Key Energy Services Management Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Key Energy Services, Inc. (KEG)
by: SA Transcripts

Key Energy Services (NYSE:KEG)

Q1 2013 Earnings Call

April 26, 2013 10:00 am ET

Executives

Gary L. Russell - Vice President of Investor Relations

Richard J. Alario - Chairman, Chief Executive Officer, President, Chairman of Equity Award Committee and Member of Executive Committee

J. Marshall Dodson - Chief Financial Officer and Senior Vice President

Newton W. Wilson - Chief Operating Officer, Executive Vice President and Assistant Secretary

Analysts

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

John M. Daniel - Simmons & Company International, Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Jim Shone

John R. Keller - Stephens Inc., Research Division

Robert L. Christensen - The Buckingham Research Group Incorporated

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Services First Quarter 2013 Earnings Call. [Operator Instructions]

At this time, I will turn the call over to Mr. Gary Russell, Vice President of Investor Relations. Mr. Russell, you may begin.

Gary L. Russell

Thank you, Shannon. And thank you all for joining Key Energy Services for our first quarter 2013 financial results conference call.

This call includes forward-looking statements. A number of factors could cause actual results to differ materially from the expectations expressed in this call, including risk factors discussed in our 2012 Form 10-K and other reports most recently filed with the SEC which are available on our website.

This call may also include references to non-GAAP financial measures. Please refer to our website for a reconciliation of any non-GAAP financial measures provided on this call to the comparable GAAP financial measures. For reference, our general investor presentation is available on Key's website at keyenergy.com under the Investor Relations tab.

I'm going to turn the call over to Dick Alario, Key's Chairman, President and CEO, who will provide some introductory comments. Then Marshall Dodson, our CFO, who will provide a financial summary. Followed by Trey Wilson, our COO, who will provide an operations summary. And finally, Dick will return to conclude our prepared remarks and open the call for your questions. Dick?

Richard J. Alario

Thank you, Gary. Good morning, everyone. In the first quarter, Key generated normalized earnings of $0.01 per share, just below our guidance of $0.02 to $0.04 per share. The shortfall was driven primarily by our U.S. Fluids Management business and by activity reductions in Mexico. Other than those 2 items, the rest of our business performed pretty much as we had projected.

In the U.S. segment, we anticipated roughly flat customer activity relative to the fourth quarter. However, the onshore drilling rig count was down 3%. This was despite the fact that macro indicators, things like oil and gas prices and drilling permits, were generally pointing towards flat to moderately higher activity from fourth quarter levels.

Our completion services, particularly Coiled Tubing, frac stack and flowback operations, grew income quarter-over-quarter due largely to cost reductions and better operating efficiencies. Thus far in April, activity is trending up moderately from March levels. U.S. revenues in March were up 5% from December. Trey will elaborate more on our recent activity trends, but this juncture in the second quarter, Key's U.S. activity is following seasonal trends, which typically generate 3% to 5% activity improvement from first quarter levels and we now anticipate a gradual activity increase for the year.

Against this backdrop, we believe that our Rig, Coiled Tubing, and Fishing & Rental Service businesses should generate improved performance going forward given their exposure to remedial work and horizontal completions and some additional operating efficiencies.

As we indicated on our last conference call, our Fluid Management Services business remains challenged due to chronic oversupply of equipment. Thus, we've commenced a significant restructuring of our FMS business. And Marshall and Trey will elaborate on that later.

In International, we're currently experiencing lower-than-anticipated activity in Mexico. Our principal customer is significantly reducing its spending in the North region, including the ATG asset where we operate. We currently understand that all new well drilling in the ATG asset is being wound down. We also understand that workover operations, the service that we provide in the ATG field, will continue but that the number of rigs that we'll operate is being reduced by approximately half for the next couple of quarters. As a result, we're actively reducing our cost to match short-term demand.

In the first quarter, we had already begun new operations with Rig and Coiled Tubing Services in the South region in Mexico, where we expect no spending reductions. We're now in the process of redeploying some of the idled rigs to the South region and to other countries, including the U.S. Outside of Mexico, our operations in other international markets are performing essentially as we had expected.

Finally, we've disclosed that we recently bought out our joint venture partner in Russia. Following our experience in the country to date and given the opportunities we see in that market, we believe the timing was right to take full ownership of the entity and better position Key to take advantage of those opportunities.

And before turning the presentation over to Marshall Dodson, Key's new CFO, I'd like to publicly welcome Marshall to our senior executive team. He's previously served as Key's Chief Accounting Officer and then was promoted to Treasurer. And in these roles, Marshall has been intimately involved in all aspects of the company. And many of you already know him well, so we welcome Marshall Dodson in his new role as Key's Chief Financial Officer.

