Key Energy Services Inc. Annual Report 2015

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, 2015 ¨¨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 ¨ No þIndicate 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. þTable 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 ¨ Accelerated filer þ 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, 2015, based on the $1.80 per share closingprice for the registrant’s common stock as quoted on the New York Stock Exchange on such date, was $240.5 million (for purposes of calculating theseamounts, 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 16, 2016, the number of outstanding shares of common stock of the registrant was 161,353,142.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 2016 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, 2015INDEX PageNumber PART I ITEM 1.Business5ITEM 1A.Risk Factors11ITEM 1B.Unresolved Staff Comments20ITEM 2.Properties20ITEM 3.Legal Proceedings21ITEM 4.Mine Safety Disclosures22 PART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities23ITEM 6.Selected Financial Data25ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations27ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk48ITEM 8.Financial Statements and Supplementary Data50ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure98ITEM 9A.Controls and Procedures98ITEM 9B.Other Information98 PART III ITEM 10.Directors, Executive Officers and Corporate Governance99ITEM 11.Executive Compensation99ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters99ITEM 13.Certain Relationships and Related Transactions, and Director Independence99ITEM 14.Principal Accounting Fees and Services99 PART IV ITEM 15.Exhibits, Financial Statement Schedules992Table 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;•our ability to receive shareholder approval at the 2016 annual meeting with respect to the reverse stock split proposal;•delisting of our common stock from trading on the NYSE;•our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenueand/or operating income and our inaccurate assessment of future activity levels, customer demand, and pricing stability which may notmaterialize (whether for Key as a whole or for geographic regions and/or business segments individually);•our ability to implement technological developments and enhancements;•our ability to execute our plans to withdraw from international markets outside North America;•our ability to achieve the benefits expected from acquisition and disposition transactions;•our ability to respond to changing or declining market conditions, including our ability to reduce the costs of labor, fuel, equipment andsupplies employed and used in our businesses;•whether we have sufficient liquidity;3Table of ContentsIndex to Financial Statements•the terms and conditions of any strategic transaction or alternative undertaken to restructure or refinance our indebtedness;•our ability to comply with covenants under our current credit facilities; and•other factors affecting our business described in “Item 1A. Risk Factors.”4Table 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 and Russia.In addition, we have a technology development and control systems business based in Canada. During the second half of 2015, we ceased operations inColombia, Ecuador and the Middle East.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 year ended December 31, 2013 have been revised toreflect the change in segments. We revised our segments to reflect changes in management’s resource allocation and performance assessment in makingdecisions 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 to5Table 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 C & J Energy Services, Inc., 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., C & J Energy Services, Inc., Nuverra Environmental Solutions, Forbes Energy Services Ltd., and Stallion Oilfield Services Ltd. Numerous smallercompanies also 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,Superior Energy Services, Inc. and C & J Energy Services, Inc. Numerous smaller companies also compete in our coiled tubing services markets in the UnitedStates. Demand for these services 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. Our rental inventory also includes frac stack equipment used to support hydraulic fracturing operations and theassociated 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 and Russia. During the second half of 2015, we ceased operations in Colombia, Ecuadorand the Middle East. We provide rig-based services such as the maintenance, workover, and recompletion of existing oil wells, completion of newly-drilledwells, and plugging and abandonment of wells at the end of their useful lives in each of those international markets. In addition, in Mexico we providedrilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico also requires us to provide third-party services, whichvary in scope by project. We also have a technology development and control systems business based in Canada which is focused on the development ofhardware and software related to oilfield service equipment controls, data acquisition and digital information flow.6Table of ContentsIndex to Financial StatementsIn April 2015, we announced our decision to exit markets in which we participate outside of North America. Our strategy is to sell or relocate theassets of the businesses operating in these markets. In the Middle East, we operated in the Kingdom of Bahrain and Oman. On August 5, 2013, we agreed tothe dissolution of AlMansoori Key Energy Services, LLC, a joint venture formed under the laws of Abu Dhabi, UAE, and the acquisition of the underlyingbusiness for $5.1 million. See “Note 2. Acquisitions” in “Item 8. Financial Statements and Supplementary Data” for further discussion. As of December 31,2015, we sold our subsidiary in Bahrain and certain assets in Oman, Ecuador and Colombia and are no longer operating in these markets. We are currently indiscussions to sell our subsidiary in Russia.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.Functional Support SegmentOur Functional Support segment includes unallocated overhead costs associated with sales, safety and administrative support for our U.S. andInternational reporting segments.Management UpdateOn February 18, 2016, we filed a Current Report on Form 8-K disclosing that, as part of our succession plan approved by our Board of Directors (the“Board”), as of March 1, 2016 (1) Richard J. Alario, the Company’s current Chief Executive Officer, would retire and, in connection therewith, resign from allpositions with the Company and its Board, (2) the number of members of the Board would be decreased to ten from eleven and (3) Robert Drummond wouldsucceed Mr. Alario as the Company’s President and Chief Executive Officer.On February 29, 2016, the Board, with Mr. Alario’s and Mr. Drummond’s concurrence, delayed the effective date of the foregoing actions to theearlier of (1) April 1, 2016 or (2) the first business day immediately following the day that the company files its Annual Report on Form 10-K for the fiscalyear ended December 31, 2015.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, 2015: Horsepower < 450 HP ≥ 450 HP TotalMarketed213 260 473Stacked301 110 411Total514 370 8847Table of ContentsIndex to Financial StatementsCoiled 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, 2015: Pipe Diameter < 2" ≥ 2" TotalMarketed17 19 36Stacked3 12 15Total20 31 51Fluid 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, 2015: Marketed Stacked TotalTruck Type Vacuum Trucks383 251 634Winch Trucks53 48 101Hot Oil Trucks86 60 146Kill Trucks89 42 131Other14 13 27Total625 414 1,039Disposal 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, 2015: Owned Leased(1) TotalLocation Arkansas1 1 2Louisiana3 — 3New Mexico1 9 10North Dakota1 1 2Texas29 28 57Total35 39 74(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.8Table of ContentsIndex to Financial StatementsCustomersOur customers include major oil companies, foreign national oil companies, and independent oil and natural gas production companies. During theyears ended December 31, 2015, 2014 and 2013, Chevron Texaco Exploration and Production accounted for approximately 15% of our consolidatedrevenue. No other customer accounted for more than 10% of our consolidated revenue in the years ended December 31, 2015, 2014 or 2013.No customers accounted for more than 10% of our total accounts receivable as of December 31, 2015 and 2014.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 competitive factor in establishing and maintaining long-term customerrelationships is having an experienced, skilled and well-trained work force. We devote substantial resources toward employee safety and training programs.In addition, we believe that our proprietary KeyView® system provides important safety enhancements. We believe many of our larger customers placeincreased emphasis on the safety, performance and quality of the crews, equipment and services provided by their contractors. Although we believe customersconsider all of these factors, price is often the primary factor in determining which service provider is awarded the work. However, in numerous instances, wesecure and maintain work for large customers for which efficiency, safety, technology, size of fleet and availability of other services are of equal importanceto price.The demand for our services and price we receive fluctuates, primarily in relation to the price (or anticipated price) of oil and natural gas, which, inturn, is driven for the most part by the supply of, and demand for, oil and natural gas. Generally, as supply of those commodities decreases and demandincreases, service and maintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of their wells in a higherpriced environment. However, in a lower oil and natural gas price environment, demand for service and maintenance generally decreases as oil and naturalgas producers decrease their activity. In particular, the demand for new or existing field drilling and completion work is driven by available investmentcapital 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 risktolerant when commodity prices are low or volatile, we may experience a more rapid decline in demand for well maintenance services compared with demandfor other types of oilfield services. Furthermore, in a low commodity price environment, fewer well service rigs are needed for completions, as these activitiesare generally 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 2016 and 2033. 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.9Table of ContentsIndex to Financial StatementsWe 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, 2015, we employed approximately 3,800 persons in our U.S. operations and approximately 500 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 experienced anysignificant 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 Earth’satmosphere. 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.10Table of ContentsIndex to Financial StatementsWater 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.Occupational 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, New Mexico and North Dakota. Regulations in these statesrequire us to obtain an Underground Injection Control permit to operate each of our SWD wells. The applicable regulatory agency may suspend or modifyone or more of our permits if our well operations are likely to result in pollution of freshwater, substantial violation of permit conditions or applicable 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.The depressed conditions in our industry have materially and adversely affected our results of operations, cash flows and financial condition during2015 and, unless conditions in our industry improve, this trend will continue during 2016 and potentially beyond. Oil and natural gas prices began a rapid and substantial decline in the fourth quarter of 2014. Depressed commodity price conditions persisted andworsened during 2015 and that trend has continued into 2016. As a result, demand for our products and services has declined substantially, and the prices weare able to charge our customers for our products and services have also declined substantially. These trends materially and adversely affected our results ofoperations, cash flows and financial condition during 2015 and, unless conditions in our industry improve, this trend will continue during 2016 andpotentially beyond.We had substantial net losses during 2014 and 2015, and, during 2015, our cash flow used by operations was $22.4 million. If industry conditionsdo not improve, we may continue to suffer net losses and negative cash flows from operations.Although we pursued a number of initiatives during 2015 to improve our liquidity and financial position and are continuing to pursue otherinitiatives, there can be no assurance that we will be able to successfully consummate these initiatives or that they will be successful to improve our financialcondition and liquidity.11Table of ContentsIndex to Financial StatementsOur 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. A continuation of the depressed state of our industry, tight credit markets and disruptions in the U.S. and globaleconomies and financial systems may adversely impact our business.Prices for oil and natural gas historically have been volatile as a result of changes in the supply of, and demand for, oil and natural gas and otherfactors. The significant decline in oil and natural gas prices that began in 2014 and continued throughout 2015 caused many of our customers tosignificantly reduce drilling, completion and other production activities and related spending on our products and services in 2015. Many exploration andproduction companies have already announced plans to further reduce spending and activity levels in 2016; thus, we expect this trend to continue andpotentially worsen in 2016 and potentially beyond. In addition, the reduction in demand from our customers has resulted in an oversupply of many of theservices and products we provide, and such oversupply has substantially reduced the prices we can charge our customers for our services.We depend on our customers’ willingness to make capital expenditures to explore for, develop and produce oil and natural gas. Therefore, weaknessin oil and natural gas prices (or the perception by our customers that oil and natural gas prices will remain reduced or will continue to decrease in the future)has and may continue to result in a reduction in the utilization of our equipment and in lower rates for our services. In addition to adversely affecting us, thecontinuation and worsening of these conditions have resulted and may continue to result in a material adverse impact on certain of our customers’ liquidityand financial position resulting in further spending reductions, delays in payment of, or non-payment of, amounts owing to us and similar impacts. Theseconditions have had and may continue to have an adverse impact on our financial conditions, results of operations and cash flows, and it is difficult topredict how long the current depressed commodity price environment will continue.Many factors affect the supply of and demand for oil and natural gas and, therefore, influence product prices, 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;•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.Spending by exploration and production companies has also been, and may continue to be, impacted by conditions in the capital markets.Limitations on the availability of capital, and higher costs of capital, for financing expenditures have contributed to exploration and production companiesmaking materially significant reductions to capital budgets and such limitations may continue if oil and natural gas prices remain at current levels ordecrease further. Such cuts in spending have curtailed, and may continue to curtail, drilling programs as well as discretionary spending on well services,which has resulted, and may continue to result, in a reduction in the demand for our services, the rates we can charge and the utilization of our assets.Moreover, reduced discovery rates of new oil and natural gas reserves, and a decrease in the development rate of reserves in our market areas whether due toincreased governmental regulation, limitations on exploration and drilling activity or other factors, have had, and may continue to have, a material adverseimpact on our business, even in a stronger oil and natural gas price environment.12Table of ContentsIndex to Financial StatementsA 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.The amount of our debt and the covenants in the agreements governing our debt could negatively impact our financial condition, results of operationsand business prospects.As of December 31, 2015, we had $964.9 million of total debt. Our level of indebtedness, and the covenants contained in the agreements governingour debt, could have important consequences for our operations, including:•making it more difficult for us to satisfy our obligations under the agreements 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 has variable interest rates.As more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and CapitalResources, each of our ABL Facility, our Term Loan Facility and our Indenture contain affirmative and negative covenants, including financial ratios andtests, with which we must comply. These covenants include, among others, covenants that restrict our ability to take certain actions without the permission ofthe holders of our indebtedness, including the incurrence of debt, the granting of liens, the making of investments, the payment of dividends and the sale ofassets, and the financial ratios and tests include, among others, a requirement that we comply with a minimum liquidity covenant, an asset coverage ratio and,during certain periods, a fixed charge coverage ratio. In addition, under our Term Loan Facility and ABL Facility, we are required to take certain steps toperfect the security interest in the Term Priority Collateral within specified periods following the closing of those facilities.Our ability to satisfy required financial covenants, ratios and tests in our debt agreements can be affected by events beyond our control, includingcommodity prices, demand for our services, the valuation of our assets, costs incurred in connection with resolving our FCPA investigation as well asprevailing economic, financial and industry conditions, and we can offer no assurance that we will be able to remain in compliance with such covenants orthat the holders of our indebtedness will not seek to assert that we are not in compliance with our covenants. A breach of any of these covenants, ratios ortests could result in a default under our indebtedness. If we default, lenders under our ABL Facility will no longer be obligated to extend credit to us andthey, as well as the trustee for our outstanding notes and the administrative agent under our Term Loan Facility, could declare all amounts of outstandingdebt together with accrued interest, to be immediately due and payable. The results of such actions would have a significant negative impact on our results ofoperations, financial position and cash flows, and absent strategic alternatives such as refinancing or restructuring our indebtedness or capital structure, wewould not have sufficient liquidity to repay all of our outstanding indebtedness. If such a result were to occur, we may be forced into bankruptcy or forced toseek bankruptcy protection to restructure our business and capital structure and may have to liquidate our assets and may receive less than the value at whichthose assets are carried on our financial statements.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, 2015, we had $964.9 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.13Table of ContentsIndex to Financial StatementsWe may not be able to generate sufficient cash flow to meet our debt service and other obligations.Our ability to make payments on our indebtedness and to fund planned capital expenditures and other costs of our operations depends on our abilityto generate cash in the future. This, to a large extent, is subject to conditions in the oil and natural gas industry, including commodity prices, demand for ourservices and the prices we are able to charge for our services, general economic and financial conditions, competition in the markets in which we operate, theimpact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control. During fiscal year 2015,we had negative cash flows from operations, and this trend could continue if conditions in our industry continue or worsen.In light of the ongoing depressed conditions in our industry and our financial condition, we continue to explore alternatives to improve ourliquidity. We may not be able to implement any such a transaction or alternative, if necessary, on commercially reasonable terms or at all, and, even if we aresuccessful in implementing a strategic transaction or alternative, such transaction or alternative may not be successful in allowing us to meet our debtobligations. If we are unable to generate sufficient cash flow to satisfy our debt or other obligations, or to implement a strategic transaction or alternative, ourcreditors could potentially force us into bankruptcy or we could be forced to seek bankruptcy protection to restructure our business and capital structure, inwhich case we could be forced to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements. Even ifwe are able to implement a strategic transaction or alternative, such transaction or alternative may impose onerous terms on us. Additionally, we have asignificant amount of secured indebtedness that is senior to our unsecured indebtedness and a significant amount of total indebtedness that is senior to ourexisting common stock in our capital structure. As a result, we believe that implementation of a strategic transaction or alternative or a bankruptcyproceeding could result in a limited recovery for unsecured noteholders, if any, and place equity holders at significant risk of losing all of their interests inour company.Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.Borrowings under our ABL 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.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. Currently, theprices we are able to charge for our services and the demand for such services are severely depressed. Even when industry conditions are favorable, weoperate in a very competitive industry and as a result, we are not always successful in raising, or maintaining our existing prices. Additionally, duringperiods of increased market demand, a significant amount of new service capacity, including new well service rigs, fluid hauling trucks, coiled tubing unitsand new fishing and rental equipment, may enter the market, which also puts pressure on the pricing of our services and limits our ability to increase ormaintain prices. Furthermore, during periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could furtheradversely affect 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.14Table of ContentsIndex to Financial StatementsWe 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 ABL Facility (as definedbelow) are not sufficient to fund our capital expenditure budget, we would be required to reduce these expenditures or fund these expenditures through debtor equity or alternative 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. We currently have very little ability to raise new capital or refinance our indebtedness due to our financial condition and covenants in our debtinstruments and, as a result, we have undertaken efforts to curtail our spending, which may limit our ability to grow our business and our ability to sustain orimprove our profits may be adversely affected. Any of the foregoing consequences could materially and adversely affect our business, financial condition,results of operations and prospects.Increased 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. During 2015, we recorded $722.1 million in impairment charges, and ifconditions in our industry do not improve or worsen, we could record additional impairment charges in future periods, which could have a material adverseeffect on our financial position and results of operations.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 insurance15Table of ContentsIndex to Financial Statementspolicies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Wealso are subject to the risk that we may be unable to maintain or obtain insurance of the type and amount we desire at a reasonable cost. If we were to incur asignificant liability for which we were uninsured or for which we were not fully insured, it could have a material adverse 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 substantially greater financial resources than we do. Contracts are traditionallyawarded 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 wholly-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 and Russia and we own a technology development and control systems business based in Canada. Asa result, we are exposed to risks of international 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.16Table of ContentsIndex to Financial StatementsOur 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.If there is a failure to comply with the Foreign Corrupt Practices Act (“FCPA”) and similar laws, it could have a negative impact on our ongoingoperations.Our ability to comply with the FCPA and similar laws is dependent on the success of our compliance program, including our ability to continue tomanage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on theefforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil and criminalprosecution 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.The current inquiries into issues related to compliance with the FCPA and similar laws may have a negative impact on our ongoing operations.In January 2014, the SEC advised Key that it is investigating possible violations involving business activities of Key's operations in Russia. In April2014, we became aware of 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. In 2014 and 2015, a Special Committee of the Board of Directors concludedan independent investigation into these matters, as well as a review of certain aspects of the Company’s operations and a risk assessment with regard to ourother international locations. The Department of Justice (“DOJ”) is also conducting investigations of these matters, and we are cooperating with both the SECand DOJ investigations. See Item 3. Legal Proceedings for a more detailed discussion of these investigations.We have incurred, and may continue to incur, legal and other expenses in connection with the Special Committee and government investigationsand related compliance activities. In addition, our reputation and our ability to obtain new business or retain existing business from our current and potentialclients in the relevant foreign jurisdictions could be adversely affected by the outcome of, or publicity relating to, the investigations, which could have anegative impact on our results of operations.