Key Energy Services’ (NYSE: KEG) revenues were up 4% in the fourth quarter of 2014 but the services company faces singular challenges as the market struggles and it bleeds money amid an ongoing federal corruption investigation.

In January 2014, the Securities and Exchange Commission (SEC) advised Key it was investigating possible violations of the Foreign Corrupt Practices Act (FCPA). The accusations involve business activities of Key’s operations in Russia. In April 2014, the company also learned of an allegation involving its Mexico operations that, if true, could potentially constitute a violation of the FCPA, Key said.

For Key Energy, the world's largest onshore well servicing and workover company, the investigation is growing more expensive as the services market tightens.

“Ongoing and increasing charges related to the FCPA investigation will likely continue to be a drag on cash flow,” said J. Marshall Adkins, analyst, Raymond James, in a Feb. 19 report.

To date, Key’s related legal costs have hit $41.1 million, costing the company about 2.5% in revenues. In 2014, Key’s revenues fell 10.3% to $1.4 billion from $1.6 billion the year before.

In particular, the company’s defense of the accusations has added to general and administrative spending, which took up 17.5% of revenues in 2014 compared to 13.9% in 2013.

In years past, fines for FCPA violations have averaged about $69 million. But in 2014, the SEC and the U.S. Department of Justice (DOJ) in particular handed out record penalties to companies. The energy sector and its executives were among industries hit with stunning fines for bribing foreign officials.

Enforcement actions resulted in total corporate penalties of $1.57 billion, the second highest amount on record, Sherman & Sterling’s report said. For 2014, average corporate fines and penalties were $156.6 million, a record.

Alstom S.A., a French power and transportation company, was hit with the largest fine of the year: $772.3 million. The company, with U.S. subsidiaries, paid to resolve charges related to a widespread scheme involving tens of millions of dollars in bribes in countries around the world, including Indonesia, Saudi Arabia, Egypt, Taiwan and the Bahamas, the DOJ said Dec. 22.

The company paid officials around the world more than $75 million to secure $4 billion in projects with a profit to the company of $300 million, the DOJ said.


Individuals are more often targeted each year.

In 2014, executives at Nobel Corp. (NYSE: NE) were accused of bribing Nigerian officials for illegal import permits for drilling rigs, said Sherman & Sterling LLP in a January report.

Executives at Petro-Tiger, a British Virgin Islands oil and gas company with operations in Colombia and offices in New Jersey, were indicted in 2014 over accusations that they bribed Colombian officials in exchange for lucrative oil services contracts, according to the DOJ. Joseph Sigelman, former co-CEO of Petro-Tiger Ltd., has pleaded not guilty.

Key Goes On

Key Energy’s board has appointed a special committee to investigate the allegations and is also reviewing operations in Colombia and other countries. The committee’s fact-finding phase of the investigation is expected by the end of March, Key said.

Revenue from the company’s work abroad is significant. Reduced customer activity in Mexico has resulted in a decline in its international division’s revenue.

In the fourth quarter, the company reported a 10% spike in international revenues, largely thanks to a new contract with Mexico’s Pemex.

“While the contract with PEMEX aided the revenue increase, start-up costs with getting previously idled rigs running weighed on operating income,” said James Crandell, managing director, Cowen & Co.

Key has operations across the world.

Outcomes

Even if all goes well for Key, lately companies investigated – and cleared – of wrongdoing have suffered in the public markets.

On Jan. 28, Cobalt said the SEC had terminated its FCPA investigation concerning the company’s activities in Angola.

In November 2011, Cobalt International Energy (NYSE: CIE) received a formal investigative order from the SEC. In August, Cobalt received a Wells Notice informing the company the SEC had made a preliminary decision to recommend taking action against them.

On the day of the notice, Cobalt lost about $700 million in market value, “presumably the market's estimate of the potential fine,” said Bob Brackett, senior analyst, Bernstein Research.

Bracket said the share price should have received a 20% uplift, but instead only saw an increase of about 7%.

The DOJ is continuing to investigate the matter.

Key, in the meantime, is placing greater focus on profitability over market share, Crandell said.

Key said it expects more moderate reductions in activity when compared with many OFS peers because of its exposure to production rather than completion related services.

“While this strategy may protect cash flow in the near term, and we recognize the more production-oriented nature of Key's well servicing and fluid hauling businesses, we find it at odds with peers who have guided to more severe reductions,” Crandell said.

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