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KLX Energy Services Second Quarter 2020 Results

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   |    Wednesday,September 02,2020

KLX Energy Services Holdings, Inc. reported financial results for its fiscal second quarter ended July 31, 2020.

On July 28, 2020, KLXE completed its previously announced merger with Quintana Energy Services Inc. (“QES”) and effected a one-for-five reverse stock split concurrently with closing the transaction. Given that the merger was completed at the end of the KLXE fiscal quarter ended July 31, 2020, results for KLXE largely reflect the performance of KLXE, and include three days of QES results.

Fiscal Second Quarter Highlights

  • Completed merger with QES on July 28, 2020, becoming the foremost provider of large diameter coiled tubing services and one of the largest independent providers of wireline services.
  • Effected a one-for-five reverse stock split concurrently with the merger completion.
  • Ended the quarter with $98.5 million in cash and $113.4 million in total liquidity (excluding the benefit of QES current assets not yet included in borrowing base due to merger timing).
  • Expects cost synergies of at least $40.0 million to be fully implemented as of the end of the first quarter of fiscal 2021 on a run rate basis, several months ahead of the timing at the announcement of the Merger.
  • Captured approximately $18.0 million of annualized run-rate cost synergies to date.

Chris Baker, President and Chief Executive Officer of KLXE, stated, “We are excited to complete our merger ahead of schedule, creating an industry-leading diversified oilfield service provider. I appreciate the tremendous efforts made by our collective team to achieve this milestone and look forward to the continued success of KLXE. Our leadership team is focused on executing on our robust integration plan and best positioning KLXE to continue to deliver industry-leading products and services to our customers and partners.

“Our fiscal second quarter results were affected by the COVID-19 pandemic, the Saudi Arabia and Russia market share dispute and the resulting supply-demand imbalance, which led to a deterioration in industry conditions and decreased demand for our services. Our geographic segments, the Southwest, Rocky Mountains and the Northeast/Mid-Con, posted fiscal second quarter revenue of $4.2 million, $18.0 million and $14.0 million, respectively.

"KLXE will continue to streamline its asset base and operational footprint as we integrate the QES merger in order to realize synergies and to align with current market conditions, thereby delivering enhanced efficiency and improving returns. KLXE is uniquely positioned to operate with comparatively lower capital expenditures given the asset-light nature of its product and service offerings. In the early days post-merger, we have seen material benefits from the combined operational reach and customer relationships along with the deep product expertise brought together by each of the legacy companies. We are confident that this coordination will allow us to pull through tools and technologies across our coiled tubing footprint as well as drive additional utilization in other product lines.

“As we look ahead, market conditions for U.S. drilling and completions will be challenging during the second half of 2020, driven by low commodity prices and significantly lower E&P capital spending. Despite  the industry backdrop, KLXE is now well equipped to deliver value to all stakeholders, supported by industry-leading safety and service quality, a strong balance sheet, a broad mix of product service lines and further investments in innovative solutions,” concluded Baker.

Keefer Lehner, Executive Vice President and Chief Financial Officer of KLXE, added, “We have accelerated the timing of our $40.0 million run-rate cost synergy commitment, which we now expect to fully capture by the end of the first fiscal quarter of 2021.

"Our management team has deep experience in integration planning, analysis and execution in a similar market environment having successfully integrated Archer's U.S. operations into QES in 2016. The $40.0 million in synergies are predominantly corporate and administrative in nature and, thus, more readily achievable. Additionally, we are optimistic we will find additional cost saving opportunities as we work through the integration process and believe the current market environment, albeit challenging, should help facilitate an expedited integration process. We remain highly confident in our ability to achieve our targets and believe KLXE’s liquidity profile, along with its reduced cost structure, will allow the Company to navigate the current market uncertainty and ultimately position the Company for long-term success.”

