KLX Energy Services Holdings, Inc. Q1 FY2025 Earnings Call

Greetings, and welcome to the KLX Energy Services 2025 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 of Investor Relations. Thank you. Ken, 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 first quarter 2025 results. With me today are Chris Baker, President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide a commentary on quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at klx.com, and there will also be a telephonic recorded replay available until May 23, 2025. More information on how to access these replay features was included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, May 9, 2025, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX management. However, various risks and uncertainties and contingencies could cause 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 and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures were included in the quarterly press release and can be found on the KLX website. And now, I'd like to turn the call over to Chris Baker. Chris?

Thank you, Ken, and good morning, everyone. I'll start with commentary on our Q1 results, recent operational performance, and strategic initiatives, then provide some perspective on the current market environment and our outlook. As discussed last quarter, Q1 is seasonally our toughest quarter, but I'm pleased to report that KLX delivered improved adjusted EBITDA and adjusted EBITDA margin in Q1 2025 versus Q1 2024, despite a meaningfully lower rig count environment. March was our best month of the quarter for both revenue and adjusted EBITDA, and our Southwest segment posted its strongest quarterly results since Q3 of 2023. Importantly, Q1 results were in line with guidance. Revenue and adjusted EBITDA were down sequentially, but ahead of Q1 last year. Our company-wide focus on cost controls enabled us to increase our first quarter 2025 adjusted EBITDA margin by 208 basis points over last year's first quarter despite revenue and rig count being down 12% and 5%, respectively, over the same period. The macro environment remains volatile, driven by OPEC+ increasing production and dynamic U.S. tariff policy driving recessionary risk and commodity price volatility. We are closely monitoring customer activity plans and our cost structure in real time. With that said, we continue to see green shoots in certain PSLs and areas as we expand our market leadership position across our rentals and tech services PSLs. In our tech services PSL, we're in the process of developing a Gen 2 version of our Oracle SRT, which is rapidly gaining market acceptance. We now have over 0.5 million running feet downhole, and this tool should position us exceptionally well in the gas basins in the years to come. We have a cycle-tested team and remain ready to respond quickly to evolving market conditions. Our diversified service offering and strong customer relationships continue to differentiate KLX and support our performance through market cycles. We saw particular strength in the Southwest, while the Rockies and Northeast regions experienced sequential declines due to seasonality and a slowdown in Mid-Con completions caused by an unforeseen operational issue that drove material downtime for one of our two frac fleets. So we expect these trends to reverse in Q2. Geographically, the Southwest represented 42% of Q1 revenue, up from 37% in Q4. The Northeast/Mid-Con was 27%, down from 30% in Q4, and the Rockies was 31%, down from 33% in Q4. The Southwest benefited from robust completion and production activity, especially in rentals and tech services, while the Rockies completion PSLs made significant contributions. Going forward, we expect continued strength in the Southwest compared to prior years as we have continued to strengthen market share, and we expect the Rockies to bounce back in Q2 as is customary coming out of the winter season. By end market, drilling, completion, production, and intervention services contributed approximately 20%, 51%, and 29% of Q1 revenue, respectively. In response to the evolving tariff landscape, we continue to assess impacts on our supply chain and cost structure. With that said, we are proud that many of our PSL components and products, such as our plugs, ERT, and thru-tubing motors have always been 100% manufactured in the U.S.A., which positions KLX uniquely in the market. While we generally anticipate some short-term disruption and pressure on our cost structure for certain equipment, our strategy is to pass along increased costs where possible and adjust sourcing to mitigate medium to longer-term risks. We also strengthened our balance sheet, reducing notes outstanding as part of our March refinancing that also increased our flexibility versus the prior capital structure. The new structure allows us to pay interest on our notes in kind. This flexibility positions us well to navigate the ongoing market volatility and maintain financial flexibility. The ability to elect PIK interest proved almost immediately valuable as we utilized this option in early April during a period of heightened market uncertainty and sharp declines in oil prices following new tariff announcements on April 2. The ability to adjust our cash outflows in real time enhances our liquidity and preserves capital for operations and strategic opportunities even in the face of unpredictable macroeconomic swings. As a result, we remain well capitalized and able to respond decisively to both risks and opportunities as they arise throughout the year. I'll now turn the call over to Keefer to review our financial results in greater detail, and I will return later in the call to discuss our outlook for 2025. Keefer?

