KLX Energy Services Q1 2024 Earnings Call Transcript

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May 8, 2024

There are 6 speakers on the call.

Operator

ladies and gentlemen, and welcome to the KLX Energy Services First Quarter Earnings Conference Call. At this time, it is my pleasure to turn the floor over to your host, Zach Vaughn.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review Q1 2024 results. With me today are Chris Baker, KLX Energy's President and Chief Executive Officer and Kiefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide a high level commentary on the financial details of the Q1 and outlook before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at www.

Speaker 1

Klx.com. And there will also be a telephonic recorded replay available until May 22, 2024. More information on how to access these replay features was included in yesterday's earnings release. Please note that information reported on this call speaks only as of today, May 8, 2024, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward looking statements within the meaning of the United States federal securities laws.

Speaker 1

These forward looking statements reflect the current views of KLX Management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10 ks, quarterly reports on Form 10 Q and current reports on Form 8 ks to understand certain of those risks, uncertainties and contingencies. The comments today will also include certain non GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release that can be found on the KLX Energy website.

Speaker 1

And now, I'll turn the call over to KLX CEO, Chris Baker. Chris?

Speaker 2

Thank you, Zach, and good morning, everyone. I'll run through the Q1 highlights before turning the call over to Keefer to review our financials in more detail, and then I'll rejoin to add some commentary on our outlook and concluding remarks before opening the call for Q and A. As we previously reported, we experienced softness at the start of the year, but expect a sequential improvement as we progress through Q2 and 2024. The Q1 was in line with our prior guidance and commentary as we navigated both expected and unexpected challenges and based on our current schedules and expectations, believe this will mark the low point for 2024. First, the previously mentioned Rockies, Mid Con and Permian activity disruptions due to the severe weather conditions resulting from the polar vortex.

Speaker 2

2nd, the previously mentioned operator initiated safety standouts due to non KLX safety incidents in the Rockies led to white space in our calendar and a slow start to certain of our product production oriented PSLs in particular. In total, these two events resulted in approximately $4,000,000 in deferred revenue. 3rd, normal seasonality in Q1 plus incremental white space on the calendar as customers were slow to reset and finalize budgets. Our customer base continued to exhibit tremendous capital discipline for crude directed activity in the face of highly constructive WTI pricing. Finally, the continued decline in natural gas prices drove an incremental 18% reduction in Haynesville rig count on a year to date basis, along with activity declines in other gas directed basins with several large operators curtailing activity and production.

Speaker 2

Consolidated first quarter results included $175,000,000 in revenue, dollars 12,000,000 in adjusted EBITDA and adjusted EBITDA margin of 7%. We ended the quarter with $128,000,000 in liquidity, including a cash balance of $85,000,000 43,000,000 dollars of availability on our ABL. Moving to our segment results. Geographically, the Southwest represented 40% of Q1 revenue compared to 35% in Q4. The Midtown Northeast represented 34% of revenue, flat to Q4 and the Rockies generated 26% of revenue compared to 31% in Q4.

Speaker 2

Demonstrating both the seasonal and transitory impacts to the Rockies and continued strong execution in the Southwest. Our gas directed activity represented approximately 17% of Q1 revenue, including the Haynesville, which accounted for approximately 10% and the Northeast, which accounted for approximately 7%. From a product line perspective, completion focused activity drove 51 percent of Q1 revenue, drilling was 24% and production and intervention was 22%. Despite the 10% sequential revenue increases: oil tubing, frac rental and flowback, the latter 2 of which are included in our other Completion Services product line. Also contributing to improved contribution from completions activity with the previously disclosed technology commercialization and leading operational performance.

Speaker 2

Operationally, KLX continues to lead the industry with record setting performance and our team set numerous notable milestones beginning in Q1. We are continuing to commercialize and roll out the Oracle SRT, which has now logged over 1,200,000 running feet as of our call today. KLX Coiled Tubing and KLX Thru Tubing are achieving record setting depth. In the Q1, we set the bar for U. S.

