Key Energy Services Inc. Annual Report 2014

Plain-text annual report

Table of ContentsIndex to Financial Statements UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ______________________________________Form 10-K(Mark One) þþANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the fiscal year ended December 31, 2014 ¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934Commission file number 001-08038KEY ENERGY SERVICES, INC.(Exact name of registrant as specified in its charter)Maryland 04-2648081(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)1301 McKinney StreetSuite 1800Houston, Texas 77010(Address of principal executive offices, including Zip Code)(713) 651-4300(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which RegisteredCommon Stock, $0.10 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:Title of ClassNoneIndicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes þ No ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes þ No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files.) Yes þ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ¨Table of ContentsIndex to Financial StatementsIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þThe aggregate market value of the common stock of the registrant held by non-affiliates as of June 30, 2014, based on the $9.14 per share closingprice for the registrant’s common stock as quoted on the New York Stock Exchange on such date, was $1.2 billion (for purposes of calculating these amounts,only directors, officers and beneficial owners of 10% or more of the outstanding common stock of the registrant have been deemed affiliates).As of February 17, 2015, the number of outstanding shares of common stock of the registrant was 154,398,693.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 with respectto the 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. Table of ContentsIndex to Financial StatementsKEY ENERGY SERVICES, INC.ANNUAL REPORT ON FORM 10-KFor the Year Ended December 31, 2014INDEX PageNumber PART I ITEM 1.Business4ITEM 1A.Risk Factors10ITEM 1B.Unresolved Staff Comments18ITEM 2.Properties18ITEM 3.Legal Proceedings19ITEM 4.Mine Safety Disclosures19 PART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities20ITEM 6.Selected Financial Data22ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations39ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk43ITEM 8.Financial Statements and Supplementary Data44ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure93ITEM 9A.Controls and Procedures93ITEM 9B.Other Information93 PART III ITEM 10.Directors, Executive Officers and Corporate Governance94ITEM 11.Executive Compensation94ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters94ITEM 13.Certain Relationships and Related Transactions, and Director Independence94ITEM 14.Principal Accounting Fees and Services94 PART IV ITEM 15.Exhibits, Financial Statement Schedules972Table of ContentsIndex to Financial StatementsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSIn addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-lookingstatements. These “forward-looking statements” are based on our current expectations, estimates and projections about Key Energy Services, Inc. and itswholly owned and controlled subsidiaries, our industry and management’s beliefs and assumptions concerning future events and financial trends affectingour financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “predicts,”“expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statementsare only predictions and are subject to substantial risks and uncertainties and are not guarantees of performance. Future actions, events and conditions andfuture results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully consider therisks outlined in “Item 1A. Risk Factors.”We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except asrequired by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionarystatements that may accompany such forward-looking statements.Important factors that may affect our expectations, estimates or projections include, but are not limited to, the following:•conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;•volatility in oil and natural gas prices;•our ability to finance future growth of our operations or future acquisitions;•our ability to implement price increases or maintain pricing on our core services;•industry capacity;•increased labor costs or unavailability of skilled workers;•asset impairments or other charges;•the periodic low demand for our services and resulting operating losses;•our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not beadequate to cover all of our losses or liabilities;•the economic, political and social instability risks of doing business in certain foreign countries;•significant costs and potential liabilities resulting from compliance with investigations relating to the possible violations the U.S. ForeignCorruption Practices Act and other applicable laws;•our historically high employee turnover rate and our ability to replace or add workers;•our ability to incur debt or long-term lease obligations or to implement technological developments and enhancements;•significant costs and liabilities resulting from environmental, health and safety laws and regulations, including those relating to hydraulicfracturing;•severe weather impacts on our business;•our ability to successfully identify, make and integrate acquisitions;•the loss of one or more of our larger customers;•the impact of compliance with climate change legislation or initiatives;•our ability to generate sufficient cash flow to meet debt service obligations;•the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt;•an increase in our debt service obligations due to variable rate indebtedness; and•other factors affecting our business described in “Item 1A. Risk Factors.”3Table of ContentsIndex to Financial StatementsPART IITEM 1. BUSINESSGeneral Description of BusinessKey Energy Services, Inc. (NYSE: KEG), a Maryland corporation, is the largest onshore, rig-based well servicing contractor based on the number ofrigs owned. References to “Key,” the “Company,” “we,” “us” or “our” in this report refer to Key Energy Services, Inc., its wholly owned subsidiaries and itscontrolled subsidiaries. We were organized in April 1977 and commenced operations in July 1978 under the name National Environmental Group, Inc. InDecember 1992, we became Key Energy Group, Inc. and we changed our name to Key Energy Services, Inc. in December 1998.We provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas productioncompanies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services,fluid management services, fishing and rental services and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drillingapplications. We operate in most major oil and natural gas producing regions of the continental United States, and we have operations in Mexico, Colombia,Ecuador, the Middle East and Russia. In addition, we have a technology development and control systems business based in Canada.The following is a description of the various products and services that we provide and our major competitors for those products and services.Service OfferingsWe revised our reportable business segments as of the fourth quarter of 2014. The revised reportable segments are U.S. Rig Services, FluidManagement Services, Coiled Tubing Services, Fishing and Rental Services and International. We also have a “Functional Support” segment associated withoverhead and other costs in support of our reportable segments. Segment disclosures as of and for the years ended December 31, 2013 and 2012 have beenrevised to reflect the change in segments. We revised our segments to reflect changes in management’s resource allocation and performance assessment inmaking decisions regarding our business. Our U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services operategeographically within the United States. The International reportable segment includes our operations in Mexico, Colombia, Ecuador, Russia, Bahrain andOman. Our Canadian subsidiary is also reflected in our International reportable segment. We evaluate the performance of our segments based on gross marginmeasures. All inter-segment sales pricing is based on current market conditions. See “Note 22. Segment Information” in “Item 8. Financial Statements andSupplementary Data” for additional financial information about our reportable business segments and the various geographical areas where we operate.U.S. Rig ServicesOur U.S. Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, wellmaintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gasproducers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes andcapabilities, allowing us to service all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView® technology,which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crewsto better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled or recently extended through aworkover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing thesezones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in thecompletion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of thecompletion.The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and timeconsuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal orlateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells intoinjection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a fewdays to several weeks, depending on the complexity of the workover.Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of thesemaintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores,and pulling rods and other downhole equipment from wellbores to4Table of ContentsIndex to Financial Statementsidentify and resolve production problems. Maintenance services are generally less complicated than completion and workover related services and requireless time to perform.Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. Theseplugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonmentservices is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are nolonger productive.We believe that the largest competitors for our U.S. Rig Services include Nabors Industries Ltd., Basic Energy Services, Inc., Superior EnergyServices, Inc., Forbes Energy Services Ltd. and Pioneer Energy Services Corp. Numerous smaller companies also compete in our rig-based markets in theUnited States.Fluid Management ServicesWe provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover andmaintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site andtransported for disposal in saltwater disposal (“SWD”) wells owned by us or a third party. Demand and pricing for these services generally correspond todemand for our well service rigs.We believe that the largest competitors for our domestic fluid management services include Basic Energy Services, Inc., Superior Energy Services,Inc., Nabors Industries Ltd., Nuverra Environmental Solutions, Forbes Energy Services Ltd., and Stallion Oilfield Services Ltd. Numerous smaller companiesalso compete in the fluid management services market in the United States.Coiled Tubing ServicesCoiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells toperform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemicaltreatments. Coiled tubing, particularly larger diameter coil units, is also used for a number of horizontal well applications such as milling temporary isolationplugs that separate frac zones and various other pre- and post-hydraulic fracturing well preparation services.Our primary competitors in the Coiled Tubing Services market include Schlumberger Ltd., Baker Hughes Incorporated, Halliburton Company andSuperior Energy Services, Inc. Numerous smaller companies also compete in our coiled tubing services markets in the United States. Demand for theseservices generally correspond to demand for well completion services.Fishing and Rental ServicesWe offer a full line of fishing services and rental equipment designed for use in providing both onshore and offshore drilling and workover services.Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists ofdrill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, powerswivels, reversing units and foam air units. As a result of the 2011 acquisition of Edge Oilfield Services, LLC and Summit Oilfield Services, LLC (collectively, “Edge”), our rental inventoryalso includes frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids, proppants, oil and natural gas.We also provide well testing services.Demand for our Fishing and Rental Services is also closely related to capital spending by oil and natural gas producers.Our primary competitors for our Fishing and Rental Services include Baker Oil Tools (owned by Baker Hughes Incorporated), WeatherfordInternational Ltd., Basic Energy Services, Inc., Smith Services (owned by Schlumberger), Superior Energy Services, Inc., Quail Tools (owned by ParkerDrilling Company) and Knight Oil Tools. Numerous smaller companies also compete in our fishing and rental services markets in the United States.International SegmentOur International segment includes operations in Mexico, Colombia, Ecuador, the Middle East and Russia. In addition, we have a technologydevelopment and control systems business based in Canada. Also, prior to the sale of our Argentina business in the third quarter of 2012, we operated inArgentina. We are reporting the results of our Argentina business as discontinued operations for the 2012 period. We provide rig-based services such as themaintenance, workover, and recompletion of existing oil wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of theiruseful lives in each of our international markets.5Table of ContentsIndex to Financial StatementsIn addition, in Mexico we provide drilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico alsorequires us to provide third-party services, which vary in scope by project.In the Middle East, we operate in the Kingdom of Bahrain and Oman. On August 5, 2013, we agreed to the dissolution of AlMansoori Key EnergyServices, LLC, a joint venture formed under the laws of Abu Dhabi, UAE, and the acquisition of the underlying business for $5.1 million. See “Note 2.Acquisitions” in “Item 8. Financial Statements and Supplementary Data” for further discussion.Our Russian operations provide drilling, workover, and reservoir engineering services. On April 9, 2013, we completed the acquisition of theremaining 50% noncontrolling interest in OOO Geostream Services Group (“Geostream”), a limited liability company incorporated in the Russian Federation,for $14.6 million. We now own 100% of Geostream. See “Note 2. Acquisitions” in “Item 8. Financial Statements and Supplementary Data” for furtherdiscussion.Our technology development and control systems business based in Canada is focused on the development of hardware and software related tooilfield service equipment controls, data acquisition and digital information flow.Functional Support SegmentOur Functional Support segment includes unallocated overhead costs associated with sales, safety and administrative support for our U.S. andInternational reporting segments.Equipment OverviewWe categorize our rigs and equipment as marketed or stacked. We consider a marketed rig or piece of equipment to be a unit that is working, onstandby, or down for repairs but with work orders assigned to it or that is available for work. A stacked rig or piece of equipment is a unit that is in theremanufacturing process and could not be put to work without significant investment in repairs and additional equipment or we intend to salvage the unit forparts, sell the unit or scrap the unit. The definitions of marketed and stacked are used for the majority of our equipment.RigsAs mentioned above, our fleet is diverse and allows us to work on all types of wells, ranging from very shallow wells to wells as deep as 20,000 feet.Typically, higher horsepower (“HP”) rigs will be utilized on deep wells while lower HP rigs will be used on shallow wells. In most cases, these rigs can bereassigned to other regions should market conditions warrant the transfer of equipment. The following table summarizes our rigs based on horsepower (“HP”)as of December 31, 2014: Horsepower < 450 HP ≥ 450 HP TotalMarketed304 336 640Stacked257 63 320Total561 399 960Coiled TubingCoiled tubing uses a spooled continuous metal pipe that is injected downhole in oil and gas wells in order to convey tools, log, stimulate, clean-outand perform other intervention functions. Typically, larger diameter coiled tubing is able to service longer lateral horizontal wells. The table belowsummarizes our Coiled Tubing Services fleet by pipe diameter as of December 31, 2014: Pipe Diameter < 2" ≥ 2" TotalMarketed17 21 38Stacked3 10 13Total20 31 516Table of ContentsIndex to Financial StatementsFluid Management ServicesWe have an extensive and diverse fleet of oilfield transportation service vehicles. We broadly define an oilfield transportation service vehicle as anyheavy-duty, revenue-generating vehicle weighing over one ton. Our transportation fleet includes vacuum trucks, winch trucks, hot oilers and other vehicles,including kill trucks and various hauling and transport trucks. The table below summarizes our Fluid Management Services fleet as of December 31, 2014: Marketed Stacked TotalTruck Type Vacuum Trucks494 94 588Winch Trucks83 5 88Hot Oil Trucks49 8 57Kill Trucks68 9 77Other33 — 33Total727 116 843Disposal WellsAs part of our Fluid Management Services, we provide disposal services for fluids produced subsequent to well completion. These fluids areremoved from the well site and transported for disposal in SWD wells. The table below summarizes our SWD facilities, and brine and freshwater stations bystate as of December 31, 2014: Owned Leased(1) TotalLocation Arkansas1 1 2Louisiana2 — 2Montana— 2 2New Mexico3 8 11North Dakota1 8 9Texas30 36 66Total37 55 92(1)Includes SWD facilities as “leased” if we own the wellbore for the SWD but lease the land. In other cases, we lease both the wellbore and the land. Leaseterms vary among different sites, but with respect to some of the SWD facilities for which we lease the land and own the wellbore, the land owner has anoption under the land lease to retain the wellbore at the termination of the lease.Other Business DataRaw MaterialsWe purchase a wide variety of raw materials, parts and components that are made by other manufacturers and suppliers for our use. We are notdependent on any single source of supply for those parts, supplies or materials.CustomersOur customers include major oil companies, foreign national oil companies, and independent oil and natural gas production companies. During theyears ended December 31, 2014 and December 31, 2013, Chevron Texaco Exploration and Production accounted for approximately 15% of our consolidatedrevenue. During the year ended December 31, 2012, Petróleos Mexicanos (“Pemex”) and Occidental Petroleum Corporation accounted for approximately12% and 10% of our consolidated revenue, respectively. No other customer accounted for more than 10% of our consolidated revenue in 2014, 2013 or 2012.Receivables outstanding from Pemex were approximately 19% of our total accounts receivable as of December 31, 2013. No other customersaccounted for more than 10% of our total accounts receivable as of December 31, 2014 and 2013.Competition and Other External FactorsThe markets in which we operate are highly competitive. Competition is influenced by such factors as price, capacity, availability of work crews,and reputation and experience of the service provider. We believe that an important competitive7Table of ContentsIndex to Financial Statementsfactor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well-trained work force. We devote substantialresources toward employee safety and training programs. In addition, we believe that our proprietary KeyView® system provides important safetyenhancements. We believe many of our larger customers place increased emphasis on the safety, performance and quality of the crews, equipment andservices provided by their contractors. Although we believe customers consider all of these factors, price is often the primary factor in determining whichservice provider is awarded the work. However, in numerous instances, we secure and maintain work for large customers for which efficiency, safety,technology, size of fleet and availability of other services are of equal importance to price.The demand for our services fluctuates, primarily in relation to the price (or anticipated price) of oil and natural gas, which, in turn, is driven for themost part by the supply of, and demand for, oil and natural gas. Generally, as supply of those commodities decreases and demand increases, service andmaintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of their wells in a higher priced environment.However, in a lower oil and natural gas price environment, demand for service and maintenance generally decreases as oil and natural gas producers decreasetheir activity. In particular, the demand for new or existing field drilling and completion work is driven by available investment capital for such work.Because these types of services can be easily “started” and “stopped,” and oil and natural gas producers generally tend to be less risk tolerant whencommodity prices are low or volatile, we may experience a more rapid decline in demand for well maintenance services compared with demand for othertypes of oilfield services. Furthermore, in a low commodity price environment, fewer well service rigs are needed for completions, as these activities aregenerally associated with drilling activity.The level of our revenues, earnings and cash flows are substantially dependent upon, and affected by, the level of U.S. and international oil andnatural gas exploration, development and production activity, as well as the equipment capacity in any particular region.SeasonalityOur operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter months due to inclementweather, fewer daylight hours and holidays. During the summer months, our operations may be impacted by tropical or other inclement weather systems.During periods of heavy snow, ice or rain, we may not be able to operate or move our equipment between locations, thereby reducing our ability to provideservices and generate revenues. In addition, the majority of our equipment works only during daylight hours. In the winter months when days become shorter,this reduces the amount of time that our assets can work and therefore has a negative impact on total hours worked. Lastly, during the fourth quarter, wehistorically have experienced significant slowdown during the Thanksgiving and Christmas holiday seasons and demand sometimes slows during this periodas our customers exhaust their annual spending budgets.Patents, Trade Secrets, Trademarks and CopyrightsWe own numerous patents, trademarks and proprietary technology that we believe provide us with a competitive advantage in the various markets inwhich we operate or intend to operate. We have devoted significant resources to developing technological improvements in our well service business andhave sought patent protection both inside and outside the United States for products and methods that appear to have commercial significance. All the issuedpatents have varying remaining durations and begin expiring between 2015 and 2031. The most notable of our technologies include numerous patentssurrounding our KeyView® system.We own several trademarks that are important to our business both in the United States and in foreign countries. In general, depending upon thejurisdiction, trademarks are valid as long as they are in use, or their registrations are properly maintained and they have not been found to become generic.Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While our patents and trademarks, in the aggregate, areof considerable importance to maintaining our competitive position, no single patent or trademark is considered to be of a critical or essential nature to ourbusiness.We also rely on a combination of trade secret laws, copyright and contractual provisions to establish and protect proprietary rights in our productsand services. We typically enter into confidentiality agreements with our employees, strategic partners and suppliers and limit access to the distribution ofour proprietary information.EmployeesAs of December 31, 2014, we employed approximately 6,700 persons in our U.S. operations and approximately 1,400 additional persons in Mexico,Colombia, Ecuador, the Middle East, Russia and Canada. Our domestic employees are not represented by a labor union and are not covered by collectivebargaining agreements. In Mexico, we have entered into a collective bargaining agreement that applies to our workers in Mexico performing work under ourPemex contracts. As noted below in “Item 1A. Risk Factors,” we have historically experienced a high employee turnover rate. We have not experienced8Table of ContentsIndex to Financial Statementsany significant work stoppages associated with labor disputes or grievances and consider our relations with our employees to be generally satisfactory.Governmental RegulationsOur operations are subject to various federal, state and local laws and regulations pertaining to health, safety and the environment. We cannotpredict the level of enforcement of existing laws or regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulingsin the future. We also cannot predict whether additional laws and regulations affecting our business will be adopted, or the effect such changes might have onus, our financial condition or our business. The following is a summary of the more significant existing environmental, health and safety laws and regulationsto which our operations are subject and for which a lack of compliance may have a material adverse impact on our results of operations, financial position orcash flows. We believe that we are in material compliance with all such laws.Environmental RegulationsOur operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants andother regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of suchmaterials, and some of our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements orpermits may result in fines and penalties, remediation orders and revocation of permits.Hazardous Substances and WasteThe Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “CERCLA” or the “Superfund” law, andcomparable state laws, impose liability without regard to fault or the legality of the original conduct of certain defined persons, including current and priorowners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardoussubstances found at the site. Under CERCLA, these “responsible persons” may be jointly and severally liable for the costs of cleaning up the hazardoussubstances, for damages to natural resources and for the costs of certain health studies.In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, may incur CERCLAliability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or otherpollutants. We also generate solid wastes that are subject to the requirements of the Resource Conservation and Recovery Act, as amended, or “RCRA,” andcomparable state statutes.Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released atproperties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. UnderCERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to performremedial activities to prevent future contamination.Air EmissionsThe Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and also impose variousmonitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operationof certain projects or facilities and may require use of emission controls.Global Warming and Climate ChangeSome scientific studies suggest that emissions of greenhouse gases (including carbon dioxide and methane) may contribute to warming of theEarth’s atmosphere. While we do not believe our operations raise climate change issues different from those generally raised by commercial use of fossil fuels,legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business could increase our costs in order to comply withany new laws.Water DischargesWe operate facilities that are subject to requirements of the Clean Water Act, as amended, or “CWA,” and analogous state laws that imposerestrictions and controls on the discharge of pollutants into navigable waters. Spill prevention, control and counter-measure requirements under the CWArequire implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for theprevention of spills are established under the Oil Pollution Act of 1990, as amended, or “OPA,” which applies to owners and operators of vessels, includingbarges, offshore platforms and certain onshore facilities. Under OPA, regulated parties are strictly and jointly and severally liable for oil spills and mustestablish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorilyresponsible.9Table of ContentsIndex to Financial StatementsOccupational Safety and Health ActWe are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or “OSHA,” and comparable state laws thatregulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used orproduced in our operations be maintained and provided to employees and state and local government authorities.Saltwater Disposal WellsWe operate SWD wells that are subject to the CWA, Safe Drinking Water Act, and state and local laws and regulations, including those establishedby the Underground Injection Control Program of the Environmental Protection Agency (“EPA”), which establishes the minimum program requirements.Most of our SWD wells are located in Texas. We also operate SWD wells in Arkansas, Louisiana, Montana, New Mexico and North Dakota. Regulations inthese states require us to obtain an Underground Injection Control permit to operate each of our SWD wells. The applicable regulatory agency may suspendor modify one or more of our permits if our well operations are likely to result in pollution of freshwater, substantial violation of permit conditions orapplicable rules, or if the well leaks into the environment.Access to Company ReportsOur Web site address is www.keyenergy.com, and we make available free of charge through our Web site our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, as soon as reasonably practicable after such materials areelectronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Our Web site also includes general information about us,including our Corporate Governance Guidelines and charters for the committees of our board of directors. Information on our Web site or any other Web siteis not a part of this report.ITEM 1A. RISK FACTORSIn addition to the other information in this report, the following factors should be considered in evaluating us and our business.Our business is cyclical and depends on conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expendituresby oil and natural gas companies. Volatility in oil and natural gas prices, tight credit markets and disruptions in the U.S. and global economies andfinancial systems may adversely impact our business.Prices for oil and natural gas historically have been volatile and as a result of changes in the supply of, and demand for, oil and natural gas and otherfactors. These include changes resulting from. among other things, the ability of the Organization of Petroleum Export Countries (“OPEC”) to support oilprices, changes in the levels of oil and natural gas production in the United States, domestic and worldwide economic conditions and political instability inoil-producing countries. We depend on our customers' willingness to make capital expenditures to explore for, develop and produce oil and natural gas.Therefore, weakness in oil and natural gas prices (or the perception by our customers that oil and natural gas prices will decrease in the future) could result ina reduction in the utilization of our equipment and result in lower rates for our services.Our customers’ willingness to undertake exploration and production activities depends largely upon prevailing industry conditions that areinfluenced by numerous factors over which we have no control, including:•prices, and expectations about future prices, of oil and natural gas;•domestic and worldwide economic conditions;•domestic and foreign supply of and demand for oil and natural gas;•the price and quantity of imports of foreign oil and natural gas including the ability of OPEC to set and maintain production levels for oil;•the cost of exploring for, developing, producing and delivering oil and natural gas;•the level of excess production capacity, available pipeline, storage and other transportation capacity;•lead times associated with acquiring equipment and products and availability of qualified personnel;•the expected rates of decline in production from existing and prospective wells;•the discovery rates of new oil and gas reserves;•federal, state and local regulation of exploration and drilling activities and equipment, material or supplies that we furnish;•public pressure on, and legislative and regulatory interest within, federal, state and local governments to stop, significantly limit or regulatehydraulic fracturing activities;•weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area and severe winter weather that caninterfere with our operations;10Table of ContentsIndex to Financial Statements•political instability in oil and natural gas producing countries;•advances in exploration, development and production technologies or in technologies affecting energy consumption;•the price and availability of alternative fuel and energy sources;•uncertainty in capital and commodities markets; and•changes in the value of the U.S. dollar relative to other major global currencies.A substantial decline in oil and natural gas prices generally leads to decreased spending by our customers. While higher oil and natural gas pricesgenerally lead to increased spending by our customers, sustained high energy prices can be an impediment to economic growth, and can therefore negativelyimpact spending by our customers. Our customers also take into account the volatility of energy prices and other risk factors by requiring higher returns forindividual projects if there is higher perceived risk. Any of these factors could affect the demand for oil and natural gas and could have a material adverseeffect on our business, financial condition, results of operations and cash flow.Spending by exploration and production companies can also be impacted by conditions in the capital markets. Limitations on the availability ofcapital, or higher costs of capital, for financing expenditures may cause exploration and production companies to make additional reductions to capitalbudgets in the future even if oil prices remain at current levels or natural gas prices increase from current levels. Any such cuts in spending will curtaildrilling programs as well as discretionary spending on well services, which may result in a reduction in the demand for our services, and the rates we cancharge and the utilization of our assets. Moreover, reduced discovery rates of new oil and natural gas reserves, or a decrease in the development rate ofreserves, in our market areas, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could alsohave a material adverse impact on our business, even in a stronger oil and natural gas price environment.We may be unable to implement price increases or maintain existing prices on our core services.We periodically seek to increase the prices of our services to offset rising costs and to generate higher returns for our stockholders. However, weoperate in a very competitive industry and as a result, we are not always successful in raising, or maintaining our existing prices. Additionally, during periodsof increased market demand, a significant amount of new service capacity, including new well service rigs, fluid hauling trucks, coiled tubing units and newfishing and rental equipment, may enter the market, which also puts pressure on the pricing of our services and limits our ability to increase or maintainprices. Furthermore, during periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adverselyaffect our profitability.Even when we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset such rising costs. In periods of highdemand for oilfield services, a tighter labor market may result in higher labor costs. During such periods, our labor costs could increase at a greater rate thanour ability to raise prices for our services. Also, we may not be able to successfully increase prices without adversely affecting our activity levels. Theinability to maintain our prices or to increase our prices as costs increase could have a material adverse effect on our business, financial position and results ofoperations.We participate in a capital-intensive industry. We may not be able to finance future growth of our operations or future acquisitions.Our activities require substantial capital expenditures. If our cash flow from operating activities and borrowings under our 2011 Credit Facility (asdefined below) are not sufficient to fund our capital expenditure budget, we would be required to fund these expenditures through debt or equity oralternative financing plans, such as refinancing or restructuring our debt or selling assets.Our ability to raise debt or equity capital or to refinance or restructure our debt will depend on the condition of the capital markets and our financialcondition at such time, among other things. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerouscovenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of thesealternatives. If debt and equity capital or alternative financing plans are not available or are not available on economically attractive terms, we would berequired to curtail our capital spending, and our ability to grow our business and sustain or improve our profits may be adversely affected. Any of theforegoing consequences could materially and adversely affect our business, financial condition, results of operations and prospects.11Table of ContentsIndex to Financial StatementsIncreased labor costs or the unavailability of skilled workers could hurt our operations.Companies in our industry, including us, are dependent upon the available labor pool of skilled employees. We compete with other oilfield servicesbusinesses and other employers to attract and retain qualified personnel with the technical skills and experience required to provide our customers with thehighest quality service. We are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other workingconditions, and which can increase our labor costs or subject us to liabilities to our employees. A shortage in the labor pool of skilled workers or othergeneral inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and couldrequire us to enhance our wage and benefits packages. Labor costs may increase in the future or we may not be able to reduce wages when demand andpricing falls, and such changes could have a material adverse effect on our business, financial condition and results of operations.Our future financial results could be adversely impacted by asset impairments or other charges.We have recorded goodwill impairment charges and asset impairment charges in the past. We periodically evaluate our long-lived assets, includingour property and equipment, indefinite-lived intangible assets, and goodwill for impairment. In performing these assessments, we project future cash flows ona discounted basis for goodwill, and on an undiscounted basis for other long-lived assets, and compare these cash flows to the carrying amount of the relatedassets. These cash flow projections are based on our current operating plans, estimates and judgmental assumptions. We perform the assessment of potentialimpairment on our goodwill and indefinite-lived intangible assets at least annually in the fourth quarter, or more often if events and circumstances warrant.We perform the assessment of potential impairment for our property and equipment whenever facts and circumstances indicate that the carrying value ofthose assets may not be recoverable due to various external or internal factors. If we determine that our estimates of future cash flows were inaccurate or ouractual results are materially different from what we have predicted, we could record additional impairment charges in future periods, which could have amaterial adverse effect on our financial position and results of operations.We have operated at a loss in the past and there is no assurance of our profitability in the future.Historically, we have experienced periods of low demand for our services and have incurred operating losses. In the future, we may incur furtheroperating losses and experience negative operating cash flow. We may not be able to reduce our costs, increase our revenues, or reduce our debt serviceobligations sufficient to achieve or maintain profitability and generate positive operating income in the future.Our business involves certain operating risks, which are primarily self-insured, and our insurance may not be adequate to cover all insured losses orliabilities we might incur in our operations.Our operations are subject to many hazards and risks, including the following:•accidents resulting in serious bodily injury and the loss of life or property;•liabilities from accidents or damage by our fleet of trucks, rigs and other equipment;•pollution and other damage to the environment;•reservoir damage;•blow-outs, the uncontrolled flow of natural gas, oil or other well fluids into the atmosphere or an underground formation; and•fires and explosions.If any of these hazards occur, they could result in suspension of operations, damage to or destruction of our equipment and the property of others, orinjury or death to our or a third party's personnel.We self-insure against a significant portion of these liabilities. For losses in excess of our self-insurance limits, we maintain insurance fromunaffiliated commercial carriers. However, our insurance may not be adequate to cover all losses or liabilities that we might incur in our operations.Furthermore, our insurance may not adequately protect us against liability from all of the hazards of our business. As a result of market conditions, premiumsand deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or availableonly for reduced amounts of coverage. We also are subject to the risk that we may be unable to maintain or obtain insurance of the type and amount we desireat a reasonable cost. If we were to incur a significant liability for which we were uninsured or for which we were not fully insured, it could have a materialadverse effect on our financial position, results of operations and cash flows.We operate in a highly competitive industry, with intense price competition, which may intensify as our competitors expand their operations.The market for oilfield services in which we operate is highly competitive and includes numerous small companies capable of competing effectivelyin our markets on a local basis, as well as several large companies that possess substantially12Table of ContentsIndex to Financial Statementsgreater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers.The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, technology,equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and productioncompanies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and canbe moved from one market to another in response to market conditions heightens the competition in the industry. We may be competing for work againstcompetitors that may be better able to withstand industry downturns and may be better suited to compete on the basis of price, retain skilled personnel andacquire new equipment and technologies, all of which could affect our revenues and profitability.Compliance with new regulations regarding the use of “conflict minerals” could limit the supply and increase the cost of certain metals used inmanufacturing our products.In accordance with Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) the SEC newdisclosure requirements, which became effective in 2014, for manufacturers of products containing certain minerals which are mined from the DemocraticRepublic of Congo and adjoining countries. These “conflict minerals” are commonly found in metals used in the manufacture of semiconductors.Manufacturers are also required to disclose their efforts to prevent the sourcing of such minerals and metals produced from them. One of our whole-ownedsubsidiaries manufactures certain products that are covered by these requirements. The implementation of these new regulations may limit the sourcing andavailability of some of the metals used in the manufacture of our products. The regulations may also reduce the number of suppliers who provide conflict-freemetals, and may affect our ability to obtain the metals in sufficient quantities or at competitive prices. Finally, some of our customers may elect to disqualifyus as a supplier if we are unable to verify that the metals used in our products are free of conflict minerals.We are subject to the economic, political and social instability risks of doing business in certain foreign countries.We currently have operations based in Mexico, Colombia, Ecuador, the Middle East and Russia and we own a technology development and controlsystems business based in Canada. In the future, we may expand our operations into other foreign countries. As a result, we are exposed to risks ofinternational operations, including:•increased governmental ownership and regulation of the economy in the markets in which we operate;•inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition of higher interest ratesand wage and price controls;•economic and financial instability of national oil companies;•increased trade barriers, such as higher tariffs and taxes on imports of commodity products;•exposure to foreign currency exchange rates;•exchange controls or other currency restrictions;•war, civil unrest or significant political instability;•restrictions on repatriation of income or capital;•expropriation, confiscatory taxation, nationalization or other government actions with respect to our assets located in the markets where weoperate;•governmental policies limiting investments by and returns to foreign investors;•labor unrest and strikes;•deprivation of contract rights; and•restrictive governmental regulation and bureaucratic delays.The occurrence of one or more of these risks may:•negatively impact our results of operations;•restrict the movement of funds and equipment to and from affected countries; and•inhibit our ability to collect receivables.Our wholly owned subsidiary, Geostream, provides drilling, workover and reservoir engineering services in Russia. Continued political instability,deteriorating macroeconomic conditions, economic sanctions and actual or threatened military action related to the annexation of the Ukrainian territory ofCrimea could have a material adverse effect on our subsidiary’s operations in the region and on the result of operations of our International segment.13Table of ContentsIndex to Financial StatementsOur failure to comply with the Foreign Corrupt Practices Act (“FCPA”) and similar laws may have a negative impact on our ongoing operations.Our ability to comply with the FCPA and similar laws is dependent on the success of our ongoing compliance program, including our ability tocontinue to manage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is alsodependent on the efforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil andcriminal prosecution as well as fines and penalties in the event of a finding of violation of the FCPA or similar laws by us or any of our employees.A Special Committee of our Board of Directors is currently investigating possible violations of the FCPA involving business activities of ouroperations in Russia and an allegation involving our Mexico operations that, if true, could potentially constitute a violation of certain of our policies,including our Code of Business Conduct, the FCPA and other applicable laws. The Special Committee’s investigation, which also includes a review ofcertain aspects of the Company’s operations in Colombia, as well as our other international locations, is ongoing. See Item 3. Legal Proceedings for a moredetailed discussion of these investigations.We have incurred, and may continue to incur, legal and other expenses in connection with the investigations and related compliance activities. Inaddition, our reputation and our ability to obtain new business or retain existing business from our current and potential clients in the relevant foreignjurisdictions could be adversely affected by the outcome of, or publicity relating to, the investigations, which could have a negative impact on our results ofoperations.Historically, we have experienced a high employee turnover rate. Any difficulty we experience replacing or adding workers could adversely affect ourbusiness.We believe that the high turnover rate in our industry is attributable to the nature of oilfield services work, which is physically demanding andperformed outdoors. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that arecompetitive with ours. The potential inability or lack of desire by workers to commute to our facilities and job sites, as well as the competition for workersfrom competitors or other industries, are factors that could negatively affect our ability to attract and retain workers. We may not be able to recruit, train andretain an adequate number of workers to replace departing workers. The inability to maintain an adequate workforce could have a material adverse effect onour business, financial condition and results of operations.We may not be successful in implementing and maintaining technology development and enhancements. New technology may cause us to become lesscompetitive.The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some ofwhich may be subject to patent protection. As competitors and others use or develop new technologies in the future, we may be placed at a competitivedisadvantage. Further, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors havegreater financial, technical and personnel resources that may allow them to implement new technologies before we can. If we are unable to develop andimplement new technologies or products on a timely basis and at competitive cost, our business, financial condition, results of operations and cash flowscould be adversely affected.A component of our business strategy is to incorporate the KeyView® system, our proprietary technology, into our well service rigs. The inability tosuccessfully develop, integrate and protect this technology could:•limit our ability to improve our market position;•increase our operating costs; and•limit our ability to recoup the investments made in this technological initiative.The loss of or a substantial reduction in activity by one or more of our largest customers could materially and adversely affect our business, financialcondition and results of operations.One customer accounted for more than 10% of our total consolidated revenues for the year ended December 31, 2014, and our ten largest customersrepresented approximately 47% of our consolidated revenues for the period. The loss of or a substantial reduction in activity by one or more of thesecustomers could have an adverse effect on our business, financial condition and results of operations.Potential adoption of future state or federal laws or regulations surrounding the hydraulic fracturing process could make it more difficult to completeoil or natural gas wells and could materially and adversely affect our business, financial condition and results of operations.Many of our customers utilize hydraulic fracturing services during the life of a well. Hydraulic fracturing is the process of creating or expandingcracks, or fractures, in underground formations where water, sand and other additives are14Table of ContentsIndex to Financial Statementspumped under high pressure into the formation. Although we are not a provider of hydraulic fracturing services, many of our services complement thehydraulic fracturing process.Legislation has been introduced in Congress to provide for broader federal regulation of hydraulic fracturing operations and the reporting andpublic disclosure of chemicals used in the fracturing process. Additionally, the EPA has asserted federal regulatory authority over certain hydraulic fracturingactivities involving diesel fuel under the Safe Drinking Water Act and in May 2012 issued draft guidance for fracturing operations that involved diesel fuels.If additional levels of regulation or permitting requirements were imposed through the adoption of new laws and regulations, our customers' business andoperations could be subject to delays and increased operating and compliance costs, which could negatively impact the number of active wells in themarketplaces we serve. New regulations addressing hydraulic fracturing and chemical disclosure have been approved or are under consideration by a numberof states and some municipalities have sought to restrict or ban hydraulic fracturing within their jurisdictions. The adoption of future federal, state ormunicipal laws regulating the hydraulic fracturing process could negatively impact our business, financial condition and results of operations.We may incur significant costs and liabilities as a result of environmental, health and safety laws and regulations that govern our operations.Our operations are subject to U.S. federal, state and local and foreign laws and regulations that impose limitations on the discharge of pollutants intothe environment and establish standards for the handling, storage and disposal of waste materials, including toxic and hazardous wastes. To comply withthese laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various governmental authorities. While the costof such compliance has not been significant in the past, new laws, regulations or enforcement policies could become more stringent and significantly increaseour compliance costs or limit our future business opportunities, which could have a material adverse effect on our financial condition and results ofoperations.Our operations pose risks of environmental liability, including leakage from our operations to surface or subsurface soils, surface water orgroundwater. Some environmental laws and regulations may impose strict liability, joint and several liability, or both. Therefore, in some situations, we couldbe exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regardto whether we caused or contributed to the conditions. Actions arising under these laws and regulations could result in the shutdown of our operations, finesand penalties, expenditures for remediation or other corrective measures, and claims for liability for property damage, exposure to hazardous materials,exposure to hazardous waste or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations also may include theassessment of administrative, civil or criminal penalties, revocation of permits, temporary or permanent cessation of operations in a particular location andissuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a materialadverse effect on our business, financial condition, results of operations and cash flow. Additionally, an increase in regulatory requirements on oil and naturalgas exploration and completion activities could significantly delay or interrupt our operations.Increasing regulatory expansion could adversely impact costs associated with our offshore Fishing and Rental Services.The scope of regulation of our services may increase in light of the April 2010 Macondo accident and resulting oil spill in the Gulf of Mexico,including possible increases in liabilities or funding requirements imposed by governmental agencies. In 2012, the Bureau of Safety and EnvironmentalEnforcement, or “BSEE”, expanded its regulatory oversight beyond oil and gas operators to include service and equipment contractors. In addition, U.S.federal law imposes on certain entities deemed to be “responsible parties” a variety of regulations related to the prevention of oil spills, releases of hazardoussubstances, and liability for removal costs and natural resource, real property and certain economic damages arising from such incidents. Some of these lawsmay impose strict and/or joint and several liability for certain costs and damages without regard to the conduct of the parties. As a provider of services andrental equipment for offshore drilling and workover services, we may be deemed a “responsible party” under federal law. The implementation of such lawsand the adoption and implementation of future regulatory initiatives, or the specific responsibilities that may arise from such initiatives may subject us toincreased costs and liabilities, which could interrupt our operations or have an adverse effect on our revenue or results of operations.Severe weather could have a material adverse effect on our business.Our business could be materially and adversely affected by severe weather. Our customers' oil and natural gas operations located in Louisiana andparts of Texas may be adversely affected by hurricanes and tropical storms, resulting in reduced demand for our services. Furthermore, our customers'operations may be adversely affected by seasonal weather conditions. Adverse weather can also directly impede our own operations. Repercussions of severeweather conditions may include:•curtailment of services;•weather-related damage to facilities and equipment, resulting in suspension of operations;•inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and15Table of ContentsIndex to Financial Statements•loss of productivity.These constraints could delay our operations and materially increase our operating and capital costs. Unusually warm winters may also adverselyaffect the demand for our services by decreasing the demand for natural gas.Acquisitions and divestitures - we may not be successful in identifying, making and integrating acquisitions or limiting ongoing costs associated withthe operations we divest.An important component of our growth strategy is to make acquisitions that will strengthen our core services or presence in selected markets. Thesuccess of this strategy will depend, among other things, on our ability to identify suitable acquisition candidates, to negotiate acceptable financial and otherterms, to timely and successfully integrate acquired business or assets into our existing businesses and to retain the key personnel and the customer base ofacquired businesses. Any future acquisitions could present a number of risks, including but not limited to:•incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to berealized as a result of acquiring operations or assets;•failure to successfully integrate the operations or management of any acquired operations or assets in a timely manner;•failure to retain or attract key employees;•diversion of management's attention from existing operations or other priorities;•the inability to implement promptly an effective control environment;•potential impairment charges if purchase assumptions are not achieved or market conditions decline;•the risks inherent in entering markets or lines of business with which the company has limited or no prior experience; and•inability to secure sufficient financing, sufficient financing on economically attractive terms, that may be required for any such acquisition orinvestment.Our business plan anticipates, and is based upon our ability to successfully complete and integrate, acquisitions of other businesses or assets in atimely and cost effective manner. Our failure to do so could adversely affect our business, financial condition or results of operations.We also make strategic divestitures from time to time. In the case of divestitures, we may agree to indemnify acquiring parties for certain liabilitiesarising from our former businesses. These divestitures may also result in continued financial involvement in the divested businesses, including throughguarantees, service level agreements, or other financial arrangements, following the transaction. Lower performance by those divested businesses could affectour future financial results if there is contingent consideration associated.Compliance with climate change legislation or initiatives could negatively impact our business.Various state governments and regional organizations comprising state governments are considering enacting new legislation and promulgatingnew regulations governing or restricting the emission of greenhouse gases, or “GHG”, from stationary sources, which may include our equipment andoperations. At the federal level, the EPA has already issued regulations that require us to establish and report an inventory of GHG emissions. The EPA alsohas established a GHG permitting requirement for large stationary sources and may lower the threshold of the permitting program, which could include ourequipment and operations. Legislative and regulatory proposals for restricting GHG emissions or otherwise addressing climate change could require us toincur additional operating costs and could adversely affect demand for natural gas and oil. The potential increase in our operating costs could include new orincreased costs to obtain permits, operate and maintain our equipment and facilities, install new emission controls on our equipment and facilities, acquireallowances to authorize our greenhouse gas emissions, pay taxes related to our GHG emissions and administer and manage a GHG emissions program.Conservation measures and technological advances could reduce demand for oil and natural gas.Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technologicaladvances in fuel economy and energy generation could reduce demand for oil and natural gas. Moreover, incentives to conserve energy or use alternativeenergy sources could reduce demand for oil and natural gas. Management cannot predict the impact of the changing demand for oil and natural gas servicesand products, and any major changes may have a material effect on our business, financial condition, results of operations and cash flows.16Table of ContentsIndex to Financial StatementsThe amount of our debt and the covenants in the agreements governing our debt could negatively impact our financial condition, results of operationsand business prospects.Our level of indebtedness, and the covenants contained in the agreements governing our debt, could have important consequences for ouroperations, including:•making it more difficult for us to satisfy our obligations under the agreement governing our indebtedness and increasing the risk that we maydefault on our debt obligations;•requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing theavailability of cash flow for working capital, capital expenditures and other general business activities;•limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporatepurposes and other activities;•limiting management's flexibility in operating our business;•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;•diminishing our ability to withstand successfully a downturn in our business or the economy generally;•placing us at a competitive disadvantage against less leveraged competitors; and•making us vulnerable to increases in interest rates, because certain of our debt will vary with prevailing interest rates.We may be required to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply with the covenants andother restrictions in the agreements governing our debt, it could lead to an event of default and the consequent acceleration of our obligation to repayoutstanding debt. Our ability to comply with debt covenants and other restrictions may be affected by events beyond our control, including generaleconomic and financial conditions.In particular, under the terms of our indebtedness, we must comply with certain financial ratios and satisfy certain financial condition tests, several ofwhich become more restrictive over time and could require us to take action to reduce our debt or take some other action in order to comply with them. Ourability to satisfy required financial ratios and tests can be affected by events beyond our control, including prevailing economic, financial and industryconditions, and we may not be able to continue to meet those ratios and tests in the future. A breach of any of these covenants, ratios or tests could result in adefault under our indebtedness. If we default, lenders under our senior secured revolving credit facility will no longer be obligated to extend credit to us andthey, as well as the trustee for our outstanding notes, could elect to declare all amounts outstanding under our 2011 Credit Facility or indentures, asapplicable, together with accrued interest, to be immediately due and payable. The results of such actions would have a significant negative impact on ourresults of operations, financial position and cash flows.We may incur more debt and long-term lease obligations in the future.The agreements governing our long-term debt restrict, but do not prohibit, us from incurring additional indebtedness and other obligations in thefuture. As of December 31, 2014, we had $748.4 million of total debt.An increase in our level of indebtedness could exacerbate the risks described in the immediately preceding risk factor and the occurrence of any ofsuch events could result in a material adverse effect on our business, financial condition, results of operations, and business prospects.We may not be able to generate sufficient cash flow to meet our debt service obligations.Our ability to make payments on our indebtedness and to fund planned capital expenditures depends on our ability to generate cash in the future.This, to a certain extent, is subject to conditions in the oil and natural gas industry, general economic and financial conditions, competition in the markets inwhich we operate, the impact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control.This risk could be exacerbated by any economic downturn or instability in the U.S. and global credit markets.Our business may not generate sufficient cash flow from operations to service our outstanding indebtedness. In addition, future borrowings may notbe available to us in amounts sufficient to enable us to repay our indebtedness or to fund our other capital needs. If our business does not generate sufficientcash flow from operations to service our outstanding indebtedness, we may have to undertake alternative financing plans, such as:•refinancing or restructuring our debt;•selling assets;•reducing or delaying acquisitions or capital investments, such as remanufacturing our rigs and related equipment; or•seeking to raise additional capital.17Table of ContentsIndex to Financial StatementsWe may not be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, and implementing any suchalternative financing plans may not allow us to meet our debt obligations. In addition, a downgrade in our credit rating would make it more difficult for us toraise additional debt in the future. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to obtain alternative financings, couldmaterially and adversely affect our business, financial condition, results of operations and future prospects for growth.Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.Borrowings under our 2011 Credit Facility bear interest at variable rates, exposing us to interest rate risk. If interest rates increase, our debt serviceobligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available forservicing our indebtedness would decrease.Our bylaws contain provisions that may prevent or delay a change in control.Our bylaws contain certain provisions designed to enhance the ability of our board of directors to respond to unsolicited attempts to acquire controlof the Company. These provisions:•establish a classified board of directors, providing for three-year staggered terms of office for all members of our board of directors;•set limitations on the removal of directors;•enable our board of directors to set the number of directors and to fill vacancies on the board occurring between stockholder meetings; and•set limitations on who may call a special meeting of stockholders.These provisions may have the effect of entrenching management and may deprive investors of the opportunity to sell their shares to potentialacquirers seeking control of the Company at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price ofour common stock.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESWe lease office space for our principal executive offices in Houston, Texas. We also lease local office space in the various countries in which weoperate. Additionally, we own or lease numerous rig facilities, storage facilities, truck facilities and sales and administrative offices throughout thegeographic regions in which we operate. We lease temporary facilities to house employees in regions where infrastructure is limited. In connection with ourFluid Management Services, we operate a number of owned and leased SWD facilities, and brine and freshwater stations. Our leased properties are subject tovarious lease terms and expirations.We believe all properties that we currently occupy are suitable for their intended uses. We believe that our current facilities are sufficient to conductour operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our businessrequires.The following table shows our active owned and leased properties, as well as active SWD facilities, categorized by geographic region as ofDecember 31, 2014:RegionOffice, Repair &Service and Other(1) SWDs, Brine andFreshwater Stations(2) Operational FieldServices FacilitiesUnited States Owned9 37 65Leased32 55 48International Owned— — —Leased47 — 7TOTAL88 92 120(1)Includes 15 residential properties leased in the United States and 8 residential properties leased outside the United States used to house employees.(2)Includes SWD facilities as “leased” if we own the wellbore for the SWD but lease the land. In other cases, we lease both the wellbore and the land. Leaseterms vary among different sites, but with respect to some of the SWD facilities for18Table of ContentsIndex to Financial Statementswhich we lease the land and own the wellbore, the land owner has an option under the land lease to retain the wellbore at the termination of the lease.ITEM 3. LEGAL PROCEEDINGSWe are subject to various suits and claims that have arisen in the ordinary course of business. We do not believe that the disposition of any of ourordinary course litigation will result in a material adverse effect on our consolidated financial position, results of operations or cash flows.Between May of 2013 and June of 2014, five lawsuits (four class actions and one enforcement action) were filed in California involving allegedviolations of California's wage and hour laws. In general, the lawsuits allege failure to pay wages, including overtime and minimum wages, failure to pay finalwages upon employment terminations in a timely manner, failure to reimburse reasonable and necessary business expenses, failure to provide wagestatements consistent with California law, and violations of the California meal and break period laws, among other claims. We intend to vigorouslyinvestigate and defend these actions. Because these cases are in relatively early stages, and we have not yet briefed class certification issues, we cannotpredict the outcome of these lawsuits at this time. Accordingly, we cannot estimate any possible loss or range of loss.In January, 2014, the SEC advised us that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) involvingbusiness activities of Key’s operations in Russia. In April 2014, we became aware of an allegation involving our Mexico operations that, if true, couldpotentially constitute a violation of certain of our policies, including our Code of Business Conduct, the FCPA and other applicable laws. A SpecialCommittee of our Board of Directors is investigating this allegation as well as the possible violations of the FCPA involving business activities of ouroperations in Russia. The Special Committee’s investigations, which also include a review of certain aspects of the Company’s operations in Colombia, aswell as our other international locations, are ongoing. On May 30, 2014, we voluntarily disclosed the allegation involving our Mexico operations andinformation from the Company’s initial investigation to the SEC and Department of Justice (“DOJ”). We are fully cooperating with investigations by the SECand DOJ. At this time we are unable to predict the ultimate resolution of these matters with these agencies and, accordingly, cannot estimate any possible lossor range of loss. The Special Committee of our Board of Directors currently expects to substantially complete the fact-finding phase of its investigation bythe end of March 2015.In August 2014, two class action lawsuits were filed in the U.S. District Court, Southern District of Texas, Houston Division, individually and onbehalf of all other persons similarly situated against the Company and certain officers of the Company, alleging violations of federal securities laws,specifically, violations of Section 10(b) and Rule 10(b)-5, Section 20(a) of the Securities Exchange Act of 1934. Those lawsuits were styled as follows: SeanCady, Individually and on Behalf of All Other Persons Similarly Situated v. Key Energy Services, Inc., Richard J. Alario, and J. Marshall Dodson, No. 4:14-cv-2368, filed on August 15, 2014; and Ian W. Davidson, Individually and on Behalf of All Other Persons Similarly Situated v. Key Energy Services, Inc.,Richard J. Alario, and J. Marshall Dodson, No. 4.14-cv-2403, filed on August 21, 2014. On December 11, 2014, the Court entered an order that consolidatedthe two lawsuits into one action, along with any future filed tag-along actions brought on behalf of purchasers of Key Energy Services, Inc. commonstock. The order also appointed Inter-Local Pension Fund as the lead plaintiff in the class action and approved the law firm of Spector Roseman Kodroff &Willis, P.C. as lead counsel for the consolidated class and Kendall Law Group, LLP, as local counsel for the consolidated class. The lead plaintiff filed theconsolidated amended complaint on February 13, 2015. Among other changes, the consolidated amended complaint adds Taylor M. Whichard III andNewton W. Wilson III as defendants and expands the class period to include the timeframe between September 4, 2012 and July 17, 2014. Because this case isin early stages, we cannot predict the outcome at this time. Accordingly, we cannot estimate any possible loss or range of loss.In addition, in a letter dated September 4, 2014, a purported shareholder of the Company demanded that the Board commence an independentinternal investigation into and legal proceedings against each member of the Board, a former member of the Board and certain officers of the Company foralleged violations of Maryland and/or federal law. The letter alleges that the Board and senior officers breached their fiduciary duties to the Company,including the duty of loyalty and due care, by (i) improperly accounting for goodwill, (ii) causing the Company to potentially violate the FCPA, resulting inan investigation by the SEC, (iii) causing the Company to engage in improper conduct related to the Company’s Russia operations; and (iv) making falsestatements regarding, and failing to properly account for, certain contracts with Pemex. As described in the letter, the purported shareholder believes that thelegal proceedings should seek recovery of damages in an unspecified amount allegedly sustained by the Company. The Board of Directors referred thedemand letter to the Special Committee. We cannot predict the outcome of this matter.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.19Table of ContentsIndex to Financial StatementsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket and Share PricesOur common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “KEG.” As of February 17, 2015, there were 568registered holders of 154,398,693 issued and outstanding shares of common stock. This number of registered holders does not include holders that haveshares of common stock held for them in “street name”, meaning that the shares are held for their accounts by a broker or other nominee. In these instances,the brokers or other nominees are included in the number of registered holders, but the underlying holders of the common stock that have shares held in“street name” are not. The following table sets forth the reported high and low closing price of our common stock for the periods indicated: High LowYear Ended December 31, 2014 1st Quarter$9.24 $7.152nd Quarter10.45 7.963rd Quarter9.19 4.844th Quarter4.82 1.05 High LowYear Ended December 31, 2013 1st Quarter$9.38 $7.152nd Quarter7.80 5.613rd Quarter8.01 6.084th Quarter8.88 6.90The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall suchinformation be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extentthat we specifically incorporate it by reference into such filing.The following performance graph compares the performance of our common stock to the PHLX Oil Service Sector Index, the Russell 2000 Index anda peer group as established by management.The peer group consists of the following companies: Baker Hughes Incorporated, Basic Energy Services, Inc., Exterran Holdings, Inc., Helix EnergySolutions Group, Inc., Noble Corporation, Oceaneering International Inc., Oil States International Inc., Patterson UTI Energy Inc., RPC, Inc., Superior EnergyServices, Inc. and Weatherford International Ltd.The graph below compares the cumulative five-year total return to holders of our common stock with the cumulative total returns of the PHLX OilService Sector, the listed Russell 2000 Index and our peer group. The graph assumes that the value of the investment in our common stock and each index(including reinvestment of dividends) was $100 at December 31, 2009 and tracks the return on the investment through December 31, 2014.20Table of ContentsIndex to Financial StatementsCOMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Key Energy Services, Inc., the Russell 2000 Index, the Russell 1000 Index,the PHLX Oil Service Sector Index and Peer Group* $100 invested on December 31, 2009 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.Dividend PolicyThere were no dividends declared or paid on our common stock for the years ended December 31, 2014, 2013 and 2012. Under the terms of our 2011Credit Facility, we must meet certain financial covenants before we may pay dividends. We do not currently intend to pay dividends.Issuer Purchases of Equity SecuritiesDuring the fourth quarter of 2014, we repurchased an aggregate of 2,848 shares of our common stock. The repurchases were to satisfy taxwithholding obligations that arose upon vesting of restricted stock. Set forth below is a summary of the share repurchases:PeriodTotal Number of SharesPurchased Average Price Paid Per Share(1)October 1, 2014 to October 31, 2014— $—November 1, 2014 to November 30, 20142,075 $2.71December 1, 2014 to December 31, 2014773 $1.55(1)The price paid per share with respect to the tax withholding repurchases was determined using the closing prices on the applicable vesting date, asquoted on the NYSE.21Table of ContentsIndex to Financial StatementsEquity Compensation Plan InformationThe following table sets forth information as of December 31, 2014 with respect to equity compensation plans (including individual compensationarrangements) under which our common stock is authorized for issuance. The material features of each of these plans are described in “Note 19. Share-BasedCompensation” in “Item 8. Financial Statement and Supplementary Date.”Plan CategoryNumber of Securitiesto be Issued UponExercise ofOutstanding Options,Warrants And Rights(a)(2) Weighted AverageExercise Price ofOutstandingOptions, WarrantsAnd Rights(b)(3) Number of Securities RemainingAvailable for Future IssuanceUnder Equity CompensationPlans (Excluding SecuritiesReflected in Column (a))(c)(4) (in thousands) (in thousands)Equity compensation plans approved by stockholders(1)1,392 $14.07 10,004Equity compensation plans not approved by stockholders— $— —Total1,392 10,004(1)Represents options and other stock-based awards outstanding under the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan (the “2014Incentive Plan”).(2)Includes 1,319,100 of shares that may be issued upon the exercise of stock options and 73,247 of shares that may be issued upon vesting of restrictedstock units (“RSUs”). Stock-settled stock appreciation rights (“SARs”) are excluded as the fair market value of our SARs was zero as of December 31,2014.(3)RSUs do not have an exercise price; therefore RSUs are excluded from weighted average exercise price of outstanding awards.(4)Represents the number of shares remaining available for grant under the 2014 Incentive Plan as of December 31, 2014. If any common stock underlyingan unvested award that is canceled, forfeited or is otherwise terminated without delivery of shares, then such shares will again be available for issuanceunder the 2014 Incentive Plan.ITEM 6. SELECTED FINANCIAL DATAThe following historical selected financial data as of and for the years ended December 31, 2010 through December 31, 2014 has been derived fromour audited financial statements included in “Item 8. Financial Statements and Supplementary Data.” For the years ended December 31, 2010 andDecember 31, 2011, we have reclassified the historical results of operations of our Argentina business as discontinued operations. Additionally, for the yearended December 31, 2010, we have reclassified the historical results of operations of our pressure pumping and wireline businesses as discontinuedoperations. The historical selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the historical consolidated financial statements and related notes thereto included in “Item 8. Financial Statements andSupplementary Data.”22Table of ContentsIndex to Financial StatementsRESULTS OF OPERATIONS DATA Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands, except per share amounts)REVENUES$1,427,336 $1,591,676 $1,960,070 $1,729,211 $1,062,595COSTS AND EXPENSES: Direct operating expenses1,059,651 1,114,462 1,308,845 1,085,190 746,441Depreciation and amortization expense200,738 225,297 213,783 166,946 133,898General and administrative expenses249,646 221,753 230,496 223,299 186,188Impairment expense121,176 — — — —Operating income (loss)(203,875) 30,164 206,946 253,776 (3,932)Loss on early extinguishment of debt— — — 46,451 —Interest expense, net of amounts capitalized54,227 55,204 53,566 40,849 41,240Other (income) expense, net1,009 (803) (6,649) (8,977) (2,807)Income (loss) from continuing operationsbefore tax(259,111) (24,237) 160,029 175,453 (42,365)Income tax (expense) benefit80,483 3,064 (57,352) (64,117) 17,961Income (loss) from continuing operations(178,628) (21,173) 102,677 111,336 (24,404)Income (loss) from discontinued operations, netof tax— — (93,568) (10,681) 94,753Net income (loss)(178,628) (21,173) 9,109 100,655 70,349Income (loss) attributable to noncontrollinginterest— 595 1,487 (806) (3,146)INCOME (LOSS) ATTRIBUTABLE TO KEY$(178,628) $(21,768) $7,622 $101,461 $73,495Earnings (loss) per share from continuingoperations attributable to Key: Basic$(1.16) $(0.14) $0.67 $0.77 $(0.16)Diluted$(1.16) $(0.14) $0.67 $0.76 $(0.16)Earnings (loss) per share from discontinuedoperations: Basic$— $— $(0.62) $(0.07) $0.73Diluted$— $— $(0.62) $(0.07) $0.73Earnings (loss) per share attributable to Key: Basic$(1.16) $(0.14) $0.05 $0.70 $0.57Diluted$(1.16) $(0.14) $0.05 $0.69 $0.57 23Table of ContentsIndex to Financial Statements Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands)Income (loss) from continuing operationsattributable to Key: Income (loss) from continuing operations$(178,628) $(21,173) $102,677 $111,336 $(24,404)Income (loss) attributable to noncontrollinginterest— 595 1,487 (806) (3,146)Income (loss) from continuing operationsattributable to Key$(178,628) $(21,768) $101,190 $112,142 $(21,258)Weighted Average Shares Outstanding: Basic153,371 152,271 151,106 145,909 129,368Diluted153,371 152,271 151,125 146,217 129,368CASH FLOW DATA Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands)Net cash provided by operating activities$164,168 $228,643 $369,660 $188,305 $129,805Net cash used in investing activities(146,840) (160,881) (428,709) (520,090) (8,631)Net cash provided by (used in) financingactivities(22,058) (85,492) 73,946 306,084 (100,205)Effect of changes in exchange rates on cash3,728 87 (4,391) 4,516 (1,735)BALANCE SHEET DATA Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands)Working capital$191,937 $273,809 $284,698 $311,060 $132,385Property and equipment, gross2,555,515 2,606,738 2,528,578 2,184,810 1,789,571Property and equipment, net1,235,258 1,365,646 1,436,674 1,197,300 920,797Total assets2,333,498 2,587,470 2,761,588 2,599,120 1,892,936Long-term debt and capital leases, net ofcurrent maturities748,426 763,981 848,110 773,975 427,121Total liabilities1,275,435 1,336,377 1,474,256 1,384,489 911,133Equity1,058,063 1,251,093 1,287,332 1,214,631 981,803Cash dividends per common share— — — — — ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidatedfinancial statements and related notes thereto in “Item 8. Financial Statements and Supplementary Data.” The discussion below contains forward-lookingstatements that are based upon our current expectations and are subject to uncertainty and changes in circumstances including those identified in“Cautionary Note Regarding Forward-Looking Statements” above. Actual results may differ materially from these expectations due to potentiallyinaccurate assumptions and known or unknown risks and uncertainties. Such forward-looking statements should be read in conjunction with ourdisclosures under “Item 1A. Risk Factors.”24Table of ContentsIndex to Financial StatementsOverviewWe provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas productioncompanies to produce, maintain and enhance the flow of oil and natural gas throughout the life of a well. These services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services and otherancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gasproducing regions of the continental United States, and we have operations in Mexico, Colombia, Ecuador, the Middle East and Russia. In addition, we havea technology development and control systems business based in Canada.The demand for our services fluctuates, primarily in relation to the price (or anticipated price) of oil and natural gas, which, in turn, is drivenprimarily by the supply of, and demand for, oil and natural gas. Generally, as supply of those commodities decreases and demand increases, service andmaintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of their wells in a higher priced environment.However, in a lower oil and natural gas price environment, demand for service and maintenance generally decreases as oil and natural gas producers decreasetheir activity. In particular, the demand for new or existing field drilling and completion work is driven by available investment capital for such work.Because these types of services can be easily “started” and “stopped,” and oil and natural gas producers generally tend to be less risk tolerant whencommodity prices are low or volatile, we may experience a more rapid decline in demand for well maintenance services compared with demand for othertypes of oilfield services. Further, in a lower-priced environment, fewer well service rigs are needed for completions, as these activities are generallyassociated with drilling activity.Business and Growth StrategiesFocus on Horizontal Well ServicesOver the past several years the number of horizontal wells, particularly horizontal oil wells, drilled in the U.S. has increased significantly. Horizontalwells tend to involve a higher degree of service intensity associated with their drilling and completion, and we believe ultimately the maintenance requiredover their lifetime as well. We believe that many of these wells are entering the phase of their life where more maintenance services are required to stemdeclines and maintain production. We further believe that over future periods, the market for maintenance on the installed base of horizontal oil wells willgrow. To capitalize on this growing market segment we have built and acquired new equipment, including more capable rigs and coiled tubing units,upgraded existing equipment capable of providing services integral to the completion and maintenance of horizontal wellbores and acquired frac stackequipment used to support completion of the horizontal wellbore. We also expanded our service offerings into unconventional shale regions wherehorizontal activity is most prevalent including the Bakken shale, the Eagle Ford shale and others. As horizontal wells have become more prevalent in thePermian Basin, we have expanded our operations and assets best suited for horizontal well maintenance, with all of our service offerings in that market.Additionally, while we have invested in the assets used to service our customer’s well site needs, we have also strengthened our sales and service efforts tobetter identify and meet the needs of our customers. We intend to continue our focus on the expansion of horizontal well service offerings, particularlyproduction maintenance related services, in existing markets and into new markets in the United States.Navigate Market UncertaintiesWe operate in a cyclical business where our customer’s spending is largely driven by the prices received on their sale of oil and natural gasproduction. During periods of declining oil and natural gas prices, demand for our services and the price we receive for our services may fall whilecompetition for the remaining market activity will increase. During these periods of low demand for our services, we will stack older and more costly tooperate equipment and reduce the amount of capital invested in the business for growth or replacement of equipment. We will also take steps to lower ourcost to operate, reducing headcount and the costs of labor. Additionally, we have taken steps to reduce the fixed costs in our business and will continue to doso. We believe that through these actions we will be able to maintain sufficient liquidity to capitalize on a return in activity as well as what we see as thelonger term trend towards higher maintenance needs on the recently installed base of horizontal oil wells.Pursue Prudent Acquisitions in Complementary BusinessesWe are focused on maximizing cash flows from acquisitions and other investments we have made, and we have added an internal financial metric,Key Value Added, or “KVA,” to evaluate our investments. We intend to continue our disciplined approach to acquisitions, seeking opportunities, thatstrengthen our presence in selected regional markets and provide opportunities to expand our core services. We also seek to acquire technologies, assets andbusinesses that represent a good operational, strategic, and/or synergistic fit with our existing service offerings.25Table of ContentsIndex to Financial StatementsPERFORMANCE MEASURESThe Baker Hughes U.S. rig count data, which is publicly available on a weekly basis, is often used as a coincident indicator of overall Explorationand Production (“E&P”) company spending and broader oilfield activity. In assessing overall activity in the U.S. onshore oilfield service industry in whichwe operate, we believe that the Baker Hughes U.S. land drilling rig count is the best barometer of E&P companies' capital spending and resulting activitylevels. Historically, our activity levels have been highly correlated to U.S. onshore capital spending by our E&P company customers as a group.YearWTI Cushing CrudeOil(1) NYMEX Henry HubNatural Gas(1) Average Baker HughesU.S. Land Drilling Rigs(2)2010$79.48 $4.38 1,5142011$94.87 $4.03 1,8462012$94.05 $2.75 1,8712013$97.98 $3.73 1,7052014$93.17 $4.37 1,804(1)Represents the average of the monthly average prices for each of the years presented. Source: U.S. Energy Information Administration, Bloomberg.(2)Source: www.bakerhughes.comInternally, we measure activity levels for our well servicing operations primarily through our rig and trucking hours. Generally, as capital spendingby E&P companies increases, demand for our services also rises, resulting in increased rig and trucking services and more hours worked. Conversely, whenactivity levels decline due to lower spending by E&P companies, we generally provide fewer rig and trucking services, which results in lower hours worked.The following table presents our quarterly rig and trucking hours from 2012 through 2014. Rig Hours Trucking Hours Key’s U.S.Working Days(3) U.S. International(1) Total(2) 2014: First Quarter347,047 46,090 393,137 481,353 63Second Quarter355,219 33,758 388,977 493,494 63Third Quarter365,891 34,603 400,494 506,486 64Fourth Quarter341,313 41,156 382,469 481,653 61Total 20141,409,470 155,607 1,565,077 1,962,986 2512013: First Quarter337,714 114,103 451,817 580,862 62Second Quarter365,956 65,280 431,236 559,584 64Third Quarter360,112 55,105 415,217 524,513 64Fourth Quarter343,626 46,553 390,179 507,636 62Total 20131,407,408 281,041 1,688,449 2,172,595 2522012: First Quarter435,280 84,469 519,749 722,718 64Second Quarter428,864 104,656 533,520 685,587 63Third Quarter412,998 103,448 516,446 607,480 63Fourth Quarter357,628 113,246 470,874 594,770 62Total 20121,634,770 405,819 2,040,589 2,610,555 252(1)International rig hours exclude rig hours generated in Argentina, as our Argentina operations were sold in the third quarter of 2012 and are reported asdiscontinued operations. Argentina hours were 54,625 and 55,972 for the first and second quarters of 2012, respectively.(2)Total rig hours included U.S. rig hours and international rig hours, as described in footnote (1) above.