Marshall?

J. Marshall Dodson

Thanks, Dick. Our consolidated revenues for the quarter were $428.4 million, down 8% on a prior quarter. U.S. revenues were $346.1 million, down 7% compared to the fourth quarter and International revenues also declined, down 12% to $82.4 million.

Our consolidated bottom line EPS was $0.01 after normalizing for the onetime G&A expense associated with the retirement of my predecessor. On a GAAP basis, our consolidated bottom line result was a net loss of $274,000 or breakeven on a per share basis for the quarter.

In the U.S., our businesses were impacted by seasonal factors, including $6 million of lost revenues attributable to weather interruptions, as well as the overall market activity decline, as Dick noted. Our operating income margins declined 270 basis points quarter-over-quarter to 11% on the lower activity, as well as the usual first quarter impact of unemployment taxes, which accounted for roughly $0.02 of the EPS decline from the fourth quarter.

Our Rig Services business saw a quarter-on-quarter decline in revenues of 8%, of which about 1/3 was due to weather disruptions, and another 1/3 was due to the impact of the large customer activity decline we spoke of in the last quarter, net of some rig redeployments. The remainder of the decline was due to price and mix changes and overall market conditions. Operating income margins declined quarter-on-quarter on the activity decline and seasonal effects, including the large share of the unemployment taxes.

Our Fluids Management business saw a 9% decline in revenues quarter-on-quarter. The primary driving factors were an oversupplied market relative to the market activity and price erosion in more crowded markets. These factors contributed to Fluid Management's decremental margins of around 100% and a decline in operating income margin in this business accounted for over half of the overall margin decline in the U.S.

As Trey will discuss in more detail, we are in the midst of significant steps to improve the profitability of this business. As these changes are implemented, we'll likely recognize charges in the second quarter associated with this effort. However, it is too early at this point to quantify.

Our Fishing & Rental business, which includes our frac stack and flowback operations, also saw revenue declined 3% this quarter. Despite the drop in sales, we enjoyed the benefit of the efforts we undertook last year in our frac stack and flowback business to adjust our cost structure and position ourselves in the right markets. These changes generated a 20% increase in the operating income from these services, expanding our Fishing & Rental operating income margins in excess of 400 basis points.

Our Coiled Tubing Services is another business where despite a decline in revenue for the quarter of 8%, our efforts to position these assets in the right markets and operate the businesses more efficiently contributed to a more than 450 basis point improvement in operating income margins over the fourth quarter.

Outside the U.S., our revenues and profitability for the quarter were negatively impacted by the activity reduction in Mexico where we saw revenues fall 13% and operating income declined 300 basis points from the prior year quarter. While our Mexico rig activity was fairly flat during the quarter, our revenues fell on less third-party services associated with our work quarter-on-quarter. This and start-up costs in the South region impacted our first quarter results.

In Colombia, revenues declined 9% on lower activity and mix as we repositioned equipment in response to customer demand, which resulted in a 150 basis point decline in operating income margin for the quarter.

Revenues in the Middle East were fairly flat this quarter, while operating income was down slightly due to start-up costs as we readied another rig for deployment in Oman. We expect this additional rig will benefit us in the second quarter.

As we previously disclosed, we've bought out our partner's interest in Russia. We paid $14.6 million for the remaining 50% of this business, which brings our total equity investment in the country to $39 million. G&A costs were $63 million or nearly 15% of revenues for the quarter. Excluding the onetime retirement charge, G&A was 14% of revenues. We're taking steps to reduce our cost structures and expect to see some benefits in the second quarter with full impacts in the third.

Depreciation and amortization expense was $54 million for the quarter and interest expense was $14 million. Our cash flow from operations was $20 million this quarter and was impacted by working capital uses, including annual tax payments. Capital spending for the quarter was $37 million and we also funded the $14.6 million for Russia I mentioned before into escrow for the buyout of the joint venture.

This is in addition to our previously announced full year capital spending budget of $210 million. We closed the quarter with a net debt to capital of 38.7% and we expect to bring our leverage down closer to a mid-30s percent over the rest of the year. We've not changed our capital spending plan for the year, but we have flexibility to reduce our planned spending as warranted by activity levels.

Now I'll turn the call over to Trey.

