KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) Q1 2024 Earnings Call Transcript May 8, 2024
KLX Energy Services Holdings, Inc. misses on earnings expectations. Reported EPS is $-1.37888 EPS, expectations were $-0.71. KLX Energy Services Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the KLX Energy Services First Quarter Earnings Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Zach Vaughan.
Zach Vaughan: 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 2024 results. With me today are Chris Baker, KLX Energy’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 first quarter 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 www.klx.com, and there will also be a telephonic recorded replay available until May 22, 2024. More information on how to access these replay features was included in yesterday’s earnings release.
Please note that information reported on this call speaks only as of today, May 8, 2024, and therefore, you are 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 financial measures are included in the quarterly press release that can be found on the KLX Energy website. And now I’ll turn the call over to KLX CEO, Chris Baker. Chris?
Christopher Baker: Thank you, Zach, and good morning, everyone. I’ll run through the first quarter highlights before turning the call over to Keefer to review our financials in more detail and then I’ll rejoin to add some commentary on our outlook and concluding remarks before opening the call for Q&A. As we previously reported, we experienced softness at the start of the year, but expect a sequential improvement as we progress through Q2 in 2024. The first quarter was in line with our prior guidance and commentary as we navigated both expected and unexpected challenges and based on our current schedules and expectations, believe this will mark the low point for 2024. First, the previously mentioned Rockies, Mid-Con and Permian activity disruptions due to the severe weather conditions resulting from the Polar vortex.
Second, the previously mentioned operator initiative, safety standards due to non-KLX safety incident in the Rockies led to white space in our calendar and a slow start to certain of our product production-oriented PSLs in particular. In total, these 2 events resulted in approximately $4 million in deferred revenue. Third, normal seasonality in Q1 plus incremental white space on the calendar as customers were slow to reset and finalize budgets. Our customer base continued to exhibit tremendous capital discipline for crude directed activity in the face of higher constructive WTI prices. Finally, the continued decline in natural gas prices drove an incremental 18% reduction in Haynesville rig count on a year-to-date basis along with activity declines and other gas direct basins with several large operators curtailing activity in production.
Consolidated first quarter results included $175 million in revenue, $12 million in adjusted EBITDA and adjusted EBITDA margin of 7%. We ended the quarter with $128 million in liquidity, including a cash balance of $85 million and $43 million of availability on our ABL. Moving to our segment results. Geographically, the Southwest represented 40% of Q1 revenue compared to 35% in Q4. The Mid-Con Northeast represent 34% of revenue, flat to Q4 and the Rockies generated 26% of revenue compared to 31% in Q4, demonstrating both the seasonal and transitory impacts to the Rockies and continued strong execution in the Southwest. Our gas directed activity represented approximately 17% of Q1 revenue, including the Haynesville, which accounted for approximately 10% and the Northeast, which accounted for approximately 7%.
From a product line perspective, completions-focused activity drove 51% of Q1 revenue. Drilling was 24% and production and intervention was 23%. Despite the 10% sequential decline in total revenue, we had 3 product lines experienced sequential revenue increases. Coiled tubing, frac rental and flowback, the latter 2 of which are included in our other completion services product line. Also contributing to improved contribution from completions activity was the previously disclosed technology commercialization and leading operational performance. Operationally, KLX continues to lead the industry with record-setting performance and our team set numerous notable milestones beginning in Q1. We are continuing to commercialize and roll out the OraclE-SRT, which has now logged over 1.2 million running feet as of our call today.
KLX Coiled tubing and KLX thru-tubing are achieving record-setting depths. In the first quarter, we set the bar for U.S. onshore coiled tubing drill-outs setting what we believe to be or new records for both total depth and lateral length. KLX repeatedly reached total depth of greater than 28,600 feet and post curve lateral lengths in excess of 20,400 feet on a recent extended reach multi-well pad. On the deepest well, KLX achieved an unprecedented TD of 28,915 feet, resulting in a groundbreaking milestone lateral length of 3.9 miles. In 2024, KLX has successfully completed 5 4-mile laterals proving to the market that is coiled tubing, thru-tubing and dissolvable frac plug offerings remain highly efficient solutions for our customers. We believe that KLX is a true leader in extended reach completion capabilities and expect more positives to come from our CT segment, the KLX PhantM Dissolvable frac plugs, SpectrA drilling motors and OraclE-SRT.