Thanks, Chris. Good morning, everyone. As Chris mentioned, Q1 2025 revenue was $154 million, a 7% sequential decline and 12% lower than Q1 2024. Consolidated adjusted EBITDA was $13.8 million with a 9% margin, down from 13.7% in Q4 2024, but more importantly, up from 7% in Q1 of 2024. As Chris noted, given the Q1 seasonality within our Rockies business, it is more helpful to compare year-over-year versus sequential when reviewing the first quarter. Also, as Chris mentioned, we exited Q1 on a high note as March 2025 was the quarter's high point for both revenue and margin. Total SG&A for Q1 was $21.6 million, but backing out non-recurring items, adjusted SG&A would have been $16.5 million, a 12% reduction versus Q1 2024 and flat compared to Q4 2024 despite a 3% higher benefit burden in Q1 versus Q4. Average G&A headcount was down 3% versus the Q4 average. The cost structure changes we implemented in 2024 continue to benefit us, and we expect this lower SG&A level to continue and to actually improve further as we navigate 2025. Moving to our segment results, for the Rockies segment, revenue was $47.8 million, operating loss was $200,000, and adjusted EBITDA was $6.7 million. Sequential revenue and adjusted EBITDA declined 11% and 43%, respectively, primarily due to seasonality. But when compared to Q1 2024, revenue and adjusted EBITDA were higher by 5% and 24%, respectively, despite Rockies' rig count being down 13% year-over-year. Given Q1 is our most seasonally impacted quarter, we expect Rockies activity and revenue to improve meaningfully on a sequential basis. In the Southwest segment, revenue, operating income, and adjusted EBITDA were $65.2 million, $3 million, and $11.7 million, respectively. On a quarterly basis, Q1 revenue increased 6% sequentially with operating income and adjusted EBITDA up 173% and 22%, respectively, due to a shift towards higher contribution from higher-margin product service lines and increased revenue across a static fixed cost structure. Q1 was a standout for the Southwest segment with adjusted EBITDA at its highest level since Q3 2023, and we expect continued strength relative to historical results as we have expanded the customer base by deploying the latest generation assets across our rentals, fishing, and thru-tubing businesses. For the Northeast/Mid-Con segment, revenue was $41 million, operating loss was $8.1 million, and adjusted EBITDA was $2.7 million. The sequential decrease in revenue of 18% was primarily driven by the previously mentioned white space in our Q1 calendar. Adjusted EBITDA declined 72% sequentially, largely driven by the completions white space Chris mentioned in his opening remarks. To put it in perspective, we missed out on approximately $6 million to $7 million of scheduled Q1 Mid-Con revenue due to the aforementioned non-recurring operational issue. At Corporate, our operating loss and adjusted EBITDA loss for Q1 were $12.4 million and $7.3 million, respectively, both of which were in line with recent quarters. Turning to our balance sheet, cash flow, and capitalization. We ended Q1 with $58.1 million in liquidity, consisting of $14.6 million of cash and cash equivalents and $43.5 million of availability on our revolving credit facility, including $4.9 million on an undrawn FILO facility. Cash declined over $60 million from year-end, mainly due to approximately $33 million in refinancing costs, working capital normalization, and seasonality and net CapEx spending. Refinancing costs included fees, OID, reduction in notes outstanding, and accrued interest. Consistent with our commentary on the Q4 call, our DSO normalized from Q4 levels to about 60 days, and DPO decreased to approximately 43 days. As we've discussed in the past, Q1 is our most working capital-intensive quarter of the year, partly because there are always two extra payrolls in the quarter. Our Q1 balance sheet includes a restricted cash balance of approximately $8 million, primarily tied to the transition from our prior ABL agreement. As of today, $6 million of this restricted cash has been freed up, and we expect the remainder to be freed up during Q2. The new indenture includes a 2% quarterly mandatory redemption, and we made our first amortization payment on the new notes at the end of Q1. In Q1 2025, KLX sold 143,000 shares of common stock under the ATM program for gross proceeds of approximately $500,000. Regarding the terms of the new indenture, these funds are now available for share buybacks for the company's 2019 share buyback program. CapEx for Q1 was $15 million gross and $10.2 million net of asset sales, focused primarily on maintenance spending within our rentals and coiled tubing fleets. We expect to reduce 2025 full-year CapEx from original estimates and now expect gross capital spending for 2025 of $40 million to $50 million and net CapEx of $30 million to $40 million. We have flexibility to further curtail second-half CapEx, if needed, as we exited Q1 with only $11 million of CapEx accrued as of March 31. Our CapEx allocation strategy remains focused on balancing reinvestment in our core product service lines with disciplined spending that supports long-term liquidity and value creation, including prioritizing investments in higher-margin service lines with quick cash-on-cash paybacks, including rentals, fishing, and thru-tubing, where we hold market-leading positions and are expanding share with major customers. We expect cash and liquidity to improve as we navigate the remainder of 2025, and our team is experienced at weathering the cyclicality and volatility of the oilfield. In real time, we are evaluating and enacting further measures to augment the cost structure, improve free cash flow and maximize financial flexibility. I'll now hand it back to Chris for his concluding remarks and more color on our outlook.

