KLX ENERGY SERVICES HOLDINGS, INC. The following discussion and analysis should be read in conjunction with the
historical condensed consolidated financial statements and related notes
included elsewhere in this Quarterly Report as well as our Transition Report on
Form 10-K for the fiscal year ended
The following discussion and analysis addresses the results of our operations
for the three and nine months ended
Company History
The merger of KLXE and QES (the "Merger") provided increased scale to serve a
blue-chip customer base across the onshore oil and gas basins in
After closing the Merger, the Company has integrated personnel, facilities, processes and systems across all functional areas of the organization. Additional synergies may be realized as management continues to rationalize operational facilities and align common roles, processes and systems throughout each function and region. The Merger also enhanced the Company's ability to effect further industry consolidation.
Looking ahead, the Company expects to continue to evaluate strategic, accretive consolidation opportunities that further strengthen the Company's competitive positioning and capital structure and drive efficiencies, accelerate growth and create longterm stockholder value.
Company Overview
We serve many of the leading companies engaged in the exploration and
development of onshore conventional and unconventional oil and natural gas
reserves in
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primarily large independent and major oil and gas companies. We currently
support these customer operations from over 60 service facilities located in the
key major shale basins. We operate in three segments on a geographic basis,
including the
These expansive operating areas provide us with access to a number of nearby unconventional crude oil and natural gas basins, both with existing customers expanding their production footprint and third parties acquiring new acreage. Our proximity to existing and prospective customer activities allows us to anticipate or respond quickly to such customers' needs and efficiently deploy our assets. We believe that our strategic geographic positioning will benefit us as activity increases in our core operating areas. Our broad geographic footprint provides us with exposure to the ongoing recovery in drilling, completion, production and intervention related service activity and will allow us to opportunistically pursue new business in basins with active drilling environments.
We work with our customers to provide engineered solutions across the lifecycle of the well by streamlining operations, reducing non-productive time and developing cost effective solutions and customized tools for our customers' challenging service needs, including their technically complex extended reach horizontal wells. We believe future revenue growth opportunities will continue to be driven by increases in the number of new customers served and the breadth of services we offer to existing and prospective customers.
We offer a variety of targeted services that are differentiated by the technical competence and experience of our field service engineers and their deployment of a broad portfolio of specialized tools and proprietary equipment. Our innovative and adaptive approach to proprietary tool design has been employed by our in-house research and development ("R&D") organization and, in selected instances, by our technology partners to develop tools covered by 30 patents and 5 pending patent applications, which we believe differentiates us from our regional competitors and also allows us to deliver more focused service and better outcomes in our specialized services than larger national competitors that do not discretely dedicate their resources to the services we provide.
We utilize contract manufacturers to produce our products which, in many cases, our engineers have developed from input and requests from our customers and customer-facing managers, thereby maintaining the integrity of our intellectual property while avoiding manufacturing startup and maintenance costs. This approach leverages our technical strengths, as well as those of our technology partners. These services and related products are modest in cost to the customer relative to other well construction expenditures but have a high cost of failure and are, therefore, critical to our customers' outcomes. We believe our customers have come to depend on our decades of field experience to execute on some of the most challenging problems they face. We believe we are well positioned as a company to service customers when they are drilling and completing complex wells, and remediating both newer and older legacy wells.
We invest in innovative technology and equipment designed for modern production techniques that increase efficiencies and production for our customers. North American unconventional onshore wells are increasingly characterized by extended lateral lengths, tighter spacing between hydraulic fracturing stages, increased cluster density and heightened proppant loads. Drilling and completion activities for wells in unconventional resource plays are extremely complex, and downhole challenges and operating costs increase as the complexity and lateral length of these wells increase. For these reasons, E&P companies with complex wells increasingly prefer service providers with the scale and resources to deliver best-in-class solutions that evolve in real-time with the technology used for extraction. We believe we offer best-in-class service execution at the wellsite and innovative downhole technologies, positioning us to benefit from our ability to service technically
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complex wells where the potential for increased operating leverage is high due to the large number of stages per well.
We endeavor to create a next generation oilfield services company in terms of management controls, processes and operating metrics, and have driven these processes down through the operating management structure in every region, which we believe differentiates us from many of our competitors. This allows us to offer our customers in all of our geographic regions discrete, comprehensive and differentiated services that leverage both the technical expertise of our skilled engineers and our in-house R&D team.
Recent Trends and Outlook
Demand for services in the oil and natural gas industry is cyclical and subject
to sudden and significant volatility. Market demand for our services is
experiencing a recovery from the lows of the last two years that were heavily
impacted by COVID-19. The ongoing conflict in
Also, the impact of COVID-19 on the global economy has lessened significantly in 2022, although recent inflation has put pressure on and is expected to continue to negatively impact global demand.
So far in 2022, West Texas Intermediate ("WTI") prices have increased by 43.1%
from
As noted above, commodity prices have recently declined slightly from the highs
experienced in the second quarter and the demand for commodities could decline
further due to, among other things, uncertainty and volatility arising from the
ongoing conflict in
During the quarter ended
The Company remains focused on providing the highest level of customer service across our regions and different service offerings, which has allowed us to make meaningful positive impacts to our revenue, operating margins, Adjusted EBITDA and cash flows. We are taking steps to hire essential personnel and increase capital expenditures as activity rebounds, but we are measured in our growth and focused on returns.
