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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

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

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

Analysts

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

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

Michael W. Urban - Deutsche Bank AG, Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Jason A. Wangler - Wunderlich Securities Inc., Research Division

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Key Energy Services, Inc. (KEG) Q2 2013 Earnings Call July 26, 2013 11:00 AM ET

Operator

Good morning, my name is Sherilee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Service Second Quarter 2013 Earnings Conference Call. [Operator Instructions]

Mr. Gary Russell, Vice President of Investor Relations, you may begin your conference, sir.

Gary L. Russell

Thank you, Sherilee, and thank you, all, for joining Key Energy Services for our second 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 in 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 Trey Wilson, our COO, will provide an operational summary, followed by Marshall Dodson, our CFO, who will review our financial results and provide some guidance commentary. And lastly, 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. Key's consolidated normalized earnings were $0.01 a share in the second quarter. This excludes about $0.04 a share of severance and restructuring charges. Marshall is going to elaborate on that after Trey goes over our operations in more detail. So yes, we are changing up the order this time.

In the U.S., revenues were up 4.5% sequentially, near the high end of our expectation of 3% to 5% activity growth. Our revenue growth was stronger than underlying market activity, as indicated by the U.S. onshore average drilling rig count, which was down 1% in the quarter. Our U.S. revenue growth of 4.5% also outpaced the onshore well count, which was up 3% compared to Q1.

Second quarter's results benefited from solid revenue and margin performance in our Rig and Coiled Tubing businesses and efficient restructuring work in our Fluid Management Services business. As a result, our U.S. incremental margin exceeded 100% sequentially. And as we said in the press release, we're very pleased with that and proud of our managers and employees who drove that performance.

Internationally, activity reductions in the north region of Mexico, the ATG field in particular, were more severe and more abrupt than we had initially expected. This had a disproportionately negative impact on our international margin. We're methodically moving idle rigs to other active regions of Mexico and to other countries, including the U.S.

Outside of Mexico, our international businesses remained stable, and we're encouraged by the view that international spending plans by operators continue to ramp up.

Those are my general comments on the quarter. I'll turn it over to Trey now, who, as I said, will give you more detail on the operations.

Newton W. Wilson

Thanks, Dick. In Mexico, our management team did an admirable job of dealing with the challenge of going from a first quarter average of 40 rigs operating in the country to a second quarter average rig count of 16. In fact, our rig count in ATG dropped as low as 3 rigs for 1 week in May.

As a result of the activity reduction in the north region of Mexico, we had to reduce our workforce there by about 2/3, or 1,000 workers, within the quarter and move the excess equipment to Costa Rica and prepare some of the equipment for export to other markets.

Today, we are working 12 rigs in the north region and 16 overall in Mexico, and expect to gradually grow that rig count over the next 2 quarters. We currently anticipate a gradual recovery in the north region, which could potentially accelerate once PEMEX begins tapping its 2014 budget, either late this year or early next year. Additionally, we are gradually growing our business in the south region with Coiled Tubing, as well as Rig Services.

We believe Mexico is a good, long-term market for us, particularly since our south region exposure gives us better balance in the country. During the second quarter, we sent a couple of rigs to open business in Ecuador and plan to send another couple this quarter. We like Ecuador's market because mature fields comprise the majority of Ecuador's oil market and the country needs higher production to fund social and other programs. Finally, we will also be sending a few rigs to Colombia, where we are having success in growing our market share.

Within our International segment, overall, an average of 37 rigs worked in the second quarter out of our international fleet of 75 rigs. And we expect to work an average of 45 rigs in the third quarter and an average of 50 to 55 in the fourth quarter. We believe that the remaining underutilized rigs will either find opportunities in our international markets or the U.S., or will go back to work in 2014 when PEMEX ramps up workover activity in the north region. Remember that we are working in the south region, as well as the north, and these numbers include improved activity in the south region.