Thanks, Keefer. As we look ahead to the remainder of 2025, we expect revenue and adjusted EBITDA growth in Q2, building on March's momentum. While the macro environment is volatile and uncertain, we are confident that our operational discipline, improved balance sheet flexibility, and proactive risk management position us to navigate 2025. We are taking a more cautious approach to the remainder of 2025, as we work to maximize financial flexibility. For Q2, we anticipate continued strength in our Southwest segment, along with modestly improving revenue as Rocky seasonality normalizes and the Mid-Con bounces back from the unforeseen Q1 white space. Based on our current schedules, we are targeting a modest sequential revenue increase with revenue expected to be up low to mid-single digits on a percentage basis and margin expansion. We continue to be bullish on the U.S. natural gas macro story and its implications for service providers, especially for KLX. We are closely watching developments in natural gas and LNG exports, commodity price volatility, and global economic trends. Our exposure to gas-focused basins positions us well for any uptick in activity, especially as new LNG capacity comes online over the next 12 to 24 months. This could drive improved pricing and utilization across our core markets. An increase in gas-directed activity could serve to cushion softness in crude-directed activity given reduced WTI pricing and the oil-focused CapEx cuts we've seen from public E&P operators recently. We remain focused on strategic accretive M&A that aligns with our growth and deleveraging goals. Clearly, M&A is complicated given the current market backdrop and our share price, but we believe we are fundamentally undervalued today and our enhanced debt structure gives us the flexibility to act quickly on attractive opportunities. Post-refinancing, we have seen a handful of opportunities that we reviewed in early to mid-2024 approach us, as they were unable to consummate deals in '24 and now recognize the need for OFS consolidation. The market backdrop makes financing transactions incredibly difficult and consummating transactions in this environment will require creativity, but we fervently believe the OFS market needs meaningful consolidation. In summary, we are confident in our ability to execute our strategy and navigate what is a dynamic and volatile market. Our scale, diversified offerings, and strong customer relationships position KLX to capture share as the industry consolidates. Thank you to our employees, customers, and shareholders for your ongoing support. With that, we'll now take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Steve Ferazani with Sidoti & Company. Please proceed with your question.

Good morning. Chris. Good morning, Keefer. Appreciate all the detail on this morning. I just wanted to start by asking about the Q2 guide. Given what Q2 and the Rockies have been in past years, the recovery and the fact that if that $6 million to $7 million hit on the frac spread was completely resolved in Q1, it seems like low to mid could be conservative for growth.