(3)Key's U.S. working days are the number of weekdays during the quarter minus national holidays.26Table of ContentsIndex to Financial StatementsMARKET CONDITIONS AND OUTLOOKMarket Conditions — Year Ended December 31, 2014Our core businesses depend on our customers' willingness to make expenditures to produce, develop and explore for oil and natural gas. Industryconditions are influenced by numerous factors, such as the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, andpolitical instability in oil producing countries.Over the course of 2014, our businesses in the U.S. were faced with strong competitive forces in a market environment where demand for completionrelated services for horizontal oil wells continued to grow. In response to the competitive environment, we made organizational changes to improve ourresponsiveness to customer demands and service requirements. In addition, given the strong demand for oilfield service labor, we faced rising labor costs inorder to ensure that we could appropriately services our customers’ needs in a market where, due to competitive pressures, we were challenged to pass thosecosts along to our customers. Demand for production maintenance services did not see the same growth in 2014, although we believe that we began to see anincrease in demand for maintenance on horizontal oil wellbores and expect that trend to continue.Outside the U.S., we were awarded a two year $48 million contract in Mexico, our first with Pemex since 2011 and began to provide services underthis contract in the fourth quarter of 2014. We believe that with this contract we can begin to stabilize our Mexican operation. Additionally, we movednineteen well service rigs from Mexico to the U.S.Market Outlook We continue to position Key to take advantage of the shift to horizontal oil well maintenance through steady investment in production-drivenservices built to address the demands of complex horizontal wellbores. We continue to see the population of horizontal well bores expand and a growingnumber of these well bores entering the more maintenance intensive cycle phase of their life associated with older producing wells and believe that we arewell positioned to take advantage of this trend.As we look to 2015, the recent unraveling in global oil prices has cast a shadow of uncertainty over the U.S. oil industry. U.S. customer capitalbudgets are being slashed in order to respond to a lower oil price environment and to preserve liquidity. Although U.S. customers are reacting in draconianfashion, we believe that the impetus to optimize existing horizontal oil production in a moderated oil price environment will continue to grow as wellmaintenance can provide an attractive return to our customers for a fraction of the outlay of a new well. It is also important that we keep a sharp focus oncontinuing to broaden our customer base to provide new opportunities to help offset spending declines. Further, we have implemented significant costcontrol efforts, including executive salary reductions, headcount reductions, furlough programs and field wage reductions in order to help mitigate margindegradation. We believe that although 2015 will present many challenges, we can weather the storm and emerge a stronger company.27Table of ContentsIndex to Financial StatementsRESULTS OF OPERATIONSConsolidated Results of OperationsThe following table shows our consolidated results of operations for the years ended December 31, 2014, 2013 and 2012: Year Ended December 31, 2014 2013 2012 (in thousands, except per share amounts)REVENUES$1,427,336 $1,591,676 $1,960,070COSTS AND EXPENSES: Direct operating expenses1,059,651 1,114,462 1,308,845Depreciation and amortization expense200,738 225,297 213,783General and administrative expenses249,646 221,753 230,496Impairment expense121,176 — —Operating income (loss)(203,875) 30,164 206,946Interest expense, net of amounts capitalized54,227 55,204 53,566Other (income) expense, net1,009 (803) (6,649)Income (loss) from continuing operations before tax(259,111) (24,237) 160,029Income tax (expense) benefit80,483 3,064 (57,352)Income (loss) from continuing operations(178,628) (21,173) 102,677Loss from discontinued operations, net of tax— — (93,568)Net income (loss)(178,628) (21,173) 9,109Income attributable to noncontrolling interest— 595 1,487INCOME (LOSS) ATTRIBUTABLE TO KEY$(178,628) $(21,768) $7,622Years Ended December 31, 2014 and 2013For the year ended December 31, 2014, our operating loss was $203.9 million, compared to operating income of $30.2 million for the year endedDecember 31, 2013. Loss per share was $1.16 for the year ended December 31, 2014 compared to $0.14 loss per share for the year ended December 31, 2013.RevenuesOur revenues for the year ended December 31, 2014 decreased $164.3 million, or 10.3%, to $1.4 billion from $1.6 billion for the year endedDecember 31, 2013, primarily due to overall lower activity in the U.S. as a result of competitive pressure and reduced customer activity. Reduced customeractivity in Mexico resulted in reduced revenue in our International segment. See “Segment Operating Results — Years Ended December 31, 2014 and 2013”below for a more detailed discussion of the change in our revenues.Direct operating expensesOur direct operating expenses decreased $54.8 million, or 4.9%, to $1.06 billion (74.2% of revenues) for the year ended December 31, 2014,compared to $1.11 billion (70.0% of revenues) for the year ended December 31, 2013 as a result of lower variable costs, such as cost attributable to directlabor and equipment, due to reduced activity levels. See “Segment Operating Results — Years Ended December 31, 2014 and 2013” below for a moredetailed discussion of the change in our direct operating expenses.Depreciation and amortization expenseDepreciation and amortization expense decreased $24.6 million, or 10.9%, to $200.7 million (14.1% of revenues) for the year ended December 31,2014, compared to $225.3 million (14.2% of revenues) for the year ended December 31, 2013. The decrease is primarily attributable to decreases in capitalexpenditures and lower amortization related to intangible assets.28Table of ContentsIndex to Financial StatementsGeneral and administrative expensesGeneral and administrative expenses increased $27.9 million, or 12.6%, to $249.6 million (17.5% of revenues) for the year ended December 31,2014, compared to $221.8 million (13.9% of revenues) for the year ended December 31, 2013. The increase is primarily due to legal expenses related to theFCPA investigation of $41.1 million partially offset by lower compensation costs due to reduced staffing levels.Impairment expenseDuring the year ended December 31, 2014, we recorded a $28.7 million impairment of goodwill and other intangibles assets in our Russian businessunit, which is included in our International reporting segment, $73.4 million impairment of fixed assets and other intangibles assets at our Fishing and RentalServices segment and a $19.1 million impairment of goodwill impairment of goodwill at our Coiled Tubing segment. No impairments were recorded in 2013.Interest expense, net of amounts capitalizedInterest expense decreased $1.0 million to $54.2 million (3.8% of revenues), for the year ended December 31, 2014, compared to $55.2 million(3.5% of revenues) for the year ended December 31, 2013. The decrease is primarily related to reduced borrowings under the revolving credit facility for theyear ended December 31, 2014 compared to 2013.Other (income) expense, netDuring the year ended December 31, 2014, we recognized other expense, net, of $1.0 million, compared to other income, net, of $0.8 million for theyear ended December 31, 2013. Our foreign exchange loss relates to U.S. dollar-denominated transactions in our foreign locations and fluctuations inexchange rates between local currencies and the U.S. dollar. The table below presents comparative detailed information about other (income) expense, net atDecember 31, 2014 and 2013: Year Ended December 31, 2014 2013 (in thousands)Interest income$(82) $(220)Foreign exchange loss3,733 834Other, net(2,642) (1,417)Total$1,009 $(803)Income tax benefitOur income tax benefit on continuing operations was $80.5 million (31.1% effective rate) on pre-tax loss of $259.1 million for the year endedDecember 31, 2014, compared to an income tax benefit of $3.1 million (12.6% effective rate) on a pre-tax loss of $24.2 million for the year endedDecember 31, 2013. Our effective tax rates for such periods differ from the U.S. statutory rate of 35% due to a number of factors, including the mix of profitand loss between domestic and international taxing jurisdictions and the impact of permanent items, such as goodwill impairment expense, that affect bookincome but do not affect taxable income.Noncontrolling interestWe have no noncontrolling interest holders in 2014, due to our acquisition of our remaining noncontrolling interest in our joint ventures in 2013.For the year ended December 31, 2013, we allocated $0.6 million associated with the income incurred by our joint ventures to the noncontrolling interestholders of these ventures.Years Ended December 31, 2013 and 2012For the year ended December 31, 2013, our operating income was $30.2 million, compared to $206.9 million for the year ended December 31, 2012.Loss per share was $0.14 for the year ended December 31, 2013 compared to $0.05 income per share for the year ended December 31, 2012.RevenuesOur revenues for the year ended December 31, 2013 decreased $368.4 million, or 18.8%, to $1.59 billion from $1.96 billion for the year endedDecember 31, 2012, primarily due to lower demand for our rig-based services in oil markets and overall weaker economic conditions affecting both ourdomestic and international operations. See “Segment Operating Results— Years Ended December 31, 2013 and 2012” below for a more detailed discussionof the change in our revenues.Direct operating expenses29Table of ContentsIndex to Financial StatementsOur direct operating expenses decreased $194.4 million, or 14.9%, to $1.1 billion (70.0% of revenues) for the year ended December 31, 2013,compared to $1.3 billion (66.8% of revenues) for the year ended December 31, 2012. The decrease was a direct result of activity decreases in our business andimproved operating efficiencies in our rig-based services and coiled tubing services. The operating efficiencies were partially offset by charges of $6.3million primarily associated with severance costs, $2.3 million of costs primarily associated with rig mobilizations from the North Region of Mexico to theSouth Region of Mexico and to other countries, including the U.S., and $1.9 million of lease cancellation fees which caused direct operating expenses as apercentage of revenue to be higher in 2013 than 2012. See “Segment Operating Results — Years EndedDecember 31, 2013 and 2012” below for a more detailed discussion of the change in our direct operating expenses.Depreciation and amortization expenseDepreciation and amortization expense increased $11.5 million, or 5.4%, to $225.3 million (14.2% of revenues) for the year ended December 31,2013, compared to $213.8 million (10.9% of revenues) for the year ended December 31, 2012. The increase is primarily attributable to the 2013 impact ofincreased capital expenditures in 2012.General and administrative expensesGeneral and administrative expenses decreased $8.7 million, or 3.8%, to $221.8 million (13.9% of revenues) for the year ended December 31, 2013,compared to $230.5 million (11.8% of revenues) for the year ended December 31, 2012. The decrease is primarily related to lower third party consulting feespartially offset by a $2.2 million charge associated with the retirement of an executive recorded during first quarter of 2013 and $2.2 million of expensesprimarily associated with severance costs recorded during the second quarter of 2013.Interest expense, net of amounts capitalizedInterest expense increased $1.6 million to $55.2 million (3.5% of revenues), for the year ended December 31, 2013, compared to $53.6 million (2.7%of revenues) for the year ended December 31, 2012. Interest expense for the year ended December 31, 2013 increased due to the issuance of the additional$200 million aggregate principal amount of 2021 Notes (as defined below) during March 2012.Other income, netDuring the year ended December 31, 2013, we recognized other income, net, of $0.8 million, compared to $6.6 million for the year ended December31, 2012. Our foreign exchange (gain) loss relates to U.S. dollar-denominated transactions in our foreign locations and fluctuations in exchange ratesbetween local currencies and the U.S. dollar. The table below presents comparative detailed information about other income, net at December 31, 2013 and2012: Year Ended December 31, 2013 2012 (in thousands)Interest income$(220) $(46)Foreign exchange (gain) loss834 (4,726)Other, net(1,417) (1,877)Total$(803) $(6,649)Income tax (expense) benefitOur income tax benefit on continuing operations was $3.1 million (12.6% effective rate) on pre-tax loss of $24.2 million for the year endedDecember 31, 2013, compared to an income tax expense of $57.4 million (35.8% effective rate) on a pre-tax income of $160.0 million for the year endedDecember 31, 2012. Our effective tax rates differ from the statutory rate of 35% primarily because of state, local and foreign income taxes, and the tax effectsof permanent items attributable to book-tax differences.Discontinued operationsOur net loss from discontinued operations for the year ended December 31, 2013 was zero compared to $93.6 million for the year ended December31, 2012. The 2012 loss is related to our Argentina business, which was sold in September 2012. Included in the loss from discontinued operations is a pre-tax loss of $85.8 million, which includes a noncash impairment charge of $41.5 million recorded in the first quarter of 2012, and a write-off of $51.9 millioncumulative translation adjustment previously recorded in accumulated other comprehensive loss. For further discussion see “Note 3. DiscontinuedOperations” in “Item 8. Financial Statements and Supplementary Data.”Noncontrolling interest30Table of ContentsIndex to Financial StatementsFor the year ended December 31, 2013, we allocated $0.6 million associated with the income incurred by our joint ventures to the noncontrollinginterest holders of these ventures compared to income of $1.5 million for the year ended December 31, 2012. The decrease in income allocated tononcontrolling interest holders is due to our acquisition of our remaining noncontrolling interests in 2013 resulting in less income being allocated tononcontrolling interests holders.Segment Operating ResultsYears Ended December 31, 2014 and 2013The following table shows operating results for each of our reportable segments for the years ended December 31, 2014 and 2013 (in thousands):For the year ended December 31, 2014 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport TotalRevenues from external customers$679,045 $249,589 $173,364 $212,598 $112,740 $— $1,427,336Operating expenses582,658 246,262 184,183 271,542 178,172 168,394 1,631,211Operating income (loss)96,387 3,327 (10,819) (58,944) (65,432) (168,394) (203,875)For the year ended December 31, 2013 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport TotalRevenues from external customers$673,465 $271,709 $193,184 $238,611 $214,707 $— $1,591,676Operating expenses539,907 267,671 169,757 207,302 241,364 135,511 1,561,512Operating income (loss)133,558 4,038 23,427 31,309 (26,657) (135,511) 30,164U.S. Rig ServicesRevenues for our U.S. Rig Services segment increased $5.6 million, or 0.8%, to $679.0 million for the year ended December 31, 2014, compared to$673.5 million for the year ended December 31, 2013. The increase in revenue is primarily due to an increase in market activity partially offset by a decreasein customer activity in California rig-based services and a decrease in customer spending.Operating expenses for our U.S. Rig Services segment were $582.7 million during the year ended December 31, 2014, which represented an increaseof $42.8 million, or 7.9%, compared to $539.9 million for the year ended December 31, 2013. These expenses increased primarily as a result of an increase indirect labor and repair and maintenance expenses related to an increase in activity.Fluid Management ServicesRevenues for our Fluid Management Services segment decreased $22.1 million, or 8.1%, to $249.6 million for the year ended December 31, 2014,compared to $271.7 million for the year ended December 31, 2013. The decrease in revenue is primarily due to lower activity and decrease in pricing due tocompetitive pressure.Operating expenses for our Fluid Management Services segment were $246.3 million during the year ended December 31, 2014, which represented adecrease of $21.4 million, or 8.0%, compared to $267.7 million for the year ended December 31, 2013. The decrease in expenses is primarily related to lowerdirect labor expenses and fuel costs due to a decrease in activity.Coiled Tubing ServicesRevenues for our Coiled Tubing Services segment decreased $19.8 million, or 10.3%, to $173.4 million for the year ended December 31, 2014,compared to $193.2 million for the year ended December 31, 2013. The decrease in revenue is primarily due to lower activity due to competitive pressure andunscheduled down time events.Operating expenses for our Coiled Tubing Services segment were $184.2 million during the year ended December 31, 2014, which represented anincrease of $14.4 million, or 8.5%, compared to $169.8 million for the year ended December 31, 2013. The increase in expenses is primarily a result ofimpairment of goodwill partially offset by lower direct labor expenses due to a decrease in activity.Fishing and Rental Services31Table of ContentsIndex to Financial StatementsRevenues for our Fishing and Rental Services segment decreased $26.0 million, or 10.9%, to $212.6 million for the year ended December 31, 2014,compared to $238.6 million for the year ended December 31, 2013. The decrease in revenue is primarily due to lower activity due to competitive pressure.Operating expenses for our Fishing and Rental Services segment were $271.5 million during the year ended December 31, 2014, which representedan increase of $64.2 million, or 31.0%, compared to $207.3 million for the year ended December 31, 2013. The increase in expenses is primarily a result ofthe impairment of fixed assets and other intangible assets partially offset by a decrease in depreciation expense.InternationalRevenues for our International segment decreased $102.0 million, or 47.5%, to $112.7 million for the year ended December 31, 2014, compared to$214.7 million for the year ended December 31, 2013. The decrease was primarily attributable to lower customer activity in Mexico.Operating expenses for our International segment decreased $63.2 million, or 26.2%, to $178.2 million for the year ended December 31, 2014,compared to $241.4 million for the year ended December 31, 2013. These expenses decreased as a direct result of lower customer activity and severance costsin Mexico, partially offset by impairment of goodwill and tradenames in our Russian business reporting unit.Functional supportOperating expenses for our Functional Support segment increased $32.9 million, or 24.3%, to $168.4 million (11.8% of consolidated revenues) forthe year ended December 31, 2014 compared to $135.5 million (8.5% of consolidated revenues) for the year ended December 31, 2013. The increase isprimarily due to increased legal expense related to the FCPA investigations, partially offset by lower employee compensation and benefit costs.Years Ended December 31, 2013 and 2012The following table shows operating results for each of our reportable segments for the years ended December 31, 2013 and 2012 (in thousands):For the year ended December 31, 2013 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport TotalRevenues from external customers$673,465 $271,709 $193,184 $238,611 $214,707 $— $1,591,676Operating expenses539,907 267,671 169,757 207,302 241,364 135,511 1,561,512Operating income (loss)133,558 4,038 23,427 31,309 (26,657) (135,511) 30,164For the year ended December 31, 2012 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport TotalRevenues from external customers$788,512 $353,597 $215,876 $268,783 $333,302 $— $1,960,070Operating expenses594,217 328,033 200,747 218,430 270,310 141,387 1,753,124Operating income (loss)194,295 25,564 15,129 50,353 62,992 (141,387) 206,946U.S. Rig ServicesRevenues for our U.S. Rig Services segment decreased $115.0 million, or 14.6%, to $673.5 million for the year ended December 31, 2013, comparedto $788.5 million for the year ended December 31, 2012. The decrease in revenue is primarily related to reduced customer spending, lower activity in naturalgas markets and increased competition.Operating expenses for our U.S. Rig Services segment were $539.9 million during the year ended December 31, 2013, which represented a decreaseof $54.3 million, or 9.1%, compared to $594.2 million for the year ended December 31, 2012. The decrease in expenses is primarily as a result of a decrease indirect labor expenses and repair and maintenance expenses directly attributable to lower activity in natural gas markets during the period and improvedoperating efficiencies.32Table of ContentsIndex to Financial StatementsFluid Management ServicesRevenues for our Fluid Management Services segment decreased $81.9 million, or 23.2%, to $271.7 million for the year ended December 31, 2013,compared to $353.6 million for the year ended December 31, 2012. The decrease in revenue is primarily related to reduced customer spending, lower activityin natural gas markets and increased competition.Operating expenses for our Fluid Management Services segment were $267.7 million during the year ended December 31, 2013, which represented adecrease of $60.4 million, or 18.4%, compared to $328.0 million for the year ended December 31, 2012. The decrease in expenses is primarily as a result of adecrease in direct labor, repair and maintenance, and fuel expenses directly attributable to lower activity in natural gas markets during the period.Coiled Tubing ServicesRevenues for our Coiled Tubing Services decreased $22.7 million, or 10.5%, to $193.2 million for the year ended December 31, 2013, compared to $215.9million for the year ended December 31, 2012. The decrease in revenue is primarily related to reduced customer spending, lower activity in natural gasmarkets and increased competition.Operating expenses for our Coiled Tubing Services segment were $169.8 million during the year ended December 31, 2013, which represented adecrease of $31.0 million, or 15.4%, compared to $200.7 million for the year ended December 31, 2012. The decrease in expenses is primarily as a result of adecrease in direct labor and fuel expenses directly attributable to lower activity in natural gas markets during the period and improved operating efficiencies.Fishing and Rental ServicesRevenues for our Fishing and Rental Services segment decreased $30.2 million, or 11.2%, to $238.6 million for the year ended December 31, 2013, comparedto $268.8 million for the year ended December 31, 2012. The decrease in revenue is primarily related to reduced customer spending, lower activity in naturalgas markets and increased competition.Operating expenses for our Fishing and Rental Services segment were $207.3 million during the year ended December 31, 2013, which represented adecrease of $11.1 million, or 5.1%, compared to $218.4 million for the year ended December 31, 2012. The decrease in expenses is primarily as a result of adecrease in direct labor expenses directly attributable to lower activity in natural gas markets during the period.InternationalRevenues for our International segment decreased $118.6 million, or 35.6%, to $214.7 million for the year ended December 31, 2013, compared to$333.3 million for the year ended December 31, 2012. The decrease was primarily attributable to lower customer activity in Mexico.Operating expenses for our International segment decreased $28.9 million, or 10.7%, to $241.4 million for the year ended December 31, 2013,compared to $270.3 million for the year ended December 31, 2012. These expenses decreased as a direct result of lower customer activity in Mexico partiallyoffset by charges of $4.8 million primarily associated with severance costs and $2.1 million of costs associated with rig mobilizations from the North Regionof Mexico to the South Region of Mexico and to other countries, including the U.S.Functional SupportOperating expenses for our Functional Support segment decreased $5.9 million, or 4.2%, to $135.5 million (8.5% of consolidated revenues) for theyear ended December 31, 2013 compared to $141.4 million (7.2% of consolidated revenues) for the year ended December 31, 2012. The decrease reflectslower consulting fees partially offset by higher severance costs and incentive bonus and equity based compensation accruals.Liquidity and Capital ResourcesWe require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives,investments and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, available cash and borrowings under our seniorsecured revolving credit facility. We maintain a senior secured credit facility pursuant to a revolving credit agreement with several lenders and JPMorganChase Bank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit AgricoleCorporate and Investment Bank and DnB NOR Bank ASA, as Co-Documentation Agents (as amended on July 27, 2011 and December 5, 2014, our “2011Credit Facility”). Our 2011 Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility, up to an aggregateprincipal amount of $400.0 million, all of which will mature no later than March 31, 2016. We intend to use these sources of liquidity to fund our workingcapital requirements, capital expenditures, strategic investments and acquisitions.33Table of ContentsIndex to Financial StatementsIn 2015, we expect to access available funds under our 2011 Credit Facility to meet our cash requirements for day-to-day operations and in times ofpeak needs throughout the year. Our planned capital expenditures, as well as any acquisitions we choose to pursue, could be financed through a combinationof cash on hand, cash flow from operations, borrowings under our 2011 Credit Facility and, in the case of acquisitions, equity. We believe that our internallygenerated cash flows from operations, current reserves of cash and availability under our 2011 Credit Facility are sufficient to finance our cash requirementsfor current and future operations, budgeted capital expenditures and debt service for the next twelve months. Under the terms of our 2011 Credit Facility,committed letters of credit count against our borrowing capacity. As of December 31, 2014, we had $70.0 million in borrowings, $50.4 million of letters ofcredit outstanding with borrowing capacity of $279.6 million available considering covenant constraints under our 2011 Credit Facility.All obligations under our 2011 Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including ouraccounts receivable, inventory and equipment. See further discussion under “Debt Service” below.As of December 31, 2014, our adjusted working capital (working capital excluding the current portion of long-term debt) was $191.9 millioncompared to $277.4 million as of December 31, 2013. Our adjusted working capital decreased during 2014 primarily as a result of a decrease in accountsreceivable, predominantly in Mexico.As of December 31, 2014, we had $27.3 million of cash, of which approximately $6.9 million was held in the bank accounts of our foreignsubsidiaries. As of December 31, 2014, $0.2 million of the cash held by our foreign subsidiaries was held in U.S. bank accounts and denominated in U.S.dollars. We believe that the cash held by our wholly owned foreign subsidiaries could be repatriated for general corporate use without material withholdings.Cash FlowsDuring the year ended December 31, 2014, we generated cash flows from operating activities of $164.2 million, compared to $228.6 million for theyear ended December 31, 2013. Operating cash inflows primarily relate to net loss adjusted for non cash items.Cash used in investing activities was $146.8 million and $160.9 million for years ended December 31, 2014 and 2013, respectively. Investing cashoutflows during these periods consisted primarily of capital expenditures. Capital expenditures primarily relate to replacement assets for our existing fleetand equipment. Additionally, during 2013, we completed the acquisition of the remaining 50% noncontrolling interest in Geostream for $14.6 million.Cash used in financing activities was $22.1 million and $85.5 million during the years ended December 31, 2014 and 2013, respectively. Financingcash outflows primarily relate to net payments on our 2011 Credit Facility.The following table summarizes our cash flows for the years ended December 31, 2014 and 2013: Year Ended December 31, 2014 2013 (in thousands)Net cash provided by operating activities$164,168 $228,643Cash paid for capital expenditures(161,639) (164,137)Proceeds from sale of fixed assets15,844 17,256Payment of accrued acquisition cost of the 51% noncontrolling interest in AlMansoori Key Energy Services LLC(5,100) —Acquisition of the 50% noncontrolling interest in Geostream— (14,600)Proceeds from notes receivable4,055 600Repayments of capital lease obligations— (393)Repayments of long-term debt(3,573) —Proceeds from borrowings on revolving credit facility260,000 220,000Repayments on revolving credit facility(275,000) (300,000)Payment of deferred financing costs— (69)Other financing activities, net(3,485) (5,030)Effect of changes in exchange rates on cash3,728 87Net decrease in cash and cash equivalents$(1,002) $(17,643)34Table of ContentsIndex to Financial StatementsDebt ServiceAt December 31, 2014, our annual maturities on our indebtedness, consisting only of our 2021 Notes and borrowings under our 2011 Credit Facilityat year-end, were as follows: Principal Payments (in thousands)2015$—201670,0002017—2018—2019 and thereafter675,000Total$745,000Interest on $675.0 million of our 2021 Notes is due on March 1 and September 1 of each year. Our 2021 Notes mature on September 1, 2021. Interestpaid on our 2014 Notes and 2021 Notes during 2014 and 2013 was $45.6 million and $45.9 million, respectively. We expect to fund interest payments fromcash on hand and cash generated by operations.8.375% Senior Notes due 2014On November 29, 2007, we issued $425.0 million aggregate principal amount of 2014 Notes. In March of 2011, we repurchased $421.4 millionaggregate principal amount of our 2014 Notes. On February 25, 2014, we redeemed the remaining $3.6 million aggregate principal amount and paid $0.1million accrued interest of 2014 Notes pursuant to the indenture dated as of November 29, 2007 (as supplemented, the “Indenture”). The 2014 Notes weregeneral unsecured senior obligations and were subordinate to all of our existing and future secured indebtedness. The 2014 Notes were jointly and severallyguaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2014 Notes was payable on June 1 andDecember 1 of each year.6.75% Senior Notes due 2021We issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “Initial 2021 Notes”) on March 4, 2011 and issued anadditional $200.0 million aggregate principal amount of the 2021 Notes (the “Additional 2021 Notes” and, together with the Initial 2021 Notes, the “2021Notes”) in a private placement on March 8, 2012 under an indenture dated March 4, 2011 (the “Base Indenture”), as supplemented by a first supplementalindenture dated March 4, 2011 and amended by a further supplemental indenture dated March 8, 2012 (the “Supplemental Indenture” and, together with theBase Indenture, the “Indenture”). We used the net proceeds to repay senior secured indebtedness under our revolving bank credit facility. We capitalized $4.6million of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.On March 5, 2013, we completed an offer to exchange the $200.0 million in aggregate principal amount of unregistered Additional 2021 Notes foran equal principal amount of such notes registered under the Securities Act of 1933. All of the 2021 Notes are treated as a single class under the Indenture andas of the closing of the exchange offer, bear the same CUSIP and ISIN numbers.The 2021 Notes are general unsecured senior obligations and are effectively subordinated to all of our existing and future secured indebtedness. The2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries.On or after March 1, 2016, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at theredemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, ifredeemed during the twelve-month period beginning on March 1 of the years indicated below:YearPercentage2016103.375%2017102.250%2018101.125%2019 and thereafter100.000%At any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at a redemption priceequal to 100% of the principal amount plus a premium with respect to the 2021 Notes plus accrued35Table of ContentsIndex to Financial Statementsand unpaid interest to the redemption date. The premium is the excess of (i) the present value of the redemption price of 103.375 of the principal amount,plus all remaining scheduled interest payments due through March 1, 2016 discounted at the treasury rate plus 0.50% over (ii) the principal amount of thenote. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.We are subject to certain negative covenants under the Indenture. The Indenture limits our ability to, among other things:•incur additional indebtedness and issue preferred equity interests;•pay dividends or make other distributions or repurchase or redeem equity interests;•make loans and investments;•enter into sale and leaseback transactions;•sell, transfer or otherwise convey assets;•create liens;•enter into transactions with affiliates;•enter into agreements restricting subsidiaries’ ability to pay dividends;•designate future subsidiaries as unrestricted subsidiaries; and•consolidate, merge or sell all or substantially all of the applicable entities’ assets.These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions relating to the covenants of our 2011Credit Facility discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agenciesassigns the 2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2014, the 2021 Noteswere rated below investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even ifthe credit rating assigned to the 2021 Notes later falls below investment grade. We were in compliance with all covenants at December 31, 2014.Senior Secured Credit FacilityOn December 5, 2014, we entered into the Second Amendment to Credit Agreement (the “Amendment”) for our $400.0 million senior secured revolving bankcredit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Capital One, N.A., Wells FargoBank, N.A., Credit Agricole Corporate and Investment Bank and DnB NOR Bank ASA, as Co-Documentation Agent (as amended, our “2011 CreditFacility”), which is an important source of liquidity for us. The Amendment decreased the total commitments by the lenders under the credit facility from$550.0 million to $400.0 million, which will automatically be further reduced from $400.0 million to $350.0 million on July 1, 2015. Among other changes,the Amendment modified the definition of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of our 2011Credit Facility, “EBITDA”) to allow for the add back of (i) all expenses incurred during the second and third quarters of 2014 related to the Company’scompliance with the FCPA and (ii) up to $50.0 million of additional expenses incurred in relation to the Company’s FCPA compliance commencing in thefourth quarter of 2014. Our 2011 Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility, all of which willmature no later than March 31, 2016. The maximum amount that we may borrow under the facility may be subject to limitation due to the operation of thecovenants contained in the facility. Our 2011 Credit Facility allows us to request increases in the total commitments under the facility by up to $100.0million in the aggregate in part or in full anytime during the term of our 2011 Credit Facility, with any such increases being subject to compliance with therestrictive covenants in our 2011 Credit Facility and in the Indenture, as well as lender approval.We capitalized $4.9 million of financing costs in connection with the execution of our 2011 Credit Facility and an additional $1.4 million related tothe first amendment that will be amortized over the term of the debt. The $0.4 million remaining unamortized financing costs related to the first amendmentwas written off at the time of the second amendment.Our interest rate per annum applicable to our 2011 Credit Facility is, at our option, (i) adjusted LIBOR plus the applicable margin or (ii) the higherof (x) JPMorgan’s prime rate, (y) the Federal Funds rate plus 0.5% and (z) one-month adjusted LIBOR plus 1.0%, plus in each case the applicable margin forall other loans. The applicable margin for LIBOR loans ranges from 225 to 300 basis points, and the applicable margin for all other loans ranges from 125 to200 basis points, depending upon our consolidated total leverage ratio as defined in our 2011 Credit Facility. Unused commitment fees on the facility equal0.5%.The 2011 Credit Facility contains certain financial covenants, which, among other things, limit our annual capital expenditures, restrict our abilityto repurchase shares and require us to maintain certain financial ratios. The financial ratios require that:•our ratio of consolidated funded indebtedness to total capitalization be no greater than 55%;36Table of ContentsIndex to Financial Statements•our senior secured leverage ratio of senior secured funded debt to trailing four quarters EBITDA be no greater than 2.00 to 1.00;•we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense for no less than the ratio specified forsuch fiscal quarter as indicated in the table below:Fiscal Quarter EndingRatioDecember 31, 2014 through September 30, 20152.75 to 1.00December 31, 2015 and thereafter3.00 to 1.00•we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of thelast day of any fiscal quarter of at least 2.00 to 1.00; and•we limit our capital expenditures and investments in foreign subsidiaries to $250.0 million per fiscal year, if the consolidated total leverageratio exceeds 3.00 to 1.00.In addition, our 2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens;(ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets;(v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or eventof default exists under our 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with otherfinancial covenants and we have at least $25.0 million of availability under our 2011 Credit Facility); (vi) dividends and other distributions to, andredemptions and repurchases from, equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming orrepurchasing subordinated (contractually or structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements;(xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (xiv) changes in the nature of business;(xv) amending organizational documents; and (xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certainexceptions.We were in compliance with these covenants at December 31, 2014. We may prepay our 2011 Credit Facility in whole or in part at any time withoutpremium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs. As of December 31, 2014, we had borrowings of$70.0 million under the revolving credit facility, $50.4 million of letters of credit outstanding with borrowing capacity of $279.6 million availableconsidering covenant constraints under our 2011 Credit Facility. For the years ended December 31, 2014 and 2013, the weighted average interest rates on theoutstanding borrowings under our 2011 Credit Facility was 2.97% and 2.76%, respectively.Letter of Credit FacilityOn November 7, 2013, we entered into an uncommitted, unsecured $15.0 million letter of credit facility to be used solely for the issuances ofperformance letters of credit. As of December 31, 2014, $3.0 million of letters of credit were outstanding under the facility.Off-Balance Sheet ArrangementsAt December 31, 2014, we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonably likely to have amaterial current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.37Table of ContentsIndex to Financial StatementsContractual ObligationsSet forth below is a summary of our contractual obligations as of December 31, 2014. The obligations we pay in future periods reflect certainassumptions, including variability in interest rates on our variable-rate obligations and the duration of our obligations, and actual payments in future periodsmay vary. Payments Due by Period Total Less than 1Year (2015) 1-3 Years(2016-2018) 4-5 Years(2019-2020) After 5 Years(2021+)(in thousands)2021 Notes675,000 — — — 675,000Interest associated with 2021 Notes300,088 45,562 136,812 91,250 26,464Borrowings under 2011 Credit Facility70,000 — 70,000 — —Interest associated with 2011 Credit Facility(1)2,746 2,198 548 — —Commitment and availability fees associatedwith 2011 Credit Facility1,747 1,398 349 — —Non-cancelable operating leases34,917 13,960 15,888 3,736 1,333Liabilities for uncertain tax positions1,004 618 386 — —Equity based compensation liabilityawards(2)386 386 — — —Total$1,085,888 $64,122 $223,983 $94,986 $702,797 (1)Based on interest rates in effect at December 31, 2014.(2)Based on our closing stock price at December 31, 2014.Debt ComplianceAt December 31, 2014, we were in compliance with all the financial covenants under our 2011 Credit Facility and 2021 Notes. Based onmanagement’s current projections, we expect to be in compliance with all the covenants under our 2011 Credit Facility and 2021 Notes for the next twelvemonths. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness. See “Item 1A. Risk Factors.”Capital ExpendituresDuring the year ended December 31, 2014, our capital expenditures totaled $161.6 million, primarily related to the ongoing replacement to our rigservice fleet, coiled tubing units, fluid transportation equipment and rental equipment. Our capital expenditure plan for 2015 contemplates spending between$50.0 million and $80.0 million, subject to market conditions. This is primarily related to equipment replacement needs, including ongoing replacement toour rig services fleet. Our capital expenditure program for 2015 is subject to market conditions, including activity levels, commodity prices, industrycapacity and specific customer needs. Our focus for 2015 will be the maximization of our current equipment fleet, but we may choose to increase our capitalexpenditures in 2015 to increase market share or expand our presence into a new market. We currently anticipate funding our 2015 capital expendituresthrough a combination of cash on hand, operating cash flow, and borrowings under our 2011 Credit Facility. Should our operating cash flows or activitylevels prove to be insufficient to warrant our currently planned capital spending levels, management expects it will adjust our capital spending plansaccordingly. We may also incur capital expenditures for strategic investments and acquisitions.AcquisitionsGeostreamOn April 9, 2013, we completed the acquisition of the remaining 50% noncontrolling interest in Geostream for $14.6 million. We now own 100% ofGeostream.AlMansoori Key Energy Services, LCCOn August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC, a joint venture formed under the laws of Abu Dhabi,UAE, and the acquisition of the underlying business for $5.1 million. During the fourth quarter of 2014 the joint venture was duly liquidated and the $5.1million was transferred to AlMansoori.38Table of ContentsIndex to Financial StatementsWe anticipate that acquisitions of complementary companies, assets and lines of businesses will continue to play an important role in our businessstrategy. While there are currently no unannounced agreements or ongoing negotiations for the acquisition of any material businesses or assets, suchtransactions can be effected quickly and may occur at any time.Critical Accounting PoliciesOur Accounting Department is responsible for the development and application of our accounting policies and internal control procedures andreports to the Chief Financial Officer.The process and preparation of our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”)requires us to make certain estimates, judgments and assumptions, which may affect the reported amounts of our assets and liabilities, disclosures ofcontingencies at the balance sheet date, the amounts of revenues and expenses recognized during the reporting period and the presentation of our statementof cash flows. We may record materially different amounts if these estimates, judgments and assumptions change or if actual results differ. However, weanalyze our estimates, assumptions and judgments based on our historical experience and various other factors that we believe to be reasonable under thecircumstances.We have identified the following critical accounting policies that require a significant amount of estimation or judgment to accurately present ourfinancial position, results of operations and cash flows:•Revenue recognition;•Estimate of reserves for workers’ compensation, vehicular liability and other self-insurance;•Contingencies;•Income taxes;•Estimates of depreciable lives;•Valuation of indefinite-lived intangible assets;•Valuation of tangible and finite-lived intangible assets; and•Valuation of equity-based compensation.Revenue RecognitionWe recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or serviceshave been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.•Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completedcustomer purchase order, field ticket, supplier contract, or master service agreement.•Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement asevidenced by a field ticket or service log.•The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price beingfixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a field ticket.•Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined creditterms that have been granted in accordance with our credit policy.We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmentaltaxing authorities.We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair valueif they have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantiallycontrolled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.Workers’ Compensation, Vehicular Liability and Other Self-InsuranceThe occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet its indemnification or insuranceobligations, could result in substantial losses. In addition, insurance may not be available to cover any or all of these risks, and, if available, we might not beable to obtain such insurance without a substantial increase in premiums. It is possible that, in addition to higher premiums, future insurance coverage may besubject to higher deductibles and coverage restrictions.We estimate our liability arising out of uninsured and potentially insured events, including workers’ compensation, employer’s liability, vehicularliability, and general liability, and record accruals in our consolidated financial statements.39Table of ContentsIndex to Financial StatementsReserves related to claims are based on the specific facts and circumstances of the insured event and our past experience with similar claims and trendanalysis. We adjust loss estimates in the calculation of these accruals based upon actual claim settlements and reported claims. Loss estimates for individualclaims are adjusted based upon actual claim judgments, settlements and reported claims. The actual outcome of these claims could differ significantly fromestimated amounts. Changes in our assumptions and estimates could potentially have a negative impact on our earnings.We are largely self-insured against physical damage to our property, rigs, equipment and automobiles due to large deductibles or self-insurance.ContingenciesWe are periodically required to record other loss contingencies, which relate to lawsuits, claims, proceedings and tax-related audits in the normalcourse of our operations, on our consolidated balance sheet. We record a loss contingency for these matters when it is probable that a liability has beenincurred and the amount of the loss can be reasonably estimated. We periodically review our loss contingencies to ensure that we have recorded appropriateliabilities on the balance sheet. We adjust these liabilities based on estimates and judgments made by management with respect to the likely outcome ofthese matters, including the effect of any applicable insurance coverage for litigation matters. Our estimates and judgments could change based on newinformation, changes in laws or regulations, changes in management’s plans or intentions, the outcome of legal proceedings, settlements or other factors.Actual results could vary materially from these reserves.We record liabilities when environmental assessment indicates that site remediation efforts are probable and the costs can be reasonably estimated.We measure environmental liabilities based, in part, on relevant past experience, currently enacted laws and regulations, existing technology, site-specificcosts and cost-sharing arrangements. Recognition of any joint and several liability is based upon our best estimate of our final pro-rata share of such liabilityor the low amount in a range of estimates. These assumptions involve the judgments and estimates of management, and any changes in assumptions or newinformation could lead to increases or decreases in our ultimate liability, with any such changes recognized immediately in earnings.We record legal obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incurthe liability. Significant judgment is involved in estimating our future cash flows associated with such obligations, as well as the ultimate timing of the cashflows. If our estimates on the amount or timing of the cash flows change, the change may have a material impact on our results of operations.Income TaxesWe account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences.Management determines our current tax liability as well as taxes incurred as a result of current operations, yet deferred until future periods. Current taxespayable represent our liability related to our income tax return for the current year, while net deferred tax expense or benefit represents the change in thebalance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets andliabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when thedifferences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain itemsfor tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local taxlaws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of futureoperations and results achieved and the timing and nature of income earned and expenditures incurred.We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%)that some or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our futuretaxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidencecan include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planningstrategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizableamount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in thedomestic and international tax jurisdictions in which we operate.If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentiallymaterial negative impacts on our earnings.Estimates of Depreciable LivesWe use the estimated depreciable lives of our long-lived assets, such as rigs, heavy-duty trucks and trailers, to compute depreciation expense, toestimate future asset retirement obligations and to conduct impairment tests. We base the estimates of our depreciable lives on a number of factors, such as theenvironment in which the assets operate, industry factors including40Table of ContentsIndex to Financial Statementsforecasted prices and competition, and the assumption that we provide the appropriate amount of capital expenditures while the asset is in operation tomaintain economical operation of the asset and prevent untimely demise to scrap. The useful lives of our intangible assets are determined by the years overwhich we expect the assets to generate a benefit based on legal, contractual or other expectations.We depreciate our operational assets over their depreciable lives to their salvage value, which is generally 10% of the acquisition cost. We recognizea gain or loss upon ultimate disposal of the asset based on the difference between the carrying value of the asset on the disposal date and any proceeds wereceive in connection with the disposal.We periodically analyze our estimates of the depreciable lives of our fixed assets to determine if the depreciable periods and salvage value continueto be appropriate. We also analyze useful lives and salvage value when events or conditions occur that could shorten the remaining depreciable life of theasset. We review the depreciable periods and salvage values for reasonableness, given current conditions. As a result, our depreciation expense is based uponestimates of depreciable lives of the fixed assets, the salvage value and economic factors, all of which require management to make significant judgments andestimates. If we determine that the depreciable lives should be different than originally estimated, depreciation expense may increase or decrease andimpairments in the carrying values of our fixed assets may result, which could negatively impact our earnings.Valuation of Indefinite-Lived Intangible AssetsWe periodically review our intangible assets not subject to amortization, including our goodwill, to determine whether an impairment of those assetsmay exist. These tests must be made on at least an annual basis, or more often if circumstances indicate that the assets may be impaired. These circumstancesinclude, but are not limited to, significant adverse changes in the business climate.The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likelythan not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepgoodwill impairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carryingamount we will perform the two-step goodwill impairment test. In the first step, a fair value is calculated for each of our reporting units, and that fair value iscompared to the current carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carryingvalue, there is no potential impairment, and the second step is not performed. If the carrying value exceeds the fair value of the reporting unit, then the secondstep is required.The second step of the test for impairment compares the implied fair value of the reporting unit’s goodwill to its current carrying value. The impliedfair value of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination,with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carryingvalue, no impairment charge is recorded. If the carrying value of the reporting unit’s goodwill is in excess of its implied fair value, an impairment chargeequal to the excess is recorded.We conducted our annual impairment test for goodwill and other intangible assets not subject to amortization as of October 1, 2014. In determiningthe fair value of our reporting units, we use a weighted-average approach of three commonly used valuation techniques — a discounted cash flow method, aguideline companies method, and a similar transactions method. We assigned a weight to the results of each of these methods based on the facts andcircumstances that are in existence for that testing period. We assigned more weight to the discounted cash flow method as we believe it is morerepresentative of the future of the business.In addition to the estimates made by management regarding the weighting of the various valuation techniques, the creation of the techniquesthemselves requires that we make significant estimates and assumptions. The discounted cash flow method, which was assigned the highest weight bymanagement during the current year, requires us to make assumptions about future cash flows, future growth rates, tax rates in future periods, book-taxdifferences in the carrying value of our assets in future periods, and discount rates. The assumptions about future cash flows and growth rates are based on ourcurrent budgets for future periods, as well as our strategic plans, the beliefs of management about future activity levels, and analysts’ expectations about ourrevenues, profitability and cash flows in future periods. The assumptions about our future tax rates and book-tax differences in the carrying value of our assetsin future periods are based on the assumptions about our future cash flows and growth rates, and management’s knowledge of and beliefs about tax law andpractice in current and future periods. The assumptions about discount rates include an assessment of the specific risk associated with each reporting unitbeing tested, and were developed with the assistance of a third-party valuation consultant. The ultimate conclusions of the valuation techniques remain ourresponsibility.41Table of ContentsIndex to Financial StatementsWe conducted our most recent annual test for impairment of our goodwill and other indefinite-lived intangible assets as of October 1, 2014. On thatdate, our reporting units for the purposes of impairment testing were U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing andRental Services and our Canadian reporting units. While this test is required on an annual basis, it can also be required more frequently based on changes inexternal factors or other triggering events. In 2014, we experienced several triggering events that required us to perform additional interim testing for thepossible impairment of goodwill, which resulted in the recording of a reduction in value of our goodwill of $41.5 million and indefinite-lived intangible of$9.9 million.Our goodwill by reporting unit as of December 31, 2014 is as follows (in thousands, except for percentages):U.S. U.S. Rig Services $297,719 51%Fluid Management Services 24,479 4%Coiled Tubing Services 82,695 14%Fishing and Rental Services 173,463 30%Subtotal 578,356 99%International Canada 4,383 1%Subtotal 4,383 1%Total $582,739 100%We also have intangible assets that are not amortized of $1.5 million and $1.2 million related to our Fishing and Rental Services segment and ourRussian reporting unit, respectively. These tradenames are tested for impairment annually using a relief from royalty method.As noted above, the determination of the fair value of our reporting units is heavily dependent upon certain estimates and assumptions that we makeabout our reporting units. Changes in those estimates and assumptions could possibly impact the determination of the fair value of our reporting units.Discount rates we use in future periods could change substantially if the cost of debt or equity were to significantly increase or decrease, or if we were tochoose different comparable companies in determining the appropriate discount rate for our reporting units. Additionally, our future projected cash flows forour reporting units could significantly impact the fair value of our reporting units, and if our current projections about our future activity levels, pricing, andcost structure are inaccurate, the fair value of our reporting units could change materially. If the current overall economy further declines or if there is asignificant and rapid adverse change in our business in the near- or mid-term for any of our reporting units, our current estimates of the fair value of ourreporting units could decrease significantly, leading to possible impairment charges in future periods. Based on our current knowledge and beliefs, we do notthink that material adverse changes to our current estimates and assumptions such that our reporting units would fail step one of the impairment test arereasonably possible.Valuation of Tangible and Finite-Lived Intangible AssetsOur fixed assets and finite-lived intangibles are tested for potential impairment when circumstances or events indicate a possible impairment mayexist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, but are not limited to, an adverse changein market conditions, a significant decrease in benefits being derived from an acquired business, a change in the use of an asset, or a significant disposal of aparticular asset or asset class.If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairment test, we makejudgments, estimates and assumptions regarding long-term forecasts of revenues and expenses relating to the assets subject to review. Market conditions,energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on theestimates we use to determine whether our assets are impaired. If the results of the analysis indicate that the carrying value of the assets being tested forimpairment are not recoverable, then we record an impairment charge to write the carrying value of the assets down to their fair value. Using differentjudgments, assumptions or estimates, we could potentially arrive at a materially different fair value for the assets being tested for impairment, which mayresult in an impairment charge.We identified triggering events in 2014 that resulted in the recording of a reduction in value of fixed assets of $62.1 million and finite-livedintangibles of $7.7 million in our Fishing and Rental Services segment. We did not identify any trigger events causing us to test our tangible and finite-livedintangible assets for impairment during the years ended December 31, 2013 or 2012.42Table of ContentsIndex to Financial StatementsValuation of Equity-Based CompensationWe have granted stock options, stock-settled stock appreciation rights (“SARs”), restricted stock (“RSAs” and “RSUs”), phantom shares andperformance units to our employees and non-employee directors. The option and SAR awards we grant are fair valued using a Black-Scholes option model onthe grant date and are amortized to compensation expense over the vesting period of the option or SAR award, net of estimated and actual forfeitures.Compensation related to RSAs and RSUs is based on the fair value of the award on the grant date and is recognized based on the vesting requirements thathave been satisfied during the period. Phantom shares are accounted for at fair value, and changes in the fair value of these awards are recorded ascompensation expense during the period. Performance units provide a cash incentive award, the unit value of which is determined with reference to ourcommon stock. See “Note 19. Share Based Compensation” in “Item 8. Financial Statements and Supplementary Data” for a more detailed discussion ofperformance units measurement.In utilizing the Black-Scholes option pricing model to determine fair values of awards, certain assumptions are made which are based on subjectiveexpectations, and are subject to change. A change in one or more of these assumptions would impact the expense associated with future grants. These keyassumptions include the volatility in the price of our common stock, the risk-free interest rate and the expected life of awards. We did not grant any stockoptions during the years ended December 31, 2014, 2013 and 2012.Accounting Standards Adopted or Not Yet Adopted in this ReportThere are no new accounting standards that have been adopted in this report.ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU is toestablish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue fromcontracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount thatreflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for interim and annualreporting periods beginning after December 15, 2016 and must be adopted using either a full retrospective method or a modified retrospective method. Weare currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates, foreign currencyexchange rates and equity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risksthrough regular operating and financing activities, and may, on a limited basis, use derivative financial instruments to manage this risk. Derivative financialinstruments were not used in the years ended December 31, 2014, 2013 and 2012. To the extent that we use such derivative financial instruments, we will usethem only as risk management tools and not for speculative investment purposes.Interest Rate RiskAs of December 31, 2014, we had outstanding $675.0 million of 2021 Notes. These notes are fixed-rate obligations, and as such do not subject us torisks associated with changes in interest rates. Borrowings under our 2011 Credit Facility bear interest at variable interest rates, and therefore expose us tointerest rate risk. As of December 31, 2014, the weighted average interest rate on our outstanding variable-rate debt obligations was 3.14%. A hypothetical10% increase in that rate would increase the annual interest expense on those instruments by $0.2 million.Foreign Currency RiskAs of December 31, 2014, we conduct operations in Mexico, Colombia, Ecuador, the Middle East and Russia. We also have a Canadian subsidiary.As of December 31, 2011, the functional currency for Mexico, Russia and Canada was the local currency and the functional currency for Colombia and theMiddle East was the U. S. dollar. Due to significant changes in economic facts and circumstances, the functional currency for Mexico and Canada waschanged to the U.S. dollar effective January 1, 2012. For balances denominated in our Russian subsidiaries’ local currency, changes in the value of theirassets and liabilities due to changes in exchange rates are deferred and accumulated in other comprehensive income until we liquidate our investment. OurRussian foreign subsidiaries must remeasure their account balances at the end of each period to an equivalent amount of U.S. dollars, with changes reflectedin earnings during the period. A hypothetical 10% decrease in the average value of the U.S. dollar relative to the value of the local currency for our Russiansubsidiaries would increase our net income by $0.4 million.43Table of ContentsIndex to Financial StatementsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAKey Energy Services, Inc. and SubsidiariesINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm45Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting46Consolidated Balance Sheets47Consolidated Statements of Operations48Consolidated Statements of Comprehensive Income (Loss)49Consolidated Statements of Cash Flows50Consolidated Statements of Stockholders’ Equity51Notes to Consolidated Financial Statements5244Table of ContentsIndex to Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersKey Energy Services, Inc.We have audited the accompanying consolidated balance sheets of Key Energy Services, Inc. (a Maryland corporation) and subsidiaries (the“Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes inshareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KeyEnergy Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years inthe period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company'sinternal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2015 expressed an unqualified opinionon the effectiveness of internal control over financial reporting./s/ GRANT THORNTON LLPHouston, TexasFebruary 24, 201545Table of ContentsIndex to Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersKey Energy Services, Inc.We have audited the internal control over financial reporting of Key Energy Services, Inc. (a Maryland corporation) and subsidiaries (the“Company”) as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sReport on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reportingbased on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedfinancial statements of the Company as of and for the year ended December 31, 2014, and our report dated February 24, 2015 expressed an unqualifiedopinion on those financial statements./s/ GRANT THORNTON LLPHouston, TexasFebruary 24, 201546Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS December 31, 2014 2013 (in thousands, exceptshare amounts)ASSETSCurrent assets: Cash and cash equivalents$27,304 $28,306Accounts receivable, net of allowance for doubtful accounts of $2,925 and $766289,466 348,966Inventories30,171 32,335Other current assets86,854 96,546Total current assets433,795 506,153Property and equipment, gross2,555,515 2,606,738Accumulated depreciation(1,320,257) (1,241,092)Property and equipment, net1,235,258 1,365,646Goodwill582,739 624,875Other intangible assets, net14,500 41,146Deferred financing costs, net10,735 13,897Other assets56,471 35,753TOTAL ASSETS$2,333,498 $2,587,470LIABILITIES AND EQUITYCurrent liabilities: Accounts payable$77,631 $58,826Other current liabilities164,227 169,945Current portion of long-term debt— 3,573Total current liabilities241,858 232,344Long-term debt748,426 763,981Workers’ compensation, vehicular and health insurance liabilities29,690 29,944Deferred tax liabilities228,394 284,453Other non-current liabilities27,067 25,655Commitments and contingencies Equity: Common stock, $0.10 par value; 200,000,000 shares authorized, 153,557,108 and 152,331,006 shares issuedand outstanding15,356 15,233Additional paid-in capital960,647 953,306Accumulated other comprehensive loss(37,280) (15,414)Retained earnings119,340 297,968Total equity1,058,063 1,251,093TOTAL LIABILITIES AND EQUITY$2,333,498 $2,587,470See the accompanying notes which are an integral part of these consolidated financial statements47Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2014 2013 2012 (in thousands, except per share amounts)REVENUES$1,427,336 $1,591,676 $1,960,070COSTS AND EXPENSES: Direct operating expenses1,059,651 1,114,462 1,308,845Depreciation and amortization expense200,738 225,297 213,783General and administrative expenses249,646 221,753 230,496Impairment expense121,176 — —Operating income (loss)(203,875) 30,164 206,946Interest expense, net of amounts capitalized54,227 55,204 53,566Other (income) loss, net1,009 (803) (6,649)Income (loss) from continuing operations before tax(259,111) (24,237) 160,029Income tax (expense) benefit80,483 3,064 (57,352)Income (loss) from continuing operations(178,628) (21,173) 102,677Loss from discontinued operations, net of tax— — (93,568)Net income (loss)(178,628) (21,173) 9,109Income attributable to noncontrolling interest— 595 1,487INCOME (LOSS) ATTRIBUTABLE TO KEY$(178,628) $(21,768) $7,622Earnings (loss) per share from continuing operations attributable to Key: Basic and diluted$(1.16) $(0.14) $0.67Loss per share from discontinued operations: Basic and diluted$— $— $(0.62)Earnings (loss) per share attributable to Key: Basic and diluted$(1.16) $(0.14) $0.05Income (loss) from continuing operations attributable to Key: Income (loss) from continuing operations$(178,628) $(21,173) $102,677Income attributable to noncontrolling interest— 595 1,487Income (loss) from continuing operations attributable to Key$(178,628) $(21,768) $101,190Weighted Average Shares Outstanding: Basic153,371 152,271 151,106Diluted153,371 152,271 151,125See the accompanying notes which are an integral part of these consolidated financial statements48Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2014 2013 2012 (in thousands)INCOME (LOSS) FROM CONTINUING OPERATIONS$(178,628) $(21,173) $102,677Other comprehensive income (loss): Foreign currency translation income (loss), net of tax(21,866) (5,607) 1,933Reclassification adjustment for sales of foreign subsidiaries— — 51,892Total other comprehensive income (loss)(21,866) (5,607) 53,825COMPREHENSIVE INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX(200,494) (26,780) 156,502Comprehensive loss from discontinued operations— — (93,568)COMPREHENSIVE INCOME (LOSS)(200,494) (26,780) 62,934Comprehensive (income) loss attributable to noncontrolling interest— 96 (3,229)COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO KEY$(200,494) $(26,684) $59,705See the accompanying notes which are an integral part of these consolidated financial statements49Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2014 2013 2012 (in thousands)CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)$(178,628) $(21,173) $9,109Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense200,738 225,297 213,783Impairment expense121,176 — 84,732Bad debt expense2,710 634 1,299Accretion of asset retirement obligations605 604 594(Income) loss from equity method investments(25) 447 926Amortization and write-off of deferred financing costs and premium on debt2,606 2,244 2,664Deferred income tax expense (benefit)(82,922) (11,929) 35,998Capitalized interest— (607) (1,314)(Gain) loss on disposal of assets, net8,686 (2,972) 1,661Share-based compensation10,949 13,785 13,306Excess tax expense (benefit) from share-based compensation1,240 1,848 (4,085)Changes in working capital: Accounts receivable54,024 54,003 (15,409)Other current assets(2,471) 5,915 (42,558)Accounts payable and accrued liabilities15,114 (82,318) 60,665Share-based compensation liability awards(846) 954 1,555Other assets and liabilities11,212 41,911 6,734Net cash provided by operating activities164,168 228,643 369,660CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures(161,639) (164,137) (447,160)Proceeds from sale of fixed assets15,844 17,256 17,127Proceeds from sale of assets held for sale— — 2,000Payment of accrued acquisition cost of the 51% noncontrolling interest in AlMansoori Key EnergyServices LLC(5,100) — —Acquisition of the 50% noncontrolling interest in Geostream— (14,600) —Proceeds from notes receivable4,055 600 —Investment in Wilayat Key Energy, LLC— — (676)Net cash used in investing activities(146,840) (160,881) (428,709)CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt(3,573) — —Proceeds from long-term debt— — 205,000Repayments of capital lease obligations— (393) (1,959)Proceeds from borrowings on revolving credit facility260,000 220,000 275,000Repayments on revolving credit facility(275,000) (300,000) (405,000)Payment of deferred financing costs— (69) (4,597)Repurchases of common stock(2,245) (3,196) (7,519)Proceeds from exercise of stock options and warrants— 14 901Excess tax (expense) benefit from share-based compensation(1,240) (1,848) 4,085Other financing activities— — 8,035Net cash provided by (used in) financing activities(22,058) (85,492) 73,946Effect of changes in exchange rates on cash3,728 87 (4,391)Net increase (decrease) in cash and cash equivalents(1,002) (17,643) 10,506Cash and cash equivalents, beginning of period28,306 45,949 35,443Cash and cash equivalents, end of period$27,304 $28,306 $45,949See the accompanying notes which are an integral part of these consolidated financial statements50Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY COMMON STOCKHOLDERS NoncontrollingInterest TotalCommon Stock AdditionalPaid-inCapital AccumulatedOtherComprehensiveLoss RetainedEarnings Number ofShares Amountat par (in thousands, except per share data)BALANCE AT DECEMBER 31, 2011150,733 $15,073 $915,400 $(58,231) $312,114 $30,275 $1,214,631Foreign currency translation— — — 191 — 1,742 1,933Foreign currency impact on sale of Argentina(Note 3)— — — 51,892 — — 51,892Common stock purchases(483) (48) (7,471) — — — (7,519)Exercise of stock options and warrants100 10 891 — — — 901Share-based compensation788 80 13,226 — — — 13,306Tax benefit from share-based compensation— — 4,085 — — — 4,085Shares surrendered(68) (7) (999) — — — (1,006)Net income— — — — 7,622 1,487 9,109BALANCE AT DECEMBER 31, 2012151,070 15,108 925,132 (6,148) 319,736 33,504 1,287,332Foreign currency translation— — — (4,916) — (691) (5,607)Common stock purchases(416) (42) (3,154) — — — (3,196)Exercise of stock options4 — 14 — — — 14Share-based compensation1,673 167 13,618 — — — 13,785Tax benefit from share-based compensation— — (1,848) — — — (1,848)Acquisition of the 50% noncontrolling interestin Geostream (Note 2)— — 22,432 (4,350) — (31,196) (13,114)Acquisition of the 51% noncontrolling interestin AlMansoori Key Energy Services, LLC(Note 2)— — (2,888) — — (2,212) (5,100)Net income (loss)— — — — (21,768) 595 (21,173)BALANCE AT DECEMBER 31, 2013152,331 15,233 953,306 (15,414) 297,968 — 1,251,093Foreign currency translation— — — (21,866) — — (21,866)Common stock purchases(291) (29) (2,216) — — — (2,245)Share-based compensation1,517 152 10,797 — — — 10,949Tax expense from share-based compensation— — (1,240) — — — (1,240)Net loss— — — — (178,628) — (178,628)BALANCE AT DECEMBER 31, 2014153,557 $15,356 $960,647 $(37,280) $119,340 $— $1,058,063See the accompanying notes which are an integral part of these consolidated financial statements51Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESKey Energy Services, Inc., and its wholly owned subsidiaries (collectively, “Key,” the “Company,” “we,” “us” and “our”) provide a full range of wellservices to major oil companies, foreign national oil companies and independent oil and natural gas production companies. Our services include rig-basedand coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rentalservices and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil andnatural gas producing regions of the continental United States, and we have operations in Mexico, Colombia, Ecuador, the Middle East and Russia. Inaddition, we have a technology development and control systems business based in Canada.Basis of PresentationThe consolidated financial statements included in this Annual Report on Form 10-K present our financial position, results of operations and cashflows for the periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”).The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financialposition, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Amongother things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure andrealization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable,(viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and recordthe effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate toimproved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from theseestimates. We believe that our estimates are reasonable.We have evaluated events occurring after the balance sheet date included in this Annual Report on Form 10-K for possible disclosure as asubsequent event. Management monitored for subsequent events through the date that these financial statements were issued.We revised our reportable business segments effective in the fourth quarter of 2014, and in connection with the revision, we have revised disclosuresfor the corresponding items of segment information for the years ended December 31, 2013 and 2012. The revised reportable segments are U.S. Rig Services,Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services and International. We also have a “Functional Support” segmentassociated with overhead costs in support of our reportable segments. We revised our segments to reflect changes in management’s resource allocation andperformance assessment in making decisions regarding our business. Our U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing andRental Services operate geographically within the United States. The International reportable segment includes our operations in Mexico, Colombia,Ecuador, Russia, Bahrain and Oman. Our Canadian subsidiary is also reflected in our International reportable segment. These changes reflect our currentoperating focus in compliance with Accounting Standards Codification (“ASC”) No. 280, Segment Reporting (“ASC 280”). These presentation changes didnot impact our consolidated net income, earnings per share, total current assets, total assets or total stockholders’ equity.On February 17, 2012, the Company announced its decision to sell its business and operations in Argentina (the “Argentina business”) and onSeptember 14, 2012 completed the sale of the Argentina business. In accordance with applicable accounting requirements and guidance, the Company hasreclassified and presented the Argentina business as a discontinued operation for the 2012 period.Principles of ConsolidationWithin our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. Weeliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, weaccount for that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for thatinterest using the equity method.52Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)AcquisitionsFrom time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations for acquisitions areincluded in our financial statements beginning on the date of acquisition and are accounted for using the acquisition method. For all business combinations(whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquired business, including goodwill, at their fair values;including contingent consideration. Final valuations of assets and liabilities are obtained and recorded as soon as practicable no later than one year from thedate of the acquisition.Revenue RecognitionWe recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or serviceshave been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.•Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completedcustomer purchase order, field ticket, supplier contract, or master service agreement.•Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement asevidenced by a field ticket or service log.•The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price beingfixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a field ticket.•Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined creditterms that have been granted in accordance with our credit policy.We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmentaltaxing authorities.We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair valueif they have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantiallycontrolled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.Cash and Cash EquivalentsWe consider short-term investments with an original maturity of less than three months to be cash equivalents. At December 31, 2014, we have notentered into any compensating balance arrangements, but all of our obligations under our 2011 Credit Facility (as defined below) with a syndicate of banksof which JPMorgan Chase Bank, N.A. is the administrative agent were secured by most of our assets, including assets held by our subsidiaries, which includesour cash and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure toany one financial institution.We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2014, accounts wereguaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 and substantially all of our accounts held deposits in excess of the FDIClimits.We believe that the cash held by our other foreign subsidiaries could be repatriated for general corporate use without material withholdings. Fromtime to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts of ourcash in deposit accounts with restrictions that limit our ability to withdraw those funds.Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. Wepresent the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balancesheets.Accounts Receivable and Allowance for Doubtful AccountsWe establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or part of theoutstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectability and establish or adjust our allowance asnecessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off theaccounts receivable and the associated provision for uncollectible accounts.53Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self-insurance liability. Wepresent these insurance receivables gross on our balance sheet as a component of other assets, separate from the corresponding liability.Concentration of Credit Risk and Significant CustomersOur customers include major oil and natural gas production companies, independent oil and natural gas production companies, and foreign nationaloil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. Wemaintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuationsin demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact ourresults of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our netcash provided by operating activities.During the years ended December 31, 2014 and December 31, 2013, Chevron Texaco Exploration and Production accounted for approximately 15%of our consolidated revenue. During the year ended December 31, 2012, Pemex and Occidental Petroleum Corporation accounted for approximately 12% and10% of our consolidated revenue, respectively. No other customer accounted for more than 10% of our consolidated revenue in 2014, 2013 or 2012.Receivables outstanding from Pemex were approximately 19% of our total accounts receivable as of December 31, 2013. No other customeraccounted for more than 10% of our total accounts receivable as of December 31, 2014 and 2013.InventoriesInventories, which consist primarily of equipment parts and spares for use in our operations and supplies held for consumption, are valued at thelower of average cost or market.Property and EquipmentProperty and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated depreciablelives of the assets using the straight-line method. Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $191.9 million, $206.2million and $190.5 million, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a value higher thanthe assets’ value as scrap. Salvage value approximates 10% of an operational asset’s acquisition cost. When an operational asset is stacked or taken out ofservice, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is operable and whether the remainingdepreciable life and salvage value should be adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When wedispose of an asset, a gain or loss is recognized.As of December 31, 2014, the estimated useful lives of our asset classes are as follows:DescriptionYearsWell service rigs and components3-15Oilfield trucks, vehicles and related equipment4-7Fishing and rental tools, coiled tubing units and equipment, tubulars and pressure control equipment3-10Disposal wells15Furniture and equipment3-7Buildings and improvements15-30From time to time, we lease certain of our operating assets under capital lease obligations whose terms run from 55 to 60 months. These assets aredepreciated over their estimated useful lives or the term of the capital lease obligation, whichever is shorter.54Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)A long-lived asset or asset group should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amountmay not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business based on the services provided,which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We would record animpairment charge, reducing the net carrying value to an estimated fair value, if the asset group’s estimated future cash flows were less than its net carryingvalue. Events or changes in circumstance that cause us to evaluate our fixed assets for recoverability and possible impairment may include changes in marketconditions, such as adverse movements in the prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use orphysical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determinationof fair value for an asset group involves significant judgment and estimates. We identified a triggering event in the third quarter of 2014 that resulted in arecording of a reduction in value of fixed assets of $62.1 million in our Fishing and Rental Services segment. We did not identify any trigger events causingus to test our tangible and finite-lived intangible assets for impairment during the years ended December 31, 2013 or 2012. See “Note 8. Property andEquipment,” for further discussion.Asset Retirement ObligationsWe recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equalamount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirementactivities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability forthe fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputsthat we believe a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjustthe cost for inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved inestimating future cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing ofthe cash flows change, such changes may have a material impact on our results of operations. See “Note 11. Asset Retirement Obligations.”DepositsDue to capacity constraints on equipment manufacturers, we have been required to make advanced payments for certain oilfield service equipmentand other items used in the normal course of business. As of December 31, 2014 and December 31, 2013, deposits totaled $10.1 million and $1.5 million,respectively. Deposits consist primarily of payments made related to high demand long-lead time items.Capitalized InterestInterest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interestrate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized todepreciation expense over the useful life of the assets, and is included in the depreciation and amortization line in the accompanying consolidated statementsof operations.Deferred Financing CostsDeferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest methodover the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination ofthe gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. See “Note14. Long-term Debt,” for further discussion.Goodwill and Other Intangible AssetsGoodwill results from business combinations and represents the excess of the acquisition consideration over the fair value of the net assets acquired.Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstancesindicate that the asset might be impaired.The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likelythan not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepgoodwill impairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carryingamount we will perform the two-step goodwill impairment test. In the first step of the test, a fair value is calculated for each of our reporting units, and that fairvalue is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting55Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for thereporting unit, then the second step of the test is required.The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fair value of thereporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, with the purchase price beingequal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment isrecorded. If the carrying value is in excess of the implied fair value, an impairment equal to the excess is recorded.To assist management in the preparation and analysis of the valuation of our reporting units, we utilize the services of a third-party valuationconsultant. The ultimate conclusions of the valuation techniques remain our sole responsibility. The determination of the fair value used in the test is heavilyimpacted by the market prices of our equity and debt securities, as well as the assumptions and estimates about our future activity levels, profitability andcash flows.We conduct our annual impairment test as of October 1 of each year. While this test is required on an annual basis, it can also be required morefrequently based on changes in external factors or other triggering events. In 2014, we experienced several triggering events that required us to performadditional interim testing for the possible impairment of goodwill, which resulted in the recording of a reduction in value of our goodwill of $41.5 millionand other intangible assets of $17.6 million. See “Note 9. Goodwill and Other Intangible Assets,” for further discussion.Internal-Use SoftwareWe capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the software’sestimated useful life, generally five to seven years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred.LitigationWhen estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss isprobable and reasonably estimable.Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental UnitedStates and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. Wecontinually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosureof these items. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonablyestimable. See “Note 15. Commitments and Contingencies.”EnvironmentalOur operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, andregulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment.Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition causedby past operations and that have no future economic benefits are expensed. We record liabilities on an undiscounted basis when our remediation efforts areprobable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurancecoverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See “Note 15.Commitments and Contingencies.”Self-InsuranceWe are largely self-insured against physical damage to our equipment and automobiles as well as workers’ compensation claims. The accruals thatwe maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through the use of historical claimsdata and trend analysis. To assist management with the liability amount for our self-insurance reserves, we utilize the services of a third party actuary. Theactual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based uponactual claim settlements and reported claims. See “Note 15. Commitments and Contingencies.”Income TaxesWe account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences.Management determines our current tax liability as well as taxes incurred as a result of current operations, but which are deferred until future periods. Currenttaxes payable represent our liability related to our income tax56Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on ourconsolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financialreporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certainassumptions about the timing of temporary tax differences for the differing treatments of certain items for tax and accounting purposes or whether suchdifferences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in eachjurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing andnature of income earned and expenditures incurred.We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%)that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding ourfuture taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Suchevidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and taxplanning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their netrecognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authoritiesin the domestic and international tax jurisdictions in which we operate. See “Note 13. Income Taxes” for further discussion of accounting for income taxes,changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.Earnings Per ShareBasic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of commonshares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstandingassuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See “Note 10. Earnings PerShare.”Share-Based CompensationIn the past, we have issued stock options, shares of restricted common stock, restricted stock units, stock appreciation rights (“SARs”), phantomshares and performance units to our employees as part of those employees’ compensation and as a retention tool. For our options, restricted shares and SARs,we calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award,net of estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. Thevaluation of our stock options and SARs requires us to estimate the expected term of award, which we estimated using the simplified method, as we did nothave sufficient historical exercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stockoption and SARs awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expectedterm of the award, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using ourstock price on the grant date. Our phantom shares and performance units are treated as “liability” awards and carried at fair value at each balance sheet date,with changes in fair value recorded as a component of compensation expense and an offsetting liability on our consolidated balance sheet. We record share-based compensation as a component of general and administrative and direct operating expense for the applicable individual. See “Note 19. Share-BasedCompensation.”Foreign Currency Gains and LossesWith respect to our operations in Russia, where the local currency is the functional currency, assets and liabilities are translated at the rates ofexchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains orlosses arising from the translation of accounts from the functional currency to the U.S. dollar are included as a separate component of stockholders’ equity inother comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity. As of December 31, 2011, thefunctional currency for Mexico, Russia and Canada was the local currency and the functional currency for Colombia and the Middle East was the U. S. dollar.Due to significant changes in economic facts and circumstances, the functional currency for Mexico and Canada was changed to the U.S. dollar effectiveJanuary 1, 2012. See “Note 16. Accumulated Other Comprehensive Loss.”From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functional currency. Thesetransactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction.At the end of each month, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rates ineffect at that time. Any adjustment57Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recorded in the income or loss of theforeign subsidiary as a component of other income, net.Comprehensive IncomeWe display comprehensive income (loss) and its components in our financial statements, and we classify items of comprehensive income by theirnature in our financial statements and display the accumulated balance of other comprehensive income separately in our stockholders’ equity.LeasesWe lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of thearrangement to determine whether the lease should be accounted for as an operating lease or a capital lease.We periodically incur costs to improve the assets that we lease under these arrangements. If the value of the leasehold improvements exceeds ourthreshold for capitalization, we record the improvement as a component of our property and equipment and amortize the improvement over the useful life ofthe improvement or the lease term, whichever is shorter.Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. Theseincreases may be the result of an inducement or “rent holiday” conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation.We recognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating leaseagreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such asmoving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us or on our behalf representincentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement.Accounting Standards Adopted or Not Yet Adopted in this ReportThere are no new accounting standards that have been adopted in this report.ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU is toestablish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue fromcontracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount thatreflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for interim and annualreporting periods beginning after December 15, 2016 and must be adopted using either a full retrospective method or a modified retrospective method. Weare currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.NOTE 2. ACQUISITIONS2013 Acquisition of Noncontrolling InterestsGeostream. On October 31, 2008, we acquired a 26% interest in OOO Geostream Services Group (“Geostream”) for $17.4 million. Geostream is alimited liability company incorporated in the Russian Federation that provides a wide range of drilling, workover and reservoir engineering services. OnSeptember 1, 2009, we acquired an additional 24% interest for $16.4 million, which brought our total investment in Geostream to 50% and provided us acontrolling interest with representation on Geostream's board of directors. We accounted for the second investment as a business combination achieved instages. The results of Geostream have been included in our consolidated financial statements since the initial acquisition date, with the portion outside of ourcontrol forming a noncontrolling interest. On April 9, 2013, we completed the acquisition of the 50% noncontrolling interest in Geostream for $14.6 million.Geostream is now our wholly owned subsidiary. This acquisition of the 50% noncontrolling interest was accounted for as an equity transaction. Therefore,our acquisition of the noncontrolling interest in Geostream in the second quarter of 2013 did not result in a gain or loss.AlMansoori Key Energy Services, LLC. On March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services, LLC (“AlMansoori”)to form the joint venture AlMansoori Key Energy Services, LLC, a joint venture under the laws of Abu Dhabi, UAE. The purpose of the joint venture was toengage in conventional workover and drilling services, coiled tubing services, fishing and rental services, rig monitoring services, pipe handling services andfluids, waste treatment and handling services. Although AlMansoori held a 51% interest in the joint venture and we held a 49% interest, we held three of thefive board of directors seats and a controlling financial interest. In addition, profits and losses of the joint venture were58Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)shared on equal terms and in equal amounts with AlMansoori. Because the joint venture did not have sufficient resources to carry on its activities without ourfinancial support, we determined it to be a variable interest entity of which we were the primary beneficiary. We consolidated the entity in our financialstatements. On August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC (the “Joint Venture”) and the acquisition of theunderlying business for $5.1 million. The acquisition of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC was accounted for as anequity transaction and therefore did not result in a gain or loss. During the fourth quarter the Joint Venture was formally liquidated and $5.1 million wastransferred to AlMansoori.NOTE 3. DISCONTINUED OPERATIONSIn September 2012, we completed the sale of our Argentina operations for approximately $12.5 million, net of transaction costs. The $12.5 millionnet proceeds from the sale of Argentina operations included $2.0 million received in cash and the balance in notes receivable which was comprised of non-interest bearing notes. These notes are included in "other current assets" in our condensed consolidated balance sheets.In connection with the sale, we recognized a total loss of $85.8 million, which includes the noncash impairment charge of $41.5 million recorded inthe first quarter of 2012, and a write-off of $51.9 million cumulative translation adjustment previously recorded in accumulated other comprehensive lossduring the third quarter of 2012. We are reporting the results of our Argentina operations in discontinued operations for 2012.The following table presents the results of operations for the Argentina business sold in this transaction for the year ended December 31, 2012 (inthousands):REVENUES$75,815COSTS AND EXPENSES: Direct operating expenses72,664Depreciation and amortization expense143General and administrative expenses11,232Asset retirements and impairments85,755Operating loss(93,979)Interest expense, net of amounts capitalized168Other expense, net3,725Loss before taxes(97,872)Income tax benefit4,304Net loss$(93,568)NOTE 4. SEVERANCE, CONTRACT TERMINATION AND MOBILIZATION COSTSIn the second quarter of 2013, we implemented a significant restructuring of our Fluid Management Services and our corporate cost structure tobetter align them with current market conditions. As a result of this restructuring, we recognized approximately $6.3 million of severance expenses in thesecond quarter of 2013. The severance costs were based on obligations under our existing severance agreements. Furthermore, we recognized leasecancellation fees of $1.9 million primarily related to our Fluid Management Services. Additionally, in our international business, due to customer spendingreductions in Mexico, we began redeploying idle rigs from the North Region of Mexico to higher demand markets, incurring mobilization cost of $2.3million. These costs are reflected in our consolidated statements of operations and include $8.3 million of direct operating expenses and $2.2 million ofgeneral and administrative expenses. On a segment basis, $7.2 million, $2.3 million, $0.3 million and $0.7 million is associated with our International, FluidManagement Services, U.S. Rig Services and Functional Support segments, respectively. The restructuring activities were implemented in the second quarterof 2013 and were completed in the fourth quarter of 2013.59Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 5. OTHER BALANCE SHEET INFORMATIONThe table below presents comparative detailed information about other current assets at December 31, 2014 and 2013: December 31, 2014 December 31, 2013 (in thousands)Other current assets: Current deferred tax assets$11,823 $11,707Prepaid current assets28,218 28,435Reinsurance receivable9,200 9,113VAT asset18,889 21,683Other18,724 25,608Total$86,854 $96,546The table below presents comparative detailed information about other non-current assets at December 31, 2014 and 2013: December 31, 2014 December 31, 2013 (in thousands)Other non-current assets: Deferred tax assets$35,238 $22,313Reinsurance receivable9,537 9,397Deposits10,125 1,533Equity method investments987 962Other584 1,548Total$56,471 $35,753The table below presents comparative detailed information about other current liabilities at December 31, 2014 and 2013: December 31, 2014 December 31, 2013 (in thousands)Other current liabilities: Accrued payroll, taxes and employee benefits$32,477 $34,956Accrued operating expenditures45,899 36,573Income, sales, use and other taxes25,892 37,064Self-insurance reserves31,359 32,129Accrued interest15,241 15,285Accrued insurance premiums7,515 8,049Other5,844 5,889Total$164,227 $169,94560Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The table below presents comparative detailed information about other non-current liabilities at December 31, 2014 and 2013: December 31, 2014 December 31, 2013 (in thousands)Other non-current accrued liabilities: Asset retirement obligations$12,525 $11,999Environmental liabilities5,730 6,176Accrued rent263 853Accrued sales, use and other taxes5,411 5,552Other3,138 1,075Total$27,067 $25,655NOTE 6. OTHER EXPENSE (INCOME), NETThe table below presents comparative detailed information about our other income and expense from continuing operations for the years endedDecember 31, 2014, 2013 and 2012: Year Ended December 31, 2014 2013 2012 (in thousands)Interest income$(82) $(220) $(46)Foreign exchange (gain) loss3,733 834 (4,726)Other, net(2,642) (1,417) (1,877)Total$1,009 $(803) $(6,649)NOTE 7. ALLOWANCE FOR DOUBTFUL ACCOUNTSThe table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2014, 2013 and 2012: Additions Balance atBeginningof