___________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
Two Tower Center, Tenth Floor, East Brunswick, NJ 08816
(Address of Principal executive offices) (ZIP Code)
Registrant's telephone number including area code: (908)247-4822
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court
since there was a distribution of securities under a plan
confirmed by a court. Yes X No
Common Shares outstanding at October 15, 1996: 10,425,176
________________________________________________________________
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities. 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security
Holders. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures. 19
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, June 30,
(Thousands, except share and per share data) 1996 1996
- ----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $17,116 $3,240
Restricted cash 1,691 971
Accounts receivable, net 22,482 20,570
Inventories 1,979 1,957
Prepaid expenses and other current assets 1,170 743
- ----------------------------------------------------------------------------
Total Current Assets 44,438 27,481
- ----------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 69,136 66,432
Oil and gas well drilling equipment 5,185 4,862
Motor vehicles 1,260 1,159
Oil and gas properties and other related
equipment, successful efforts method 17,946 17,663
Furniture and equipment 806 716
Buildings and land 5,339 5,295
- ----------------------------------------------------------------------------
99,672 96,127
Accumulated depreciation & depletion (10,890) (8,920)
- ----------------------------------------------------------------------------
Net Property and Equipment 88,782 87,207
- ----------------------------------------------------------------------------
Other Assets 9,518 7,034
- ----------------------------------------------------------------------------
Total Assets $142,738 $121,722
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $12,745 $11,086
Other accrued liabilities 10,139 11,002
Accrued interest 1,081 417
Accrued income taxes 53 53
Deferred tax liability 310 310
Current portion of long-term debt 869 1,471
- ----------------------------------------------------------------------------
Total Current Liabilities 25,197 24,339
- ----------------------------------------------------------------------------
Long-term debt, less current portion 63,061 45,354
Non-current accrued expenses 4,909 4,909
Deferred income taxes 5,026 4,244
Minority interest 1,309 1,252
Stockholders' equity:
Common stock, $.10 par value; 25,000,000
shares authorized, 10,425,176 and 10,413,513
shares issued and outstanding at September 30,
1996 and June 30, 1996,respectively 1,043 1,041
Additional paid-in capital 32,819 32,763
Retained earnings 9,374 7,820
- ----------------------------------------------------------------------------
Total Stockholders' Equity 43,236 41,624
- ----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $142,738 $121,722
============================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
September 30,
(Thousands, except per share data) 1996 1995
- ---------------------------------------------------------------------------
REVENUES:
Oilfield services $27,311 $9,767
Oil and gas 1,525 816
Oil and gas well drilling 2,324 1,602
Other, net 302 213
- ---------------------------------------------------------------------------
31,462 12,398
- ---------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 19,700 7,264
Oil and gas 513 265
Oil and gas well drilling 1,881 1,347
Depreciation, depletion and amortization 2,095 823
General and administrative 3,527 1,192
Interest 1,350 438
- ---------------------------------------------------------------------------
29,066 11,329
- ---------------------------------------------------------------------------
Income before income taxes and minority interest 2,396 1,069
Income tax expense 784 343
Minority interest in net income 58 -
- ---------------------------------------------------------------------------
NET INCOME $1,554 $726
===========================================================================
EARNINGS PER SHARE :
Primary:
Income before income taxes and
minority interest $0.22 $0.15
Net income $0.14 $0.11
Assuming full dilution:
Income before income taxes and
minority interest $0.20 $0.15
Net income $0.13 $0.11
WEIGHTED AVERAGE OUTSTANDING:
Primary 10,894 6,914
Assuming full dilution 16,974 6,914
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
September 30,
(Thousands) 1996 1995
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,554 $726
Adjustments to reconcile income from
operations to net cash provided
by operations:
Depreciation, depletion and amortization 2,095 823
Deferred income taxes 784 343
Minority interest in net income 58 -
Change in assets and liabilities net of effects
from the acquisitions:
Increase in accounts receivable (1,912) (498)
Increase (decrease) in other current assets (449) 111
Decrease (increase) in accounts payable and
accrued expenses 853 (274)
Increase in accrued interest 664 13
