KLX Energy Services Holdings Inc (KLXE) 2020 Q4 法說會逐字稿

Greetings, and welcome to the KLX Energy Services fourth quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Mr. Dennard. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal fourth quarter 2020 results. With me today are Chris Baker, KLXE'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 fourth quarter and outlook before opening the call for questions and answers. There will be a replay of today's call, and it will be available by webcast on the company's website at klxenergy.com. There will also be a telephonic recorded replay available until April 22. More information on how to access the replay features were included in yesterday's release.

Please note that information reported on this call speaks only as of today, April 15, 2021. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listing or transcript reading.

In addition, management's comments may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLXE's management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and 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 reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLXE website.

And now without further ado, I'll turn the call over to KLXE's President and CEO, Mr. Chris Baker. Chris?

Thank you, Ken, and good morning, everyone. Thank you for joining us today for KLX Energy Services Fiscal Fourth Quarter 2020 Conference Call. Let me begin by giving you all an update on the broader market environment during the quarter as well as some of the significant themes impacting our results. I will then turn the call over to Keefer to review our fiscal fourth quarter financial performance before returning for some final comments on our strategy and outlook.

During the fourth quarter, I'm pleased to say that despite the overhanging issues brought about by COVID-19, we saw a broad-based macroeconomic improvement that benefited most of our geo segments and product lines and was directly reflected in our financial results.

For the fiscal fourth quarter ended January 31, WTI price rose roughly 43% after having fallen about 11% during the prior fiscal quarter. Likewise, rig count rose 30% over the same period, having fallen roughly 19% during the preceding quarter. The active frac spread count has also continued to trend favorably, continuing its upward rise from a low of 70 spreads during the fiscal third quarter, all the way to approximately 170 spreads at the end of the fourth fiscal quarter.

Strengthening market activity across the drilling and completion markets drove a marked improvement in our performance as our revenues were up 22% sequentially to approximately $87 million, and our adjusted EBITDA loss improved to $2.6 million compared to an adjusted EBITDA loss of $5.4 million in Q3.

Turning to the North American market. The E&P operators have reprioritized their objectives now focusing on capital discipline and returns rather than production growth. This focus means that operators have only marginally begun to ramp activity in response to improving commodity prices, and as a result, the service industry is currently running at less than half the activity levels seen roughly 1.5 years ago, and equipment capacity remains oversupplied in every service line.

This disconnect between crude pricing and activity, along with the overhang of service equipment and lack of consolidation within OFS, creates a unique paradigm, whereby oil service pricing is unsustainably low and can now be regarded as one of the greatest challenges to the sector. The OFS industry has already thoroughly streamlined its cost structure over an extended down cycle and pricing simply cannot be reduced further. And therefore, pricing must increase for short, medium and long-term sustainability of the service industry. Without KLXE and other high-quality service companies, there would not be 30,000-foot laterals, 40 well pads and $40 breakeven WTI.

The other related dynamic having a material impact on the service industry today is that E&P operators are consolidating at a more rapid pace in the oilfield services space, which means that there will ultimately be a smaller universe of operators controlling larger positions within key petroleum basins, and we're seeing this play out in the Permian today, and expect similar trends across all basins.

This will drive a continued shift in rig count and completions activity with the larger operators taking a larger share of the overall onshore activity base. As they execute on amalgamating these larger core positions, we expect that our customers will begin to pursue additional supply chain savings, leveraging their economies of scale and developing additional operating efficiencies by drilling larger pads with further extended laterals. And we believe that KLXE is the ideal provider to provide the high level of technical service necessary to execute on this strategy.

We also expect that these larger operators will operate via centralized supply chain management infrastructure for purchasing and vendor selection decisions, which should ultimately benefit companies such as KLXE, which is able to offer a broad, high-quality product and service offering under a single MSA across multiple basins. It is also likely that we will see our customers make a greater push towards ESG initiatives with operators increasingly incorporating ESG into its vendor selection process.