Merger Related Highlights

  • KLXE and QES merger closed on July 28, 2020, creating an industry-leading diversified provider of asset-light drilling, completion, production and intervention products and services.
  • The Company operates from over 60 service facilities throughout all major basins and provides services to a combined group of blue-chip independent and major E&P companies.
  • KLXE will operate under the executive leadership of QES’s legacy management team, including Christopher J. Baker, President and Chief Executive Officer, and Keefer M. Lehner, EVP and Chief Financial Officer.
  • The Board of Directors is comprised of nine directors, with five legacy KLXE directors and four legacy QES directors.
  • KLXE’s corporate headquarters are now located in Houston, Texas, and the Company plans to close the legacy Wellington, Florida headquarters by October 31, 2020.

The combined organization has a highly talented workforce with a commitment to safety, performance, customer satisfaction and profitability. As the foremost U.S. provider of large diameter coiled tubing services, KLXE also offers its blue-chip customer base a complementary portfolio of products and services, including thru-tubing services, throughout all major onshore oil and gas basins in the U.S. The Company is now able to streamline operational support and technology advancements across a broader suite of service offerings. Finally, through its increased scale and product and service offerings designed to meet the needs of customers throughout the well lifecycle, KLXE is expected to generate cross-selling opportunities that allow for an increased share of customer spend.

Excluding the impact of the estimated $40.0 million of annualized run-rate cost synergies that will result from the merger, the combined companies’ fiscal year 2019 pro forma revenues were more than $1.0 billion, and adjusted EBITDA was $106.0 million. As of July 31, 2020, KLXE had approximately $98.5 million of cash and an undrawn $100.0 million revolving credit facility, of which approximately $14.9 million was available (excluding the benefit of QES current assets). Importantly, the combined company has a strong balance sheet to support critical ongoing business initiatives as well as the pursuit of additional value-creating consolidation opportunities within the oilfield service industry.

Asset and Product Portfolio Update

On a combined basis following the closing of the merger, KLXE has a substantial asset base comprised of high-quality young assets and has conducted a thorough review of its joint coiled tubing and wireline asset base as part of the Company’s integration plan.

KLXE now has a fleet of 39 coiled tubing units (24 of which are large diameter), making KLXE the largest provider of large diameter coiled tubing in the United States. In addition to the market leading coiled tubing offering, KLXE is a premier provider of wireline, fishing, thru-tubing and well control services.

The KLXE portfolio now includes QES’ Directional Drilling platform and expects to capture synergies on downhole tools and motors with the products and services provided through the completion and production offerings.

Reverse Stock Split

On July 24, 2020, KLXE stockholders approved a proposal to amend KLXE's certificate of incorporation to effect a one-for-five reverse stock split.

Fiscal Second Quarter 2020 Financial Results

Revenue for the fiscal second quarter of 2020 totaled $36.2 million, a decrease of 56.4%, compared to $83.0 million for the first quarter of 2020. Net loss for the fiscal second quarter of 2020 was $20.4 million, compared to net loss of $243.1 million, inclusive of $208.7 million non-cash asset impairment charge, for the first quarter of 2020. Adjusted EBITDA loss for the fiscal second quarter of 2020 was $10.6 million, compared to Adjusted EBITDA income of $2.6 million for the first quarter of 2020. Selling, general and administrative expenses, inclusive of $5.5 million of deal costs, $7.5 million of severance and $15.1 million of non-cash equity compensation tied to accelerated vesting for the fiscal second quarter of 2020 totaled $41.8 million, as compared to $17.4 million for the first quarter of 2020. The decrease in revenues reflects the impact of the COVID-19 pandemic and the impact of the Saudi Arabia and Russia market share dispute and resulting supply-demand imbalance, which led to a deterioration in industry conditions and a decrease in demand for our services. On a product line basis, completion, production and intervention services contributed approximately 60.5%, 18.8% and 20.7%, respectively, to fiscal second quarter revenues.

Fiscal Second Quarter 2020 Segment Results

The Company reports through three geographic business segments, the Rocky Mountains, Southwest and Northeast/Mid-Con. Revenue decreases across all three geographic segments were driven by the combination of the lingering impacts of the Saudi Arabia and Russia oil market share dispute and the prolonged demand destruction caused by the COVID-19 pandemic, which have  jointly driven the demand for oil to depressed levels resulting in decreases in demand for services such as those provided by the Company.