Now to our U.S. business. In the second quarter, we had good profitability improvement in our 3 largest U.S. service lines: Rig Services, Fluid Management Services and Coiled Tubing Services. Specifically, in Rig Services, we generated a 35% improvement in operating income on almost 8% revenue growth. In Fluid Management Services, we improved from an operating loss in the first quarter to profitability in the second quarter on flat revenue. And in Coiled Tubing Services, we generated almost twice as much operating income from the first quarter to the second on 10% higher revenue.

Overall, the improved profitability was driven by operating efficiency gains in each of these businesses without any pricing help. We expect stable pricing through year end in Rig Services and Coiled Tubing; however, our Fluid Management Services business has the most competition, and we believe that competitive pressures will continue.

Our Coiled Tubing service line had the greatest improvement in operating efficiencies. Active operators in the shales are exploiting their acreage in a more efficient way, leveraging the drilling and completion lessons they've learned. Through better planning with our customers, our managers achieved improved utilization that has enabled us to exploit the business' operating leverage, which has had a significant impact on profitably. Our overall utilization climbed from an average of 45% in the first quarter to about 50% in the second quarter.

We are working on improving our utilization of our smaller diameter units. We are pursuing opportunities to move underutilized, smaller diameter equipment to markets in and outside the U.S. market where we can deploy it efficiently, and we already have a couple of smaller units working in the south region of Mexico, both with very high utilization.

Rig Services also benefited from improved efficiencies. Our team did an excellent job of managing our costs, while at the same time working 8% more hours and generating more revenue, as compared to the first quarter. We had increased completion-related activity in the quarter and Rig Services benefited, as did Coiled Tubing, from improved customer efficiencies.

In the second quarter, in Fluid Management Services, we took the difficult steps to lower cost, and in some areas, we found better quality revenues. We've moved and continue to move assets from weak markets to better markets and have better positioned our assets to drive down repair and maintenance expense. We've grown our better margin businesses and continue to streamline our management and labor force to tighter fit the service opportunities that we have. We still have more to do. And I'm pleased with the progress today.

So in conclusion, we had a tale of 2 markets, International and U.S., in the second quarter. Our expectation is that in the U.S., we should be able, in the third quarter, to maintain the margin gains of the second quarter. We also believe that our business in Mexico will improve in the third and fourth quarters, contributing to better performance in these quarters by our International business.

And now, I'll turn the call over to Marshall.

J. Marshall Dodson

Thanks, Trey. Our consolidated revenues for the quarter were $411.4 million, down 4% from the first quarter. U.S. revenues were $361.7 million, up 5% compared to the first quarter, while International revenues declined 40% to $49.7 million. Our consolidated bottom line EPS was $0.01 after normalizing for restructuring costs, including $6 million of severance expense.

On a GAAP basis, our consolidated bottom line result was a net loss of $4 million or a loss of $0.03 per share. We had several moving parts this quarter with the restructuring and mobilization costs. So I'm going to summarize these items to help clarify.

In the second quarter, we incurred severance and restructuring costs of $8.3 million, of which $2.4 million was in our U.S. segment; $5.2 million was in our International segment; and $700,000 was in our Functional Support segment. We also incurred mobilization costs in the quarter of $2.3 million, of which $200,000 was in U.S. operations and $2.1 million was in our International segment.

In terms of where these costs show in our consolidated income statement, $6 million of the severance and restructuring is reflected in direct operating expense, and $2.3 million of the severance and restructuring costs are reflected in G&A. All of our mobilization costs are recorded in direct operating costs.

Our severance and restructuring costs include both the cost to reduce our workforce, as well as costs incurred to terminate or restructure lease arrangements. The net impact of these charges was $0.04 of earnings lost and $0.01 of loss due to the mobilization costs.

Looking at the U.S. All of our businesses saw improved performance sequentially, generating quarter-over-quarter growth in the operating income margin of 420 basis points, even while the U.S. margin was burdened by restructuring costs. Excluding these costs, the U.S. operating income margin increased nearly 500 basis points. This sequential improvement was largely driven by slightly positive operating income in our Fluids Management business and through efficiency gains in our Coiled Tubing and Rig Services business on top of their higher activity.