Turning to safety. We are extremely proud that our 2020 safety performance yielded an all-time low TRIR of 0.57, continuing a trend of improvement in each of the past 5 years. We continue to advance initiatives around real-time monitoring and believe these solutions will ultimately provide us with the opportunity to predict downhole and surface fatigue and failures, and as a result, reduce in-person interaction with dangerous job functions, which will further improve our industry-leading safety metrics and be a key differentiator in the marketplace.

To proactively address these aforementioned market trends, we affected the KLXE-QES merger in July 2020, which facilitated the creation of a leading diversified provider of drilling, completion, production and intervention services. KLXE now has a leading blue-chip customer base made up of large independents and major oil and gas companies, and they represent the majority of the largest operators in the U.S., the very same group that is leading the consolidation effort on the E&P side.

With our strong presence in all key basins across the U.S. and our established relationships with larger, better capitalized blue-chip companies, we are well positioned to grow as the market recovers. And we not only have a balanced geographical presence but also have balanced product line offering as well that puts us into contact with nearly all aspects of the well's life cycle. From drilling to completion to production and intervention, we have an equipment fleet comprised of modern, high-quality equipment and proprietary technologies supporting our diverse revenue base, which offers a wealth of cross-selling opportunities and new customers.

I'm also pleased to report that the integration of our operations has been successfully completed ahead of schedule. With the closure of our Florida legacy corporate headquarters and the relocation of all key functions to Houston having been completed in Q3, we then focused on eliminating redundancies and duplicative functions throughout our operations in Q4. We recently sublet the legacy QES headquarters and within a week moved the entire corporate office to the legacy KLXE location, eliminating redundant office space in Houston.

Back in May 2020, we stated that we expected to generate annualized cost synergies of $40 million within 12 months. During Q3, we identified an additional $6 million in cost savings and now have successfully largely completed the integration process and realized the full $46 million in projected savings, well ahead of schedule.

I'd like to thank the tireless efforts of all of our employees in bringing the integration to a successful conclusion. This truly was a team effort, and everyone played a part in making both the merger and integrations a success that we can be proud of. Having executed complex transactions during challenging times, such as this as well as the 2015 acquisition of the Archer Well Entities, our management team has developed a wealth of experience and expertise in finding compatible companies that can add meaningful value in extracting efficiencies and synergies to help drive shareholder value.

Let me note that while our primary integration effort is completed, we are still working through optimization and rationalization of idle facilities, and we're always evaluating and improving all aspects of our organization to enhance efficiency and add value, whether it is in operations, sales, HR, accounting and so forth. In short, the advancement improvement of our organization is a continual process that will remain a critical part of our strategy, regardless of the market environment. So overall, I'm excited about our strength and position within the industry, and believe it will position KLXE to better compete in this rapidly evolving market.

With that, I'll now turn the call over to Keefer, who will review Q4 financial results. Keefer?

Thank you, Chris. Before I begin, let me remind you that during our third quarter, we changed our methodology for the allocation of our corporate costs, which directly impacts our segment presentation. Since Q3, we have allocated the geographic segments only those corporate costs that directly tie to their operations, whereas the remaining unallocated balance now appears as a separate line item in our consolidated financial statements. With that said, I'll now discuss our fourth quarter 2020 consolidated results.

For the fourth quarter ended January 31, 2021, revenues were $86.8 million, an increase of $15.8 million or 22% as compared to the revenue for the fiscal third quarter of 2020. Once again, the revenue increase reflects the impact of improving market activity across most of our geo markets and product lines, particularly the Rockies geo and our directional drilling, coiled tubing and fishing and rentals product lines.

Adjusted operating loss was $20.8 million for the quarter. Adjusted EBITDA loss and adjusted EBITDA loss margin were negative $2.6 million and negative 3%, respectively. The adjusted EBITDA loss improved by roughly $2.8 million compared to the fiscal third quarter loss of $5.4 million and a pro forma fiscal second quarter loss of $19.3 million.