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.17Table of ContentsIndex to Financial StatementsThe 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, 2015, and our ten largest customersrepresented approximately 51% 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 are pumped under high pressure into the formation. Although we are nota provider of hydraulic fracturing services, many of our services complement the hydraulic 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 costsassociated 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 future18Table of ContentsIndex to Financial Statementsregulatory initiatives, or the specific responsibilities that may arise from such initiatives may subject us to increased costs and liabilities, which couldinterrupt 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; and•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.19Table of ContentsIndex to Financial StatementsConservation 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.The Company has received a notice of failure to comply with the NYSE continued listing standard related to the minimum trading price of its commonstock. If the Company is unable to avoid the delisting of its common stock from the NYSE, it could have a material adverse effect on the liquidity andtrading price of the Company’s common stock.On September 2, 2015, Key Energy Services, Inc. was notified by the New York Stock Exchange (the “NYSE”) that it is not in compliance with thecontinued listing standards set forth in Section 802.01C of the NYSE Listed Company Manual because the average closing price of the Company’s commonstock was less than $1.00 over a consecutive 30 trading-day period.Under the NYSE Listed Company Manual, a listed company is generally afforded a six-month period following receipt of the NYSE deficiencynotice to regain compliance, after which the NYSE will commence suspension of trading and delisting procedures. However, if the Company’s plan to curethe stock price deficiency requires stockholder approval, the Company can avoid delisting procedures as long as it obtains stockholder approval of thereverse stock split at its next annual meeting and promptly implements the reverse stock split following the meeting. Regaining compliance requires, on thelast trading day of any calendar month, a company’s common stock price per share and 30 trading-day average closing share price to be at least $1.00. Duringthis six month period, and if necessary, any additional period in order to obtain stockholder approval at the Company’s next annual meeting, a company’scommon stock will continue to be traded on the NYSE, subject to compliance with other continued listing requirements and further subject to the discretionof the NYSE to commence delisting procedures against a company’s common stock for other reasons, such as selling for an abnormally low price. Althoughthe Company intends to submit the reverse stock split to its stockholders at the next annual meeting in order to cure the stock price deficiency and return tocompliance with the NYSE continued listing requirement, the Company can provide no assurance that this measure will be successful.In addition, the Company's common stock could be delisted pursuant to Section 802.01D of the NYSE Listed Company Manual if the trading priceof the Company's stock is deemed by the NYSE to be “abnormally low.” In this event, the Company would not have an opportunity to cure the stock pricedeficiency, and the Company's shares would be immediately suspended from trading on the NYSE. While there is no formal definition of “abnormally low” inthe NYSE rules, we understand that the NYSE has recently delisted the common stock of issuers when it trades below $0.16 per share. The Company’scommon stock has recently traded as low as $0.17 per share and we can offer no assurance that continued trading of the Company’s common stock at thislevel or a lower level would not be deemed “abnormally low” by the NYSE, which would result in immediate suspension and subsequent delisting. Inaddition, the NYSE will promptly initiate suspension and delisting procedures if the NYSE determines that we have an average global market capitalizationover a consecutive 30 trading-day period of less than $15.0 million.If the Company’s common stock ultimately were to be delisted for any reason, it could negatively impact the Company by, among other things, (i)reducing the liquidity and market price of the Company’s common stock; (ii) reducing the number of investors willing to hold or acquire the Company’scommon stock, which could further harm the performance of the Company’s common stock and negatively impact the Company’s ability to raise equityfinancing; (iii) limiting the Company’s ability to use a registration statement to offer and sell freely tradable securities, thereby preventing the Company fromaccessing the public capital markets; and (iv) impairing the Company’s ability to provide equity incentives to its employees.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.20Table of ContentsIndex to Financial StatementsThe following table shows our active owned and leased properties, as well as active SWD facilities, categorized by geographic region as ofDecember 31, 2015:RegionOffice, Repair &Service and Other(1) SWDs, Brine andFreshwater Stations(2) Operational FieldServices FacilitiesUnited States Owned13 35 86Leased42 39 48International Owned— — —Leased6 — 4TOTAL61 74 138(1)Includes 21 residential properties leased in the United States and one residential property 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 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.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. Two of the five cases have beenconsolidated in United States District Court for the Central District of California. On December 22, 2015, that court issued an order granting in part anddenying in part a class certification motion. The court certified a class of hourly paid, non-exempt oilfield employees who allege they did not receivereimbursement for all business expenses and allege they did not receive all rest breaks required by California law. The court did not determine whether Key isliable to any of the class members. The court in one of the remaining cases that had been stayed pending outcome of the class certification motion recentlyissued an order lifting the stay. The fourth case is waiting for a decision regarding whether it will move forward in California state court or in federal court.The fifth case is an enforcement action for civil penalties based on California’s Private Attorneys General Act, which is pending in California state court. Wehave investigated the claims in all five lawsuits, and intend to vigorously defend them. At this time, we cannot estimate any possible loss or range of loss.In January 2014, the SEC advised Key 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. On May 30, 2014,Key voluntarily disclosed the allegation involving our Mexico operations and certain information from the Company’s initial investigation to both the SECand Department of Justice (“DOJ”). A Special Committee of our Board of Directors conducted an independent investigation regarding this allegation as wellas possible violations of the FCPA involving business activities of our operations in Russia. The Special Committee’s independent review, which alsoincluded a review of certain aspects of the Company’s operations in Colombia, as well as a risk assessment with regard to our other international locations,has been completed. We are continuing to cooperate with the SEC and DOJ. At this time we are unable to predict the ultimate resolution of these matters withthese agencies and, accordingly, cannot reasonably estimate any possible loss or range of loss.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 December21Table of ContentsIndex to Financial Statements11, 2014, the Court entered an order that consolidated the two lawsuits into one action, along with any future filed tag-along actions brought on behalf ofpurchasers of Key Energy Services, Inc. common stock. The order also appointed Inter-Local Pension Fund as the lead plaintiff in the class action andapproved 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 forthe consolidated class. The lead plaintiff filed the consolidated amended complaint on February 13, 2015. Among other changes, the consolidated amendedcomplaint adds Taylor M. Whichard III and Newton W. Wilson III as defendants, and seeks to represent a class of purchasers of the Company's stock betweenSeptember 4, 2012 and July 17, 2014. Defendants Key Energy Services, Inc., Richard J. Alario, J. Marshall Dodson and Newton W. Wilson III filed a Motionto Dismiss on April 14, 2015. Defendant Taylor M. Whichard III filed a Joinder in Motion and Motion to Dismiss on the same date. Lead plaintiff filed anopposition to that motion, and all defendants filed reply briefs in support of the motion. The court has not ruled upon it. Because this case is in the earlystages, 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.In March 2015, two collective action lawsuits were filed in the Southern District of Texas, Corpus Christi Division, individually and on behalf of allothers similarly situated, alleging violations of the Fair Labor Standards Act of 1938 (“FLSA”). We agreed to conditional certification in the first lawsuit andnotice of the case issued to 56 putative class members. Roughly 20% of the eligible putative class members timely filed a notice of consent to join thelawsuit. We will soon begin merit-based discovery in the first lawsuit, which will last at least six months. We also agreed to conditional certification in thesecond lawsuit and notice of the case recently issued to 14 putative class members. Four putative class members, including the named plaintiff, have filed anotice of consent to join the lawsuit thus far and there is approximately a month and a half remaining for others to join. The parties will begin merit-baseddiscovery in the second case as soon as the notice period closes. Because the cases are in the early stages, we cannot predict the outcome of these cases at thistime. Accordingly, we cannot estimate any possible loss or range of loss for either case.In May 2015, a class and collective action lawsuit was filed in the Southern District of Texas, Houston Division, individually and on behalf of allothers similarly situated, alleging violations of the FLSA and the New Mexico Minimum Wage Act. We agreed to conditional certification of a putative classand notice issued to 174 putative class members. The notice period closed in early February and roughly 15% of eligible putative class members timely fileda consent to join the lawsuit. The parties will soon begin merit-based discovery in this case, which will likely last six to nine months. Because the case is inthe early stages, we cannot predict the outcome at this time. Accordingly, we cannot estimate any possible loss or range of loss for this case.In November 2015, the Santa Barbara County District Attorney filed a criminal complaint against two former employees and Key, and specificallyalleging three counts of violations of California Labor Code section 6425(a) against Key. The complaint seeks unspecified penalties against Key related toan October 12, 2013 accident which resulted in the death of one Key employee at a drilling site near Santa Maria, California. An arraignment was held onFebruary 10, 2016, where Key and its former employees pleaded not guilty to all charges. Because the matter is in early stages, we cannot predict the outcomeat this time. Accordingly, we cannot estimate any possible loss or range of loss.On or about November 23, 2015, the North Dakota Industrial Commission ("NDIC") filed a notice in the county of Burleigh County, ND allegingstatutory violations by Key Energy Services, LLC, as operator of two salt water disposal wells in the state of North Dakota. The NDIC has pled forapproximately $888,000 in fines and costs. The Company is currently in discussions with the NDIC and is not able to estimate any possible loss or range ofloss at this time.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.22Table 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 16, 2016, there were 560registered holders of 161,353,142 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, 2015 1st Quarter$2.39 $1.322nd Quarter2.69 1.723rd Quarter1.60 0.474th Quarter0.78 0.42 High LowYear Ended December 31, 2014 1st Quarter$9.24 $7.152nd Quarter10.45 7.963rd Quarter9.19 4.844th Quarter4.82 1.05The 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, oldpeer group and new peer group as established by management.Our peer group was adjusted during 2015 to more closely represent the size of our Company. The new peer group consists of the followingcompanies: Archrock, Inc., Basic Energy Services, Inc., C & J Energy Services, Inc., Helix Energy Solutions Group, Inc., Oceaneering International Inc., OilStates International Inc., Patterson UTI Energy Inc., Pioneer Energy Services Corp., RPC, Inc., Seventy-Seven Energy Inc., and Superior Energy Services, Inc.The old peer group consists of the following companies: Archrock, Inc., Baker Hughes Incorporated, Basic Energy Services, 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 new and old peer groups. The graph assumes that the value of the investment in our common stock andeach index (including reinvestment of dividends) was $100 at December 31, 2010 and tracks the return on the investment through December 31, 2015.23Table 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, 2010 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, 2015, 2014 and 2013. Under the terms of ourindenture, ABL Facility and Term Loan Facility (defined below), we must meet certain financial covenants before we may pay dividends. We do not currentlyintend to pay dividends.Issuer Purchases of Equity SecuritiesDuring the fourth quarter of 2015, we repurchased an aggregate of 92,750 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, 2015 to October 31, 201569,022 $0.54November 1, 2015 to November 30, 20153,174 $0.50December 1, 2015 to December 31, 201520,554 $0.48(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.24Table of ContentsIndex to Financial StatementsEquity Compensation Plan InformationThe following table sets forth information as of December 31, 2015 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)904 $14.81 4,526Equity compensation plans not approved by stockholders— $— —Total904 4,526(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 811,550 of shares that may be issued upon the exercise of stock options and 92,883 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 31,2015.(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, 2015. 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, 2011 through December 31, 2015 has been derived fromour audited financial statements included in “Item 8. Financial Statements and Supplementary Data.” For the year ended December 31, 2011 we havereclassified the historical results of operations of our Argentina business as discontinued operations. The historical selected financial data should be read inconjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidatedfinancial statements and related notes thereto included in “Item 8. Financial Statements and Supplementary Data.”25Table of ContentsIndex to Financial StatementsRESULTS OF OPERATIONS DATA Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share amounts)REVENUES$792,326 $1,427,336 $1,591,676 $1,960,070 $1,729,211COSTS AND EXPENSES: Direct operating expenses714,637 1,059,651 1,114,462 1,308,845 1,085,190Depreciation and amortization expense180,271 200,738 225,297 213,783 166,946General and administrative expenses202,631 249,646 221,753 230,496 223,299Impairment expense722,096 121,176 — — —Operating income (loss)(1,027,309) (203,875) 30,164 206,946 253,776Loss on early extinguishment of debt— — — — 46,451Interest expense, net of amounts capitalized73,847 54,227 55,204 53,566 40,849Other (income) expense, net9,394 1,009 (803) (6,649) (8,977)Income (loss) from continuing operationsbefore tax(1,110,550) (259,111) (24,237) 160,029 175,453Income tax (expense) benefit192,849 80,483 3,064 (57,352) (64,117)Income (loss) from continuing operations(917,701) (178,628) (21,173) 102,677 111,336Loss from discontinued operations, net of tax— — — (93,568) (10,681)Net income (loss)(917,701) (178,628) (21,173) 9,109 100,655Income (loss) attributable to noncontrollinginterest— — 595 1,487 (806)INCOME (LOSS) ATTRIBUTABLE TO KEY$(917,701) $(178,628) $(21,768) $7,622 $101,461Earnings (loss) per share from continuingoperations attributable to Key: Basic$(5.86) $(1.16) $(0.14) $0.67 $0.77Diluted$(5.86) $(1.16) $(0.14) $0.67 $0.76Loss per share from discontinued operations: Basic$— $— $— $(0.62) $(0.07)Diluted$— $— $— $(0.62) $(0.07)Earnings (loss) per share attributable to Key: Basic$(5.86) $(1.16) $(0.14) $0.05 $0.70Diluted$(5.86) $(1.16) $(0.14) $0.05 $0.69 26Table of ContentsIndex to Financial Statements Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands)Income (loss) from continuing operationsattributable to Key: Income (loss) from continuing operations$(917,701) $(178,628) $(21,173) $102,677 $111,336Income (loss) attributable to noncontrollinginterest— — 595 1,487 (806)Income (loss) from continuing operationsattributable to Key$(917,701) $(178,628) $(21,768) $101,190 $112,142Weighted Average Shares Outstanding: Basic156,598 153,371 152,271 151,106 145,909Diluted156,598 153,371 152,271 151,125 146,217CASH FLOW DATA Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands)Net cash provided by (used in) operatingactivities$(22,386) $164,168 $228,643 $369,660 $188,305Net cash used in investing activities(19,403) (146,840) (160,881) (428,709) (520,090)Net cash provided by (used in) financingactivities218,729 (22,058) (85,492) 73,946 306,084Effect of changes in exchange rates on cash110 3,728 87 (4,391) 4,516BALANCE SHEET DATA Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands)Working capital$265,943 $191,937 $273,809 $284,698 $311,060Property and equipment, gross2,376,388 2,555,515 2,606,738 2,528,578 2,184,810Property and equipment, net880,032 1,235,258 1,365,646 1,436,674 1,197,300Total assets1,327,798 2,322,763 2,573,573 2,744,960 2,584,349Long-term debt and capital leases, net ofcurrent maturities961,700 737,691 750,084 831,482 758,802Total liabilities1,187,508 1,264,700 1,322,480 1,457,628 1,369,718Equity140,290 1,058,063 1,251,093 1,287,332 1,214,631Cash 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.”27Table 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 and Russia. In addition, we have a technology development andcontrol systems business based in Canada. During the second half of 2015, we ceased operations in Colombia, Ecuador and the Middle East.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 the lower oil and natural gas price environment that has persisted since late 2014, demand for service and maintenance has decreased as oil andnatural gas producers decrease their activity. In particular, the demand for new or existing field drilling and completion work is driven by availableinvestment capital for such work and our customers have significantly curtailed their capital spending in both 2015 and 2016. Because these types ofservices can be easily “started” and “stopped,” and oil and natural gas producers generally tend to be less risk tolerant when commodity prices are low orvolatile, we may experience a more rapid decline in demand for well maintenance services compared with demand for other types of oilfield services. Further,in a lower-priced environment, fewer well service rigs are needed for completions, as these activities are generally associated 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 customers’ spending is largely driven by the prices received on their sale of oil and natural gasproduction. In the current depressed commodity price environment, demand for our services and the price we receive for our services has fallen significantlyand competition for the remaining market activity has increased. In response, we have stacked older and more costly to operate equipment and reduced theamount of capital invested in the business for growth or replacement of equipment. We have also taken steps to lower our cost to operate, reducing headcountand the costs of labor. Additionally, we have taken steps to reduce the fixed costs in our business and will continue to do so. These actions have been takenin an effort to preserve our liquidity pending an increase in activity levels.28Table of ContentsIndex to Financial StatementsExit Operations Outside North AmericaAfter evaluating market opportunities presented by the secular trend of aging horizontal wellbores and options for the allocation of the Company’scapital, the Board of Directors and management have refined the Company’s strategy to focus on North American production enhancement. As such, in thesecond quarter of 2015, we began our evaluation of alternatives and took steps to exit markets in which we participate outside of North America, either bysale or relocation of assets. We have sold our subsidiary in Bahrain and in Oman, Colombia and Ecuador, we have sold the property, plant and equipment, netand inventories and have ceased operations. We are currently in discussion to sell our Russian subsidiary and expect the sale to occur in the first half of 2016.PERFORMANCE 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)2011$94.87 $4.03 1,8462012$94.05 $2.75 1,8712013$97.98 $3.73 1,7052014$93.17 $4.37 1,8042015$48.66 $2.62 943(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.com29Table of ContentsIndex to Financial StatementsInternally, 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 2013 through 2015. Rig Hours Trucking Hours Key’s U.S.Working Days(1) U.S. International Total 2015: First Quarter271,005 36,950 307,955 418,032 62Second Quarter232,169 25,555 257,724 342,271 63Third Quarter226,953 13,330 240,283 309,601 64Fourth Quarter203,252 8,279 211,531 247,979 62Total 2015933,379 84,114 1,017,493 1,317,883 2512014: 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 2,172,595 252(1)Key's U.S. working days are the number of weekdays during the quarter minus national holidays.MARKET CONDITIONS AND OUTLOOKMarket Conditions — Year Ended December 31, 2015Our 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.The fourth quarter continued the deterioration of the oil and gas industry as persistently low commodity prices caused oilfield service activity tocontinue to decline. Additionally, a pronounced seasonal reduction in activity, due to holidays, fewer daylight hours and adverse weather conditions,contributed to activity declines during the quarter. E&P companies have continued to scale back capital spending in order to preserve liquidity. Further,operating expenditures, on which Key’s core production services business relies, have also been scaled down as the economics supporting this spend haseroded at current commodity prices. Key has aggressively reshaped its organizational structure and reduced its cost structure to reflect the realities of today’smarket.The Company moved closer to exiting the markets in which it participates outside of North America. All of our physical assets in Colombia,Ecuador, Bahrain and Oman have been sold or were relocated to the U.S. As it pertains to the Company’s business in Russia, we continue to work withpotential buyers to finalize the due diligence and negotiate a final transaction. Once we have finalized a sale of our Russia business, our remaining operationsoutside of the U.S. will be limited to Mexico and our subsidiary in Canada.30Table of ContentsIndex to Financial StatementsMarket Outlook The domestic oil and gas complex is now facing the challenge of how to achieve return-accretive cash flow in the face of low commodity prices. Webelieve that due to deferred maintenance there is a backlog of well maintenance building, though it remains unclear what set of factors will drive ourcustomers to resume normal production maintenance activity levels. However, we believe that our customers must work on these wells to maintain theproduction base and further believe that the economics associated with this work make sense at an oil price lower than was enjoyed by our customers at thepeak of the most recent drilling cycle. As such, we believe that our commitment to production enhancement activities will eventually provide a meaningfulopportunity for us.As we look into the first quarter, the outlook for the U.S. oilfield services landscape remains challenged. The Company will continue to identifyways to streamline its cost structure and will continue to explore ways to enhance the liquidity position of the company both internally and externally.RESULTS OF OPERATIONSConsolidated Results of OperationsThe following table shows our consolidated results of operations for the years ended December 31, 2015, 2014 and 2013: Year Ended December 31, 2015 2014 2013 (in thousands)REVENUES$792,326 $1,427,336 $1,591,676COSTS AND EXPENSES: Direct operating expenses714,637 1,059,651 1,114,462Depreciation and amortization expense180,271 200,738 225,297General and administrative expenses202,631 249,646 221,753Impairment expense722,096 121,176 —Operating income (loss)(1,027,309) (203,875) 30,164Interest expense, net of amounts capitalized73,847 54,227 55,204Other (income) loss, net9,394 1,009 (803)Loss before income taxes(1,110,550) (259,111) (24,237)Income tax benefit192,849 80,483 3,064Net loss(917,701) (178,628) (21,173)Income attributable to noncontrolling interest— — 595LOSS ATTRIBUTABLE TO KEY$(917,701) $(178,628) $(21,768)Years Ended December 31, 2015 and 2014For the year ended December 31, 2015, our operating loss was $1.0 billion, compared to an operating loss of $203.9 million for the year endedDecember 31, 2014. Loss per share was $5.86 for the year ended December 31, 2015 compared to $1.16 loss per share for the year ended December 31, 2014.RevenuesOur revenues for the year ended December 31, 2015 decreased $635.0 million, or 44.5%, to $792.3 million from $1.4 billion for the year endedDecember 31, 2014, due to lower spending from our customers as a result of lower oil prices. These market conditions resulted in reduced customer activityand a reduction in the price received for our services. Internationally, we had lower revenue as a result of reduced customer activity in Russia and Colombiaand the exit of operations in the Middle East and South America. See “Segment Operating Results — Years Ended December 31, 2015 and 2014” below for amore detailed discussion of the change in our revenues.Direct operating expensesOur direct operating expenses decreased $345.0 million, or 32.6%, to $714.6 million (90.2% of revenues) for the year ended December 31, 2015,compared to $1.06 billion (74.2% of revenues) for the year ended December 31, 2014. The decrease is primarily related to a decrease in employeecompensation costs, fuel expense and repair and maintenance expense as we31Table of ContentsIndex to Financial Statementssought to reduce our cost structure and as a result of lower activity levels. See “Segment Operating Results — Years Ended December 31, 2015 and 2014”below for a more detailed discussion of the change in our direct operating expenses.Depreciation and amortization expenseDepreciation and amortization expense decreased $20.5 million, or 10.2%, to $180.3 million (22.8% of revenues) for the year ended December 31,2015, compared to $200.7 million (14.1% of revenues) for the year ended December 31, 2014. The decrease is primarily attributable to the impairment ofcertain fixed assets and decreases in capital expenditures and lower amortization expense due to the impairment of certain intangible assets.General and administrative expensesGeneral and administrative expenses decreased $47.0 million, or 18.8%, to $202.6 million (25.6% of revenues) for the year ended December 31,2015, compared to $249.6 million (17.5% of revenues) for the year ended December 31, 2014. The decrease is primarily due to lower employee compensationcosts due to reduced staffing levels and reduction in wages and lower expenses related to our FCPA investigations.Impairment expenseDuring the year ended December 31, 2015, we recorded a $582.7 million impairment of goodwill, a $51.1 million impairment of fixed assets that arebeing held and used, a $1.5 million impairment of other intangible assets that are no longer being used, and a $86.8 million impairment of fixed assets toreduce the carrying value of assets held for sale to fair market value. During the year ended December 31, 2014, we recorded a $28.7 million impairment ofgoodwill and tradenames in our Russian business unit which is included in our International reporting segment and a $73.4 million impairment of goodwilland fixed assets at our Fishing and Rental Services segment and a $19.1 million impairment of goodwill at our Coiled Tubing segment.Interest expense, net of amounts capitalizedInterest expense increased $19.6 million to $73.8 million (9.3% of revenues), for the year ended December 31, 2015, compared to $54.2 million(3.8% of revenues) for the year ended December 31, 2014. The increase is primarily related to increased borrowings and interest rate under the new Term LoanFacility in the year ended December 31, 2015 and the write-off of the remaining $0.8 million of unamortized deferred financing costs related to the 2011Credit Facility in the second quarter of 2015.Other loss, netDuring the year ended December 31, 2015, we recognized other loss, net, of $9.4 million, compared to other loss, net, of $1.0 million for the yearended December 31, 2014. A $7.8 million allowance for the collectibility of our notes receivable related to the sale of our operations in Argentina wasrecorded in the year ended December 31, 2015. Our foreign exchange loss relates to U.S. dollar-denominated transactions in our foreign locations andfluctuations in exchange rates between local currencies and the U.S. dollar.The table below presents comparative detailed information about other loss, net at December 31, 2015 and 2014: Year Ended December 31, 2015 2014 (in thousands)Interest income$(159) $(82)Foreign exchange loss4,153 3,733Allowance for collectibility of notes receivable7,705 —Other, net(2,305) (2,642)Total$9,394 $1,009Income tax benefitOur income tax benefit on continuing operations was $192.8 million (17.4% effective rate) on pre-tax loss of $1.1 billion for the year endedDecember 31, 2015, compared to an income tax benefit of $80.5 million (31.1% effective rate) on a pre-tax loss of $259.1 million for the year endedDecember 31, 2014. 