Our U.S. results also benefited in the second quarter by approximately 80 basis points, due to a reduction in our workers' compensation and auto liability accrual as a result of improving safety performance. Excluding this benefit, our operating income margin still increased 420 basis points to about 15%.

Outside of the U.S., we experienced a 40% decline in revenues with a decremental margin of 70%. Substantially all of that decline is attributable to our Mexico business, which experienced sharp activity reductions and incurred meaningful operation inefficiencies, primarily with labor, which caused a 1,600 basis point decline in International operating income margin, excluding the impact of severance.

The severance from our labor force reduction and changes in our cost structure, most of which occurred in Mexico, resulted in approximately 1,000 basis points of negative impact to our International operating income margin.

Our International margin was further burdened by the mobilization expense related to moving rigs out of the north region of Mexico. The impact of these expenses resulted in approximately 400 basis points of International operating income margin decline.

The inefficiencies caused by the PEMEX activity reductions resulted in a loss for us in Mexico, even when excluding severance expenses, as the activity levels were not sufficient to generate margin to cover our fixed costs, including the depreciation on our idled rigs.

At the end of the second quarter, we had $145 million of accounts receivable outstanding with PEMEX. Late in the quarter, PEMEX began accepting our invoices for payment and we began to collect on our receivable in June. Since the end of the second quarter through today, we have collected $35 million of our outstanding balance and we've continued to invoice PEMEX. Based on indications for PEMEX, our expectation is that we will collect our past-due balances by the end of 2013.

In addition to the cost-reduction efforts in our operational groups, we remain focused on removing costs in our support functions. Second quarter results include severance related to headcount reductions in our Functional Support segment. Functional Support is reflected in our consolidated G&A expense, which was $58 million or 14% of revenues for the second quarter, or 13.5% of revenues, excluding the severance expense of $2.2 million.

Depreciation and amortization expense was $58 million for the quarter and interest expense was $14 million. Cash flow from operations was $36 million, and capital expenditures for the quarter were $37 million, with $73 million of capital expenditures for the first half of the year.

We ended the quarter with a net-debt-to-capitalization ratio of 38.8%, and we still expect to bring our leverage down towards the mid-30s as the year progresses.

Looking forward, we expect our U.S. activity and pricing in the third quarter to be generally flat with the second quarter, with our operating income margin remaining around 15%.

Regarding the fourth quarter in the U.S., at this point, we anticipate a seasonal decline in activity and a corresponding seasonal decline in operating income margin. Outside the U.S., Trey discussed our average International rig count improving from 37 in the second quarter to an average of 40 to 45 in the third quarter and to an average of 50 to 55 in the fourth quarter. And we would expect a similar progression in our revenues at roughly the same revenue per average rig.

Our International operating income margin will remain challenged, as we deploy rigs and until we reach a higher level of utilization. We expect the International operating income margin for the third quarter to be around breakeven, improving possibly into the low double digits in the fourth quarter. We anticipate that our International operating income margin will move back into the mid- to upper teens, as we are able to achieve utilization beyond those expected with fourth quarter activity levels.

In the third quarter, we expect G&A expense to come in around $58 million, and depreciation and amortization expense to be around $60 million.

Now I'll turn the call back over to Dick.

Richard J. Alario

Thank you, Marshall. In closing, I'd like to address 2 topics. First, a broader look at our business in Mexico, and then, a more detailed view of certain of our expectations in the U.S.

For Mexico, we believe Key's customer base and its revenue base will be more stable in the future for 3 reasons. First, the recent awarding of 3 incentivized contracts in the ATG asset means that 3 entities, other than PEMEX, will now supply capital to increase production in ATG. Thus, there are several additional potential customers for Key to target in the north region. In fact, we already are working for one of the operators of an incentivized contract from an earlier licensing round.

Second, we believe that our early success in mobilizing our Rig and Coiled Tubing Services into the south region further diversifies our revenue concentration outside the north, which somewhat further derisks Key's exposure.

And third, as PEMEX increases spending to recover quickly declining production rates in ATG, we believe we'll be well positioned to assist this customer and regain utilization. According to PEMEX, this spending could commence in the fourth quarter when the following year budget can be accessed, which is typical in Mexico.

