There is nothing quite like a flurry of smart money and guru entries into a company to catch market interest, and if there is one company that is capturing attention right now for that reason, it is Key Energy Services Inc. (KEG, Financial).
Over the last week, the company has announced three major institutional positions, each of which should be enough as a single holding to inject some positive sentiment. Here is who is buying shares and why we think they are picking up exposure.
Before we get into the gurus, however, a bit of background.
Key Energy Services is an oil and gas company based in the U.S., with operations around the globe. At one point (and very recently) it was the largest onshore, rig-based well servicing contractor based on the number of rigs owned, providing well intervention services and has operations in all major onshore oil and gas producing regions of the continental United States and internationally in Mexico and Russia.
In October of this year, however, the company filed for Chapter 11 Bankruptcy. Those familiar with this space will be all too aware that Key is not the only company to have slipped into bankruptcy over the last 24 months. Energy prices slumped throughout 2016, and as prices slumped, asset-liability ratios worsened. Companies big and small fell foul of the disparity between what an oil or gas company could sell its product for and what it needed to sell it for in order to remain current on its liability servicing.
At the time of Key's filing, the company held circa $1 billion of debt, with an associated yearly interest expense of approximately $79 million. To add some perspective, revenues for the third quarter of 2016 came in at a little over $102 million, and $792 million throughout full-year 2015. Net loss on these revenues for the two periods came in at $130 million and $917 million respectively.
To add a little more perspective, and to illustrate the company's struggle in line with the decline in energy prices, Key lost just $22 million on $1.59 billion in revenues during 2013 and lost $178 million on revenues of $1.42 billion during 2014.
Cash on hand at the end of 2015 came in at $204 million, while cash on hand at the end of September 2016 (the latest filing before the bankruptcy application) was $75 million. Total assets at that date were $995 million, so not terrible when compared with the $1 billion in liabilities, but more than three quarters of these assets were tied up in property and plant (read: not something that the company could use to pay off monthly or quarterly interest payments).
So as mentioned, all this amounted to a bankruptcy filing, but ahead of the filing, Key had already secured a restructuring plan. The plan essentially saw it unload a large portion of its assets, designed to reduce its debt to $250 million and its annual interest expense to $31 million.
Fast forward a couple of months and the company emerged from bankruptcy, pretty much as per the planned restructuring. The target numbers were not were not quite hit (it now has a little over $250 million in debt and around $34 million in annual expense) but they are manageable. The smooth transition suggests we are just as likely to see a smooth recovery. Exactly how much of its asset value the company has had to let go is not yet clear (we are waiting on the next company report to find this out), but we expect that it is not a crippling amount. Why? Because 95% of Key's outstanding shares pre-bankruptcy went to creditors, suggesting a large portion of the company's debt did not get paid in cash.
Bottom line here is that Key looks to have been a company that, in a normal energy environment, would have been sound from a balance sheet perspective. A drop in energy prices revealed some degree of overleveraging, however, and this caused some trouble. It looks to be out of the woods heading into the new year, however, and it seems the smart money agrees.
Which brings us to the latest buys.
On Dec. 27, billionaire George Soros (Trades, Portfolio)‘ Soros Fund Management filed to report a 9.09% stake in Key, or 1.83 million shares. A day later, Edward Mule, by way of his Silver Point Capital fund, announced a 1.34 million-share purchase, accounting for 6.7% of Key's common stock. On Dec. 29, Jon Bauer's Contrarian Capital filed to disclose a 2.38 million-share holding, amounting to an 11.8% stake.
So in three days before the close of the year, three major funds have amassed just shy of 30% of the company. Sure, the creditors are likely offloading their newly acquired shares in order to cash in on some of the capital owed to them pre-restructuring, but this cannot last too long. It looks as though there is plenty of upside potential for Key going forward. Couple this with what looks to be a recovering energy environment (so long as China can hold out) and things look promising.
Disclosure: The author owns no stocks mentioned in this article and does not intend to buy shares in any companies discussed.
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