peter.Ricchiuti@tulane.edu
PIKE HOWARD DILIP KUMAR KYLE MAY

Associate Directors of Research
BURKENROAD REPORTS Tulane University New Orleans, LA 70118-5669 (504) 862-8489 (504) 865-5430 Fax
ANTHONY WOOD
Senior Director of Accounting Awood11@tulane.edu
Named in honor of William B. Burkenroad Jr., an alumnus and a longtime supporter of Tulanes business school, and funded through contributions from his family and friends, BURKENROAD REPORTS is a nationally recognized program, publishing objective, investment research reports on public companies in our region. Students at Tulane Universitys Freeman School of Business prepare these reports. Alumni of the BURKENROAD REPORTS program are employed at a number of highly respected financial institutions including: ABN AMRO Bank Aegis Value Fund Invesco/AIM Capital Management Alpha Omega Capital Partners American General Investment Management Ameriprise Financial Atlas Capital Banc of America Securities Bank of Montreal Bancomer Barclays Capital Barings PLC Bearing Point Bessemer Trust Black Gold Capital Bloomberg Brookfield Asset Management Brown Brothers Harriman Capital Blackrock Financial Management Boston Consulting Group Buckingham Research California Board of Regents Cambridge Associates Canaccord Genuity Cantor Fitzgerald Chaffe & Associates Citadel Investment Group Citibank Citigroup Private Bank City National Bank Cornerstone Resources Credit Suisse D. A. Davidson & Co. Deutsche Banc Duquesne Capital Management Equitas Capital Advisors Factset Research Financial Models First Albany Fiduciary Trust Fitch Investors Services Forex Trading Franklin Templeton Friedman Billings Ramsay Fulcrum Global Partners Gintel Asset Management Global Hunter Securities Goldman Sachs Grosever Funds Gruntal & Co. Guggenheim Securities , LLC Hancock Investment Services Healthcare Markets Group Capital One Southcoast Howard Weil Labouisse Friedrichs IBERIABANK Capital Markets J.P. Morgan Securities Janney Montgomery Scott Jefferies & Co. Johnson Rice & Co. KBC Financial KDI Capital Partners Key Investments Keystone Investments Legacy Capital Liberty Mutual Lowenhaupt Global Advisors Mackay Shields Manulife/John Hancock Investments Marsh & McLennan Mercer Partners Merrill Lynch Miramar Asset Management Moodys Investor Services Morgan Keegan Morgan Stanley New York Stock Exchange Perkins Wolf McDonnell Piper Jaffray & Co. Professional Advisory Services Quarterdeck Investment Services RBC Raymond James Restoration Capital Rice Voelker, LLC Royal Bank of Scotland Sandler O'Neill & Partners Sanford Bernstein & Co. Scotia Capital Scottrade Second City Trading LLC Sequent Energy Sidoti & Co Simmons & Co. Southwest Securities Stephens & Co. Sterne Agee Stewart Capital LLC Stifel Nicolaus Sun-Trust Capital Markets Susquehanna Investment Group Thomas Weisel Partners TD Waterhouse Securities Texas Employee Retirement System Texas Teachers Retirement System ThirtyNorth Investments Thornburg Investment Management Tivoli Partners Tudor Pickering & Co. Tulane University Endowment Fund Turner Investment Partners UBS Value Line Investments Vaughan Nelson Investment Management Wells Fargo Capital Management Whitney National Bank William Blair & Co. Zephyr Management
To receive complete reports on any of the companies we follow, contact: Peter Ricchiuti, Founder & Director of Research Tulane University Freeman School of Business BURKENROAD REPORTS Phone: (504) 862-8489 Fax: (504) 865-5430 E-mail: Peter.Ricchiuti@Tulane.edu Please visit our web site at www.BURKENROAD.org
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March 18, 2013

KEY ENERGY SERVICES, INC.

Wall Street's Farm Team

2012 A $ 0.05 170.6x $ 2.37 3.6x

2013 E $ 0.19 44.0x $ 1.89 4.5x

2014 E $ 0.37 23.1x $ 2.00 4.3x

$5.82 - $15.04 -49.32% Nil $ 8.52 2.31

Company Quick View:

Investment Research Manager: Larry Hall

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

STOCK PRICE PERFORMANCE Figure 1: 5-year Stock Price Performance

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

E&P capital expenditures should continue to drive earnings.

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Figure 2: Heavy Duty Key Workover Rig in Mexico

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Figure 4: Keys Domestic Operations

Source: Key Energy Services, Investor Presentation

Figure 5: Keys International Operations

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Table 3: Key 2011 and 2012 Revenue Split

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Source: Yahoo Finance ttm and mrg as of September 30, 2012

Key Energy Services Inc. (KEG)

BURKENROAD REPORTS (www.burkenroad.org)

March 18, 2013

Key Energy Services Inc. (KEG)