Key Energy Services is North America's largest land based well servicing company
Key Energy Services (nyse: KEG) ($12.90) is North America's largest land based well servicing company. The firm has a trailing enterprise value of $2.58 billion, and generated $406 million of EBITDA. The firm is selling for 6.35X trailing EV/EBITDA.
In the near term, the industry will remain out of favour, due to a terrible oversupply of equipment. Cash flow metrics are an unreliable measure of value in this sector, due to the heavy maintenance capex required simply to keep rigs operating.
Key is trying to carve out a niche as a specialist in servicing already drilled wells. This business, while not carrying the same high profit margins as drillers when times are good, tends to have a steady demand. When prices are low, companies prefer to stimulate and re work existing wells, rather than drill new ones. So, Key's services are less susceptible to changes in oil pricing than pure drillers.
Key has also been investing in the development of a business relationship with Pemex, the Mexican oil company. Pemex has a significant supply of land based wells which require reworks to return to productivity. KEY seems to have the inside track with the government.
2008 looks to be flat in terms of revenue and EBITDA. In the latter half of 2008, natural gas drilling and maintenance will need to accelerate sharply, simply to maintain production rates at status quo. Key should be a prime beneficiary of this trend.
I forecast that EBITDA may rise to $630 million by 2011, an increase of 55% above my 2008 forecast. Cash flow should be sufficient to reduce total debts by more than $340 million over that period.
Should the markets simply pay a 6.35X multiple for Key in 2011, I forecast a share price of $26.00; 100% above the present price. If Key improves its relationship with the Mexican government, this may prove to be a conservative estimate.
Key represents my favourite stock in the oil service industry. While the sector is out of favour at present, natural gas prices now suggest a sharp rebound may occur before year end 2008.
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