Oil prices might be at multiyear lows but on Thursday, small cap oil services stock Key Energy Services, Inc (NYSE: KEG) surged 35.59% – meaning its worth taking a closer look at the stock along with the performance of oil benchmarks like the Market Vectors Oil Services ETF (NYSEARCA: OIH) and the United States Oil Fund LP ETF (NYSEARCA: USO). After all, oil services stocks should not be surging right now.
What is Key Energy Services, Inc?Small cap Key Energy Services is the largest onshore, rig-based well servicing contractor based on the number of rigs owned and provides a complete range of well intervention services with operations in all major onshore oil and gas producing regions of the continental United States and internationally in Mexico, Colombia, Ecuador, the Middle East and Russia. Onshore energy production services and solutions include drilling and workover rigs, coiled tubing, frac stack and well testing, fluid services, onshore and deepwater fishing, and rental services.
As for potential performance benchmarks, the Market Vectors Oil Services ETF replicates the performance of the Market Vectors US Listed Oil Services 25 Index (MVOIHTR) which tracks the overall performance of 25 of the largest US listed, publicly traded oil services companies while the United States Oil Fund LP ETF tracks the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil primarily via listed crude oil futures contracts and other oil-related futures contracts.
What You Need to Know or Be Warned About Key Energy Services, IncKey Energy Services seems to have begun rising after being upgraded to "outperform" from "sector perform" by analysts at RBC Capital but shares were trading at nearly double the normal trading volume (4.74 million shares) for the two previous trading days (as oil prices moved a bit higher) and then quadruple the normal volume on Thursday.
| Dec 18, 2014 | 1.36 | 1.80 | 1.36 | 1.60 | 16,183,276 |
| Dec 17, 2014 | 1.05 | 1.20 | 1.04 | 1.18 | 8,387,241 |
| Dec 16, 2014 | 1.11 | 1.16 | 1.00 | 1.05 | 8,413,193 |
| Dec 15, 2014 | 1.24 | 1.24 | 1.12 | 1.13 | 5,459,888 |
| Dec 12, 2014 | 1.25 | 1.27 | 1.10 | 1.12 | 6,241,630 |
However, its hard to understand why one analyst upgrade would send shares surging by 35.59% but there was the following post on the Yahoo! Finance message boards:
Have not heard any rumors but KEG is a MAJOR TAKEOVER TARGET BECAUSE OF THE FOLLOWING REASONS:
VERY NICE BALANCE SHEET
THE STOCK IS CHEAP
AND IT NOW HAS THE BACKING OF RBC
While others have posted messages like the following:
bond market thinks KEG is heading for bankrupctyselling for 50cents on the dollar
On December 8th, Key Energy Services did announce an amended credit agreement with the Chairman/CEO stating:
"We are pleased to have completed this step in amending our existing Credit Facility to improve our liquidity position. We will be working with our lenders to replace our Credit Facility that matures in March 2016. Taking in to account the current amendments made to the Credit Facility, Key's liquidity position as of the end of the third quarter of 2014 would have been $328.3 million, which includes cash of $57.4 million as of the end of the third quarter of 2014 and undrawn availability under the Credit Facility."
On December 1st, Moody's Investors Service had downgraded Key Energy Services' Corporate Family Rating (CFR) to B1, senior unsecured notes rating to B2 and lowered its Speculative Grade Liquidity Rating to SGL-3 while the outlook was changed to negative. A Moody's AVP was quoted as saying:
"The downgrade reflects weak earnings prospects of Key Energy in 2015 leading to significantly higher leverage, substantial legal expenses related to Foreign Corrupt Practices Act (FCPA) investigations that we expect to continue at least through mid 2015, and diminished liquidity. The negative outlook reflects the uncertainty around the resolution of the FCPA allegations and the company's ability to maintain sufficient headroom under its credit agreement financial covenants."
The announcement itself stated:
The outlook could change to stable when the FCPA issues are resolved, the company achieves more meaningful covenant cushion and the revolver maturity has been extended. The rating could be downgraded if covenant challenges continue to linger or if FCPA costs increase significantly or continue beyond mid-2015. Given our negative outlook on the OFS industry and Key Energy's weak EBITDA prospects for the next twelve months, we don't anticipate an upgrade in 2015.
Share Performance: Key Energy Services, Inc vs. OIH & USOOn Thursday, small cap Key Energy Services surged 35.59% to $1.60 (KEG has a 52 week trading range of $1.00 to $10.52 a share) for a market cap of $182.24 million plus shares are down 79.7% since the start of the year and down 82.2% since January 2010. Here is a look at the long term performance of Key Energy Services verses that of the Market Vectors Oil Services ETF and the United States Oil Fund LP ETF:
As you can see from the above performance chart, Key Energy Services had two big surges a few years ago and has fallen off more sharply than the Market Vectors Oil Services ETF and the United States Oil Fund LP ETF.
Finally, here is a look at the latest technical charts for all three oil related investments:
The Bottom Line. I don't see any real justification for the sudden price surge of Key Energy Services beyond something going on behind the scenes or the activities of speculators. Moreover and just because a stock in a beaten down sector is hot does not mean it's a good buy or that now is a good time to buy.
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