The material decrease in our adjusted EBITDA loss was the result of both higher revenue driven by activity and utilization increases and fixed cost synergies associated with the merger flowing through the system. Given the increase in revenue was largely utilization driven, we expect incremental margins to improve further once pricing increases gain traction.

I'll begin the segment review with the Rockies. The Rocky Mountains segment fiscal fourth quarter revenue of $29.4 million increased by $11.2 million or 62% as compared with the fiscal third quarter of 2020. The sequential increase in revenue was primarily driven by a material uptick in fishing, rentals and other completion-oriented services.

Adjusted operating income for the fiscal fourth quarter was $1 million as compared with adjusted operating loss of $3.8 million in the fiscal third quarter of 2020. Adjusted EBITDA was $6.5 million as compared to the fiscal third quarter adjusted EBITDA of $500,000, and the strong margin realized in the fourth quarter was driven by revenue mix with a higher concentration of our higher-margin service lines.

Now moving to our Southwest segment. Southwest segment generated revenues of $30.1 million, an increase of $5.3 million or 21% as compared to the fiscal third quarter of 2020. The significant increase in revenue was driven by meaningful increases in directional drilling and completion rental activity. Q4 adjusted operating loss was $6.4 million compared to fiscal third quarter adjusted operating loss of $8.5 million, and adjusted EBITDA was $1.1 million compared to fiscal third quarter adjusted EBITDA loss of $2.2 million.

I will round out the segment discussion with the Northeast and Mid-Con. Fiscal fourth quarter revenues were $27.3 million and were largely consistent with the fiscal third quarter of 2020. Adjusted operating loss for the fiscal fourth quarter was $10.4 million as compared with adjusted operating loss of $2.4 million in the fiscal third quarter of 2020.

Adjusted EBITDA loss was $5.4 million as compared to the fiscal third quarter adjusted EBITDA of $1.5 million. The decrease in adjusted EBITDA was largely driven by a $4.6 million accounts receivable reserve recognized in response to a recent customer bankruptcy. We performed well control services to bring an offshore shallow water well under control. The customer has an operator's extra expense insurance policy, which we believe should ultimately cover a material portion of the amounts owed.

Our adjusted corporate and other EBITDA loss for the fiscal fourth quarter was $4.8 million, a decrease of $400,000 or 8% compared to $5.2 million for the third quarter, which demonstrates the speed with which we were able to implement corporate fixed cost synergies.

Now let me review our consolidated financial position. KLX continues to have one of the strongest liquidity positions in the small to mid-cap OFS space. As of January 31, 2021, cash on hand was approximately $47 million, and total liquidity was $82 million. Preserving cash and liquidity remains a priority as the market improves, and we continue to proactively manage our cost structure to return the business to positive unlevered free cash flow as soon as possible.

Our long-term debt of $244 million less cash resulted in net debt as of the end of the fourth quarter of approximately $197 million. There were no borrowings outstanding under the company's $100 million credit facility, with $35 million of net availability when factoring in the $10 million liquidity holdback tied to the fixed charge coverage ratio in our ABL. There continue to be no near-term debt maturities with our ABL maturing in the fall of 2023, and our bonds not maturing until November 2025.

For the 3 months ended January 31, 2021, cash flow used in operations was $29 million and free cash flow was negative $30 million. The sequential decline in cash flow from operations was largely driven by a $15 million semiannual interest payment made in November as well as a $3 million payment to the ownership group of Motley, which was the final payment owed to the group from the fall of 2018 acquisition.

There is also an approximately $14 million investment in net working capital during the fiscal fourth quarter compared to $8 million in the third quarter. This is largely associated with accounts receivable growth as revenue expanded by 22% sequentially. Capital expenditures for the quarter were approximately $1.1 million, most of which was primarily tied to maintenance spending. We continue to expect total CapEx for 2021 to be in the range of $15 million to $20 million.