Other assets and liabilities (631) (9)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 3,016 1,235
- ---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell service
operations (2,900) (886)
Capital expenditures - Oil and gas operations (41) (7)
Capital expenditures - Oil and gas well
drilling operations (323) (140)
Acquisitions - oil and gas operations (281) (914)
- ---------------------------------------------------------------------------
Net cash used in investing activities (3,545) (1,947)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (899) (904)
Borrowings (payments) under line-of-credit 939 (66)
Proceeds from exercised stock options 58 -
Proceeds from long-term debenture, net 50,440 -
Repayment of long-term debt (35,413) -
Proceeds from long-term debt - other - 1,305
- ---------------------------------------------------------------------------
Net cash provided by financing activities 15,125 335
- ---------------------------------------------------------------------------
Net increase(decrease) in cash and
restricted cash 14,596 (377)
Cash and restricted cash at beginning
of period 4,211 1,275
- ---------------------------------------------------------------------------
Cash and restricted cash at end of period $18,807 $898
===========================================================================
Supplemental cash flow disclosures:
Interest paid $686 $425
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The consolidated financial information in this report includes
the accounts of Key Energy Group, Inc. (the "Company") and its
wholly-owned subsidiaries and was prepared in conformity with
accounting policies used in the Annual Report on Form 10-K
furnished for the preceding fiscal year.
The Company operates 332 well service and workover rigs, which
is the third largest fleet of well service and workover rigs in
the United States. The Company operates in Texas, Oklahoma,
Michigan, the Appalachian Basin and Argentina and is a leader in
each of its domestic markets. The Company provides maintenance
and workover rigs to service producing oil and gas wells.
Although the range and extent of services provided varies from
region to region, as part of its well service business, the
Company generally provides a full range of maintenance and
workover rig services. These services include the completion of
newly drilled wells, the recompletion of existing wells
(including horizontal recompletions) and the plugging and
abandonment of wells at the end of their useful lives. Other
services include hot oiling, oil field liquid transportation,
fishing tools and services, frac tank rental and salt water
injection. The Company also is engaged in the production of oil
and natural gas and contract drilling in the Permian Basin of
West Texas.
The Company conducts operations through four wholly-owned
subsidiaries: Yale E. Key, Inc. ("Yale E. Key"); WellTech
Eastern, Inc. ("WellTech Eastern"); Odessa Exploration
Incorporated ("Odessa Exploration"); and Key Energy Drilling,
Inc. d/b/a Clint Hurt Drilling ("Clint Hurt"). In addition, Key
operates in Argentina through its 63% ownership in Servicios
WellTech, S.A. ("Servicios"). WellTech Eastern operates through
two divisions; WellTech Mid-Continent Division and WellTech
Eastern Division. Yale E. Key, WellTech Eastern and Servicios
provide oil and gas well services. Odessa Exploration is
engaged in the production of oil and gas and Clint Hurt provides
contract oil and gas well drilling services.
In July 1996, the Company completed the offering of $52,000,000
of 7% convertible subordinated debentures due 2003 (the
"Offering"). The Offering was a private offering pursuant to
Rule 144A under the Securities Act. Proceeds from the Offering
were used to substantially repay existing long-term debt
(approximately $35.2 million). The remaining proceeds, together
with proceeds of borrowings under existing credit arrangements,
are intended to fund the expansion of the Company's services
through acquisitions of businesses and assets and for working
capital and general corporate purposes. See Note 3 to the
Financial Statements for a more detailed description of the
Offering.
Odessa Exploration utilizes the successful efforts method of
accounting for its oil and gas properties. Under this method,
all costs associated with productive wells and nonproductive
development wells are capitalized, while nonproductive
exploration costs and geological and geophysical costs (if any),
are expensed. Capitalized costs relating to proved properties
are depleted using the unit-of-production method based on proved
reserves expressed as net equivalent Bbls as reviewed by
independent petroleum engineers. The carrying amounts of
properties sold or otherwise disposed of and the related
allowance for depletion are eliminated from the accounts and any
gain/loss is included in results of operations.
Odessa Exploration's aggregate oil and gas properties are stated
at cost, not in excess of total estimated future net revenues
net of related income tax effects.