Speaker 2

Onshore coiled tubing drill outs, setting what we believe to be our new records for both total depth and lateral length. ALX repeatedly reached total depth of greater than 28,600 feet and post curve lateral length in excess of 20,400 feet on a recent extended reach multi well pad. On the deepest well, KLX achieved an unprecedented TD of 28,915 feet, resulting in a groundbreaking milestone lateral length of 3.9 miles. In 2024, KLX has successfully completed 5 4 mile laterals, proving to the market that its coiled tubing, thru tubing and dissolvable frac plug offerings remain highly efficient solutions for our customers. We believe that KLX is a true leader in extended reach completion capabilities and expect more positives to come from our CT segment, the KLX Phantom dissolvable frac flow, Spectra drilling motors and Oracle SRT.

Speaker 2

We believe that with market leading tubing capacity, best in class engineering and execution, KLX has decisively answered the question as to whether or not coiled tubing can remain competitive on extended reach laterals in excess of 3 miles. Also consistent with our prior guidance, we exited Q1 with the month of March delivering the strongest adjusted EBITDA and adjusted EBITDA margin results for the quarter. Our calendar for Q2 shows a material reduction in white space and increased utilization across some of our higher margin product service lines. Additionally, during the Q1 and through early Q2, we initiated several cost cutting measures, both on the fixed and variable sides of our cost structure, which should improve margins in the Q2 and beyond. We will continue to align our cost structure to maximize margins in the prevailing market environment.

Speaker 2

In summary, our diversification and strategic position across all major U. S. Onshore basins has been critical to our success to date and positions us to capture a greater portion of customer spending. Most importantly, our network of dedicated team members makes KLX stand out from its competitors by efficiently delivering our market leading services and proprietary products for the largest, most active and well capitalized operators in the U. S.

Speaker 2

Onshore market. With that, I'll now turn the call over to Keefer, who will review our financial results in more detail, and I'll return later in the call to discuss our outlook.

Speaker 3

Keefer? Thanks, Chris. Good morning, everyone. As Chris mentioned, we reported Q1 revenue of $175,000,000 representing a 10% sequential decrease and consolidated Q1 adjusted EBITDA of $12,000,000 On a consolidated basis, the sequential decrease in revenue was driven by increased white space and a shift in geographic and product service line mix with reduced contribution from the Rockies and from some of our higher margin product service lines, including rentals and tech services, which includes our fishing business, which as Chris mentioned, we expect to see this trend reverse in the Q2. The Southwest and NortheastMid Con segments contributed 40% 34% of Q1 revenue respectively, led in the Southwest by our directional drilling, coiled tubing and frac rentals product service lines and in a mid con by our pressure pumping, accommodations and directional drilling offerings.

Speaker 3

The Rockies contributed 26% led by coil tubing, rentals and tech services. Total SG and A expense for Q1 was $21,600,000 When you back out non recurring costs, adjusted SG and A expense for Q1 would have been only $18,700,000 or just 10.7% of our quarterly revenue. During late Q1, we actioned several changes to our fixed cost structure related to third party costs and insurance to reduce our overhead going forward. This will begin to be reflected in our Q2 results and will benefit margins for the remainder of 2024. Calyxt continues to have one of the most streamlined overhead structures for a diversified business.

Speaker 3

Turning now to a review of our segment results. Starting with the Southwest. Southwest revenue, operating loss and adjusted EBITDA for Q1 were $69,400,000 negative $700,000 $6,700,000 respectively. 1st quarter revenue represents a 3% sequential increase over the Q4 of 2023, largely due to operational and management improvements aided by a 1% increase in average rig count, which positively affected our flowback, wireline, tech services and coiled tubing offerings despite being negatively affected by the extreme weather of the polar vortex. Segment adjusted EBITDA decreased 24% sequentially as a function of slightly reduced pricing and the maintenance of slightly elevated staffing levels to support an expected increase in Q2 activity.