Turning to the U.S., within the context of our view of this market, we want to be clear that the well-advertised rig efficiency being experienced in the drilling process enhances productivity for Key's field operations. It's part of the reason you saw our margin improve in the U.S. this past quarter. Let me explain.

Pad drilling allows for a more efficient work scope for multiple wells at a single location. This requires much less downtime between frac stages and well installations. Coupled with high-speed drilling rigs, the result for our completion services is less nonproductive time. This enables us to more effectively manage our personnel and equipment costs and the close proximity of multiple well pads -- wells, sorry, on a pad cuts equipment mobilization and demobilization time and cost considerably when compared to conventional well space.

Now the benefits don't end here and we're still counting them. But we thought it was important to share with you that drill-rig efficiency has created yet another new ballgame, and we believe our company's clearly one of the winners as it evolves.

These conclude our prepared remarks, operator, so we'll open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Blake Hutchinson from Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Just firstly, looking at your U.S. operating margin commentary. Given that Fluids Management is still kind of hovering around the breakeven area, is your outlook kind of discounting that, that remains in that range and not really giving any credence to improvement there to -- in terms of the margin outlook?

Richard J. Alario

I'll make a general comment, Marshall may have something else to say and Trey might as well. But, Blake, in the Fluids Management restructuring process, our guys went out and grabbed some value very, very quickly, as you can tell. And we're still going to do more of that. But it's going to be slower. So part of the outlook for the quarter on that business is that we are not planning in the outlook for as fast a accretive process in terms of improving the margins in the business as we did last quarter. We will still get some benefit in that business. There are still things going on, I would say, lots of them. But we're not planning that they're going to happen as quickly. That's part of this.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

So not margin step-backs elsewhere, it's just you're not going to bank too much on a linear improvement in that division?

Richard J. Alario

I think that's a good way to say it.

J. Marshall Dodson

Right. And I think, while we continue to work on the cost structure and getting the assets in the right markets, it's still a very competitive business with the most amount of competitive pressures.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Great. And then, Marshall, I just want to make sure I read you loud and clear in terms of the -- your thoughts on the international progression here. As we move from 37 active rigs to 45 to 50 to 55. In your outlook, that coincides with the movement to kind of a breakeven margin in 3Q, something in the mid- to high single digits, and then a more natural margin into the double digits as we move through the -- through year end and into next year.

J. Marshall Dodson

Right. The third quarter is going to have more mob in it, about the same as we had in the last quarter. So that's going to pressure margins. And then, as we get past that and have lower mob costs and more rigs out, the utilization will benefit margins. That could get us up into the low double digits.

Operator

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

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

Just to stay on the -- this international discussion. As you think about the revenue improvements over this third and fourth quarters, does that happen kind of in the same relationship as the magnitude of rig count increase? I guess, if you did 37 rigs working in the second quarter to 42 in the third and 52 in the fourth, it would imply kind of a 10% to 15% revenue growth in the third and 20 plus percent revenue growth sequentially in the fourth. Is that how you're thinking, or a more measured revenue growth path than that?

J. Marshall Dodson

That's how we're thinking about it, based on our redeployment plans. So we expect it to kind of grow as we get these rigs moved around and working for our customers.

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

And so a place like Ecuador has the same magnitude of revenue intensity as you guys were able to achieve in ATG, that's correct?

J. Marshall Dodson

I think, thinking about it on average for our international rig count, is kind of the way to think about the progression.

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

And then, in the domestic coil business, another significant step-up there this quarter. I guess, on the continuum of where you want to be in terms of operating that business efficiency versus you were a couple of quarters ago, how far are you along in kind of the self-help process?

