KLX Energy Services Holdings, Inc. Q4 FY2020 Earnings Call

Greetings, and welcome to the KLX Energy Services Fourth Quarter 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. 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, KLX’s President and Chief Executive Officer, and Keefer Lehner, Executive Vice President and Chief Financial Officer.

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, which 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 after having fallen roughly 19% during the preceding quarter.

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 to the geographic segments only those corporate costs that are directly tied 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.

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 hardships and 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 de-lever during 2021. 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. I should emphasize that despite our many cost reduction actions and asset sales, we still remain strongly leveraged to recovery. 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 145% 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 for many areas of the US 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 US 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 US and globally, and ultimately a greater level of investment and activity in the US land market. In the interim, it is critical that our industry attains 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, 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 a 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 efficiency, 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. 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 US, hitting Texas particularly hard in February. The midcontinent region had been hit quite hard with cold weather for most of the month, and the coldest regional weather in 30 plus years caused all production to drop 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 whitespace in our calendar and losing over seven 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 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, positioning us very well for the future as the industry recovers. We would also like to thank our customers for valuing our customer service and execution in the field. With that, we will now take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Ian Macpherson with Simmons Energy. Please proceed with your question.

Yeah. Hi. I wanted to ask more about your outlook for consolidated top line growth and EBITDA improvement this quarter notwithstanding the loss of the week. I think that we all see quite strong 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 provide just a little more specifics around the April quarter outlook and then if you could also talk about how April compares to January on a run rate basis, that would help us frame up the run rate going into your fiscal Q2.

Yeah. Sure. Good morning. I appreciate your question. Look, as I stated in the prepared remarks, we estimate that we lost about seven revenue days across a number of material districts. All of our peers have already commented on the situation. That incremental revenue, those seven days, is essentially margin because when a situation like that occurs, you can't really cut your call structure. Fuel and some of your variable costs go away, but by and large, your costs for that month are fixed. Compounding that situation is exactly what you mentioned, which is horizontal and directional rig count was up approximately 40 rigs at the point in time the storm hit from year end. That's about a 12% increase. Therefore, the industry, our company, et cetera, was in a bit of a minor ramp-up situation, and then the activity comes to a halt. I guess what I'd say is the last point is from a schedule perspective, as you well know, whitespace is the bane of oilfield existence at this point in the calendar, and your calendar never lines up perfectly. So, you'll always end up stacking updates as you come out of those situations. That created a slow start in February, and we're working every day to mitigate that slow start. It's a little too early to tell, but we're clearly starting from behind in February. We'll see how the quarter plays out. Overall, activity and revenue are continuing to ramp, and we believe it will do so going into early summer. 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 was at least north of that January run rate revenue, so we are seeing the ramp; it’s just a matter of mitigating the loss in February.

Understood. Thanks, Chris. Given the healthier baseline of activity now, and I think probably just a shared sense of stability at bed levels, you still want better pricing than we have today, but you're clearly operating on a higher plan and a better plan than you were six months ago. Does that make you more encouraged and optimistic with regard to consummating another transformative combination that needs to happen, you know, 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 address both quickly. Look, pricing, we've definitely seen an improvement in commodity prices. There's a historical disconnect, as you know, between where pricing is. I think we're at $58 WTI, which is more in line with that $60 WTI level and what you would have thought about normalized historical activity from a rig or factory 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, especially going through the fourth quarter or third quarter of last year, you're in a unique paradigm where OFS pricing is completely unsustainable; 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. So, pricing really can't be reduced any further and must increase for OFS sustainability. We feel like some of the irrational pricing behavior that we saw late last year or even early into January has kind of abated, and it feels like we've found a 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; we try to do that every single day of the week. Regarding consolidation, you know it felt like there was some capitulation last year. We talked about this in both the third and fourth quarter earnings calls where it felt like especially on the private side, people were realizing they wanted to be a part of a larger, more scalable platform. I would say as oil prices ramped up, we saw considerable low in deal flow from the private side in the last couple of months. I think part of that is they view it as an opportunity to strengthen their financial statements, whether it's their profit or loss statement or their balance sheet, and try to improve upon the overall deal economics. So, we've seen that flow a little but we’re still seeing imbalance from some of the other small to mid-cap companies, and we’ll just have to see how that plays out ultimately.

Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.

Hey, guys, I 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, but we just don't really seem to get it done.

Look, I appreciate that comment and understand. I'm not sure that I can fully opine on all the roadblocks. I think most parties are worried about ultimate shareholder value and all stakeholders. And I know you've seen a lot of our peers go through various forms of liability management, et cetera. If you ask that question years ago or even six months ago, social issues all would seem to get in the way. I think when you go through the depth of the trough that we’ve been through, everybody is actively trying to right the ship and fix their structure as quickly as they can. There are disagreements upon the ultimate value and trajectory of each company, right? So the reality is that we've shown the ability to strip out an enormous amount of cost. I'm very impressed and proud of our team. We’ve closed, I think, 20 facilities—now 20 plus facilities—given what we did with the corporate office last week. We just consolidated one corporate office here in Houston, but we closed those 20 facilities and rationalized them within nine months. We achieved the $46 million synergy target, basically $6 million over the original estimate and about one quarter ahead of our original timeline. The synergies are there. The impetus to get something done is present; it's just a matter of bringing some of the consolidated players to the table.

Okay. Just to continue on this, that’s okay, but assuming you're looking at a company, how much is the PPP loan situation impeding the ability to get deals done? Have you encountered that at all?

We have run into it. We've seen it. I think the PPP loans, especially last year, were a portion of the irrational pricing behavior in the market as companies were having personnel issues. Unfortunately, we've seen a recent spate of that within certain business loans. We have looked at some deals where there's a pretty sizable unknown as to how that is going to be handled.

Got it. Fair enough. And then I guess the last one—well, I got two more if that's okay— for Keefer, can you share your thoughts on the bank market? Haven't for a bit, if you guys did a deal and required financing, what’s that market like right now?

Yeah. 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’ve seen public disclosures from some of the larger investment banks around alignment and ESG. 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. But likely this creates a void in the market that some of the larger regional lenders in oil and gas producing states, Texas, Oklahoma, and others may be able to fill. But I'm speaking not from direct experience; this is just our feeling.

Sure. Right. That’s all, just talking from a big picture. Last one will be just on the line, the service lines you guys have. Can you provide any granularity and some of the specific service lines as opposed to the geographic comment? Utilization, anything like that—and if you can't, that’s fine?

Yeah. 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.

Our next question comes from the line of Jamie Perez with R.F. Lafferty & Co. Please proceed with your question.

Good morning. Hi everybody. Most of my questions have been asked and answered. Thank you.

Okay. Thank you, Jamie. I appreciate you tuning in.

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.