In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all normal
recurring adjustments necessary to present fairly the financial
position as of September 30, 1996, the statement of cash flows
for the three months ended September 30, 1996 and 1995, and the
results of operations for the three month periods then ended.
2. BUSINESS AND PROPERTY ACQUISITIONS
Subsequent and Pending Acquisitions
Woodward Well Services, Inc.
In September 1996, the Company announced the completion of the
acquisition of Woodward Well Services, Inc. for approximately
$719,000. Woodward Well Services, Inc., which operates in
Oklahoma and operates five oilwell service units and fishing
tools, will be operated by the WellTech Mid-Continent Division
of the Company.
Hitwell Surveys, Inc.
On September 25, 1996, the Company announced an agreement to
aquire Hitwell Surveys, Inc. Consideration for the aquisition will
be approximately $1.3 million. Hitwell Surveys, Inc., which operates
in the Appalachian Basin and Michigan and operates eight well logging
and perforating trucks, will be operated by the WellTech Eastern
Division of the Company.
Brooks Well Servicing, Inc.
On October 30, 1996, the Company announced an agreement to
acquire Brooks Well Servicing, Inc. Consideration for the
acquisition will be approximately one million shares of the
Company's common stock. Brooks Well Servicing, Inc. is a
wholly-owned subsidiary of Hunt Oil Co. and operates 32 oilwell
service rigs and ancillary equipment. Brooks Well Servicing,
Inc. operates in the East Texas region and will be operated by
the WellTech Mid-Continent Division of the Company.
Brownlee Well Service Inc.
In October, 1996, the Company consummated an agreement to
acquire Brownlee Well Service, Inc.("Brownlee") and Integrity
Fishing and Rental Tools Inc., a wholly-owned subsidiary of Brownlee.
Consideration for the acquisition is approximately $7 million which
is a combination of the Company's common stock and cash. Brownlee,
with operations in West Texas, owns 16 oilwell service rigs with
ancillary equipment and a variety of oilfield fishing tools.
Brownlee will be operated by Yale E. Key, Inc.
B&L Hotshot, Inc.
On October 11, 1996, the Company announced an agreement to
acquire B&L Hotshot, Inc. and five affiliated entities for
approximately $5 million. B&L Hotshot, Inc. and its affiliates
are based in Michigan and provide trucking and related services
for producing oil and natural gas wells in that region. B&L
Hotshot, Inc. will be operated by the WellTech Eastern Division
of the Company.
Completed Acquisitions
WellTech, Inc.
On March 26, 1996, the Company acquired, through a merger,
WellTech. Key was the surviving entity in the merger. Net
consideration for the merger was 3,500,000 shares of the
Company's common stock and warrants to purchase 500,000
additional shares. In the merger, WellTech stockholders received
an aggregate of 4,929,962 shares of the Company's common stock
and warrants to purchase 750,000 shares of the Company's common
stock at $6.75 per share. As part of the merger, 1,429,962 of
the 1,635,000 shares of the Company's common stock owned by
WellTech and previously issued warrants to purchase 250,000
shares of the Company's common stock at $5.00 per share were
cancelled. WellTech's principal line of business was oil and
gas well servicing and it operated in the Mid-Continent and
Northeast areas of the United States and in Argentina. The
acquisition was accounted for using the purchase method.
Odessa Exploration Properties
In April of 1996, Odessa Exploration purchased approximately
$6.9 million of oil and gas producing properties from an
unrelated company. Financing for the acquisition came from bank
financing. The acquisition was accounted for using the purchase
method.
3. LONG-TERM DEBT
7 1/2% Convertible Subordinated Debentures
In July 1996, the Company completed the offering of $52,000,000
of 7 1/2% convertible subordinated debentures due 2003. The
Offering was a private offering pursuant to Rule 144A under the
Securities Act. Proceeds from the Offering were approximately
$52,000,000 and were used to substantially repay existing
long-term debt (approximately $35.4 million). The remaining
proceeds are to be used to fund the expansion of the Company's
services through acquisitions of businesses and assets, for
working capital and general corporate purposes.