We believe that with market-leading tubing capacity, best-in-class engineering and execution, KLX has decisively answered the question as to whether or not coiled tubing can remain competitive on extended reach laterals in excess of 3 miles. Also consistent with our prior guidance, we exited Q1 with the month of March delivering the strongest adjusted EBITDA and adjusted EBITDA margin results for the quarter. Our calendar for Q2 shows a material reduction in white space and increased utilization across some of our higher-margin product service lines. Additionally, during the first quarter and through early Q2, we initiated several cost-cutting measures both on the fixed and variable sides of our cost structure, which should improve margins in the second quarter and beyond.
We will continue to align our cost structure to maximize margins in the prevailing market environment. In summary, our diversification and strategic position across all major U.S. onshore basins has been critical to our success to date and positions us to capture a greater portion of customer spending. Most importantly, our network of dedicated team members makes KLX stand out from its competitors by efficiently delivering our market-leading services and proprietary products for the largest, most active and well-capitalized operators in the U.S. onshore market. With that, I’ll now turn the call over to Keefer, who will review our financial results in more detail and I’ll return later in the call to discuss our outlook. Keefer?
Keefer Lehner : Thanks, Chris. Good morning, everyone. As Chris mentioned, we reported Q1 revenue of $175 million, representing a 10% sequential decrease and consolidated Q1 adjusted EBITDA of $12 million. On a consolidated basis, the sequential decrease in revenue was driven by increased white space and a shift in geographic and product service line mix with reduced contribution from the Rockies and from some of our higher-margin product service lines, including rentals and tech services, which includes our fishing business, which as Chris mentioned, we expect to see this trend reverse in the second quarter. The Southwest and Northeast Mid-Con segments contributed 40% and 34% of Q1 revenue, respectively, led in the Southwest by our directional drilling, coiled tubing and frac rentals product service lines and in the Mid-Con, by our pressure pumping, accommodations and directional drilling offerings.
The Rockies contributed 26% led by coiled tubing, rentals and tech services. Total SG&A expense for Q1 was $21.6 million. When you back out nonrecurring costs, adjusted SG&A expense for Q1 would have been only $18.7 million or just 10.7% of our quarterly revenue. During late Q1, we actioned several changes to our fixed cost structure related to third-party costs and insurance to reduce our overhead going forward. This will begin to be reflected in our Q2 results and will benefit margins for the remainder of 2024. KLX continues to have one of the most streamlined overhead structures for a diversified business. Turning now to a review of our segment results. Starting with the Southwest. Southwest revenue, operating loss and adjusted EBITDA for Q1 were $69.4 million, negative $700,000 and $6.7 million, respectively.
First quarter revenue represents a 3% sequential increase over the fourth quarter of 2023 largely due to operational and management improvements, aided by a 1% increase in average rig count, which positively affected our flowback, wireline, tech services and coiled tubing offerings despite being negatively affected by the extreme weather of the polar vortex. Segment adjusted EBITDA decreased 24% sequentially as a function of slightly reduced pricing and the maintenance of slightly elevated staffing levels to support an expected increase in Q2 activity. Moving to the Rockies. Rockies revenue, operating loss and adjusted EBITDA for Q1 was $45.6 million, negative $1.2 million and $5.4 million, respectively. First quarter revenue represents a 24% sequential decrease over the fourth quarter of 2023, largely due to a 2% reduction in average rig count, annual seasonality, increment weather, and non-KLX related safety standdowns which negatively affected the vast majority of our regional drilling, completion and production offerings, including rentals, tech services, frac rentals and wireline and were partially offset by an increase in coiled tubing activity.
Adjusted EBITDA decreased 58% sequentially as a function of the seasonal decrease in revenue, which is expected to materially correct as we progress through the second quarter of 2024. Lastly, for segment results, the Northeast Mid-Con segment revenue, operating income and adjusted EBITDA for the segment were $59.7 million, $2.4 million and $10.2 million, respectively, for the first quarter of 2024. First quarter revenue represents 11% sequential decrease over the fourth quarter of 2023 due to reduced regional gas-focused activity across the vast majority of our drilling completion and production offerings including coiled tubing, directional drilling, accommodations and tech services. Segment operating income and adjusted EBITDA decreased 42% and 5%, respectively, largely due to lower pricing.