Speaker 3

Moving to the Rockies. Rockies revenue, operating loss and adjusted EBITDA for Q1 was $45,600,000 negative $1,200,000 and $5,400,000 respectively. 1st quarter revenue represents a 24% sequential decrease over the Q4 of 2023, largely due to a 2% reduction in average rig count, annual seasonality, inclement weather and non KLX related safety stand downs, which negatively affected the vast majority of our regional drilling, completion and production offerings, including rentals, tech services, frac rentals and wireline and were partially offset by an increase in coiled tubing activity. Adjusted EBITDA decreased 58% sequentially as a function of the seasonal decrease in revenue, which is expected to materially correct as we progress through the Q2 of 2024. Lastly, for segment results, the NortheastMid Con.

Speaker 3

Segment revenue, operating income and adjusted EBITDA for this segment were $59,700,000 $2,400,000 $10,200,000 respectively for the Q1 of 2024. 1st quarter revenue represents 11% sequential decrease over the Q4 of 2023 due to reduced regional gas focused activity across the vast majority of our drilling completion and production offerings, including coiled tubing, directional drilling, accommodations and tech services. Segment operating income and adjusted EBITDA decreased 42% and 5% respectively, largely due to lower pricing. At corporate, our adjusted operating loss and adjusted EBITDA loss for Q1 were $11,600,000 $10,300,000 respectively. The corporate adjusted EBITDA loss increased slightly on a sequential basis, but improved 8% when compared to Q1 of 2023 and is expected to improve in Q2 based on the previously actioned and discussed fixed cost reduction initiatives.

Speaker 3

I'll now turn to our net working capital, cash flow and capitalization. Net working capital was approximately $60,000,000 as of Q1 and we ended the quarter with a net debt balance of $200,000,000 Our March 31 cash balance was $85,000,000 down sequentially and up 113 percent from $40,000,000 in Q1 of 2023. Consistent with prior commentary, the Q1 is typically our most working capital intensive quarter, driven by seasonally elevated payrolls, driven by the payment of the 2023 bonus payout and extra payroll run-in the Q1 and elevated payroll taxes that typically burden the Q1 relative to Q4 of 2023. We also experienced a slight sequential increase in DSO and a reduction in DPO, both of which had negative impacts on the sequential change in cash. Now turning to CapEx.

Speaker 3

1st quarter capital expenditures were $13,500,000 which were primarily focused on maintenance spending across our segments. Q1 net CapEx or CapEx less asset sales was approximately $10,000,000 Going forward, we now expect total CapEx for 2024 to be in the range of $50,000,000 to $55,000,000 down approximately 10% from our original forecasted range of $50,000,000 to $60,000,000 Most of the budget for the year is earmarked for maintenance expenses with around 80% dedicated to supporting our ongoing operations. We ended the Q1 with roughly $128,000,000 in liquidity, consisting of $85,000,000 of cash and availability of $43,000,000 under our March 2024 ABL borrowing based certificate. Our ABL and senior secured notes both mature in the fall of 2025. Given our conservative capitalization and outlook for meaningfully improved results and positive free cash flow generation through year end, we are confident the business is well positioned.

Speaker 3

Throughout the remainder of 2024, we will continue to monitor market conditions and evaluate opportunities to refinance the outstanding notes and our ABL. Going forward, our focus remains on maximizing margins and free cash flow generation, ensuring robust financial strength and that KLX is well positioned to pursue value creating growth opportunities. With that, I'll now turn the call back to Chris.

Speaker 2

Thanks, Keefer. Before we wrap up, I'd like to share some additional color on the current market and our outlook for Q2 and the remainder of 2024. The E and P industry experienced over $200,000,000,000 in merger and acquisition activity in 2023 and operator consolidation continues in 2024. We are confident that our platform is exceptionally well positioned to capitalize on the growing industry consolidation as we have outsized exposure to the largest, most active customers across our geographic regions. This customer consolidation is driving a greater need for certified equipment at higher specifications, including enhanced redundancy and safety features across many of our PSLs.

Speaker 2

These requirements are driving a portion of our 2024 capital expenditure program as we lean into the demand and position KLX for the future. Customers continue to search for safest and most efficient service providers available. KLX stands apart with its performance driven, technologically differentiated offerings, exemplary safety record and premier job execution. And in certain instances, KLX has already been selected as vendor of choice by top tier operators due to our enhanced capabilities. These capabilities, combined with our broad geographic footprint, contribute to our strong competitive position.