Period Charged toExpense Charged toOtherAccounts Deductions Balance atEnd ofPeriod (in thousands)As of December 31, 2014$766 $2,710 $— $(551) $2,925As of December 31, 20132,860 634 — (2,728) 766As of December 31, 20128,013 1,299 6 (6,458) 2,86061Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 8. PROPERTY AND EQUIPMENTProperty and equipment consists of the following: December 31, 2014 2013 (in thousands)Major classes of property and equipment: Oilfield service equipment$1,927,353 $1,960,208Disposal wells88,465 87,681Motor vehicles288,523 304,244Furniture and equipment132,617 122,218Buildings and land91,553 86,085Work in progress27,004 46,302Gross property and equipment2,555,515 2,606,738Accumulated depreciation(1,320,257) (1,241,092)Net property and equipment$1,235,258 $1,365,646Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interestrate based on related debt until the underlying assets are placed into service. Capitalized interest for the years ended December 31, 2014, 2013 and 2012 waszero, $0.6 million, and $1.3 million, respectively. As of December 31, 2014 and 2013, we have no capital lease obligations.Depreciation of assets held under capital leases was zero, $1.9 million, and $2.8 million for the years ended December 31, 2014, 2013 and 2012,respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations.The decline in market value of our common stock in comparison to the carrying value of our assets during the third quarter of 2014 was determinedto be a triggering event. This triggering event required us to perform step one of the goodwill impairment test to identify potential impairment. Our step onetesting indicated potential impairment in our Fishing and Rental Services segment which required us to perform step two of the goodwill impairment test todetermine the amount of impairment, if any. Our preliminary step two testing performed during the third quarter of 2014, using a discounted cash flow modelto determine fair value, concluded that certain assets, primarily frac stack and well testing assets, were impaired. As a result, we recorded an estimated pre-taxcharge of $60.8 million in the third quarter of 2014. Our preliminary step two testing also indicated no impairment of goodwill in our Fishing and RentalServices segment. During the fourth quarter of 2014 we finalized our step two testing, preliminarily performed in the third quarter of 2014, based onadditional analysis performed by outside consultants. As a result, we recorded an additional pre-tax asset impairment charge of $1.3 million in the fourthquarter of 2014.During the fourth quarter the market value of our stock continued to decline and we determined it was necessary to perform the first step of thegoodwill impairment test for our U.S. Rig Services, Coiled Tubing Services, Fishing and Rental Services and Fluid Management Services segments. Theresults of our step one analysis indicated potential impairment in our Coiled Tubing Services segment. Step two of the goodwill impairment testing for theCoiled Tubing Services segment was performed preliminarily during the fourth quarter of 2014 and our analysis concluded that that there was no impairmentof goodwill. In addition, our analysis concluded that there was no impairment of fixed assets. Step two testing for our Coiled Tubing Services segment will beconcluded in the first quarter of 2015 and any adjustment to the amount recorded, which could differ materially, will be recorded in the first quarter of 2015.There were no asset impairment charges for the years ended 2013 and 2012.62Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETSThe changes in the carrying amount of our goodwill for the years ended December 31, 2014 and 2013 are as follows: U.S. Rig Services Fluid ManagementServices Coiled TubingServices Fishing andRental Services International Total (in thousands)December 31, 2012$297,719 $24,479 $101,795 $173,463 $29,025 $626,481Impact of foreign currency translation— — — — (1,606) (1,606)December 31, 2013297,719 24,479 101,795 173,463 27,419 624,875Goodwill impairment— — (19,100) — (22,437) (41,537)Impact of foreign currency translation— — — — (599) (599)December 31, 2014$297,719 $24,479 $82,695 $173,463 $4,383 $582,739The components of our other intangible assets as of December 31, 2014 and 2013 are as follows: December 31, 2014 December 31, 2013 (in thousands)Noncompete agreements: Gross carrying value$2,269 $9,332Accumulated amortization(1,710) (7,104)Net carrying value$559 $2,228Patents, trademarks and tradenames: Gross carrying value$3,106 $14,039Accumulated amortization(263) (223)Net carrying value$2,843 $13,816Customer relationships and contracts: Gross carrying value$59,045 $100,271Accumulated amortization(52,303) (78,926)Net carrying value$6,742 $21,345Developed technology: Gross carrying value$8,494 $7,583Accumulated amortization(4,138) (3,826)Net carrying value$4,356 $3,757Customer backlog: Gross carrying value$779 $779Accumulated amortization(779) (779)Net carrying value$— $—Total: Gross carrying value$73,693 $132,004Accumulated amortization(59,193) (90,858)Net carrying value$14,500 $41,146 63Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Amortization expense for our intangible assets with determinable lives was as follows: Year Ended December 31,2014 2013 2012 (in thousands)Noncompete agreements$1,671 $2,082 $3,827Patents and trademarks40 40 309Customer relationships and contracts6,749 16,726 18,941Developed technology316 221 221Total intangible asset amortization expense$8,776 $19,069 $23,298Of our intangible assets at December 31, 2014, $2.7 million are indefinite-lived tradenames and patents which are not subject to amortization. Thesetradenames are tested for impairment annually using a relief from royalty method. The weighted average remaining amortization periods and expectedamortization expense for the next five years for our definite lived intangible assets are as follows: Weightedaverage remainingamortizationperiod (years) Expected Amortization Expense2015 2016 2017 2018 2019 (in thousands)Noncompete agreements1.8 $309 $250 $— $— $—Trademarks3.4 40 40 40 17 —Customer relationships and contracts5.0 2,473 1,875 1,392 431 341Developed technology16.0 400 400 400 400 324Total expected intangible asset amortizationexpense $3,222 $2,565 $1,832 $848 $665Certain of our other intangible assets are denominated in Russian Rubles and, as such, the values of these assets are subject to fluctuationsassociated with changes in exchange rates.We perform an analysis of goodwill impairment on an annual basis unless an event occurs that triggers additional interim testing. During 2014 weidentified several triggering events requiring us to perform testing for possible goodwill impairment.Deterioration in the capital investment climate in Russia as a result of geopolitical events occurring during the second quarter of 2014 wasdetermined to be a triggering event. This triggering event required us to perform testing for possible goodwill impairment of our Russian business reportingunit which is included in our International reporting segment. Our analysis concluded that Russia's $22.4 million of goodwill was fully impaired, and that$6.3 million of Russia's tradename intangible assets was impaired as well. We concluded that there was no impairment to Russia's other long-lived assets.The decline in market value of our common stock in comparison to the carrying value of our assets during the third quarter of 2014 was determinedto be a triggering event requiring us to perform testing for possible goodwill impairment in our U.S. Rig Services, Coiled Tubing Services, Fishing and RentalServices and Fluid Management Services segments. Our step one testing indicated there may be impairment in our Fishing and Rental Services segment. Noimpairment was indicated in our other U.S. segments. Step two of the goodwill impairment testing for the Fishing and Rental Service segment was performedpreliminarily during the third quarter of 2014 and, while our preliminary analysis concluded that that there was no impairment of goodwill, it did indicatethat there was an impairment of fixed assets. During the fourth quarter of 2014 we engaged outside consultants to finalize our step two testing. The additionalanalysis preformed by our consultants confirmed that there was no impairment of goodwill. The analysis did conclude that $7.7 million of customerrelationship and $3.6 million of tradename intangible assets in our Fishing and Rental Services segment was impaired.During the fourth quarter we performed our annual qualitative analysis of goodwill impairment as of October 1, 2014. Based on this analysis wedetermined our Canadian reporting unit, which is included in our International reporting segment, did not have an indication of impairment. However, themarket value of our stock continued to decline during the fourth quarter and we determined it was necessary to perform the first step of the goodwillimpairment test for our U.S. Rig Services, Coiled Tubing Services, Fishing and Rental Services and Fluid Management Services segments. Based on theresults of our step one analysis, the fair value of our U.S. Rig Services, Fluid Management Services and Fishing and Rental Services segments64Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)exceeded their carrying values, but indicated potential impairment in our Coiled Tubing Services segment. Step two of the goodwill impairment testing forthe Coiled Tubing Services segment was performed preliminarily during the fourth quarter of 2014 and our analysis concluded that $19.1 million of goodwillwas impaired and recorded in the fourth quarter. Our analysis concluded that there was no impairment of fixed assets. Step two testing will be concluded inthe first quarter of 2015 and any adjustment to the amount recorded, which could differ materially, will be recorded in the first quarter of 2015. See “Note 8.Property and Equipment,” for further discussion.NOTE 10. EARNINGS PER SHAREThe following table presents our basic and diluted earnings per share (“EPS”) for the years ended December 31, 2014, 2013 and 2012: Year Ended December 31,2014 2013 2012(in thousands, except per share amounts)Basic EPS Calculation: Numerator Income (loss) from continuing operations attributable to Key$(178,628) $(21,768) $101,190Loss from discontinued operations, net of tax— — (93,568)Income (loss) attributable to Key$(178,628) $(21,768) $7,622Denominator Weighted average shares outstanding153,371 152,271 151,106Basic earnings (loss) per share from continuing operations attributable to Key$(1.16) $(0.14) $0.67Basic loss per share from discontinued operations— — (0.62)Basic earnings (loss) per share attributable to Key$(1.16) $(0.14) $0.05Diluted EPS Calculation: Numerator Income (loss) from continuing operations attributable to Key$(178,628) $(21,768) $101,190Loss from discontinued operations, net of tax— — (93,568)Income (loss) attributable to Key$(178,628) $(21,768) $7,622Denominator Weighted average shares outstanding153,371 152,271 151,106Stock options— — 19Total153,371 152,271 151,125Diluted earnings (loss) per share from continuing operations attributable to Key$(1.16) $(0.14) $0.67Diluted loss per share from discontinued operations— — (0.62)Diluted earnings (loss) per share attributable to Key$(1.16) $(0.14) $0.05Stock options, warrants and SARs are included in the computation of diluted earnings per share using the treasury stock method. Restricted stockawards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding. The diluted earnings pershare calculation for the years ended December 31, 2014, 2013, and 2012 exclude the potential exercise of 1.4 million, 1.7 million and 2.0 million stockoptions, respectively, and 0.3 million, 0.3 million and 0.4 million SARs, respectively, because the effects of such exercises on earnings per share would beanti-dilutive.There have been no material changes in share amounts subsequent to the balance sheet date that would have a material impact on the earnings pershare calculation for the year ended December 31, 2014. However, we issued 0.9 million shares of restricted stock on January 30, 2015.65Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 11. ASSET RETIREMENT OBLIGATIONSIn connection with our well servicing activities, we operate a number of SWD facilities. Our operations involve the transportation, handling anddisposal of fluids in our SWD facilities that are by-products of the drilling process. SWD facilities used in connection with our fluid hauling operations aresubject to future costs associated with the retirement of these properties. As a result, we have incurred costs associated with the proper storage and disposal ofthese materials.Annual accretion of the assets associated with the asset retirement obligations was $0.6 million for the years ended December 31, 2014, 2013 and2012. A summary of changes in our asset retirement obligations is as follows (in thousands):Balance at December 31, 2012$11,659Additions174Costs incurred(135)Accretion expense604Disposals(303)Balance at December 31, 201311,999Additions—Costs incurred(79)Accretion expense605Disposals—Balance at December 31, 2014$12,525NOTE 12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTSThe following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31, 2014 and 2013.Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities. These carrying amounts approximate fair value because ofthe short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date. December 31, 2014 December 31, 2013Carrying Value Fair Value Carrying Value Fair Value(in thousands)Financial assets: Notes receivable — Argentina operations sale$8,300 $8,300 $12,355 $12,355Financial liabilities: 6.75% Senior Notes due 2021$675,000 $413,438 $675,000 $690,3908.375% Senior Notes due 2014— — 3,573 3,627Credit Facility revolving loans70,000 70,000 85,000 85,000Notes receivable — Argentina operations sale. The fair value of these notes are based upon the quoted market Treasury rates as of the datesindicated. The carrying values of these items approximate their fair values due to the maturity dates rapidly approaching, thus giving way to discount ratesthat are similar.6.75% Senior Notes due 2021. The fair value of these notes is based upon the quoted market prices for those securities as of the dates indicated. Thecarrying value of these notes as of December 31, 2014 was $675.0 million, and the fair value was $413.4 million (61.3% of carrying value).8.375% Senior Notes due 2014. At December 31, 2013 the fair value of our 2014 Notes was based upon the quoted market prices for those securitiesas of the dates indicated. These notes were redeemed in February 2014.Credit Facility Revolving Loans. Because the variable interest rates of these loans approximate current market rates, the fair values of the revolvingloans borrowed under our 2011 Credit Facility approximate their carrying values. The carrying and fair values of these loans as of December 31, 2014 were$70.0 million.66Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 13. INCOME TAXESThe components of our income tax expense are as follows: Year Ended December 31, 2014 2013 2012 (in thousands)Current income tax expense: Federal and state$(755) $(8,515) $(16,165)Foreign(1,684) (350) (5,189) (2,439) (8,865) (21,354)Deferred income tax (expense) benefit: Federal and state69,508 (4,870) (32,729)Foreign13,414 16,799 (3,269) 82,922 11,929 (35,998)Total income tax (expense) benefit$80,483 $3,064 $(57,352)The sources of our income or loss from continuing operations before income taxes and noncontrolling interest were as follows: Year Ended December 31, 2014 2013 2012 (in thousands)Domestic income (loss)$(202,973) $29,086 $129,865Foreign income (loss)(56,138) (53,323) 30,164Total income (loss)$(259,111) $(24,237) $160,029We made federal income tax payments of zero, $30.0 million and $5.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.We made state income tax payments of $1.6 million, $2.9 million and $2.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. Wemade foreign tax payments of $1.1 million, $2.3 million and $5.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. For the yearsended December 31, 2014, 2013 and 2012, tax benefit (expense) allocated to stockholders’ equity for compensation expense for income tax purposes inexcess of amounts recognized for financial reporting purposes was $1.2 million, $1.8 million and $4.1 million, respectively. In addition, we received federalincome tax refunds of $11.9 million, $25.1 million and $16.7 million during the years ended December 31, 2014, 2013 and 2012, respectively.Income tax expense differs from amounts computed by applying the statutory federal rate as follows: Year Ended December 31, 2014 2013 2012Income tax computed at Federal statutory rate35.0 % 35.0 % 35.0 %State taxes1.4 % (6.0)% 2.5 %Meals and entertainment(0.7)% (7.7)% — %Foreign rate difference(0.7)% (8.0)% — %Non-deductible goodwill(3.9)% — % — %Other— % (0.7)% (1.7)%Effective income tax rate31.1 % 12.6 % 35.8 %67Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of December 31, 2014 and 2013, our deferred tax assets and liabilities consisted of the following: December 31, 2014 2013 (in thousands)Deferred tax assets: Net operating loss and tax credit carryforwards$64,107 $36,860Capital loss carryforwards21,417 21,417Self-insurance reserves15,751 16,217Allowance for doubtful accounts1,046 199Accrued liabilities6,283 8,981Share-based compensation7,254 7,759Other869 (392)Total deferred tax assets116,727 91,041Valuation allowance for deferred tax assets(22,247) (22,248)Net deferred tax assets94,480 68,793Deferred tax liabilities: Property and equipment(225,136) (269,167)Intangible assets(46,543) (48,807)Other(4,134) (1,252)Total deferred tax liabilities(275,813) (319,226)Net deferred tax liability, net of valuation allowance$(181,333) $(250,433)The December 31, 2014 net deferred tax liability balance is comprised of $228.4 million long-term deferred tax liability, less $11.8 million currentdeferred tax asset and $35.2 million long-term deferred tax asset. The December 31, 2013 net deferred liability balance is comprised of $284.5 million long-term deferred tax liability, less $11.7 million current deferred tax asset and $22.3 million long-term deferred tax asset.In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets willbe realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in whichthose deferred income tax assets would be deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxableincome for this determination. To fully realize the deferred income tax assets related to our federal net operating loss carryforwards that do not have avaluation allowance due to Section 382 limitations, we would need to generate future federal taxable income of approximately $0.1 million over the nextfour years. With certain exceptions noted below, we believe that after considering all the available objective evidence, both positive and negative, historicaland prospective, with greater weight given to the historical evidence, it is more likely than not that these assets will be realized.We estimate that as of December 31, 2014, 2013 and 2012, we have available $50.7 million, $2.4 million and $2.8 million, respectively, of federalnet operating loss carryforwards. Approximately $2.4 million of our net operating losses as of December 31, 2014 are subject to a $5,000 annual Section 382limitation and expire in 2016 through 2018. The gross deferred tax asset associated with our federal net operating loss carryforward at December 31, 2014 is$17.8 million. Due to annual limitations under Sections 382 and 383, management believes that we will not be able to utilize all available carryforwardsprior to their ultimate expiration. At December 31, 2014 and 2013, we had a valuation allowance of $0.8 million related to the deferred tax asset associatedwith our remaining federal net operating loss carryforwards that will expire before utilization due to Section 382 limitations.We estimate that as of December 31, 2014, 2013 and 2012, we have available approximately $102.0 million, $64.9 million and $44.4 million,respectively, of state net operating loss carryforwards that will expire between 2015 and 2034. The deferred tax asset associated with our remaining state netoperating loss carryforwards at December 31, 2014 is $5.2 million, net of federal tax benefit. Management believes that it is more likely than not that we willbe able to utilize all available state carryforwards prior to their ultimate expiration.We estimate that as of December 31, 2014, 2013 and 2012, we have available approximately $177.5 million, $117.6 million, and $34.4 million,respectively, of foreign net operating loss carryforwards that will expire between 2020 and 2030. The gross deferred tax asset associated with our foreign netoperating loss carryforwards at December 31, 2014 is $50.468Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)million. Management believes that it is more likely than not that we will be able to utilize the net operating loss carryforwards prior to their ultimateexpiration in all foreign jurisdictions in which we currently operate.The Company recognized a valuation allowance of $21.4 million as of December 31, 2014 against the deferred tax asset associated with the capitalloss carryforward. The capital loss carryforward will expire in 2017.We did not provide for U.S. income taxes or withholding taxes on unremitted earnings of our Mexico, Canada, Colombia and the Middle Eastsubsidiaries, as these earnings are considered permanently reinvested because the cash flow generated by these businesses is needed to fund additionalequipment and working capital requirements in these jurisdictions. Furthermore, we did not provide for U.S. income taxes on unremitted earnings of our otherforeign subsidiaries as our tax basis in these foreign subsidiaries exceeded the book basis.We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. In 2014 the Internal Revenue Service(“IRS”) concluded their audit of our returns for the tax years ended December 31, 2010, 2011 and 2012 with no material changes. Our other significantfilings, which are in Mexico, are currently being examined for tax years 2009 and 2010.As of December 31, 2014, 2013 and 2012, we had $1.0 million, $0.9 million and $1.2 million, respectively, of unrecognized tax benefits which, ifrecognized, would impact our effective tax rate. We have accrued $0.1 million, $0.4 million and $0.3 million for the payment of interest and penalties as ofDecember 31, 2014, 2013 and 2012, respectively. We believe that it is reasonably possible that $0.6 million of our currently remaining unrecognized taxpositions, each of which are individually insignificant, may be recognized by the end of 2015 as a result of a lapse of the statute of limitations and settlementof an open audit.We recognized a net tax benefit of less than $0.1 million in 2014 for expirations of statutes of limitations.The following table presents the gross activity during 2014 and 2013 related to our liabilities for uncertain tax positions (in thousands):Balance at January 1, 2013$1,593Additions based on tax positions related to the current year251Reductions for tax positions from prior years(473)Settlements—Balance at December 31, 20131,371Additions based on tax positions related to the current year108Reductions for tax positions from prior years(30)Settlements—Balance at December 31, 20141,449 Tax Legislative ChangesTax Increase Prevention Act of 2014. On December 19, 2014, H.R. 5771, Tax Increase Prevention Act of 2014, was signed into law. The new lawretroactively extends for one year, until the end of 2014, most of the provisions of the American Taxpayer Relief Act that expired at the end of 2013,including the first-year bonus depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service during 2014.On September 13, 2013, the United States Treasury Department and the IRS issued final regulations providing comprehensive guidance on the taxtreatment of costs incurred to acquire, repair, or improve tangible property. The final regulations are generally effective for taxable years beginning on or afterJanuary 1, 2014. On January 16, 2015 the IRS issued procedural guidance for taxpayers to follow with respect to filing applications for changes inaccounting methods. This guidance includes the method change procedures that taxpayers must follow for adopting the tangible property regulations. We arecurrently assessing the future impacts of these regulations, but do not anticipate a material impact on our financial condition, results of operations or cashflows.69Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 14. LONG-TERM DEBTThe components of our long-term debt are as follows: December 31, 2014 December 31, 2013 (in thousands)6.75% Senior Notes due 2021$675,000 $675,0008.375% Senior Notes due 2014— 3,573Senior Secured Credit Facility revolving loans due 201670,000 85,000Net unamortized premium on debt3,426 3,981Total debt748,426 767,554Less current portion— (3,573)Total long-term debt and capital leases$748,426 $763,9818.375% Senior Notes due 2014On November 29, 2007, we issued $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the “2014 Notes”). In March of2011, we repurchased $421.4 million aggregate principal amount of our 2014 Notes. On February 25, 2014, we redeemed the remaining $3.6 millionaggregate principal amount and paid $0.1 million accrued interest of 2014 Notes pursuant to the indenture dated as of November 29, 2007 (as supplemented,the “Indenture”). The 2014 Notes were general unsecured senior obligations and were subordinate to all of our existing and future secured indebtedness. The2014 Notes were jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2014Notes was payable on June 1 and December 1 of each year.6.75% Senior Notes due 2021We issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “Initial 2021 Notes”) on March 4, 2011 and issued anadditional $200.0 million aggregate principal amount of the 2021 Notes (the “Additional 2021 Notes” and, together with the Initial 2021 Notes, the “2021Notes”) in a private placement on March 8, 2012 under an indenture dated March 4, 2011 (the “Base Indenture”), as supplemented by a first supplementalindenture dated March 4, 2011 and amended by a further supplemental indenture dated March 8, 2012 (the “Supplemental Indenture” and, together with theBase Indenture, the “Indenture”). We used the net proceeds to repay senior secured indebtedness under our revolving bank credit facility. We capitalized $4.6million of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.On March 5, 2013, we completed an offer to exchange the $200.0 million in aggregate principal amount of unregistered Additional 2021 Notes foran equal principal amount of such notes registered under the Securities Act of 1933. All of the 2021 Notes are treated as a single class under the Indenture andas of the closing of the exchange offer, bear the same CUSIP and ISIN numbers.The 2021 Notes are general unsecured senior obligations and are effectively subordinated to all of our existing and future secured indebtedness. The2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest onthe 2021 Notes is payable on March 1 and September 1 of each year. The 2021 Notes mature on March 1, 2021. On or after March 1, 2016, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at theredemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, ifredeemed during the twelve-month period beginning on March 1 of the years indicated below:YearPercentage2016103.375%2017102.250%2018101.125%2019 and thereafter100.000%At any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at a redemption priceequal to 100% of the principal amount plus a premium with respect to the 2021 Notes plus accrued70Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)and unpaid interest to the redemption date. The premium is the excess of (i) the present value of the redemption price of 103.375% of the principal amount,plus all remaining scheduled interest payments due through March 1, 2016 discounted at the treasury rate plus 0.5% over (ii) the principal amount of thenote. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.We are subject to certain negative covenants under the Indenture. The Indenture limits our ability to, among other things:•incur additional indebtedness and issue preferred equity interests;•pay dividends or make other distributions or repurchase or redeem equity interests;•make loans and investments;•enter into sale and leaseback transactions;•sell, transfer or otherwise convey assets;•create liens;•enter into transactions with affiliates;•enter into agreements restricting subsidiaries’ ability to pay dividends;•designate future subsidiaries as unrestricted subsidiaries; and•consolidate, merge or sell all or substantially all of the applicable entities’ assets.These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions relating to the covenants of our 2011Credit Facility discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agenciesassigns the 2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2014, the 2021 Noteswere rated below investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even ifthe credit rating assigned to the 2021 Notes later falls below investment grade. We were in compliance with these covenants at December 31, 2014.Senior Secured Credit FacilityOn December 5, 2014, we entered into the Second Amendment to Credit Agreement (the “Amendment”) for our $400.0 million senior securedrevolving bank credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Capital One,N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank and DnB NOR Bank ASA, as Co-Documentation Agent (as amended, our“2011 Credit Facility”), which is an important source of liquidity for us. The Amendment decreased the total commitments by the lenders under the creditfacility from $550.0 million to $400.0 million, which will automatically be further reduced from $400.0 million to $350.0 million on July 1, 2015. Amongother changes, the Amendment modified the definition of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms ofour 2011 Credit Facility, “EBITDA”) to allow for the add back of (i) all expenses incurred during the second and third quarters of 2014 related to theCompany’s compliance with the FCPA and (ii) up to $50.0 million of additional expenses incurred in relation to the Company’s FCPA compliancecommencing in the fourth quarter of 2014. Our 2011 Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility,all of which will mature no later than March 31, 2016. The maximum amount that we may borrow under the facility may be subject to limitation due to theoperation of the covenants contained in the facility. Our 2011 Credit Facility allows us to request increases in the total commitments under the facility by upto $100.0 million in the aggregate in part or in full anytime during the term of our 2011 Credit Facility, with any such increases being subject to compliancewith the restrictive covenants in our 2011 Credit Facility and in the Indenture, as well as lender approval.We capitalized $4.9 million of financing costs in connection with the execution of our 2011 Credit Facility and an additional $1.4 million related tothe first amendment that will be amortized over the term of the debt. The $0.4 million remaining unamortized financing costs related to the first amendmentwas written off at the time of the second amendment.The interest rate per annum applicable to the 2011 Credit Facility is, at our option, (i) adjusted LIBOR plus the applicable margin or (ii) the higherof (x) JPMorgan’s prime rate, (y) the Federal Funds rate plus 0.5% and (z) one-month adjusted LIBOR plus 1.0%, plus in each case the applicable margin forall other loans. The applicable margin for LIBOR loans ranges from 225 to 300 basis points, and the applicable margin for all other loans ranges from 125 to200 basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility equal0.5%.71Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Our 2011 Credit Facility contains certain financial covenants, which, among other things, limit our annual capital expenditures, restrict our abilityto repurchase shares and require us to maintain certain financial ratios. The financial ratios require that:•our ratio of consolidated funded indebtedness to total capitalization be no greater than 55%;•our senior secured leverage ratio of senior secured funded debt to trailing four quarters EBITDA be no greater than 2.00 to 1.00;•we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense for no less than the ratio specified forsuch fiscal quarter as indicated in the table below:Fiscal Quarter EndingRatioDecember 31, 2014 through September 30, 20152.75 to 1.00December 31, 2015 and thereafter3.00 to 1.00•we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of thelast day of any fiscal quarter of at least 2.00 to 1.00; and•we limit our capital expenditures and investments in foreign subsidiaries to $250.0 million per fiscal year, if the consolidated total leverageratio exceeds 3.00 to 1.00.In addition, our 2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens;(ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets;(v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or eventof default exists under our 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with otherfinancial covenants and we have at least $25.0 million of availability under our 2011 Credit Facility); (vi) dividends and other distributions to, andredemptions and repurchases from, equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming orrepurchasing subordinated (contractually or structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements;(xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (xiv) changes in the nature of business;(xv) amending organizational documents; and (xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certainexceptions.We were in compliance with these covenants at December 31, 2014. We may prepay our 2011 Credit Facility in whole or in part at any time withoutpremium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs. As of December 31, 2014, we had borrowings of$70.0 million under the revolving credit facility, $50.4 million of letters of credit outstanding with borrowing capacity of $279.6 million availableconsidering covenant constraints under our 2011 Credit Facility. For the years ended December 31, 2014 and 2013, the weighted average interest rates on theoutstanding borrowings under our 2011 Credit Facility was 2.97% and 2.76%, respectively.Letter of Credit FacilityOn November 7, 2013, we entered into an uncommitted, unsecured $15.0 million letter of credit facility to be used solely for the issuances ofperformance letters of credit. As of December 31, 2014, $3.0 million of letters of credit were outstanding under the facility.72Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Long-Term Debt Principal Repayment and Interest ExpensePresented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of December 31,2014: Principal Amount of Long-Term Debt (in thousands)2015$—201670,0002017—2018—2019—Thereafter675,000Total long-term debt$745,000 Interest expense for the years ended December 31, 2014, 2013 and 2012 consisted of the following: Year Ended December 31, 2014 2013 2012 (in thousands)Cash payments$49,410 $51,705 $46,767Commitment and agency fees paid2,179 1,799 1,450Amortization of premium on debt(556) (556) (463)Amortization of deferred financing costs2,800 2,800 2,695Write-off of deferred financing costs362 — —Net change in accrued interest32 63 4,431Capitalized interest— (607) (1,314)Net interest expense$54,227 $55,204 $53,566As of December 31, 2014, 2013 and 2012, the weighted average interest rates of our variable rate debt was 3.14%, 2.88% and 2.70%, respectively.Deferred Financing CostsA summary of deferred financing costs including capitalized costs, write-offs and amortization, for the years ended December 31, 2014 and 2013 arepresented in the table below (in thousands):Balance at December 31, 2012$16,628Capitalized costs69Amortization(2,800)Balance at December 31, 201313,897Amortization(2,800)Write-off(362)Balance at December 31, 2014$10,735 NOTE 15. COMMITMENTS AND CONTINGENCIESOperating Lease ArrangementsWe lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2021, with varying paymentdates throughout each month. In addition, we have a number of leases scheduled to expire during 2015.73Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2014, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands): Lease Payments2015$13,96020169,00620174,25020182,63220192,012Thereafter3,057Total$34,917We are also party to a significant number of month-to-month leases that can be canceled at any time. Operating lease expense was $22.3 million,$23.9 million, and $24.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.LitigationVarious suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental UnitedStates and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. Wecontinually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and the need for disclosure ofthese items, if any. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonablyestimable. As of December 31, 2014, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is $0.1million. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have beenrecorded. Our liabilities related to litigation matters that were deemed probable and reasonably estimable as of December 31, 2013 were $0.3 million.Between May of 2013 and June of 2014, five lawsuits (four class actions and one enforcement action) were filed in California involving allegedviolations of California's wage and hour laws. In general, the lawsuits allege failure to pay wages, including overtime and minimum wages, failure to pay finalwages upon employment terminations in a timely manner, failure to reimburse reasonable and necessary business expenses, failure to provide wagestatements consistent with California law, and violations of the California meal and break period laws, among other claims. We intend to vigorouslyinvestigate and defend these actions. Because these cases are in relatively early stages, and we have not yet briefed class certification issues, we cannotpredict the outcome of these lawsuits at this time. Accordingly, we cannot estimate any possible loss or range of loss.In January, 2014, the SEC advised us that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) involvingbusiness activities of Key’s operations in Russia. In April 2014, we became aware of an allegation involving our Mexico operations that, if true, couldpotentially constitute a violation of certain of our policies, including our Code of Business Conduct, the FCPA and other applicable laws. A SpecialCommittee of our Board of Directors is investigating this allegation as well as the possible violations of the FCPA involving business activities of ouroperations in Russia. The Special Committee’s investigations, which also include a review of certain aspects of the Company’s operations in Colombia, aswell as our other international locations, are ongoing. On May 30, 2014, we voluntarily disclosed the allegation involving our Mexico operations andinformation from the Company’s initial investigation to the SEC and Department of Justice (“DOJ”). We are fully cooperating with investigations by the SECand DOJ. At this time we are unable to predict the ultimate resolution of these matters with these agencies and, accordingly, cannot estimate any possible lossor range of loss. The Special Committee of our Board of Directors currently expects to substantially complete the fact-finding phase of its investigation bythe end of March 2015.In August 2014, two class action lawsuits were filed in the U.S. District Court, Southern District of Texas, Houston Division, individually and onbehalf of all other persons similarly situated against the Company and certain officers of the Company, alleging violations of federal securities laws,specifically, violations of Section 10(b) and Rule 10(b)-5, Section 20(a) of the Securities Exchange Act of 1934. Those lawsuits were styled as follows: SeanCady, Individually and on Behalf of All Other Persons Similarly Situated v. Key Energy Services, Inc., Richard J. Alario, and J. Marshall Dodson, No. 4:14-cv-2368, filed on August 15, 2014; and Ian W. Davidson, Individually and on Behalf of All Other Persons Similarly Situated v. Key Energy Services, Inc.,Richard J. Alario, and J. Marshall Dodson, No. 4.14-cv-2403, filed on August 21, 2014. On December 11, 2014, the Court entered an order that consolidatedthe two lawsuits into one action, along with any future filed tag-along74Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)actions brought on behalf of purchasers of Key Energy Services, Inc. common stock. The order also appointed Inter-Local Pension Fund as the lead plaintiffin the class action and approved the law firm of Spector Roseman Kodroff & Willis, P.C. as lead counsel for the consolidated class and Kendall Law Group,LLP, as local counsel for the consolidated class. The lead plaintiff filed the consolidated amended complaint on February 13, 2015. Among other changes,the consolidated amended complaint adds Taylor M. Whichard III and Newton W. Wilson III as defendants and expands the class period to include thetimeframe between September 4, 2012 and July 17, 2014. Because this case is in early stages, we cannot predict the outcome at this time. Accordingly, wecannot estimate any possible loss or range of loss.In addition, in a letter dated September 4, 2014, a purported shareholder of the Company demanded that the Board commence an independentinternal investigation into and legal proceedings against each member of the Board, a former member of the Board and certain officers of the Company foralleged violations of Maryland and/or federal law. The letter alleges that the Board and senior officers breached their fiduciary duties to the Company,including the duty of loyalty and due care, by (i) improperly accounting for goodwill, (ii) causing the Company to potentially violate the FCPA, resulting inan investigation by the SEC, (iii) causing the Company to engage in improper conduct related to the Company’s Russia operations; and (iv) making falsestatements regarding, and failing to properly account for, certain contracts with Pemex. As described in the letter, the purported shareholder believes that thelegal proceedings should seek recovery of damages in an unspecified amount allegedly sustained by the Company. The Board of Directors has referred thedemand letter to the Special Committee. We cannot predict the outcome of this matter.Tax AuditsWe are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As of December 31,2014 and 2013, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of prior audits. While we believe wehave fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates.Self-Insurance ReservesWe maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarialmethod based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation,vehicular liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. Theretention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As ofDecember 31, 2014 and 2013, we have recorded $61.0 million and $62.1 million, respectively, of self-insurance reserves related to workers’ compensation,vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $18.7 million and $18.5 million of insurancereceivables as of December 31, 2014 and 2013, respectively. We believe that the liabilities we have recorded are appropriate based on the known facts andcircumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.Environmental Remediation LiabilitiesFor environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we recordliabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. As of December 31, 2014and 2013, we have recorded $5.7 million and $6.2 million, respectively, for our environmental remediation liabilities. We believe that the liabilities we haverecorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties to comply withenvironmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required todivest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).NOTE 16. ACCUMULATED OTHER COMPREHENSIVE LOSSThe components of our accumulated other comprehensive loss are as follows (in thousands): December 31, 2014 2013Foreign currency translation loss$(37,280) $(15,414)Accumulated other comprehensive loss$(37,280) $(15,414)75Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Upon the completion of the sale of our Argentina operations on September 14, 2012, the accumulated foreign currency translation balance related toArgentina was reversed out of our accumulated other comprehensive loss and recorded as part of our 2012 loss from discontinued operations.The local currency is the functional currency for our operations in Russia. As of December 31, 2014 and 2013, one U.S. dollar was equal to 56.45and 32.77 Russian rubles, respectively. As of December 31, 2011, the functional currency for Mexico, Russia and Canada was the local currency and thefunctional currency for Colombia and the Middle East was the U.S. dollar. Due to significant changes in economic facts and circumstances, the functionalcurrency for Mexico and Canada was changed to the U.S. dollar effective January 1, 2012. The cumulative translation gains and losses resulting fromtranslating financial statements from the functional currency to U.S. dollars are included in other comprehensive income and accumulated in stockholders’equity until a partial or complete sale or liquidation of our net investment in the entity.NOTE 17. EMPLOYEE BENEFIT PLANSWe maintain a 401(k) plan as part of our employee benefits package. We match 100% of employee contributions up to 4% of the employee’s salary,which vest immediately, into our 401(k) plan, subject to maximums of $10,400, $10,200 and $10,000 for the years ended December 31, 2014, 2013 and2012, respectively. Our matching contributions were $10.9 million, $10.4 million and $10.7 million for the years ended December 31, 2014, 2013 and 2012,respectively. We do not offer participants the option to purchase shares of our common stock through a 401(k) plan fund.NOTE 18. STOCKHOLDERS’ EQUITYCommon StockAs of December 31, 2014 and 2013, we had 200,000,000 shares of common stock authorized with a par value of $0.10 per share, of which153,557,108 shares were issued and outstanding at December 31, 2014 and 152,331,006 shares were issued and outstanding at December 31, 2013. During2014, 2013 and 2012, no dividends were declared or paid. Under the terms of the 2021 Notes and our 2011 Credit Facility, we must meet certain financialcovenants before we may pay dividends. We currently do not intend to pay dividends.Tax WithholdingWe repurchase shares of restricted common stock that have been previously granted to certain of our employees, pursuant to an agreement underwhich those individuals are permitted to sell shares back to us in order to satisfy the minimum income tax withholding requirements related to vesting ofthese grants. We repurchased a total of 290,697 shares, 416,101 shares and 482,951 shares for an aggregate cost of $2.2 million, $3.2 million and $7.5 millionduring 2014, 2013 and 2012, respectively, which represented the fair market value of the shares based on the price of our stock on the dates of purchase.NOTE 19. SHARE-BASED COMPENSATION2014 Incentive PlanOn May 15, 2014, our stockholders approved the 2014 Equity and Cash Incentive Plan (the “2014 Incentive Plan”). The 2014 Incentive Plan isadministered by our board of directors or a committee designated by our board of directors (the “Committee”). Our board of directors or the Committee (the“Administrator”) will have the power and authority to select Participants (as defined below) in the 2014 Plan and grant Awards as defined below) to suchParticipants pursuant to the terms of the 2014 Incentive Plan. The 2014 Incentive Plan expires May 15, 2024. The 2014 Plan was established as a successor tothe Company’s 2012 Equity Cash and Incentive Plan (the “2012 Incentive Plan” ), the 2009 Equity Cash and Incentive Plan (the “2009 Incentive Plan” ) andthe 2007 Equity Cash and Incentive Plan (the “2007 Incentive Plan”, collectively with the 2012 Plan and the 2009 Plan, the “Prior Plans”). The Prior Planswere merged with and into the 2014 Plan effective as of May 15, 2014. Outstanding awards under the Prior Plans will continue in effect according to theirterms as in effect before the merger of the Prior Plans into the 2014 Plan (subject to such amendments as the Administrator deems appropriate), and the shareswith respect to outstanding grants under the Prior Plans will be issued or transferred under the 2014 Plan. No additional grants will be made under the PriorPlans.Subject to adjustment, the total number of shares of our common stock that will be available for grant of Awards under the 2014 Plan may notexceed 12,310,750 shares; however, for purposes of this limitation, any stock subject to an Award that is canceled, forfeited, expires or otherwise terminateswithout the issuance of stock, is settled in cash, or is exchanged with the Administrator's permission, prior to the issuance of stock, for an Award notinvolving stock, will again become available for issuance under the 2014 Incentive Plan. Awards may be in the form of stock options (incentive stockoptions and nonqualified76Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)stock options), restricted stock, restricted stock units, performance compensation awards and SARs (collectively, "Awards"). Awards may be granted toemployees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expected to becomeemployees, directors or consultants following the grant date of the Award (“Participants”). However, incentive stock options may be granted only toemployees.Our board of directors at any time, and from time to time, may amend or terminate the 2014 Incentive Plan. However, except as provided otherwise inthe 2014 Incentive Plan, no amendment will be effective unless approved by the stockholders of the Company to the extent stockholder approval isnecessary to satisfy any applicable law or securities exchange listing requirements. Further, if the exercise price of an option, including an incentive