Long-term debt, which was repaid with proceeds from the Offering
in July 1996, were the term note with CIT Group/Credit Finance,
Inc. ("CIT") of approximately $21.2 million and all bank debt
associated with Odessa Exploration, previously with Norwest Bank
Texas, N.A. ("Norwest") of approximately $14.2 million.
The Debentures mature on July 1, 2003 and are convertible at any
time after November 1, 1996 and before maturity, unless
previously redeemed, into shares of the Company's common stock
at a conversion price of $9 3/4 per share, subject to adjustment
in certain events. In addition, holders of the Debentures who
convert prior to July 1, 1999 will receive, in addition to the
Company's common stock, a payment generally equal to 50% of the
interest otherwise payable on the converted Debentures from the
date of conversion through July 1, 1999, payable in cash or
common stock, at the Company's option. Interest on the
Debentures is payable semi-annually on January 1 and July 1 of
each year, commencing January 1, 1997.
The Debentures are not redeemable before July 15, 1999.
Thereafter, the Debentures will be redeemable at the option of
the Company in whole or part, at the declining redemption prices
set forth in the original Debenture prospectus, together with
accrued and unpaid interest thereon. The Debentures also may be
redeemed at the option of the holder if there is a change in
control (as defined in the original Debenture prospectus) at
100% of their principal amount, together with accrued interest
thereon.
Other Long-term Debt
As a result of the Offering described above and subsequent
repayment of all long-term debt with CIT, except the lines of
credit, the Company is currently renegotiating its overall
credit facilities with CIT including, but not limited to,
maximum credit availability, interest rate and maturity dates.
The CIT line of credit, ($10,849,000 approximate balance at
September 30, 1996) currently requires monthly payments of
interest at one and one-quarter percent above the stated prime
rate of 8.25% at September 30, 1996. The line of credit is
collateralized by the accounts receivable of Yale E. Key, Clint
Hurt and WellTech Eastern. At September 30, 1996, there was no
credit line availability.
4. IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted FAS 121 effective as of July 1, 1996. FAS
121 requires that long-lived assets held and used by an entity,
including oil and gas properties accounted for under the
successful efforts method of accounting, be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Long-lived assets to be disposed of are to be accounted for at
the lower of carrying amount or fair value less cost to sell
when management has committed to a plan to dispose of the
assets. All companies, including sucessful efforts oil and gas
companies, are required to adopt FAS 121 for fiscal years
beginning after December 15, 1995.
In order to determine whether an impairment had occurred, the
Company estimated the expected future cash flows of its oil and
gas properties and compared such future cash flows to the
carrying amount of the oil and gas properties to determine if
the carrying amount was recoverable. Based on this process, no
writedown in the carrying amount of the Company's proved
properties was necessary at September 30, 1996.
5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of
business are pending against the Company. Management does not
believe that the disposition of any of these items will result
in a material adverse impact to the consolidated financial
position of the Company.
KEY ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The following discussion and analysis should be read in
conjunction with the Company's audited 10-K for the year ended
June 30, 1996.
Overview
Fluctuations in well servicing activity historically have had a
strong correlation with fluctuations in oil and gas prices. The
Company seeks to minimize the effects of such fluctuations on
its operations and financial condition through diversification
of services, entry into new markets and customer alliances.
Since 1993, the Company has made a number of acquisitions, or is
in the process thereof, which have significantly expanded the
Company's operations:
Subsequent and Pending Acquisitions
* Woodward Well Services, Inc.
In September 1996, the Company announced the completion of the
acquisition of Woodward Well Services, Inc. for approximately
$719,000. Woodward Well Services, Inc., which operates in
Oklahoma and operates five oilwell service units and fishing
tools, will be operated by the WellTech Mid-Continent Division
of the Company.
* Hitwell Surveys, Inc.
On September 25, 1996, the Company announced an agreement to
aquire Hitwell Surveys, Inc. Consideration for the aquisition
will be approximately $1.3 million. Hitwell Surveys, Inc.,
which operates in the Appalachian Basin and Michigan and
operates eight well logging and perforating trucks, will be
operated by the WellTech Eastern Division of the Company.
* Brooks Well Servicing, Inc.
