Modern Counsel: How closely is Key Energy Services’ success tied to oil and natural gas prices?
Katherine Hargis: We offer well services to companies that produce, maintain, and enhance the flow of oil and natural gas, so the demand for our services fluctuates with our customers’ cash flows, which are directly tied to oil and natural gas prices. We’ve been in a low price environment since late 2014, and we’ve therefore seen the demand for our services, and all oilfield services more broadly, dip as customers significantly decreased their activity in response to the low commodity price.
MC: Has that hit Key hard?
KH: It’s not just us; it’s the entire industry. But we’ve had additional stressors like the [Foreign Corrupt Practices Act of 1977] investigations by the US Securities and Exchange Commission (SEC) and US Department of Justice (DOJ).
MC: What is the latest news on those proceedings?
KH: In April 2016, we announced that the DOJ has declined prosecution of the company. The company has reached an agreement in principle with the staff of the SEC in terms of a proposed offer of settlement, which must be presented to the commission for approval. We are optimistic that the proposed resolution will become final soon, and as such, have accrued a liability in the amount of $5 million in connection with the offer of settlement. We have spent over $80 million in professional fees in connection with these investigations.
While these matters are very close to resolution, they’ve taken a toll of time and resources for the past two years.
MC: What is legal’s role in navigating these challenges?
KH: Obviously we played a major role in the investigations, and we work closely with operations, senior management, and the board in guiding and supporting the company in a distressed environment.
MC: And you’re no stranger to that kind of work?
KH: I was in-house at US Concrete during and after the housing crisis, and the down market hit that business in a very similar way. We went through a restructuring then, and now, Key has continued to analyze a variety of transactions and alternatives designed to reduce our debt and improve our liquidity, including engaging in active discussions with our lenders and note holders regarding a prepackaged restructuring deal.
MC: What’s the main objective?
KH: We simply have to get in a better position with liquidity to allow Key to capitalize on opportunities as the market inevitably improves.
MC: When do you expect that will be?
KH: It’s impossible to know for sure, but we are doing all we can to prepare. We have a new chief executive officer with a great operational background, and he’s helped us strip the company down to the essential core. He’s also reorganized us to cater to regional markets instead of specific lines of business, and we’re divesting noncore businesses as well as our international operations.
MC: Why is Key getting out of markets outside of the United States?
KH: We have to maximize our strengths and reduce international risk exposure so we can focus on what we do really, really well. The market will bounce back sometime in the future, and we will be ready when it does.
MC: What is legal’s most important role in that?
KH: It’s all about facilitating, assisting, and guiding our board, senior executives, and operations in matters related to corporate governance, business transactions, customer contracts, deals, and financing. It’s guiding the divestitures and preparing for what’s just around the corner. Out of downturns come unique opportunities, and we want to be well-positioned to take advantage of such opportunities.
MC: What are you doing now to prepare you department for the future of the company?
KH: We have to be able to work with fewer people, so everyone I have on my team has to wear more hats. They have to be willing to learn new things, and they have to respond well to change.
MC: And for you, as a leader?
KH: I have to keep the team united and motivated. We have to understand the new landscape emerging in the wake of the recent downturn and how to best attract and retain outstanding individuals to contribute in a meaningful way to our business.
MC: Is there a secret to avoiding attrition in an industry as difficult as yours?
KH: It’s hard when you live in a world with finite resources, so I think about what matters to each person. Everyone is different, and I take the time to talk to each person and work to understand what motivates them in order to assess the right candidate for Key and create attractive opportunities for such candidates.
MC: What do you discover in those talks?
KH: It can range from something small to something large. Some people value flex time or a bigger office. Others want a different title, or professional development, or the opportunity to learn something new. Above all, I think people want to feel heard and valued. I try really hard to do that.
MC: Did you learn any major lessons from supporting a business in a distressed environment?
KH: Always remember that operations is your client. They’re the reason you have a job and the reason the company will succeed. In stressful times, they need things from you even faster, and you have to respond. Pick up the phone when it rings. Return calls and e-mails within twenty-four hours at the absolute latest. Be a resource for operations.
MC: Does this spark any new opportunities?
KH: Thankfully, I’ve seen this before, and so I know that going through this actually hones one’s legal skills. It’s a great experience because, as a lawyer, you see how directly your work helps the company become successful and grow and you get a lot of exposure to corporate governance, different financing mechanisms, deals, and strategy. When the company is just humming along and you do the same work day after day, you get less direct input into strategy.
MC: Where is Key Energy Services headed, and how do you make sure your department is aligned?
KH: Oil prices have recovered to a degree, and I expect we’ll eventually see increased demand for our services. The company will react accordingly because we will have done our job, which is to do the hard work now to ensure Key has the right level of liquidity and the right capital structure to successfully take advantage of the opportunities that will present themselves when the time comes.