Speaker 2

Our industry continues to expect investment in LNG to drive incremental gas demand and key industry players believe it will be the fastest growing energy source through 2,050. ALX intends to benefit over the next 2 years from constructive commodity prices as U. S. LNG export demand rises, which is expected to drive incremental U. S.

Speaker 2

Onshore natural gas directed activity, which should ultimately support elevated service pricing and utilization across all basins. As we exited Q1, white space is much less pronounced. Based on our current schedules, we expect a sequential improvement in Q2. For perspective, based on our current results, April was our best revenue month since November of 2023, partly driven by the dissipating impact of seasonality in the Rockies where segment revenue for April was the strongest it has been since October of 2023. And consolidated May June are currently scheduled to be above April levels.

Speaker 2

We anticipate 2nd quarter revenue to be $180,000,000 to 200,000,000 dollars or roughly 5% to 15% higher than the Q1 with adjusted EBITDA margins of 9% to 11% with an increasingly stronger performance into Q3. In summary, I would like to thank our customers and shareholders for their support of KLX and most importantly, our team members for propelling us to where we are today. By prioritizing safety, customer service and the successful execution of our strategic initiatives, we will deliver continued profitability even in a relatively flat market. With that, we will now take your questions. Operator?

Operator

Thank you. And we'll take our first question from Steve Farazani from Sidoti. Please go ahead, Steve.

Speaker 4

Good morning, Chris. Good morning, Keith. Appreciate all the detail on the call.

Speaker 3

Good morning, Keith.

Speaker 4

In terms of how you think the year plays out based on your guidance for 2Q, if we're assuming and in your closing comments noted, assuming was probably is going to be something close to flat U. S. Land activity for the remainder of the year. What do you do beyond the typical 3Q seasonal uptick that you usually see, what can you get to drive profitability? Or do you expect not to drive further profitability at this point in the second half of the year?

Speaker 4

Will we see the full cost cuts in 2Q, immobilizing assets? Anything you can tell us in terms of how you think right now based on what we know today, what you think about second half compared to how you're guiding for 2Q?

Speaker 2

Yes. Good morning, Steve. This is Chris. That's a long question with a number of different topics. I guess I'll take 2Q and 3Q guidance first.

Speaker 2

Look, ultimately, Q1 was tough, as we know, with some of the seasonal impacts, transitory issues, etcetera. But 2Q specifically, we expect reduced white space, a material rebound in our Rockies activity, which is typically our highest margin segment, as well as a rebound in overall higher margin PSLs, which would include rentals and fishing. As we said in our prepared remarks, April is our best month since November, and April was the best month in the Rockies since October. And so when we think about our 2Q guide of 180,000,000 to 200,000,000 dollars and 9% to 11% of adjusted EBITDA margin, if we just look at our current calendars as well as our initial look at our internal financials for April, we believe we're trending towards the mid to high end of the guidance range is the reality of it. And as we stated, we expect further improvement as we progress to 3Q.

Speaker 2

And so as we think about 3Q relative to 2Q, we talked on the call about we saw an increase in revenue in April over our March exit rate, which was the highest exit rate in Q1. And so our current revenue forecast show a further increase in May, June July. So if 3Q holds and you have 3 months that are on par with May June, we'd expect continued improvement. And then to your point, and you astutely stated, 3Q historically is outside of cycles. It's typically the best month in the services space, just simply due to longer daylight, fewer holidays, near zero seasonal impacts in the northern regions as well.

Speaker 2

So we would expect just continued overall growth in the face and margin enhancement in the face of the cost cuts that we're enacting today.

Speaker 4

That's really helpful. Thanks, Chris. Given the challenges of this year and hopefully certainly reasons to believe 25% is better, Over the last 2 years, you did a lot to improve the balance sheet. Obviously, you're sitting on a much better cash position than you had been 2 years ago. It sounded like Kiefer said you expect some level of cash flow this year.

Speaker 4

Is that fair? And with the lower CapEx, do you expect that you can protect the balance sheet this year given sort of your outlook?