Newton W. Wilson

Thank you, Marshall. With regard to our U.S. business the moderate activity growth that we were expecting late in the first quarter did not occur, while we are seeing activity growth this month, it's primarily seasonally driven. In Rig Services, our revenue decline was primarily due to the full quarter impact of the activity reduction by 1 large customer and weather disruptions, both of which caused labor cost inefficiencies. Our activity, as measured in rig hours, declined 6% in the first quarter compared to the fourth quarter. We've made good progress with our efforts to replace the work that we lost from our large customer last quarter. In our West Coast market we have totally recovered the lost hours without any pricing degradation. We believe that we will redeploy the few remaining idled rigs in the Permian Basin in the coming months while maintaining stable pricing.

For the second quarter, we expect improved activity and improved labor efficiencies to drive higher revenue and operating margins, which may be partially offset by slightly unfavorable change in mix. The financial results of our Fluid Management Services business have been declining over the past several quarters and conditions continue to worsen given customer demand levels in regionally oversupplied markets. Despite our cost reduction efforts over the past couple of quarters, we still lost money in the first quarter and will likely lose money again in the second quarter. Of course, this is unacceptable and we have initiated more dramatic changes to this business.

More specifically, we are consolidating the management teams and operations of our Rig Services and Fluid Management Services businesses. Putting the 2 businesses under 1 management team enabled us to remove the top 2 layers of management in the Fluids business and we expect to gain meaningful operating efficiencies and synergies. We will also reduce capacity in certain markets, dispose of our non-strategic and older assets, and focus our assets on more attractive markets. We believe this will result in a lower Fluid Management Services revenues near term, but we expect operating income improvements beginning in the third quarter.

In our Coiled Tubing Services business, our efforts to improve efficiencies benefited results in the first quarter. Our revenues were down compared to the fourth quarter due to lower customer demand, our operating income margin improved on better operating and cost efficiencies. Pricing was flat during the first quarter and is expected to remain flat this quarter.

Our utilization was down slightly in the first quarter to 45% from 47% in the fourth quarter. While we are working to increase our utilization, our objective is to do so in markets and with opportunities where we can deliver profitable revenues to the bottom line, as we demonstrated this quarter.

Utilization improved in our extended reach long lateral units quarter-on-quarter from 73% to 78%. These are our largest and most capable units generally outfitted with 22,000 feet of 2 3/8 inch pipe and make up about 1/4 of our active U.S. fleet of 46 units. Our focus is to only work equipment, which we can employ at high utilization levels and to avoid crewing equipment for intermittent callout work.

We believe customer demand will improve moderately through the balance of the year, which should benefit profitability even assuming pricing remains flat. And we believe we still have room to further improve our operating efficiencies.

In our Fishing & Rental Services business, slightly lower first quarter revenue was attributed to lower demand for fishing services, weather interruptions and slightly less drill pipe rental revenues offset by improvements in operating efficiencies in our frac stack and flowback services. Pricing for our frac stack and flowback services was flat this quarter. We expect a modest increase in revenues in our Fishing & Rental Services business in the second quarter consistent with seasonal trends.

Moving on to International, our segment results were lower than expected largely due to lower activity in Mexico. Roughly 75% of the reduction in International revenues was attributable to Mexico. Dick mentioned the dynamic in Mexico, I'll add that during the fourth quarter of 2012, we averaged approximately 40 rigs working in Mexico. And we ended the year with 51 total rigs in the country in anticipation of higher levels of activity in 2013. Instead, we averaged approximately 40 rigs working in the first quarter and we are now working approximately 20 rigs in Mexico. Our customer is yet to confirm its 4-year plan with us in ATG, but we understand that they intend to keep us near this current activity level over the next 1 to 2 quarters. Meanwhile, we are deploying some of our idled rigs to the South region where we began operations in the first quarter with Rig and Coiled Tubing Services. Activity in the South region has been growing and we understand that PEMEX will continue spending in this area independent of the cutbacks in the North region.

We're also moving rigs out of Mexico to other countries such as Colombia. You may recall that in 2010 when our customer in Mexico reduced activity, we used these idled assets to open our Colombian operations, which began with 1 rig and we have 13 rigs there today. We'll also move a number of these idled rigs to the United States. Even though our total U.S. fleet is not fully utilized, we are essentially sold out of our 550-horsepower class heavy workover rigs. This more capable class workover rig is enjoying strong market demand in the U.S. and full effect of utilization throughout this cycle and we see demand in the U.S. market for more of these rigs.

In the Middle East, revenue was flat quarter-over-quarter. We expect our Middle East revenue to grow in the second quarter as we get full benefit of our sixth rig working in the region. While our business today in the Middle East is relatively small, this area has significant growth potential as large producers in the region focus on increased production from mature fields.