At corporate, our adjusted operating loss and adjusted EBITDA loss for Q1 were $11.6 million and $10.3 million, respectively. The corporate adjusted EBITDA loss increased slightly on a sequential basis, but improved 8% when compared to Q1 of 2023 and is expected to improve in Q2 based on the previously actioned and discussed fixed cost reduction initiatives. I’ll now turn to our net working capital, cash flow and capitalization. Net working capital was approximately $60 million as of Q1, and we ended the quarter with a net debt balance of $200 million. Our March 31 cash balance was $85 million, down sequentially and up 113% from $40 million in Q1 of 2023. Consistent with prior commentary, the first quarter is typically our most working capital-intensive quarter driven by seasonally elevated payroll driven by the payment of the 2023 bonus payout, an extra payroll run in the first quarter and elevated payroll taxes that typically burden the first quarter relative to fourth quarter of 2023.
We also experienced a slight sequential increase in DSO and a reduction in DPO, both of which had negative impacts on the sequential change in cash. Now turning to CapEx. First quarter capital expenditures were $13.5 million, which were primarily focused on maintenance spending across our segments, Q1 net CapEx or CapEx less asset sales was approximately $10 million. Going forward, we now expect total CapEx for 2024 to be in the range of $50 million to $55 million, down approximately 10% from our original forecasted range of $50 million to $60 million. Most of the budget for the year is earmarked for maintenance expenses with around 80% dedicated to supporting our ongoing operations. We ended the first quarter with roughly $128 million in liquidity, consisting of $85 million of cash and availability of $43 million under our March 2024 ABL borrowing base certificates.
Our ABL and senior secured notes, both mature in the fall of 2025. Given our conservative capitalization and outlook for meaningfully improved results and positive free cash flow generation through year-end, we are confident the business is well positioned. Throughout the remainder of 2024, we will continue to monitor market conditions and evaluate opportunities to refinance the outstanding notes and our ABL. Going forward, our focus remains on maximizing margins and free cash flow generation, ensuring robust financial strength and that KLX is well positioned to pursue value-creating growth opportunities. With that, I’ll now turn the call back to Chris.
Christopher Baker: Thanks, Keefer. Before we wrap up, I’d like to share some additional color on the current market and our outlook for Q2 and the remainder of 2024. The E&P industry experienced over $200 billion in merger and acquisition activity in 2023 and operator consolidation continues in 2024. We are confident that our platform is exceptionally well positioned to capitalize on the growing industry consolidation as we have outsized exposure to the largest, most active customers across our geographic regions. This customer consolidation is driving a greater need for certified equipment at higher specifications, including enhanced redundancy and safety features across many of our PSLs. These requirements are driving a portion of our 2024 capital expenditure program as we lean into the demand and position KLX for the future.
Customers continue to search for the safest and most efficient service providers available. KLX stands apart with its performance-driven technologically differentiated offerings, exemplary safety record and premier job execution and in certain instances, KLX has already been selected as vendor of choice by top-tier operators due to our enhanced capabilities. These capabilities, combined with our broad geographic footprint, contribute to our strong competitive position. Our industry continues to expect investment in LNG to drive incremental gas demand and key industry players believe it will be the fastest-growing energy source through 2050. KLX intends to benefit over the next 2 years from constructive commodity prices as U.S. LNG export demand rises, which is expected to drive incremental U.S. onshore natural gas directed activity, which should ultimately support elevated service pricing and utilization across all basins.
As we exited Q1, white space is much less pronounced. Based on our current schedules, we expect a sequential improvement in Q2. For perspective, based on our current results, April was our best revenue month since November of 2023, partly driven by the dissipating impact of seasonality in the Rockies for segment revenue for April was the strongest it has been since October of 2023, and consolidated May and June are currently scheduled to be above April levels. We anticipate second quarter revenue to be $180 million to $200 million or roughly 5% to 15% higher than the first quarter, with adjusted EBITDA margins of 9% to 11% with an increasingly stronger performance into Q3. In summary, I would like to thank our customers and shareholders for their support of KLX and most importantly, our team members for propelling us to where we are today.
By prioritizing safety, customer service and the successful execution of our strategic initiatives, we will deliver continued profitability even in a relatively flat market. With that, we will now take your questions. Operator?
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