Richard J. Alario

I'll make a general comment. Trey will probably have some details. We are partway along. We're certainly not at the end of the game here. But we've -- I am extremely proud, I think our management team is very proud of the job that our team in Coiled Tubing has done, taking advantage of the rig efficiency opportunities that I've talked about, but also, getting costs out of the business, reducing the amount of employee rotators that we have working outside of markets. I mean, the whole business has improved. And you can see it in the responses we're getting from our customers in terms of the quality of our service. So we're somewhere short -- we're somewhere past first inning, but we're not in the late innings there. That business, if you look back historically, has generated better margins than we're getting right now. And coming from a low point, we are happy with what we've gotten accomplished, but traditionally, the business generates better margins. And I would tell you that the focus that we have on large equipment, large very capable [ph] equipment that's being used very heavily in -- as the laterals get longer in the horizontals, I think just sets us up well to improve even more. Did you have anything else, Trey?

Newton W. Wilson

Well, I would say that we're certainly in the back end of the game in terms of healing the business, I mean, I think the overall quality of the business and our operating efficiencies, we've had some pretty significant gains there. And like Dick, I believe there's -- there will be additional gains over time. But the pad efficiencies have really, really helped us, have been really -- it's been a qualitative change in the type of work we're doing. It's allowed us to keep our equipment working constantly on a plan that allows us to plan our maintenance, manage our crews, manage our out-of-pocket expenses well, and our guys get more and more skilled in how they manage Coiled T [ph]. And it's been a game changer for us. And I think there's some more to be gained. But we're very excited about that part of the business. And as I said, that -- our smaller units that aren't involved in these completions of shale wells, we're seeing opportunities to put some additional equipment to work. So we've got some more work to do, but I'm very pleased with how far we've come.

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

[indiscernible] My last question just on the Fishing & Rental business. There has been kind of a slow trickle down in revenue in the past couple of quarters. Ultimately, the -- I mean, is what we need in order to turn that business to the upside rig count improvement? Is that the ultimate answer for what we need to see the top line grow there?

Richard J. Alario

Well, it's no question that part of the reason for the revenue performance is our drill pipe rentals. Yes -- well, obviously, rig count improvement would help that. But frankly, the other phenomenon that we're watching is how quickly, with this speed of drilling that's taking place, how quickly the rental pipe in the market is wearing out. That's going to have the opposite effect in terms of the rig count decline. So I don't know if they're going to balance out. But we're -- I think we're doing a pretty decent job of finding the right opportunities and putting the equipment in the markets that we feel are the most sustainable, so that we don't have an upset in the future. So for example, we're -- our rental business in the Permian, as an example, is extremely strong, we continue to flush more equipment into that market. So we'll have some self-help opportunities there. And I wouldn't look at the rig count as the only factor.

Operator

Our next question comes from the line of Mike Urban from Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

Looking into the third quarter, certainly appreciate the desire to try and be conservative, but it does kind of strike me as conservative. Obviously, you have the usual seasonal improvement and the lack of some of the weather issues you might have had in the U.S. in the first and second quarters. Hopefully, you get, again, the full benefit from some of the restructuring that you've done. And you've talked a couple of times about how Key should benefit from higher drilling rig efficiency. So again, even if the drilling rig count is flat, which is I think what most folks are looking for, you should have that growth in well count and the associated benefit in your completion services business. So it would seem to me that all those things would suggest that you get at least a little better in the U.S. And so just trying to understand if there's something declining out there, whether that's pricing, maybe some activity declines in some markets that you haven't addressed or, again, just trying to be conservative, given that there are so many moving parts out there.

Richard J. Alario

Yes, Mike. This is Dick. Thanks for the question. Let me start out this way. First of all, Q2 and Q3 are generally our best quarters, absent any other significant drivers. So we had such a strong quarter, an improvement in Q2. One of the things we're paying attention to is sort of the law of large numbers. In our outlook for Q3, we're not counting on margin improvement, as you can see, we're counting on keeping what we got in Q2. We could see improvement. If we do -- and if we do, we'll look back and see that we're somewhat conservative. We're watching the effective rig efficiency, as you mentioned. We think it could be the next big thing, let me just say it that way. It's new. It's helpful. But we're not counting all of our benefits from it until we've had multiple quarters without some restructuring or other major self-help projects so that we can cleanly see what the effect on our business is. I would say the next point is that competition and labor costs in certain markets continue to pressure our margins, so we're counting on that or we're contemplating some of that. Not really any more than we've seen, however. And as you heard Trey say, we expect pricing generally to be stable. And then, frankly, we're hearing about E&P CapEx increases, several of them, in the quarterly report so far. But I mean, we're just hearing about those now. We really haven't had time to study the impact of that and which regions that will -- that extra CapEx will go into and what the effect on us. So if that is one of the factors, if that rolls out -- some of our customers increase CapEx, and some of them have already announced it, that would be upside to our view on Q3.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay, appreciate the color. And shifting over back to the International side. Are you still out there looking for opportunities either to expand in some of your -- I'm talking about outside of Latin America, still looking for opportunities to either expand in your existing markets or potentially enter a new market? Or do you have your hands full right now trying to reallocate and address the moving parts in Latin America?