On October 30, 1996, the Company announced an agreement to
acquire Brooks Well Servicing, Inc. ("Brooks"). Brooks is a
wholly-owned subsidiary of Hunt Oil Co. and operates 32 oilwell
service rigs and ancillary equipment. Brooks operates in the
East Texas region and will be operated by the WellTech
Mid-Continent Division of the Company.
* Brownlee Well Service Inc.
In October, 1996, the Company announced an agreement to acquire
Brownlee Well Service, Inc. ("Brownlee") and Integrity Fishing
and Rental Tools Inc., a wholly-owned subsidiary of Brownlee.
Brownlee, with operations in West Texas, owns 16 oilwell
service rigs with ancillary equipment and a variety of
oilfield fishing tools. Brownlee will be operated by Yale E.
Key, Inc.
* B&L Hotshot, Inc.
On October 11, 1996, the Company announced an agreement to
acquire B&L Hotshot, Inc. and five affiliated entities for
approximately $5 million. B&L Hotshot, Inc. and its
affiliates are based in Michigan and provide trucking and
related services for producing oil and natural gas in that
region. B&L Hotshot, Inc. will be operated by the WellTech
Eastern Division of the Company.
Completed Acquisitions
* Odessa Exploration Properties
In April 1996, Odessa Exploration consummated the
purchase of $6.9 million of oil and gas properties, and as
a result, acquired additional oil and gas producing properties
with daily average net production of 240 barrels of oil and
1.5 million cubic feet of natural gas.
* WellTech
In March 1996, WellTech, a well services provider,
merged into the Company, doubling the Company's
fleet of well service and workover rigs and adding two oil and
gas drilling rigs to the Company's contract
drilling operations. WellTech now operates as WellTech
Eastern and has two operating divisions, WellTech
Mid-Continent Division and WellTech Eastern Division.
* Clint Hurt Drilling
In March 1995, the Company acquired four oil and gas
drilling rigs from Clint Hurt.
* WellTech West Texas
In August 1994, the Company acquired 58 well service
and workover rigs and other well service equipment
in West Texas from WellTech.
* Odessa Exploration, Inc.
In July 1993, the Company acquired Odessa Exploration,
an oil and gas production company.
In addition to the above acquisitions, the Company has acquired
several smaller oilwell service related entities and expanded
its ancillary equipment services.
Other Recent Developments
In July 1996, the Company completed the offering of $52,000,000
of 7% convertible subordinated debentures due 2003 (the
"Offering"). The Offering was a private offering pursuant to
Rule 144A under the Securities Act. Net proceeds from the
Offering were used substantially to repay existing long-term
debt (approximately $35.2 million). The remaining proceeds,
together with proceeds of borrowings under existing credit
arrangements, are intended to fund the expansion of the
Company's services through acquisitions of businesses and assets
and for working capital and general corporate purposes. See
Note 3 to the Financial Statements for a more detailed
description, (including an interest rate increase), of the
Offering.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1996 VERSUS QUARTER ENDED SEPTEMBER
30, 1995
The following discussion provides information to assist in the
understanding of the Company's financial condition and results
of operations. It should be read in conjunction with the
financial statements and related notes appearing elsewhere in
this report.
Operating results for the quarter ended September 30, 1996
include the Company's oilfield well service operations conducted
by its wholly-owned subsidiaries, Yale E. Key, Inc. ("Yale E.
Key") and WellTech Eastern, Inc., ("WellTech Eastern"), its oil
and natural gas exploration and production operations conducted
by its wholly-owned subsidiary, Odessa Exploration, Inc.
("Odessa Exploration") and Key Energy Drilling, Inc. d/b/a Clint
Hurt Drilling ("Clint Hurt Drilling") which is engaged in oil
and natural gas well contract drilling. In addition, the
Company conducts oilfield services in Argentina through its 63%
ownership in Servicios WellTech, S.A. ("Servicios"), an
Argentinian corporation.
Historically, fluctuations in oilfield well service operations
and oil and gas well contract drilling activity have been
closely linked to fluctuations in crude oil and natural gas
prices. However, the Company, through acquisitions, customer
alliances and agreements, and diversification of services, seeks
to minimize the effects of such fluctuations on the Company's
results of operations and financial condition.