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, including goodwill impairment expense and expensessubject to statutorily imposed limitations such as meals and entertainment expenses, that affect book income but do not affect taxable income and discretetax adjustments, such as valuation allowances against deferred tax assets and tax expense or benefit recognized for uncertain tax positions.32Table of ContentsIndex to Financial StatementsYears 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.General 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 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) loss, netDuring the year ended December 31, 2014, we recognized other loss, net, of $1.0 million, compared to other income, net, of $0.8 million for the yearended December 31, 2013. Our foreign exchange loss relates to U.S. dollar-denominated transactions in our foreign locations and fluctuations in exchangerates between local currencies and the U.S. dollar.The table below presents comparative detailed information about other (income) loss, net at December 31, 2014 and 2013: Year Ended December 31, 2014 2013 (in thousands)Interest income$(82) $(220)Foreign exchange loss3,733 834Other, net(2,642) (1,417)Total$1,009 $(803)33Table of ContentsIndex to Financial StatementsIncome 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.Segment Operating ResultsYears Ended December 31, 2015 and 2014The following table shows operating results for each of our reportable segments for the years ended December 31, 2015 and 2014 (in thousands):For the year ended December 31, 2015 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport TotalRevenues from external customers$377,131 $153,153 $89,823 $121,883 $50,336 $— $792,326Operating expenses685,070 196,637 244,991 319,295 232,872 140,770 1,819,635Operating loss(307,939) (43,484) (155,168) (197,412) (182,536) (140,770) (1,027,309)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)U.S. Rig ServicesRevenues for our U.S. Rig Services segment decreased $301.9 million, or 44.5%, to $377.1 million for the year ended December 31, 2015, comparedto $679.0 million for the year ended December 31, 2014. The decrease for this segment is primarily due to lower spending from our customers as a result oflower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.Operating expenses for our U.S. Rig Services segment were $685.1 million during the year ended December 31, 2015, which represented an increaseof $102.4 million, or 17.6%, compared to $582.7 million for the year ended December 31, 2014. These expenses increased primarily as a result of a $297.7million impairment of goodwill in 2015, partially offset by a decrease in employee compensation costs and equipment expense as we sought to reduce ourcost structure and as a result of lower activity levels.Fluid Management ServicesRevenues for our Fluid Management Services segment decreased $96.4 million, or 38.6%, to $153.2 million for the year ended December 31, 2015,compared to $249.6 million for the year ended December 31, 2014. The decrease for this segment is primarily due to lower spending from our customers as aresult of lower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.Operating expenses for our Fluid Management Services segment were $196.6 million during the year ended December 31, 2015, which represented adecrease of $49.6 million, or 20.2%, compared to $246.3 million for the year ended December 31, 2014. These expenses decreased primarily as a result of adecrease in equipment expense and employee compensation costs as we sought to reduce our cost structure and as a result of lower activity levels. Thisdecrease was partially offset by a $24.5 million impairment of goodwill recorded in 2015.34Table of ContentsIndex to Financial StatementsCoiled Tubing ServicesRevenues for our Coiled Tubing Services segment decreased $83.5 million, or 48.2%, to $89.8 million for the year ended December 31, 2015,compared to $173.4 million for the year ended December 31, 2014. The decrease for this segment is primarily due to lower spending from our customers as aresult of lower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.Operating expenses for our Coiled Tubing Services segment were $245.0 million during the year ended December 31, 2015, which represented anincrease of $60.8 million, or 33.0%, compared to $184.2 million for the year ended December 31, 2014. These expenses increased primarily as a result of a$82.7 million impairment of goodwill and a $51.1 million impairment of fixed assets in 2015 compared to a $19.1 million impairment of goodwill in 2014,partially offset by a decrease in employee compensation costs, repair and maintenance expense and fuel costs as we sought to reduce our cost structure and asa result of lower activity levels.Fishing and Rental ServicesRevenues for our Fishing and Rental Services segment decreased $90.7 million, or 42.7%, to $121.9 million for the year ended December 31, 2015,compared to $212.6 million for the year ended December 31, 2014. The decrease for this segment is primarily due to lower spending from our customers as aresult of lower oil prices. These market conditions resulted in reduced customer activity and a reduction in the price received for our services.Operating expenses for our Fishing and Rental Services segment were $319.3 million during the year ended December 31, 2015, which representedan increase of $47.8 million, or 17.6%, compared to $271.5 million for the year ended December 31, 2014. These expenses increased primarily as a result of a$173.5 million impairment of goodwill and a $6.0 million impairment of intangible assets in 2015 compared to a $62.1 impairment of fixed assets in 2014,partially offset by a decrease in employee compensation costs, repair and maintenance expense and fuel costs as we sought to reduce our cost structure and asa result of lower activity levels.InternationalRevenues for our International segment decreased $62.4 million, or 55.4%, to $50.3 million for the year ended December 31, 2015, compared to$112.7 million for the year ended December 31, 2014. The decrease was primarily attributable to lower customer activity in Russia and Colombia and theexit of operations in the Middle East and South America.Operating expenses for our International segment increased $54.7 million, or 30.7%, to $232.9 million for the year ended December 31, 2015,compared to $178.2 million for the year ended December 31, 2014. These expenses increased primarily as a result of an increase in impairment of assets heldfor sale of $80.8 million and a $4.4 million impairment of goodwill in 2015 compared to a $22.4 million impairment of goodwill and $6.3 millionimpairment of intangible assets in 2014, partially offset by a decrease in employee compensation costs and equipment expense, primarily due to loweractivity.Functional supportOperating expenses for our Functional Support segment decreased $27.6 million, or 16.4%, to $140.8 million (17.8% of consolidated revenues) forthe year ended December 31, 2015 compared to $168.4 million (11.8% of consolidated revenues) for the year ended December 31, 2014. The decrease inexpense is primarily due to lower employee compensation costs due to reduced staffing levels and a decrease of $9.5 million of legal expense related to theFCPA investigations.35Table of ContentsIndex to Financial StatementsYears 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 ServicesRevenues 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 ended36Table of ContentsIndex to Financial StatementsDecember 31, 2013. The increase in expenses is primarily a result of the impairment of fixed assets and other intangible assets partially offset by a decrease indepreciation 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.Liquidity and Capital ResourcesWe require capital to fund our ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growthinitiatives, investments and acquisitions, our debt service payments and our other obligations. Our primary sources of liquidity are cash flows generated fromour operations, available cash and borrowings under our ABL facility.Oil and natural gas prices began a rapid and substantial decline in the fourth quarter of 2014. Depressed commodity price conditions persisted andworsened during 2015 and that trend has continued into 2016. As a result, demand for our products and services has declined substantially, and the prices weare able to charge our customers for our products and services have also declined substantially. These trends materially and adversely affected our results ofoperations, cash flows and financial condition during 2015 and, unless conditions in our industry improve, this trend will continue during 2016 andpotentially beyond.In response to these conditions, we have undertaken several actions detailed below in an effort to preserve and improve our liquidity and financialposition.•On June 1, 2015, we entered into our $100 million ABL Facility due February 28, 2020 and our $315 million Term Loan Facility due June 1, 2020.At the closing, we borrowed the full amount available under the Term Loan Facility and used a portion of the proceeds to repay and terminate ourprior revolving credit facility. Remaining proceeds were retained as cash to provide liquidity. As of December 31, 2015, we had no borrowingsoutstanding under the ABL Facility and $47.9 million of letters of credit outstanding with available borrowing capacity of $27.2 million available,as restricted by covenant constraints under our ABL Facility.•In April 2015, we announced our decision to exit markets in which we participate outside of North America. Our strategy is to sell or relocate theassets of the businesses operating in these markets. As of December 31, 2015, we had sold our subsidiary in Bahrain and certain assets in Oman,Ecuador and Colombia and are no longer operating in these markets. We are currently in discussions to sell our subsidiary in Russia.•Beginning in the first quarter of 2015, we began a series of cost cutting initiatives at both corporate and field levels, which include fixed costs,supply-chain efficiencies and headcount and wage reductions.However, we still have substantial indebtedness and other obligations, and we may incur additional expenses and be obligated to pay fines orpenalties in connection with seeking to resolve our ongoing FCPA investigation, although, at this time, we are unable to predict the ultimate resolution ofthis matter.Our ability to fund our operations, pay the principal and interest on our long-term debt and to satisfy our other obligations will depend upon ouravailable liquidity and the amount of cash flows we are able to generate from our operations. During 2015, our net cash used in operating activities was $22.4million, and, if industry conditions do not improve, we may have negative cash flows from operations in 2016.As of December 31, 2015, our adjusted working capital (working capital excluding the current portion of long-term debt) was $269.1 millioncompared to $191.9 million as of December 31, 2014. Our adjusted working capital increased during 2015 primarily as a result of the receipt of cash proceedsfrom the Term Loan Facility and a decrease in accounts payable and other accrued expenses partially offset by a decrease in accounts receivable andrepayment of the 2011 Credit Facility.37Table of ContentsIndex to Financial StatementsAs of December 31, 2015, we had $204.4 million of cash, of which approximately $13.7 million was held in the bank accounts of our foreignsubsidiaries. As of December 31, 2015, $10.6 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.We believe that our internally generated cash flows from operations, current reserves of cash and availability under our ABL facility are sufficient tofinance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for the next twelve months.However, in light of the current conditions in our industry, we continue to explore alternatives to improve our liquidity. We may not, however, be able toimplement any such a transaction or alternative, if necessary, on commercially reasonable terms or at all, and, even if we are successful in implementingstrategic transaction or alternative, such transaction or alternative may not be successful in allowing us to meet our debt obligations. In addition, even if weare able to implement a strategic transaction or alternative, such transaction or alternative may impose onerous terms on us and/or certain of our securityholders and could materially and adversely impact the interests of certain of our security holders. See Item 1A—Risk Factors—“The amount of our debt andthe covenants in the agreements governing our debt could negatively impact our financial condition, results of operations and business prospects.” and“We may not be able to generate sufficient cash flow to meet our debt service and other obligations.” Our future operating performance and ability torefinance will be affected by the results of our operations, economic and capital market conditions, oil and natural gas prices and other factors, many of whichare beyond our control.Cash FlowsCash used in operating activities was $22.4 million for the year ended December 31, 2015, compared to cash provided by operating activities of$164.2 million for the year ended December 31, 2014. Cash used by operating activities for the year ended December 31, 2015 was primarily related to netloss adjusted for noncash items and payments of accounts payable and other accrued liabilities partially offset by cash inflows related to the collection ofaccounts receivable. Cash provided by operating activities for the year ended December 31, 2014 was primarily related to net income adjusted for noncashitems, collection of accounts receivable and an increase in accounts payable.Cash used in investing activities was $19.4 million and $146.8 million for the years ended December 31, 2015 and 2014, respectively. Investingcash outflows during these periods consisted primarily of capital expenditures partially offset by the sales of assets. Capital expenditures primarily relate toreplacement assets for our existing fleet and equipment.Cash provided by financing activities was $218.7 million for the year ended December 31, 2015, compared to cash used in financing activities of$22.1 million during the year ended December 31, 2014. Cash provided by financing activities for the year ended December 31, 2015 primarily relates toproceeds from long-term debt partially offset by net payments on our 2011 Credit Facility. Cash used in financing activities for the year ended December 31,2014 primarily relates to net payments on our 2011 Credit Facility.The following table summarizes our cash flows for the years ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014 (in thousands)Net cash provided by operating activities$(22,386) $164,168Cash paid for capital expenditures(40,808) (161,639)Proceeds from sale of assets20,810 15,844Payment of accrued acquisition cost of the 51% noncontrolling interest in AlMansoori Key Energy Services LLC— (5,100)Proceeds from notes receivable595 4,055Repayments of long-term debt(1,575) (3,573)Proceeds from long-term debt305,550 —Proceeds from borrowings on revolving credit facility130,000 260,000Repayments on revolving credit facility(200,000) (275,000)Payment of deferred financing costs(11,461) —Other financing activities, net(3,785) (3,485)Effect of changes in exchange rates on cash110 3,728Net increase (decrease) in cash and cash equivalents$177,050 $(1,002)38Table of ContentsIndex to Financial StatementsDebt ServiceAt December 31, 2015, our annual maturities on our indebtedness, consisting only of our 2021 Notes and Term Loan Facility at year-end, were asfollows: Principal Payments (in thousands)2016$3,15020173,15020183,15020193,1502020300,8252021 and thereafter675,000Total$988,425Interest 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 2021 Notes during 2015 and 2014 was $45.6 million. We expect to fund interest payments from cash on hand and cash generated by operations.6.75% Senior Notes due 2021We have outstanding $675.0 million of 6.75% Senior Notes due 2021 (the “2021 Notes”). The 2021 Notes are general unsecured senior obligationsand are effectively subordinated to all of our existing and future secured indebtedness. The 2021 Notes are or will be jointly and severally guaranteed on asenior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2021 Notes is payable on March 1 and September 1 of eachyear. The 2021 Notes mature on March 1, 2021. We capitalized $4.6 million of financing costs associated with the issuance of the 2021 Notes that will beamortized over the term of the notes.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 accrued and unpaid interest to the redemption date. The premiumis 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 throughMarch 1, 2016 discounted at the treasury rate plus 0.50% over (ii) the principal amount of the note. If we experience a change of control, subject to certainexceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes, in whole or in part, at a purchase price equal to 101% ofthe 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.39Table of ContentsIndex to Financial StatementsSubstantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the 2021 Notes aninvestment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2015, the 2021 Notes were rated belowinvestment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit ratingassigned to the 2021 Notes later falls below investment grade. We were in compliance with all covenants under the Indenture at December 31, 2015.ABL FacilityOn June 1, 2015, the Company entered into a Loan and Security Agreement (the “ABL Facility”), among the Company and Key Energy Services,LLC, as the Borrowers (collectively, the “ABL Borrowers”), certain subsidiaries of the ABL Borrowers named as guarantors therein, the financial institutionsparty thereto from time to time as Lenders (collectively, the “ABL Lenders”), Bank of America, N.A., as Administrative Agent for the Lenders, and Bank ofAmerica, N.A. and Wells Fargo Bank, National Association, as Co-Collateral Agents for the Lenders. The ABL Facility provides for aggregate initialcommitments from the ABL Lenders of $100 million (the “Commitments”) and matures on February 28, 2020.The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) theCommitments and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable,subject to a limit equal to the greater of (x) $35 million and (y) 25% of the Commitments plus (c) certain cash and cash equivalents deposited for the benefitof the ABL Lenders, subject to a limit of $15 million. The amount that may be borrowed under the ABL Facility is subject to reduction for certain reservesprovided for by the ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation describedabove is subject to reduction to the extent of certain bad debt write-downs and similar amounts provided in the ABL Facility.Borrowings under the ABL Facility bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, withthe consent of the ABL Lenders, 360 days, plus 4.5% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Fundsrate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) 3.5%. In addition, the ABL Facility provides for unused line fees of 1.00% to 1.25% per year,depending on utilization, letter of credit fees and certain other fees.The ABL Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABLBorrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted to the AdministrativeAgent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets andproceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage orsimilar costs.The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to takecertain actions without the permission of the ABL Lenders or as permitted under the ABL Facility including the incurrence of debt, the granting of liens, themaking of investments, the payment of dividends and the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply with aminimum liquidity covenant, an asset coverage ratio and, during certain periods, a fixed charge coverage ratio.Under the asset coverage ratio covenant, the ABL Borrowers must maintain an asset coverage ratio of at least 1.5 to 1.0. The asset coverage ratio isgenerally defined as the ratio of (i) the sum of (a) the value of the Term Priority Collateral plus (b) certain cash and cash equivalents in excess of $100 millionheld for the benefit of the Term Loan Lenders to (ii) the sum of (a) the amount outstanding under the Term Loan Facility and, following repayment of theTerm Loan Facility, the amount outstanding under the ABL Facility, plus (b) the amount of any fine or settlement in respect of the FCPA Matter (as definedin the ABL Facility) that is secured by a lien on the ABL Priority Collateral or the Term Priority Collateral (the “Asset Coverage Ratio”).Under the fixed charge coverage ratio covenant, the ABL Borrowers must maintain a fixed charge coverage ratio of at least 1.0 to 1.0 during theperiod commencing on the day that availability under the ABL Facility is less than the greater of $20 million and 20% of the Commitments and continuinguntil the 90th day following the day that availability under the ABL Facility is greater than the greater of $20 million and 20% of the Commitments. Thefixed charge coverage ratio is generally defined as the ratio of (i) EBITDA minus certain capital expenditures and cash taxes paid to (ii) the sum of cashinterest expenses, scheduled principal payments on borrowed money and certain distributions. The ABL Facility permits the ABL Borrowers, in calculatingEBITDA, to add back certain amounts in respect of the investigatory expenses associated with the40Table of ContentsIndex to Financial StatementsFCPA Matter and amounts paid in settlement of the FCPA Matter to the extent such amounts do not exceed net liquidity, defined as certain cash and cashequivalents minus the principal amount of loans outstanding under the ABL Facility.Under the minimum liquidity covenant (the “Minimum Liquidity Covenant”), the ABL Borrowers must not permit Liquidity, defined as the sum of(i) availability under the ABL Facility plus (ii) certain unrestricted cash and cash equivalents, to be less than $100.0 million as of the last day of any fiscalquarter or immediately after any cash payment of a settlement of, or fine in connection with, the FCPA Matter.The ABL Facility contains customary representations and warranties and conditions to borrowing, including the absence of any default or event ofdefault, the accuracy in all material respects of the representations and warranties of the ABL Loan Parties contained in the ABL Facility and the absence ofany event or circumstance that has or could reasonably be expected to have a material adverse effect.The ABL Facility contains customary events of default, the occurrence of which entitle the ABL Lenders to accelerate the maturity of amountsoutstanding under the ABL Facility and exercise other customary remedies and an event of that is triggered if, immediately after any cash payment of asettlement of the FCPA Matter (and after any cash or borrowings under the ABL Facility are used to fund such payment), (i) the Company shall fail to be incompliance with the Minimum Liquidity Covenant or (ii) if any loans under the ABL Facility are outstanding on the date of such cash payment, availabilityunder the ABL Facility is less than 33% of the borrowing base in effect on such date.Term Loan FacilityOn June 1, 2015, the Company entered into a Term Loan and Security Agreement (the “Term Loan Facility”), among the Company, as Borrower,certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “TermLoan Lenders”), Cortland Capital Market Services LLC, as Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole LeadArranger and Sole Bookrunner.On June 1, 2015, the Company and other parties thereto closed on the Term Loan Facility, the Company borrowed $315 million (prior to givingeffect to an upfront discount of 3% which resulted in net proceeds to the Company, prior to expenses, of approximately $305.5 million), and the Companyused a portion of such proceeds to repay its prior credit facility. The Term Loan Facility provides for an incremental facility which, subject to the agreementof one or more Term Loan Lenders or other institutional lenders agreeing to provide the additional loans and the satisfaction of certain terms and conditions,would enable the Company to borrow additional amounts under the Term Loan Facility as long as the aggregate outstanding amount of all borrowingsthereunder does not exceed $400 million. The Term Loan Facility will mature on June 1, 2020, although such maturity date may, at the Company’s request,be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility.Borrowings under the Term Loan Facility bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or,with the consent of the Term Loan Lenders, 12 months, plus 9.