Richard J. Alario

Well, I think it's fair to say we're very busy moving equipment around and rebuilding our revenue base from the disastrous results that we had in the quarter. Part of that, by the way, is seeking opportunities to put some of that equipment into markets that could either be growth or expansion of existing markets. I would go back to our comments last quarter, when we talked about, as the year -- as we viewed the year, it was -- it is still mostly about expansion in existing markets. However, we said, at that time, we might have an opportunity or 2. And so we've announced Ecuador, and that was one of the ones that we were contemplating. So I think it's fair to say, based on performance and outlook, we believe both offer opportunities for later this year. I think expansion in existing markets would be our first priority and our preference, obviously, because we've got overhead already in these markets and growth of the asset base would help us margin-wise. So -- but there'll be opportunities to do both. And I think Ecuador represents the growth side of it. The other country, I think I would call out and -- with respect to this answer, is Colombia. We've got a number of rigs on the way there. We've got opportunity there. And so one of the markets that we'll certainly expand as a result of excess capacity in Mexico is Colombia.

Operator

Our next question comes from the line of Neal Dingmann from SunTrust.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

... questions. First, just on Mexico. I was wondering, the timing of mobilization, is most of that already -- I was just trying to get a sense of, is most of that already taken place or will you continue to do some of that mobilization through probably the remainder of this year? And then kind of along with that, I think you had mentioned 16 rigs running, is that currently what you still have running there?

Newton W. Wilson

Yes, we currently have 16 rigs running in Mexico. And we're going to be -- our forecast that Marshall and I gave does include mobilization of rigs from the north region of Mexico to other places, like the south region of Mexico, a couple of rigs to Ecuador, several rigs to Colombia and possibly additional rigs to the U.S. So we're going to be exporting rigs throughout the rest of the year outside of the north region. And as I said in my remarks, at the time that PEMEX taps into the 2014 budget, we expect a ramp-up in activity in the north region, where that -- maybe in the first quarter, maybe in the fourth -- first quarter next year. Could very well be the fourth quarter of this year. We haven't built that into the forecast, but it could occur. And then once that ramp-up occurs, we'll see if there are any underutilized rigs left in the fleet. But until we take up the slack that we have in the north region in terms of utilization, we're going to continue to move rigs out of the north region to other places.

J. Marshall Dodson

And Neal, it's Marshall. I would add that our mobilization costs in the third quarter, think about them roughly equivalent to the second quarter. We may move fewer rigs out. There's physical constraints on how many rigs we can actually get out, only 2 to 3 a month. And so we'll have maybe some more expensive mob in Q3, but the dollar amount will be about the same.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then maybe back for Trey, just kind of shifting back to the U.S. Trey, it appeared that the Intervention, or just maybe looking specifically at the Coiled Tubing, was certainly a bit stronger at least than I was forecasting. Your thoughts on that sort of for the remainder of the year as far as the way that it's looking right now with utilization and pricing for that component.

