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KLX Energy Services First Quarter 2020 Results

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KLX Energy Services Holdings, Inc. reported its first fiscal quarter ended April 30, 2020 financial results.

Results Overview

The oilfield services industry experienced an abrupt deterioration in demand during the second half of 2019, which has continued into 2020 and was further exacerbated by the unprecedented demand destruction being caused by the COVID-19 pandemic. The combination of the Saudi Arabia/Russia oil market share dispute and the demand destruction caused by the COVID-19 pandemic has driven the price of oil to unprecedented levels resulting in decreases in demand for services such as those provided by the Company. The Company responded with contemporaneous cost reductions in all aspects of the Company’s business, which resulted in business rationalization costs, and initial costs related to the pending merger with QES, totaling $14.0 million. In addition, the Company recorded an approximately $208.7 million non-cash asset impairment charge, as required by GAAP, due to the sudden decline in demand for oilfield services such as those provided by the Company. All of these costs and charges aggregated approximately $222.7 million and are presented as “Costs as Defined” in this earnings release.

On a GAAP basis, for the three-month period ended April 30, 2020, revenues of $83.0 million decreased 16.0 percent as compared with the fourth quarter 2019; operating loss, net loss and net loss per diluted share, all of which were negatively impacted by the aforementioned matters and Costs as Defined, were $(235.6) million, $(243.1) million and $(10.52) per diluted share, respectively.

Q1 Highlights:

• Announced agreement to merge with QES in an all-stock merger on May 3, 2020, with an expected merger completion date in the second half of 2020.
• Revenues were $83.0 million, a decrease of 16.0 percent as compared with the fourth quarter 2019
• Gross profit and gross margin, adjusted to exclude depreciation and Costs as Defined (“Adjusted Gross Profit and Adjusted Gross Margin” respectively), were $15.7 million and 18.9 percent, respectively, up 420 basis points notwithstanding a 16.0 percent decline in sequential quarterly revenues.
• Adjusted operating loss, exclusive of Costs as Defined, was $(12.9) million¹
• Adjusted EBITDA , exclusive of Costs as Defined and non-cash compensation expense, was $2.6 million, up $1.3 million despite the 16.0 percent decline in revenues
• Adjusted Net Loss and Adjusted Net Loss per diluted share, exclusive of Costs as Defined, were $(20.1) million and $(0.87) per diluted share²
• Implemented additional cost reductions during Q1 2020 which are expected to reduce operating expenses by approximately $30 million on an annualized basis; cumulative cost reduction actions from July 31, 2019 to date are expected to drive approximately $100 million in annualized cost reductions

Q1 Consolidated Results

For the first quarter ended April 30, 2020, revenues were $83.0 million, a decrease of $15.8 million, or 16.0 percent, as compared to the fourth quarter 2019. The decrease in revenues reflects the impact of the COVID-19 pandemic, the impact of the Saudi Arabia/Russia market share dispute and the resulting supply-demand imbalance, which led to an unprecedented deterioration in industry conditions. On a product line basis, completion, production and intervention services contributed approximately 60 percent, 17 percent and 23 percent, respectively, to first quarter revenues. Adjusted Gross Profit and Adjusted Gross Margin were $15.7 million and 18.9 percent, respectively. Adjusted Gross Margin expanded by 420 basis points as compared to the prior quarter despite the 16.0 percent decline in sequential quarterly revenues. The improvement in Adjusted Gross Margin reflects a substantial benefit from the Company’s cost reduction initiatives. Adjusted operating loss was $(12.9) million and Adjusted EBITDA was $2.6 million. Adjusted Net Loss and Adjusted Net Loss per diluted share were $(20.1) million and $(0.87) per diluted share, respectively.

Tom McCaffrey, President, Chief Executive Officer and Chief Financial Officer of KLX Energy Services commented, “As we have previously reported, we initiated an ongoing comprehensive business review and cost rationalization program targeted at aligning our cost structure with customer demand. Specifically, we implemented a reduction in force consistent with expected demand, reduced base compensation, realigned field compensation structure, warm stacked assets and we aggressively cut costs in every area of our business. All of the cost reduction actions we have taken since the end of Q2 2019 are expected to reduce our cost structure by approximately $100 million per year.

“Our workforce stood at approximately 1,646 employees at the end of the second quarter 2019 (July 31, 2019), and was approximately 790 employees at May 31, 2020, a reduction of 52 percent. By way of comparison, our revenues for the first quarter, as reported today, were $83.0 million, a decline of approximately 49.7 percent as compared with the second quarter 2019 revenues. While painful, these actions were necessary to protect our liquidity in a period of uncertainty, while continuing to provide best-in-class service to our customers.