Good morning, Steve. It's challenging to provide a full-year guidance at this moment, so we decided to share a Q2 outlook instead. For the second quarter, we anticipate revenue growth in the low to mid-single digits. There are various factors to consider, including the $6 million impact on our top line that Keefer mentioned. Each basin and product line has its own unique rebound trajectory. Since April 2, when crude prices reached $56, we noticed several operators postponing projects. In some cases, we had multiple completions scheduled for specific pads, but just a week later, when WTI went up to $62, those same operators began reassessing their schedules, leading to a fluctuating situation. While I wouldn't call the guidance conservative, it is derived from our 90-day revenue forecast. Just this week, WTI hit $59, suggesting there might be delays, but it then bounced back to $62 by this morning. Thus, making projections becomes quite complex as we move further out in the 90-day period, and we are focusing on what we can assess right now.

I appreciate that, Chris. I can imagine the uncertainty that's out there right now. My question is whether you have noticed the impact from lower oil prices, and it seems like you are already seeing some effects, even though we expect that to become more pronounced in the second half regarding rig count.

Yeah. I think, look, the smaller operators are more exposed and candidly more exposed to the tariff impact of line pipe, casing, etc., and they're more exposed to commodity prices. Some of the smaller operators we work for don't have the hedging programs of the larger operators. As you look across the news of the last week, we've seen a lot of the blue chip operators talk about reductions on the order of everything from zero to maybe a banded range as high as 5% or 10% to their capital programs for 2025. I would agree, most of that seems to be second half weighted. But some of the smaller operators will react when crude has a five handle on it, and they'll at least elect to delay. It doesn't mean they cancel that project in totality, but delays can hit us when they hit us across multiple product lines, they have a disproportionate impact, right?

That's really helpful. Thanks, Chris. Now, regarding the new capital structure and your thoughts on it, I acknowledge that with all the uncertainty, it's challenging to project cash flow. I was somewhat surprised that you exercised the PIK option already. How are you approaching the flexibility of the PIK option, given that Q1 is the most capital-intensive period and usually sees the lowest cash flow? Additionally, I understand you've discussed share repurchases, but then utilized the ATM, which leads to some confusion on my end about your strategy for capital allocation in light of the increasing uncertainty.

Good question, Steve. This is Keefer. Good morning. Clearly, timing plays an impact into some of those actions as you think about the last 45 days or so. Clearly, the ATM sales were executed on prior to the tremendous economic shift and outlook that occurred post-April 2. With that said, there is additional flexibility that we're able to put in place with the new credit docs, both on the indenture and ABL side. You mentioned the PIK side. So the refinanced notes do afford us the flexibility to PIK interest. The first month, we clearly paid cash. The PIK election for the second month was due the week of the tariff announcement. Given that market uncertainty and the news from OPEC that week, we did elect to PIK interest. There's certainly a corresponding cash-related cost to us PIK-ing interest. So, there's an incremental kind of 100 basis points of interest rate spread that is tied to a PIK. With that said, PIK-ing interest does defer about $2.4 million to $2.5 million of monthly cash cost. So we do have tremendous flexibility there, and it is a tool with which we will continue to evaluate and on a go-forward basis, make sure that we're maximizing and optimizing the company's flexibility, both to be defensive as well as offensive as we navigate through the market. So that's the main puts and takes. On the buyback side, as you mentioned, clearly, we've had a $49 million or so authorized buyback in place since 2019, that is subject to availability under the new debt covenants. Practically speaking, the availability is much smaller than the $49 million, and our share price has moved tremendously, particularly post the announcements from D.C. as well as OPEC in early April. And so post-refinancing, this is flexibility that is now built back into the new debt documents that we didn't have historically. There is an additional opportunity here, when warranted and we believe prudent, to buy back a small amount of shares. So, on a go-forward basis, in terms of cash flow management, we're obviously laser-focused on maximizing margins and driving as much free cash flow as possible, recognizing to Chris' point that there is a tremendous amount of market uncertainty today. But hopefully, some of this starts to come to resolution, and we'll have a better line of sight on what's going to happen for the remainder of the year.