Newton W. Wilson

Well, as I said in my remarks, we're seeing pricing there stable. And our -- the equipment that's serving the shale markets is really very active, very active right now. And the pad drilling that's increasing significantly in the Eagle Ford, which is one of our primary markets, that is -- that pad drilling and those efficiencies by our operators have really been helpful to us in terms of utilizing, not only our fleet, but also the individual spreads are being utilized at a very high level on location because of the multiple wells per pad. The demand pull from our customer base feels very good to me right now. And we're going to work very hard to become even more efficient and to improve our utilization as the year continues. So I guess, overall, I feel good about our Coiled Tubing business. I feel good about the people that are leading it and the quality of service that we're providing our customers and our improvement in managing our cost. So it's a business that's -- I feel like is healed and it is getting -- is getting stronger.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then the last one either Trey, for you, or Dick, just wanted kind of an overall picture. Now after the last few quarters you've done a fair amount of restructuring on -- in few different areas. Is there still some assets that, I guess, particularly when I look at U.S., some areas where you're -- maybe operations are a bit small that you might pull back and try to consolidate, I don't know if I'd necessarily call those restructuring. So just wondering, Dick, maybe for the remainder of the year, are you now pretty well positioned? Do you feel like you're positioned, I guess, specifically looking at the U.S.? Or are there some other things that still need to be maybe adjusted?

Richard J. Alario

Oh, we're well down that path, Neal. I would give you 2 perspectives. There's always going to be motion amongst the discrete regional markets. I mean, if you look at the -- I'll give an example. You just look at the potential of a place like the Tuscaloosa Marine Shale as we've seen good news, again, come out of that area this week. That's a place where we have capabilities already, and we could move assets into that fairly efficiently if that market continues to play out strongly as it does. So that constant, Utica, it's still got give-and-take with capacity. And so every quarter, we'll continue to have motion among the regions in the U.S. business to address demand by customers. And I would tell you that we're not done looking at facility margins and demand levels particularly in the Fluid Management Services area; we'll have some more of that to go on. So I think that's one of the reasons Trey commented that there's still some upside to improvement in there. I would say that with respect to speed, we've got a lot of low-hanging fruit in the Fluid Management business in the second quarter. So as I said earlier, we don't anticipate the improvement that's left to be had is going to be as fast, but it's out there and it takes a form of placing the assets in better markets and then looking very, very hard on a district basis at profitability. One more element, and that's in our rig business, I mean, just in terms of opportunity, don't forget, we still have a number of rigs in our stacked rig fleet. They can't go to work today. They all require some level of maintenance to go back into the field. But we commented that we expect our production business to continue to remain strong, demand in that business to remain high. And one of the opportunities there, as that plays out, is for us to deploy a few more rigs out of our stack fleet into the production services, kind of in the legacy markets. So we talk a lot about the shales and the high-end, complex work, completion work that we do. But remember, 50% of Key's U.S. business is still driven by production services. And we still like that market a whole lot, love our customers there and the demand there is very, very strong. So there could be some opportunity to put some assets to work.

Operator

Our next question comes from the line of Jason Wangler from Wunderlich Securities.

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Just curious on the international front, if what you're seeing from the Middle East and everything -- we've talked, obviously, a lot about South America, but what you're seeing over that way?

Newton W. Wilson

Well, we -- over in the Eastern Hemisphere and the Middle East, we have a very strong business development team. And we're operating in Bahrain and Oman, and our focus is growing business in both of those countries. But we're -- but we've been prequalified to participate in some other opportunities in the region. We have a very strong focus on that. And we'll be looking for, in 2014, some opportunities there to grow our business. That business tends to come in chunks. And we'll be looking for an opportunity to put a meaningful number of rigs to work there next year. We don't have anything in hand that I can report today, but I can tell you that we're very focused on it.

Richard J. Alario

Jason, I would add, if I could. This is Dick. Trey didn't talk about Russia. Let's spend a second on that. As you know, we now own that business entirely as a result of the acquisition early in the second quarter. So what -- as you would expect, our focus on the ground there and our folks who run our international business here in Houston, have spent a lot of time over the last 90 days looking at the business, looking at the opportunity for efficiencies. And that's the first thing you do, typically, and we're well into that process and beginning to develop a view for the direction we want to take it and beginning to develop a view, as Trey alluded to, with our Middle East business, of what the best next steps are to firm up our 2014 growth plans over there. So happy with the results of what we've been able to get done so far in terms of planning and developing a process to have a much stronger business over there.