With that, I will now turn the call back to Chris.

Thanks, Keefer. Looking back at a highly tumultuous year that saddled us with numerous challenges, I'm thrilled that we were able to rise above the hardship to make KLXE a much stronger company in the process. By decisively executing on our plans in the merger with QES and successfully integrating our operations in such a short period of time, we've been able to expedite substantial cost savings and synergies while also building out our product offerings and geographic reach to cement our position as a premier provider of asset-light oilfield solutions.

Despite having a strong balance sheet, ample liquidity and no near-term debt maturities, we will continue to explore opportunities to delever during 2021. Thus, it's clear that we've made great strides over the past year in creating a leaner, more efficient organization to weather the challenges of the ever-turbulent oil and gas market.

But I should emphasize that despite our many cost reduction actions and asset sales, we still remain strongly levered to a recovery as we have a well-positioned asset base, enabling us to quickly provide a wealth of cost-effective solutions to serve not just our current base of customers, but also new customers looking to ramp up their activity.

This positions KLXE for the future regardless of what may come, and it appears that fundamentals and the outlook are becoming more favorable, with crude prices up more than 14% year-to-date as of early April. There appears to be a solid foundation for a more constructive outlook and a meaningful increase in activity, perhaps later this year or in 2022.

As we look at the supply and demand picture, we have greater numbers of people being vaccinated against COVID as well as a return to economic normalcy from many areas of the U.S. and globally, albeit at varying rates, which will drive increased demand for crude over the course of 2021 and 2022. On the supply side, we have a core production base in the U.S. that is being depleted and has had declining investment over 2020.

At the same time, OPEC+ has taken proactive supply side measures to preserve a constructive oil price. All in all, this makes a compelling case for a potential economic recovery and such a recovery would further spur energy demand within the U.S. and globally and ultimately a greater level of investment and activity in the U.S. land market.

In the interim, it is critical that our industry attain meaningful pricing gains wherever possible. And in the case of KLXE, our deployment of additional equipment will be contingent on higher pricing. As it now stands, there continues to be a good deal of irrational pricing behavior by some competitors. And when coupled with the significant oversupply of equipment in the marketplace, creating an unsustainable market dynamic. We further believe that consolidation within OFS along with current macroeconomic trends continuing should allow the industry to come to better balance.

As we've often emphasized in the past, one of these adjustments will be the overarching issue of consolidation. Reducing the overcapacity and inefficiencies in the market via consolidation will be critically important to the long-term health of the industry. And the oilfield service industry will have to keep up with a faster pace of M&A set by the E&P industry.

With our own merger now completed, we are well positioned to continue leading the effort to consolidate the oilfield services industry. Given our history of successfully executing on mergers and acquisitions, we know that we can increase economies of scale, enhance operating efficiencies and drive meaningful shareholder value through consolidation. Simply put, it remains a fundamental part of our strategy to become a low-cost structure provider of high-quality drilling, completion and production services.

I also wanted to touch on Q1 and our outlook for 2021. So far, in our Q1, which for KLXE begins in February, we were materially impacted by Winter Storm Uri that ripped through the central U.S., hitting Texas particularly hard in February. The Mid-Continent region had been hit quite hard with cold weather for most of the month, and the coldest regional weather in 30-plus years cut oil production roughly 3 million barrels per day due to well shut-ins, flow line outages and disrupted road transportation.

In response to the storm, our customers shut-in wells and slid out their drilling and completion schedules. We certainly felt the effects of Winter Storm Uri on our own operations, seeing significant white space in our calendar, losing 7-plus revenue days in February. We expect this revenue to be made up over the course of 2021 as our customers are not changing their budgets, but we do not expect to be able to make up for this lost work during Q1.