We believe our diverse product and service offerings uniquely position KLXE to respond to a rapidly evolving marketplace where we can provide a comprehensive suite of engineered solutions for our customers with one call and one master services agreement.
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How We Generate Revenue and the Costs of Conducting Our Business
Our business strategy seeks to generate attractive returns on capital by providing differentiated services and prudently applying our cash flows to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term. Our services generally require equipment that is less expensive to maintain and is operated by a smaller staff than many other oilfield service providers. As part of our returns-focused approach to capital spending, we are focused on efficiently utilizing capital to develop new products. We support our existing asset base with targeted investments in R&D, which we believe allows us to maintain a technical advantage over our competitors providing similar services using standard equipment.
Demand for services in the oil and natural gas industry is cyclical and subject to sudden and significant volatility. We remain focused on serving the needs of our customers by providing a broad portfolio of product service lines across the major basins, while maintaining sufficient operating liquidity and prudently managing our capital expenditures.
We believe we have strong management systems in place, which will allow us to manage our operating resources and associated expenses relative to market conditions. Historically, we believe our services have generated margins superior to our competitors based upon the differential quality of our performance, and that these margins would contribute to future cash flow generation. The required investment in our business includes both working capital (principally for accounts receivable, inventory and accounts payable growth tied to increasing activity and revenues) and capital expenditures for both maintenance of existing assets and ultimately growth when economic returns justify the spending.
How We Evaluate Our Operations
Key Financial Performance Indicators
We recognize the highly cyclical nature of our business and the need for metrics to (1) best measure the trends in our operations and (2) provide baselines and targets to assess the performance of our managers.
The measures we believe most effective to achieve the above stated goals include:
•Revenue
•Adjusted Earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"): Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. Adjusted EBITDA is not a measure of net earnings or cash flows as determined by GAAP. We define Adjusted EBITDA as net earnings (loss) before interest, taxes, depreciation and amortization, further adjusted for (i) goodwill and/or long-lived asset impairment charges, (ii) stock-based compensation expense, (iii) restructuring charges, (iv) transaction and integration costs related to acquisitions and (v) other expenses or charges to exclude certain items that we believe are not reflective of ongoing performance of our business.
•Adjusted EBITDA Margin: Adjusted EBITDA Margin is defined as Adjusted EBITDA, as defined above, as a percentage of revenue.
We believe Adjusted EBITDA is useful because it allows us to supplement the GAAP measures in order to evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above in arriving at Adjusted EBITDA (Loss) because these amounts can vary substantially from company to company within our industry depending upon accounting methods, book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net (loss) earnings as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax
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structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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Results of Operations
Three Months Ended
Revenue. The following is a summary of revenue by segment:
Three Months Ended
September 30, 2022 October 31, 2021 % Change
Revenue:
Rocky Mountains $ 66.5 $ 36.5 82.2 %
Southwest 68.5 45.8 49.6 %
Northeast/Mid-Con 86.6 56.7 52.7 %
Total revenue $ 221.6 $ 139.0 59.4 %
For the quarter ended
On a product line basis, drilling, completion, production and intervention
services contributed approximately 25.7%, 52.2%, 12.3% and 9.8%, respectively,
to revenue for the three months ended
Cost of sales. For the quarter ended
Selling, general and administrative expenses. For the quarter ended
Operating income (loss). The following is a summary of operating income (loss) by segment:
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Three Months Ended
September 30, 2022 October 31, 2021 % Change
Operating income (loss):
Rocky Mountains $ 11.7 $ (1.7) 788.2 %
Southwest 5.2 (4.1) 226.8 %
Northeast/Mid-Con 17.2 1.7 911.8 %
Corporate and other (13.7) (6.3) (117.5) %
Total operating income (loss) $ 20.4 $ (10.4) 296.2 %
For the quarter ended
Each segment's operating results improved significantly compared to the prior
year period.
Income tax expense. For the quarter ended
Net income (loss). For the quarter ended
Results of Operations
Nine Months Ended
Revenue. The following is a summary of revenue by segment:
Nine Months Ended
September 30, 2022 October 31, 2021 % Change
Revenue:
Rocky Mountains $ 162.9 $ 94.4 72.6 %
Southwest 180.4 126.8 42.3 %
Northeast/Mid-Con 215.0 120.5 78.4 %
Total revenue $ 558.3 $ 341.7 63.4 %
For the nine months ended
On a product line basis, drilling, completion, production and intervention
services contributed approximately 27.3%, 50.9%, 12.0% and 9.8%, respectively,
to revenue for the nine months ended
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Drilling, completion, production and intervention services revenues increased by
approximately
Cost of sales. For the nine months ended
Selling, general and administrative expenses. For the nine months ended
Operating income (loss). The following is a summary of operating income (loss)
by segment:
Nine Months Ended
September 30, 2022 October 31, 2021 % Change
Operating income (loss):
Rocky Mountains $ 14.9 $ (11.1) 234.2 %
Southwest 6.8 (15.3) 144.4 %
Northeast/Mid-Con 23.7 (8.9) 366.3 %
Corporate and other (35.1) (20.9) (67.9) %
Total operating income (loss) $ 10.3 $ (56.2) 118.3 %
For the nine months ended
Each segment's operating results improved significantly compared to the prior
year period.