Great. I really appreciate all that detail. If I could get one more in. There is some optimism around the gas plays. Maybe that can partially offset some of the rig count decline in the Permian and Rockies. You typically have had flexibility in terms of being able to move your assets around. How are you positioning for that potential? Do you have to position ahead of time? And how are you thinking about what could be sort of the reverse of what we saw two, three years ago where gas plays are a little bit better while oil plays maybe get weaker?

Yes, that's a great question. We touched on this a bit during our Q4 call. We're actively monitoring the market. As you mentioned, we're seeing some progress in the gas plays. Our dry gas revenue percentage in Q1 has remained consistent with the past four quarters, around 12.5%. Our Northeast segment performed exceptionally well from a seasonally adjusted standpoint in Q1, and we expect that opportunity to grow throughout the year. We know several operators are increasing rig counts in both the Haynesville and Northeast regions. Stability in natural gas prices has been evident, and they continue to improve. So far, we haven't moved any assets. In response to your question, I believe we're already well-positioned, but we have the ability to relocate additional assets if necessary.

Thanks, Chris. Thanks, Keefer.

Yeah. Appreciate it, Steve. Thank you.

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

Thank you for having me. I have a quick question regarding M&A and the opportunities that may be emerging. I'm interested in your geographic strategy without getting into specifics about valuation or service lines. Places like the Permian are more fragmented compared to the more stable gas markets. How do you approach your strategy from a geographic standpoint? That's all I have.

Yeah. Look, it's a great question. I think the current market is candidly driving some deal capitulation. Some counterparties are at least now saying they're willing to be creative, and they understand relative valuations have come off as multiples have declined. As I mentioned in the prepared remarks on the call, we have seen a couple of counterparties that are quality companies that were hung or dead deals last year kind of pop up over the last couple of months. We'll see how that plays out. I wouldn't say that they are necessarily geographically focused by any stretch. We're trying to be much more opportunistic. As we look at our new debt facility post refinance, I want to be clear; the debt facility does have limitations. The first most important limitation is that the deal has to be deleveraging for us to add pari passu debt to the facility. We realize certain counterparties are going to require some component of cash. The second is that the reality is we need the lenders or new lenders to step up if there's a cash component required to consummate the deal. But the reality is, ultimately, deleveraging transactions benefit all of our stakeholders, equity, and debt. I think it's finally time in the market where some of the, to your point, fragmented smaller operators, in particular, as well as some of the larger ones are realizing that scale matters to manage cycles, and that's what we're doing right now is managing the cycle. So, we're going to continue to be opportunistic and go from there. But we're not necessarily geographically focused, I would say.

Fair enough. And then just a quick follow-up if I may, on the activity. Just looking at a lot of the announcements from your E&P customers, a lot of the reductions are coming in the Permian. And to your point, the gassy markets are improving. Can you just give us your thoughts on the other oily areas away from the Permian in terms of what you're hearing from your customers?

Yeah. It's a great question. What I would say is, similar to what I referenced with Steve, with some of the smaller operators, they are more opportunistic and sensitive to the whipsaw of commodity prices. So, we've definitely seen in the Bakken, in the Rockies and other areas, people delay projects and kind of sit on the sidelines for some period of time. But we're also having conversations about when they're going to bring those back. So it's lost revenue for the time being, but we expect that some of that may come back to us in kind of short order. Then the question is that, to your point, the larger reductions in CapEx, how quick do the decline curves start to support crude prices and potentially in the second half of the year. The smaller operators are clearly quick on the trigger to revamp projects. We're trying to stay as close to them as we can.

Okay. Thank you for having me. Good luck, guys.

All right. Thank you, John. Appreciate it.

Thank you. This now concludes our question-and-answer session. I would like to turn the floor back over to President and CEO, Christopher Baker for closing remarks.

Thank you once again for joining us on this call and your continued interest in KLX. We look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.