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the FederalFunds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 8.25%.The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together withthe Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted to the Agent afirst-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assetsand the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility aresecured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certaincircumstances as provided in the Term Loan Facility. The Company is required to make principal payments in the amount of $787,500 per quartercommencing with the quarter ended September 30, 2015. In addition, pursuant to the Term Loan Facility, the Company must offer to prepay term loans out ofthe Net Cash Proceeds (as defined in the Term Loan Facility) of certain asset sales and, for each fiscal year beginning with the Company’s fiscal year endingDecember 31, 2015, the Company must offer to prepay term loans in an aggregate principal amount equal to 50% of the Company’s Excess Cash Flow (asdefined in the Term Loan Facility) for such fiscal year. Within 30 days following any Change of Control (as defined in the Term Loan Facility), the Companymust offer to prepay all term loans (i) at a price of 101% of the amount thereof if, after giving effect to such Change of Control, the Asset Coverage Ratio is atleast 1.5 to 1.0 or (ii) at a price equal to the greater of 101% of the amount thereof and the applicable prepayment premium provided for in the Term LoanFacility if, after giving effect to such Change of Control, the Asset Coverage Ratio is less than 1.5 to 1.0.The Term Loan Facility contains customary representations and warranties and certain affirmative and negative covenants, including covenants thatrestrict the ability of the Term Loan Parties to take certain actions without the permission of41Table of ContentsIndex to Financial Statementsthe Term Loan Lenders or as permitted under the Term Loan Facility including the incurrence of debt, the granting of liens, the making of investments, thepayment of dividends and the sale of assets. The Term Loan Facility also contains financial covenants requiring that the Company maintain an AssetCoverage Ratio of at least 1.5 to 1.0 and that Liquidity (as defined in the Term Loan Facility) must not be less than $100 million as of the last day of anyfiscal quarter or immediately after any cash payment of a settlement of, or fine in connection with, the FCPA Matter.The Term Loan Facility contains events of default, the occurrence of which entitle the Term Loan Lenders to accelerate the maturity of amountsoutstanding under the Term Loan Facility and exercise other customary remedies.We were in compliance with covenants of the ABL Facility and Term Loan Facility as of December 31, 2015. As of December 31, 2015, we have noborrowings outstanding under the ABL Facility and $47.9 million of letters of credit outstanding with borrowing capacity of $27.2 million available subjectto covenant constraints under our ABL Facility.Our ability to fund our operations, pay the principal and interest on our long-term debt and to satisfy our other obligations will depend upon ouravailable liquidity and the amount of cash flows we are able to generate from our operations. During 2015, cash used in operations was $22.4 million, and, ifindustry conditions do not improve, we may have negative cash flows from operations in 2016.We believe that our internally generated cash flows from operations, current reserves of cash and availability under our ABL facility are sufficient tofinance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for the next twelvemonths. However, in light of the current conditions in our industry, we continue to analyze a variety of transactions and mechanisms designed to reduce ourdebt and improve our liquidity. Our future operating performance and ability to refinance will be affected by the results of our operations, economic andcapital market conditions, oil and natural gas prices and other factors, many of which are beyond our control.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, and are unable to cure, obtain a waiver or an amendment, it could lead to an event of default and theconsequent acceleration of our obligation to repay all of our outstanding debt. Our ability to comply with debt covenants and other restrictions may beaffected by events beyond our control, including general economic and financial conditions.In particular, under the terms of our indebtedness, we must comply with certain financial ratios and satisfy certain financial condition tests that couldrequire us to take action to reduce our debt or take some other action in order to comply with them. Our ability to satisfy required financial ratios and testscan be affected by events beyond our control, including prevailing economic, financial and industry conditions, and we may not be able to continue to meetthose ratios and tests in the future. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness. If we default, lendersunder our ABL Facility will no longer be obligated to extend credit to us and they, as well as the trustee for our outstanding notes and the administrativeagent under our Term Loan Facility, could elect to declare all amounts of outstanding debt together with accrued interest, to be immediately due andpayable. The results of such actions would have a significant negative impact on our results of operations, financial position and cash flows.In addition, access to the liquidity provided by our ABL Facility is predicated upon our ability to satisfy the conditions to borrowing, whichconditions require that the representations and warranties under the facility, including representations and warranties related to our solvency and the absenceof a material adverse effect, remain true and correct.The weighted average interest rates on the outstanding borrowings under the ABL Facility and Term Loan Facility for the year ended December 31,2015 were as follows: The Year Ended December 31, 2015 (in thousands)ABL Facility—%Term Loan Facility10.27%Senior Secured Credit FacilityOn June 1, 2015, in connection with entering into the ABL Facility and the Term Loan Facility, we terminated our senior secured revolving bankcredit facility, dated as of March 31, 2011, as amended through December 5, 2014 (the “2011 Credit Facility”), which was scheduled to mature no later thanMarch 31, 2016. The 2011 Credit Facility provided for a senior secured credit facility consisting of a revolving credit facility, letter of credit sub-facility andswing line facility of up to an aggregate principal amount of $400.0 million. The 2011 Credit Facility was terminated without any prepayment penalties. Theremaining unamortized deferred financing costs of $0.8 million were written off at the time of the termination.42Table of ContentsIndex to Financial StatementsThe interest rate per annum applicable to the 2011 Credit Facility was, 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 had ranged from 225 to 300 basis points, and the applicable margin for all other loans ranges from125 to 200 basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facilitywas equal to 0.5%. For the five months ended June 1, 2015 and year ended December 31, 2014, the weighted average interest rates on the outstandingborrowings under our 2011 Credit Facility was 3.14% and 2.97%, 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, 2015, $2.0 million of letters of credit were outstanding under the facility.Off-Balance Sheet ArrangementsAt December 31, 2015, 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.Contractual ObligationsSet forth below is a summary of our contractual obligations as of December 31, 2015. 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 (2016) 1-3 Years(2017-2019) 4-5 Years(2020-2021) After 5 Years(2022+)(in thousands)2021 Notes675,000 $— $— $675,000 $—Interest associated with 2021 Notes254,402 45,563 136,688 72,151 —Term Loan Facility due 2020313,425 3,150 9,450 300,825 —Interest associated with Term Loan Facility(1)31,688 7,175 21,525 2,988 —Non-cancelable operating leases56,405 9,712 19,428 9,638 17,627Liabilities for uncertain tax positions408 157 251 — —Equity based compensation liabilityawards(2)271 271 — — —Total$1,331,599 $66,028 $187,342 $1,060,602 $17,627 (1)Based on interest rates in effect at December 31, 2015.(2)Based on our closing stock price at December 31, 2015.Debt ComplianceAt December 31, 2015, we were in compliance with all the financial covenants under our ABL Facility, Term Loan Facility and 2021 Notes. Basedon management’s current projections, we expect to be in compliance with all the covenants under our 2011 Credit Facility and 2021 Notes for the nexttwelve months. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness. See “— Debt Service” and “Item 1A. RiskFactors”43Table of ContentsIndex to Financial StatementsCapital ExpendituresDuring the year ended December 31, 2015, our capital expenditures totaled $40.8 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 2016 contemplates spending between$20.0 million and $30.0 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 2016 is subject to market conditions, including activity levels, commodity prices, industrycapacity and specific customer needs. Our focus for 2016 will be the maximization of our current equipment fleet, but we may choose to increase our capitalexpenditures in 2016 to increase market share or expand our presence into a new market. We currently anticipate funding our 2016 capital expendituresthrough a combination of cash on hand, operating cash flow, and borrowings under our ABL Facility. Should our operating cash flows or activity levelsprove to be insufficient to fund our currently planned capital spending levels, management expects it will adjust our capital spending plans accordingly. Wemay 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.We 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.44Table of ContentsIndex to Financial Statements•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. Reserves related to claims are based on the specific facts andcircumstances of the insured event and our past experience with similar claims and trend analysis. We adjust loss estimates in the calculation of these accrualsbased upon actual claim settlements and reported claims. Loss estimates for individual claims are adjusted based upon actual claim judgments, settlementsand reported claims. The actual outcome of these claims could differ significantly from estimated amounts. Changes in our assumptions and estimates couldpotentially have a negative impact on our earnings.We are primarily 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.45Table of ContentsIndex to Financial StatementsIncome 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 including forecasted prices and competition, and the assumption that we provide the appropriateamount of capital expenditures while the asset is in operation to maintain economical operation of the asset and prevent untimely demise to scrap. The usefullives of our intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or otherexpectations.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 the46Table of ContentsIndex to Financial Statementsreporting unit exceeds its carrying value, there is no potential impairment, and the second step is not performed. If the carrying value exceeds the fair value ofthe reporting unit, then the second step 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.In determining the fair value of our reporting units, we use a weighted-average approach of three commonly used valuation techniques — adiscounted cash flow method, a guideline companies method, and a similar transactions method. We assigned a weight to the results of each of these methodsbased on the facts and circumstances that are in existence for that testing period. We assigned more weight to the discounted cash flow method as we believeit is more representative 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.The decline in market value of our stock during the third quarter of 2015 as well as the persistent low oil prices and the affect that low oil prices haveon our industry were determined to be triggering events making it necessary to perform testing for possible goodwill impairment for our U.S. Rig Services,Coiled Tubing Services, Fishing and Rental Services, Fluid Management Services and International segments. Our analysis concluded that the remaining$561.0 million of goodwill of these segments was fully impaired.We also have intangible assets that are not amortized of $0.9 million related to our Russian reporting unit in ourInternational segment. These tradenames are tested for impairment annually using a relief from royalty method.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.47Table of ContentsIndex to Financial StatementsValuation of Equity-Based CompensationWe have granted stock options, stock-settled stock appreciation rights (“SARs”), restricted stock (“RSAs” and “RSUs”) and performance units to ouremployees and non-employee directors. The option and SAR awards we grant are fair valued using a Black-Scholes option model on the grant date and areamortized to compensation expense over the vesting period of the option or SAR award, net of estimated and actual forfeitures. Compensation related toRSAs and RSUs is based on the fair value of the award on the grant date and is recognized based on the vesting requirements that have been satisfied duringthe period. The grant-date fair value of our restricted stock awards is determined using our stock price on the grant date. Performance units provide a cashincentive award, the unit value of which is determined with reference to our common stock. See “Note 19. Share Based Compensation” in “Item 8. FinancialStatements and Supplementary Data” for a more detailed discussion of performance units measurement.In utilizing the Black-Scholes option pricing model to determine fair values of stock options and SARs awards, certain assumptions are made whichare based on subjective expectations, and are subject to change. A change in one or more of these assumptions would impact the expense associated withfuture grants. These key assumptions include the volatility in the price of our common stock, the risk-free interest rate and the expected life of awards. We didnot grant any stock options during the years ended December 31, 2015, 2014 and 2013.Recent Accounting DevelopmentsASU 2015-17. In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). The objective of thisASU is to simplify the current guidance which requires entities to separately present deferred tax assets and liabilities as current and non-current in aclassified balance sheet. The new guidance will require entities to present deferred tax assets and liabilities as non-current in a classified balance sheet. ASU2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and may be applied either prospectively to alldeferred tax assets and liabilities or retrospectively to all periods presented. We are currently evaluating the standard to determine the impact of its adoptionon the consolidated financial statements.ASU 2015-03. In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of DebtIssuance Costs. The objective of this ASU is to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debtliability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Therecognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The ASU is effective for annual periodsbeginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. We adopted ASU 2015-03 in the secondquarter of 2015 using the retrospective transition method. As a result, $10.7 million of unamortized deferred financing costs on our December 31, 2014balance sheet was reclassified from non-current assets to a direct deduction of long-term debt. The adoption of this standard did not affect our results ofoperations or cash flows.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 must be adopted using either a fullretrospective method or a modified retrospective method. During a July 2015 meeting, the FASB affirmed a proposal to defer the effective date of the newrevenue standard for all entities by one year. As a result, ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning afterDecember 15, 2017 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluatingthe 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, 2015, 2014 and 2013. 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, 2015, 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 Term Loan Facility bear interest at variable interest rates, and therefore expose us tointerest rate risk. As of December 31, 2015, the interest rate on our48Table of ContentsIndex to Financial Statementsoutstanding variable-rate debt obligations was 10.25%. A hypothetical 10% increase in that rate would increase the annual interest expense on thoseinstruments by $3.2 million. Borrowings under our ABL Facility also bear interest at variable interest rates, however, there are no borrowings under thisfacility.Foreign Currency RiskAs of December 31, 2015, we conduct operations in Mexico and Russia. We also have a Canadian subsidiary. The local currency is the functionalcurrency for our operations in Russia. For balances denominated in our Russian subsidiaries’ local currency, changes in the value of their assets and liabilitiesdue to changes in exchange rates are deferred and accumulated in other comprehensive income until we liquidate our investment. Our Russian foreignsubsidiaries must remeasure their account balances at the end of each period to an equivalent amount of U.S. dollars, with changes reflected in earningsduring 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 Russian subsidiarieswould increase our net income by $1.4 million.49Table 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 Firm51Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting52Consolidated Balance Sheets53Consolidated Statements of Operations54Consolidated Statements of Comprehensive Income (Loss)55Consolidated Statements of Cash Flows56Consolidated Statements of Stockholders’ Equity57Notes to Consolidated Financial Statements5850Table 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, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes instockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility ofthe Company'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, 2015 and 2014, and the results of their operations and their cash flows for each of the three years inthe period ended December 31, 2015 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, 2015, 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 March 4, 2016 expressed an unqualified opinion onthe effectiveness of internal control over financial reporting./s/ GRANT THORNTON LLPHouston, TexasMarch 4, 201651Table 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, 2015, 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, 2015,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, 2015, and our report dated March 4, 2016 expressed an unqualified opinionon those financial statements./s/ GRANT THORNTON LLPHouston, TexasMarch 4, 201652Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS December 31, 2015 2014 (in thousands, exceptshare amounts)ASSETSCurrent assets: Cash and cash equivalents$204,354 $27,304Accounts receivable, net of allowance for doubtful accounts of $20,915 and $2,925115,992 289,466Inventories29,395 30,171Other current assets70,685 86,854Total current assets420,426 433,795Property and equipment, gross2,376,388 2,555,515Accumulated depreciation(1,496,356) (1,320,257)Property and equipment, net880,032 1,235,258Goodwill— 582,739Other intangible assets, net5,883 14,500Other assets21,457 56,471TOTAL ASSETS$1,327,798 $2,322,763LIABILITIES AND EQUITYCurrent liabilities: Accounts payable$30,740 $77,631Other current liabilities120,593 164,227Current portion of long-term debt3,150 —Total current liabilities154,483 241,858Long-term debt961,700 737,691Workers’ compensation, vehicular and health insurance liabilities26,327 29,690Deferred tax liabilities14,252 228,394Other non-current liabilities30,746 27,067Commitments and contingencies Equity: Common stock, $0.10 par value; 200,000,000 shares authorized, 157,543,259 and 153,557,108 shares issuedand outstanding15,754 15,356Additional paid-in capital966,637 960,647Accumulated other comprehensive loss(43,740) (37,280)Retained earnings (deficit)(798,361) 119,340Total equity140,290 1,058,063TOTAL LIABILITIES AND EQUITY$1,327,798 $2,322,763See the accompanying notes which are an integral part of these consolidated financial statements53Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2015 2014 2013 (in thousands, except per share amounts)REVENUES$792,326 $1,427,336 $1,591,676COSTS AND EXPENSES: Direct operating expenses714,637 1,059,651 1,114,462Depreciation and amortization expense180,271 200,738 225,297General and administrative expenses202,631 249,646 221,753Impairment expense722,096 121,176 —Operating income (loss)(1,027,309) (203,875) 30,164Interest expense, net of amounts capitalized73,847 54,227 55,204Other (income) loss, net9,394 1,009 (803)Loss before income taxes(1,110,550) (259,111) (24,237)Income tax benefit192,849 80,483 3,064Net loss(917,701) (178,628) (21,173)Income attributable to noncontrolling interest— — 595LOSS ATTRIBUTABLE TO KEY$(917,701) $(178,628) $(21,768)Loss per share: Basic and diluted$(5.86) $(1.16) $(0.14)Loss per share attributable to Key: Basic and diluted$(5.86) $(1.16) $(0.14)Weighted Average Shares Outstanding: Basic and diluted156,598 153,371 152,271See the accompanying notes which are an integral part of these consolidated financial statements54Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2015 2014 2013 (in thousands)NET LOSS$(917,701) $(178,628) $(21,173)Other comprehensive loss: Foreign currency translation loss(6,460) (21,866) (5,607)Total other comprehensive loss(6,460) (21,866) (5,607)COMPREHENSIVE LOSS(924,161) (200,494) (26,780)Comprehensive loss attributable to noncontrolling interest— — 96COMPREHENSIVE LOSS ATTRIBUTABLE TO KEY$(924,161) $(200,494) $(26,684)See the accompanying notes which are an integral part of these consolidated financial statements55Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2015 2014 2013 (in thousands)CASH FLOWS FROM OPERATING ACTIVITIES: Net loss$(917,701) $(178,628) $(21,173)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense180,271 200,738 225,297Impairment expense722,096 121,176 —Bad debt expense21,172 2,710 634Accretion of asset retirement obligations630 605 604(Income) loss from equity method investments(39) (25) 447Amortization and write-off of deferred financing costs and premium on debt4,645 2,606 2,244Deferred income tax benefit(189,327) (82,922) (11,929)Capitalized interest— — (607)(Gain) loss on disposal of assets, net51,531 8,686 (2,972)Share-based compensation10,173 10,949 13,785Excess tax expense from share-based compensation3,423 1,240 1,848Changes in working capital: Accounts receivable151,489 54,024 54,003Other current assets12,050 (2,471) 5,915Accounts payable and accrued liabilities(91,978) 15,114 (82,318)Share-based compensation liability awards— (846) 954Other assets and liabilities19,179 11,212 41,911Net cash provided by (used in) operating activities(22,386) 164,168 228,643CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures(40,808) (161,639) (164,137)Proceeds from sale of assets20,810 15,844 17,256Payment 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 receivable595 4,055 600Net cash used in investing activities(19,403) (146,840) (160,881)CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt(1,575) (3,573) —Proceeds from long-term debt305,550 — —Repayments of capital lease obligations— — (393)Proceeds from borrowings on revolving credit facility130,000 260,000 220,000Repayments on revolving credit facility(200,000) (275,000) (300,000)Payment of deferred financing costs(11,461) — (69)Repurchases of common stock(362) (2,245) (3,196)Proceeds from exercise of stock options and warrants— — 14Excess tax expense from share-based compensation(3,423) (1,240) (1,848)Net cash provided by (used in) financing activities218,729 (22,058) (85,492)Effect of changes in exchange rates on cash110 3,728 87Net increase (decrease) in cash and cash equivalents177,050 (1,002) (17,643)Cash and cash equivalents, beginning of period27,304 28,306 45,949Cash and cash equivalents, end of period$204,354 $27,304 $28,306See the accompanying notes which are an integral part of these consolidated financial statements56Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY COMMON STOCKHOLDERS NoncontrollingInterest TotalCommon Stock AdditionalPaid-inCapital AccumulatedOtherComprehensiveLoss RetainedEarnings(Deficit) Number ofShares Amountat par (in thousands, except per share data)BALANCE 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 options and warrants4 — 14 — — — 14Share-based compensation1,673 167 13,618 — — — 13,785Tax expense 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 — 1,058,063Foreign currency translation— — — (6,460) — — (6,460)Common stock purchases(240) (24) (338) — — — (362)Share-based compensation4,226 422 9,751 — — — 10,173Tax expense from share-based compensation— — (3,423) — — — (3,423)Net loss— — — — (917,701) — (917,701)BALANCE AT DECEMBER 31, 2015157,543 $15,754 $966,637 $(43,740) $(798,361) $— $140,290See the accompanying notes which are an integral part of these consolidated financial statements57Table 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 and Russia. In addition, we have a technologydevelopment and control systems business based in Canada. During the second half of 2015, we ceased operations in Colombia, Ecuador and the MiddleEast.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.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.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.58Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)•The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. The price being fixed anddeterminable 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 according to determined credit terms thathave 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, 2015, we have notentered into any compensating balance arrangements, but all of our obligations under our ABL Facility and Term Loan Facility (as defined below) weresecured by most of our assets, including assets held by our subsidiaries, which includes our cash and cash equivalents. We restrict investment of cash tofinancial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2015, 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.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, 2015, 2014 and 2013, Chevron Texaco Exploration and Production accounted for approximately 15% of ourconsolidated revenue. No other customer accounted for more than 10% of our consolidated revenue in the years ended December 31, 2015, 2014 or 2013.No customer accounted for more than 10% of our total accounts receivable as of December 31, 2015 and 2014.59Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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, 2015, 2014 and 2013 was $176.1 million, $191.9million and $206.2 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, 2015, 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 improvements15-30A 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. See “Note 8. Property and Equipment,” 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, 2015 and December 31, 2014, deposits totaled $3.5 million and $10.1 million,respectively. Deposits consist primarily of payments made related to high demand long-lead time items.60Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 reporting unit exceeds itscarrying value, there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for the reporting unit, thenthe 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 2015, we experienced several triggering events that required us to performadditional interim testing for the possible impairment of goodwill. Our analysis in the third quarter of 2015 concluded that our $561.0 million of goodwillwas fully impaired. 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 a61Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. See “Note 15. Commitmentsand 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 primarily 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 tax returns for the current year, while net deferred tax expense or benefit represents the change inthe balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assetsand liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect whenthe differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatments of certainitems for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation oflocal tax laws, 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 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.”62Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Share-Based CompensationIn the past, we have issued stock options, shares of restricted common stock, restricted stock units, stock appreciation rights (“SARs”) andperformance units to our employees as part of those employees’ compensation and as a retention tool. For our options, restricted shares and SARs, wecalculate 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, netof estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. The valuation ofour stock options and SARs requires us to estimate the expected term of award, which we estimated using the simplified method, as we did not have sufficienthistorical exercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stock option andSARs awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expected term of theaward, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using our stock priceon the grant date. Our performance units are treated as “liability” awards and carried at fair value at each balance sheet date, with changes in fair valuerecorded as a component of compensation expense and an offsetting liability on our consolidated balance sheet. We determine the fair value of ourperformance units using a Monte Carlo simulation model. We record share-based compensation as a component of general and administrative and directoperating expense for the applicable individual. See “Note 19. Share-Based Compensation.”