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KLXE KLX Energy Services

Participants
Ken Dennard IR
Chris Baker Chairman and CEO
Keefer Lehner CFO
Call transcript
Operator

Greetings, and welcome to the KLX Energy Services' Fiscal First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Ken.

You may now begin.

Ken Dennard

Thank you, Operator, and good morning everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal first quarter 2021 results. With me today are Chris Baker, KLX's President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer.

Following my remarks, management will provide a high-level commentary on the financial details of the first quarter and the outlook, before opening the call for questions and answers. There will be a replay of today's call that will be available by webcast on the company's Web site, at klxenergy.com. There will also be a recorded replay telephonically until June 17, 2021. And more information on how to access these replay features, they were included in the yesterday's earnings release. Please note that information reported on this call speaks only as of today, June 10, 2021, 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.

In addition, management's comments may contain certain forward-statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of KLX's management.

However, various risks, uncertainties and contingencies could cause the 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-K, quarterly reports on Form 10-Q, or current reports on Form 8-K, to understand certain of those risks, uncertainties, and contingencies. The comments today may also include certain non-GAAP financial measures.

Additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLXE Energy Web site. And now, I'd like to turn the call over to KLXE's President and Chief Executive Officer, Mr. Chris Baker. Chris?

Chris Baker

Thank you, Ken, and good morning, everyone. Thank you for joining us today for KLX Energy Services' Fiscal First Quarter 2021 Conference Call. I'll begin by providing an update on the broader market environment, as well as some of the significant themes impacting our results during the quarter. I will then turn the call over to Keefer to review our financial performance, before returning for some final comments on our outlook and strategy.

As the global economy reopens post COVID-19, the market continues to improve, from both a macro supply-demand perspective, as well as from a U.S. onshore activity perspective.

For the fiscal first quarter ended April 30, both WTI prices and rig counts were up roughly 21%. And the rig count currently sits at approximately 10% above the Q1 average.

Additionally, the U.S. frac spread count increased approximately 24% during our fiscal first quarter, ending with roughly 212 frac spreads running in the U.S. With that said, our customer base continues to focus on capital discipline and returning capital to shareholders.

While we are seeing very evident signs of meaningful market improvement, we also found ourselves in a difficult transitory period, in which some of the crosscurrents we mentioned during our prior call weighed on our Q1 results. Revenue and margins were impacted materially by seasonal weather issues, Winter Storm Uri, as well as material customer scheduling and well issues, particularly in the Rockies. We lost approximately seven-plus revenue days due to Winter Storm Uri alone, which coincided with us staffing up to service the increased activity levels expected in March and April.

So, there was significant negative operating leverage associated with the foregone revenue. Despite the aforementioned headwinds experienced in Q1, our revenue improved 5% sequentially, to approximately $91 million. Monthly results improved throughout the quarter, and we exited Q1 on a high note, generating our highest revenue level since closing the QES merger. Last quarter, we spoke at length about pricing power for oilfield services companies, and how it remains challenging despite clear improvements in commodity fundamentals.

On the positive side and since we spoke last quarter, our ability to improve price has improved around the margin, but the broader macro [themes] [Ph] remained the same.

Our customers are focusing heavily on returns and capital discipline, rather than production growth, leading to activity gains being significantly lower than would have occurred in prior cycles. When combined with the large quantity of stacked equipment in the marketplace and the lack of meaningful consolidation amongst OFS companies, it is easy to see why making proportional headway in pricing is considerably more difficult now than in previous cycles.

Our team has done an excellent job executing on our merger integration and cost reduction initiatives. Since completing the implementation of the $46 million in annualized merger synergies in April 2021, we have actioned an additional $4.4 million in annualized fixed cost savings during late-Q1 and into Q2, that will begin to benefit our Q2 results, it should be fully reflected in our 3Q results. These savings are inclusive of the actions taken during the June 8 Annual Meeting to reduce the size of the Board from nine Directors to seven.

Our efforts to seek out greater savings and operational efficiencies have been very successful, and we will continue to monitor the need for future actions alongside our attempts to move pricing where it is viable to do so. I'll discuss our outlook for Q2 in more detail later in the call, but we're optimistic around the trajectory of the industry and our competitive positioning at KLXE.

We expect our results to improve materially in Q2, as we expect revenue will increase 15% to 20% sequentially, and the business should return to breakeven adjusted EBITDA in the quarter for the first time since early 2020. With that, I'll now turn the call over to Keefer, who will review our Q1 financial results. Keefer?

Keefer Lehner

Thank you, Chris.

Let me begin by discussing our first quarter 2021 consolidated results.