“We realized a substantial benefit from our cost rationalization actions in the first quarter of this year as evidenced by the 420 basis point increase in Adjusted Gross Margin on the 16.0 percent decline in sequential quarterly revenues. The incremental benefit realized in our first quarter results, as compared with our fourth quarter costs, was approximately $8 million. During the first quarter, the Company generated $7.0 million of cash flows from operations and approximately $2.2 million in free cash flow and ended the quarter with approximately $126 million in cash and no borrowings under our $100 million credit facility. We believe the Company’s continued tight cost controls and focus on ROIC and free cash flow generation should enhance the Company’s position as a proven value-added partner to our customers, with a strong liquidity profile and a history of providing value added services, while maintaining superior Health, Safety and Environmental standards,” concluded Mr. McCaffrey.

Q1 Segment Results

On a GAAP basis, for the quarter ended April 30, 2020, including Costs as Defined, Rocky Mountains segment operating loss was $(37.8) million. Northeast/Mid-Con segment operating loss was $(97.4) million and Southwest segment operating loss was $(100.4) million.

For the quarter ended April 30, 2020, Rocky Mountains segment revenues of $33.8 million decreased by approximately 27.6 percent. Adjusted Operating Loss was $(3.6) million and Adjusted EBITDA and Adjusted EBITDA margin were $1.7 million and 5.0 percent.

First quarter ended April 30, 2019 Northeast/Mid-Con segment revenues of $24.8 million increased by $0.8 million, or 3.3 percent. Adjusted Operating Loss was $(5.0) million and Adjusted EBITDA and Adjusted EBITDA margin were $0.4 million and 1.6 percent, respectively.

For the quarter ended April 30, 2019, Southwest segment revenues were $24.4 million and decreased $(3.7) million, or 13.2 percent, as compared with the fourth quarter of 2019 for the reasons set forth above. Adjusted EBITDA and Adjusted EBITDA margin were $0.5 million and 2.0 percent, respectively.

Liquidity

As of April 30, 2020, cash on hand was approximately $126 million and increased $2.1 million on a sequential quarterly basis. Total long-term debt of $250 million less cash resulted in net debt of approximately $124 million, and the Company’s leverage ratio (net debt divided by LTM Adjusted EBITDA) was 2.3x. There were no borrowings outstanding under the Company’s $100 million credit facility, of which approximately $42 million was available under the Company’s borrowing base. For the three months ended April 30, 2020, net cash flow provided by operations was $7.0 million and free cash flow was $2.2 million. The Company expects capital expenditures of approximately $8 million for the current year.

Quintana Acquisition Update

On May 3, 2020, the Company entered into an all-stock merger agreement with QES. The combined company will have an industry-leading, asset-light product and service offering present in all major U.S. onshore oil and gas basins, with more than $1 billion of pro forma fiscal year 2019 revenue and approximately $106 million in fiscal year 2019 Adjusted EBITDA, excluding an estimated $40 million of annualized cost synergies and a strong liquidity profile with approximately $118 million of cash and a $100 million revolving credit facility.

Over the past five weeks, managements of the Company and QES have been engaged in preliminary integration planning activities. A preliminary version of the Form S-4 joint merger proxy was filed with the SEC on June 2, 2020, and the Company believes the merger will be completed in the second half of 2020.

Mr. McCaffrey commented, “This merger clearly expands the breadth of services offered throughout the life cycle of a well and also provides opportunities to generate incremental revenues for the legacy businesses that may not otherwise have been available. QES will add directional drilling, snubbing and well control services to KLXE’s already broad range of product and service lines. Together, we will be rationalizing two of the largest fleets of coiled tubing and wireline assets, dramatically reducing future capital spending requirements. We expect the merger to facilitate the pull-through of the combined company’s asset-light products and services. In addition, this merger facilitates QES’ decision to reap the benefits from repurposing the vast majority of its recently idled pressure pumping equipment to support the foremost fleet of large diameter coiled tubing assets in North America and to support one of the largest wireline fleets in the U.S.

“KLXE has successfully demonstrated that the provision of coiled tubing services along with our broad range of asset-light products and services results in the addition of new customers and facilitates the capture of a greater share of customer spend. Fundamentally, this transaction allows the combined company to pursue what we know to be a successful, returns (ROIC)-focused strategy, while positioning the combined company to weather the current storm and ultimately, to grow on a significantly-reduced capital expenditure budget. Chris Baker, QES’ CEO, and his team have clearly embraced this philosophy through our preliminary integration planning discussions. Both companies are looking forward to completing the merger and beginning to implement our jointly developed integration plan as we address new market opportunities arising from the combination.”