In closing, let me again thank our employees who have been critical in helping us execute and achieve our strategic goals and move forward during these challenging times. Their efforts have enabled KLXE to successfully adapt to the new realities of the market and execute a milestone transaction that makes us stronger, both operationally and financially and positions us very well for the future as the industry recovers. We would also like to thank our customers that value our customer service and execution in the field.

With that, we will now take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Ian MacPherson with Simmons Energy.

Chris and Keefer, thanks for the comments. I was -- I wanted to probe a little more with -- given we're pretty late into your fiscal Q1, maybe a little more specifics on the outlook for consolidated top line growth and EBITDA improvement this quarter. Notwithstanding the loss of the week, I think that we all see quite hot drilling and completions indicators, which would suggest that you would have sequential improvement of a good magnitude. But I don't know how much of that has been offset by the weather. So if you could maybe just put a little more specifics around the April quarter outlook. And then if you could also talk about how April compares to January on an exit basis to help us frame up the run rate going into your fiscal Q2.

Yes, sure. Appreciate the question. Look, as I stated in the prepared remarks, we estimate that we lost about 7 revenue days in a number of material districts. And so I think all of our peers have already commented on the situation. And as you well know, that incremental revenue, those 7 days, is essentially margin because when a situation like that comes out, you can't really cut your cost structure. Fuel and some of your variable cost goes away, but by and large, your cost for that month is fixed.

Compounding that situation is exactly what you alluded to, which both horizontal and directional rig count was up approximately 40 rigs at the point in time the storm hit from year-end. So that's about a 12% increase. Therefore, the industry, our company, et cetera, was in a bit of a minor ramp-up situation where your cost structure is actually marginally increasing and then the activity comes to a halt.

So I guess what I'd say is the last point is from a schedule perspective is as you well know, white space is the bane of OFS existence at this point in your calendar, and your calendar never lines up perfectly. So you'll always end up stacking up dates as you come out of those situations. And so that created a slow start in February. We're working every day to mitigate that slow start. I think it's a little too early to tell, but we're clearly starting from behind in February. So we'll see how the quarter plays out.

Overall activity and revenue is continuing to ramp. We believe it will do so going into early summer. And then ultimately, as you know, the margin output will depend on the ability to drive incremental price and maintain utilization. But I would say that our run rate revenue coming out of March, at least, was north of that January run rate revenue. So we are seeing that the ramp, it's just a matter of mitigating the loss in February.

Understood. Chris, given the healthier baseline of activity now, and I think probably just a shared sense of stability at better levels, you still want better pricing than what you have today, but you're clearly operating on a higher plane and a better plane than you were 6 months ago. Does that make you more encouraged and optimistic with regard to consummating another transformative combination that, as you point out, needs to happen for you and for the industry? Do you think that consolidation for small-cap OFS is becoming more actionable now at these activity levels?

So I guess I'll hit both just quickly. Look, pricing, we've definitely seen an improvement in commodity prices. There's a historical disconnect, as you know, between where pricing is at -- I think we were at $58 WTI this morning, but kind of that $60 WTI level and what you would have thought about normalized historical activity from a rig or frac perspective.

So we have seen that marginal uptick. The reality, though, is that our customers are solely focused on free cash flow and return of dividends to their shareholders, as you well know. And so at this point in time and especially going through the fourth quarter and third quarter of last year, during unique paradigm where OFS pricing is completely unsustainable. And it's really one of the major threats to the industry.

We have streamlined our cost structure, as have most of our peers over an extended downturn, and so pricing really can't be reduced any further and has to increase for OFS sustainability. We feel like some of the irrational pricing behavior that we saw late last year and even early into January is kind of abated and it feels like we found the floor. The question becomes how soon and when can you push. And you have to push, as you know, based off of customer service, performance and the value proposition we bring. And we try to do that every single day of the week.