Speaker 3

Yes. Good question and good morning, Steve. So I think what I said in the prepared remarks was Q1 is the low point and in terms of operational performance. And as we progress through year end, we actually expect to generate positive free cash flow from this point forward. Spot on in terms of where a lot of our focus has been over the last few years is growing back into the operating platform that we have and growing back into our balance sheet.

Speaker 3

We think we've more than done that. We're obviously coming off a pretty strong 2023 and we're exiting what is going to be the low point for 2024. So expecting, as Chris mentioned, pretty strong sequential improvement into Q2 with further improvement thereafter. So we believe we continue to be conservatively capitalized from a leverage standpoint and then obviously from a cash and liquidity standpoint, have a very strong balance sheet.

Speaker 4

As you if I get one more in, in terms of refi conversations, it's May. Have you started those conversations? From the last time you did this, your balance sheet is much stronger. You've shown the improvement, but you're probably entering those conversations at a tough time for OFS in general. How does that influence those conversations?

Speaker 4

And how are you thinking about them right now?

Speaker 3

Yes. I think Q1 was certainly tough. I think as we think about the remainder of 2024 and then certainly as you think about the improved demand for U. S. Onshore services as it relates to gas directed activity and what that does to support a higher floor across the broader market, including the liquids basins.

Speaker 3

I think we get pretty excited about 2025 and onward as you think about the short to medium term outlook for the services space. So I think there actually are some pretty strong tailwinds for the sector. With that said, we just talked about it. I think we're still conservatively capitalized. I think we have a really strong cash and liquidity position.

Speaker 3

There is almost a 3% call premium on the notes today. So we acknowledge that exists. And then as I said in the prepared remarks, we're actively monitoring the market and we'll continue to evaluate opportunities to refinance both the nodes and the ABL as we progress through the remainder of 2024.

Operator

Thanks, Chris. Thanks, Keefer.

Speaker 2

Thank you, Steve.

Operator

And we'll take our next question from John Daniel from Daniel Energy Partners. Please go ahead, John.

Speaker 5

Hey, good morning, Keith and Chris.

Speaker 3

Good morning. Just curious,

Speaker 5

if we can pretend for some that we're going to stay sort of range bound at 600 ish rig count over the next plus or minus 5% over the next year and a half or so. As you look across the various basins that you're in, are there you feel a need to do any prosecute any very small tuck in deals just to get scale in particular areas? Is that something that you would be evaluating?

Speaker 2

Look, we look at deals all the time, right? And we've talked about that, I think, on every earnings call we've had for the past couple of quarters. We're still seeing deal flow today. I won't say it's necessarily increased or decreased. What I will say is we've seen a couple of deals lately where the feedback from bankers has been that PE is the lead horse in essentially all cash deals.

Speaker 2

And what we view is kind of outside multiples, which candidly is a bit surprising. And so as we've talked about before here at KLX, we're strong believers in aligning incentives and believe majority equity linked deals are a key alignment mechanism. That's how we executed the Greens deal. We've been very pleased with retention of customers and employees thus far. And so we're continuing to evaluate opportunities.

Speaker 2

But today, our primary focus is our internal initiatives and driving adjusted EBITDA. And so to your point, our diversification is a key strength because it allows us to integrate tuck in deals very quickly. And so we'll evaluate it. Right. The counter is all of our assets have wheels, primarily can travel, and we have redeployed some assets into the more active basins as we've shied away from some of the gas basins and activity has declined.

Speaker 2

So I think we're going to take it on a case by case basis.

Speaker 5

Okay. Would you I mean, it does feel like there could be pockets of weakness in Q2. I'm not saying you, but just broadly speaking, do you think you're going to see more opportunities arise in the next 3 to 4 months?

Speaker 2

It would sure seem that way. We talked about that last call where you think there'd be capitulation with some of the mom and pops, especially in the gassier basins. I think to your point, if you look at the peer group, there's pretty material dislocation between the shape of both Q1 quarterly results and outlook and trajectory. With what we're seeing with the Rockies rebounding, our completion and production side of our business, in particular, in the Rockies rebounding into 2Q and 3Q, we're pretty confident in our guidance. I just think it comes back to how are you aligned with key customers?