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. See “Note 16. Accumulated OtherComprehensive 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 adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recordedin the income or loss of the foreign subsidiary as a component of other income, net.Comprehensive Income (Loss)We display comprehensive income (loss) and its components in our financial statements, and we classify items of comprehensive income (loss) bytheir nature in our financial statements and display the accumulated balance of other comprehensive income (loss) 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.63Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Recent Accounting DevelopmentsASU 2015-17. In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). The objective of thisASU is to simplify the current guidance which requires entities to separately present deferred tax assets and liabilities as current and non-current in aclassified balance sheet. The new guidance will require entities to present deferred tax assets and liabilities as non-current in a classified balance sheet. ASU2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and may be applied either prospectively to alldeferred tax assets and liabilities or retrospectively to all periods presented. We are currently evaluating the standard to determine the impact of its adoptionon our consolidated financial statements.ASU 2015-03. In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of DebtIssuance Costs. The objective of this ASU is to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debtliability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Therecognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The ASU is effective for annual periodsbeginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. We adopted ASU 2015-03 in the secondquarter of 2015 using the retrospective transition method. As a result, $10.7 million of unamortized deferred financing costs on our December 31, 2014balance sheet was reclassified from non-current assets to a direct deduction of long-term debt. The adoption of this standard did not affect our results ofoperations or cash flows.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 must be adopted using either a fullretrospective method or a modified retrospective method. During a July 2015 meeting, the FASB affirmed a proposal to defer the effective date of the newrevenue standard for all entities by one year. As a result, ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning afterDecember 15, 2017 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluatingthe standard to determine the impact of its adoption on our 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 were shared on equal terms and in equalamounts with AlMansoori. Because the joint venture did not have sufficient resources to carry on its activities without our financial support, we determined itto be a variable interest entity of which we were the primary beneficiary. We consolidated the entity in our financial statements. On August 5, 2013, weagreed to the dissolution of AlMansoori Key Energy Services, LLC (the “Joint Venture”) and the acquisition of the underlying business for $5.1 million. Theacquisition of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC was accounted for as an equity transaction and therefore did notresult in a gain or loss. During the fourth quarter of 2014, the Joint Venture was formally liquidated and $5.1 million was transferred to AlMansoori.64Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 3. ASSETS HELD FOR SALEIn April 2015, we announced our decision to exit markets in which we participate outside of North America. Our strategy is to sell or relocate theassets of the businesses operating in these markets. During the second quarter of 2015, certain assets of our Oman business unit, which was included in ourInternational reporting segment, met the criteria for assets held for sale. We completed the sale of these assets in the fourth quarter. We recorded a $21.4million impairment of fixed assets to reduce the carrying value of these assets to their fair market value.In the third quarter of 2015, we transferred four rigs from Ecuador to the U.S. and sold the remaining operating assets of our Ecuadorian business unitat auction and recorded an impairment of $4.1 million to reduce the carrying value of those assets to the price at which they were sold.Additionally, during the third quarter of 2015, the assets and related liabilities of our Bahrain business unit and certain assets of our Colombianbusiness unit, which were included in our International reporting segment, and our Enhanced Oilfield Technology business unit, which is included in ourFishing and Rental reporting segment, met the criteria for assets held for sale. In Bahrain, we completed the sale of our subsidiary for $4.9 million in thefourth quarter of 2015. In Colombia, we relocated one rig to the U.S. in the third quarter of 2015 and sold thirteen rigs and remaining property and equipment,net, and inventories in the fourth quarter. We are also planning to sell certain assets of our Enhanced Oilfield Technology business unit and expect this saleto be complete by the end of 2016. We recorded an impairment of $7.0 million, $25.3 million and $6.0 million for our Bahraini, Colombian and EnhancedOilfield Technology business units, respectively, to reduce the carrying value of their assets and related liabilities to their fair market value.During the fourth quarter of 2015, the assets and related liabilities of our Russian business unit which is included in our International reportingsegment met the criteria for assets held for sale. We expect this sale to occur in the first half of 2016. We recorded a $23.0 million impairment of our Russianfixed assets to reduce the carrying value of these assets to their fair market value.The following assets and related liabilities are classified as held for sale on our December 31, 2015 consolidated balance sheet. Russia Enhanced OilfieldTechnology Total (in thousands)Current assets: Cash and cash equivalents$398 $— $398Accounts receivable2,502 — 2,502Inventories— 1,791 1,791Total current assets2,900 1,791 4,691Property and equipment, net— 1,209 1,209Total assets$2,900 $3,000 $5,900Current liabilities: Accounts payable$161 $— $161Other current liabilities368 — 368Total current liabilities529 — 529Net Assets$2,371 $3,000 $5,37165Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.NOTE 5. OTHER BALANCE SHEET INFORMATIONThe table below presents comparative detailed information about other current assets at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 (in thousands)Other current assets: Current deferred tax assets$10,131 $11,823Prepaid current assets23,287 28,218Reinsurance receivable8,409 9,200VAT asset12,784 18,889Current assets held for sale4,691 —Other11,383 18,724Total$70,685 $86,854 The table below presents comparative detailed information about other non-current assets at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 (in thousands)Other non-current assets: Deferred tax assets$6,260 $35,238Reinsurance receivable8,877 9,537Deposits3,463 10,125Equity method investments1,026 987Non-current assets held for sale1,209 —Other622 584Total$21,457 $56,47166Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The table below presents comparative detailed information about other current liabilities at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 (in thousands)Other current liabilities: Accrued payroll, taxes and employee benefits$19,578 $32,477Accrued operating expenditures12,514 45,899Income, sales, use and other taxes24,833 25,892Self-insurance reserves30,029 31,359Accrued interest23,685 15,241Accrued insurance premiums3,588 7,515Current liabilities held for sale529 —Other5,837 5,844Total$120,593 $164,227The table below presents comparative detailed information about other non-current liabilities at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 (in thousands)Other non-current accrued liabilities: Asset retirement obligations$12,218 $12,525Environmental liabilities5,520 5,730Accrued rent192 263Accrued sales, use and other taxes11,137 5,411Other1,679 3,138Total$30,746 $27,067NOTE 6. OTHER (INCOME) LOSS, NETThe table below presents comparative detailed information about our other income and expense for the years ended December 31, 2015, 2014 and2013: Year Ended December 31, 2015 2014 2013 (in thousands)Interest income$(159) $(82) $(220)Foreign exchange loss4,153 3,733 834Allowance for collectibility of notes receivable7,705 — —Other, net(2,305) (2,642) (1,417)Total$9,394 $1,009 $(803)67Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 7. ALLOWANCE FOR DOUBTFUL ACCOUNTSThe table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2015, 2014 and 2013: Balance atBeginningof Period Charged toExpense Deductions Balance atEnd ofPeriod (in thousands)As of December 31, 2015$2,925 $21,172 $(3,182) $20,915As of December 31, 2014766 2,710 (551) 2,925As of December 31, 20132,860 634 (2,728) 766NOTE 8. PROPERTY AND EQUIPMENTProperty and equipment consists of the following: December 31, 2015 2014 (in thousands)Major classes of property and equipment: Oilfield service equipment$1,779,433 $1,927,353Disposal wells79,949 88,465Motor vehicles273,857 288,523Furniture and equipment130,772 132,617Buildings and land105,671 91,553Work in progress6,706 27,004Gross property and equipment2,376,388 2,555,515Accumulated depreciation(1,496,356) (1,320,257)Net property and equipment$880,032 $1,235,258Interest 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, 2015, 2014 and 2013 waszero, zero, and $0.6 million, respectively. As of December 31, 2015 and 2014, we have no capital lease obligations.Depreciation of assets held under capital leases was zero, zero, and $1.9 million for the years ended December 31, 2015, 2014 and 2013,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.The decline in market value of our common stock in comparison to the carrying value of our assets during the third quarter of 2015 as well as thepersistent low oil prices and the affect that low oil prices has on our industry were determined to be goodwill testing triggering events. These triggeringevents required us to perform step one of the goodwill impairment test to identify potential impairment. Our step one testing indicated potential impairmentin our Coiled Tubing Services segment which required us to perform step two of the goodwill impairment test to determine the amount of impairment, if any.Our preliminary68Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)step two testing performed during the third quarter of 2015, using a discounted cash flow model to determine fair value, concluded that certain fixed assetswere impaired. As a result, we recorded an estimated pre-tax charge of $45.0 million in the third quarter of 2015. During the fourth quarter of 2015 wefinalized our step two testing, preliminarily performed in the third quarter of 2015, based on additional analysis performed by outside consultants. As a result,we recorded an additional pre-tax asset impairment charge of $6.1 million in the fourth quarter of 2015. There were no asset impairment charges for the yearended December 31, 2013.NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETSThe changes in the carrying amount of our goodwill for the years ended December 31, 2015 and 2014 are as follows: U.S. Rig Services Fluid ManagementServices Coiled TubingServices Fishing andRental Services International Total (in thousands)December 31, 2013$297,719 $24,479 $101,795 $173,463 $27,419 $624,875Goodwill impairment— — (19,100) — (22,437) (41,537)Impact of foreign currency translation— — — — (599) (599)December 31, 2014297,719 24,479 82,695 173,463 4,383 582,739Goodwill impairment(297,719) (24,479) (82,695) (173,463) (4,383) (582,739)December 31, 2015$— $— $— $— $— $—The components of our other intangible assets as of December 31, 2015 and 2014 are as follows: December 31, 2015 December 31, 2014 (in thousands)Noncompete agreements: Gross carrying value$1,535 $2,269Accumulated amortization(1,289) (1,710)Net carrying value$246 $559Patents, trademarks and tradenames: Gross carrying value$1,329 $3,106Accumulated amortization(302) (263)Net carrying value$1,027 $2,843Customer relationships and contracts: Gross carrying value$41,996 $59,045Accumulated amortization(38,705) (52,303)Net carrying value$3,291 $6,742Developed technology: Gross carrying value$4,778 $8,494Accumulated amortization(3,459) (4,138)Net carrying value$1,319 $4,356Total: Gross carrying value$50,417 $73,693Accumulated amortization(44,534) (59,193)Net carrying value$5,883 $14,500 69Key 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 31,2015 2014 2013 (in thousands)Noncompete agreements$278 $1,671 $2,082Patents and trademarks40 40 40Customer relationships and contracts3,430 6,749 16,726Developed technology370 316 221Total intangible asset amortization expense$4,118 $8,776 $19,069Of our intangible assets at December 31, 2015, $0.9 million are indefinite-lived tradenames which are not subject to amortization. These tradenamesare tested for impairment annually using a relief from royalty method. The weighted average remaining amortization periods and expected amortizationexpense for the next five years for our definite lived intangible assets are as follows: Weightedaverage remainingamortizationperiod (years) Expected Amortization Expense2016 2017 2018 2019 2020 (in thousands)Noncompete agreements1.0 $246 $— $— $— $—Trademarks2.4 40 40 17 — —Customer relationships and contracts3.6 1,276 1,013 431 341 230Developed technology3.8 352 352 352 263 —Total expected intangible asset amortizationexpense $1,914 $1,405 $800 $604 $230Certain 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.As a result of the planned sale of certain of our Enhanced Oilfield Technology business units assets, we will no longer be using a certain developedtechnology patent. As a result, we fully impaired the $3.4 million patent. In addition, we will no longer use our Edge tradename. As a result, we fully impairedthe $1.5 million tradename. Both the Edge tradename and Enhanced Oilfield Technology developed technology patent were part of our Fishing and RentalServices segment.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 Russiaas a result of geopolitical events occurring during the second quarter of 2014 was determined to be a triggering event. This triggering event required us toperform testing for possible goodwill impairment of our Russian business reporting unit which is included in our International reporting segment. Ouranalysis 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 aswell. 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 the analysis needed to complete ourstep two testing. The additional analysis preformed by our consultants confirmed that there was no impairment of goodwill. The analysis did conclude that$7.7 million of customer relationship and $3.6 million of tradename intangible assets in our Fishing and Rental Services segment was impaired.During the fourth quarter of 2014 we performed our annual qualitative analysis of goodwill impairment as of October 1, 2014. Based on this analysiswe determined 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 the70Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)fourth quarter and we determined it was necessary to perform the first step of the goodwill impairment test for our U.S. Rig Services, Coiled Tubing Services,Fishing and Rental Services and Fluid Management Services segments. Based on the results of our step one analysis, the fair value of our U.S. Rig Services,Fluid Management Services and Fishing and Rental Services segments exceeded their carrying values, but indicated potential impairment in our CoiledTubing Services segment. Step two of the goodwill impairment testing for the Coiled Tubing Services segment was performed preliminarily during the fourthquarter of 2014 and our analysis concluded that $19.1 million of goodwill was impaired and recorded in the fourth quarter. Our analysis concluded that therewas no impairment of fixed assets. During the first quarter of 2015, we engaged outside consultants to assist us in finalizing the analysis needed to completeour step two testing. Based on the additional analysis performed, we concluded that there was an additional $21.7 million of goodwill that was impaired.The additional decline in market value of our stock during the third quarter of 2015 as well as the persistent low oil prices and the affect that low oilprices have on our industry were also determined to be triggering events making it necessary to perform testing for possible goodwill impairment for our U.S.Rig Services, Coiled Tubing Services, Fishing and Rental Services, Fluid Management Services and International segments. Our analysis concluded that theremaining $561.0 million of goodwill of these segments was fully impaired. Also, during our goodwill analysis, there was an indication of impairment offixed assets in our Coiled Tubing Services segment. See “Note 8. Property and Equipment,” for further discussion.NOTE 10. EARNINGS PER SHAREThe following table presents our basic and diluted earnings per share (“EPS”) for the years ended December 31, 2015, 2014 and 2013: Year Ended December 31,2015 2014 2013(in thousands, except per share amounts)Basic and diluted EPS Calculation: Numerator Loss attributable to Key$(917,701) $(178,628) $(21,768)Denominator Weighted average shares outstanding156,598 153,371 152,271Basic and diluted loss per share attributable to Key$(5.86) $(1.16) $(0.14)Stock 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, 2015, 2014, and 2013 exclude the potential exercise of 1.3 million, 1.4 million and 1.7 million stockoptions, respectively, and 0.3 million, 0.3 million and 0.3 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, 2015. However, we issued 4.1 million shares of restricted stock on January 30, 2016.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.71Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Annual accretion of the assets associated with the asset retirement obligations was $0.6 million for the years ended December 31, 2015, 2014 and2013. A summary of changes in our asset retirement obligations is as follows (in thousands):Balance at December 31, 2013$11,999Additions—Costs incurred(79)Accretion expense605Disposals—Balance at December 31, 201412,525Additions165Costs incurred(326)Accretion expense630Disposals(424)Balance at December 31, 2015$12,570NOTE 12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTSThe following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31, 2015 and 2014.Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities. These carrying amounts approximate fair value because ofthe short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date. December 31, 2015 December 31, 2014Carrying Value Fair Value Carrying Value Fair Value(in thousands)Financial assets: Notes receivable — Argentina operations sale$— $— $8,300 $8,300Financial liabilities: 6.75% Senior Notes due 2021$675,000 $175,568 $675,000 $413,438Term Loan Facility due 2020313,425 313,425 — —Credit Facility revolving loans— — 70,000 70,000Notes receivable — Argentina operations sale. A $4.0 million valuation allowance for collectibility of the notes receivable was recorded in the firstquarter of 2015. An additional $3.8 million reserve was recorded in the third quarter of 2015.6.75% 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, 2015 was $675.0 million, and the fair value was $175.6 million (26.0% of carrying value).Term Loan Facility due 2020. Because the variable interest rates of these loans approximate current market rates, the fair values of the loansborrowed under this facility approximate their carrying values.Credit Facility Revolving Loans. In connection with entering into the ABL Facility and the Term Loan Facility, we terminated our 2011 CreditFacility on June 1, 2015.72Key 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, 2015 2014 2013 (in thousands)Current income tax (expense) benefit: Federal and state$3,522 $(755) $(8,515)Foreign— (1,684) (350) 3,522 (2,439) (8,865)Deferred income tax (expense) benefit: Federal and state230,620 69,508 (4,870)Foreign(41,293) 13,414 16,799 189,327 82,922 11,929Total income tax benefit$192,849 $80,483 $3,064The sources of our income or loss from continuing operations before income taxes and noncontrolling interest were as follows: Year Ended December 31, 2015 2014 2013 (in thousands)Domestic income (loss)$(955,629) $(202,973) $29,086Foreign loss(154,921) (56,138) (53,323)Total loss$(1,110,550) $(259,111) $(24,237)We made federal income tax payments of zero, zero and $30.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. Wemade state income tax payments of $0.8 million, $1.6 million and $2.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. Wemade foreign tax payments of $0.2 million, $1.1 million and $2.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. For the yearsended December 31, 2015, 2014 and 2013, tax expense allocated to stockholders’ equity for compensation expense for income tax purposes in excess ofamounts recognized for financial reporting purposes was $3.4 million, $1.2 million and $1.8 million, respectively. In addition, we received federal incometax refunds of $6.9 million, $11.9 million and $25.1 million during the years ended December 31, 2015, 2014 and 2013, respectively.Income tax benefit differs from amounts computed by applying the statutory federal rate as follows: Year Ended December 31, 2015 2014 2013Income tax benefit computed at Federal statutory rate35.0 % 35.0 % 35.0 %State taxes1.6 % 1.4 % (6.0)%Meals and entertainment(0.1)% (0.7)% (7.7)%Foreign rate difference(1.3)% (0.7)% (8.0)%Non-deductible goodwill(4.8)% (3.9)% — %Change in valuation allowance(12.9)% — % — %Other(0.1)% — % (0.7)%Effective income tax rate17.4 % 31.1 % 12.6 %73Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of December 31, 2015 and 2014, our deferred tax assets and liabilities consisted of the following: December 31, 2015 2014 (in thousands)Deferred tax assets: Net operating loss and tax credit carryforwards$172,749 $64,107Capital loss carryforwards21,417 21,417Self-insurance reserves14,516 15,751Allowance for doubtful accounts593 1,046Accrued liabilities9,344 6,283Share-based compensation6,155 7,254Intangible assets105,070 —Other5,453 869Total deferred tax assets335,297 116,727Valuation allowance for deferred tax assets(163,835) (22,247)Net deferred tax assets171,462 94,480Deferred tax liabilities: Property and equipment(168,090) (225,136)Intangible assets— (46,543)Other(1,233) (4,134)Total deferred tax liabilities(169,323) (275,813)Net deferred tax asset (liability), net of valuation allowance$2,139 $(181,333)The December 31, 2015 net deferred tax asset balance is comprised of $10.1 million current deferred tax asset and $6.3 million long-term deferredtax asset, less $14.3 million long-term deferred tax liability. The December 31, 2014 net deferred liability balance is comprised of $228.4 million long-termdeferred tax liability, less $11.8 million current deferred tax asset and $35.2 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. Due to the history of losses in recent years and the current downturn in the oil and gas industry, management believes that it ismore likely than not that we will not be able to realize a substantial portion of our net deferred tax assets.We estimate that as of December 31, 2015, 2014 and 2013, we have available $243.8 million, $50.7 million and $2.4 million, respectively, offederal net operating loss carryforwards. In addition, approximately $2.4 million of our net operating losses as of December 31, 2015 are subject to a $5,000annual Section 382 limitation and expire in 2016 through 2018. The remaining net operating loss carryforward not subject to Section 382 will begin toexpire in 2035.We estimate that as of December 31, 2015, 2014 and 2013, we have available $258.9 million, $102.0 million and $64.9 million, respectively, ofstate net operating loss carryforwards that will expire between 2016 and 2034.We estimate that as of December 31, 2015, 2014 and 2013, we have available $289.6 million, $177.5 million, and $117.6 million, respectively, offoreign net operating loss carryforwards that will expire between 2020 and 2030.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 subsidiary in Canada, as these earnings are consideredpermanently reinvested because the cash flow generated by this business is needed to fund additional equipment and working capital requirements in thisjurisdiction. Furthermore, we did not provide for U.S. income taxes on unremitted earnings of our other foreign subsidiaries as our tax basis in these foreignsubsidiaries 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, have been examined through tax years 2010.74Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2015, 2014 and 2013, we had $0.4 million, $1.0 million and $0.9 million, respectively, of unrecognized tax benefits which, ifrecognized, would impact our effective tax rate. We have accrued less than $0.1 million, $0.1 million and $0.4 million for the payment of interest andpenalties as of December 31, 2015, 2014 and 2013, respectively. We believe that it is reasonably possible that $0.2 million of our currently remainingunrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2016 as a result of a lapse of the statute oflimitations and settlement of an open audit.We recognized a net tax benefit $0.6 million in 2015 for expirations of statutes of limitations.The following table presents the gross activity during 2015 and 2014 related to our liabilities for uncertain tax positions (in thousands):Balance at January 1, 2014$1,371Additions based on tax positions related to the current year108Reductions for tax positions from prior years(30)Settlements—Balance at December 31, 20141,449Additions based on tax positions related to the current year—Reductions for tax positions from prior years(883)Settlements—Balance at December 31, 2015$566Tax 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.NOTE 14. LONG-TERM DEBTThe components of our long-term debt are as follows: December 31, 2015 December 31, 2014 (in thousands)6.75% Senior Notes due 2021$675,000 $675,000Term Loan Facility due 2020313,425 —Senior Secured Credit Facility revolving loans due 2016— 70,000Debt issuance costs and unamortized premium (discount) on debt, net(23,575) (7,309)Total964,850 737,691Less current portion(3,150) —Long-term debt$961,700 $737,69175Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)6.75% Senior Notes due 2021We have outstanding $675.0 million of 6.75% Senior Notes due 2021 (the “2021 Notes”). The 2021 Notes are general unsecured senior obligationsand are effectively subordinated to all of our existing and future secured indebtedness. The 2021 Notes are or will be jointly and severally guaranteed on asenior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2021 Notes is payable on March 1 and September 1 of eachyear. 