For the first quarter ended April 30, 2021, revenues were $90.8 million, an increase of $4 million, or 5% as compared to the revenue for the fiscal fourth quarter of 2020. Once again, the revenue increase reflected the impact of improving market activity across two of our geo markets and multiple product lines, particularly the Southwest segment up 26%, driven by our directional drilling, coil tubing, and rentals product lines.

Now to detail our revenue contribution by end-market, Q1 2021 revenue was 27% drilling, 49% completion, 13% production and 10% intervention services, which compares to 24%, 49%, 13%, and 13% respectively in the fourth quarter of 2020. Revenues become a much larger contributor to KLXE revenue in Q1 2021.

Our directional drilling business experienced material increase in activity from Q4 to Q1 as rig count continue to rebound off 2020 lows and as of the end of Q1, we believe we have approximately 8% market share. Directional drilling is now one of our largest product lines at KLXE.

Turning to the completion side of our business, the biggest drivers of our completion business remains our coiled tubing and rentals product lines. They made great strides pulling through our plug sales and flow tubing services to our integrated coiled tubing offering throughout each of our geo markets.

Moving to our consolidated profitability, I would note that we changed our presentation this quarter and now breakout depreciation expense from cost of sales on the face of the income statement. Jumping into our results, adjusted operating loss was $25.6 million for the quarter, adjusted EBITDA loss and adjusted EBITDA loss margins were negative $9.4 million and negative 10% respectively.

As Chris alluded, the increase in our adjusted EBITDA loss was a result of seasonal weather issues, winter storm Uri and customer scheduling and well issues particularly in the Rockies. I'd also note that our cost of sales is burdened by $2.1 million per quarter related to five legacy coiled tubing operating leases, which impacts our comparability to peers. I'll begin the segment review with the Rockies. The Rocky Mountain segment fiscal first quarter revenue of $24.3 million decreased by $5.1 million, or 17% as compared with the fiscal fourth quarter of 2020. The sequential decrease in revenue was primarily driven by reduced activity levels as a result of certain customer scheduling and well issues. Adjusted operating loss for the fiscal first quarter was $6.8 million as compared with adjusted operating income of $1 million in the fiscal fourth quarter of 2020. Adjusted EBITDA loss was $1.6 million as compared to the fiscal fourth quarter adjusted EBITDA of $6.5 million. The erosion and profitability was related to unforeseen customer scheduling and well issues.

Now moving to our Southwest segment, our Southwest segment increased its revenue substantially by 26% as compared to the fiscal fourth quarter of 2020 generating revenues of $38 million. The significant increase in revenue was driven by meaningful increases and directional drilling and completion rental activity. Q1 adjusted operating loss was $6.6 million compared to fiscal fourth quarter adjusted operating loss of $6.4 million and adjusted EBITDA loss was $700,000 compared to fiscal fourth quarter adjusted EBITDA of $1.1 million.

Now, to finish out the segment discussion with the Northeast and Mid-Con. Fiscal fourth quarter revenues were $28.5 million up 4% as compared to fiscal fourth quarter of 2020. Adjusted operating loss for the fiscal first quarter was $6.1 million and improved $4.3 million as compared with adjusted operating loss of $10.4 million in the fiscal fourth quarter of 2020. Adjusted EBITDA loss was $2.1 million as compared to the fiscal fourth quarter adjusted EBITDA loss of $5.4 million. The improvement and adjusted EBITDA loss was primarily driven by the $4.6 million account receivable reserve recognized in fiscal fourth quarter 2020 in response to a customer bankruptcy, which is detailed in our 10-K filing. pro forma for this reserve, the adjusted EBITDA loss actually increased by $800,000, primarily due to impacts from winter storm Uri, which impacted the East Texas in Arcotex region, which are included in our Mid-Con segment.

Our adjusted corporate and other EBITDA loss for the fiscal first quarter remains largely unchanged sequentially at approximately $5 million. With that said, the cost synergies from the merger are now materially benefiting the results of KLXE. When comparing first quarter SG&A expense to standalone legacy KLXE 2020 SG&A expense, the first quarter 2021 SG&A expense is $1.4 million lower than that of standalone KLXE in the first quarter of 2020. On a pro forma basis for the QES merger, first quarter 2021 adjusted G&A expense was 38% or $8 million below pro forma first quarter 2020 adjusted SG&A expense. Annualized, this would represent $32 million of savings and recall that 100% of the merger synergies were not yet benefiting KLX for the entirety of Q1 2021.

Now let me review our consolidated balance sheet and cash flow.