Operator

[Operator Instructions] Our next question comes from the line of Jim Rollyson from Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

A couple of just follow-up questions on things you said earlier. Dick, you guys talked about the rig count internationally kind of going to this 40 to 45 range in the third quarter and then in the 50 to 55 range in the fourth quarter. Any color on kind of where you see those -- that incremental 10 rigs getting deployed and how much visibility you have on that right now?

Richard J. Alario

Trey actually has some numbers.

Newton W. Wilson

Well, Jim, this is Trey. The -- here's -- the rigs are going to go or the increase comes in these areas, okay? We expect some gradual improvement, additional rigs over the latter half of the year in the north region. We will be moving some additional equipment to the south region, okay? We're going to send, say, 3 or so rigs to Colombia, a couple to Ecuador. So I think that we have a pretty good level of confidence in the forecast that we've given here. And we have a fair degree of visibility to what's going to happen and why it is that these rigs are going to end up where I suggest that they will end up. So that's probably...

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Yes, that's helpful color. If I remember right, you guys are on track to maybe top 50 rigs going to Mexico when things were still cranking along before the budget thing hit you. And you keep talking about once we get into the next budget cycle, obviously, things should hopefully start picking back up. How many rigs are you going to ultimately leave in the north end of Mexico for when the budget rolls back to resets?

Richard J. Alario

Jim, it's Dick. Well, you heard Trey say earlier -- well, a combination of Trey and Marshall's comments, 2 to 3 rigs a quarter is what we've got coming out of the country. Now that doesn't count the ones that could move or have moved to the south region. But in terms of shipping equipment out of Mexico to other countries, you could think about 3 a quarter. So if you just think about that, and say a few go to work in the south region, we're certainly going to have a good number left in Mexico at the end of the year. This plan that we talked about, 40 to 45 next quarter, and 50, 55 in the fourth quarter, does not contemplate a large increase in the north region; should PEMEX actually do that in Q4, that would be upside to that forecast. That's the first thing. And so there will be rigs there to take advantage of it. But the plan would be to continue to move 2, 3 rigs a quarter into other markets from now on until we get everything back working. Whether it goes to the south region, gets picked up in the north region or moves to another country. 2 points about that. One, the plan is and the steps are being taken to diversify the revenue base, derisk the business and get a more stable outlook about revenue. Two, we still have a goal to limit our market share in the north region to something less than 50%. We were well over 50% before the changes that were made early in the quarter. And we intend to keep that to less than that, accomplish the diversification of the revenue base that we've been talking about, and still have a very strong business in Mexico as a country.

Newton W. Wilson

Let me just comment a little bit on the north region just to set -- give you our perspective on that. There's nothing fundamentally wrong with the opportunity in the north region. We just got caught up in a budget issue that PEMEX had. The production in ATG in June was a little over 65,000 barrels of oil a day. And that's down 14% from a peak of 76,000 barrels per day in November of 2012. So I have no doubt that when the 2014 budget moneys are available in the north region, I'm highly confident that PEMEX is going to want to get going on workovers as fast as possible, and we'll have an opportunity to serve, be there and serve a good deal of that opportunity. And so I think that, again, the north region is a really good, long-term market opportunity for Key. And we need to be there, but as Dick said, probably don't need to have as large a market share as we have had in the past. And our south region business is growing. And we're very excited about that as well. So as I said in my prepared remarks, we think Mexico is a very good long-term market for Key. And we're not especially worried about it. We're disappointed with this activity disruption. It's certainly been very, very painful for us. But I'm confident that, at some point, late next -- late this year or early next year, we'll see an improvement in our activity. And that's our best view, and that's what we believe.

Operator

There are no further questions in queue at this time. I turn the call back over to the presenters.

Gary L. Russell

Thank you, Sherilee. 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 have posted a schedule of our quarterly rig and truck hours. This concludes our call. Thank you all for joining us today.

Operator

Again, this concludes today's conference call. You may now disconnect.

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Source: Key Energy Services, Inc. (KEG) Management Discusses Q2 2013 Results - Earnings Call Transcript
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