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 accrued and unpaid interest to the redemption date. The premiumis the excess of (i) the present value of the redemption price of 103.375% of the principal amount, plus all remaining scheduled interest payments duethrough March 1, 2016 discounted at the treasury rate plus 0.5% over (ii) the principal amount of the note. If we experience a change of control, subject tocertain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes, in whole or in part, at a purchase price equal to101% 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.Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the 2021 Notes aninvestment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2015, the 2021 Notes were rated belowinvestment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit ratingassigned to the 2021 Notes later falls below investment grade. We were in compliance with these covenants at December 31, 2015.ABL FacilityOn June 1, 2015, the Company entered into a Loan and Security Agreement (the “ABL Facility”), among the Company and Key Energy Services,LLC, as the Borrowers (collectively, the “ABL Borrowers”), certain subsidiaries of the ABL Borrowers named as guarantors therein, the financial institutionsparty thereto from time to time as Lenders (collectively, the “ABL Lenders”), Bank of America, N.A., as Administrative Agent for the Lenders, and Bank ofAmerica, N.A. and Wells Fargo Bank, National Association, as Co-Collateral Agents for the Lenders. The ABL Facility provides for aggregate initialcommitments from the ABL Lenders of $100 million (the “Commitments”) and matures on February 28, 2020.The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) theCommitments and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable,subject to a limit equal to the greater of (x) $35 million and (y) 25% of the Commitments plus (c) certain cash and cash equivalents deposited for the benefitof the ABL Lenders, subject to a limit of $1576Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)million. The amount that may be borrowed under the ABL Facility is subject to reduction for certain reserves provided for by the ABL Facility. In addition,the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent ofcertain bad debt write-downs and similar amounts provided in the ABL Facility.Borrowings under the ABL Facility bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, withthe consent of the ABL Lenders, 360 days, plus 4.5% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Fundsrate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) 3.5%. In addition, the ABL Facility provides for unused line fees of 1.00% to 1.25% per year,depending on utilization, letter of credit fees and certain other fees.The ABL Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABLBorrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted to the AdministrativeAgent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets andproceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage orsimilar costs.The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to takecertain actions without the permission of the ABL Lenders or as permitted under the ABL Facility including the incurrence of debt, the granting of liens, themaking of investments, the payment of dividends and the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply with aminimum liquidity covenant, an asset coverage ratio and, during certain periods, a fixed charge coverage ratio.Under the asset coverage ratio covenant, the ABL Borrowers must maintain an asset coverage ratio of at least 1.5 to 1.0. The asset coverage ratio isgenerally defined as the ratio of (i) the sum of (a) the value of the Term Priority Collateral plus (b) certain cash and cash equivalents in excess of $100 millionheld for the benefit of the Term Loan Lenders to (ii) the sum of (a) the amount outstanding under the Term Loan Facility and, following repayment of theTerm Loan Facility, the amount outstanding under the ABL Facility, plus (b) the amount of any fine or settlement in respect of the FCPA Matter (as definedin the ABL Facility) that is secured by a lien on the ABL Priority Collateral or the Term Priority Collateral (the “Asset Coverage Ratio”).Under the fixed charge coverage ratio covenant, the ABL Borrowers must maintain a fixed charge coverage ratio of at least 1.0 to 1.0 during theperiod commencing on the day that availability under the ABL Facility is less than the greater of $20 million and 20% of the Commitments and continuinguntil the 90th day following the day that availability under the ABL Facility is greater than the greater of $20 million and 20% of the Commitments. Thefixed charge coverage ratio is generally defined as the ratio of (i) EBITDA minus certain capital expenditures and cash taxes paid to (ii) the sum of cashinterest expenses, scheduled principal payments on borrowed money and certain distributions. The ABL Facility permits the ABL Borrowers, in calculatingEBITDA, to add back certain amounts in respect of the investigatory expenses associated with the FCPA Matter and amounts paid in settlement of the FCPAMatter to the extent such amounts do not exceed net liquidity, defined as certain cash and cash equivalents minus the principal amount of loans outstandingunder the ABL Facility.Under the minimum liquidity covenant (the “Minimum Liquidity Covenant”), the ABL Borrowers must not permit Liquidity, defined as the sum of(i) availability under the ABL Facility plus (ii) certain unrestricted cash and cash equivalents, to be less than $100.0 million as of the last day of any fiscalquarter or immediately after any cash payment of a settlement of, or fine in connection with, the FCPA Matter.The ABL Facility contains customary representations and warranties and conditions to borrowing, including the absence of any default or event ofdefault, the accuracy in all material respects of the representations and warranties of the ABL Loan Parties contained in the ABL Facility and the absence ofany event or circumstance that has or could reasonably be expected to have a material adverse effect.The ABL Facility contains customary events of default, the occurrence of which entitle the ABL Lenders to accelerate the maturity of amountsoutstanding under the ABL Facility and exercise other customary remedies and an event of that is triggered if, immediately after any cash payment of asettlement of the FCPA Matter (and after any cash or borrowings under the ABL Facility are used to fund such payment), (i) the Company shall fail to be incompliance with the Minimum Liquidity77Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Covenant or (ii) if any loans under the ABL Facility are outstanding on the date of such cash payment, availability under the ABL Facility is less than 33% ofthe borrowing base in effect on such date.Term Loan FacilityOn June 1, 2015, the Company entered into a Term Loan and Security Agreement (the “Term Loan Facility”), among the Company, as Borrower,certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “TermLoan Lenders”), Cortland Capital Market Services LLC, as Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole LeadArranger and Sole Bookrunner.On June 1, 2015, the Company and other parties thereto closed on the Term Loan Facility, the Company borrowed $315 million (prior to givingeffect to an upfront discount of 3% which resulted in net proceeds to the Company, prior to expenses, of approximately $305.5 million), and the Companyused a portion of such proceeds to repay its prior credit facility. The Term Loan Facility provides for an incremental facility which, subject to the agreementof one or more Term Loan Lenders or other institutional lenders agreeing to provide the additional loans and the satisfaction of certain terms and conditions,would enable the Company to borrow additional amounts under the Term Loan Facility as long as the aggregate outstanding amount of all borrowingsthereunder does not exceed $400 million. The Term Loan Facility will mature on June 1, 2020, although such maturity date may, at the Company’s request,be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility.Borrowings under the Term Loan Facility bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or,with the consent of the Term Loan Lenders, 12 months, plus 9.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the FederalFunds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 8.25%.The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together withthe Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted to the Agent afirst-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assetsand the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility aresecured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certaincircumstances as provided in the Term Loan Facility. The Company is required to make principal payments in the amount of $787,500 per quartercommencing with the quarter ended September 30, 2015. In addition, pursuant to the Term Loan Facility, the Company must offer to prepay term loans out ofthe Net Cash Proceeds (as defined in the Term Loan Facility) of certain asset sales and, for each fiscal year beginning with the Company’s fiscal year endingDecember 31, 2015, the Company must offer to prepay term loans in an aggregate principal amount equal to 50% of the Company’s Excess Cash Flow (asdefined in the Term Loan Facility) for such fiscal year. Within 30 days following any Change of Control (as defined in the Term Loan Facility), the Companymust offer to prepay all term loans (i) at a price of 101% of the amount thereof if, after giving effect to such Change of Control, the Asset Coverage Ratio is atleast 1.5 to 1.0 or (ii) at a price equal to the greater of 101% of the amount thereof and the applicable prepayment premium provided for in the Term LoanFacility if, after giving effect to such Change of Control, the Asset Coverage Ratio is less than 1.5 to 1.0.The Term Loan Facility contains customary representations and warranties and certain affirmative and negative covenants, including covenants thatrestrict the ability of the Term Loan Parties to take certain actions without the permission of the Term Loan Lenders or as permitted under the Term LoanFacility including the incurrence of debt, the granting of liens, the making of investments, the payment of dividends and the sale of assets. The Term LoanFacility also contains financial covenants requiring that the Company maintain an Asset Coverage Ratio of at least 1.5 to 1.0 and that Liquidity (as definedin the Term Loan Facility) must not be less than $100 million as of the last day of any fiscal quarter or immediately after any cash payment of a settlement of,or fine in connection with, the FCPA Matter.The Term Loan Facility contains events of default, the occurrence of which entitle the Term Loan Lenders to accelerate the maturity of amountsoutstanding under the Term Loan Facility and exercise other customary remedies.We were in compliance with covenants of the ABL Facility and Term Loan Facility as of December 31, 2015. As of December 31, 2015, we have noborrowings outstanding under the ABL Facility and $47.9 million of letters of credit outstanding with borrowing capacity of $27.2 million available subjectto covenant constraints under our ABL Facility.Our ability to fund our operations, pay the principal and interest on our long-term debt and to satisfy our other obligations will depend upon ouravailable liquidity and the amount of cash flows we are able to generate from our operations. 78Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)During 2015, cash used in operations was $22.4 million, and, if industry conditions do not improve, we may have negative cash flows from operations in2016.We believe that our internally generated cash flows from operations, current reserves of cash and availability under our ABL facility are sufficient tofinance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for the next twelvemonths. However, in light of the current conditions in our industry, we continue to analyze a variety of transactions and mechanisms designed to reduce ourdebt and improve our liquidity. Our future operating performance and ability to refinance will be affected by the results of our operations, economic andcapital market conditions, oil and natural gas prices and other factors, many of which are beyond our control.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, and are unable to cure, obtain a waiver or an amendment, it could lead to an event of default and theconsequent acceleration of our obligation to repay all of our outstanding debt. Our ability to comply with debt covenants and other restrictions may beaffected by events beyond our control, including general economic and financial conditions.In particular, under the terms of our indebtedness, we must comply with certain financial ratios and satisfy certain financial condition tests that couldrequire us to take action to reduce our debt or take some other action in order to comply with them. Our ability to satisfy required financial ratios and testscan be affected by events beyond our control, including prevailing economic, financial and industry conditions, and we may not be able to continue to meetthose ratios and tests in the future. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness. If we default, lendersunder our ABL Facility will no longer be obligated to extend credit to us and they, as well as the trustee for our outstanding notes and the administrativeagent under our Term Loan Facility, could elect to declare all amounts of outstanding debt together with accrued interest, to be immediately due andpayable. The results of such actions would have a significant negative impact on our results of operations, financial position and cash flows.In addition, access to the liquidity provided by our ABL Facility is predicated upon our ability to satisfy the conditions to borrowing, whichconditions require that the representations and warranties under the facility, including representations and warranties related to our solvency and the absenceof a material adverse effect, remain true and correct.The weighted average interest rates on the outstanding borrowings under the ABL Facility and Term Loan Facility for the year ended December 31,2015 were as follows: The Year Ended December 31, 2015 (in thousands)ABL Facility—%Term Loan Facility10.27%Senior Secured Credit FacilityOn June 1, 2015, in connection with entering into the ABL Facility and the Term Loan Facility, we terminated our senior secured revolving bankcredit facility, dated as of March 31, 2011, as amended through December 5, 2014 (the “2011 Credit Facility”), which was scheduled to mature no later thanMarch 31, 2016. The 2011 Credit Facility provided for a senior secured credit facility consisting of a revolving credit facility, letter of credit sub-facility andswing line facility of up to an aggregate principal amount of $400.0 million. The 2011 Credit Facility was terminated without any prepayment penalties. Theremaining unamortized deferred financing costs of $0.8 million were written off at the time of the termination.The interest rate per annum applicable to the 2011 Credit Facility was, 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 had ranged from 225 to 300 basis points, and the applicable margin for all other loans ranges from125 to 200 basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facilitywas equal to 0.5%. For the five months ended June 1, 2015 and year ended December 31, 2014, the weighted average interest rates on the outstandingborrowings under our 2011 Credit Facility was 3.14% and 2.97%, respectively.79Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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, 2015, $2.0 million of letters of credit were outstanding under the facility.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 31,2015: Principal Amount of Long-Term Debt (in thousands)2016$3,15020173,15020183,15020193,1502020300,825Thereafter675,000Total long-term debt$988,425 Interest expense for the years ended December 31, 2015, 2014 and 2013 consisted of the following: Year Ended December 31, 2015 2014 2013 (in thousands)Cash payments$68,105 $49,410 $51,705Commitment and agency fees paid1,097 2,179 1,799Amortization of discount and premium on debt547 (556) (556)Amortization of deferred financing costs3,277 2,800 2,800Write-off of deferred financing costs821 362 —Net change in accrued interest— 32 63Capitalized interest— — (607)Net interest expense$73,847 $54,227 $55,204Deferred Financing CostsA summary of deferred financing costs including capitalized costs, write-offs and amortization, for the years ended December 31, 2015 and 2014 arepresented in the table below (in thousands):Balance at December 31, 2013$13,897Amortization(2,800)Write-off(362)Balance at December 31, 201410,735Capitalized costs11,461Amortization(3,277)Write-off(821)Balance at December 31, 2015$18,098 80Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 15. COMMITMENTS AND CONTINGENCIESOperating Lease ArrangementsWe lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2027, with varying paymentdates throughout each month. In addition, we have a number of leases scheduled to expire during 2016.As of December 31, 2015, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands): Lease Payments2016$9,71220177,49920186,14220195,78720205,073Thereafter22,192Total$56,405We are also party to a significant number of month-to-month leases that can be canceled at any time. Operating lease expense was $16.9 million,$22.3 million, and $23.9 million for the years ended December 31, 2015, 2014 and 2013, 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, 2015, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is $1.6million. 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, 2014 were $0.1 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. Two of the five cases have beenconsolidated in United States District Court for the Central District of California. On December 22, 2015, that court issued an order granting in part anddenying in part a class certification motion. The court certified a class of hourly paid, non-exempt oilfield employees who allege they did not receivereimbursement for all business expenses and allege they did not receive all rest breaks required by California law. The court did not determine whether Key isliable to any of the class members. The court in one of the remaining cases that had been stayed pending outcome of the class certification motion recentlyissued an order lifting the stay. The fourth case is waiting for a decision regarding whether it will move forward in California state court or in federal court.The fifth case is an enforcement action for civil penalties based on California’s Private Attorneys General Act, which is pending in California state court. Wehave investigated the claims in all five lawsuits, and intend to vigorously defend them. At this time, we cannot estimate any possible loss or range of loss.In January 2014, the SEC advised Key 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. On May 30, 2014,Key voluntarily disclosed the allegation involving our Mexico operations and certain information from the Company’s initial investigation to both the SECand Department of Justice (“DOJ”). A Special Committee of our Board of Directors conducted an independent investigation regarding this allegation as wellas possible violations of the FCPA involving business activities of our operations in Russia.81Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Special Committee’s independent review, which also included a review of certain aspects of the Company’s operations in Colombia, as well as a riskassessment with regard to our other international locations, has been completed. We are continuing to cooperate with the SEC and DOJ. At this time we areunable to predict the ultimate resolution of these matters with these agencies and, accordingly, cannot reasonably estimate any possible loss or range of loss.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. common stock.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 seeks to represent a class of purchasers of the Company's stock between September 4, 2012 and July 17, 2014.Defendants Key Energy Services, Inc., Richard J. Alario, J. Marshall Dodson and Newton W. Wilson III filed a Motion to Dismiss on April 14, 2015.Defendant Taylor M. Whichard III filed a Joinder in Motion and Motion to Dismiss on the same date. Lead plaintiff filed an opposition to that motion, and alldefendants filed reply briefs in support of the motion. The court has not ruled upon it. Because this case is in the early stages, we cannot predict the outcomeat 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.In March 2015, two collective action lawsuits were filed in the Southern District of Texas, Corpus Christi Division, individually and on behalf of allothers similarly situated, alleging violations of the Fair Labor Standards Act of 1938 (“FLSA”). We agreed to conditional certification in the first lawsuit andnotice of the case issued to 56 putative class members. Roughly 20% of the eligible putative class members timely filed a notice of consent to join thelawsuit. We will soon begin merit-based discovery in the first lawsuit, which will last at least six months. We also agreed to conditional certification in thesecond lawsuit and notice of the case recently issued to 14 putative class members. Four putative class members, including the name plaintiff, have filed anotice of consent to join the lawsuit thus far and there is roughly a month and a half remaining for others to join. The parties will begin merit-based discoveryin the second case as soon as the notice period closes. Because the cases are in the early stages, we cannot predict the outcome of these cases at this time.Accordingly, we cannot estimate any possible loss or range of loss for either case.In May 2015, a class and collective action lawsuit was filed in the Southern District of Texas, Houston Division, individually and on behalf of allothers similarly situated, alleging violations of the FLSA and the New Mexico Minimum Wage Act. We agreed to conditional certification of a putative classand notice issued to 174 putative class members. The notice period closed in early February and roughly 15% of eligible putative class members timely fileda consent to join the lawsuit. The parties will soon begin merit-based discovery in this case, which will likely last six to nine months. Because the case is inthe early stages, we cannot predict the outcome at this time. Accordingly, we cannot estimate any possible loss or range of loss for this case.In November 2015, the Santa Barbara County District Attorney filed a criminal complaint against two former employees and Key, and specificallyalleging three counts of violations of California Labor Code section 6425(a) against Key. The complaint seeks unspecified penalties against Key related toan October 12, 2013 accident which resulted in the death of one Key employee at a drilling site near Santa Maria, California. An arraignment was held onFebruary 10, 2016, where Key and its former employees82Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)pleaded not guilty to all charges. Because the matter is in early stages, we cannot predict the outcome at this time. Accordingly, we cannot estimate anypossible loss or range of loss.On or about November 23, 2015, the North Dakota Industrial Commission ("NDIC") filed a notice in the county of Burleigh County, ND allegingstatutory violations by Key Energy Services, LLC, as operator of two salt water disposal wells in the state of North Dakota. The NDIC has pled forapproximately $888,000 in fines and costs. The Company is currently in discussions with the NDIC and is not able to estimate any possible loss or range ofloss at this time.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 31,2015 and 2014, 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, 2015 and 2014, we have recorded $56.4 million and $61.0 million, respectively, of self-insurance reserves related to workers’ compensation,vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $17.3 million and $18.7 million of insurancereceivables as of December 31, 2015 and 2014, 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, 2015and 2014, we have recorded $5.5 million and $5.7 million, respectively, for our environmental remediation liabilities. We believe that the liabilities we haverecorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties to comply withenvironmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required todivest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).NOTE 16. ACCUMULATED OTHER COMPREHENSIVE LOSSThe components of our accumulated other comprehensive loss are as follows (in thousands): December 31, 2015 2014Foreign currency translation loss$(43,740) $(37,280)Accumulated other comprehensive loss$(43,740) $(37,280)The local currency is the functional currency for our operations in Russia. As of December 31, 2015 and 2014, one U.S. dollar was equal to 73.16and 56.45 Russian rubles, respectively. The cumulative translation gains and losses resulting from translating financial statements from the functionalcurrency to U.S. dollars are included in other comprehensive income and accumulated in stockholders’ equity until a partial or complete sale or liquidationof our net investment in the entity.83Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 17. EMPLOYEE BENEFIT PLANSWe maintain a 401(k) plan as part of our employee benefits package. In the third quarter of 2015, management suspended the 401(k) matchingprogram as part of our cost cutting efforts. Prior to this, we matched 100% of employee contributions up to 4% of the employee’s salary, which vestimmediately, into our 401(k) plan, subject to maximums of $10,600, $10,400 and $10,200 for the years ended December 31, 2015, 2014 and 2013,respectively. Our matching contributions were $5.5 million, $10.9 million and $10.4 million for the years ended December 31, 2015, 2014 and 2013,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, 2015 and 2014, we had 200,000,000 shares of common stock authorized with a par value of $0.10 per share, of which157,543,259 shares were issued and outstanding at December 31, 2015 and 153,557,108 shares were issued and outstanding at December 31, 2014. During2015, 2014 and 2013, no dividends were declared or paid. Under the terms of our Senior Notes due 2021 and Credit Facilities due 2020, we must meet certainfinancial covenants 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 239,636 shares, 290,697 shares and 416,101 shares for an aggregate cost of $0.4 million, $2.2 million and $3.2 millionduring the years ended December 31, 2015, 2014 and 2013, respectively, which represented the fair market value of the shares based on the price of our stockon 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 nonqualified stock options), restricted stock, restricted stock units, performance compensation awards and SARs (collectively, "Awards"). Awardsmay be granted to employees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expected tobecome employees, 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 first84Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)have been approved by a vote 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 amendment would constitute an impairment of the rights under any Award, we must request the consent of the Participant and the Participantmust consent in writing. It is expressly contemplated that the board may amend the 2014 Incentive Plan in any respect our board of directors deem necessaryor advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Internal Revenue Code of1986, as amended, and the regulations promulgated thereunder relating to incentive stock options and/or to bring the 2014 Incentive Plan and/or Awardsgranted under it into compliance therewith. As of December 31, 2015, there were 4.5 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, 2015 Options Weighted AverageExercise Price Weighted AverageFair ValueOutstanding at beginning of period1,319 $14.07 $5.99Granted— $— $—Exercised— $— $—Cancelled or expired(507) $12.89 $5.99Outstanding at end of period812 $14.81 $6.00Exercisable at end of period812 $14.81 $6.00 We did not grant any stock options during the years ended December 31, 2015, 2014 and 2013. No stock options vested during the year endedDecember 31, 2015. We recognized zero pre-tax expense and zero tax benefits related to our stock options for the years ended December 31, 2015, 2014 and2013. All of the stock option awards were vested as of December 31, 2012. The weighted average remaining contractual term for stock option awardsexercisable as of December 31, 2015 is 1.7 years. The intrinsic value of the options exercised for the years ended December 31, 2015, 2014 and 2013 waszero, zero and less than $0.1 million, respectively.