With regards to consolidation, so it felt like there was some capitulation last year. We talked about this, I think, on both the third and fourth quarter earnings call, where it felt like, especially on the private side, people are realizing they want it to be a part of a larger, more scalable platform. I would say, as oil price ramped up, we probably saw a bit of a lull in deal flow from the private side in the last couple of months.

And I think part of that is they view it as an opportunity to strengthen their financial statements, whether it's their profit and loss statement or their balance sheet and try to improve upon overall deal economics. So we've seen that slow a little bit. I would say we're still seeing inbounds from some of the other smaller and mid-cap companies, and we'll just have to see how that plays out ultimately.

(Operator Instructions) Our next question comes from the line of John Daniel with Daniel Energy Partners.

Just want to follow Ian's last question just on the M&A. Chris, what do you think is actually preventing the deals from happening right now? Because everyone talks about the need for it, we just don't really seem to get it done.

Look, I appreciate that comment and understand. I'm not sure that I fully can opine on all the roadblocks. I think most parties have learned about ultimate shareholder value and all stakeholders in a deal. You've seen a lot of our peers go through various forms of liability management, et cetera. I would say if you ask that question, as you know, years ago or even 6 months ago, social issues, et cetera, always seem to get in the way.

I think when you go through the depths of the trough that we've been through, everybody is actively trying to ride the ship and fix their cost structure as quickly as they can, and there becomes disagreements upon the ultimate value and trajectory of each company. And so the reality of the situation is, we've shown the ability to strip out an enormous amount of cost. I mean, I'm very impressed and proud of our team.

We've now closed an idle, I think, 20 facilities now -- 20-plus facilities. Given what we did with the corporate office last week, we just consolidated into one corporate office here in Houston. So we closed those 20 facilities, rationalized those within 9 months, achieve the $46 million synergy target, basically $6 million over the original estimate and about one quarter ahead of our original time line. And so the synergies are there. The impetus to get something done is there. It's just a matter of bringing some of the consolidated players, I think, to the table.

Okay. I just don't want to continue on this, if that's okay. But as you look at -- assuming you're looking at companies, but assuming you do, how much is the PPP loan situation impeding the ability to get deals done? Have you run into that at all?

We have run into it. We've seen it. I think the PPP loans have been, especially last year, a portion of the irrational pricing behavior in the market as people are even grabbing personnel or market share, unfortunately. We've seen a recent spate of that a little bit within certain business lines. We have looked at some deals where there's a pretty sizable unknown as to how that is going to be handled. So I think with all the mid-cap companies, that's typically not an issue. But on the private side, we've definitely seen that on their balance sheet.

Got it. Fair enough. And then I guess last one, well, I got 2 more, if that's okay, for Keefer. Can you just give us your thoughts on the bank market? And heaven forbid, if you guys did do a deal and require financing, what's that market like right now?

Yes. Good question. I mean we've got an existing credit facility in place. So it's not a market that we've been active in. Certainly, we see some public disclosure from some of the larger bulge bracket banks around alignment and ESG alignment. So I think broadly, there seems to be some question in the market about continued support and activity from some of the larger banks for the oil and gas sector in general. But likely, I think that probably creates a void in the market that some of the larger regional lenders in the oil and gas producing states, Texas, Oklahoma and others, may be able to fill. But I'm speaking not from direct experience on that as it's just our feeling.

Sure. That's helpful. I was just hoping for big picture. Last one would be just on the line -- the service lines you guys have. Can you provide any granularity into some of the specific service lines as opposed to the geographic comments? Utilization, anything, if you can, that's fine.

Yes. So we provided a bit of color in the prepared remarks, but I don't think we'll be able to provide anything additional to what's been disclosed in the remarks. We'll obviously have any disclosures in the filings as well.

Our next question comes from the line of Jaime Perez with R.F. Lafferty & Company.

Most of my questions have been asked and answered.

This does conclude today's teleconference. I'd like to pass the call back to management for closing remarks.

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

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