Since the end of April, several company insiders have bought shares of Key Energy Services (KEG), according to filings with the Securities and Exchange Commission. For example, the company's COO Newton W. Wilson III purchased 10,000 shares of stock on May 3 at an average price of $6.34 per share.
The oilfield services company, which is focused on onshore drilling, has a market capitalization of $950 million with over 3 million shares traded on average per day, so at current prices there is more than $18 million of dollar volume. The company reported weak results in the first quarter of 2013: revenue fell 12% vs. a year earlier, and with costs showing little change, Key experienced much lower operating income and a net loss on the bottom line. Cash flow from operations came in at only $20 million for the quarter (as opposed to $74 million in first quarter of 2012) and even though the company slashed its capital expenditures, it did tap more deeply into its revolver to preserve a high cash balance. We wouldn't be surprised if some of Key's troubles last quarter were due to weather conditions, though the adjusted EPS results were below analyst expectations. The stock is now down 13% year to date, and nearly 50% below year ago levels.
Trailing earnings per share are very low, and analyst consensus is for 2013 to be a rough year with projections implying a price-to-earnings multiple of 27. Next year is expected to be much better; however, the average forecast is for $0.59 in EPS, which would make the current price only 11x forward earnings estimates. That valuation is dependent on the business hitting its targets for 2014, so we wouldn't call it a value stock yet. But we can see the logic behind the insider purchases as officers and board members see that the decline in the stock price so far this year has left it cheap relative to what they expect for the future. There are good prospects for onshore drilling in the U.S., as the shale boom in oil and gas continues, though a number of other oilfield services companies are either considerably larger in terms of market capitalization or are cheaper in terms of current performance than Key is.
We like the industry, particularly if natural gas prices increase enough to bring back a natural gas boom to supplement the current activity in oil-dominant plays, and while in terms of quantitative metrics Key might not be as attractive as some of its peers, these insider purchases represent a noticeable vote of confidence in the company. Investors who are not already too exposed to oil and gas would be well served by considering small-cap oilfield services companies -- giving Key a bit of extra credit in the analysis with this insider activity -- as well as larger peers such as Halliburton (HAL) or Schlumberger (SLB).