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, 2015, 2014 and 2013 was $1.89, $7.31 and $7.56, respectively. The total fair marketvalue of all common stock awards vested during the years ended December 31, 2015, 2014 and 2013 was $13.2 million, $12.0 million and $16.6 million,respectively.The following tables summarize information for the year ended December 31, 2015 about our unvested common stock awards that we haveoutstanding (shares in thousands): Year Ended December 31, 2015 Outstanding Weighted AverageIssuance PriceShares at beginning of period2,566 $7.92Granted4,586 $1.89Vested(2,134) $6.19Cancelled(330) $3.92Shares at end of period4,688 $3.10We have issued 598,860 shares, 197,865 shares and 288,780 shares of common stock to our non-employee directors that vested immediately uponissuance during 2015, 2014 and 2013, 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, 2015, 2014 and 2013, we recognized $10.2million, $10.9 million and $13.8 million, respectively, of pre-tax expense from continuing operations associated with common85Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)stock awards, including common stock grants to our outside directors. For the unvested common stock awards outstanding as of December 31, 2015, weanticipate that we will recognize $8.2 million of pre-tax expense over the next 0.9 years.Performance UnitsIn the first quarter of 2015, the Compensation Committee of the Board of Directors adopted both the 2014 Performance Award Agreement (“2014 PUAward Agreement”) under the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan (the “2014 Plan”) and the 2015 Performance Unit Plan (the“2015 PU Plan”). We believe that the 2015 PU Plan and 2014 PU Award Agreement will enable us to obtain and retain employees who will contribute to ourlong term success by aligning the interests of our executives with the interests of our stockholders by providing compensation that is linked directly toincreases in share value.In January 2015, we issued 2.1 million performance units to our executive officers under the 2014 Plan with such material terms as set forth in the2014 PU Award Agreement. In February 2015, we issued 0.4 million performance units to certain other employees under the 2015 PU Plan. The performanceunits are measured based on one three-year performance period from January 1, 2015 to December 31, 2017. The number of performance units that may beearned by a participant is determined at the end of the performance period based on the relative placement of Key’s total stockholder return for that periodwithin the peer group, as follows:Company Placement for the Performance Period Performance Units Earned asa Percentage of TargetFirst 200%Second 180%Third 160%Fourth 140%Fifth 120%Sixth 100%Seventh 0%Eighth 0%Ninth 0%Tenth 0%Eleventh 0%Twelfth 0%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, 2015, the fair value of outstanding performance units was $0.8million, and is being accreted to compensation expense over the vesting terms of the awards. As of December 31, 2015, the unrecognized compensation costrelated to our unvested performance units is estimated to be $0.5 million and is expected to be recognized over a weighted-average period of 2.0 years.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 2015, 2014 and 2013. We did not forfeit any SARsduring 2015. As of December 31, 2015, 0.2 million SARs remained unexercised.86Table of ContentsIndex to Financial StatementsNOTE 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 $12.1 million, $32.5 million and $41.2 million for the years endedDecember 31, 2015, 2014 and 2013, respectively. Receivables outstanding from Anadarko were $0.9 million and $2.9 million as of December 31, 2015 and2014, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2015 2014 2013 (in thousands)Noncash investing and financing activities: Asset retirement obligations$— $— $174Supplemental cash flow information: Cash paid for interest$68,048 $51,589 $53,504Cash paid for taxes1,077 2,699 35,239Tax refunds6,972 13,109 26,361Cash 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 year ended December 31, 2013 have been revised to reflect thechange in reportable segments. We revised our segments to reflect changes in management’s resource allocation and performance assessment in makingdecisions 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. During the second half of 2015, we ceased operations in Colombia,Ecuador and the Middle East. We evaluate the performance of our segments based on gross margin measures. All inter-segment sales pricing is based oncurrent market conditions. These changes reflect our current operating focus in compliance with ASC 280. We aggregate services that create our reportablesegments in accordance with ASC 280, and the accounting policies for our segments are the same as those described in “Note 1. Organization and Summaryof Significant Accounting Policies” above.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.87Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.InternationalOur International segment includes operations in Mexico and Russia. During the second half of 2015, we ceased operations in Colombia, Ecuadorand the Middle East. We provide rig-based services such as the maintenance, workover, and recompletion of existing oil wells, completion of newly-drilledwells, and plugging and abandonment of wells at the end of their useful lives in each of those international markets. In addition, in Mexico we providedrilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico also requires us to provide third-party services, whichvary in scope by project. We also have a technology development and control systems business based in Canada which is focused on the development ofhardware and software related to oilfield service equipment controls, data acquisition and digital information flow.In April 2015, we announced our decision to exit markets in which we participate outside of North America. Ourstrategy is to sell or relocate the assets of the businesses operating in these markets. In the Middle East, we operated in the Kingdom of Bahrain and Oman. OnAugust 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 theacquisition of the underlying business for $5.1 million. See “Note 2. Acquisitions” for further discussion. As of December 31, 2015, we sold our subsidiary inBahrain and certain assets in88Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Oman, Ecuador and Colombia and are no longer operating in these markets. We are currently in discussions to sell our subsidiary in Russia.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.Functional SupportOur Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reportingsegments.Financial SummaryThe following table presents our segment information as of and for the years ended December 31, 2015, 2014 and 2013 (in thousands):As of and for the year ended December 31, 2015 U.S. Rig Service FluidManagementServices Coiled TubingServices Fishing andRentalServices International FunctionalSupport(2) ReconcilingEliminations TotalRevenues fromexternal customers$377,131 $153,153 $89,823 $121,883 $50,336 $— $— $792,326Intersegment revenues813 1,393 4 5,988 4,256 1,264 (13,718) —Depreciation andamortization59,515 28,138 21,593 34,662 23,872 12,491 — 180,271Impairment expense297,719 24,479 133,795 180,974 85,129 — — 722,096Other operatingexpenses327,836 144,020 89,603 103,659 123,871 128,279 — 917,268Operating loss(307,939) (43,484) (155,168) (197,412) (182,536) (140,770) — (1,027,309)Interest expense, net ofamounts capitalized— — — — 57 73,790 — 73,847Loss before taxes(307,899) (43,402) (155,154) (197,325) (185,306) (221,464) — (1,110,550)Long-lived assets(1)492,906 133,553 54,156 129,204 48,538 186,211 (137,196) 907,372Total assets1,325,591 267,466 138,177 468,214 185,342 (643,226) (413,766) 1,327,798Capital expenditures,excluding acquisitions14,356 6,509 4,621 8,581 2,881 3,860 — 40,80889Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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) beforetaxes96,922 3,581 (10,442) (58,794) (68,924) (221,454) — (259,111)Long-lived assets(1)796,654 181,041 196,265 326,218 270,893 268,169 (150,272) 1,888,968Total assets1,608,122 295,670 260,375 669,823 397,295 (520,964) (387,558) 2,322,763Capital expenditures,excludingacquisitions90,982 3,920 10,815 30,389 7,560 17,973 — 161,63990Key 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) beforetaxes133,642 4,110 23,436 31,351 (26,795) (189,981) — (24,237)Long-lived assets(1)746,021 222,075 246,889 420,486 333,273 287,135 (188,459) 2,067,420Total assets1,511,419 279,950 246,180 637,163 497,938 (195,837) (403,240) 2,573,573Capital expenditures,excludingacquisitions79,761 7,307 12,682 25,378 19,541 19,468 — 164,137(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, 2015: Revenues$267,799 $197,496 $176,857 $150,174Direct operating expenses204,530 158,841 174,505 176,761Net loss(59,676) (65,379) (640,161) (152,485)Loss per share(1): Basic and diluted(0.39) (0.42) (4.06) (0.97)91Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 per share(1): Basic and Diluted(0.08) (0.34) (0.41) (0.34)(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, 2015 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Assets: Current assets$202,688 $192,083 $25,655 $— $420,426Property and equipment, net— 869,150 10,882 — 880,032Intercompany notes and accounts receivableand investment in subsidiaries2,107,092 1,226,433 87,435 (3,420,960) —Other assets— 16,885 10,455 — 27,340TOTAL ASSETS$2,309,780 $2,304,551 $134,427 $(3,420,960) $1,327,798Liabilities and equity: Current liabilities$35,233 $101,594 $17,656 $— $154,483Long-term debt and capital leases, less currentportion961,700 — — — 961,700Intercompany notes and accounts payable1,162,648 2,731,926 125,565 (4,020,139) —Deferred tax liabilities3,658 15,159 (4,565) — 14,252Other long-term liabilities6,267 50,229 577 — 57,073Equity140,274 (594,357) (4,806) 599,179 140,290TOTAL LIABILITIES AND EQUITY$2,309,780 $2,304,551 $134,427 $(3,420,960) $1,327,79892Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 — 582,739Intercompany 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$3,209,894 $3,531,146 $221,109 $(4,639,386) $2,322,763Liabilities and equity: Current liabilities$22,046 $192,079 $27,733 $— $241,858Long-term debt and capital leases, less currentportion737,691 — — — 737,691Intercompany 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$3,209,894 $3,531,146 $221,109 $(4,639,386) $2,322,763CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2015 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $751,923 $52,567 $(12,164) 792,326Direct operating expense— 667,551 52,616 (5,530) 714,637Depreciation and amortization expense— 170,574 9,697 — 180,271General and administrative expense803 193,241 15,197 (6,610) 202,631Impairment expense— 643,250 78,846 — 722,096Operating loss(803) (922,693) (103,789) (24) (1,027,309)Interest expense, net of amounts capitalized73,791 — 56 — 73,847Other (income) expense, net(2,318) 10,278 1,325 109 9,394Loss before income taxes(72,276) (932,971) (105,170) (133) (1,110,550)Income tax (expense) benefit234,142 (44,629) 3,336 — 192,849Net income (loss)161,866 (977,600) (101,834) (133) (917,701)Income attributable to noncontrolling interest— — — — —INCOME (LOSS) ATTRIBUTABLE TO KEY$161,866 $(977,600) $(101,834) $(133) $(917,701)93Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2014 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $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 before income taxes(53,160) (173,455) (32,433) (63) (259,111)Income tax benefit68,883 10,551 1,179 (130) 80,483Net 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) $(178,628)CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2013 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $1,494,683 $161,536 $(64,543) $1,591,676Direct operating expense— 1,046,376 118,028 (49,942) 1,114,462Depreciation and amortization expense— 214,334 10,963 — 225,297General and administrative expense1,077 202,599 33,336 (15,259) 221,753Operating income (loss)(1,077) 31,374 (791) 658 30,164Interest expense, net of amounts capitalized55,747 (606) 63 — 55,204Other (income) expense, net(3,616) (1,126) 316 3,623 (803)Income (loss) before income taxes(53,208) 33,106 (1,170) (2,965) (24,237)Income tax (expense) benefit(13,385) 15,456 993 — 3,064Net income (loss)(66,593) 48,562 (177) (2,965) (21,173)Income attributable to noncontrolling interest— — 595 — 595INCOME (LOSS) ATTRIBUTABLE TO KEY$(66,593) $48,562 $(772) $(2,965) $(21,768)94Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2015 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Net cash used in operating activities$— $(19,878) $(2,508) $— $(22,386)Cash flows from investing activities: Capital expenditures— (39,566) (1,242) — (40,808)Intercompany notes and accounts— 47,613 — (47,613) —Other investing activities, net— 21,405 — — 21,405Net cash provided by (used in) investingactivities— 29,452 (1,242) (47,613) (19,403)Cash flows from financing activities: Repayment of long-term debt(1,575) — — — (1,575)Proceeds from long-term debt305,550 — — — 305,550Proceeds from borrowings on revolvingcredit facility130,000 — — — 130,000Repayments on revolving credit facility(200,000) — — — (200,000)Payment of deferred financing costs(11,461) — — — (11,461)Repurchases of common stock(362) — — — (362)Intercompany notes and accounts(47,613) — — 47,613 —Other financing activities, net(3,423) — — — (3,423)Net cash used in financing activities171,116 — — 47,613 218,729Effect of changes in exchange rates on cash— — 110 — 110Net increase (decrease) in cash and cashequivalents171,116 9,574 (3,640) — 177,050Cash and cash equivalents at beginning ofperiod19,949 450 6,905 — 27,304Cash and cash equivalents at end of period$191,065 $10,024 $3,265 $— $204,354 95Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2014ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated(in thousands)Net cash provided by operating activities$— $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: Repayments 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 $— $27,30496Key Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2013 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Net cash provided by operating activities$— $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 $— $28,30697Table 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, 2015. 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, 2015.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 2015, that materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNot applicable.98Table of ContentsIndex to Financial StatementsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 10 is incorporated herein by reference from our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act orwill be filed by amendment, in either case, within 120 days after the close of the year ended December 31, 2015.ITEM 11. EXECUTIVE COMPENSATIONItem 11 is incorporated herein by reference from our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act orwill be filed by amendment, in either case, within 120 days after the close of the year ended December 31, 2015.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 12 is incorporated herein by reference from our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act orwill be filed by amendment, in either case, within 120 days after the close of the year ended December 31, 2015.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEItem 13 is incorporated herein by reference from our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act orwill be filed by amendment, in either case, within 120 days after the close of the year ended December 31, 2015.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESItem 14 is incorporated herein by reference from our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act orwill be filed by amendment, in either case, within 120 days after the close of the year ended December 31, 2015.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 50.2. 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.99Table 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: March 4, 2016POWER 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.100Table 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 March 4, 2016.Signature Title /s/ RICHARD J. ALARIO Chief Executive OfficerRichard J. Alario (Principal Executive Officer) /s/ J. MARSHALL DODSON Senior Vice President and Chief Financial OfficerJ. Marshall Dodson (Principal Financial Officer) /s/ MARK A. COX Vice President and ControllerMark A. Cox (Principal Accounting Officer) /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 101Table of ContentsIndex to Financial StatementsEXHIBIT INDEXExhibit No. Description 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 Ninth Amended and Restated By-laws of Key Energy Services, Inc. as amended through August 21, 2015 (Incorporatedby reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on August 24, 2015, File No. 001-08038.) 4.1.1 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.) 4.1.2 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.) 4.1.3 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.) 4.1.4 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.) 4.1.5 Form of global note for 6.750% Senior Notes due 2021 (Incorporated by reference from Exhibit A to Exhibit 4.8.) 4.1.6 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.) 4.1.7 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.) 102Table of ContentsIndex to Financial StatementsExhibit No. Description 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.) 103Table 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† Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan Performance Unit Award Agreement dated January 30thby and between Richard J. Alario and Key Energy Services, Inc. as revised June 13, 2015. (Incorporated by reference toExhibit 10.1 of our Quarterly Report on Form 10-Q file on August 3, 2015, File No. 001-08038.) 10.8† Employment Agreement dated June 22, 2015 by and between Robert Drummond, Key Energy Services, Inc. and KeyEnergy Services, LLC (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 22,2015, File No. 001-08038.) 10.9 Loan and Security Agreement, dated as of June 1, 2015, among Key Energy Services, Inc. and Key Energy Services, LLCas the borrowers, certain subsidiaries of the borrowers named as guarantors therein, the financial institutions party theretofrom time to time as lenders, Bank of America, N.A., as administrative agent for the lenders, and Bank of America, N.A.and Wells Fargo Bank, national Association, as co-collateral agents for the lenders. (Incorporated by reference to Exhibit10.1 of our Current Report on Form 8-K filed on June 2, 2015, 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. (Incorporated by reference to Exhibit 10.13 to the Company's Annual Reporton Form 10-K for the fiscal year ended December 31, 2014, File No. 001-0838.) 104Table of ContentsIndex to Financial StatementsExhibit No. Description 10.14 Term Loan and Security Agreement, dated as of June 1, 2015, among Key Energy Services, Inc., as borrower, certainsubsidiaries of the borrower named as guarantors therein, the financial institutions party thereto from time to time aslenders, Cortland Capital Market Services LLC, as agent for the lenders, and Merrill Lynch, Pierce, Fenner & SmithIncorporated, as sole lead arranger and sole bookrunner. (Incorporated by reference to Exhibit 10.2 of our Current Reporton Form 8-K filed on June 2, 2015, File No. 001-08038.) 10.15 Twenty-First Amendment to Office Lease, dated May 15, 2014, between Crescent 1301 McKinney, L.P. and Key EnergyServices, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 16,2014 File No. 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. (Incorporated by reference toExhibit 10.16.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No.001-08038.) 10.16.3† Form of Performance Unit Award Agreement under 2014 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.16.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No.001-08038.) 10.16.4† Form of Director Restricted Stock Unit Agreement under 2014 Equity and Cash Incentive Plan. (Incorporated by referenceto Exhibit 10.16.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No.001-08038.) 10.17* First Amendment to Loan Agreement dated November 20, 2015 among Key Energy Services, Inc., each of the lendersfrom time to time party thereto, Bank of America, N.A., as administrative agent. 10.18* Twenty-Second Amendment to Office Lease, dated May 12, 2015, between Crescent 1301 McKinney, L.P. and KeyEnergy Services, Inc. 10.19* Twenty-Third Amendment to Office Lease, dated November 20, 2015, between Crescent 1301 McKinney, L.P. and KeyEnergy Services, Inc. 10.20† Form of Cash Retention Award Agreement (Incorporated by reference to Exhibit 99.1 of our current report on Form 8-Kfile February 3, 2016, File No. 001-08038.) 10.21 Letter Agreement Regarding Continued Employment Terms, effective as of August 21, 2015, between Key EnergyServices, Inc., Key Energy Services, LLC and Richard J. Alario (Incorporated by reference to Exhibit 10.1 to our CurrentReport on Form 8-K filed on August 24, 2015, File No. 001-08038.) 10.22† Transition Agreement between Key Energy Services, Inc. and Kim B. Clarke dated September 30, 2015. (Incorporated byreference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on October 3, 2015, File No. 001-08038.) 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. 105Table of ContentsIndex to Financial StatementsExhibit No. Description 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. 106Exhibit 10.17FIRST AMENDMENT TO LOAN AGREEMENTThis First Amendment to Loan Agreement, dated as of November 20, 2015 (this “Agreement”) is among KEY ENERGY SERVICES, INC., aMaryland corporation (the “Company”), KEY ENERGY SERVICES, LLC, a Texas limited liability company (“Key Energy LLC”, and together with theCompany, collectively, “Borrowers”), certain subsidiaries of the Borrowers as Guarantors, Lenders party to this Agreement and BANK OF AMERICA, N.A., anational banking association, as administrative agent for the Lenders (in such capacity, “Administrative Agent”).W I T N E S S E T H:WHEREAS, Borrowers, certain subsidiaries of Borrowers as Guarantors from time to time party thereto, the Lenders from time to time partythereto, the Administrative Agent, and Bank of America, N.A. and Wells Fargo Bank, National Association, as Co-Collateral Agents, are parties to that certainLoan and Security Agreement dated as of June 1, 2015 (as amended, supplemented, restated or otherwise modified from time to time, the “Loan Agreement”;capitalized terms not otherwise defined herein having the definitions provided therefor in the Loan Agreement) and to certain other documents executed inconnection with the Loan Agreement; andWHEREAS, the Borrowers and the Lenders are willing to amend certain provisions of the Loan Agreement, and have agreed to suchamendments on terms and subject to conditions set forth herein.NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto agree asfollows:NOW, THEREFORE, the parties hereto agree as follows:1.Amendments to the Loan Agreement. The Loan Agreement is hereby amended as follows:1.1 Schedule 1.1 to the Loan Agreement is amended and restated as Schedule 1.1 attached to this Agreement.1.2 Section 13.1.1 of the Loan Agreement is amended by replacing the following sentence appearing therein:“In addition to the foregoing, each Secured Party hereby irrevocably authorizes the Administrative Agent, at Administrative Agent’s optionand discretion, to enter into, or amend, the Intercreditor Agreement (or similar agreements with the same or similar purpose) and any othersubordination or intercreditor agreement to effect the subordination of Liens securing Obligations under the Loan Documents contemplatedby Sections 10.2.1(i) and 10.2.1(j) as agent for and on its behalf in accordance with the terms specified in this Agreement.”with the following sentence:“In addition to the foregoing, each Secured Party hereby irrevocably authorizes the Administrative Agent (x) to enter into the IntercreditorAgreement and (y) with the consent of Required Lenders, such consent not to be unreasonably withheld or delayed, (i) to amend theIntercreditor Agreement, (ii) enter into, or amend, similar agreements with the same or similar purpose, as agent for and on its behalf inaccordance with the terms specified in this Agreement and (iii) to enter into, or amend, any other subordination or intercreditor agreementto effect the subordination of Liens securing Obligations under the Loan Documents contemplated by Sections 10.2.1(i) and 10.2.1(j) asagent for and on its behalf in accordance with the terms specified in this Agreement.”2.No Other Amendments or Waivers.This Agreement, and the terms and provisions hereof, constitute the entire agreement among the parties hereto pertaining to the subjectmatter hereof and supersedes any and all prior or contemporaneous amendments relating to the subject matter hereof. Except for the amendments to the LoanAgreement expressly set forth in Section 1 hereof, the Loan Agreement shall remain unchanged and in full force and effect. Except as expressly set forth inSection 1 hereof, the execution, delivery, and performance of this Agreement shall not operate as a waiver of or as an amendment of, any right, power, orremedy of Administrative Agent or the Lenders under the Loan Agreement or any of the other Loan Documents as in effect prior to the date hereof, norconstitute a waiver of any provision of the Loan Agreement or any of the other Loan Documents. The agreements set forth herein1are limited to the specifics hereof, shall not apply with respect to any facts or occurrences other than those on which the same are based, shall not excusefuture non-compliance under the Loan Agreement or other Loan Documents, and shall not operate as a consent to any further or other matter, under the LoanDocuments.3.Conditions Precedent. The effectiveness of this Agreement is subject to the satisfaction of the following conditions precedent onthe date hereof:3.1 Execution of Agreement. Each Obligor, Administrative Agent and Required Lenders shall have duly executed and delivered thisAgreement.4.Representations and Warranties. Each Obligor hereby jointly and severally represents and warrants to Administrative Agent andLenders, that this Agreement has been duly executed and delivered by such Obligor and constitutes a legal, valid and binding obligation of such Obligor, asapplicable, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affectingcreditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.5.