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 on Form 10-Q ("Quarterly Report") as
well as our Annual 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 six months ended
Company History
On
The Merger of KLXE and QES provides increased scale to serve a blue-chip
customer base across the onshore oil and gas basins in
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Table of Contents After closing the Merger, the Company has been focused on integrating personnel, facilities, processes and systems across all functional areas of the organization.
By the end of first quarter of 2021, the Company implemented approximately
During the first quarter of 2021, we consolidated corporate offices in
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 enhances the Company's ability to effect further industry consolidation. Looking ahead, the Company expects to pursue 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
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 the most 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' most challenging service needs, including their most 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 organization and, in selected instances, by our technology partners to
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Table of Contents develop tools covered by 28 patents and 7 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, mission 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 the most technically 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 research and development team.
Depreciation and Amortization
The Company changed its presentation of depreciation and amortization expense in the first quarter of 2021. Depreciation and amortization expense is presented separately from cost of sales and selling, general, and administrative expenses. Prior period results have been reclassified to conform with current presentation.
Segment Reporting
During the third quarter of 2020, the Company changed its presentation of
reportable segments related to the allocation of corporate overhead costs to
reflect the presentation used by the Company's chief operational decision-making
group ("CODM") to make decisions about resources to be allocated to the
Company's reportable segments and to assess segment performance. Historically,
and through
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The Company also changed its presentation of service offering revenues.
Historically, and through
These changes in the Company's corporate allocation method and service offering revenue disclosures have no net impact to the condensed consolidated financial statements. The change better reflects the CODM's philosophy on assessing performance and allocating resources as well as improves the Company's comparability to its peer group.
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 during 2020
was challenged due to the COVID-19 pandemic and macro supply and demand
concerns. While the extent and duration of the continued global impact of the
COVID-19 pandemic is unknown, economic activity has increased from the
Despite the market headwinds experienced in 2020, the Company remained focused on building a leaner and more profitable set of service offerings, which allowed us to make meaningful positive impacts to our revenue, operating margins, cash flows and Adjusted EBITDA. We have taken, and are continuing to take, steps to reduce costs, including reductions in capital expenditures, as well as other workforce rightsizing and ongoing streamlining initiatives.
In February of 2021, we experienced a material slow down due to the
unprecedented Winter Storm Uri, the costliest winter storm in
So far in fiscal 2021, West Texas Intermediate ("WTI") prices have increased an
incremental 21.7% from
Excluding the period impacted by Winter Storm Uri, we saw a meaningful increase in overall activity throughout the first and second quarters of 2021, as commodity prices remained constructive. Looking ahead to the remainder of fiscal 2021, provided that the impact of the COVID-19 pandemic lessens, economic activity continues to increase, and commodity prices remain strong, we expect to experience further increases in activity and corresponding improvements in the price of our product and services.
We believe our diverse product and service offerings uniquely positions 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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Table of Contents 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 flow to select targeted opportunities, with the potential to deliver high returns that we believe offer superior margins over the long-term and short payback periods. 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 research and development, 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 all major basins, while preserving a solid balance sheet, maintaining sufficient operating liquidity and prudently managing our capital expenditures.
We believe our operating cost structure is now materially lower than during
historical financial reporting periods and the realization of the
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 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 capital expenditures for both maintenance of existing assets and ultimately growth when economic returns justify the spending. Our required maintenance capital expenditures tend to be lower than other oilfield service providers due to the generally asset-light nature of our services, the younger average age of our assets and our ability to charge back a portion of asset maintenance to customers for a number of our assets.