Under our joint venture agreement with Geostream in Russia, we had the opportunity to buy out our partner. We decided to exercise that option and we closed on that purchase earlier this month. Over the past couple of years, we have tested and evaluated the market in Russia and have learned a great deal. Our 2,000-horsepower rigs are under good contracts. And we believe that there are further market opportunities for the reliable and efficient services Key provides.

Russia is the second largest well servicing workover market in the world after the United States and we see opportunities to expand our presence there profitably. In addition, we see significant untapped value within Geostream's reservoir engineering enterprise with about 50 professionals, which we intend to leverage to grow our consulting formation evaluation and production enhancement business in Russia and other operating regions. This expanded capability allows us to provide a more complete solution for our customer needs to enhance production in mature fields and to exploit shale opportunities around the world.

Now I'll turn the call to Dick for his concluding remarks.

Richard J. Alario

Thank you, Trey. Looking ahead, while some U.S. gas markets are showing recent activity increases, we still expect 2013 to be primarily an oil driven year. Further, given the ongoing trends toward higher service intensity in horizontal wells, we believe we'll see completion activity growth that outpaces drilling activity growth in the future. Certainly good for Key. Those conclude our prepared remarks. Operator, we'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Marshall Adkins of Raymond James.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Dick, let's delve in Mexico a little bit. It seems like a few years ago these guys pulled the rug up from under your feet. And if I remember correctly in the last quarter, you were still pretty optimistic about Mexico. And it seems like this is just come out of the blue again. So give us a little more color on what's going on there and kind of how you deal with this going forward?

Richard J. Alario

I think it's -- in order to understand this as we do, it's important first to go back a little bit. In the third quarter, we were adding rigs to our business in Mexico based on customer demand. Those rigs, it got there and that quarter went to work. And as we said, we averaged 40 rigs working in the fourth quarter based on the additional or incremental rigs that went down there in Q3. At that time we were still getting a request for additional equipment. We shipped additional rigs into there anticipating that with the large budget that PEMEX had for the North region in the first quarter, work would continue to build. We hired people to get ready for those rigs to go to work. We also sent our coiled tubing units down there and hired and trained those people. As the quarter unfolded, the incremental work was erratic and did not really begin to materialize. And toward the end of the first quarter, we had actually had a couple of rigs dropped-off of the activity, but we still averaged 40 rigs in the quarter. Now what we understand and I don't want to get into specific dialogue between us and our customer, that's not our place. But here's what we understand. Very recently, our customer has done a portfolio review looking at their assets in the country and found that a large part of their 2013 budget for the North region was spent in the late Q3, Q4 period of 2012. That matches up pretty well with the demand that we were seeing and the activity increase that we were expecting. After that portfolio review, 2 decisions have been made. One, to curtail all drilling in the ATG field. And the status of that, as we understand it, is that a number of 35 or so rigs that were drilling in this area have already been turned back to the owners. And the rigs that are drilling in the field today have been told to pack up and go home once the current wells that are being drilled are finished. The other thing we understand as we said, is that workover activities in the field are going to be cut in half or have been cut in half. And this was a very recent and very quick scenario that unfolded. So it's true we had a little warning. I think we believe that the idea is that because the '13 budget was overspent too early, what we're understanding is that as the calendar and the rest of the budget match up in the back half of the year, then activity will pick up again. And this has happened before. This has -- in terms of the activity change, it's certainly not as bad as what happened in 2010. In 2010, we went down to 0 rigs running essentially. This time, we're being told we're going to go to half. And in 2010, it was a different set of issues. This is, as I said as we understand it, a portfolio review which has resulted in a delay of spending, which should last 1 to 2 quarters. And that activity should pick up in the Q4. Having said all that, we're not going to wait around and see, we're going to do what we did in 2010. We have already begun to pack up rigs, move them to other places in Latin America. And in particular, we're going to move several kits to the South region. We have talked for a while about the South region being a region which is larger than the North region, which as we understand it, is going to be uninhibited by these recent budget cuts. This is a region that has almost twice the production that the North region has. And we know historically that the South region has been able to maintain the consistency of its budget spending better than the North region. We've seen this before as you've noted. And so we had our target, our eyes set on the North -- South region for quite some time. And fortunately, for us, about the time that we began to move in that direction is when this change in view has taken place in the North region. So we're encouraged from the standpoint that there are other opportunities that we could take advantage of with the assets and crews that we already have in Mexico, but we're not going to sit around and wait for any activity improvements in the North region. By the time the fourth quarter comes around, we'll have the excess rigs replaced or relocated. We'll grow as Trey alluded to, we'll grow our Colombia business. A number of those rigs will be shipped back to the U.S. And this, I think gives some additional credence to the strategy that we've had to build these, what we call these franchise rigs, which are the big 550-horsepower rigs that can be used literally anywhere in the world. Those are the rigs that are in highest demand in our U.S. markets, so a number of them. Can't tell you the number right now, but you can think of something around a dozen. At this point, we would intend to bring back to the U.S. We believe we'll be able to accrue them, put them to work as soon as they get here because, again, that's the asset that has been most in demand for completion of horizontal wells here in the U.S. market. You know that the oil markets are strong from that. So yes, this was a surprise, but we have a good plan. We're lowering our costs. We're going to get rightsized for the market. And then, when the -- later in the year when the demand comes back, we'll make our assessments about what to do. And as you alluded to, Marshall, with the thing that you learned from these things certainly is to be more cautious. But look, let me just finish by saying -- finish this long-winded answer by saying, this market has been excellent for Key. People who watched the company have been extremely complementary about the business that we built down there with regard to returns and profitability. Just like in other places in the world customers do reviews. And from time-to-time, move that capital spending around and that's what's happening. And we still are very positive on the Mexico market. We might be a little more cautious obviously in the future depending on demand. But the last point I want to make is that when this all started, we had about 65% of the market share in the North region for workover completion, and we still have 65% market share for workover completion in North region of Mexico. So this is not the case where competitors coming in or anything like that. This is a shift in strategy by the customer.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Very helpful. Last follow-up, gas getting better you mentioned that. Are you seeing anything tangible on that side or is it more a matter of it makes sense that, that side of the business will start to come around in the next few quarters?