stockoption, exceeds the fair market value of our common stock on a given date, the Committee has the authority to reduce the exercise price of such option to anew exercise price that is no less than the then-current fair market value of our common stock; provided that such action shall first have been approved by avote of our stockholders. The Administrator at any time, and from time to time, may amend the terms of any one or more Awards; however, if the amendmentwould constitute an impairment of the rights under any Award, we must request the consent of the Participant and the Participant must consent in writing. It isexpressly contemplated that the board may amend the 2014 Incentive Plan in any respect our board of directors deem necessary or advisable to provideeligible employees with the maximum benefits provided or to be provided under the provisions of the Internal Revenue Code of 1986, as amended, and theregulations promulgated thereunder relating to incentive stock options and/or to bring the 2014 Incentive Plan and/or Awards granted under it intocompliance therewith. As of December 31, 2014, there were 10.0 million shares available for grant under the 2014 Incentive Plan.Stock Option AwardsStock option awards granted under our incentive plans have a maximum contractual term of ten years from the date of grant. Shares issuable uponexercise of a stock option are issued from authorized but unissued shares of our common stock. The following tables summarize the stock option activity(shares in thousands): Year Ended December 31, 2014 Options Weighted AverageExercise Price Weighted AverageFair ValueOutstanding at beginning of period1,372 $14.10 $6.00Granted— $— $—Exercised— $— $—Cancelled or expired(53) $14.70 $6.23Outstanding at end of period1,319 $14.07 $5.99Exercisable at end of period1,319 $14.07 $5.99 We did not grant any stock options during the years ended December 31, 2014, 2013 and 2012. No stock options vested during the year endedDecember 31, 2014. We recognized zero, zero and less than $0.1 million in pre-tax expense related to stock options for the years ended December 31, 2014,2013 and 2012, respectively. We recognized tax benefits of zero, zero and less than $0.1 million, related to our stock options for the years endedDecember 31, 2014, 2013 and 2012, respectively. All of the stock option awards were vested as of December 31, 2012. The weighted average remainingcontractual term for stock option awards exercisable as of December 31, 2014 is 1.3 years. The intrinsic value of the options exercised for the years endedDecember 31, 2014, 2013 and 2012 was zero, less than $0.1 million and $0.6 million, respectively. We received no cash from the exercise of options for theyear ended December 31, 2014 with zero associated tax benefits.77Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Common Stock AwardsOur common stock awards include restricted stock awards and restricted stock units. The weighted average grant date fair market value of allcommon stock awards granted during the years ended December 31, 2014, 2013 and 2012 was $7.31, $7.56, $13.44, respectively. The total fair market valueof all common stock awards vested during the years ended December 31, 2014, 2013 and 2012 was $12.0 million, $16.6 million and $14.2 million,respectively.The following tables summarize information for the year ended December 31, 2014 about our unvested common stock awards that we haveoutstanding (shares in thousands): Year Ended December 31, 2014 Outstanding Weighted AverageIssuance PriceShares at beginning of period2,246 $9.68Granted1,893 $7.31Vested(1,187) $10.12Cancelled(386) $8.41Shares at end of period2,566 $7.92We have issued 197,865 shares, 288,780 shares and 153,063 shares of common stock to our non-employee directors that vested immediately uponissuance during 2014, 2013 and 2012, respectively. For common stock grants that vest immediately upon issuance, we record expense equal to the fairmarket value of the shares on the date of grant. For common stock awards that do not immediately vest, we recognize compensation expense ratably over thegraded vesting period of the grant, net of estimated and actual forfeitures. For the years ended December 31, 2014, 2013 and 2012, we recognized $10.9million, $13.8 million and $13.3 million, respectively, of pre-tax expense from continuing operations associated with common stock awards, includingcommon stock grants to our outside directors. In connection with the expense related to common stock awards recognized during the year endedDecember 31, 2014, we recognized tax benefits of $3.8 million. Tax benefits for the years ended December 31, 2013 and 2012 were $5.2 million and $4.2million, respectively. For the unvested common stock awards outstanding as of December 31, 2014, we anticipate that we will recognize $8.2 million of pre-tax expense over the next 0.9 years.Performance UnitsOn January 30, 2014, the Compensation Committee of the Board of Directors adopted the 2014 Performance Unit Plan (the “2014 PU Plan”) andgranted performance units pursuant to the Performance Award Agreement (“2012 PU Award Agreement”) under the Key Energy Services, Inc. 2012 Equityand Cash Incentive Plan (the “2012 Plan”). We believe that the 2014 PU Plan and 2012 PU Award Agreement will enable us to obtain and retain employeeswho will contribute to our long term success by aligning the interests of our executives with the interests of our stockholders by providing compensation thatis linked directly to increases in share value.78Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In January 2014, we issued 0.5 million performance units to our executive officers under the 2012 Plan with such material terms as set forth in the2012 PU Award Agreement. In February 2014, we issued 0.1 million performance units to certain other employees under the 2014 PU Plan. The performanceunits are measured based on two performance periods from January 1, 2014 to December 31, 2014 and from January 1, 2015 to December 31, 2015. One halfof the performance units are measured based on the first performance period, and the other half are measured based on the second performance period. Thenumber of performance units that may be earned by a participant is determined at the end of each performance period based on the relative placement ofKey’s total stockholder return for that period within the peer group, as follows:Company Placement for the Performance Period Percentile Ranking inPeer Group Performance Units Earned asa Percentage of TargetFirst 100% 200%Second 91% 180%Third 82% 160%Fourth 73% 140%Fifth 64% 120%Sixth 55% 100%Seventh 45% 75%Eighth 36% 50%Ninth 27% 25%Tenth 18% —%Eleventh 9% —%Twelfth —% —%If any performance units vest for a given performance period, the award holder will be paid a cash amount equal to the vested percentage of theperformance units multiplied by the closing stock price of our common stock on the last trading day of the performance period. We account for theperformance units as a liability-type award as they are settled in cash. As of December 31, 2014, the fair value of outstanding performance units was $0.5million, and is being accreted to compensation expense over the vesting terms of the awards. As of December 31, 2014, the unrecognized compensation costrelated to our unvested performance units is estimated to be $0.3 million and is expected to be recognized over a weighted-average period of 1.0 years.Phantom Share PlanIn December 2006, we announced the implementation of a “Phantom Share Plan,” in which certain of our employees were granted “PhantomShares.” Phantom Shares vest ratably over a four-year period and convey the right to the grantee to receive a cash payment on the anniversary date of thegrant equal to the fair market value of the Phantom Shares vesting on that date. Grantees are not permitted to defer this payment to a later date. The PhantomShares are a “liability” type award and we account for these awards at fair value. We recognize compensation expense related to the Phantom Shares based onthe change in the fair value of the awards during the period and the percentage of the service requirement that has been performed, net of estimated and actualforfeitures, with an offsetting liability recorded on our consolidated balance sheets. We recognized pre-tax compensation benefit from continuing operations,associated with the Phantom Shares of zero, zero and less than $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. As ofDecember 31, 2014, no Phantom Shares were outstanding.We recognized income tax benefit associated with the Phantom Shares of zero, zero and less than $0.1 million for the years ended December 31,2014, 2013 and 2012, respectively. During 2014, there were no cash payments related to the Phantom Shares.79Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Stock Appreciation RightsIn August 2007, we issued approximately 587,000 SARs to our executive officers. Each SAR has a ten-year term from the date of grant. The vestingof all outstanding SAR awards was accelerated during the fourth quarter of 2008. Upon the exercise of a SAR, the recipient will receive an amount equal tothe difference between the exercise price and the fair market value of a share of our common stock on the date of exercise, multiplied by the number of sharesof common stock for which the SAR was exercised. All payments will be made in shares of our common stock. Prior to exercise, the SAR does not entitle therecipient to receive any shares of our common stock and does not provide the recipient with any voting or other stockholders’ rights. We account for theseSARs as equity awards and recognize compensation expense ratably over the vesting period of the SAR based on their fair value on the date of issuance, netof estimated and actual forfeitures. We did not recognize any expense associated with these awards during 2014, 2013 and 2012. We did not forfeit any SARsduring 2014. As of December 31, 2014, 0.3 million SARs remained unexercised.NOTE 20. TRANSACTIONS WITH RELATED PARTIESBoard of Director RelationshipsA member of our board of directors is the Executive Vice President, General Counsel and Chief Administrative Officer of Anadarko PetroleumCorporation (“Anadarko”), which is one of our customers. Sales to Anadarko were $32.5 million, $41.2 million and $37.0 million for the years endedDecember 31, 2014, 2013 and 2012, respectively. Receivables outstanding from Anadarko were $2.9 million and $4.9 million as of December 31, 2014 and2013, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.A member of our board of directors serves on the United States Advisory Board of the Alexander Proudfoot practice of Management ConsultingGroup PLC (“Proudfoot”), which provided consulting services related to our general and administrative cost restructuring initiative in 2012. Payments toProudfoot were zero, zero and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2014 2013 2012 (in thousands)Noncash investing and financing activities: Sale of Argentina operations/Notes receivable$— $— $12,955Asset retirement obligations— 174 —Supplemental cash flow information: Cash paid for interest$51,589 $53,504 $48,217Cash paid for taxes2,699 35,239 13,148Tax refunds13,109 26,361 18,681Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, and commitment and agency fees paid.NOTE 22. SEGMENT INFORMATIONWe revised our reportable business segments as of the fourth quarter of 2014. The revised reportable segments are U.S. Rig Services, FluidManagement Services, Coiled Tubing Services, Fishing and Rental Services and International. We also have a “Functional Support” segment associated withoverhead costs in support of our reportable segments. Segment disclosures as of and for the years ended December 31, 2013 and 2012 have been revised toreflect the change in reportable segments. We revised our segments to reflect changes in management’s resource allocation and performance assessment inmaking decisions regarding our business. Our U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services operategeographically within the United States. The International reportable segment includes our operations in Mexico, Colombia, Ecuador, Russia, Bahrain andOman. Our Canadian subsidiary is also reflected in our International reportable segment. We evaluate the performance of our segments based on gross marginmeasures. All inter-segment sales pricing is based on current market conditions. These changes reflect our current operating focus in compliance with ASC280. We aggregate services that create our reportable segments in accordance with ASC 280, and the accounting policies for our segments are the same asthose described in “Note 1. Organization and Summary of Significant Accounting Policies” above.80Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)U.S. Rig ServicesOur U.S. Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, wellmaintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gasproducers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes andcapabilities, allowing us to service all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView® technology,which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crewsto better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through aworkover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing thesezones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in thecompletion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of thecompletion.The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and timeconsuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal orlateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells intoinjection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a fewdays to several weeks, depending on the complexity of the workover.Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of thesemaintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores,and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services are generally lesscomplicated than completion and workover related services and require less time to perform.Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. Theseplugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonmentservices is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are nolonger productive.Fluid Management ServicesWe provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover andmaintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site andtransported for disposal in SWD wells owned by us or a third party. In addition, we operate a fleet of hot oilers capable of pumping heated fluids used to clearsoluble restrictions in a wellbore. Demand and pricing for these services generally correspond to demand for our well service rigs.Coiled Tubing ServicesCoiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells toperform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemicaltreatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, andvarious other pre- and post- hydraulic fracturing well preparation services.Fishing and Rental ServicesWe offer a full line of services and rental equipment designed for use in providing both onshore and offshore drilling and workover services. Fishingservices involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe,tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels,reversing units, foam air units frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids, proppants, oiland natural gas. We also provide well testing services.Demand for our Fishing and Rental Services is closely related to capital spending by oil and natural gas producers, which is generally a function ofoil and natural gas prices.81Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)InternationalOur International segment includes operations in Mexico, Colombia, Ecuador, the Middle East and Russia. In addition, we have a technologydevelopment and control systems business based in Canada. Also, prior to the sale of our Argentina business in the third quarter of 2012, we operated inArgentina. We are reporting the results of our Argentina business as discontinued operations for the 2012 period. We provide rig-based services such as themaintenance, workover, recompletion of existing oil wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of theiruseful lives in each of our international markets.In addition, in Mexico we provide drilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico alsorequires us to provide third party services which varies in scope by project.In the Middle East, we operate in the Kingdom of Bahrain and Oman. On August 5, 2013, we agreed to the dissolution of AlMansoori Key EnergyServices, LLC, a joint venture formed under the laws of Abu Dhabi, UAE, and the acquisition of the underlying business for $5.1 million. See “Note 2.Acquisitions” for further discussion.Our Russian operations provide drilling, workover, and reservoir engineering services. On April 9, 2013, we completed the acquisition of theremaining 50% noncontrolling interest in Geostream for $14.6 million. We now own 100% of Geostream. See “Note 2. Acquisitions” for further discussion.Our technology development and control systems business based in Canada is focused on the development of hardware and software related tooilfield service equipment controls, data acquisition and digital information flow.Functional SupportOur Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reportingsegments.82Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Financial SummaryThe following table presents our segment information as of and for the years ended December 31, 2014, 2013 and 2012 (in thousands):As of and for the year ended December 31, 2014 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport(2) ReconcilingEliminations TotalRevenues fromexternal customers$679,045 $249,589 $173,364 $212,598 $112,740 $— $— $1,427,336Intersegment revenues706 1,258 — 6,078 9,142 1,988 (19,172) —Depreciation andamortization59,190 31,870 23,375 44,004 30,311 11,988 — 200,738Impairment expense— — 19,100 73,389 28,687 — — 121,176Other operatingexpenses523,468 214,392 141,708 154,149 119,174 156,406 — 1,309,297Operating income(loss)96,387 3,327 (10,819) (58,944) (65,432) (168,394) — (203,875)Interest expense, netof amounts capitalized— — — — 32 54,195 — 54,227Income (loss) fromcontinuing operationsbefore tax96,922 3,581 (10,442) (58,794) (68,924) (221,454) — (259,111)Long-lived assets(1)796,654 181,041 196,265 326,218 270,893 278,904 (150,272) 1,899,703Total assets1,608,122 295,670 260,375 669,823 397,295 (510,229) (387,558) 2,333,498Capital expenditures,excludingacquisitions90,982 3,920 10,815 30,389 7,560 17,973 — 161,63983Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of and for the year ended December 31, 2013 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport(2) ReconcilingEliminations TotalRevenues fromexternal customers$673,465 $271,709 $193,184 $238,611 $214,707 $— $— $1,591,676Intersegment revenues4,283 700 10 5,637 8,715 509 (19,854) —Depreciation andamortization64,804 37,510 25,877 53,785 30,227 13,094 — 225,297Other operatingexpenses475,103 230,161 143,880 153,517 211,137 122,417 — 1,336,215Operating income(loss)133,558 4,038 23,427 31,309 (26,657) (135,511) — 30,164Interest expense, netof amounts capitalized1 — — — 62 55,141 — 55,204Income (loss) fromcontinuing operationsbefore tax133,642 4,110 23,436 31,351 (26,795) (189,981) — (24,237)Long-lived assets(1)746,021 222,075 246,889 420,486 333,273 301,032 (188,459) 2,081,317Total assets1,511,419 279,950 246,180 637,163 497,938 (181,940) (403,240) 2,587,470Capital expenditures,excludingacquisitions79,761 7,307 12,682 25,378 19,541 19,468 — 164,13784Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of and for the year ended December 31, 2012 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport(2) ReconcilingEliminations TotalRevenues fromexternal customers$788,512 $353,597 $215,876 $268,783 $333,302 $— $— $1,960,070Intersegment revenues39,257 263 15 4,332 6,273 15 (50,155) —Depreciation andamortization69,513 40,637 25,205 47,147 19,643 11,638 — 213,783Other operatingexpenses524,704 287,396 175,542 171,283 250,667 129,749 — 1,539,341Operating income(loss)194,295 25,564 15,129 50,353 62,992 (141,387) — 206,946Interest expense, netof amounts capitalized11 — 1 5 172 53,377 — 53,566Income (loss) fromcontinuing operationsbefore tax194,558 25,712 15,182 50,394 68,036 (193,853) — 160,029Long-lived assets(1)749,031 250,872 265,786 453,690 334,329 286,369 (168,283) 2,171,794Total assets1,343,275 261,310 215,125 595,963 541,882 153,665 (349,632) 2,761,588Capital expenditures,excludingacquisitions69,105 35,491 45,545 97,660 171,095 28,264 — 447,160(1)Long-lived assets include: fixed assets, goodwill, intangibles and other assets.(2)Functional Support is geographically located in the United States.NOTE 23. UNAUDITED QUARTERLY RESULTS OF OPERATIONSThe following table presents our summarized, unaudited quarterly information for the two most recent years covered by these consolidated financialstatements (in thousands, except for per share data): First Quarter Second Quarter Third Quarter Fourth QuarterYear Ended December 31, 2014: Revenues$356,141 $350,595 $365,798 $354,802Direct operating expenses258,302 262,883 272,112 266,354Net loss(11,899) (52,196) (62,229) (52,304)Loss attributable to Key(11,899) (52,196) (62,229) (52,304)Loss per share(1): Basic and Diluted(0.08) (0.34) (0.41) (0.34)85Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) First Quarter Second Quarter Third Quarter Fourth QuarterYear Ended December 31, 2013: Revenues$428,449 $411,390 $389,673 $362,164Direct operating expenses299,182 287,102 268,297 259,881Net loss(186) (3,772) (4,697) (12,518)Loss attributable to Key(274) (4,128) (4,848) (12,518)Loss per share(1): Basic and Diluted— (0.03) (0.03) (0.08)(1)Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quartersmay not equal annual earnings per common share.NOTE 24. CONDENSED CONSOLIDATING FINANCIAL STATEMENTSOur 2021 Notes are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly owned. The guarantees are joint and several, full,complete and unconditional. There are no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information pursuant to SECRegulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2014 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Assets: Current assets$39,020 $341,188 $53,587 $— $433,795Property and equipment, net— 1,128,776 106,482 — 1,235,258Goodwill— 578,358 4,381 — 582,739Deferred financing costs, net10,735 — — — 10,735Intercompany notes and accounts receivableand investment in subsidiaries3,170,874 1,426,160 42,352 (4,639,386) —Other assets— 56,664 14,307 — 70,971TOTAL ASSETS$3,220,629 $3,531,146 $221,109 $(4,639,386) $2,333,498Liabilities and equity: Current liabilities$22,046 $192,079 $27,733 $— $241,858Long-term debt and capital leases, less currentportion748,426 — — — 748,426Intercompany notes and accounts payable1,162,648 2,696,051 123,810 (3,982,509) —Deferred tax liabilities228,199 398 (134) (69) 228,394Other long-term liabilities1,264 55,182 311 — 56,757Equity1,058,046 587,436 69,389 (656,808) 1,058,063TOTAL LIABILITIES AND EQUITY$3,220,629 $3,531,146 $221,109 $(4,639,386) $2,333,49886Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2013 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Assets: Current assets$50,321 $398,188 $57,644 $— $506,153Property and equipment, net— 1,244,216 121,430 — 1,365,646Goodwill— 597,457 27,418 — 624,875Deferred financing costs, net13,897 — — — 13,897Intercompany notes and accounts receivableand investment in subsidiaries3,421,607 1,364,174 12,939 (4,798,720) —Other assets— 34,278 42,621 — 76,899TOTAL ASSETS$3,485,825 $3,638,313 $262,052 $(4,798,720) $2,587,470Liabilities and equity: Current liabilities$26,097 $182,497 $23,750 $— $232,344Long-term debt and capital leases, less currentportion763,981 — — — 763,981Intercompany notes and accounts payable1,162,648 2,667,943 97,050 (3,927,641) —Deferred tax liabilities280,828 4,643 (1,819) 801 284,453Other long-term liabilities1,195 54,486 (82) — 55,599Equity1,251,076 728,744 143,153 (871,880) 1,251,093TOTAL LIABILITIES AND EQUITY$3,485,825 $3,638,313 $262,052 $(4,798,720) $2,587,47087Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2014 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $1,325,670 $125,262 $(23,596) 1,427,336Direct operating expense— 979,018 90,584 (9,951) 1,059,651Depreciation and amortization expense— 187,676 13,062 — 200,738General and administrative expense941 239,276 23,054 (13,625) 249,646Impairment expense— 92,489 28,687 — 121,176Operating loss(941) (172,789) (30,125) (20) (203,875)Interest expense, net of amounts capitalized54,195 — 32 — 54,227Other (income) expense, net(1,976) 666 2,276 43 1,009Loss from continuing operations before taxes(53,160) (173,455) (32,433) (63) (259,111)Income tax benefit68,883 10,551 1,179 (130) 80,483Income (loss) from continuing operations15,723 (162,904) (31,254) (193) (178,628)Discontinued operations— — — — —Net income (loss)15,723 (162,904) (31,254) (193) (178,628)Income attributable to noncontrolling interest— — — — —INCOME (LOSS) ATTRIBUTABLE TO KEY$15,723 $(162,904) $(31,254) $(193) $(178,628) Year Ended December 31, 2013 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $1,494,683 $161,536 $(64,543) $1,591,676Direct operating expense— 1,046,376 118,028 (49,942) 1,114,462Depreciation and amortization expense— 214,334 10,963 — 225,297General and administrative expense1,077 202,599 33,336 (15,259) 221,753Operating income (loss)(1,077) 31,374 (791) 658 30,164Interest expense, net of amounts capitalized55,747 (606) 63 — 55,204Other (income) expense, net(3,616) (1,126) 316 3,623 (803)Income (loss) from continuing operations beforetaxes(53,208) 33,106 (1,170) (2,965) (24,237)Income tax (expense) benefit(13,385) 15,456 993 — 3,064Income (loss) from continuing operations(66,593) 48,562 (177) (2,965) (21,173)Discontinued operations— — — — —Net income (loss)(66,593) 48,562 (177) (2,965) (21,173)Income attributable to noncontrolling interest— — 595 — 595INCOME (LOSS) ATTRIBUTABLE TO KEY$(66,593) $48,562 $(772) $(2,965) $(21,768)88Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2012 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $1,867,198 $165,248 $(72,376) $1,960,070Direct operating expense— 1,254,087 117,293 (62,535) 1,308,845Depreciation and amortization expense— 205,755 8,028 — 213,783General and administrative expense1,046 216,069 24,853 (11,472) 230,496Operating income (loss)(1,046) 191,287 15,074 1,631 206,946Interest expense, net of amounts capitalized54,690 (1,292) 170 (2) 53,566Other income, net(5,500) (1,474) (3,142) 3,467 (6,649)Income (loss) from continuing operations beforetaxes(50,236) 194,053 18,046 (1,834) 160,029Income tax expense(48,893) (3,385) (5,073) (1) (57,352)Income (loss) from continuing operations(99,129) 190,668 12,973 (1,835) 102,677Discontinued operations— — (93,568) — (93,568)Net income (loss)(99,129) 190,668 (80,595) (1,835) 9,109Income attributable to noncontrolling interest— — 1,487 — 1,487INCOME (LOSS) ATTRIBUTABLE TO KEY$(99,129) $190,668 $(82,082) $(1,835) $7,62289Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2014 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Net cash provided by operating activities$— $158,707 $5,461 $— $164,168Cash flows from investing activities: Capital expenditures— (154,952) (6,687) — (161,639)Payment of accrued acquisition cost of the51% noncontrolling interest in AlMansooriKey Energy Services LLC— (5,100) — — (5,100)Intercompany notes and accounts— (18,892) — 18,892 —Other investing activities, net— 19,899 — — 19,899Net cash used in investing activities— (159,045) (6,687) 18,892 (146,840)Cash flows from financing activities: Repayment of long-term debt(3,573) — — — (3,573)Proceeds from borrowings on revolvingcredit facility260,000 — — — 260,000Repayments on revolving credit facility(275,000) — — — (275,000)Repurchases of common stock(2,245) — — — (2,245)Intercompany notes and accounts18,892 — — (18,892) —Other financing activities, net(1,240) — — — (1,240)Net cash used in financing activities(3,166) — — (18,892) (22,058)Effect of changes in exchange rates on cash— — 3,728 — 3,728Net increase (decrease) in cash and cashequivalents(3,166) (338) 2,502 — (1,002)Cash and cash equivalents at beginning ofperiod23,115 788 4,403 — 28,306Cash and cash equivalents at end of period$19,949 $450 $6,905 $— $27,304 90Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2013ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated(in thousands)Net cash provided by operating activities$— $222,364 $6,279 $— $228,643Cash flows from investing activities: Capital expenditures— (157,443) (6,694) — (164,137)Acquisition of the 50% noncontrollinginterest in Geostream— (14,600) — — (14,600)Intercompany notes and accounts— (68,597) — 68,597 —Other investing activities, net— 17,856 — — 17,856Net cash used in investing activities— (222,784) (6,694) 68,597 (160,881)Cash flows from financing activities: Repayments of capital lease obligations— (393) — — (393)Proceeds from borrowings on revolvingcredit facility220,000 — — — 220,000Repayments on revolving credit facility(300,000) — — — (300,000)Payment of deferred financing cost(69) — — — (69)Repurchases of common stock(3,196) — — — (3,196)Intercompany notes and accounts68,597 — — (68,597) —Other financing activities, net(1,834) — — — (1,834)Net cash used in financing activities(16,502) (393) — (68,597) (85,492)Effect of changes in exchange rates on cash— — 87 — 87Net decrease in cash and cash equivalents(16,502) (813) (328) — (17,643)Cash and cash equivalents at beginning ofperiod39,617 1,601 4,731 — 45,949Cash and cash equivalents at end of period$23,115 $788 $4,403 $— $28,30691Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2012 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Net cash provided by operating activities$— $349,208 $20,452 $— $369,660Cash flows from investing activities: Capital expenditures— (430,045) (17,115) — (447,160)Intercompany notes and accounts676 49,926 — (50,602) —Other investing activities, net(676) 19,127 — — 18,451Net cash used in investing activities— (360,992) (17,115) (50,602) (428,709)Cash flows from financing activities: Proceeds from long term debt205,000 — — — 205,000Repayments of capital lease obligations— (1,959) — — (1,959)Proceeds from borrowings on revolvingcredit facility275,000 — — — 275,000Repayments on revolving credit facility(405,000) — — — (405,000)Payment of deferred financing cost(4,597) — — — (4,597)Repurchases of common stock(7,519) — — — (7,519)Intercompany notes and accounts(49,926) (676) — 50,602 —Other financing activities, net4,986 8,035 — — 13,021Net cash provided by financing activities17,944 5,400 — 50,602 73,946Effect of changes in exchange rates on cash— — (4,391) — (4,391)Net increase (decrease) in cash and cashequivalents17,944 (6,384) (1,054) — 10,506Cash and cash equivalents at beginning ofperiod21,673 7,985 5,785 — 35,443Cash and cash equivalents at end of period$39,617 $1,601 $4,731 $— $45,94992Table of ContentsIndex to Financial StatementsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresWe maintain a set of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosedin our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to ourmanagement, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered bythis report. Based on such evaluation, our principal executive and financial officers have concluded that our disclosure controls and procedures wereeffective as of the end of such period.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management anddirectors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets thatcould have a material effect on the financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherentlimitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment andbreakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override.Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financialreporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are knownfeatures of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be preventedor detected on a timely basis.Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014. In making thisassessment, management used the criteria described in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as ofDecember 31, 2014.Our internal control over financial reporting has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated intheir report included herein.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting during our last fiscal quarter of 2014, that materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATION93Table of ContentsIndex to Financial StatementsNot applicable.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 10 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect tofile the definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2014.ITEM 11. EXECUTIVE COMPENSATIONItem 11 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect tofile the definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2014.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 12 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect tofile the definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2014.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEItem 13 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect tofile the definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2014.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESItem 14 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect tofile the definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2014.PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESThe following financial statements and exhibits are filed as part of this report:1. Financial Statements — See “Index to Consolidated Financial Statements” at Page 44.2. We have omitted all financial statement schedules because they are not required or are not applicable, or the required information is shown in thefinancial statements or the notes to the financial statements.3. ExhibitsThe Exhibit Index, which follows the signature pages to this report and is incorporated by reference herein, sets forth a list of exhibits to this report.94Table of ContentsIndex to Financial StatementsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.KEY ENERGY SERVICES, INC. By: /s/ J. MARSHALL DODSON J. Marshall Dodson, Senior Vice President and Chief Financial Officer(As duly authorized officer andPrincipal Financial Officer)Date: February 24, 2015POWER OF ATTORNEYEach person whose signature appears below hereby constitutes and appoints Richard J. Alario and J. Marshall Dodson, and each of them, his true andlawful attorney-in-fact and agent, with full powers of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and allamendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission granting to said attorneys-in-fact, and each of them, full power and authority to perform any other act on behalf of theundersigned required to be done in connection therewith.95Table of ContentsIndex to Financial StatementsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant in their capacities and on February 24, 2015.Signature Title /s/ RICHARD J. ALARIO Chairman of the Board of Directors, President and ChiefRichard J. Alario Executive Officer (Principal Executive Officer) /s/ J. MARSHALL DODSON Senior Vice President and Chief Financial Officer (PrincipalJ. Marshall Dodson Financial Officer) /s/ MARK A. COX Vice President and Controller (Principal Accounting Officer)Mark A. Cox /s/ LYNN R. COLEMAN DirectorLynn R. Coleman /s/ KEVIN P. COLLINS DirectorKevin P. Collins /s/ WILLIAM D. FERTIG DirectorWilliam D. Fertig /s/ W. PHILLIP MARCUM DirectorW. Phillip Marcum /s/ RALPH S. MICHAEL, III DirectorRalph S. Michael, III /s/ WILLIAM F. OWENS DirectorWilliam F. Owens /s/ ROBERT K. REEVES DirectorRobert K. Reeves /s/ MARK H. ROSENBERG DirectorMark H. Rosenberg /s/ ARLENE M. YOCUM DirectorArlene M. Yocum 96Table of ContentsIndex to Financial StatementsEXHIBIT INDEXExhibit No. Description 2.1 Asset Purchase Agreement, dated as of July 2, 2010, by and among Key Energy Pressure Pumping Services, LLC, KeyElectric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as UniversalPressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on July 6, 2010, File No. 001-08038.) 2.2 Amending Letter Agreement, dated September 1, 2010, by and among Key Energy Pressure Pumping Services, LLC, KeyElectric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as UniversalPressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’sQuarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, File No. 001-08038) 2.3 Amending Letter Agreement, dated October 1, 2010, by and among Key Energy Pressure Pumping Services, LLC, KeyElectric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as UniversalPressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’sQuarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, File No. 001-08038) 2.4 Purchase and Sale Agreement, dated as of July 23, 2010, by and among OFS Holdings, LLC, a Delaware limited liabilitycompany, OFS Energy Services, LLC, a Delaware limited liability company, Key Energy Services, Inc., a Marylandcorporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporated by reference to Exhibit 2.1of the Company’s Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) 2.5 Amendment No. 1 to Purchase and Sale Agreements, dated as of August 27, 2010, by and among OFS Holdings, LLC, aDelaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, Key EnergyServices, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporatedby reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) 2.6 Amendment No. 2 to Purchase and Sale Agreements, dated as of September 30, 2010, by and among OFS Holdings, LLC,a Delaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, Key EnergyServices, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporatedby reference to Exhibit 2.3 of the Company’s Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) 2.7 Agreement and Plan of Merger, dated as of July 13, 2011, by and among Key Energy Services, Inc., Key Merger Sub I,Key Merger Sub II, Edge Oilfield Services, L.L.C., Summit Oilfield Services, L.L.C., the Edge Holders and the SummitHolders (Incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on July 15, 2011, File No. 001-08038.) 3.1 Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-08038.) 3.2 Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting thedesignation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 001-08038.) 3.3 Seventh Amended and Restated By-laws of Key Energy Services, Inc. as amended through February 26, 2014(Incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on February 26, 2014, FileNo. 001-08038.) 97Table of ContentsIndex to Financial StatementsExhibit No. Description 4.1.1 Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bankof New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Current Reporton Form 8-K filed on November 30, 2007, File No. 001-08038.) 4.1.2 First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantorsand The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’sQuarterly Report on Form 10-Q for the quarter ended March 31, 2008, File No. 001-08038.) 4.1.3 Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantorsand The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.6 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) 4.1.4 Third Supplemental Indenture, dated as of July 31, 2009, among Key Energy Services California, Inc., the existingGuarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 4.1.5 Fourth Supplemental Indenture dated as of March 1, 2011 by and among Key Energy Services, Inc., the subsidiaryguarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by referenceto Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on March 1, 2011, File No. 001-08038.) 4.1.6 Fifth Supplemental Indenture dated as of January 17, 2013 by and among Key Energy Services, Inc., the subsidiaryguarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by referenceto Exhibit 4.1.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No.001-0838.) 4.2.1 Indenture, dated as of March 4, 2011, among Key Energy Services, Inc., the guarantors named therein and The Bank ofNew York Mellon Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s CurrentReport on Form 8-K filed on March 4, 2011, File No. 001-08038.) 4.2.2 First Supplemental Indenture, dated as of March 4, 2011, among Key Energy Services, Inc., the guarantors named thereinand The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.2 of theCompany’s Current Report on Form 8-K filed on March 4, 2011, File No. 001-08038.) 4.2.3 Amended First Supplemental Indenture, dated as of March 8, 2012, by and among Key Energy Services, Inc., theguarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by referenceto Exhibit 4.1 of the Company's Current Report on Form 8-K filed March 9, 2012, File No. 001-08038.) 4.2.4 Second Supplemental Indenture, dated as of January 17, 2013, among Key Energy Services, Inc., the guarantors namedtherein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.2.4 tothe Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 001-0838.) 4.2.5 Form of global note for 6.750% Senior Notes due 2021 (Incorporated by reference from Exhibit A to Exhibit 4.8.) 4.2.6 Form of global note for 6.750% Senior Notes due 2021. (Incorporated by reference from Exhibit A to Rule144A/Regulation S Appendix to Exhibit 4.1 of the Company's Current Report on Form 8-K filed March 9, 2012, File No.001-08038.) 98Table of ContentsIndex to Financial StatementsExhibit No. Description 4.2.7 Registration Rights Agreement with MHR Group dated July 26, 2012. (Incorporated by reference to Exhibit 4.2.7 to theCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, File No. 001-0838.) 10.1.1† Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of theCompany’s Schedule 14A Proxy Statement filed on November 1, 2007, File No. 001-08038.) 10.1.2† Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 001-08038.) 10.1.3† Form of Restricted Stock Award Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company’s Current Report on Form 8-K dated April 16, 2008, File No. 001-08038.) 10.2.1† Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of theCompany’s Schedule 14A Proxy Statement filed on April 16, 2009, File No. 001-08038.) 10.2.2† Form of Restricted Stock Award Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 10.2.3† Form of Nonqualified Stock Option Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 10.2.4† Form of Restricted Stock Unit Award Agreement (Canadian) under 2009 Equity and Cash Incentive Plan. (Incorporatedby reference to Exhibit 10.2.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,2012, File No. 001-0838.) 10.2.5† Form of Restricted Stock Unit Award Agreement (Non-Canadian) under 2009 Equity and Cash Incentive Plan.(Incorporated by reference to Exhibit 10.2.5 to the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2012, File No. 001-0838.) 10.2.6† Form of Performance Unit Award Agreement under the Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan.(Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed January 20, 2012, File No.001-08038.) 10.3† Key Energy Services, Inc. 2012 Performance Unit Plan. (Incorporated by reference to Exhibit 10.1 of the Company'sCurrent Report on Form 8-K filed January 20, 2012, File No. 001-08038.) 10.4.1† Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan. (Incorporated by reference to Appendix A of theCompany's Proxy Statement on Schedule 14A filed on April 11, 2012, File No. 001-08038.) 10.4.2† Form of Restricted Stock Award Agreement under 2012 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company's Current Report on Form 8-K filed January 25, 2013, File No. 001-08038.) 10.4.3† Form of Performance Unit Award Agreement under 2012 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.2 of the Company's Current Report on Form 8-K filed January 25, 2013, File No. 001-08038.) 99Table of ContentsIndex to Financial StatementsExhibit No. Description 10.4.4† Form of Nonstatutory Stock Option Agreement under 2012 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 001-0838.) 10.4.5† Form of Restricted Stock Unit Award Agreement (Canadian) under 2012 Equity and Cash Incentive Plan. (Incorporatedby reference to Exhibit 10.4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,2012, File No. 001-0838.) 10.4.6† Form of Restricted Stock Unit Award Agreement (Non-Canadian) under 2012 Equity and Cash Incentive Plan.(Incorporated by reference to Exhibit 10.4.6 to the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2012, File No. 001-0838.) 10.5† Key Energy Services, Inc. 2013 Performance Unit Plan. (Incorporated by reference to Exhibit 10.5 to the Company'sAnnual Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 001-0838.) 10.6† Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s CurrentReport on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.7† Employment Agreement, dated as of March 26, 2009, by and between Trey Whichard and Key Energy Shared Services,LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 1, 2009, FileNo. 001-08038.) 10.8† Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.3 of the Company’s CurrentReport on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.9† Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.14 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) 10.10† Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services,Inc. and Key Energy Shared Services, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Current Reporton Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.11† Employment Agreement, dated effective as of March 25, 2013, among J. Marshall Dodson and Key Energy Services, LLC(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated March 28, 2013, File No.001-08038.) 10.12† Form of Amendment to Employment Agreement, in the form executed on March 29, 2010, by and between Key EnergyServices, Inc., Key Energy Shared Services, LLC, and each of Richard J. Alario, T.M. Whichard III, Newton W. Wilson III,Kim B. Clarke and Kim R. Frye. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-Kdated April 1, 2010, File No. 001-08038.) 10.13* Key Energy Services, Inc. Clawback Policy. 10.14.1 Credit Agreement, dated as of March 31, 2011, among Key Energy Services, Inc., each of the lenders from time to timeparty thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, andCapital One, N.A. and Wells Fargo Bank, N.A., as co-documentation agents. (Incorporated by reference to Exhibit 10.1 ofthe Company’s Current Report on Form 8-K filed on April 5, 2011, File No. 001-08038.) 100Table of ContentsIndex to Financial StatementsExhibit No. Description 10.14.2 First Amendment to Credit Agreement, dated as of July 27, 2011, among Key Energy Services, Inc., each of the lendersfrom time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., assyndication agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank andDnB NOR Bank ASA, as co-documentation agents (Incorporated by reference to Exhibit 10.1 of the Company’s CurrentReport on Form 8-K filed on July 29, 2011, File No. 001-08038.) 10.14.3 Second Amendment to Credit Agreement, dated as of December 5, 2014, among Key Energy Services, Inc., each of thelenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., assyndication agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank andDnB NOR Bank ASA, as co-documentation agents (Incorporated by reference to Exhibit 10.1 of the Company’s CurrentReport on Form 8-K filed on December 8, 2014, File No. 001-08038.) 10.15 Twenty-First Amendment to Office Lease dated May 15, 2014 Crescent 1301 McKinney, L.P. and Key Energy Services,Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 16, 2014 FileNo. 001-08038.) 10.16.1† Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan. (Incorporated by reference to Appendix A of theCompany's Proxy Statement on Schedule 14A filed on May 7, 2014, File No. 001-08038.) 10.16.2†* Form of Restricted Stock Award Agreement under 2014 Equity and Cash Incentive Plan. 10.16.3†* Form of Performance Unit Award Agreement under 2014 Equity and Cash Incentive Plan. 10.16.4†* Form of Director Restricted Stock Unit Agreement under 2014 Equity and Cash Incentive Plan. 21* Significant Subsidiaries of the Company. 23* Consent of Independent Registered Public Accounting Firm. 31.1* Certification of CEO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act. of 2002. 31.2* Certification of CFO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002. 32* Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101* Interactive Data File. †Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. *Filed herewith. 