Shares Outstanding:  135 million

Market cap as of November 13^th:  $1.92 billion

Total debts – current assets:  $204 million.

Enterprise Value:  $2.127 billion.

Forecast 2006 EBITDA:  $480 million

Forecast 2007 EBITDA:  $575 million.

Website:  http://www.keyenergy.com/main.php

Key Energy Services considers itself to be the world's largest rig based oil and natural gas well servicing company.  Services include well maintenance, workovers, pressure pumping, logging and wireline services.

Revenues are forecast to exceed $1.58 billion in 2006, and may grow to as much as $1.78 billion in 2007.

Key Energy has one of the lowest debt ratios of any major oil service company in North America today.  Revenue growth is as strong as any other major firm among peers, and EBITDA has grown sharply in the last two years.  Key has made significant capital expenditures to ensure that its equipment is arguably, state of the art among competitors in North America.  The firm has a reputation as being one of the most reliable well service companies around. 

Shares have not fully participated in the multiyear oilservices run.  This is due to the inability of investors to obtain recent audited financial statements.  Key Energy was found to have been deficient in its SEC filings, going back to the end of 2002.  Consequently, the firm found itself unable to produce financial reports since that time.  Along with the financial statement furor which ensued, Key Energy lost its major stock exchange listing.

The shares now trade on the pink sheets, until such time as the restatement process is completed.

The critical issues (it seemed) with Key, lay in its historic accounting of depreciation and amortization of assets.  Well service companies carry vast inventories of equipment.  Key's new auditors required the firm to provide up to date records of even the smallest items, so as to be able to determine the depreciation rates.  Previous record keeping was quite sloppy.  It was eventually determined that tens of millions of dollars of depreciated items (dating in some cases prior to 2002) could not be found.  Numerous items which should have been expensed in a single year were also incorrectly depreciated over multiple years. 

Accounting issues are closer to being resolved.  All financial records starting in the year 2003 have been carefully and painstakingly poured over.  With a 2003 fiscal year end in sight, auditors will be able to more rapidly calculate depreciation on equipment, so as to calculate earnings.  2004 and 2005 records are now being worked on.  It is estimated that by July 2007, the 2006 tax year should be completed, and all filings may brought to date.

Most institutional holders were forced to sell their holdings.  In my view, the inability of investors to view an audited set of financial records has reduced the ownership pool, to only those willing to delve into financial records themselves.  Many institutional accounts and mutual funds are unable to invest in pink sheet securities.  These were forced to sell the shares when the NYSE listing was lost.  Even fewer retail investors will own shares of a company that does not have audited financial reports.

Key may now be much cheaper than other midcap oilservice companies.

Despite the lack of historic earnings reports, current financial data suggests that the company has been growing rapidly, increasing its profitability sharply and reducing levels of debt dramatically.  

Current valuations lend credence to this thesis.  Large cap peers include Nabors Industries (NBR), presently selling for about 5.1X estimated 2007 EBITDA and  Superior Energy Services (SPN), selling for roughly 5.6X estimated 2007 EBITDA. 

KEGS sells for roughly 3.7X estimated 2007 EBITDA.  Based upon this relative measure, if Key was trading on a recognized exchange, the shares would appear to be undervalued by approximately 27%-34%.

Key generates far more cash than is required for capital spending and debt service. A share buyback program of up to $250 million is contemplated.  Lender consents are required for this action.  

Current financial data is available.  Key produces relatively useful financial data from a revenue and expense point of view, on a monthly basis.  Recent data suggests that Key is on track to generate more than $1.58 billion of revenues in 2006.  Earnings before interest, taxes and depreciation, to date, suggest that the firm may generate as much as $480 million of EBITDA in 2006.  Key has raised prices several times in 2006, which appears to have made a positive impact upon EBITDA since they were implemented.  A further price increase for 2007 has been announced.

The 3^rd quarter revenue and expense statements for the period ending September 30^th 2006 were filed today.  Key generated $419 million of revenues, up by approximately 12% from the second quarter 2006 revenues of $374.4 million.

EBITDA for the quarter ending September 30^th, 2006, increased to $144.9 million, or 34.5% of revenues.  This was roughly 35% higher than second quarter 2006 EBITDA of $106.7 million.

Should institutional investors return to Key, the shares may move.   Upon completion of the earnings restatement, Key will almost certainly be listed upon a major exchange, such as NASDAQ or AMEX.  Institutional investors will once again, be permitted to own Key.  Investment firms will also be able to produce research with the benefit of financial statements as a guide.  This may result in an increase in retail investor ownership.  All else being equal, a major listing would be beneficial.

Intrepid investors who act in anticipation of a positive restatement process could be rewarded. Value seekers may find KEGS compelling around current levels. The firm is a dominant company in its sector, and has very low levels of debt.  Once the restatements are  completed, Key may be sought after by mutual funds, mid cap index funds and retail investors.  Major firms such as NBR, may also find that Key to be an inexpensive acquisition candidate.

The most recent financial report may be obtained by linking here.

http://biz.yahoo.com/prnews/061113/nym155.html?.v=65

The most recent audio presentation from the corporation may be found by linking here.