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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM EST, Wednesday, May 30: My friend, Jim Kingsdale, the oil maven, says oil wouldn't be this high and we wouldn't be concerned about "peak oil" etc. if it weren't for two countries in chaos:

1. Iraq is pumping only 1.8 million barrels a day. It could easily be pumping 5 million.
2. Nigeria is pumping roughly the same. It too could be pumping 5 million.

There is no country that can quickly step into the supply void left by these disasters. Hence oil is staying high at $63+ a barrel.

At this price, there are many companies in the oil drilling and oil services that will (and are doing) well. I've mentioned Dril-Quip (DRQ) which has inched up (thankfully) since I mentioned it. My latest favorite (actually Jim's latest favorite) is Key Energy Services Inc. (KEGS.PK). Here's a description from

Key Energy Services, Inc. operates as a rig-based, onshore well service company. The company provides diversified energy operations, including well servicing, contract drilling, pressure pumping, fishing and rental tool services, and other oilfield services. It has operations in all major onshore oil and gas producing regions of the continental United States; and internationally in Argentina, Canada, and Egypt. The company is headquartered in Midland, Texas.

Here's a chart:

The company has a cloudy history with all sorts of horrid accounting problems, most of which are now apparently behind it. There's not much written on this company. Newsletter Value Investor Insight had an April 30 interview with RS Investments Andrew Pilara which included:

Tell us about one of your specific energy ideas, Key Energy Services:

MD: Key provides basic maintenance services to existing oil and natural-gas wells, mostly onshore and in the U.S. That accounts for about 80% of cash flow, with the other 20% coming from pressure pumping, which is used to stimulate new wells. They are the U.S. leader in maintenance services with about 35% of the market, ahead of Nabors Industries and Basic Energy. The industry has consolidated fairly rapidly: the top four players control about 65% of the market, with mom-and-pops making up the rest.

We like the service aspect of the business. The company is paid by the hour to make sure existing wells are producing at the levels they are capable of, which results in a more durable and predictable level of cash flow than you would see in, say, contract drillers. Customers understand that Key's service can improve a well's productivity by 30- 35% and it’s viewed as an on-going business expense versus coming out of the capital budget.

Joe spoke earlier about the importance of understanding the unit economics of a business – how attractive are those here?

MD: Key’s refurbished well-service rigs cost around $800,000. Day rates today are $400 per hour and utilization levels are about 85%, with margins running in the low 40%s. That gets you to a roughly 70% pre-tax return on investment at the unit level. Even if you cut hourly rates to $250, utilization to 65% and margins to 30%, they’d still earn a pretax return on capital of over 20%. So even in a bad environment they’ll earn more than their cost of capital and increase overall company value.

Why isn’t the company current in its financial reporting?

MD: They made a lot of acquisitions that were poorly accounted for, resulting in unanswered questions about book depreciation that have kept them from filing since 2003. We actually got interested in Key three years ago after the stock got hit on the news they couldn’t file. I’d spent a lot of time analyzing distressed companies, and in this case it was fairly easy to look at cash flows and see that the assets were generating very high rates of return.

The ongoing financial information we get is fairly good. Creditors require monthly financial updates, which are made public and provide a good picture of how the business is performing. We don’t believe there are accounting issues beyond the depreciation/book value issue.

What has management been doing right operationally?

MD: They’ve done an excellent job of maintaining service levels while also becoming more of a price leader, which they should be as the biggest player in a consolidated industry. They’ve been conservative with capital spending while they get their accounting issues resolved. They’ve clearly benefited from higher activity levels, but as I mentioned earlier, we don’t consider this to be as cyclical a business as the market is implying.

Trading at $18.80, what upside do you see for the shares?

MD: We think the shares are being valued as if this was a highly-cyclical contract driller, when it’s actually a much higher-quality business. We expect them to generate $1.2 billion in free cash flow over the next four years, assuming $50- per-barrel oil and $7-per-mcf natural gas. That’s on an enterprise value of $2.4 billion, including $100 million of net debt. If we run an LBO valuation model, it’s easy to achieve a 30% annual rate of return from today’s price.

What are the biggest risks?

MD: Oil going to $35 per barrel would obviously impact the demand economics. You could also conceivably see increased supply and pricing pressure in the maintenance business, but Key is difficult to compete with because it’s the leader.

The company has said it will file up-to-date financial statements through 2006 by the middle of this year. If that slips, it could cause a short-term problem for the stock, but we wouldn’t expect it to impact the long-term potential.

Going to Boston today: Colleges and graduate schools charge a fortune these days to accommodate your privileged children. And worse, they're all short of accommodation for their students. As a result, we (Michael and I) tour to Boston today to find a suitable place to buy we can rent to fellow students at vast rents. We played slumlords while Michael was in college and it worked, selling the joint after his graduation. We might have to hold this one a little longer. But the economics -- Michael's Marvellous Maths -- look pretty good.

Everyone should be an entrepreneur. Who am I to say that this dumb idea won't work. MetroNaps wants to rent you 20 minutes in these things for $14.

Here's their promotion:

MetroNaps enhances workforce productivity through educational seminars and mid-day napping equipment. Born from the realization that individuals can significantly increase their energy with brief daytime rest, MetroNaps seeks to be the world’s premier provider of professional napping products and services. ...

There comes a point when all the caffeine in the world can’t do the trick. MetroNaps, a pay-per-snooze endeavor years in the making. For $14, tired workers can snuggle into sleek adjustable pods, put on noise-blocking Bose headphones or listen to calming music for ergonomic 20-minute power naps. Gentle vibrations and lights start when the time’s up. Afterwards, grab a citrus-smelling towel, spray on some facial mist, and the boss will never know you were napping.

They even offer seminars on napping. In fact, go to their web site and check how you can make science out of virtually anything, including sleeping.

Let me state for the record: I do believe in napping. I do believe you work better after napping. I often nap twice a day. I don't believe you need this gadget. Two pillows and a couch work just fine for me.

Jet lag can be cured: A team of Argentie scientists announced that Viagra could be effective in treating jet lag, at least in hamsters. Lucky hamsters.

Bob Hope's brilliance:
ON TURNING 70: "You still chase women, but only downhill".

ON TURNING 80: "That's the time of your life when even your birthday suit needs pressing."

ON TURNING 90: "You know you're getting old when the candles cost more than the cake."

ON TURNING 100: " I don't feel old. In fact I don't feel anything until noon . Then it's time for my nap."

ON GIVING UP HIS EARLY CAREER, BOXING: "I ruined my hands in the ring ... the referee kept stepping on them."

ON GOLF: "Golf is my profession. Show business is just to pay the green fees."

ON PRESIDENTS: " I have performed for 12 presidents and entertained six."

ON WHY HE CHOSE SHOWBIZ FOR HIS CAREER: " When I was born, the doctor said to my mother, 'Congratulations. You have an eight-pound ham'."

ON RECEIVING THE CONGRESSIONAL GOLD MEDAL: "I feel very humble, but I think I have the strength of character to fight it."

ON HIS FAMILY'S EARLY POVERTY: "Four of us slept in the one bed. When it got cold, mother threw on another brother."

ON HIS SIX BROTHERS. "That's how I learned to dance. Waiting for the bathroom."

ON HIS EARLY FAILURES: "I would not have had anything to eat if it weren't for the stuff the audience threw at me."

ON GOING TO HEAVEN: "I've done benefits for ALL religions. I'd hate to blow the hereafter on a technicality."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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