The Company
Revenues of the Company for the quarter ended September 30, 1996
increased $19,064,000 or 154% to $31,462,000 from $12,398,000
for the quarter ended September 30, 1995, while net income of
$1,554,000 increased $828,000 or 114% from the 1995 quarter
total of $726,000. The increase in revenues was primarily due
to the increased oil and gas revenues from Odessa
Exploration, increased oilwell service equipment utilization and
the acquisition of the WellTech Eastern operations from the date
of acquisition of March 26, 1996 (see Note 2 ). The increase in
quarterly 1996 net income over the quarterly 1995 net income is
partially attributable to the acquisition of WellTech, but is
also a result of an increase in oilwell service equipment
utilization and a decrease in total consolidated Company costs
and expenses as a percent of total revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key and WellTech
Eastern. Yale E. Key conducts oilfield services primarily in
West Texas, while WellTech Eastern conducts oilfield services in
the mid-continent region of the United States (primarily in
Oklahoma) through its operating division, WellTech
Mid-Continent, and in the Northeastern United States (primarily
in Michigan, Pennsylvania and West Virginia) through its
operating division; WellTech Eastern. In addition, the Company
conducts oilfield services in Argentina through its 63%
ownership in Servicios WellTech, S.A. ("Servicios"), an
Argentinian corporation.
Oilfield service revenues increased $17,544,000 or 180% from
$9,767,000 for the 1995 quarter to $27,311,000 for the 1996
quarter. The increase in revenues is primarily attributable to
higher equipment utilization as the result of an increase in
demand for oilfield services and the acquisition of WellTech
Eastern whose operating results are included for the current
quarter but not for the comparable 1995 quarter. In addition,
Yale E. Key diversified oilfield services into higher margin
business segments such as oilfield frac tanks, oilfield fishing
tools and trucking operations.
Oilfield service expenses increased $12,436,000 or 171% from
$7,264,000 for the 1995 quarter to $19,700,000 for the current
1996 quarter. The increase was due primarily to the acquisition
of WellTech on March 26, 1996 and the increased demand for
oilfield services. In addition, the Company has continued to
expand its services, offering ancillary services and equipment
such as oilwell fishing tools, blow-out preventers and oilwell
frac tanks.
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production operations are
performed by Odessa Exploration. Revenues from oil and gas
activities increased $709,000 or 87% from $816,000 during the
quarter ended September 30, 1995 to $1,525,000 for the current
quarter. The increase in revenues was primarily the result of
increased production of oil and natural gas as several oil and
natural gas wells which were drilled began production during
1996, higher oil and natural gas prices for the current year,
and the April 1996 purchase of $6.9 million of oil and gas
properties from an unrelated third party, which almost doubled
the size of Odessa Exploration.
Of the total $1,525,000 of revenues for the quarter ended
September 30, 1996, approximately $1,319,000 was from the sale
of oil and gas - 29,823 barrels of oil at an average price of
$21.28 per barrel and 337,330 MCF of natural gas at an average
price of $2.03 per MCF. The remaining $206,000 of revenues
represented primarily administrative fee income and other
miscellaneous income.
Expenses related to oil and gas activities increased $248,000 or
94% from $265,000 for the 1995 quarter to $513,000 for current
1996 quarter. The increase in expenses was primarily the result
of increased production of oil and natural gas as several oil
and natural gas wells which were drilled began production during
1996 and the April 1996 purchase of $6.9 million in oil and gas
properties which almost doubled the size of Odessa Exploration.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by
Clint Hurt Drilling. Oil and natural gas well drilling revenues
increased $722,000 or 45% from $1,602,000 for the 1995 quarter
to $2,324,000 for the 1996 quarter. The increase in revenues is
primarily attributable to higher equipment utilization and an
increase pricing structure. In addition, two drilling rigs were
acquired in the March 1996 merger with WellTech Eastern.
Expenses related to oil and natural gas well drilling activities
increased $534,000 or 40% from $1,347,000 for the 1995 quarter
to $1,881,000 for current 1996 quarter. The increase in
expenses is attributable to higher equipment utilization and the
addition of two drilling rigs as the result of the WellTech
merger.