Our long-term debt $244 million less cash resulted in a net debt position as of the end of the first quarter of approximately $206 million.

As of April 30 2021, cash on hand was approximately $38 million and total liquidity was $79 million. Preservation of our cash and liquidity continues to be a top priority. And as Chris mentioned, we expect materially higher activity through the remainder of the year, we will continue to proactively manage our cost structure and working capital as a business continues to ramp in Q2 in order to maximize margin and cash flow. We would also expect that our borrowing base would increase in conjunction with the 15% to 20% increase in revenue Chris mentioned earlier on the call.

In addition to the $4.4 million of incremental annualized cost savings Chris mentioned previously, there's another item that will benefit cash flow going forward. Back in Q3 2020, we took a non-cash charge for our grounded corporate aircraft lease, where there were still quarterly cash lease payments of roughly $700,000, which burned our Q1 quarterly cash flow that lease officially ended on April 30, and the plain was returned to the lessor following end of lease inspections in May and early June and is now fully off our books. The three months ended April 30 2021 cash flow used in operations was $11.3 million and free cash flow loss was $7.4 million. There was no cash interest paid in Q1 2021. And our next semi-annual interest payment is due in Q2. Cash flow use in operations was partially offset by a $4.8 million on wind and our investment in networking capital during the fiscal first quarter. Capital expenditures for the quarter were approximately $2.2 million, most of which was tied to maintenance-oriented spending.

We continue to scrutinize all capital spending and reduce our full-year CapEx spend. We now expect total CapEx for fiscal 2021 to be in the range of $14 million to $16 million.

We also monetize $6 million of assets during Q1 primarily comprised of real property as part of our ongoing efforts to finalize our facility footprint integration.

Going forward, we would expect additional monetization of obsolete facilities and assets, including three facilities that are currently held for sale. With that, I will now turn the call back to Chris.

Chris Baker

Thanks, Keefer.

Looking out over the oil and gas horizon, we see widespread evidence both domestically and overseas that the macroeconomic fundamentals are becoming increasingly favorable, which has been and should continue to drive a supportive commodity price environment for the OFS industry. The vaccine rollout, additional government stimulus, the stronger economic activity, as well as declining crude stockpiles and OPEC+ production discipline have laid a solid foundation for growth in the U.S. onshore space. With this encouraging backdrop, why has profitability in the oilfield services industry lag.

As we said before, the fragmented nature of the industry as well as the oversupply of vital equipment available severely constraints potential pricing power, this means that we seek to protect our profits primarily using the other lever available to us that is continued productivity improvement via consistent utilization and expense reductions. On that front, we have been extremely successful attaining an additional $4.4 million in fixed costs savings over and above the $46 million we achieved last year.

So given our history of aggressively pursuing greater efficiency and lower costs, I'm confident that we have a good handle on how to leverage our resources and operate with as lean a cost structure as possible. In the interim, we are focused on pushing the other lever pricing, where it is economically feasible to do so.

Our efforts to affect pricing changes in the last few months equates to an approximate $9 million annualized uptick in revenue.

While we're making progress, the majority of the benefit of higher commodity prices as crude to our EMT customers and their shareholders. This leads me to reiterate the margins for the service companies remained unsustainably low and the industry remains out of balance from a competitive standpoint. This logically leads you back to consolidation, which is the corrective measure, needed to bring things back into balance. Consolidation remains a critical strategy component for both KLX and the industry as a whole. KLX successfully completed a merger and remains well positioned to continue to lead and are participate in the effort to consolidate the OFS industry. We belong emphasize the consolidation in the realization of synergy are key components in remaining competitive in this new normal environment. I also want to touch on Q2 and our outlook for 2021. We do expect stronger results in Q2 and an additional improvement throughout most of the balance of the year. This is supported by a material near term uptick in activity across many of our product lines. Altogether, we expect the uptick in activity to drive a sequential revenue increase on the order of 15% to 20% above Q1 levels. Combined with the substantial cost savings, we have attained over the last year in the modest pricing wins mentioned earlier. We believe we should be able to return to break even adjusted EBITDA in 2Q.

Looking out to the remainder of 2021, we also expect to generally see steady improvement in activity, revenue, and margins throughout the remainder of the fiscal year. In closing, let me think our employees, customers, and shareholders for their support.

We are confident that the improvement we are seeing in the economy will fuel better times ahead for our industry, and that KLX will continue to serve an important role in delivering its many mission critical resources, assets, and expertise to EMP operators throughout the U.S. With that, we'll now take your questions. Operator? Thank you. [Operator Instructions]

Chris Baker

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

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.

You may disconnect your lines, and have a wonderful day.