101Exhibit 10.13 POLICYClawback PolicyPolicyKey Energy Services, Inc., (“Key” or the “Company”) has adopted a Clawback Policy as described below.In the event of a material restatement of the Company’s financial results occurring after the Effective Date of this ClawbackPolicy, the Board of Directors of the Company (the “Board”) or the Compensation Committee of the Board or anothercommittee designated by the Board (each, the “Committee”) will review the incentive compensation that was paid or awarded,with respect to the period to which the restatement relates, to the Company’s current and former executive officers whoengaged in fraud or other misconduct that resulted in the restatement (the “Officers”)PurposeThe purpose of this policy is to provide a mechanism for the Company to recoup incentive compensation from current andformer executive officers who engage in fraud or other misconduct that results in a material restatement.ApplicabilityThis policy applies to all current and former executive officers.ResponsibilityThe Board and any designated Committee are responsible for implementing and enforcing this policy.DetailsTo the extent permitted by applicable law and as the Board or Committee in its sole discretion deems appropriate and in thebest interests of the Company, the Board or Committee may seek the recoupment or forfeiture of any incentive-basedcompensation paid or awarded to an Officer in excess of the amount that would have been paid or awarded to the Officer underthe Company’s restated financial statements.This policy shall be interpreted (including the determination of the amounts recoverable) by the Board or Committee in its solediscretion, exercising its business judgment. To the extent that applicable rules or regulations with respect to recovery ofincentive-based compensation are adopted by the Securities and Exchange Commission and NYSE pursuant to Section 10D oftheSecurities Exchange Act of 1934, as amended, nothing in this policy shall be deemed to limit or restrict the right or obligationof the Company to recover incentive-based compensation to the fullest extent required by such rules or regulations. The Boardmay amend this policy in its discretion at any time, including, without limitation, to the extent required by applicable law, rulesor regulations.Record retentionThis policy shall be reviewed periodically by the Board as the Board deems appropriate.Exhibit 10.16.2KEY ENERGY SERVICES, INC.2014 EQUITY AND CASH INCENTIVE PLANRESTRICTED STOCK AWARD AGREEMENTTHIS RESTRICTED STOCK AWARD AGREEMENT, including the Appendices attached hereto (this “Agreement”),dated as of __________, 2014 (the “Date of Grant”), is made by and between Key Energy Services, Inc., a Maryland corporation(the “Company”), and the employee named in the Award Summary delivered in connection with this grant (the “Participant”).R E C I T A L S:WHEREAS, the Company has adopted the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan (the “Plan”)pursuant to which awards of Restricted Stock of the Company may be granted; andWHEREAS, the Committee has determined that it is in the best interests of the Company and its stockholders to grant theaward of restricted shares of Common Stock provided for herein (the “Restricted Stock Award”) to the Participant in recognition ofthe Participant’s services to the Company, such grant to be subject to the terms set forth herein.NOW, THEREFORE, in consideration for the services rendered by the Participant to the Company and the mutual covenantshereinafter set forth, the parties hereto agree as follows:1.Grant of Restricted Stock Award. Pursuant to Section 7.1 of the Plan, the Company hereby issues to the Participanton the Date of Grant the Restricted Stock Award consisting of, in the aggregate, «Shares» shares of Restricted Stock of the Company(hereinafter called the “Restricted Shares”) having the rights and subject to the restrictions set out in this Agreement and the Plan. TheRestricted Shares shall vest in accordance with Section 4 hereof.2.Incorporation by Reference. The provisions of the Plan including, without limitation, Sections 11, 12, 14.5, 14.6,and 14.7 thereof, are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall beconstrued in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall havethe definitions set forth in the Plan. To the extent that this Agreement is silent with respect to, or in any way inconsistent with, the termsof the Plan, the provisions of the Plan shall govern and this Agreement shall be deemed to be modified accordingly. The Committeeshall have the authority to interpret and construe the Plan and this Agreement and to make any and all determinations thereunder, andits decision shall be binding and conclusive upon the Participant and his or her legal representative in respect of any questions arisingunder the Plan or this Agreement.3.Restrictions. Except as provided in the Plan or this Agreement, the restrictions on the Restricted Shares are that theywill be forfeited by the Participant and all of the Participant’s rights to such shares shall immediately terminate without any payment orconsideration by the Company, in the event of (i) the Participant’s termination of employment during the Restricted Period (as definedbelow), except as otherwise provided in Section 4, or (ii) any sale, assignment, transfer, hypothecation, pledge or other alienation ofsuch Restricted Shares made or attempted during the Restricted Period, whether voluntary or involuntary, and if involuntary whetherby process of law in any civil or criminal suit, action or proceeding, whether in the nature of an insolvency or bankruptcy proceedingor otherwise, without the written consent of the Board.-1-4.Vesting. Except as otherwise provided herein, the restrictions described in Section 3 above will lapse on the date ordates, as the case may be, set forth on Exhibit A to this Agreement (each a “Vesting Date,” and, with respect to each Restricted Share,the period beginning on the Date of Grant and ending on the applicable Vesting Date for such share, the “Restricted Period”);provided, that, the Participant is still in Continuous Service with the Company on such Vesting Date.(a)Death, Disability. The Restricted Period shall expire and all restrictions will lapse with respect to 100% of theRestricted Shares upon the termination of the Participant’s Continuous Service due to death or Disability prior to the VestingDate.(b)Termination Following a Change in Control. The Restricted Period shall expire and all restrictions will lapsewith respect to 100% of the Restricted Shares upon termination of the Participant’s Continuous Service by the Companywithout Cause that occurs prior to the Vesting Date and upon, or within 24 months following, a Change in Control.(c)Effect of Individual Employment Agreement. Notwithstanding any provision herein, if the Participant and theCompany or one of its Affiliates are parties to an employment agreement that provides that the Participant is entitled to vestingof equity-based incentives if the Participant’s Continuous Service terminates under specified circumstances, then the RestrictedStock Award will vest in accordance with the provisions of the employment agreement upon termination of the Participant’sContinuous Service under the circumstances described therein. If the Participant and the Company or one of its Affiliates areparties to an employment agreement that provides for vesting solely on account of a change in control (as defined in theemployment agreement) without regard to whether a termination of Continuous Service occurs, the Participant hereby waivesthe Participant’s right to accelerated vesting solely on account of a change in control under such provision as applicable to theRestricted Stock Award and hereby acknowledges that, notwithstanding any provision of the employment agreement to thecontrary, the Restricted Shares shall not become vested solely on account of a change in control. This waiver shall supersedethe otherwise applicable provisions of the employment agreement.(d)Termination of Continuous Service. Except as otherwise set forth in Section 4(a), (b) or (c) above, if theParticipant’s Continuous Service terminates for any reason at any time prior to the Vesting Date, the unvested Restricted Shareswill be forfeited and all of the Participant’s rights to such shares of Common Stock shall immediately terminate.(e)Disputes. If the Participant’s Continuous Service terminates prior to the Vesting Date, and there exists adispute between the Participant and the Company or the Committee as to the satisfaction of the conditions to the lapse of therestrictions or the terms and conditions of the grant, the Restricted Shares shall remain subject to the restrictions until theresolution of such dispute, except that any distributions that may be payable to the holders of record of Common Stock as of adate during the period from termination of the Participant’s Continuous Service to the resolution of such dispute shall:(i) to the extent to which such distributions would have been payable to the Participant on the RestrictedShares under the terms hereof, be held by the Company as part of its general funds, and shall be paid to or for the accountof the Participant only upon, and in the event of, a resolution of such dispute in a manner favorable to the Participant, andthen only with respect to such of the Restricted Shares as to which such resolution shall be so favorable, subject tocompliance with Section 409A of the Code, if applicable, or an exception thereunder, and(ii) be retained by the Company in the event of a resolution of such dispute in a manner unfavorable to theParticipant only with respect to such of the Restricted Shares as to which such resolution shall be so unfavorable.-2-5.Taxes.(a)Tax Withholding. All shares of Common Stock and other payments under this Agreement are subject toapplicable foreign, federal, state, or local tax withholding, and the Company shall have the right to withhold from anycompensation paid to the Participant any such tax withholding amounts. Shares of Vested Restricted Stock shall be withheld tosatisfy applicable tax withholding with respect to such shares, up to the minimum amount of tax required to be withheld byapplicable law, unless, to the extent permitted by the Committee, the Participant elects to satisfy such withholding obligation inanother manner, consistent with procedures established by the Committee.(b)Section 83(b) of the Code. If the Participant properly elects, within thirty (30) days after the Date of Grant, toinclude in gross income for federal income tax purposes an amount equal to the Fair Market Value of the Restricted Shares asof the Date of Grant pursuant to Section 83(b) of the Code, to the extent required by law, the Participant shall pay to theCompany, or make other arrangements satisfactory to the Committee to pay to the Company, in the year of such grant, anyfederal, state or local taxes required to be withheld with respect to the Restricted Shares. If the Participant fails to make suchpayments, the Company or its Affiliates shall, to the extent permitted by law, have the right to deduct from any payment of anykind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect tosuch Restricted Shares.6.Rights as Shareholders; Dividends. The Participant shall be the record owner of the Restricted Shares unless anduntil such shares of Common Stock are cancelled or rescinded pursuant to the terms of the Plan or sold or otherwise disposed of, andas record owner shall be entitled to all rights of a stockholder of the Company, including, without limitation, voting rights, if any, withrespect to the Restricted Shares and the right to receive dividends, if any, while the Restricted Shares are held in custody.7.Certificates. Reasonably promptly following the Date of Grant, the Company shall either cause to be issued to theParticipant a certificate in respect of the Restricted Shares or reflect ownership thereof in book-entry form on the Company’s books andrecords. If a certificate for Restricted Shares is issued, such certificate shall bear the following (or a similar) legend in addition to anyother legends that may be required under federal or state securities laws:“THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF COMMON STOCKREPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE)CONTAINED IN THE KEY ENERGY SERVICES, INC. 2014 EQUITY AND CASH INCENTIVE PLAN AND THERESTRICTED STOCK AWARD AGREEMENT DATED AS OF ___________________ ENTERED INTOBETWEEN THE REGISTERED OWNER AND KEY ENERGY SERVICES, INC. A COPY OF THE PLAN ANDTHE AWARD AGREEMENT ARE ON FILE AT THE OFFICES OF KEY ENERGY SERVICES, INC.”If a certificate for Restricted Shares is issued, the Committee shall require that such certificate evidencing such shares ofCommon Stock be delivered upon issuance to the Company or such other depository as may be designated by the Committee as adepository for safekeeping until the restrictions set forth herein and in the Plan lapse. At the expiration of the restrictions, theCompany shall deliver to the Participant (or his legal representative, beneficiary or heir, if applicable) any stock certificates for theshares of Common Stock deposited with it free from legend except as otherwise provided by the Plan or as otherwise required byapplicable law.8.Restrictive Covenants. If the Participant’s primary work location is in a State other than California, then theprovisions of Appendix A attached hereto shall apply to the Participant. If the Participant’s-3-primary work location is in California, then the provisions of Appendix B attached hereto shall apply to the Participant.9.Compliance with Laws, Regulations and Company Policies. The issuance and transfer of the Restricted Sharesand any Common Stock pursuant to this Restricted Stock Award shall be subject to compliance by the Company and the Participantwith all applicable requirements of state and federal laws and regulatory agencies and with all applicable requirements of any stockexchange on which the Company’s Common Stock may be listed at the time of such issuance or transfer. This Restricted Stock Awardshall also be subject to any applicable clawback or recoupment policies, share trading and stock ownership policies, and other policiesthat may be implemented by the Board from time to time.10.Stop-Transfer Instructions. The Participant agrees that, to ensure compliance with the restrictions imposed by thisAgreement, the Company may issue appropriate “stop-transfer” instructions to its transfer agent, if any, and if the Company transfersits own securities, it may make appropriate notations to the same effect in its own records.11.Refusal to Transfer. The Company will not be required to (a) register any transfer of shares of Common Stock onits register of stockholders if such shares of Common Stock have been sold or otherwise transferred in violation of any of theprovisions of this Agreement or (b) treat as owner of such shares of Common Stock, or to accord the right to vote or pay dividends toany purchaser or other transferee to whom such shares of Common Stock have been so transferred.12.No Right to Continuous Service. Nothing in this Agreement shall be deemed by implication or otherwise to imposeany limitation on any right of the Company or any of its Affiliates to terminate the Participant’s Continuous Service at any time.13.Notices. All notices, demands and other communications provided for or permitted hereunder shall be made inwriting and shall be by registered or certified first class mail, return receipt requested, telecopier, courier service, or personal delivery:if to the Company:Key Energy Services, Inc.1301 McKinney Street, Suite 1800Houston, Texas 77010Facsimile: 713-651-4559Attention: General Counselif to the Participant, at the Participant’s last known address on file with the Company.All such notices, demands, and other communications shall be deemed to have been duly given when delivered by hand, if personallydelivered; when delivered by courier, if delivered by commercial courier service; five (5) business days after being deposited in themail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied.14.Bound by Plan. By accepting this Agreement, the Participant acknowledges that the Participant has received a copyof the Plan and has had an opportunity to review the Plan and agrees to be bound by all of the terms and provisions of the Plan.15.Beneficiary. The Participant may file with the Committee a written designation of a beneficiary on such form as maybe prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survivesthe Participant, the legal representative of the Participant’s estate shall be deemed to be the Participant’s beneficiary.-4-16.Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, itssuccessors and assigns, and on the Participant and the beneficiaries, executors, administrators, heirs, and successors of the Participant.17.Amendment of Restricted Stock Award. Subject to Section 18 of this Agreement and subject to the terms of thePlan, the Committee at any time and from time to time may amend the terms of this Restricted Stock Award; provided, however, thatthe Participant’s rights under this Restricted Stock Award shall not be impaired by any such amendment unless the Company requeststhe Participant’s consent and the Participant consents in writing, or except as otherwise permitted under the Plan.18.Adjustment Upon Changes in Capitalization; Change in Control. Restricted Stock Awards may be adjusted asprovided in the Plan including, without limitation, Section 11 of the Plan. The Participant, by the Participant’s execution and entry intothis Agreement, irrevocably and unconditionally consents and agrees to any such adjustments as may be made at any time hereafter. Inaddition, in the event of a Change in Control, the Committee may take such actions as it deems appropriate under Section 12 of thePlan.19.Authority of the Committee. The Committee shall have final authority to interpret and construe the Plan and thisAgreement and to make any and all determinations thereunder, and its decisions shall be binding and conclusive upon the Participantand his or her legal representative in respect of any questions arising under the Plan or this Agreement.20.Governing Law and Venue. The provisions of this Agreement shall be construed and enforced in accordance withthe laws and decisions of the State of Texas, without regard to Texas’ conflict of law principles. Any dispute or conflict between theparties shall be brought in a state or federal court located in Harris County, Texas. The parties hereto submit to jurisdiction and venuein Harris County, Texas and all objections to such venue and jurisdiction are hereby waived.21.Severability. If any provision of this Agreement or any part of any provision of this Agreement is determined to beunenforceable for any reason whatsoever, it shall be severable from the rest of the Agreement and shall not invalidate or affect theother portions or parts of this Agreement, which shall remain in full force and effect. Furthermore, each covenant contained in thisAgreement shall stand independently and be enforceable without regard to any other covenants or to any other provisions of thisAgreement.22.Waiver. The waiver by the Company of a breach of any provision contained in this Agreement shall not operate orbe construed as a waiver of any subsequent breach or as a waiver of any other provisions of this Agreement.23.Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis forinterpretation of construction, and shall not constitute a part of this Agreement.24.Right to Reject Restricted Stock Award; Deemed Acceptance.If the Participant DOES NOT WISH TO ACCEPT this Restricted Stock Award and to be bound by the terms and conditionsof this Agreement, the Participant must provide written notice of the Participant’s desire to reject this Restricted Stock Award within 30days of the receipt of this Agreement and such written notice must be signed and dated. Such written notice must be sent to:Key Energy ServicesAttention: Legal Department1301 McKinney StreetSuite 1800Houston, Texas, 77010-5-If the Participant does not provide timely written notice of rejection of the Restricted Stock Award and the Participant does notelectronically acknowledge and accept this Restricted Stock Award within 30 days of receipt of this Agreement, the Participant shallbe DEEMED to: (a) acknowledge receipt of the Plan incorporated herein, (b) confirm that the prospectus for the Plan has been madeavailable to the Participant, (c) acknowledge that he or she has read this Agreement, the Plan and the Plan prospectus and understandsthe terms and conditions of them, (d) accept the Restricted Stock Award described in this Agreement, (e) agree to be bound by theterms of the Plan and this Agreement, and (f) agree that all decisions and determinations of the Committee with respect to theRestricted Stock Award shall be final and binding on the Participant, his or her beneficiaries, and any other person having or claimingan interest under this Restricted Stock Award.[Signature Page Follows] -6-IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement effective as of the Dateof Grant set forth above.KEY ENERGY SERVICES, INC.By:____________________________Name:Title: Address:1301 McKinney Street,Suite 1800Houston, Texas 77010By deemed acceptance as described in Section 24 above, the Participant (a) acknowledges receipt of the Plan incorporatedherein, (b) confirms that the prospectus for the Plan has been made available to the Participant, (c) acknowledges that he or she hasread this Agreement, the Plan and the Plan prospectus and understands the terms and conditions of them, (d) accepts the RestrictedStock Award described in this Agreement, (e) agrees to be bound by the terms of the Plan and this Agreement, and (f) agrees that alldecisions and determinations of the Committee with respect to the Restricted Stock Award shall be final and binding on the Participant,his or her beneficiaries, and any other person having or claiming an interest under the Restricted Stock Award.The undersigned hereby accepts the terms of this Agreement and the Plan. «Name1»ADDRESS:«Address1»«City», «StateProvince» «Postal_code»EMPLOYEE ID NUMBER: «Account_Number»-7-EXHIBIT ARESTRICTED STOCK VESTINGVESTED RESTRICTED STOCKVESTING DATEOne-third (1/3) of the Restricted SharesThe first anniversary of the Date of GrantOne-third (1/3) of the Restricted SharesThe second anniversary of the Date of GrantOne-third (1/3) of the Restricted SharesThe third anniversary of the Date of Grant-8-APPENDIX AThe provisions of this Appendix A shall apply to the Participant if the Participant’s primary work location is in a State otherthan California.(a)The Participant acknowledges that the Company and its Affiliates (collectively, the “Key EnergyCompanies”) will provide the Participant with “Confidential Information” throughout the Participant’s employment with theKey Energy Companies. In addition to its meaning under the applicable law, Confidential Information shall include all non-public information owned, possessed, developed, or used by the Key Energy Companies, whether or not created or maintainedin written form, which constitutes, relates to, or refers to the Key Energy Companies or their business, including, but not limitedto, any and all of the following: techniques, know-how, policies, procedures, intellectual property, technology, procurementrequirements, purchasing and financial information, accounting information, manufacturing information, customer lists, data,and information, pricing, procedures and methods, strategies, expenditures, business plans and forecasts, marketing andfinancial information, costs, business prospects, business opportunities, financial data, commercial data, custom or proprietarydata, prices, trade secrets, designs, design specifications, strategic plans, product development information (or other proprietaryproduct data), marketing plans, processes, techniques, formulas, inventions, devices, training manuals, training materials,computer programs, databases, client documents, client lists, client contact information, risk management, engineering data,analytical models, vendor lists, vendor contact information, employee names, compensation, competencies, skills, performanceor other employee information, and any similar or other non-public or proprietary information. The Participant agrees thatConfidential Information shall be and remain the sole and absolute property of the Key Energy Companies. Upon terminationof the Participant’s Continuous Service for any reason, the Participant shall immediately return to the Key Energy Companiesall documents and materials that contain or constitute Confidential Information of the Key Energy Companies, in any formwhatsoever, including, but not limited to, all copies, summaries, and abstracts thereof. The Participant agrees not to disclose,use, re-create, copy, duplicate, or otherwise permit the use, re-creation, disclosure, unauthorized copying, or duplication of anyConfidential Information of the Key Energy Companies other than in connection with authorized activities conducted in thecourse of the Participant’s service with the Key Energy Companies for the benefit of the Key Energy Companies. AllConfidential Information that by its nature cannot be returned, including, but not limited to, electronic information, shall beobliterated and destroyed upon termination of the Participant’s Continuous Service.(b)Good-Will. As a result of the Restricted Shares granted herein, and/or the Participant’s position with the KeyEnergy Companies, the Participant will develop and cultivate the business Good-Will of the Key Energy Companies, whichincludes but is not limited to the relationships between the Key Energy Companies and its Customers or Other Third Parties, asdefined herein (“Good-Will”). The Participant understands and acknowledges that the restrictive covenants herein are in partdesigned to protect the Good-Will of the Key Energy Companies.(c)Non-Competition. In exchange for the Confidential Information provided to the Participant as described inSection (a) above, the grant of the Restricted Shares hereunder, and the Good-Will of the Key Energy Companies associatedwith the Restricted Shares as described in Section (b) above, employment, and other consideration as provided herein, theParticipant agrees that the Participant will not, directly or indirectly, own, manage, operate, join, become an employee of,control, or participate in any manner in any Competing Business during the Prohibited Period within the Restricted Area.-9-(d)Non-Solicitation of Service Providers. In exchange for the Confidential Information provided to theParticipant as described in Section (a) above, the grant of the Restricted Shares hereunder, employment, and other considerationas provided herein, the Participant agrees that the Participant will not, directly or indirectly, solicit any Service Provider of theKey Energy Companies to leave his or her employment or service with the Key Energy Companies, employ or seek to employ,or hire or seek to hire, any Service Provider of the Key Energy Companies, or cause or induce any Competing Business tosolicit or employ any Service Provider of the Key Energy Companies during the Prohibited Period within the Restricted Area.(e)Non-Solicitation of Customers or Other Third Parties. In exchange for the Confidential Information providedto the Participant as described in Section (a) above, the grant of the Restricted Shares hereunder, employment, and otherconsideration as provided herein, the Participant agrees that the Participant will not, directly or indirectly, recruit, solicit, orotherwise induce or influence in any way any of the then existing Customers or Other Third Parties to discontinue or reduce theextent of their business relationship with the Key Energy Companies during the Prohibited Period within the Restricted Area.(f)Definitions. For purposes of this Appendix A:i)“Business” means any and all onshore or offshore oil and gas services provided by the Key EnergyCompanies to any client or customer of the Key Energy Companies.ii)“Competing Business” means any business, individual, partnership, firm, corporation, or other entity(other than the Key Energy Companies) that engages in any aspect of the Business with which the Participant was involvedwithin 12 months before the termination of the Participant’s Continuous Service, or provides services so similar in nature tothose which the Key Energy Companies provide and with which the Participant was involved within 12 months before thetermination of the Participant’s Continuous Service that it would displace business opportunities or customers of the KeyEnergy Companies, within the Restricted Area. The Participant will be considered to be involved with an aspect of theBusiness if the Participant has business-related interactions, or receives Confidential Information, with respect to suchaspect of the Business.iii)“Customers or Other Third Parties” means any customers, distributors, or sales representatives ofthe Key Energy Companies with whom the Participant had direct business dealings, or otherwise had access toConfidential Information about, during the Participant’s employment with the Key Energy Companies.iv)“Prohibited Period” means the period during which the Participant is employed by the Key EnergyCompanies and the twelve (12) month period following the date on which the Participant’s Continuous Service terminatesfor any reason.v)If the Participant at any time works primarily at a facility other than in Louisiana, “Restricted Area”means the 100 mile radius surrounding the location where the Participant primarily performed services or reported duringthe last two (2) years of the Participant’s period of employment with the Key Energy Companies. If the Participant at anytime works primarily at a facility in Louisiana, then “Restricted Area” means the 100 mile radius surrounding any of thefollowing parishes in which the Participant primarily performed services or reported during the last two (2) years ofParticipant’s period of employment with the Key Energy Companies: Calcasieu, Terrebonne, Jefferson Davis, and/or St.Martin.vi)“Service Provider” means any person who is personally providing services to the Key EnergyCompanies as an employee, consultant or independent contractor.-10-(g)Effect of Employment or Other Agreement. Notwithstanding the foregoing, in the event of any inconsistencybetween the covenants set forth above in Sections (a), (b), (c), (d), or (e) and the restrictive covenants in any writtenemployment or other agreement entered into between any of the Key Energy Companies and the Participant, the restrictivecovenants of such employment or other agreement shall control; provided, that, Sections (i) and (j) of this Appendix A shallapply to the Restricted Stock Award in the event of any breach of the restrictive covenants of such employment or otheragreement.(h)Enforceability. The parties agree that if the scope or enforceability of the covenants set forth in this AppendixA are in any way disputed at any time, it is the intent of the parties that a court or other trier of fact modify and enforce thecovenants to the extent required to render them enforceable.(i)Injunctive Relief and Other Equitable Relief. The Participant acknowledges and agrees that the business of theKey Energy Companies is highly competitive, that the Confidential Information has been developed by the Key EnergyCompanies at significant expense and effort, and that the restrictions contained in this Appendix A are reasonable andnecessary to protect the legitimate business interests of the Key Energy Companies. The Participant acknowledges that theservices the Participant will render to the Key Energy Companies are of a special, unique, and extraordinary character, whichgive them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law.By reason of this, the Participant consents and agrees that in addition to any other remedies the Key Energy Companies mayhave at law, the forfeiture requirements set forth in Section (j) below, and the remedies set forth in Section 14.5 of the Plan, ifthe Participant violates any provision or covenant set forth in this Appendix A, the Key Energy Companies shall be entitled tothe remedies of injunction, specific performance, and other equitable relief. This Appendix A shall not, however, be construedas a waiver of any of the rights to which the Key Energy Companies may be entitled for damages or otherwise.(j)The Participant acknowledges and agrees that in the event the Participant breaches any of the covenants oragreements contained in this Appendix A (including covenants described in Section (g)):i)The Committee may in its discretion determine that the Participant shall forfeit all of the outstandingRestricted Shares, and the outstanding Restricted Shares shall immediately terminate, andii)The Committee may in its discretion require the Participant to return to the Company any CommonStock received in settlement of the Restricted Stock Award and any dividends paid on Restricted Shares; provided, that, ifthe Participant has disposed of any such Common Stock, then the Committee may require the Participant to pay to theCompany, in cash, the Fair Market Value of such shares of Common Stock as of the date of disposition, in such mannerand on such terms as may be required by the Committee. The Company shall be entitled to set-off against such amountsany amount owed to the Participant by the Company, subject to compliance with Section 409A of the Code, if applicable.The Committee shall exercise the right of recoupment provided in this Section (j)(ii) within one year after the Participant’sbreach of any of the covenants or agreements contained in this Appendix A (including covenants described in Section (g)).-11-APPENDIX BThe provisions of this Appendix B shall apply to the Participant if the Participant’s primary work location is in California.(a)The Participant acknowledges that the Company and its Affiliates (collectively, the “Key EnergyCompanies”) will provide the Participant with “Confidential Information” throughout the Participant’s employment with theKey Energy Companies. In addition to its meaning under the applicable law, Confidential Information shall include all non-public information owned, possessed, developed, or used by the Key Energy Companies, whether or not created or maintainedin written form, which constitutes, relates to, or refers to the Key Energy Companies or their business, including, but not limitedto, any and all of the following: techniques, know-how, policies, procedures, intellectual property, technology, procurementrequirements, purchasing and financial information, accounting information, manufacturing information, customer lists, data,and information, pricing, procedures and methods, strategies, expenditures, business plans and forecasts, marketing andfinancial information, costs, business prospects, business opportunities, financial data, commercial data, custom or proprietarydata, prices, trade secrets, designs, design specifications, strategic plans, product development information (or other proprietaryproduct data), marketing plans, processes, techniques, formulas, inventions, devices, training manuals, training materials,computer programs, databases, client documents, client lists, client contact information, risk management, engineering data,analytical models, vendor lists, vendor contact information, employee names, compensation, competencies, skills, performanceor other employee information, and any similar or other non-public or proprietary information. The Participant agrees thatConfidential Information shall be and remain the sole and absolute property of the Key Energy Companies. Upon terminationof the Participant’s Continuous Service for any reason, the Participant shall immediately return to the Key Energy Companiesall documents and materials that contain or constitute Confidential Information of the Key Energy Companies, in any formwhatsoever, including, but not limited to, all copies, summaries, and abstracts thereof. The Participant agrees not to disclose,use, re-create, copy, duplicate, or otherwise permit the use, re-creation, disclosure, unauthorized copying, or duplication of anyConfidential Information of the Key Energy Companies other than in connection with authorized activities conducted in thecourse of the Participant’s service with the Key Energy Companies for the benefit of the Key Energy Companies. AllConfidential Information that by its nature cannot be returned, including, but not limited to, electronic information, shall beobliterated and destroyed upon termination of the Participant’s Continuous Service.(b)Non-Solicitation of Service Providers. In exchange for the Confidential Information provided to theParticipant as described in Section (a) above, the grant of the Restricted Shares hereunder, employment, and other considerationas provided herein, the Participant agrees that the Participant will not, directly or indirectly, solicit any Service Provider of theKey Energy Companies to leave his or her employment or service with the Key Energy Companies, employ or seek to employ,or hire or seek to hire, any Service Provider of the Key Energy Companies, or cause or induce any Competing Business tosolicit or employ any Service Provider of the Key Energy Companies during the Prohibited Period within the Restricted Area.(c)Non-Solicitation of Customers or Other Third Parties. In exchange for the Confidential Information providedto the Participant as described in Section (a) above, the grant of the Restricted Shares hereunder, employment, and otherconsideration as provided herein, the Participant agrees that the Participant will not, on behalf of a Competing Business orotherwise, use or disclose, or assist others in using or disclosing, the Key Energy Companies’ trade secrets or ConfidentialInformation for the purposes of directly or indirectly soliciting, accepting as a client, or performing services of-12-any type that the Key Energy Companies provides or renders for any person or entity, including any current or former client ofthe Key Energy Companies.(d)Definitions. For purposes of this Appendix B:i)“Business” means any and all onshore or offshore oil and gas services provided by the Key EnergyCompanies to any client or customer of the Key Energy Companies.ii)“Competing Business” means any business, individual, partnership, firm, corporation, or other entity(other than the Key Energy Companies) that engages in any aspect of the Business with which the Participant was involvedwithin 12 months before the termination of the Participant’s Continuous Service, or provides services so similar in nature tothose which the Key Energy Companies provide and with which the Participant was involved within 12 months before thetermination of the Participant’s Continuous Service that it would displace business opportunities or customers of the KeyEnergy Companies, within the Restricted Area. The Participant will be considered to be involved with an aspect of theBusiness if the Participant has business-related interactions, or receives Confidential Information, with respect to suchaspect of the Business.iii)“Customers or Other Third Parties” means any customers, distributors, or sales representatives ofthe Key Energy Companies with whom the Participant had direct business dealings, or otherwise had access toConfidential Information about, during the Participant’s employment with the Key Energy Companies.iv)“Prohibited Period” means the period during which the Participant is employed by the Key EnergyCompanies and the twelve (12) month period following the date on which the Participant’s Continuous Service terminatesfor any reason.v)“Restricted Area” means the 100 mile radius surrounding any location where the Participantperformed services, reported or regularly attended during the last two (2) years of the Participant’s period of employmentwith the Key Energy Companies.vi)“Service Provider” means any person who is personally providing services to the Key EnergyCompanies as an employee, consultant or independent contractor.(e)Effect of Employment or Other Agreement. Notwithstanding the foregoing, in the event of any inconsistencybetween the covenants set forth above in Sections (a), (b) or (c) and the restrictive covenants in any written employment orother agreement entered into between any of the Key Energy Companies and the Participant, the restrictive covenants of suchemployment or other agreement shall control; provided that, Sections (g) and (h) of this Appendix B shall apply to theRestricted Stock Award in the event of any breach of the restrictive covenants of such employment or other agreement.(f)The parties agree that if the scope or enforceability of the covenants set forth in this Appendix B are in anyway disputed at any time, it is the intent of the parties that a court or other trier of fact modify and enforce the covenants to theextent required to render them enforceable.(g)Injunctive Relief and Other Equitable Relief. The Participant acknowledges and agrees that the business ofthe Key Energy Companies is highly competitive, that the Confidential Information has been developed by the Key EnergyCompanies at significant expense and effort, and that the restrictions contained in this Appendix B are reasonable andnecessary to protect the legitimate business interests of the Key Energy Companies. The Participant acknowledges that theservices the Participant will render to the Key Energy Companies are of a special, unique, and extraordinary character, whichgive them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law.By reason of this, the Participant consents and agrees-13-that in addition to any other remedies the Key Energy Companies may have at law, the forfeiture requirements set forth inSection (h) below, and the remedies set forth in Section 14.5 of the Plan, if the Participant violates any provision or covenantset forth in this Appendix B, the Key Energy Companies shall be entitled to the remedies of injunction, specific performance,and other equitable relief. This Appendix B shall not, however, be construed as a waiver of any of the rights to which the KeyEnergy Companies may be entitled for damages or otherwise.(h)The Participant acknowledges and agrees that in the event the Participant breaches any of the covenants oragreements contained in this Appendix B (including covenants described in Section (e)):i)The Committee may in its discretion determine that the Participant shall forfeit all of the outstandingRestricted Shares, and the outstanding Restricted Shares shall immediately terminate, andii)The Committee may in its discretion require the Participant to return to the Company any CommonStock received in settlement of the Restricted Stock Award and any dividends paid on Restricted Shares; provided, that, ifthe Participant has disposed of any such Common Stock, then the Committee may require the Participant to pay to theCompany, in cash, the Fair Market Value of such shares of Common Stock as of the date of disposition, in such mannerand on such terms as may be required by the Committee. The Company shall be entitled to set-off against such amountsany amount owed to the Participant by the Company, subject to compliance with Section 409A of the Code, if applicable.The Committee shall exercise the right of recoupment provided in this Section (h)(ii) within one year after the Participant’sbreach of any of the covenants or agreements contained in this Appendix B (including covenants described in Section (e)).-14-Exhibit 10.16.3KEY ENERGY SERVICES, INC.2014 EQUITY AND CASH INCENTIVE PLANPERFORMANCE UNIT AWARD AGREEMENTTHIS PERFORMANCE UNIT AWARD AGREEMENT, including the Appendices attached hereto (this “Agreement”),dated as of __________, 2015 (the “Date of Grant”), is made by and between Key Energy Services, Inc., a Maryland corporation(the “Company”), and _____________ (the “Participant”).R E C I T A L S:WHEREAS, the Company has adopted the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan (the “Plan”)pursuant to which awards intended to qualify as Performance Compensation Awards may be granted (“Performance Units”); andWHEREAS, in recognition of the Participant’s services to the Company, the Administrator has determined that it is in the bestinterests of the Company and its stockholders to grant the Performance Units provided for herein (the “Performance Unit Award”)pursuant to the terms of the Plan and subject to the further terms and conditions set forth herein.NOW, THEREFORE, in consideration for the services rendered by the Participant to the Company and the mutual covenantshereinafter set forth, the parties hereto agree as follows:1.Grant of Performance Unit. Pursuant to Sections 7.2 and 7.4 of the Plan, the Company hereby grants the Participant aPerformance Unit Award consisting of a target of ______ Performance Units. Each Performance Unit represents the valueof one share of Common Stock. The number of Performance Units that the Participant will actually earn (which may be upto 200% of the target Performance Units) will be determined by the level of achievement of the Performance Goals set forthin Section 3 hereof. Upon the certification by the Administrator of the level of achievement of the Performance Goals forthe Performance Period, the Company will pay out the Performance Units the Participant has earned for the PerformancePeriod in cash.2.Incorporation by Reference. The provisions of the Plan including, without limitation, Sections 11, 12, 14.5, 14.6, and14.7 thereof, are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreementshall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in thisAgreement shall have the definitions set forth in the Plan. The Administrator shall have the authority to interpret andconstrue the Plan and this Agreement and to make any and all determinations thereunder, and its decision shall be bindingand conclusive upon the Participant and his or her legal representative in respect of any questions arising under the Plan orthis Agreement.3.Earning of Performance Units.(a)Performance Goals. The number of Performance Units earned in respect of the Performance Period will be determinedat the end of the Performance Period based on the relative placement of the Company within the group that consists ofthe Company and the Proxy Peer Group (the “Performance Group”), based on Total Shareholder Return as set forthin Section 3(b) below, as follows:-1-Company PlacementIn Performance Group forthe Performance PeriodPerformance UnitsEarned as aPercentage of TargetFirst200%Second180%Third160%Fourth140%Fifth120%Sixth100%Seventh0%Eighth0%Ninth0%Tenth0%Eleventh0%Twelfth0%As an example, and solely for avoidance of doubt, if the Company’s placement in the Performance Group forthe Performance Period is second, the Participant will earn a number of Performance Units for the Performance Periodequal to the product of (a) the number of target Performance Units, times (b) 180%.(b)Proxy Peer Group TSR. In order to determine the Company’s placement, total shareholder return will be calculated bythe Administrator or its designee for all members of the Proxy Peer Group on the same basis as Total ShareholderReturn is calculated for the Company.(c)Employment Condition. Except as provided in Section 5 and Section 6 hereof, a Participant must continue inContinuous Service through the payment date in respect of a Performance Unit to be eligible for payment with respectto the Performance Period. Except as provided in Section 5 and Section 6, if the Participant’s Continuous Serviceterminates for any reason before the payment date, the Participant will not receive any payment in respect of thePerformance Units.(d)Certification. Following completion of the Performance Period, the Administrator shall review and certify in writingwhether, and to what extent, the performance goal for the Performance Period has been achieved and, if so, calculateand certify in writing the number of Performance Units that the Participant earned for such period based upon theCompany’s TSR relative to the Proxy Peer Group. Performance Units that do not vest shall be forfeited as of the end ofthe Performance Period.4.Payment.(a)Timing. Payment in respect of the Performance Unit Award will be made in cash, less applicable tax withholdingamounts, as soon as administratively practicable following completion of the certification required by Section 3(d)above, and in any event within sixty (60) days following the end of the Performance Period, except as otherwiseprovided in Section 6. Such payment shall be subject to the Participant’s Continuous Service through the payment date,except as provided in Section 5 and Section 6.(b)Amount. The amount payable to the Participant in respect of the Performance Period will be equal to the product of (i)and (ii) where (i) is the number of Performance Units earned for the Performance Period, as determined by theAdministrator in accordance with Section 3,-2-and (ii) is the closing price per share of the Common Stock on the last trading day of the Performance Period.5.Termination of Employment.(a)Death or Disability Following the end of the Performance Period. Notwithstanding the provisions of Section 3(c), in thecase of the Participant’s death or Disability following the end of the Performance Period but prior to the payment datefor the Performance Period, any payment earned by the Participant with respect to the Performance Period shall be paidto the Participant (or the Particpant’s beneficiary, as applicable) at the date described in Section 4(a).(b)Participant Employment Agreement. Notwithstanding the foregoing, if termination of Continuous Service byParticipant would cause the Equity-Based Incentives to vest under the terms of the Participant’s EmploymentAgreement, the Administrator shall cause the Performance Units to vest and be paid within sixty (60) days followingthe Participant’s termination of Continuous Service calculated as follows:i)The Performance Period shall end as of the day immediately preceding the closing date of the termination ofContinuous Service (the “Termination Date”) and the Final Stock Price for the Performance Period shall be basedon the 30 calendar day period ending on the Termination Date and any dividends declared during the PerformancePeriod and on or prior to the Termination Date (the “Termination Date Value.”)ii)The Administrator shall calculate a “Termination Amount” equal to (x) the number of Performance Units thatwould be payable based on the Company’s TSR as of the Termination Date, as determined by the Administrator,and the Company’s placement within the Performance Group as of such date, multiplied by (y) the TerminationDate Value and (z) the Pro-Rata Period.(c)Other Termination of Employment. Except as provided above or in Section 6 below, all Performance Units with respectto the Performance Period shall be forfeited upon the Participant’s termination of Continuous Service before thepayment date for the Performance Period.6.Change in Control.(a)If a Change in Control occurs during the Performance Period, the Administrator shall calculate a Change in ControlAmount as follows:i)The Performance Period shall end as of the day immediately preceding the closing date of the Change in Control(the “Change in Control Date”) and the Final Stock Price for the Performance Period shall be based on the 30calendar day period ending on the Change in Control Date and any dividends declared during the PerformancePeriod and on or prior to the Change in Control Date (the “Change in Control Value”).ii)The Administrator shall calculate a “Change in Control Amount” equal to (x) the number of Performance Units thatwould be payable based on the Company’s TSR as of the Change in Control Date, as determined by theAdministrator, and the Company’s placement within the Performance Group as of such date, multiplied by (y) theChange in Control Value.