[Reserved].6.Miscellaneous.6.1 Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement.6.2 Governing Law. UNLESS EXPRESSLY PROVIDED IN ANY LOAN DOCUMENT, THIS AGREEMENT AND ALL CLAIMSSHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWPRINCIPLES EXCEPT FEDERAL LAWS RELATING TO NATIONAL BANKS.6.3 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be valid under ApplicableLaw. If any provision is found to be invalid under Applicable Law, it shall be ineffective only to the extent of such invalidity and the remainingprovisions of this Agreement shall remain in full force and effect.6.4 Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns, and shallinure to the sole benefit of the parties and their respective successors and assigns. 6.5 References. Any reference to the Loan Agreement contained in any notice, request, certificate, or other document executedconcurrently with or after the execution and delivery of this Agreement shall be deemed to include this Agreement unless the context shall otherwiserequire.6.6 Loan Document. This Agreement shall be deemed to be and shall constitute a Loan Document.6.7 Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Agreement are not intended to and do notserve to effect a novation as to the Loan Agreement. The Loan Agreement and each of the Loan Documents remain in full force and effect. 6.8 Entire Agreement. This constitute the entire agreement, and supersede all prior understandings and agreements, among the partiesrelating to the subject matter thereof.6.9 Counterparts; Execution. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of whichwhen taken together shall constitute a single contract. This Agreement shall become effective when Administrative Agent has received counterpartsbearing the signatures of all parties hereto. Delivery of a signature page of this Agreement by telecopy or other electronic means shall be effective asdelivery of a manually executed counterpart of such agreement. Any signature, contract formation or record-keeping through electronic means shallhave the same legal validity and enforceability as manual or paper-based methods, to the fullest extent permitted by Applicable Law, including theFederal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any similar statelaw based on the Uniform Electronic Transactions Act.[Remainder of Page Intentionally Left Blank]2IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of theday and year first above written.BORROWERS:KEY ENERGY SERVICES, INC.By _________________________Name:Title:KEY ENERGY SERVICES, LLC.By _________________________Name:Title:GUARANTOR:KEY ENERGY MEXICO, LLCBy _________________________Name:Title:[Signature Page to First Amendment toLoan Agreement]ADMINISTRATIVE AGENT AND LENDERS:BANK OF AMERICA, N.A., as Administrative Agent,and a LenderBy _________________________Name:Title:[Signature Page to First Amendment toLoan Agreement]WELLS FARGO BANK, NATIONAL ASSCIATION, s a LenderBy _________________________Name:Title:[Signature Page to First Amendment toLoan Agreement]COMERICA BANK, as a LenderBy _________________________Name:Title:[Signature Page to First Amendment toLoan Agreement]AMEGY BANK NATIONAL ASSOCIATION, as a LenderBy _________________________Name:Title:[Signature Page to First Amendment toLoan Agreement]SIEMENS FINANCIAL SERVICES, INC., as a LenderBy _________________________Name:Title:By _________________________Name:Title:[Signature Page to First Amendment toLoan Agreement]SCHEDULE 1.1toLoan and Security AgreementCOMMITMENTS OF LENDERSLenderRevolver CommitmentTotal CommitmentsBank of America, N.A.$40,000,000.00$40,000,000.00Wells Fargo Bank, National Association$32,700,000.00$32,700,000.00Siemens Financial Services, Inc.$16,150,000.00$16,150,000.00Comerica Bank$7,150,000.00$7,150,000.00Amegy Bank National Association$4,000,000.00$4,000,000.00 $100,000,000.00Exhibit 10.18TWENTY-SECOND AMENDMENT TO OFFICE LEASETHIS TWENTY-SECOND AMENDMENT TO OFFICE LEASE (this “Amendment”) is entered into between CRESCENT 1301 MCKINNEY, L.P., aDelaware limited partnership (“Landlord”), and KEY ENERGY SERVICES, INC., a Maryland corporation (“Tenant”), with reference to the following:A.Landlord and Tenant entered into that certain Office Lease dated effective as of January 20, 2005; that certain First Amendment to OfficeLease dated March 15, 2005; that certain Second Amendment to Office Lease dated June 24, 2005; that certain Commencement Letter dated as of September28, 2005; that certain Third Amendment to Office Lease dated November 30, 2005; that certain Fourth Amendment to Office Lease dated March 30, 2006;that certain Fifth Amendment to Office Lease dated March 31, 2006; that certain Sixth Amendment to Office Lease dated June 7, 2006; that certain SeventhAmendment to Office Lease dated August 9, 2006; that certain Eighth Amendment to Office Lease dated October 31, 2006; that certain CommencementLetter dated January 16, 2007; that certain Ninth Amendment to Office Lease dated January 11, 2008; that certain Tenth Amendment to Office Lease datedMarch 27, 2008 (the “Tenth Amendment”); that certain Eleventh Amendment to Office Lease dated April 9, 2008; that certain Twelfth Amendment to OfficeLease dated May 12, 2008; that certain Thirteenth Amendment to Office Lease dated June 20, 2008 (the “Thirteenth Amendment”); that certain FourteenthAmendment to Office Lease dated October 20, 2011; that certain Fifteenth Amendment to Office Lease dated October 25, 2011 (the “Fifteenth Amendment”);that certain Sixteenth Amendment to Office Lease dated March 6, 2012; that certain Seventeenth Amendment to Office Lease dated April 23, 2012; thatcertain Eighteenth Amendment to Office Lease dated July 23, 2012; that certain Nineteenth Amendment to Office Lease dated August 31, 2012; that certainTwentieth Amendment to Office Lease dated December 17, 2012; and that certain Twenty-First Amendment to Office Lease dated April 3, 2014 (the “Twenty-First Amendment”) (as amended, the “Lease”), currently covering approximately 96,992 square feet of Rentable Square Footage on floors 15, 16, 17 and 18(the “Premises”) of the building located at 1301 McKinney, Houston, Texas (the “Building”).B.Tenant desires to release and surrender to Landlord a portion of the Premises consisting of approximately 7,234 square feet of RentableSquare Footage on floor 15 of the Building (the “Reduction Space”), as shown on Exhibit A attached hereto and incorporated herein for all purposes, leavingthe balance of the Premises, consisting of approximately 89,758 square feet of Rentable Square Footage on floors 15, 16, 17 and 18 of the Building (the“Remaining Premises”). Landlord is willing to accept the release and surrender of the Reduction Space on the terms and conditions set forth below.C.Landlord and Tenant now desire to further amend the Lease as set forth below. Unless otherwise expressly provided in this Amendment,capitalized terms used in this Amendment shall have the same meanings as in the Lease.FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are acknowledged, the parties agree as follows:1.Space Reduction. The Lease is amended to provide that, effective as of 11:59 p.m. on April 30, 2015 (the “Reduction Date”), (a) the ReductionSpace shall be subtracted from the Premises, (b) the floor plan drawings with respect to the portion of the Premises located on floor 15 of the Buildingattached as Exhibit A-1 to the Tenth Amendment, Exhibit A-2 attached to the Thirteenth Amendment and Exhibit A-1 attached to the Fifteenth Amendmentshall be deleted and replaced with Exhibit A-1 attached to this Amendment (the “Floor 15 Portion of the Remaining Premises”), and (c) the term,“Premises,” as used in the Lease shall mean and include approximately 89,758 square feet of Rentable Square Footage on floors 15, 16, 17 and 18 of theBuilding, being the Rentable Square Footage of the Remaining Premises. As of the Reduction Date, (i) Tenant shall no longer have any right to occupyand/or use the Reduction Space, (ii) the Lease shall be deemed terminated with respect to the Reduction Space except for the continuing Rent obligation setforth in Paragraph 3 below, (iii) except for the continuing Rent obligation set forth in Paragraph 3 below, neither Tenant nor Landlord shall have anyfurther liability or obligation to the other with respect to the Reduction Space, except for those items that survive the termination of the Lease pursuant to itsterms and except as specifically set forth in this Amendment. Additionally, Tenant shall have no further option to surrender a portion of the Premises pursuantto Paragraph 4 of the Twenty-First Amendment.12.Surrender of the Reduction Space; Access; Permitted Holdover.(a)On the Reduction Date, the Reduction Space shall be surrendered by Tenant to Landlord as required under Article 29 of the Lease.Tenant shall fully comply with all obligations under the Lease respecting the Reduction Space through the Reduction Date, including without limitation,those provisions relating to the condition of the Reduction Space, payment of any and all Rent and other known amounts owed to Landlord through theReduction Date, removal of all persons occupying and using the Reduction Space, and removal of Tenant’s personal property therefrom prior to theReduction Date.(b)Landlord may prohibit access by Tenant to the Reduction Space after the Reduction Date by changing the locks to the Reduction Spaceor by any other means permitted by the Lease, at law or in equity.(c)Notwithstanding anything to the contrary contained in this Amendment, Tenant may remain in the Reduction Space on a month-to-month basis for up to two (2) months (the “Permitted Holdover Period”) so long as Tenant provides written notice to Landlord no later than thirty (30) days’prior to the Reduction Date. If Tenant timely delivers such notice, Tenant’s possession of the Reduction Space during the Permitted Holdover Period shall besubject to all of the terms and conditions of the Lease.3.Rent. Notwithstanding the reduction of the Premises by the Reduction Space as of the Reduction Date, Tenant shall continue to pay Rent(inclusive of Base Rent, the OE Payment and the management fee) for the Reduction Space for the period commencing on the Reduction Date and expiringon June 30, 2016, except that Tenant shall receive for such period a credit against Base Rent equal to $15.00 per square foot of Rentable Square Footage perannum, which credit shall be ratably applied over the aforesaid eighteen (18) month period.4.Condition of Remaining Premises. Tenant accepts the Remaining Premises in its “as-is” condition and configuration. At Tenant’s sole cost andexpense except as hereinbelow provided, Tenant shall have constructed so as to be substantially completed by the Reduction Date, a demising wallseparating the Reduction Space from the remaining portion of the Premises located on floor 15 of the Building (the “Demising Wall”), using Buildingstandard materials and construction methods. Tenant shall be permitted to utilize the Reimbursement Allowance (defined in Paragraph 2 of the Work Letterattached as Exhibit A to the Twenty-First Amendment) for the cost of the Demising Wall, subject to Tenant’s compliance with the applicable provisions ofsuch Exhibit A for the disbursement thereof. Tenant acknowledges that Landlord has not undertaken to perform any modification, alteration or improvementto the Remaining Premises. TENANT WAIVES (a) ALL CLAIMS DUE TO DEFECTS IN THE REMAINING PREMISES, THE BUILDING AND/OR THEPROPERTY AND (b) ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THOSE OF SUITABILITIY,HABITABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. Tenant waives the right to terminate the Lease due to the condition of the RemainingPremises, the Building or the Property.5.Parking. Effective as of the Reduction Date, Tenant shall surrender its rights under the Parking Agreement attached as Exhibit E to the Lease to(a) five (5) permits allowing access to unreserved spaces in the Houston Center Garage 1, and (b) two (2) permits allowing access to unreserved spaces in theBuilding Garage, the and such permits shall be considered deleted from the provisions of the Parking Agreement.6.Prohibited Persons and Transactions. Tenant represents to Landlord: (a) that neither Tenant nor any person or entity that directly owns a tenpercent (10%) or greater equity interest in it, nor any of its officers, directors or managing members, is a person or entity with whom U.S. persons or entitiesare restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including thosenamed on OFAC’s Specially Designated and Blocked Persons List) or under Executive Order 13224 (the “Executive Order”) signed on September 24, 2001,and entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism”, or other Laws, (b) thatTenant’s activities do not violate the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the regulations or orderspromulgated thereunder, as they may be amended from time to time, or other anti-money laundering Laws (the “Anti-Money Laundering Laws”), and (c) thatthroughout the Term of the Lease Tenant shall comply with the Executive Order and with the Anti-Money Laundering Laws.7.ERISA Matters. Tenant represents that (a) neither Tenant nor any entity controlling or controlled by Tenant owns a five percent (5%) or moreinterest (within the meaning of Prohibited Transaction Class Exemption 84-14) in JPMorgan Chase Bank, N.A. (“JPMorgan”) or any of JPMorgan’saffiliates, and (b) neither JPMorgan, nor any of its affiliates, owns a five percent (5%) or more interest in Tenant or any entity controlling or controlled byTenant.8.Consent. This Amendment is subject to, and conditioned upon, any required consent or approval being unconditionally granted by Landlord’smortgagee(s). If any such consent shall be denied, or granted subject to an unacceptable condition, this Amendment shall be null and void and the Leaseshall remain unchanged and in full force and effect.29.Broker. Tenant represents and warrants that it has not been represented by any broker or agent in connection with the execution of thisAmendment except Partners Commercial Realty, L.P. d/b/a NAI Houston. Tenant shall indemnify and hold harmless Landlord and its designated propertymanagement, construction and marketing firms, and their respective partners, members, affiliates and subsidiaries, and all of their respective officers,directors, shareholders, employees, servants, partners, members, representatives, insurers and agents from and against all claims (including costs of defenseand investigation) of any broker or agent or similar party other than the above-named broker claiming by, through or under Tenant in connection with thisAmendment.10.Time of the Essence. Time is of the essence with respect to Tenant’s execution and delivery to Landlord of this Amendment. If Tenant fails toexecute and deliver a signed copy of this Amendment to Landlord by 5:00 p.m. (in the city in which the Premises is located) on ___________, 2015, thisAmendment shall be deemed null and void and shall have no force or effect, unless otherwise agreed in writing by Landlord. Landlord’s acceptance,execution and return of this Amendment shall constitute Landlord’s agreement to waive Tenant’s failure to meet such deadline.11.Miscellaneous. This Amendment shall become effective only upon full execution and delivery of this Amendment by Landlord and Tenant. ThisAmendment contains the parties’ entire agreement regarding the subject matter covered by this Amendment, and supersedes all prior correspondence,negotiations, and agreements, if any, whether oral or written, between the parties concerning such subject matter. There are no contemporaneous oralagreements, and there are no representations or warranties between the parties not contained in this Amendment. Except as modified by this Amendment, theterms and provisions of the Lease shall remain in full force and effect, and the Lease, as modified by this Amendment, shall be binding upon and shall inureto the benefit of the parties hereto, their successors and permitted assigns.12.Ratification. Tenant hereby ratifies and confirms its obligations under the Lease and represents and warrants to Landlord that it has no defensesthereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, (a) the Lease is and remains in good standing and full force and effect,and (b) Tenant has no claims, counterclaims, set-offs or defenses against Landlord arising out of the Lease or in any way relating thereto or arising out of anyother transaction between Landlord and Tenant.[Signatures Appear on the Following Page]3LANDLORD AND TENANT enter into this Amendment on _______________, 2015.LANDLORD:CRESCENT 1301 MCKINNEY, L.P.,a Delaware limited partnershipBy: Crescent 1301 GP, LLC,a Delaware limited liability company,its General PartnerBy:_____________________________ Dianna A. RussoPresidentTENANT:KEY ENERGY SERVICES, INC.,a Maryland corporationBy:_____________________________________Name:______________________________Title:_______________________________ 4EXHIBIT AREDUCTION SPACEExhibit A-iEXHIBIT A-1FLOOR 15 PORTION OF THE REMAINING PREMISESExhibit A-1-iExhibit 10.19TWENTY-THIRD AMENDMENT TO OFFICE LEASETHIS TWENTY-THIRD AMENDMENT TO OFFICE LEASE (this “Amendment”) is entered into between CRESCENT 1301 MCKINNEY, L.P., aDelaware limited partnership (“Landlord”), and KEY ENERGY SERVICES, INC., a Maryland corporation (“Tenant”), with reference to the following:A.Landlord and Tenant entered into that certain Office Lease dated effective as of January 20, 2005; that certain First Amendment to OfficeLease dated March 15, 2005; that certain Second Amendment to Office Lease dated June 24, 2005; that certain Commencement Letter dated as of September28, 2005; that certain Third Amendment to Office Lease dated November 30, 2005; that certain Fourth Amendment to Office Lease dated March 30, 2006;that certain Fifth Amendment to Office Lease dated March 31, 2006; that certain Sixth Amendment to Office Lease dated June 7, 2006; that certain SeventhAmendment to Office Lease dated August 9, 2006; that certain Eighth Amendment to Office Lease dated October 31, 2006; that certain CommencementLetter dated January 16, 2007; that certain Ninth Amendment to Office Lease dated January 11, 2008; that certain Tenth Amendment to Office Lease datedMarch 27, 2008; that certain Eleventh Amendment to Office Lease dated April 9, 2008; that certain Twelfth Amendment to Office Lease dated May 12, 2008;that certain Thirteenth Amendment to Office Lease dated June 20, 2008; that certain Fourteenth Amendment to Office Lease dated October 20, 2011; thatcertain Fifteenth Amendment to Office Lease dated October 25, 2011; that certain Sixteenth Amendment to Office Lease dated March 6, 2012; that certainSeventeenth Amendment to Office Lease dated April 23, 2012; that certain Eighteenth Amendment to Office Lease dated July 23, 2012; that certainNineteenth Amendment to Office Lease dated August 31, 2012; that certain Twentieth Amendment to Office Lease dated December 17, 2012; that certainTwenty-First Amendment to Office Lease dated April 3, 2014 (the “Twenty-First Amendment”); and that certain Twenty-Second Amendment to Office Leasedated May 7, 2015 (as amended, the “Lease”), currently covering approximately 89,758 square feet of Rentable Square Footage on floors 15, 16, 17 and 18(the “Premises”) of the building located at 1301 McKinney, Houston, Texas (the “Building”), of which approximately 223 square feet of Rentable SquareFootage on floor 15 is used exclusively for telecommunications purposes (the “Telecom Space”), within the Building.B.Landlord and Tenant now desire to further amend the Lease as set forth below. Unless otherwise expressly provided in this Amendment,capitalized terms used in this Amendment shall have the same meanings as in the Lease.FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are acknowledged, the parties agree as follows:1.Adjustment of Rent Abatement Period. Landlord and Tenant acknowledge and agree that (a) Tenant is requesting the rent abatement periodprovided in the Twenty-First Amendment be adjusted to commence effective as of December 1, 2015, and (b) Landlord is willing to grant such adjustment onthe terms and conditions set forth in this Amendment. Accordingly, provided that Tenant is not in Monetary Default under the Lease beyond any applicablenotice and/or cure period, the monthly Base Rent, the OE Payment and the management fee shall be abated for the eight (8) month period commencing onDecember 1, 2015, and expiring July 31, 2016. However, the foregoing Rent abatement shall not apply to the Telecom Space; accordingly, for the periodcommencing on December 1, 2015 and expiring July 31, 2016, Tenant shall continue to pay as monthly Rent for the Telecom Space the sum of $520.33 plusthe allocable share of the OE Payment and management fee for such space.12.Base Rent. The rent schedule set forth in Paragraph 2 of the Twenty-First Amendment is deleted in its entirety and replaced with the followingrent schedule, plus any applicable tax thereon:Premises[89,758 square feetof Rentable Square Footage]FromThroughANNUAL BASE RENT RATEPER SQUARE FOOTMonthlyBase RentJuly 1, 2016July 31, 2016$0.00*$0.00*August 1, 2016June 30, 2017$28.00$209,435.33July 1, 2017June 30, 2018$28.84$215,718.39July 1, 2018June 30, 2019$29.71$222,225.85July 1, 2019June 30, 2020$30.60$228,882.90July 1, 2020June 30, 2021$31.51$235,689.55July 1, 2021June 30, 2022$32.47$242,870.19July 1, 2022June 30, 2023$33.44$250,125.63July 1, 2023June 30, 2024$34.44$257,605.46July 1, 2024June 30, 2025$35.48$265,384.49July 1, 2025June 30, 2026$36.54$273,313.11July 1, 2026February 28, 2027$37.64$281,540.93* Rent abated pursuant to Paragraph 1 above.3.Operating Expenses. Paragraph 3 of the Twenty-First Amendment is deleted in its entirety and replaced with the following paragraph:Tenant shall continue to pay Tenant’s Pro Rata Share of Operating Expenses payable under Article 4 of the Lease during the First Extension Period,commencing July 1, 2016; provided, however, that so long as Tenant is not in Monetary Default under the Lease beyond any applicable noticeand/or cure period, the OE Payment and management fee for the month of July 2016 shall be abated.4.Prohibited Persons and Transactions. Tenant represents to Landlord: (a) that neither Tenant nor any person or entity that directly owns a tenpercent (10%) or greater equity interest in it, nor any of its officers, directors or managing members, is a person or entity with whom U.S. persons or entitiesare restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including thosenamed on OFAC’s Specially Designated and Blocked Persons List) or under Executive Order 13224 (the “Executive Order”) signed on September 24, 2001,and entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism”, or other Laws, (b) thatTenant’s activities do not violate the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the regulations or orderspromulgated thereunder, as they may be amended from time to time, or other anti-money laundering Laws (the “Anti-Money Laundering Laws”), and (c) thatthroughout the Term of the Lease Tenant shall comply with the Executive Order and with the Anti-Money Laundering Laws.5.ERISA Matters. Tenant represents that (a) neither Tenant nor any entity controlling or controlled by Tenant owns a five percent (5%) or moreinterest (within the meaning of Prohibited Transaction Class Exemption 84-14) in JPMorgan Chase Bank, N.A. (“JPMorgan”) or any of JPMorgan’saffiliates, and (b) neither JPMorgan, nor any of its affiliates, owns a five percent (5%) or more interest in Tenant or any entity controlling or controlled byTenant.6.Consent. This Amendment is subject to, and conditioned upon, any required consent or approval being unconditionally granted by Landlord’smortgagee(s). If any such consent shall be denied, or granted subject to an unacceptable condition, this Amendment shall be null and void and the Leaseshall remain unchanged and in full force and effect.7.Broker. Tenant represents and warrants that it has not been represented by any broker or agent in connection with the execution of thisAmendment except Partners Commercial Realty, L.P. d/b/a NAI Houston. Tenant shall indemnify and hold harmless Landlord and its designated propertymanagement, construction and marketing firms, and their respective partners, members, affiliates and subsidiaries, and all of their respective officers,directors, shareholders, employees, servants, partners, members, representatives, insurers and agents from and against all claims (including costs of defenseand investigation) of any2broker or agent or similar party other than the above-named broker claiming by, through or under Tenant in connection with this Amendment.8.Time of the Essence. Time is of the essence with respect to Tenant’s execution and delivery to Landlord of this Amendment. If Tenant fails toexecute and deliver a signed copy of this Amendment to Landlord by 5:00 p.m. (in the city in which the Premises is located) on November 20, 2015, thisAmendment shall be deemed null and void and shall have no force or effect, unless otherwise agreed in writing by Landlord. Landlord’s acceptance,execution and return of this Amendment shall constitute Landlord’s agreement to waive Tenant’s failure to meet such deadline.9.Miscellaneous. This Amendment shall become effective only upon full execution and delivery of this Amendment by Landlord and Tenant. ThisAmendment contains the parties’ entire agreement regarding the subject matter covered by this Amendment, and supersedes all prior correspondence,negotiations, and agreements, if any, whether oral or written, between the parties concerning such subject matter. There are no contemporaneous oralagreements, and there are no representations or warranties between the parties not contained in this Amendment. Except as modified by this Amendment, theterms and provisions of the Lease shall remain in full force and effect, and the Lease, as modified by this Amendment, shall be binding upon and shall inureto the benefit of the parties hereto, their successors and permitted assigns.10.Ratification. Tenant hereby ratifies and confirms its obligations under the Lease and represents and warrants to Landlord that it has no defensesthereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, (a) the Lease is and remains in good standing and full force and effect,and (b) Tenant has no claims, counterclaims, set-offs or defenses against Landlord arising out of the Lease or in any way relating thereto or arising out of anyother transaction between Landlord and Tenant.LANDLORD AND TENANT enter into this Amendment on _______________, 2015.LANDLORD:CRESCENT 1301 MCKINNEY, L.P.,a Delaware limited partnershipBy: Crescent 1301 GP, LLC,a Delaware limited liability company,its General PartnerBy:____________________________ Dianna A. RussoPresidentTENANT:KEY ENERGY SERVICES, INC.,a Maryland corporationBy:___________________________________ Name:____________________________ Title:_____________________________ 3Exhibit 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 de Mexico S. De R.L. de C.V.MexicoKey Energy Services, LLCTexasLeader, LLCRussian FederationRecursos Omega, S. de R.L. de C.V.Mexico Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated March 4, 2016, with respect to the consolidated financial statements and internal control over financial reporting includedin the Annual Report of Key Energy Services, Inc. on Form 10-K for the year ended December 31, 2015. We hereby consent to the incorporation by referenceof said reports in the Registration Statements of Key Energy Services, Inc. on Forms S-8 (File No. 333-196134 effective May 5, 2014, File No. 333-146294,effective September 25, 2007 and File No. 333-146293, effective September 25, 2007)./s/ GRANT THORNTON LLPHouston, TexasMarch 4, 2016Exhibit 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,Chief Executive Officer(Principal Executive Officer)Date: March 4, 2016Exhibit 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: March 4, 2016Exhibit 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, 2015 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,Chief Executive Officer(Principal Executive Officer)Dated: March 4, 2016 /S/ J. MARSHALL DODSONJ. Marshall DodsonSenior Vice President and Chief Financial Officer(Principal Financial Officer)Dated: March 4, 2016

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