Richard J. Alario

Well, it's early days. We talked about this on the call last quarter that we have begun to see some green shoots and heard some customers talk about additional activity in the gas markets. And as you know, we've seen more completions in the Marcellus. We've seen more rigs, slightly more rigs in the Haynesville. Those trends continue. We have -- I will say this, we have more hope today than we did 90 days ago. That we have more confidence today than we did 90 days ago about our gas markets. We're not overconfident certainly, but we certainly appreciate the impact that has been illustrated with regard to spot pricing in the gas market. And we've really focused on those customers who have core acreage in these gas shales who can generate good returns in the price range that exist out there now. We're seeing some impact I would tell you this, tangible but not very big at this point, but somewhat encouraging.

Operator

Your next question comes from the line of John Daniel of Simmons & Company.

John M. Daniel - Simmons & Company International, Research Division

I just want to follow-up on some of Marshall's questions just on International. And I can understand the reluctance to provide guidance. But if, Trey, when we look at rigs being down, cut in half in Mexico, you're moving equipment to other regions and you've got start-up costs in other regions as well. I mean is it within the realm of possibility that we see operating margins go sub-10% or even negative in Q2?

Richard J. Alario

I don't think so, John. The -- we'll have some costs associated with shipping rigs. It's not -- I don't think that cost is material. The crews we can pull together here in the United States fairly quickly, so we don't have a big front-end cost associated with training and hiring here in the U.S. for these crews that would man these 550s. And some of the rigs -- several of the rigs I think will go into the Colombian market. And I think that we're already prepared to add additional rigs there and have crews identified. And we've already been training some crews there to go from 9 rigs to 13 rigs, and then we'll hopefully add some more rigs on top of that. So I think that the big cost differential primarily will be shipping costs and I don't think those will be material.

John M. Daniel - Simmons & Company International, Research Division

So I guess then the bigger issue for Q2 would just be the drop-off in revenue from the last update as opposed to margin degradation?

Richard J. Alario

Right. I think it's the revenue loss that we're going to have in the short-term but we're going to be busting our tail to recapture that revenue.

Operator

Your next question comes from the line of Blake Hutchinson of Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Just quickly following up on that line of questioning. With regard to most of the mobilization and restructuring efforts, I take it that you would regard that as most of that work being done within probably the second quarter?

Richard J. Alario

That's right.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay, great. And then skipping over to the Fluids Management reorg. First of all I want to confirm, Trey, in your commentary you said that the Fluids Management contribution was actually negative at the field operating income line this quarter?

Richard J. Alario

I don't think we said that. I think we said that the decremental on the revenue was in excess of 100% and that we want to return it to profitability.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Oh, okay. I guess then maybe can you give us some idea of how far off the other business lines your profitability actually is? Are we talking 500,000 basis points that has prompted a more in-depth review here?