(b)If a Change in Control occurs during the Performance Period and the Participant continues in Continuous Servicethrough December 31, 2017, the Change in Control Amount shall be paid in cash between January 1, 2018 and March1, 2018.-3-(c)Notwithstanding the foregoing, if a Change in Control occurs during the Performance Period, and the Participant’sContinuous Service is terminated by the Company without Cause upon or following the Change in Control and prior tothe payment date, then the Change in Control Amount shall vest and be paid within sixty (60) days following theParticipant’s termination of Continuous Service.(d)Notwithstanding the foregoing, in the event of a Change in Control, the Administrator may take such other actions withrespect to the Performance Units as it deems appropriate pursuant to the Plan and any applicable employmentagreement between the Participant and the Company or an Affiliate.7.Tax Withholding. The Company shall have the right to withhold from any payment due under the Plan and thisAgreement an amount equal to the applicable required withholding obligation in respect of any federal, state or local tax.8.No Rights as Stockholder. The Participant shall have no rights as a stockholder with respect to the shares of CommonStock underlying the Performance Units, nor shall the Participant have any rights to Dividend Equivalents with respect tothe Performance Units.9.Restrictive Covenants. If the Participant’s primary work location is in a State other than California, then the provisions ofAppendix A attached hereto shall apply to the Participant. If the Participant’s primary work location is in California, thenthe provisions of Appendix B attached hereto shall apply to the Participant.10.Compliance with Laws, Regulations and Company Policies. The grant and payment of the Performance Units shall besubject to compliance by the Company and the Participant with all applicable requirements of state and federal laws andregulatory agencies and with all applicable requirements of any stock exchange on which the Company’s Common Stockmay be listed at the time of such issuance or transfer, if applicable. This Performance Unit Award shall also be subject toany applicable clawback or recoupment policies, share trading and stock ownership policies, and other policies that may beimplemented by the Board from time to time.11.Section 409A. Any amounts payable with respect to the Performance Units are intended to be exempt from Section 409Aof the Code in reliance on the short-term deferral exemption set forth in the final regulations issued thereunder. If anyamounts payable with respect to the Performance Units are determined to be subject to Section 409A of the Code, suchpayments may only be made under this Agreement upon an event and in a manner permitted by Section 409A of the Code.All payments to be made upon a termination of employment may only be made upon a “separation from service” underSection 409A of the Code. For purposes of Section 409A of the Code, each payment shall be treated as a separatepayment. In no event may the Participant, directly or indirectly, designate the calendar year in which the payments underthis Award Letter will be made. Notwithstanding anything in this Agreement to the contrary, if the Participant is a“specified employee” as defined by Section 409A of the Code, then if and to the extent required by Section 409A of theCode, any payment with respect to the Performance Units upon a separation from service will not be made be made beforethe date that is six months after the Participant separates from service or such earlier date permitted by Section 409A of theCode.12.No Right to Continuous Service. Nothing in this Agreement shall be deemed by implication or otherwise to impose anylimitation on any right of the Company or any of its Affiliates to terminate the Participant’s Continuous Service at any time.13.Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing andshall be by registered or certified first class mail, return receipt requested, telecopier, courier service or personal delivery:-4-if to the Company:Key Energy Services, Inc.1301 McKinney Street, Suite 1800Houston, Texas 77010Facsimile: 713-651-4559Attention: General Counselif to the Participant, at the Participant’s last known address on file with the Company.All such notices, demands and other communications shall be deemed to have been duly given when delivered byhand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) businessdays after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, iftelecopied.14.Bound by Plan. By accepting this Agreement, the Participant acknowledges that he or she has received a copy of the Planand has had an opportunity to review the Plan and agrees to be bound by all of the terms and provisions of the Plan.15.Beneficiary. The Participant may file with the Administrator a written designation of a beneficiary on such form as may beprescribed by the Administrator and may, from time to time, amend or revoke such designation. If no designatedbeneficiary survives the Participant, the legal representative of the Participant’s estate shall be deemed to be the Participant’sbeneficiary.16.Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors andassigns, and on the Participant and the beneficiaries, executors, administrators, heirs, and successors of the Participant.17.Amendment of Performance Unit Award. Subject to Section 18 of this Agreement and subject to the terms of the Plan,the Administrator at any time and from time to time may amend the terms of this Performance Unit Award; provided,however, that the Participant’s rights under this Performance Unit Award shall not be impaired by any such amendmentunless the Company requests the Participant’s consent and the Participant consents in writing, or except as otherwisepermitted under the Plan.18.Adjustment Upon Changes in Capitalization. The shares of Common Stock underlying the Performance Units and thePerformance Goals may be adjusted as provided in the Plan including, without limitation, Section 11 of the Plan. TheParticipant, by his or her execution and entry into this Agreement, irrevocably and unconditionally consents and agrees toany such adjustments as may be made at any time hereafter.19.Governing Law and Venue. The provisions of this Agreement shall be construed and enforced in accordance with thelaws and decisions of the State of Texas, without regard to Texas’ conflict of law principles. Any dispute or conflictbetween the parties shall be brought in a state or federal court located in Harris County, Texas. The parties hereto submit tojurisdiction and venue in Harris County, Texas and all objections to such venue and jurisdiction are hereby waived.20.Severability. If any provision of this Agreement or any part of any provision of this Agreement is determined to beunenforceable for any reason whatsoever, it shall be severable from the rest of the Agreement and shall not invalidate oraffect the other portions or parts of this Agreement, which shall remain in full force and effect. Furthermore, each covenantcontained in this-5-Agreement shall stand independently and be enforceable without regard to any other covenants or to any other provisionsof this Agreement.21.Waiver. The waiver by the Company of a breach of any provision contained in this Agreement shall not operate or beconstrued as a waiver of any subsequent breach or as a waiver of any other provisions of this Agreement.22.Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis forinterpretation of construction, and shall not constitute a part of this Agreement.23.Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original,with the same effect as if the signatures thereto and hereto were upon the same instrument.24.Definitions.(a)“Employment Agreement” means the employment agreement between the Company (or its affiliate or subsidiary) andthe Participant.(b)“Equity-Based Incentives” shall have the meaning set forth in the Participant’s Employment Agreement.(c)“Final Stock Price” means the sum of (i) and (ii) where (i) is the average closing stock price of the Common Stock forthe last thirty (30) trading days of the Performance Period and (ii) is any dividends paid per share over the PerformancePeriod.(d)“Initial Stock Price” means the average closing stock price of the Common Stock for the thirty (30) trading daysimmediately preceding the Performance Period.(e)“Performance Period” means the period from January 1, 2015 through December 31, 2017, subject to Section 6 above.(f)“Pro-Rata Period” means the pro-rata time period of Continuous Service during the Performance Period determined bydividing (i) by (ii), where (i) equals the total number of days of Participant’s Continuous Service beginning andincluding January 1, 2015 until the Termination Date and (ii) is the total number of days in the Performance Period.(g)“Proxy Peer Group” means Basic Energy Services, Inc. (BAS); C&J Energy Services, Inc. (CJES); Exterran Holdings,Inc. (EXH); Helix Energy Solutions Group, Inc. (HLX); Oceaneering International, Inc. (OII); Oil States International,Inc. (OIS); Patterson-UTI Energy, Inc. (PTEN); Pioneer Energy Services Corp (PES); RPC, Inc. (RES); SeventySeven Energy Inc. (SSE); and Superior Energy Services, Inc. (SPN).(h)“Total Shareholder Return” or “TSR” means the change in value of a share of Common Stock determined by dividing(i) by (ii), where (i) equals the Final Stock Price minus the Initial Stock Price and (ii) equals the Initial Stock Price.25.Right to Reject Performance Unit Award; Deemed Acceptance.If the Participant DOES NOT WISH TO ACCEPT this Performance Unit Award and to be bound by the terms and conditionsof this Agreement, the Participant must provide written notice of the Participant’s desire to reject this Performance Unit Award within30 days of the receipt of this Agreement and such written notice must be signed and dated. Such written notice must be sent to:Key Energy ServicesAttention: Legal Department-6-1301 McKinney StreetSuite 1800Houston, Texas, 77010If the Participant does not provide timely written notice of rejection of the Performance Unit Award within 30 days of receipt ofthis Agreement, the Participant shall be DEEMED to: (a) acknowledge receipt of the Plan incorporated herein, (b) confirm that theprospectus for the Plan has been made available to the Participant, (c) acknowledge that he or she has read this Agreement, the Planand the Plan prospectus and understands the terms and conditions of them, (d) accept the Performance Unit Award described in thisAgreement, (e) agree to be bound by the terms of the Plan and this Agreement, and (f) agree that all decisions and determinations ofthe Committee with respect to the Performance Unit Award shall be final and binding on the Participant, his or her beneficiaries, andany other person having or claiming an interest under this Performance Unit Award.[Signature Page Follows]-7-IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement effective as of theDate of Grant set forth above.KEY ENERGY SERVICES, INC.By: _______________________________Name: Title: Address:1301 McKinney Street,Suite 1800Houston, Texas 77010By deemed acceptance of this Performance Unit Award as described in Section 25 above, the Participant (a) acknowledgesreceipt of the Plan incorporated herein, (b) confirms that the prospectus for the Plan has been made available to the Participant, (c)acknowledges that he or she has read this Agreement, the Plan and the Plan prospectus and understands the terms and conditions ofthem, (d) accepts the Performance Unit Award described in this Agreement, (e) agrees to be bound by the terms of the Plan and thisAgreement, and (f) agrees that all decisions and determinations of the Committee with respect to the Performance Unit Award shall befinal and binding on the Participant, his or her beneficiaries, and any other person having or claiming an interest under the PerformanceUnit Award.The undersigned hereby accepts the terms of this Agreement and the Plan. «Name1»ADDRESS: «Address1» «City», «StateProvince» «Postal_code»EMPLOYEE ID NUMBER: «Account_Number»-8-APPENDIX AThe provisions of this Appendix A shall apply to the Participant if the Participant’s primary work location is in a State other thanCalifornia.(a)The Participant acknowledges that the Company and its Affiliates (collectively, the “Key Energy Companies”) willprovide the Participant with “Confidential Information” throughout the Participant’s employment with the KeyEnergy Companies. In addition to its meaning under the applicable law, Confidential Information shall include all non-public information owned, possessed, developed, or used by the Key Energy Companies, whether or not created ormaintained in written form, which constitutes, relates to, or refers to the Key Energy Companies or their business,including, but not limited to, any and all of the following: techniques, know-how, policies, procedures, intellectualproperty, technology, procurement requirements, purchasing and financial information, accounting information,manufacturing information, customer lists, data, and information, pricing, procedures and methods, strategies,expenditures, business plans and forecasts, marketing and financial information, costs, business prospects, businessopportunities, financial data, commercial data, custom or proprietary data, prices, trade secrets, designs, designspecifications, strategic plans, product development information (or other proprietary product data), marketing plans,processes, techniques, formulas, inventions, devices, training manuals, training materials, computer programs,databases, client documents, client lists, client contact information, risk management, engineering data, analyticalmodels, vendor lists, vendor contact information, employee names, compensation, competencies, skills, performance orother employee information, and any similar or other non-public or proprietary information. The Participant agrees thatConfidential Information shall be and remain the sole and absolute property of the Key Energy Companies. Upontermination of the Participant’s Continuous Service for any reason, the Participant shall immediately return to the KeyEnergy Companies all documents and materials that contain or constitute Confidential Information of the Key EnergyCompanies, in any form whatsoever, including, but not limited to, all copies, summaries, and abstracts thereof. TheParticipant agrees not to disclose, use, re-create, copy, duplicate, or otherwise permit the use, re-creation, disclosure,unauthorized copying, or duplication of any Confidential Information of the Key Energy Companies other than inconnection with authorized activities conducted in the course of the Participant’s service with the Key EnergyCompanies for the benefit of the Key Energy Companies. All Confidential Information that by its nature cannot bereturned, including, but not limited to, electronic information, shall be obliterated and destroyed upon termination of theParticipant’s Continuous Service.(b)Good-Will. As a result of the Performance Units granted herein, and/or the Participant’s position with the Key EnergyCompanies, the Participant will develop and cultivate the business Good-Will of the Key Energy Companies, whichincludes but is not limited to the relationships between the Key Energy Companies and its Customers or Other ThirdParties, as defined herein (“Good-Will”). The Participant understands and acknowledges that the restrictive covenantsherein are in part designed to protect the Good-Will of the Key Energy Companies.(c)Non-Competition. In exchange for the Confidential Information provided to the Participant as described in Section (a)above, the grant of the Performance Units hereunder, and the Good-Will of the Key Energy Companies associated withthe Performance Units as described in Section (b) above, employment, and other consideration as provided herein, theParticipant-9-agrees that the Participant will not, directly or indirectly, own, manage, operate, join, become an employee of, control,or participate in any manner in any Competing Business during the Prohibited Period within the Restricted Area.(d)Non-Solicitation of Service Providers. In exchange for the Confidential Information provided to the Participant asdescribed in Section (a) above, the grant of the Performance Units hereunder, employment, and other consideration asprovided herein, the Participant agrees that the Participant will not, directly or indirectly, solicit any Service Provider ofthe Key Energy Companies to leave his or her employment or service with the Key Energy Companies, employ or seekto employ, or hire or seek to hire, any Service Provider of the Key Energy Companies, or cause or induce anyCompeting Business to solicit or employ any Service Provider of the Key Energy Companies during the ProhibitedPeriod within the Restricted Area.(e)Non-Solicitation of Customers or Other Third Parties. In exchange for the Confidential Information provided to theParticipant as described in Section (a) above, the grant of the Performance Units hereunder, employment, and otherconsideration as provided herein, the Participant agrees that the Participant will not, directly or indirectly, recruit, solicit,or otherwise induce or influence in any way any of the then existing Customers or Other Third Parties to discontinue orreduce the extent of their business relationship with the Key Energy Companies during the Prohibited Period within theRestricted Area.(f)Definitions. For purposes of this Appendix A:i) “Business” means any and all onshore or offshore oil and gas services provided by the Key EnergyCompanies to any client or customer of the Key Energy Companies.ii) “Competing Business” means any business, individual, partnership, firm, corporation, or other entity (otherthan the Key Energy Companies) that engages in any aspect of the Business with which the Participant wasinvolved within 12 months before the termination of the Participant’s Continuous Service, or provides servicesso similar in nature to those which the Key Energy Companies provide and with which the Participant wasinvolved within 12 months before the termination of the Participant’s Continuous Service that it would displacebusiness opportunities or customers of the Key Energy Companies, within the Restricted Area. The Participantwill be considered to be involved with an aspect of the Business if the Participant has business-relatedinteractions, or receives Confidential Information, with respect to such aspect of the Business.iii) “Customers or Other Third Parties” means any customers, distributors, or sales representatives of the KeyEnergy Companies with whom the Participant had direct business dealings, or otherwise had access toConfidential Information about, during the Participant’s employment with the Key Energy Companies.iv) “Prohibited Period” means the period during which the Participant is employed by the Key EnergyCompanies and the twelve (12) month period following the date on which the Participant’s Continuous Serviceterminates for any reason.v) If the Participant at any time works primarily at a facility other than in Louisiana, “Restricted Area” meansthe 100 mile radius surrounding the location where the Participant primarily performed services or reportedduring the last two (2) years of the Participant’s period of employment with the Key Energy Companies. If theParticipant at any time works primarily at a facility in Louisiana, then “Restricted Area” means the 100 mileradius surrounding any of the following parishes in which-10-the Participant primarily performed services or reported during the last two (2) years of Participant’s period ofemployment with the Key Energy Companies: Calcasieu, Terrebonne, Jefferson Davis, and/or St. Martin. vi) “Service Provider” means any person who is personally providing services to the Key Energy Companies asan employee, consultant or independent contractor.(g)Effect of Employment or Other Agreement. Notwithstanding the foregoing, in the event of any inconsistency betweenthe covenants set forth above in Sections (a), (b), (c), (d), or (e) and the restrictive covenants in any written employmentor other agreement entered into between any of the Key Energy Companies and the Participant, the restrictivecovenants of such employment or other agreement shall control; provided that Sections (i) and (j) of this Appendix Ashall apply to this Performance Unit Award in the event of any breach of the restrictive covenants of such employmentor other agreement.(h)Enforceability. The parties agree that if the scope or enforceability of the covenants set forth in this Appendix A are inany way disputed at any time, it is the intent of the parties that a court or other trier of fact modify and enforce thecovenants to the extent required to render them enforceable.(i)Injunctive Relief and Other Equitable Relief. The Participant acknowledges and agrees that the business of the KeyEnergy Companies is highly competitive, that the Confidential Information has been developed by the Key EnergyCompanies at significant expense and effort, and that the restrictions contained in this Appendix A are reasonable andnecessary to protect the legitimate business interests of the Key Energy Companies. The Participant acknowledges thatthe services the Participant will render to the Key Energy Companies are of a special, unique, and extraordinarycharacter, which give them a peculiar value, the loss of which cannot be reasonably or adequately compensated indamages in any action at law. By reason of this, the Participant consents and agrees that in addition to any otherremedies the Key Energy Companies may have at law, the forfeiture requirements set forth in Section (j) below, and theremedies set forth in Section 14.5 of the Plan, if the Participant violates any provision or covenant set forth in thisAppendix A, the Key Energy Companies shall be entitled to the remedies of injunction, specific performance, and otherequitable relief. This Appendix A shall not, however, be construed as a waiver of any of the rights to which the KeyEnergy Companies may be entitled for damages or otherwise.(j)The Participant acknowledges and agrees that in the event the Participant breaches any of the covenants or agreementscontained in this Appendix A (including covenants described in Section (g)):i) The Committee may in its discretion determine that the Participant shall forfeit all of the outstandingPerformance Units, and the outstanding Performance Units shall immediately terminate, andii) The Committee may in its discretion require the Participant to return to the Company any payment received insettlement of the Performance Units, in such manner and on such terms as may be required by the Committee.The Company shall be entitled to set-off against such amounts any amount owed to the Participant by theCompany, subject to compliance with Section 409A of the Code, if applicable. The Committee shall exercisethe right of recoupment provided in this Section (j)(ii) within one year after the Participant’s breach of any of thecovenants or agreements contained in this Appendix A (including covenants described in Section (g)).-11-APPENDIX BThe provisions of this Appendix B shall apply to the Participant if the Participant’s primary work location is in California.(a)The Participant acknowledges that the Company and its Affiliates (collectively, the “Key Energy Companies”) willprovide the Participant with “Confidential Information” throughout the Participant’s employment with the KeyEnergy Companies. In addition to its meaning under the applicable law, Confidential Information shall include all non-public information owned, possessed, developed, or used by the Key Energy Companies, whether or not created ormaintained in written form, which constitutes, relates to, or refers to the Key Energy Companies or their business,including, but not limited to, any and all of the following: techniques, know-how, policies, procedures, intellectualproperty, technology, procurement requirements, purchasing and financial information, accounting information,manufacturing information, customer lists, data, and information, pricing, procedures and methods, strategies,expenditures, business plans and forecasts, marketing and financial information, costs, business prospects, businessopportunities, financial data, commercial data, custom or proprietary data, prices, trade secrets, designs, designspecifications, strategic plans, product development information (or other proprietary product data), marketing plans,processes, techniques, formulas, inventions, devices, training manuals, training materials, computer programs,databases, client documents, client lists, client contact information, risk management, engineering data, analyticalmodels, vendor lists, vendor contact information, employee names, compensation, competencies, skills, performance orother employee information, and any similar or other non-public or proprietary information. The Participant agrees thatConfidential Information shall be and remain the sole and absolute property of the Key Energy Companies. Upontermination of the Participant’s Continuous Service for any reason, the Participant shall immediately return to the KeyEnergy Companies all documents and materials that contain or constitute Confidential Information of the Key EnergyCompanies, in any form whatsoever, including, but not limited to, all copies, summaries, and abstracts thereof. TheParticipant agrees not to disclose, use, re-create, copy, duplicate, or otherwise permit the use, re-creation, disclosure,unauthorized copying, or duplication of any Confidential Information of the Key Energy Companies other than inconnection with authorized activities conducted in the course of the Participant’s service with the Key EnergyCompanies for the benefit of the Key Energy Companies. All Confidential Information that by its nature cannot bereturned, including, but not limited to, electronic information, shall be obliterated and destroyed upon termination of theParticipant’s Continuous Service.(b)Non-Solicitation of Service Providers. In exchange for the Confidential Information provided to the Participant asdescribed in Section (a) above, the grant of the Performance Units hereunder, employment, and other consideration asprovided herein, the Participant agrees that the Participant will not, directly or indirectly, solicit any Service Provider ofthe Key Energy Companies to leave his or her employment or service with the Key Energy Companies, employ or seekto employ, or hire or seek to hire, any Service Provider of the Key Energy Companies, or cause or induce anyCompeting Business to solicit or employ any Service Provider of the Key Energy Companies during the ProhibitedPeriod within the Restricted Area.(c)Non-Solicitation of Customers or Other Third Parties. In exchange for the Confidential Information provided to theParticipant as described in Section (a) above, the grant of the Performance Units hereunder, employment, and otherconsideration as provided herein, the Participant agrees that the Participant will not, on behalf of a Competing Businessor otherwise,-12-use or disclose, or assist others in using or disclosing, the Key Energy Companies’ trade secrets or ConfidentialInformation for the purposes of directly or indirectly soliciting, accepting as a client, or performing services of any typethat the Key Energy Companies provides or renders for any person or entity, including any current or former client ofthe Key Energy Companies.(d)Definitions. For purposes of this Appendix B:i) “Business” means any and all onshore or offshore oil and gas services provided by the Key EnergyCompanies to any client or customer of the Key Energy Companies.ii) “Competing Business” means any business, individual, partnership, firm, corporation, or other entity (otherthan the Key Energy Companies) that engages in any aspect of the Business with which the Participant wasinvolved within 12 months before the termination of the Participant’s Continuous Service, or provides servicesso similar in nature to those which the Key Energy Companies provide and with which the Participant wasinvolved within 12 months before the termination of the Participant’s Continuous Service that it would displacebusiness opportunities or customers of the Key Energy Companies, within the Restricted Area. The Participantwill be considered to be involved with an aspect of the Business if the Participant has business-relatedinteractions, or receives Confidential Information, with respect to such aspect of the Business.iii) “Customers or Other Third Parties” means any customers, distributors, or sales representatives of the KeyEnergy Companies with whom the Participant had direct business dealings, or otherwise had access toConfidential Information about, during the Participant’s employment with the Key Energy Companies.iv) “Prohibited Period” means the period during which the Participant is employed by the Key EnergyCompanies and the twelve (12) month period following the date on which the Participant’s Continuous Serviceterminates for any reason.v) “Restricted Area” means the 100 mile radius surrounding any location where the Participant performedservices, reported or regularly attended during the last two (2) years of the Participant’s period of employmentwith the Key Energy Companies.vi) “Service Provider” means any person who is personally providing services to the Key Energy Companies asan employee, consultant or independent contractor.(e)Effect of Employment or Other Agreement. Notwithstanding the foregoing, in the event of any inconsistency betweenthe covenants set forth above in Sections (a), (b) or (c) and the restrictive covenants in any written employment or otheragreement entered into between any of the Key Energy Companies and the Participant, the restrictive covenants of suchemployment or other agreement shall control; provided that Sections (g) and (h) of this Appendix B shall apply to thisPerformance Unit Award in the event of any breach of the restrictive covenants of such employment or otheragreement.(f)Enforceability. The parties agree that if the scope or enforceability of the covenants set forth in this Appendix B are inany way disputed at any time, it is the intent of the parties that a court or other trier of fact modify and enforce thecovenants to the extent required to render them enforceable.(g)Injunctive Relief and Other Equitable Relief. The Participant acknowledges and agrees that the business of the KeyEnergy Companies is highly competitive, that the Confidential Information has been developed by the Key EnergyCompanies at significant expense and effort, and that the restrictions contained in this Appendix B are reasonable andnecessary to-13-protect the legitimate business interests of the Key Energy Companies. The Participant acknowledges that the servicesthe Participant will render to the Key Energy Companies are of a special, unique, and extraordinary character, whichgive them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any actionat law. By reason of this, the Participant consents and agrees that in addition to any other remedies the Key EnergyCompanies may have at law, the forfeiture requirements set forth in Section (h) below, and the remedies set forth inSection 14.5 of the Plan, if the Participant violates any provision or covenant set forth in this Appendix B, the KeyEnergy Companies shall be entitled to the remedies of injunction, specific performance, and other equitable relief. ThisAppendix B shall not, however, be construed as a waiver of any of the rights to which the Key Energy Companies maybe entitled for damages or otherwise.(h)The Participant acknowledges and agrees that in the event the Participant breaches any of the covenants or agreementscontained in this Appendix B (including covenants described in Section (e)):i) The Committee may in its discretion determine that the Participant shall forfeit all of the outstandingPerformance Units, and the outstanding Performance Units shall immediately terminate, andii) The Committee may in its discretion require the Participant to return to the Company any payment received insettlement of the Performance Units, in such manner and on such terms as may be required by the Committee.The Company shall be entitled to set-off against such amounts any amount owed to the Participant by theCompany, subject to compliance with Section 409A of the Code, if applicable. The Committee shall exercisethe right of recoupment provided in this Section (h)(ii) within one year after the Participant’s breach of any ofthe covenants or agreements contained in this Appendix B (including covenants described in Section (e)).-14-Exhibit 10.16.4KEY ENERGY SERVICES, INC.2014 EQUITY AND CASH INCENTIVE PLANRESTRICTED STOCK UNIT AGREEMENT(Directors and Consultants)This Agreement is made and entered into as of [_______________] (the “Date of Grant”) by and between Key EnergyServices, Inc., a Maryland corporation (the “Company”) and you;WHEREAS, the Company, in order to induce you to enter into and to continue and dedicate service to the Company and tomaterially contribute to the success of the Company, agrees to grant you this restricted stock unit award;WHEREAS, the Company adopted the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan, as it may beamended from time to time (the “Plan”), under which the Company is authorized to grant restricted stock units to certain employees,directors and other service providers of the Company;WHEREAS, a copy of the Plan has been furnished to you and shall be deemed a part of this Restricted Stock Unit Agreement(the “Agreement”) as if fully set forth herein; andWHEREAS, you desire to accept the restricted stock unit award made pursuant to this Agreement.NOW, THEREFORE, in consideration of and mutual covenants set forth herein and for other valuable considerationhereinafter set forth, the parties agree as follows:1.The Grant. Subject to the conditions set forth below and in the remainder of this Agreement, the Companyhereby grants you, effective as of the Date of Grant, an award consisting of [_______________] number of Restricted StockUnits, whereby each Restricted Stock Unit represents the right to receive one share of common stock, par value $0.10 pershare, of the Company (“Stock”), plus the additional rights to Dividend Equivalents set forth in Section 3, in accordance withthe terms and conditions set forth herein and in the Plan (the “Award”). To the extent that any provision of this Agreementconflicts with the expressly applicable terms of the Plan, you acknowledge and agree that those terms of the Plan shall controland, if necessary, the applicable terms of this Agreement shall be deemed amended so as to carry out the purpose and intent ofthe Plan. Terms that have their initial letter capitalized, but that are not otherwise defined in this Agreement shall have themeanings given to them in the Plan.2.No Shareholder Rights. The Restricted Stock Units granted pursuant to this Agreement do not and shall not entitleyou to any rights of a holder of Stock prior to the date shares of Stock are issued to you in settlement of the Award.3.Dividend Equivalents. In the event that the Company declares and pays a dividend in respect of its outstanding sharesof Stock and, on the record date for such dividend, you hold Restricted Stock Units granted pursuant to this Agreement that have notbeen settled, the Company shall create a bookkeeping account that will track the amount of the Dividend Equivalents you would havebeen entitled to receive on or following the Date of Grant as if you had been the holder of record of the number of shares of Stockrelated to the Restricted Stock Units that have not been settled as of the record date, calculated without interest. All DividendEquivalent amounts credited to your bookkeeping account from the Date of Grant until the settlement of the underlying RestrictedStock Units shall be paid to you in a lump sum cash payment on the date that the underlying Restricted Stock Units associated withthat Dividend Equivalent amount is settled-1-pursuant to Section 5 or 6 below. In the event that the Restricted Stock Units are forfeited to the Company without settlement to you,you will also forfeit any associated Dividend Equivalent amounts.4.Vesting Date. Subject to all other terms and conditions of this Agreement, your Restricted Stock Units grantedpursuant to this Agreement will be 100% vested on the Date of Grant.5.Issuance of Stock. No shares of Stock shall be issued to you prior to the date on which the Restricted Stock Units vestand the restrictions with respect to the Restricted Stock Units lapse. Unless you have chosen to defer the settlement of all or a portionof your Award pursuant to Section 6 below, the Company shall, promptly and within thirty (30) days of the vesting date for yourAward, cause to be issued Stock registered in your name in payment of such vested Restricted Stock Units upon receipt by theCompany of any required tax withholding, if any. The Company shall evidence the Stock to be issued in payment of such vestedRestricted Stock Units in the manner it deems appropriate. The value of any fractional Restricted Stock Units shall be rounded down atthe time Stock is issued to you in connection with the Restricted Stock Units. No fractional shares of Stock, nor the cash value of anyfractional shares of Stock, will be issuable or payable to you pursuant to this Agreement. The value of such shares of Stock shall notbear any interest owing to the passage of time. Neither this Section 5 nor any action taken pursuant to or in accordance with thisSection 5 shall be construed to create a trust or a funded or secured obligation of any kind.6.Deferral Elections. Notwithstanding anything to the contrary in Section 5 above, you may elect to defer the settlementof all or a portion of your Award pursuant to a deferral election agreement provided to you by the Company. In the event that youproperly execute and deliver such a deferral election agreement to the Company within the time frame set by the Company and inaccordance with Section 409A of the Code, the settlement of any portion of your Award that has been properly deferred shall begoverned by the terms and conditions of the applicable deferral election agreement and all applicable rules of Section 409A of theCode. Any portion of your Award that you do not elect to defer or any portion of your Award that is not properly deferred under theterms of a deferral election agreement or Section 409A of the Code shall continue to be governed solely by the terms of thisAgreement.7.Payment of Taxes. As an independent contractor you will be responsible for the payment of any and all taxes thatresult from the grant, vesting or settlement of this Award.8.Compliance with Securities Law. Notwithstanding any provision of this Agreement to the contrary, the issuance ofStock will be subject to compliance with all applicable requirements of federal, state, or foreign law with respect to such securities andwith the requirements of any stock exchange or market system upon which the Stock may then be listed. No Stock will be issuedhereunder if such issuance would constitute a violation of any applicable federal, state, or foreign securities laws or other law orregulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, Stockwill not be issued hereunder unless (a) a registration statement under the Securities Act is, at the time of issuance, in effect with respectto the shares issued or (b) in the opinion of legal counsel to the Company, the shares issued may be issued in accordance with the termsof an applicable exemption from the registration requirements of the Securities Act. YOU ARE CAUTIONED THAT ISSUANCEOF STOCK UPON THE VESTING OF RESTRICTED STOCK UNITS GRANTED PURSUANT TO THIS AGREEMENTMAY NOT OCCUR UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. The inability of the Company to obtainfrom any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to thelawful issuance and sale of any shares subject to the Award will relieve the Company of any liability in respect of the failure to issuesuch shares as to which such requisite authority has not been obtained. As a condition to any issuance hereunder, the Company mayrequire you to satisfy any qualifications that may be necessary or appropriate to evidence compliance with any applicable law orregulation and to make any representation or warranty with respect to such compliance as may be requested by the Company. Fromtime to time, the Board and appropriate officers of the Company-2-are authorized to take the actions necessary and appropriate to file required documents with governmental authorities, stock exchanges,and other appropriate Persons to make shares of Stock available for issuance.9.Legends. The Company may at any time place legends referencing any restrictions imposed on the shares on allcertificates representing shares issued with respect to this Award.10.Right of the Company and Affiliates to Terminate Services. Nothing in this Agreement confers upon you the right tocontinue performing services for the Company or any Affiliate, or interfere in any way with the rights of the Company or any Affiliateto terminate your service relationship at any time.11.Furnish Information. You agree to furnish to the Company all information requested by the Company to enable it tocomply with any reporting or other requirements imposed upon the Company by or under any applicable statute or regulation.12.No Liability for Good Faith Determinations. The Company and the members of the Board shall not be liable for anyact, omission or determination taken or made in good faith with respect to this Agreement or the Restricted Stock Units grantedhereunder.13.Execution of Receipts and Releases. Any payment of cash or any issuance or transfer of shares of Stock or otherproperty to you, or to your legal representative, heir, legatee or distributee, in accordance with the provisions hereof, shall, to the extentthereof, be in full satisfaction of all claims of such persons hereunder. The Company may require you or your legal representative, heir,legatee or distributee, as a condition precedent to such payment or issuance, to execute a release and receipt therefor in such form as itshall determine.14.No Guarantee of Interests. The Board and the Company do not guarantee the Stock of the Company from loss ordepreciation.15.Company Records. Records of the Company or its Affiliates regarding your period of service, termination of serviceand the reason(s) therefor, and other matters shall be conclusive for all purposes hereunder, unless determined by the Company to beincorrect.16.Notice. All notices required or permitted under this Agreement must be in writing and personally delivered or sent bymail and shall be deemed to be delivered on the date on which it is actually received by the person to whom it is properly addressed orif earlier the date it is sent via certified United States mail.17.Waiver of Notice. Any person entitled to notice hereunder may waive such notice in writing.18.Information Confidential. As partial consideration for the granting of the Award hereunder, you hereby agree to keepconfidential all information and knowledge, except that which has been disclosed in any public filings required by law, that you haverelating to the terms and conditions of this Agreement; provided, however, that such information may be disclosed as required by lawand may be given in confidence to your spouse and tax and financial advisors. In the event any breach of this promise comes to theattention of the Company, it shall take into consideration that breach in determining whether to recommend the grant of any futuresimilar award to you, as a factor weighing against the advisability of granting any such future award to you.19.Successors. This Agreement shall be binding upon you, your legal representatives, heirs, legatees and distributees,and upon the Company, its successors and assigns.20.Clawback. Notwithstanding any provisions in the Agreement to the contrary, any compensation, payments, orbenefits provided hereunder (or profits realized from the sale of the Stock delivered hereunder), whether in the form of cash orotherwise, shall be subject to a clawback to the extent necessary to comply with the requirements of any Company policy or applicablelaw, including but not-3-limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, section 304 of the Sarbanes Oxley Act of 2002,or any regulations promulgated thereunder.21.Severability. If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality orinvalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall beconstrued and enforced as if the illegal or invalid provision had never been included herein.22.Company Action. Any action required of the Company shall be by resolution of the Board or by a person or entityauthorized to act by resolution of the Board.23.Headings. The titles and headings of Sections are included for convenience of reference only and are not to beconsidered in construction of the provisions hereof.24.Governing Law. All questions arising with respect to the provisions of this Agreement shall be determined byapplication of the laws of Maryland, without giving any effect to any conflict of law provisions thereof, except to the extent Marylandstate law is preempted by federal law. The obligation of the Company to sell and deliver Stock hereunder is subject to applicable lawsand to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of suchStock.25.Amendment. This Agreement may be wholly or partially amended or otherwise modified, suspended or terminated atany time or from time to time by the Board or the Committee (i) to the extent permitted by the Plan, (ii) to the extent necessary tocomply with applicable laws and regulations or to conform the provisions of this Agreement to any changes thereto, or (iii) to settle theRestricted Stock Units pursuant to all applicable provisions of the Plan. Except as provided in the preceding sentence, this Agreementcannot be modified, altered or amended in any way that is adverse to you except by a written agreement signed by both the you andthe Company.26.The Plan. This Agreement is subject to all the terms, conditions, limitations and restrictions contained in the Plan.[Signature Page to Follow]-4-IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.KEY ENERGY SERVICES, INC.By: _______________________Name: ___________________________________Title: ___________________________________AcceptanceI hereby acknowledge receipt of a copy of the Plan, represent that I have read and understood the terms and provisions of thePlan and this Agreement, and accept the Award, as of the date first written above, subject to all of the terms and provisions of the Planand this Agreement. Participant SignatureName: ____________________________________-5-Exhibit 21KEY ENERGY SERVICES, INC. — SUBSIDIARIES LISTThe following is a list of the significant subsidiaries of Key Energy Services, Inc. showing the place of incorporation or organization and the namesunder which each subsidiary does business. The names of certain subsidiaries are omitted as such subsidiaries, considered as a single subsidiary, would notconstitute a significant subsidiary.Subsidiary/Doing Business AsState ofIncorporation/Organization Advanced Measurements Inc.AlbertaEnconco CJSCRussian FederationGeostream Drilling, LLCRussian FederationGeostream Services Group, LLCRussian FederationGeostream Vostok, LLCRussian FederationGK Drilling Leasing Company Ltd.CyprusKey Energy Mexico, LLCDelawareKey Energy Services Bahrain W.L.LBahrainKey Energy Services de Mexico S. De R.L. de C.V.MexicoKey Energy Services, LLCTexasLeader, LLCRussian FederationRecursos Omega, S. de R.L. de C.V.MexicoWilayat Key Energy, L.L.C.Oman Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 24, 2015, with respect to the consolidated financial statements and internal control over financial reportingincluded in the Annual Report of Key Energy Services, Inc. on Form 10-K for the year ended December 31, 2014. We hereby consent to the incorporation byreference of said reports in the Registration Statements of Key Energy Services, Inc. on Forms S-8 (File No. 333-146293, effective September 25, 2007, FileNo. 333-146294, effective September 25, 2007, File No. 333-150098, effective April 4, 2008, File No. 333-159794, effective June 5, 2009 and File No. 333-181541, effective May 18, 2012) and on Forms S-3 (File No. 333‑171322, effective December 21, 2010, and File No. 333-172532, effective March 1, 2011)./s/ GRANT THORNTON LLPHouston, TexasFebruary 24, 2015Exhibit 31.1CERTIFICATIONI, Richard J. Alario, certify that:1. I have reviewed this annual report on Form 10-K of Key Energy Services, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. By: /s/ RICHARD J. ALARIO Richard J. Alario,President and Chief Executive Officer(Principal Executive Officer)Date: February 24, 2015Exhibit 31.2CERTIFICATIONI, J. Marshall Dodson, certify that:1. I have reviewed this annual report on Form 10-K of Key Energy Services, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. By: /S/ J. MARSHALL DODSON J. Marshall Dodson Senior Vice President and Chief Financial Officer(Principal Financial Officer) Date: February 24, 2015Exhibit 32CertificationPursuant to 18 U.S.C. SECTION 1350,As Adopted Pursuant toSection 906 of the SARBANES-OXLEY ACT of 2002Each of the undersigned officers of Key Energy Services, Inc. (the "Company") hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, to such officer's knowledge that:(1) the accompanying Annual Report on Form 10-K for the period ending December 31, 2014 as filed with the U.S. Securities and ExchangeCommission (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany as of the dates and for the periods expressed in the Report. /S/ RICHARD J. ALARIORichard J. Alario,President and Chief Executive Officer(Principal Executive Officer)Dated: February 24, 2015 /S/ J. MARSHALL DODSONJ. Marshall DodsonSenior Vice President and Chief Financial Officer(Principal Financial Officer)Dated: February 24, 2015

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