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-Generally Accepted Accounting Principles ("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
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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 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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Table of Contents Results of Operations Three Months EndedJuly 31, 2021 Compared to Three Months EndedJuly 31, 2020
Revenue. The following is a summary of revenue by segment:
Three Months Ended
July 31, 2021 July 31, 2020 % Change
Revenue:
Rocky Mountains $ 33.6 $ 18.0 86.7 %
Southwest 43.0 4.2 923.8 %
Northeast/Mid-Con 35.3 14.0 152.1 %
Total revenue $ 111.9 $ 36.2 209.1 %
For the quarter ended
On a product line basis, drilling, completion, production and intervention
services contributed approximately 28.6%, 45.8%, 14.9% and 10.7%, 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 loss. The following is a summary of operating loss by segment:
Three Months Ended
July 31, 2021 July 31, 2020 % Change
Operating loss:
Rocky Mountains $ (2.2) $ (6.7) 67.2 %
Southwest (3.7) (7.2) 48.6 %
Northeast/Mid-Con (3.8) (5.4) 29.6 %
Corporate and other(1) (7.2) 6.5 (210.8) %
Total operating loss(1) $ (16.9) $ (12.8) (32.0) %
(1) Includes bargain purchase gain of
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For the quarter ended
Income tax expense. For the quarter ended
Net loss. For the quarter ended
Results of Operations Six Months EndedJuly 31, 2021 Compared to Six Months EndedJuly 31, 2020
Revenue. The following is a summary of revenue by segment:
Six Months Ended
July 31, 2021 July 31, 2020 % Change
Revenue:
Rocky Mountains $ 57.9 $ 51.8 11.8 %
Southwest 81.0 28.6 183.2 %
Northeast/Mid-Con 63.8 38.8 64.4 %
Total revenue $ 202.7 $ 119.2 70.1 %
For the six months ended
On a product line basis, drilling, completion, production and intervention
services contributed approximately 28.0%, 47.4%, 14.1% and 10.5%, respectively,
to revenue for the six months ended
Cost of sales. For the six months ended
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Selling, general and administrative expenses. For the six months ended
Operating loss. The following is a summary of operating loss by segment:
Six Months Ended
July 31, 2021 July 31, 2020 % Change
Operating loss:
Rocky Mountains (9.4) (40.7) 76.9 %
Southwest (11.2) (105.3) 89.4 %
Northeast/Mid-Con (10.6) (100.1) 89.4 %
Corporate and other(1) (14.6) (2.3) (534.8) %
Total operating loss(1) $ (45.8) $ (248.4) 81.6 %
(1) Includes bargain purchase gain of
For the six months ended
Income tax expense. For the six months ended
Net loss. For the six months ended
We require capital to fund ongoing operations, including maintenance
expenditures on our existing fleet and equipment, organic growth initiatives,
investments and acquisitions. Our primary sources of liquidity to date have been
capital contributions from our equity and note holders and borrowings under the
Company's ABL Facility and cash flows from operations. At
Our cash flow used in operations for the six months ended
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a decrease in demand for our services in the last part of the first quarter
through the third quarter of 2020. We started to see a moderate increase in
overall activity throughout the first and second quarters of 2021, which we
expect to continue into the remainder of the fiscal year. Additionally, should
our customers experience financial distress due to the current market
conditions, they could default on their payments owed to us, which would affect
our cash flows and liquidity. As of
Our primary use of capital resources has been for funding working capital and
investing in property and equipment used to provide our services. We actively
manage our capital spending and are focused on required maintenance spending. In
addition, we regularly monitor potential sources of capital, including equity
and debt financings, in an effort to meet our planned capital expenditure and
liquidity requirements and reduce cost. The COVID-19 pandemic, coupled with the
global crude oil supply and demand imbalance and the resulting volatility in
At
The following table sets forth our cash flows for the periods presented below:
Six Months Ended
July 31, 2021 July 31, 2020
Net cash used in operating activities $ (37.4) $ (15.5)
Net cash provided by (used in) investing activities 2.9 (9.1)
Net cash provided by (used in) financing activities 26.8 (0.4)
Net change in cash (7.7) (25.0)
Cash balance end of period $ 39.4 $ 98.5
Net cash used in operating activities
Net cash used in operating activities was
Net cash provided by (used in) investing activities
Net cash provided by investing activities was
Net cash provided by (used in) financing activities
Net cash provided by financing activities was
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paid on capital lease obligations, and
Financing Arrangements
We entered into a
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
In conjunction with the acquisition of Motley in 2018, we issued
We believe our cash on hand, along with
Capital Requirements and Sources of Liquidity
Our capital expenditures were
Our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic and political conditions, the level of drilling, completion, production and intervention services activity for North American onshore oil and natural gas resources, the continuation of the COVID-19 pandemic, and financial and business and other factors, many of which are beyond our control. We believe based on our current forecasts, our cash on hand, the ABL Facility availability, the Equity Distribution
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Table of Contents Agreement (defined below), together with our cash flows, will provide us with the ability to fund our operations and make planned capital expenditures for at least the next 12 months.
The Company also continues to assess various sources and options including public and private financings to bolster its liquidity and believes that, given current market conditions, it has opportunities to do so.
On
Any Common Stock offered and sold in the 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% of the gross sales price of the Common Stock sold.
The Company plans to use the net proceeds from the 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.
During the three and six months ended
As a smaller reporting company, we are not required to provide the disclosure required by Item 303(a)(5)(i) of Regulation S-K. Off-Balance Sheet Arrangements
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.
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Table of Contents 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.
Lease Commitments
The Company finances its use of certain facilities and equipment under committed
lease arrangements provided by various institutions. Since the terms of these
arrangements meet the accounting definition of operating lease arrangements, the
aggregate sum of future minimum lease payments is not reflected on the
consolidated balance sheets. At
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described in the Critical
Accounting Policies section of Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our 2020 Annual Report on Form
10-K filed with the
Recent Accounting Pronouncements
See Note 2 "Recent Accounting Pronouncements" to our condensed consolidated financial statements for a discussion of recently issued accounting pronouncements. As an "emerging growth company" under the Jumpstart Our Business Startups Act (the "JOBS Act"), we are offered an opportunity to use an extended transition period for the adoption of new or revised financial accounting standards. We operate under the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards, until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
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