Richard J. Alario

I think the trends we've been seeing the market for a while in terms of overcapacity, pricing weakness have driven us to this, as supposed to 1 quarter of performance. It's been an ongoing evaluation that we've been making. So this quarter was the worst by far. But this is a business where we're working to rightsize it for a couple of quarters now. And it's gotten to the point some markets that we have to make some significant changes.

Newton W. Wilson

Right. This is Trey. Really looking at the entire business, the worst part of the business, the worst market that we have is the Bakken. And I think the very poor performance in the Bakken is dragging the whole business down to some extent. It's the biggest impact to the business that we have. That business is we've got an extremely oversupplied the market in the Bakken and our customers are using less water as they perfect their completion techniques. So the combination of those 2 things, gross oversupply of capacity and lower water consumption, is not a very good market dynamic. So we had maintained our business at a certain level with the expectation and hope we bid on some large tenders of recapturing some profitable business, most of that didn't -- that didn't materialize. We have very high fixed costs I mean, Dick and others of us have talked about it for some time, that market is still a very difficult market in the sense of labor, lack of labor, lack of housing. So we have a very high fixed cost. We gave the business an opportunity to recover. It hasn't recovered. And so we're going to downsize that business, significantly, we're going to take assets -- substantial amount of assets out of that business and rightsize the business to make it sustainable on the long term and cut our overhead on that business as well. So if we -- when we get the Bakken business fixed and we're very focused on that right now, that will go a long way in helping us improve the profitability of the total business.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

How large has the Bakken been just roughly in terms of the -- your overall exposure in Fluids Management?

Newton W. Wilson

20% to a quarter.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay so that's a fairly large factor in there. I appreciate the help with that, Trey, and Marshall, congratulations on the appointment.

J. Marshall Dodson

Thanks, Blake.

Operator

Your next question comes from the line of Jeff Tillery of Tudor, Pickering, Holt.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I just wanted to -- actually, I'm thinking about the -- just the numbers impact over the next couple of quarters the right way out of Mexico. Would it seem unreasonable to think about revenue falling for international operations by 1/3 sequentially. Is that a fair way to think about things?

J. Marshall Dodson

I think one of the issues is the timing of getting these rigs redeployed. We're working to do that in the second quarter. That's going to be a big factor on when we get the activity back up. So it's kind of hard to nail down when the revenues are going to come back, be it late in the second quarter or early third.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then if I think about just -- with a big revenue change, I think -- I mean, it's impossible to move costs in lockstep with that. So I think about kind of 60% or 70% decrements on whatever the drop in revenue is and then conversely once the revenue starts coming back kind of similar order of magnitude to incremental margins, is that a fair way to think about it?

J. Marshall Dodson

Yes, I think our decrementals will be kind of in the -- somewhat in the range you saw quarter where we had a fall off in activity as well as some start-up costs.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then last question I had is on the Fluids Management business. I guess, excluding restructuring charges, would you think about first quarter profitability levels from that being effectively at bottom?

J. Marshall Dodson

Yes, with the changes we're making, the first quarter should be our bottom in this business, excluding the charges we take.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And so we see kind of that business is not really improving top line, but also -- or maybe eroded top line but you -- kind of profit impact negligible from here and then just kind of leaves the overall business where we improve here in the second quarter and the incremental margins on that revenue growth is kind of a changing profitability, is that fair?

J. Marshall Dodson

Yes. We're working to focus our efforts on areas where we are -- where we see good return to -- or good move to the profitable areas such as Permian where we have a tremendous market presence and a lot of good customer activity, as well as on infrastructure that can support this business much better than what you're getting in the high fixed cost area such as the Bakken.

Operator

Your next question comes from the line of Jim Crandell of Cowen.

Jim Shone

This is actually Jim Shone for Jim Crandell. I was just wondering if you could provide a little more color on your Coiled Tubing operations. We've been hearing reports of pricing pressure. And yet you guys highlighted that as a positive this quarter. I think you mentioned some shifting of your equipment helped you out, but is this a temporary benefit? And if you could just comment on how you see pricing in this market going forward?

