Sunday, July 5, 2015

Seeking Alpha: Should This KEG Be Tapped?

If you believe that the ugly conditions today in the U.S. onshore energy market are just a part of the ups and downs that the market has seen over decades, you probably see several values in the space. Whether Key Energy Services (NYSE:KEG) belongs on that list is an interesting question to me. This wasn't always a particularly well-run company before the widespread downturn, and I believe it is going to be difficult to generate attractive economic returns in coiled tubing and fluid services due to the low barriers to entry.

On the other hand, Key has the largest well services fleet in the U.S. onshore market and the steep decline rates of new unconventional wells, not to mention their high drilling cost, should make for a worthwhile long-term opportunity. In addition, a refinancing last month should significantly reduce the company's liquidity risks (albeit at a cost). Looking at the long-term FCF potential, EV/EBITDA, and ROE-TBV, I believe that $2.50 to $3.50 is a credible range for valuation, but this is a very high-risk proposition in a market where residual asset value means little and E&P companies are more than willing to use service companie

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Should This KEG Be Tapped?

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