Speaker 2

Do they have gaps in their upcoming schedule? Do they take breaks to review production or manage capital discipline, etcetera? And earnings get whipsawed. And I think that's what you've seen through Q1 by and large. But I think some of that starts to abate as the weather improves, etcetera, in 2Q and 3Q, whether or not some of the smaller mom and pops and tuck in opportunities take that market and to your point kind of a flattish market is an opportunity to extract value if you will and take equity and ride the upside is TBD.

Speaker 2

Okay. The last one for me is on the coiled tubing, the highlights you had earlier. To get to

Speaker 5

those depths, did you have to do anything differently? Like what got you to drive to hit those records?

Speaker 2

So what I would say is, look, anytime you're at the tip of the spear, it takes incredible field execution back stopped by very precise engineering, friction modeling, string design, fluid selection as well as you well know, optimal DHA, whether the motor, the ERT, the bits, the mills, everything has to work in concert with each other. I mean, the reality is it's a true team effort. We're very, very proud of the strides that we've made in expanding the commercial opportunity for coil. If you roll the clock back and I'm preaching to the choir, you know this all too well. Pre COVID, you would have a lot of people saying you'd never get beyond 2 mile laterals with CT and stick pipe was going to take over.

Speaker 2

And by the way, we have stick pipe, we have BOPs, we have snubbing units as well, right? So we can be a little agnostic. What we've seen is tremendous capacity expansion in the size and carrying capacity of coiled tubing over the last couple of years. And regarding our specific achievements, look, I'm not going to disclose what we think are competitive strengths candidly. That being said, what I will tell you is we were still making headway and acceptable ROP at mile 3.9 in the lateral and had not reached lockup yet.

Speaker 2

So how much deeper does the rabbit hole go? I'm not sure. We'll wait and see. But we're clearly ecstatic, I would say, with our results. And I think we're continuing to see operators' willingness to continue to experiment with extreme lateral lengths in coiled tubing.

Speaker 5

Got it. That's all I had. Thank you all very much.

Speaker 2

Yes, sir. Appreciate it.

Operator

Thank you. And we'll take our next question from David Marsh from Singular Research. Please go ahead, David.

Speaker 5

Hey, thanks for taking the questions guys.

Speaker 3

Good morning, David.

Speaker 5

Good morning. I just wanted to start with your proposed cost cutting. Could you Keefer, could you just give us a sense of how that's going to cut across the P and L in terms of whether it's going to be impacting mostly SG and A or is it going to be on kind of your fixed cost side that would impact your cost to get sold? And can you give us any sense of order of magnitude that you think that you can realize here?

Speaker 2

Yes. Hey, David, good morning. This is Chris. I'll jump in and then Keefer can backfill. Short answer is yes.

Speaker 2

Look, as rig count continues to decline in Q1, we initiated a number of actions and those extend through to today is the reality of it. The way I frame those actions is really numerous adjustments and modifications to fixed cost, corporate level vendors and those costs would include insurance, accounting, IT, legal, you name it. And so we really try to attack the fixed cost side of the cost ledger. At the same time, we've always monitored crew utilization headcount with an idle maintaining capacity for May, June, July levels of forecasted revenue. So we haven't disclosed the dollar figure to date.

Speaker 2

However, what I would say is we're expecting a partial quarter realization from the 2Q cuts kind of that started in earnest in March through April, and we'll receive a full quarter benefit of those in Q3.

Speaker 3

I guess the only thing I'd add there is to your question between COGS and G and A split. It's going to be a mix of both of those cost buckets, probably frankly evenly split. And to Chris's point, you'll start to see that roll through. But it's a mix of both fixed and variable, obviously more variable at the COGS line and more fixed at the G and A line.

Operator

Excellent. Thank you. And this concludes our question and answer session. I'll turn the floor back to Chris Baker for closing remarks.

Speaker 2

Thank you once again for joining us on this call and for your interest in KLX. We look forward to speaking with you again next quarter.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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