Richard J. Alario

Yes, Jim, this is Dick, I'll give you some sort of a 50,000-foot comments and Trey may have 1 or 2 to add. I think that in terms of timing, we probably got started with our self-help programs a little earlier than most people. And that's why you're seeing improvement in our efficiencies today. And some people out in the business today maybe didn't get started as quite as early. That's the first thing. Second thing, we believe we now have our equipment in the markets where we can continue to get efficiencies. So no, we do not perceive these as a one quarter thing, especially given the fact that completion activity should grow somewhat as the year unfolds, both with respect to seasonal improvement and with respect to increased service intensity. And thirdly, our guys that run the Coiled Tubing business have done an excellent job at minimizing some of the incremental structural costs that we had inherited. We, and when I say we, all of us did as we began to move out to some of these frontier shale markets that we weren't servicing as an industry years ago. So those are the sort of big picture items that I would comment on that generate the bottom line that we, as we said in the prepared remarks, we expect continued improvement in the operating efficiencies of the business at a minimum in a flattish scenario, and then some improvement on top of that as the market gains a little traction as the year unfolds.

Operator

Your next question comes from the line of John Keller of Stephens.

John R. Keller - Stephens Inc., Research Division

Just a couple of quick ones here. If I just look what the U.S. kind of bigger picture, not byproducts service line necessary, if the seasonal uptick in activity is 3% to 5% in the second quarter, Fluids notwithstanding, is that a reasonable rate to think about kind of absolute growth rate in revenues, or can you grow in excess of that?

Richard J. Alario

Well, admittedly, our outlook is somewhat tempered given the lack of urgency that we've seen from some of our customers or most of our customers so far this year. None of the macro positives that we've talked and talked and talked about in the horizontal service intensity, the building inventory of wells that will need to be maintained, the oily nature of this cycle, none of those positives have changed. And so admittedly and understandably I think, our view is to, at this point, tie our outlook to what we believe to be kind of an indestructible change which would be typical seasonal improvement. We are not saying that we will not see some additional customer spending as the year unfolds. I mean commodity prices are still good. Customers are getting more and more efficient with the installation of their large expensive wells. Some of those things we think are going to add sort of fuel to the fire. But at this point our view is tempered by the fact that there's been a little less activity ramp up than we normally would have seen by this time. So I think you put our outlook in a fairly conservative bucket and recognize that there certainly could be some upside to that. But that -- at this point we've taken a view that we're running the company as if we're going to get seasonal improvement only and anything, and by doing that, in terms of our cost structure, restructuring as we talked about with the FMS business, by doing that, then upside really becomes upside, if it happens.

John R. Keller - Stephens Inc., Research Division

Fair enough and it's prudent obviously. And just, as you sit here today, can U.S. margins on an as-reported basis be up sequentially in Q2?

Richard J. Alario

Well, it certainly can given the programs that we've got on -- that we've gotten on, -- got going on addressing costs.

J. Marshall Dodson

Yes, when you say as-reported, we will have some charges associated with the changes we're making. But our goal is to get the margins up.

Operator

Your next question comes from the line of Megan Rapine [ph] of FBR Capital Markets.

Unknown Analyst

My question is on the well service business. You mentioned during your prepared remarks that you're making progress getting some of those rigs back to work. I was just more curious on kind of the price competition that you've seen as you tried to line up new work for those rigs?

Richard J. Alario

Yes, Megan, this is Dick. As we indicated, I'll be little more colorful on it. I'm really happy that we've been able to redeploy all of those rigs and get back all of the hours that we have lost in our California market and didn't have any negative impact on pricing whatsoever in that market. There's been a mild impact in the Permian, which was the other place that we have rigs that came off in that situation. But I would tell you that we're not unhappy with the way that we've been able to get hours back and get more of those rigs and crews back into the marketplace. But these are oily markets with high demand. And we have been prudent not to deteriorate from the stable pricing that we have that we enjoyed in the well service business right now. So I'll look back on this and I have to give us a pretty decent grade on being able to react to this situation the way we have. And it continues to get better.

Unknown Analyst

Can you guys clarify, are all of the Permian rigs now back up and running, or do you still have some that you're putting back to work?

Richard J. Alario

No, as I said in my remarks, we still have a number of those rigs that we'll be adding back over the next months. But we have added back a meaningful number of those that were released. And we're continuing to add those as time progresses. So we've got a good recovery plan underway in the Permian Basin.

Operator

Your next question comes from the line of Bob Christensen of Buckingham Research.

Robert L. Christensen - The Buckingham Research Group Incorporated

What is the account receivable from PEMEX right now?

J. Marshall Dodson

At the end of the quarter, it was $137 million. We believe we'll be able to collect that and understand as much from our customer.

Robert L. Christensen - The Buckingham Research Group Incorporated

And refresh me on Argentina, please. Is that sale closed?

Richard J. Alario

Yes. I've closed that sale last year.

Robert L. Christensen - The Buckingham Research Group Incorporated

Sorry I missed that one. I guess the other question that I have is, what do you estimate the cost of all this movement out of Mexico will cost?