Rocky Mountains:  Revenue and adjusted EBITDA loss for the Rocky Mountains segment was $18.0 million and $3.7 million, respectively for the fiscal second quarter of 2020. Revenue represents a 46.7% decrease over first quarter 2020.

Southwest:  Revenue and adjusted EBITDA loss for the Southwest segment, which includes the Permian and South Texas, was $4.2 million and $1.9 million, respectively, for the fiscal second quarter of 2020. Revenue represents an 82.8% decrease over first quarter 2020.

Northeast/Mid-Con:  Revenue and adjusted EBITDA loss for the Northeast/Mid-Con segment was $14.0 million and $5.0 million, respectively, for the fiscal second quarter of 2020. Revenues decreased 43.5% over first quarter 2020.

For the quarter ended July 31, 2020, the Rocky Mountains segment operating loss was $25.6 million, Northeast/Mid-Con segment operating loss was $17.2 million and Southwest segment operating loss was $11.1 million.

The following is a tabular summary of revenue and Adjusted EBITDA for the three-month periods ended July 31, 2020 and April 30, 2020 ($ in millions):

    Three Months Ended
    July 31, 2020   April 30, 2020
Southwest   $ 4.2     $ 24.4  
Rocky Mountains   18.0     33.8  
Northeast/Mid-Con   14.0     24.8  
Total revenue   $ 36.2     $ 83.0  


    Three Months Ended
    July 31, 2020   April 30, 2020
Adjusted EBITDA        
Southwest   $ (1.9 )   $ 0.5  
Rocky Mountains   (3.7 )   1.7  
Northeast/Mid-Con   (5.0 )   0.4  
Total Adjusted EBITDA (loss) income1   $ (10.6 )   $ 2.6  

Fiscal Second Quarter 2020 EBITDA Addbacks

Adjusted EBITDA loss for the fiscal second quarter of 2020 includes net adjustments of $10.3 million, driven by the $41.1 million bargain purchase gain, offset by $13.0 million of transaction related costs, $15.1 million of non-cash stock compensation expense and $2.7 million in other costs.

Balance Sheet and Liquidity

Total debt outstanding as of July 31, 2020 was $243.4 million, compared to $243.0 million as of January 31, 2020.  As of July 31, 2020, cash and equivalents totaled $98.5 million.

Total available liquidity as of July 31, 2020 was approximately $113.4 million, including availability under our undrawn ABL Facility. As of July 31, 2020, approximately $26.2 million of accounts receivable and inventories had not yet been included in our borrowing base.

Bargain Purchase Gain

On July 28, 2020, the Company completed the merger with QES for an aggregate acquisition price of approximately $44.4 million, comprised of 3.4 million shares of the Company’s common stock. Total consideration includes the $34.7 million purchase price and repayment of $9.7 million in outstanding borrowings and associated fees and expenses of QES's five-year asset-based revolving credit agreement (the “QES ABL Facility”).

Based on the Company’s preliminary purchase price allocation, the purchase price was less than the fair value of the identifiable assets acquired, which resulted in a $41.1 million bargain purchase gain being recorded on the condensed consolidated statements of operations for the three and six months ended July 31, 2020.

Acceleration of Intangible Amortization

During the fiscal quarter ended July 31, 2020, management evaluated the intangible assets primarily related to customer relationships. Considering current customer activity and market conditions, the Company elected to accelerate intangible amortization costs that resulted in an amortization charge of $2.7 million.

Other Financial Information

Capital expenditures were $3.7 million during the fiscal second quarter of 2020, decreased of $1.1 million, or 22.9%, compared to capital expenditures of $4.8 million in the first quarter of 2020. Capital spending during the fiscal first and second quarters of 2020 was driven primarily by maintenance capital expenditures across our segments.

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