Interest Expense
Interest expense increased $912,000 or 208% to $1,350,000 for
the current 1996 quarter from $438,000 for the 1995 comparable
quarter. The increase was primarily the result of the issuance
of $52 million in principal amount of 7 1/2% Convertible
Subordinated Debentures, (see Note 3).
General and Administrative Expenses
General and administrative expenses are comprised of the
Company's and all its subsidiaries general and administrative
expenses. These expenses increased $2,335,000, or 196%, to
$3,527,000 for the current 1996 quarter from $1,192,000 for the
comparable 1995 quarter. The increase was primarily
attributable to the Company's recent acquisitions and expanded
services.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased
$1,272,000, or 155%, to $2,095,000 for the current 1996 quarter
from $823,000 for the comparable 1995 quarter. The increase is
primarily due to oilfield service depreciation expense, which is
the result of increased oilfield service capital expenditures
for the current period versus the prior period and the
acquisition of WellTech. In addition, depletion expense
increased for the period due to the increase in the production
of oil and natural gas.
Income Taxes
Income tax expense of $2,396,000 for current 1996 quarter
increased from $1,069,000 in income tax expense for the
comparable 1995 quarter. The increase in income taxes is
primarily due to the increases in operating income. However,
the Company does not expect to be required to remit a
significant amount of the $2,396,000 in total federal income
taxes for fiscal year 1997, because of the availability of net
operating loss carryforwards,accelerated depreciation and
drilling tax credits.
Cash Flow
Net cash provided by operating activities increased $1,839,000
from $1,235,000 during the comparable 1995 quarter to $3,074,000
for the current 1996 quarter. The increase is attributable
primarily to increases in net income and increases in the
Company's depreciation, depletion and amortization expense, as
well as an increase in accounts receivable.
Net cash used in investing activities increased from $1,947,000
for the comparable 1995 quarter to $3,545,000 for the current
1996 quarter. The increase is primarily the result of increased
capital expenditures for oilwell service operations associated
with the acquisition of WellTech. This increase is partially
offset by a decrease in expenditures for oil and gas properties.
Net cash provided by financing activities was $15,067,000 for
the current 1996 quarter as compared to $335,000 in net cash
provided by financing activities for the comparable 1995
quarter. The increase is primarily the result of the proceeds
from the issuance of the Company's 7 1/2% debenture which is
partially off-set by the repayment of previously existing
long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $17,116,000 in cash as
compared to $3,240,000 in cash at June 30, 1996.
The Company has projected $6.5 million for oilfield service
capital expenditures for fiscal 1997 as compared to $5.2 million
for fiscal 1996. Oilfield service capital expenditures for the
current quarter of $2.9 million are expected to significantly
decrease through the remaining fiscal 1997 fiscal year. Capital
expenditures are expected to be primarily capitalized
improvement costs to existing equipment and machinery. The
Company expects to finance these capital expenditures utilizing
the operating cash flows of the Company.
Odessa Exploration is forecasting outlays of approximately $6.0
million in development costs for fiscal 1997, as compared to
$9.8 million during fiscal 1996. Financing is expected to come
from borrowings.
Clint Hurt Drilling has forecast approximately $500,000 for oil
and gas drilling capital expenditures for fiscal 1997 primarily
for improvements to existing equipment and machinery compared to
$598,000 for fiscal 1996. Such outlays are treated as capital
costs. Financing is expected to come from existing cash flow.
Debt
In July 1996, the Company completed the offering of $52,000,000
of 7 1/2% convertible subordinated debentures due 2003. The
Offering was a private offering pursuant to Rule 144A
under the Securities Act. Net proceeds from the Offering were
used to substantially repay existing long-term debt
(approximately $35.2 million). The remaining proceeds are
intended to fund the expansion of the Company's services through
acquisitions of businesses and assets and for working capital
and general corporate purposes. Long-term debt which was repaid
with proceeds from the Offering in July 1996 included the term
note with CIT Group/Credit Finance, Inc. ("CIT") of
approximately $21.2 million and all bank debt associated with
Odessa Exploration, previously with Norwest Bank Texas, N.A.
("Norwest"), of approximately $14.2 million.