Richard J. Alario

Are you talking about moving the rigs?

Robert L. Christensen - The Buckingham Research Group Incorporated

Yes, the mobilization to Colombia, the mobilization back to the U.S., it's fairly steep going into the country. I'd imagine it would be somewhat maybe less coming out of the country, I don't know.

Richard J. Alario

Yes, it's early, Bob, I mean, we're just packing up these rigs and making arrangements for -- I mean this just occurred within the last 10 days, really. So we're just now getting our hands -- we've got fairly good arrangements to be able to move the stuff around at competitive costs. It's a little too early to comment. These rigs run from 50,000 to 75,000 or something like that depending on where you're -- which new market you're going to.

Robert L. Christensen - The Buckingham Research Group Incorporated

Of your $210 million capital budget, how much is I guess oriented at the 550-horsepower class your preferred class, is it, are we still adding new equipment of that genre?

Richard J. Alario

Yes. We have intent this year to add 30, 35, 40 of those rigs, something in that range. Again, these rigs are in high demand. And they can go to any, literally any market in the world. So we still have a need to raise the percentage of our fleet in the U.S., for example, that is made up of those rigs because they're very profitable, they work 24-hour a day generally, they generate doing completion work on large horizontal wells. So whether -- and as I mentioned that's the good news about the fleet that we have in Mexico, that's what it is. So we have no doubt that we'll be able to put through excess rigs back to work, but we still need 35 or 40 of those to meet near term market demand. And we intend to build them at this point. And assuming the year folds out -- rolls out the way we anticipated it, we'll leave the capital budget as is to build those rigs and of course, at any time, if the worst-case scenario starts to develop, we can trim CapEx from the $210 million, if we need to. We haven't come to that point yet but at this point, we're still in the process of building some of those rigs and we plan to continue.

Robert L. Christensen - The Buckingham Research Group Incorporated

Just coming back to the receivable question from Mexico. I guess how many days outstanding. I mean it sounds like it's a fairly large number.

J. Marshall Dodson

Yes, it's a significant receivable for us that we have a lot of focus on in our interactive dialogue with our customer around in terms of collections.

Richard J. Alario

Operator, we'll take one more call.

Operator

Certainly, your next question comes from the comes from the line of Michael Cerasoli of Goldman Sachs.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

For the franchise rigs coming back to the U.S. market I'm assuming you have discretion on where those go. Are there any -- can you tell us what specific plays regions you're targeting for those rigs?

Richard J. Alario

We haven't made that decision yet. As I said, this news is fairly hot off the press. But you should think of the more active oil shale markets as our first target at this point.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. And then internationally you touched upon -- you already touched upon Mexico and Colombia. What about elsewhere? Can you give us how is the activity and the outlook faring in the Middle East, for example?

Richard J. Alario

It's good. We -- about where these rigs work in that part of the world as well. And what we've been saying about the Middle East is that we have the ability at some point to ramp-up the -- our presence there and particularly as we get closer to the kind of critical mass with assets that allows us to bid on short-term projects. We're still not there, but we have another rig starting off in that region at this time. So it gets us a little bit closer and I think there's some speculation now that we might take a few of these rigs that actually go participate in short-term work as a result. So it could move a calendar up a little bit with regard to ramping up our Middle East activity. We would look to do that because we really believe that's the biggest potential growth market going forward in terms of our international rig activity.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. And then just my last question is on the frac stack. You didn't -- you mentioned that you're making progress in getting into the oil plays. I'm just curious to see how far along this is, this is where your wanted to be, probably not but how far along that path are we.

Richard J. Alario

In terms of moving the business into the oil plays?

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Yes, yes.

Richard J. Alario

Well, we've done most of the work I would say associated with establishing a very strong market position in the Eagle Ford. We have -- it's early days with regard to the other 2 or 3 markets that we're in. So there's still some certainly some growth out in front of us -- outside of the Eagle Ford. The Eagle Ford is where we put most of our efforts early on when the Haynesville market began to collapse. But it's well set up now, we're a significant player there and so with the focus is to continue to grow that, but to also put more forceful pressure on getting the other markets -- the other 2 or 3 markets to grow from the point where they are because we're really just getting started outside the Eagle Ford.

Gary L. Russell

This concludes our call for today. A replay of this call can be accessed on our website at keyenergy.com under the Investor Relations tab. Also under the Investor Relations tab, we've posted a schedule of our quarterly rig and truck hours. Thank you for joining us.

Operator

This concludes today's conference call. You may now disconnect.

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