Avoid Key Energy

| About: Key Energy (KEG)

Summary

Key Energy is in the process of receiving approval for a reverse stock split to meet NYSE compliance.

The company is also in the middle of an investigation for violations of the U.S. Foreign Corrupt Practices Act with Russia and Mexico.

Investors should avoid Key Energy for now, and consider a short position after the reverse stock split.

Key Energy On September 2nd 2015 Key Energy (NYSE:KEG) received notice from the NYSE that it had failed to keep its stock price above the $1 minimum and had until March 2nd 2016 to restore the stock price. The company then announced it would seek approval for a reverse stock split of at least 1 for 10 from shareholders at the annual share holder meeting.

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The company has yet to announce the date of the shareholder meeting, but the 2015 meeting was held on May 14th.

Because the Company's plan to cure the stock price deficiency requires stockholder approval, the Company expects to avoid delisting as long as it obtains stockholder approval of the reverse stock split at its 2016 annual meeting and promptly implements the reverse stock split following the meeting. Under the NYSE rules, the Company's common stock will continue to be traded on the NYSE until the 2016 annual meeting, subject to the Company's compliance with other continued listing requirements.

According to the latest press release it seems the NYSE will potentially let the company slide for a few months past the March 2nd deadline as long as the company has the intention to conduct the reverse.

In the short term, reverse stock splits are almost universally negative for a company stock and present shorting opportunities if they can reach a marginable level with shares available. KEG is still in a volatile place, with shares up

Operationally, the company has been part of the down turn in the oil industry. The company added this to the 3Q15 earnings release:

Key's Chief Executive Officer, Dick Alario, stated, "The third quarter continued the deterioration in what is now the worst peak-to-trough downturn in several decades. The steps we took during the quarter to improve our cost structure in the U.S. helped mitigate these pressures to yield a normalized U.S. decremental operating margin of 23% sequentially. Further, our highly-capable Class 4 rigs continued to exhibit activity improvement as hours in this rig class improved 11% sequentially.

The company wrote off significant assets and began to exit portions of the industry both domestically and internationally. Total net income resulted in a -$640.2M due to these write offs. Revenue came in at $176.9M, but has been on a steady decline since 2012. EBITDA was also in at -$697M, again due to the write offs, but adjusted EBITDA was still negative at -$13.3M.

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The balance sheet has also seen some decline with the exception of cash on hand. Total Assets came in at just under $1.5B, but has also been in decline since 2012. Thanks to the write offs, Total Equity is down to just under $300M. Total Liabilities have been pretty level over the last two years with around $1.2B.

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The turn down isn't completely related to the down turn in oil. The company has been working through a violation of the U.S. Foreign Corrupt Practices Act (OTCPK:FCPA) with allegations in Russia and Mexico. The company has supposedly been cooperative with the SEC and Department of Justice and results of the inquiry should come soon.

Conclusion

The down turn in the oil industry, combined with the ongoing FCPA investigation have been killers for KEG. The reverse stock split is another bearish signal for KEG. While the stock has seesaw-ed over the past few days, in the long run, investors should avoid the company. Once the reverse stock split has been completed, investors might want to consider a short position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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