The Debentures mature on July 1, 2003 and are convertible at any
time after November 1, 1996 and before maturity, unless
previously redeemed, into shares of the Company's common stock
at a conversion price of $9 3/4 per share, subject to adjustment
in certain events. In addition, holders of the Debentures who
convert prior to July 1, 1999 will receive, in addition to the
Company's common stock, a payment generally equal to 50% of the
interest otherwise payable on the converted Debentures from the
date of conversion through July 1, 1999, payable in cash or common
stock, at the Company's option. Interest on the Debentures is
payable semi-annually on January 1 and July 1 of each year,
commencing January 1, 1997.
The Debentures will not be redeemable before July 15, 1999.
Thereafter, the Debentures will be redeemable at the option of
the Company in whole or part, at the declining redemption prices
set forth in the original prospectus, together with accrued and
unpaid interest thereon. The Debentures also may be redeemed at
the option of the holder if there is a change in control (as
defined in the original prospectus) at 100% of their principal
amount, together with accrued interest thereon.
As a result of the convertible subordinated debenture Offering
described above and subsequent repayment of all long-term debt
with CIT, except the lines of credit, the Company is currently
renegotiating its overall credit facilities with CIT, including,
but not limited to, maximum credit availability, interest rate
and maturity dates.
Impact of SFAS 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121") regarding the impairment of long-lived assets,
identifiable intangibles and goodwill related to those assets.
The application of SFAS 121 will require periodic
determination of whether the book value of long-lived assets
exceeds the future cash flows expected to result from the use of
such assets and, if so, will require reduction of the carrying
amount of the "impaired" assets to their estimated fair values.
The Company implemented SFAS 121 on July 1, 1996 (see Note 4).
Impact of Inflation on Operations
Although in our complex environment it is extremely difficult to
make an accurate assessment of the impact of inflation on the
Company's operations, management is of the opinion that
inflation has not had a significant impact on its business.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is filed as a part of the Form 10-Q:
Number Description
11(a) Statement - Computation of per share earnings.
Filed herewith as part of the Condensed
Consolidated Financial Statements).
27(a) Statement - Financial Data Schedule (Filed
herewith as part of the Condensed Consolidated
Financial Statements).
(b) There were no reports filed on form 8-K during the
quarter ended September 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. John
President, Chief Executive Officer
Dated: November 6, 1996 and Chief Financial Officer
By /s/ Danny R. Evatt
Dated: November 6, 1996 Vice President and Chief
Accounting Officer
KEY ENERGY GROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
EXIBIT 11(a) THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Three Months Ended Three Months Ended
September 30, September 30,
1996 1995
Fully- Fully-
(Thousands, except per share amounts) Primary Diluted Primary Diluted
- -----------------------------------------------------------------------------
Net Income and Adjusted Earnings:
- --------------------------------
Net Income before income taxes and
minority interest $2,396 $2,396 $1,069 $1,069
Effect of interest on debentures - 975 - -
------ ------ ------ ------
Adjusted net income before income
taxes and minority interest $2,396 $3,371 $1,069 $1,069
====== ====== ====== =====
Net Income $1,554 $1,554 $ 726 $ 726
Effect of interest on convertible
debentures, net of tax effect - 649 - -
------ ------ ------ ------
Adjusted net income $1,554 $2,203 $ 726 $ 726
====== ====== ====== ======
Weighted Average Shares and Share
Equivalents Outstanding:
- ---------------------------------
Weighted average shares outstanding
(as reported) 10,425 10,425 6,914 6,914
------ ------ ------ ------
Common share equivalents issuable
under stock option plans 347 373 - -
Common share equivalents issuable on
assumed conversion of
WellTech warrants 122 150 - -
Common share equivalents issuable on
assumed conversion of
convertible debentures - 5,333 - -
Common share equivalents issuable for
interest on assumed conversion of
convertible debentures - 693 - -
------ ------ ----- -----
Weighted average shares and share
equivalents outstanding 10,894 16,974 6,914 6,914
====== ====== ===== =====
Earnings per Share:
Net income before income taxes
and minority interest $0.22 $0.20 $0.15 $0.15
Net income $0.14 $0.13 $0.11 $0.11
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0
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