Income tax expense. For the nine months ended
Net loss. For the nine months ended
Liquidity and Capital Resources
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Overview
We require capital to fund ongoing operations, including maintenance
expenditures on our existing fleet and equipment, organic growth initiatives,
debt service obligations, investments and acquisitions. Our primary sources of
liquidity to date have been capital contributions from our equity and note
holders, borrowings under the Company's ABL Facility and cash flows from
operations. At
Our material cash commitments from known contractual and other obligations
consist primarily of obligations for long-term debt and related interest as well
as leases for property and equipment and purchase obligations as part of normal
operations. See below "- ABL Facility" and "- Senior Notes" for information
regarding scheduled maturities of our long-term debt. See "Note 10 - Leases" of
Item 8 in our 2021 Transition Report on Form 10-K filed with the
We have taken several actions to continue to improve our liquidity position,
including issuing equity under our ATM program and monetizing non-core and
obsolete assets. We actively manage our capital spending and are focused
primarily on required maintenance spending. Additionally, despite ongoing
volatility in commodity prices and increased inflation, increasing oil prices
have resulted in an increase in demand for our services and an improvement in
our operating cash flows in the nine months ended
We have substantial indebtedness. As of
Our ABL Facility matures in
In light of our substantial leverage position and the uncertainty regarding future market conditions, availability of capital and our financial performance, as market conditions warrant and subject to our contractual restrictions, liquidity position and other factors, we may explore various alternatives to recapitalize, refinance or otherwise restructure our capital structure. We may accomplish this through open market or privately negotiated transactions, which may include, among other things, a mix of refinancings, private or public equity or debt raises and rights offerings, repurchases of our outstanding Notes, debt-for-debt or debt-for-equity exchanges or conversions that if successful could result in the dilution of ownership by existing stockholders.
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Some of these alternatives may require the consent of current lenders,
stockholders or noteholders, and there is no assurance that we will be able to
execute any of these alternatives on acceptable terms, or at all. As noted
below, our recent Amendment provides us with the ability to redeem, repurchase,
defease or otherwise satisfy the outstanding Notes using proceeds of equity
issuances or by converting or exchanging Notes for equity. In
ABL Facility
We entered into a
On
The Amendment, among other things, (i) extends the maturity date of the ABL
Facility by a year from
The ABL Facility includes a springing financial covenant which requires the
Company's consolidated FCCR to be at least 1.0 to 1.0 if availability falls
below the greater of
The ABL Facility includes financial, operating and negative covenants that limit our ability to incur indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities. It also includes a covenant to deliver annual audited financial statements that are not qualified by a "going concern" or like qualification or exception. A failure to comply with the obligations contained in the ABL Facility could result in an event of default, which could permit acceleration of the debt, termination of undrawn commitments and enforcement against any liens securing the debt.
Senior Notes
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In conjunction with the acquisition of Motley in 2018, we issued
The indenture contains customary affirmative and negative covenants restricting, among other things, the Company's ability to incur indebtedness and liens, pay dividends or make other distributions, make certain other restricted payments or investments, sell assets, enter into restrictive agreements, enter into transactions with the Company's affiliates, and merge or consolidate with other entities or sell substantially all of the Company's assets.
The indenture also contains customary events of default including, among other
things, the failure to pay interest for 30 days, failure to pay principal when
due, failure to observe or perform any other covenants or agreement in the
indenture subject to grace periods, cross-acceleration to indebtedness with an
aggregate principal amount in excess of
Indemnities, Commitments and Guarantees
In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. Our management believes that any liability for these indemnities, commitments and guarantees would not be material to our financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.
We have employment agreements with certain key members of management expiring on various dates. Our employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change in control.
Capital Expenditures
Our capital expenditures were
Equity Distribution Agreement
On
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Company's common stock, par value
Any Common Stock offered and sold in the ATM Offering will be issued pursuant to
the Company's shelf registration statement on Form S-3 (Registration No.
333-256149) filed with the
The Equity Distribution Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Equity Distribution Agreement, the Company will pay the Agent a commission equal to 3.0% of the gross sales price of the Common Stock sold.
The Company plans to use the net proceeds from the ATM Offering, after deducting the Agent's commissions and the Company's offering expenses, for general corporate purposes, which may include, among other things, paying or refinancing all or a portion of the Company's then-outstanding indebtedness, and funding acquisitions, capital expenditures and working capital.
COVID-19 coupled with the ongoing conflict in
During the three and nine months ended
Cash Flows
Our cash flows provided by operating activities for the nine months ended
At
The following table sets forth our cash flows for the periods presented below:
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