Key Energy Services: Will a Government Investigation Create a Long-Term Opportunity?

You might think Key Energy is a value investment opportunity, but make sure you read this before coming to any such conclusions.

Jun 11, 2014 at 1:14PM

Key Energy Services (NYSE:KEG) provides onshore well services with more than 175 locations in the United States. The stock has fallen more than 20% from its 2014 highs. These losses are a result of poor fundamental performance relative to other onshore drilling companies and also the possibility of corruption that could unmask significant problems for the company. Should you see its losses as an opportunity or seek value in its peers such as Basic Energy Services (NYSE:BAS) and Nabors Industries (NYSE:NBR)?

An unraveling puzzle with unanswered questions
Key Energy is currently investigating allegations involving its Mexican operations for possible violations of the U.S. Foreign Corrupt Practices Act. Furthermore, Key Energy has voluntarily disclosed the allegations and information surrounding the situation from its initial investigation to the U.S. Securities and Exchange Commission.

This disclosure only adds to the controversy surrounding this company, as the same allegations emerged last month in regard to its Russian business. According to a recent 8-K filing, an investigation has been launched by the SEC and U.S. Department of Justice, and the company claims that it is fully cooperating.

Nonetheless, there are no additional details as to what this corruption may include, which leaves the situation open to speculation. With that said, it is rather serious to have two different enforcement agencies of the U.S. government conducting an investigation and equally serious to have the same problem surface in two separate regions of its business in different countries.

As a result, investors can only assume that as this puzzle unravels, even more troubles could come to light, such as the possibility of corruption or further issues with the way Key Energy does business. Therefore, it's rather difficult to call the stock a buying opportunity right now with so many unanswered questions, especially when compared to peers.

Two investment options with actual growth and without controversy
Nabors Industries and Basic Energy Services are two other large land-based drillers, both of which have trended in a different direction than Key. As you can see, Key Energy has significantly underperformed its peers, and while its stock has seen a pullback in the last couple months, its underperformance can be traced to more than just an investigation.

For example, in Key's first quarter, its total revenue fell nearly 17% year over year to $356.1 million as the company struggled with concluding international contracts. In retrospect, its U.S. business isn't that bad, with flat revenue and an operating margin of 11%; although that's still down from 14.5% last year. However, it's the lagging international business that is killing Key, with a negative operating margin of 32.7%.

Charts

Key Energy Services 1 Year Total Returns data by YCharts

In comparison, Basic Energy and Nabors have been solid companies. Basic Energy's revenue increased 10.6% in its last quarter, while Nabors' declined 3.7%. On the other hand, higher oil prices and improved well utilization rates are expected to bode well for the two companies, with analysts projecting full-year revenue growth of 6.7% and 12.8% for Nabors and Basic Energy, respectively.

Foolish thoughts
With that said, it's really hard to find a reason to invest in Key with so much uncertainty and fundamental declines. Basic Energy is growing much faster, has higher margins, and trades at the same 0.8 times sales premium. And while Nabors is more expensive at 1.3 times sales, its operating margin is about triple that of its peers, at 8.5%, and its 14 times forward earnings multiple is rather attractive. Therefore, why chase Key when there are two solid alternatives, especially with two agencies investigating its operational practices?

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers