Q3 2021 KLX Energy Services Holdings Inc Earnings Call

December 10, 2021

Greetings and welcome to the KLX Energy services third quarter 2021 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ken Dennard. Thank you, Mr. Dennard, you may begin. Thank you operator and good morning, everyone. We appreciate you joining us for the KLX energy services conference call and webcast to review fiscal third quarter 2021 results.

This call and webcast to review fiscal third quarter 2021 results.

With me today is 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 third quarter and outlook before opening the call for questions and answers.

Keith or Laner, Executive Vice President and Chief Financial Officer.

Following my remarks management will provide a high level commentary on the financial details of the third quarter and outlook before opening the call for questions and answers.

There'll be a replay of today's call. It'll be available by webcast on the company's website at KLXEnergy.com and there will also be a telephonic recorded replay available until December 24, 2021. More information on how to access the replay features was included in yesterday's earnings release.

Please note that information reported on this call speaks only as of today December 10th 2021 and therefore, you are advised that time-sensitive information may no longer be accurate as of any time of the replay listening or transcript reading.

In addition, management's comments may 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 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.

First in the statements made by management.

The listener or reader is encouraged to read the annual report on Form 10-K.

The reports on Form 10-Q.

And current reports on form 8-K to understand certain of those risks uncertainties and contingencies.

The comments today may 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, which can be found on the KLX Energy website. And now I'd like to turn the call over to Calix Energy services, President and CEO, Mr. Chris Baker, Chris.

And now I'd like to turn the call over to Calix Energy services, President and CEO, Mr. Chris Baker, Chris.

Thank you and good morning, everyone. Thank you for joining us today for KLX energy Services' fiscal third-quarter 2021 conference call. Let me begin by highlighting a snapshot of our strong third-quarter result, as well as some of the significant things impacting our business during the quarter.

We begin by highlighting a snapshot of our strong third quarter result, as well as some of the significant things impacting our business during the quarter.

After this, I will turn the call over to Keefer to review our financial performance in greater detail before returning for some final comments. The macro backdrop for fiscal Q3 was the most constructive in years. WTI price averaged $73 per barrel and we exited our fiscal Q3 with oil 13% higher than where we began the quarter. Henry hub natural gas prices averaged $4.90 per Mcf and we exited our fiscal Q3 with natural gas, 37% higher than where we began the quarter. Rig count over the same period expanded 55 rigs or 11%.

The macro backdrop for fiscal Q3 was the most constructive in years.

Ti price averaged $73 per barrel and we exited our fiscal Q3 with oil 13% higher than where we began the quarter.

Henry hub natural gas prices averaged $4.90 per Mcf and we exited our fiscal Q3 with natural gas, 37% higher than where we began the quarter.

Rig count over the same period expanded 55 rigs or 11%.

Beginning with our fiscal third-quarter result, I am very pleased to report that the third-quarter revenue increased 24% to $139 million, which was double the high end of our 8% to 12% guidance provided on the Q2 call. The sequential increase in revenue was largely driven by an improved commodity price environment and associated increases in utilization, market share and pricing across the majority of our drilling, completion production and intervention product and service lines. Third-quarter adjusted EBITDA was $5 million improving materially relative to Q2 result, and was positive for the second consecutive quarter. Additionally, we ended the quarter with total liquidity of $88 million and available liquidity net of the FCC or hold back of $70.8 million an increase of approximately 13.6 million or 24% compared to Q2.

Sequential increase in revenue was largely driven by an improved commodity price environment and associated increases in utilization market share and pricing across the majority of our drilling completion production and intervention product and service lines.

Third quarter, adjusted EBITDA was $5 million improving.

relative to Q2 result, and was positive for the second consecutive quarter. Additionally, we ended the quarter with total liquidity of $88 million and available liquidity net of the FCC or hold back of $70.8 million an increase of approximately 13.6 million or 24% compared to Q2.

<unk> 6 million or 24% compared to Q2.

Despite the market improvements, there are always countervailing forces that they're monitoring. And this time is no exception. We are in the midst of an acutely inflationary environment. We have seen material wage pressure in the labor market as well as both higher cost and longer lead times for critical items in our supply chain.

We have seen material wage pressure in the labor market as well as both higher cost and longer lead times for critical items in our supply chain.

These variables will and have pressured our cost structure and are one of the primary challenges to expanding our margins. The supply chain issues and inflationary pressures became prevalent in late Q3 and have persisted into the fourth quarter, while our suppliers have provided some advanced warning of lead times and price inflation. There are always surprises. This is just another unfortunate challenge that our team has to manage it will force us to make early decision and vendor selection as well as whether to pre-purchase consumables and inventories at current lower prices where available. Going into 2022 will be to stay ahead of such pressures by providing transparency to our clients and moving service pricing ahead of realizing these inflationary pressures. Not afterwards.

The supply chain issues and inflationary pressures became prevalent in late Q3 and have persisted into the fourth quarter, while our suppliers have provided some advanced warning of lead times and price inflation. There are always surprises. This is just another unfortunate challenge that our team has to manage it will force us to make.

early decision and vendor selection as well as whether to pre-purchase consumables and inventories at current lower prices where available. Going into 2022 will be to stay ahead of such pressures by providing transparency to our clients and moving service pricing ahead of realizing these inflationary pressures. Not afterwards.

Going into 2022 will be to stay ahead of such pressures by providing transparency to our clients and moving service pricing ahead of realizing these inflationary pressures not afterwards.

The OFS industry cannot sustain margin erosion on consumables and has to pass these costs directly through to our customers. Ultimately, it will take a partnership approach with our vendors and customers to manage the inflationary pressures.

On the labor front, we discussed it before. However, it's disappointing that just when the industry begins to have positive pricing momentum, competitors resort to employee poaching attempts at deploying incremental assets rather than focusing on maximizing price and utilization, which are the true key to profitability and cash flow. So once again the industry can become its own worst enemy.

Flow so once again the industry can become its own worst enemy.

Additionally, COVID-19 had a material impact on our business in the third quarter and the low vaccination rate within the oilfield is complicating the industry's ability to staff crews in an already tight labor market as well as creating white space and driving incremental overtime throughout the organization. We have incurred $1 million of cost year to date on COVID testing and treatment.

We have incurred $1 million.

Cost year to date on Covid testing and treatment.

And in the third quarter, incurred material expenses related to overtime and contract labor costs due to quarantine crews. To put some numbers to this, from Q2 to Q3 quarantine days increased over three <unk>. From over 300 days in Q2 to approximately 950 days in the third quarter.

To put some numbers to this from Q2 to Q3 <unk> seen days increased over three <unk>.

From over 300 days in Q2 to approximately 950 days in the third quarter.

COVID will continue to be an issue for the industry and we currently have crews in quarantine today. With all of that said, I'm very pleased to report that to date, we have been largely successful at staying ahead of these rising cost pressures and have been able to pass on higher prices across our service lines.

With all of that said I'm very pleased to report that to date, we have been largely successful at staying ahead of these rising cost pressures and have been able to pass on higher prices across our service lines.

This will remain a critical priority going forward as we look to maintain the margin gains we have achieved over the last few quarters. Operationally, we continue to excel and we have made great strides in augmenting our suite of proprietary products and services.

Operationally, we continue to excel and we have made great strides in augmenting our suite of proprietary products and services.

We continue to take share in the Frac plug market with our latest generation composite and dissolvable plug. Plug sales volume increased approximately 32% sequentially in the quarter. We are also now beginning to benefit from our fully integrated R&D organization and are working towards commercializing latest generation technology, our completions customers that will cement our position as a market leader.

We are also now beginning to benefit from our fully integrated R&D organization and are working towards commercializing latest generation technology, our completions customers that will cement our position as a market leader. Additionally.

Additionally, despite our minimal capital spending, our R&D and fabrication teams have done a fantastic job at cost-effectively working to electrify portions of our wireline, coiled tubing and snubbing operations. And we will continue to pursue opportunities to electrify, our equipment, where possible and cost-effective.

The macro market has clearly been volatile over the last few weeks. Despite this volatility and concerns over a new COVID-19 variant. We are highly encouraged by our third-quarter results and we exited the third quarter on a strong run rate with over $600 million in annualized revenue, which gives us considerable optimism for 2022. With that, I'll now turn the call over to Keefer who will review our Q3 financial results.

Yeah.

With that I'll now turn the call over to Keefer, who will review our Q3 financial results.

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Thank you, Chris. Let me begin by discussing our third quarter 2021 consolidated results. For the third quarter ended October 31st, 2021 revenues were $139 million, an increase of $27 million or 24%. As compared to the revenue for the fiscal second quarter of 2021. Revenue growth was driven by broad increases in drilling completion production and intervention activity.

Let me begin by discussing our third quarter 2021 consolidated results.

For the third quarter ended October 31, 2021 revenues were $139 million, an increase of $27 million or 24% as compared to the revenue for the fiscal second quarter of 2021 revenue.

Revenue growth was driven by broad increases in drilling completion production and intervention activity.

On a product line basis, drilling completion production and intervention products and services contributed approximately 28%, 49%, 14% and 9% to revenue respectively for the fiscal third quarter of 2021. Adjusted operating loss for the quarter was $9.6 million. Adjusted EBITDA and adjusted EBITDA margin were $5 million and 3.6% respectively.

Adjusted operating loss for the quarter was $9 $6 million adjust.

Adjusted EBITDA and adjusted EBITDA margin.

$5 million and three 6% respectively.

Adjusted EBITDA improved by roughly $4.4 million compared to fiscal second quarter. On an annualized basis, this would imply a $20 million run rate for Q3 2021. And when compared to a year ago Q3 2020 results, it would imply a $42 million annualized improvement driven by a combination of realized cost synergies as well as a significant rebound in our underlying activity and pricing. Total adjusted SG&A expense for Q3 was $13.8 million, which equates to roughly 10% of revenue.

On an annualized basis.

Would imply a $20 million run rate for Q3 2021.

And when compared to a year ago Q3, 2020 results would imply a $42 million annualized improvement driven by a combination of realized cost synergies as well as a significant rebound in our underlying activity and pricing.

Total adjusted SG&A expense for Q3 was $13 8 million, which equates to roughly 10% of revenue.

Our adjusted corporate and other EBITDA loss for the fiscal third quarter was $5.1 million, which represents only 3.7% of revenue. We believe these metrics highlight the merits of the QES merger and the associated cost synergies. [QES] now has one of the most efficient cost structures and the [OFS] industry and we believe we can scale further from current levels with minimal SG&A additions.

We believe these metrics highlight the merits of the <unk> merger and the associated cost synergies.

<unk> now has one of the most efficient cost structures and the Oss industry and we believe we can scale further from current levels with minimal SG&A additions.

Turning to review our segment results, let me begin with the Rockies. The Rocky Mountains segment fiscal third-quarter revenue of $36.5 million increased by $2.9 million or 9% as compared with the fiscal second quarter of 2021.

The Rocky Mountains segment fiscal third quarter revenue of $36 5 million increased by $2 9 million.

Or 9% as compared with the fiscal second quarter of 2021.

The sequential increase in revenue was primarily driven by a material uptick in fishing, rentals, drilling, and our completion oriented services included coiled tubing, wireline, pumping, and plug sales. Offset by modest declines in a few of our smaller completion oriented service lines due to customer scheduling issues.

Offset by modest declines in a few of our smaller completion oriented service lines due to customer scheduling issues.

Adjusted operating loss for the fiscal third quarter was $1.7 million as compared with adjusted operating loss of $2 million in the fiscal second quarter. Adjusted EBITDA was $3.5 million as compared to fiscal second quarter, adjusted EBITDA of $3.1 million. The sequential margin improvement was driven by revenue mix shifting to higher concentration of our higher-margin service lines in Q3, including rentals and tech services.

<unk> was driven by revenue mix shifting to higher concentration of our higher margin service lines in Q3, including rentals and Tech services.

Moving to our southwest segment. The segment generated Q3 revenues of $45.8 million, an increase of $2.8 million or 6.5% as compared to fiscal second quarter of 2021. The sequential improvement in revenue was driven by increases in directional drilling, wireline, coiled tubing, blood sales and accommodation and was modestly offset by a slight decline in fishing activity. Q3 adjusted operating loss for this segment was $3.8 million compared to fiscal second-quarter adjusted operating loss of $3.6 million and adjusted EBITDA was $800,000 compared to fiscal second-quarter adjusted EBITDA of $1.8 million.

Segment generated Q3 revenues of $45 $8 million, an increase of $2 8 million or six 5% as compared to fiscal second quarter of 2021.

The sequential improvement in revenue was driven by increases in directional drilling wireline coiled tubing blood sales and accommodation and was modestly offset by a slight decline in fishing activity.

Q3, adjusted operating loss for this segment was $3 8 million <unk>.

Compared to fiscal second quarter, adjusted operating loss of $3 $6 million and adjusted EBITDA was $800000 compared to fiscal second quarter, adjusted EBITDA of $1 $8 million.

The decline in margin was primarily driven by lower margins in our South Texas region, due to labor constraints, and COVID-19 related overtime and contract labor costs. Now to wrap up the segment discussion with the northeast and mid-Con. Fiscal third-quarter revenues were up 61% sequentially to $56.7 million.

Now to wrap up the segment discussion with the northeast and mid Con fiscal.

Fiscal third quarter revenues were up 61% sequentially to $56 $7 million.

The increase in revenue was driven by increases across all drilling completion and production service lines led by directional drilling, coiled tubing, pumping, fishing, and rentals. Adjusted operating income for the fiscal third quarter was $2.1 million as compared with adjusted operating loss of $3.2 million in the fiscal second quarter. Adjusted EBITDA was $5.8 million as compared to second-quarter adjusted EBITDA of $500,000. The material increase in activity and revenue led to a corresponding 25% incremental margin for this segment from Q2 to Q3.

Adjusted operating income for the fiscal third quarter was $2 1 million as compared with adjusted operating loss of $3 $2 million in the fiscal second quarter.

Adjusted EBITDA was $5 8 million as.

Third to second quarter, adjusted EBITDA of $500000 the material increase in activity and revenue led to a corresponding 25% incremental margin for this segment from Q2 to Q3.

Now I'll turn to our balance sheet and cash flow. Cash increased by $1.4 million or almost 4% sequentially to $48 million. Our net debt increased by $3.6 million sequentially to $243.9 million driven by a slight increase in long term debt and capital leases offset by the aforementioned increase in our cash balance.

Cash increased by $1 $4 million or almost.

<unk>, 4% sequentially to $48 million.

Our net debt increased by $3 $6 million sequentially to $243 $9 million driven by a slight increase in long term debt and capital leases offset by the aforementioned increase in our cash balance.

For the three months ended October 31st, 2021, cash flow used in operations was $5.8 million and free cash flow was negative $2.5 million. Networking capital was $44.4 million. Compared to Q2 net working capital of $40.3 million. Capital expenditures for the quarter were approximately $1.8 million and we're focused on maintenance spending.

Compared to Q2, net working capital of $43 million.

Capital expenditures for the quarter were approximately $1 $8 million and we're focused on maintenance spending.

We now expect total Capex for 2021 to be in the range of 9 million to $11 million, which is down from previous guidance of $14 million to $16 million in part due to the abbreviated fourth quarter. We were able to offset cash flow used in operations and Capex with proceeds from the ATM program and asset sales. During the fiscal third quarter. We had at the market sales of 1.07 million shares, which yielded proceeds of $4.8 million net of planned costs.

We were able to offset cash flow used in operations and Capex with proceeds from the ATM program and asset sales during the fiscal third quarter. We had at the market sales of 1.07 million shares, which yielded proceeds of $4 $8 million net of planned costs.

We also sold $2.6 million of obsolete assets within the quarter, primarily tied to the sale of the company-owned aircraft and an obsolete operational location. And $2.6 million remains an asset held for sale of which we expect to close half a million dollars by the end of 2021.

Of which we expect to close half a million dollars by the end of 2021.

Our borrowing base increased 43% sequentially to $40 million based on increased activity in revenue-driving our net AR balance to $102.9 million. We also reduced our letters of credit as part of our annual insurance renewal during Q3 by $1.6 million or 24%, which has a one for one impact on borrowing base availability.

Or 24%, which has a one for one impact on borrowing base availability.

As of October 31st, 2021, our total liquidity was $80.8 million, which was comprised of $40.8 million in cash and $40 million in available borrowing base. And our available liquidity was $70.8 million less a $10 million fixed charge coverage ratio holdback. Liquidity increased $13.6 million or 24% sequentially, which is almost equivalent to a semiannual interest payment. Subsequent to the end of Q3, we made our second semiannual interest payment of 2021 in early November utilizing cash on hand.

Liquidity increased $13 6 million or 24% sequentially, which is almost equivalent to a semiannual interest payment.

Subsequent to the end of Q3.

We made our second semiannual interest payment of 2021 in early November utilizing cash on hand as.

As we have emphasized in the past, the continued management and preservation of our cash and liquidity to support the continued rebound in our business remains a top priority. Lastly, due to the change in our fiscal year-end from January 31st to December 31st, taking effect, the fourth quarter of fiscal 2021 will be a shortened stub period comprised of only two months, November and December.

Lastly, due to the change in our fiscal year end from January 31 to December 31, taking effect the fourth quarter of fiscal 2021 will be a shortened stub period comprised of only two months November and December.

Once we complete Q4, we will file a transition 10-K with an 11 month period and we'll begin fiscal 2022 on January 1st. As part of this transition, we also plan to share pro forma results for calendar and periods. With that, I will now turn the call back to Chris.

As part of this transition we also plan to share pro forma results for calendar and periods with that I will now turn the call back to Chris.

Thanks, Keefer. I will close the call by discussing the current market environment and notable changes taking place therein as well as our forward outlook and our efforts to achieve higher returns via pricing gains. Looking out towards Q4 and beyond, we believe that a constructive commodity price environment is here to stay as both ramping demand occur production limits skews the supply-demand equation in favor of a constructive macro backdrop going forward.

Close the call by discussing the current market environment and notable changes taking place therein as well as our forward outlook and our efforts to achieve higher returns via pricing gains.

Looking out towards Q4 and beyond we believe that a constructive commodity price environment is here to stay as both ramping demand occur production limits skews the supply demand equation in favor of a constructive macro backdrop going forward.

Following this trend, pricing continues to plot an upward path and the rate at which pricing is improving is continuing to accelerate which bodes very favorably for our business and the industry as a whole through 2022.

This positive outlook is clearly tenuous as we've experienced recently on Black Friday due to the Omicron variant. However, thus far we have not seen any of our customers materially alter their plans and it seems like WTI is regaining steam as more is learned about Omicron. As you know, I've spoken in the past about how rising commodity prices have disproportionately benefited E&P companies in the early stages of the market upcycle.

As you know I've spoken in the past about how rising commodity prices have disproportionately benefited E&P companies in the early stages of the market up cycle.

Conversely, this has largely come at the expense of oilfield services companies as the fragmented nature of the industry is surplus of available equipment kept prices depressed. However, we are now at a point where demand is absorbing a greater proportion of the available supply of equipment and more importantly, available crews. As a result, we are able to attain greater levels of pricing power that was possible in the past few quarters and we believe this trend will accelerate into 2022 as operator activity continues to increase.

Surplus of available equipment kept prices depressed.

However, we are now at a point where demand is absorbing a greater proportion of the available supply of equipment and more importantly, available crews. As a result, we are able to attain greater levels of pricing power that was possible in the past few quarters and we believe this trend will accelerate into 2022 as operator activity continues to increase.

operator activity continues to increase.

The simple reality is pricing has to continue to increase due to supply chain challenges. I will now provide some color and guidance on Q4 and 2022. We do expect a slight slowdown for the holidays, especially on the production services side of the business. But it will not have nearly the same level of decline as we've seen in years past tied to budget exhaustion due to a more supportive commodity price environment and the improved free cash flow generation of our customers.

I will now provide some color and guidance on Q4 and 2022.

We do expect a slight slowdown for the holidays, especially on the production services side of the business, but it will not have nearly the same level of decline as we've seen in years past tied to budget exhaustion due to a more supportive commodity price environment and the improved free cash flow generation of our customers.

For the abbreviated two months quarter, we expect revenue to be in the $90 million to $95 million range. The pro forma three months fourth quarter period ended December 31st, we expect to generate revenue between 140 and $145 million. Looking ahead to 2022, we're very optimistic about the prospects for all of our businesses.

The pro forma three months fourth quarter period ended December 31, we expect to generate revenue between 140 and $145 million.

Looking ahead to 2022, we're very optimistic about the prospects for all of our businesses.

We have already been awarded sizable packages of activity and materially improved pricing across a range of product and service lines. But we are still waiting over many of our customers to finalize their 2022 capital plans. With the positive momentum we built through extensive cost rationalization via synergy realization along with the strides we are making on the R&D and technology side. There is significant operating leverage in the platform today positioning KLX for substantial improvement as market activity and pricing continues to move in our favor.

With the positive momentum, we built through extensive cost rationalization via synergy realization along with the strides we are making on the R&D and technology side. There is significant operating leverage in the platform today positioning <unk> for substantial improvement as market activity and pricing continues to move.

Move in our favor.

In closing, let me once again, thank our employees, customers, and shareholders. As market conditions at KLX's results improve, we are confident that even better times are ahead for KLX energy services. The combination of our experienced personnel, comprehensive portfolio of specialized equipment and tools, and a strong focus on technological innovation positions KLX to generate higher returns and deliver superior operational performance from our comprehensive portfolio and products and services. With that, we will now take your questions. Operator.

As market conditions.

<unk> results in Peru, we are confident that even better times are ahead for <unk> energy services. The combination of our experienced personnel comprehensive portfolio of specialized equipment and tools and a strong focus on technological innovation positions <unk> to generate.

Higher returns and deliver superior operational performance from our comprehensive portfolio and products and services with that we will now take your questions operator.

Thank you. To ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, while we poll for questions. I would like to turn the conference back. We do have a question from John Daniel from Daniel Energy Partners. Please proceed.

To ask a question. Please press star one on your <unk>.

Telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like.

To remove your question from the queue.

And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys one.

One moment, while we poll for questions.

I would like to turn the conference back.

We do have a question from John Daniel from Daniel Energy Partners. Please proceed.

Yes, please. Please go ahead, sir. John, are you still there did you drop? We lost you we can't hear you speaking. Please check and see if your phone is muted. Alright, Hey can you guys hear me now?

Please go ahead, Sir Hey, Jonathan.

John are you still there did you drop we lost you we can't hear you speaking.

Mr. Danny Alicia and see if your phone is muted.

Okay.

Alright, Hey can you guys hear me now.

Yes. Good morning, we've got you, John. Alright, I am in the middle of Nowhere, Texas, and I've got terrible service, but I'm trying hard to listen to you guys. The question is just comment on assets that are sort of against that Vince the costs to reactivate those should activity continued to ramp. Just what we should be thinking about in terms of reactivation costs.

Alright, I am in the middle of Nowhere, Texas, and I've got terrible service, but I'm trying hard to listen to you guys.

The question is just comment on assets that are sort of against that Vince the costs to reactivate those should activity continued to ramp just what we should be thinking about in terms of reactivation costs.

So as you know it's a very good question because there are plenty of assets still [cash flow within water throughout] the industry. What I would say is we're very much still in the process of finalizing our budget for next year. So I don't have a specific number because it's very product line specific. That being said, I mean I think a phenomenal job this year of offsetting reactivation costs via asset sales et cetera.

So I don't have a specific number because it's very product line specific.

That being said I mean I.

I think Nathan.

Non metal job this year of offsetting reactivation costs via asset sales et cetera.

We still have some assets held for sale, probably about $2.6 million that we expect will close at some point in time next year, if not even in the fourth quarter of this year. And so there is as you would expect no way that we can curtail CAPEX to the levels we crystallize that adds this year. That being said, the economy sustaining up the incremental assets in the face of what we've seen recently, which we're very optimistic about which is double-digit price increases start to finally make sense.

There is as you would expect no way that we can curtail capex to the levels. We crystallize that adds this year that being said the economic sustaining up the incremental assets in the face of what we've seen recently, which we're very optimistic about which is double digit price increases start to finally makes sense.

And so we're finalizing that process today, but I would say we're pretty well situated when it comes to incremental activity, especially on the rentals, the frac valve side et cetera. We've actually spent a lot of that money this year. And we're pretty well situated for incremental activity going into Q1.

Actually spent a lot of that money this year.

And we're pretty well situated for incremental activity going into Q1.

Okay, great good job on the top line this quarter. Thanks for taking my call. Yes, anytime absolutely. Appreciate it. That concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.

Thanks for taking my call.

Yes anytime absolutely appreciate it.

That concludes our question and answer session I would like to turn the conference back over to management for closing remarks.

Thank you, operator. We are very optimistic about the macro outlook for the remainder of 2021 and into 2022. Thank you once again for joining us on the call today and for your interest in KLX Energy services, we look forward to next quarter. Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.

Energy services, we look forward to next quarter.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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Greetings and welcome to the Calix energy Services' third quarter, 2020, One earnings conference call.

At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ken Dennard. Thank you Mr. Zhu.

And argue may begin thank you operator, and good morning, everyone. We appreciate you joining us for the <unk> Energy services conference call and webcast to review fiscal third quarter 2021 results.

With me today is Chris Baker, <unk> synergies, President and Chief Executive Officer and Keith.

Keith or Laner, Executive Vice President and Chief Financial Officer.

Following my remarks management will provide a high level commentary on the financial details of the third quarter and outlook before opening the call for questions and answers.

There'll be a replay of today's call it'll be available by webcast on the company's website at <unk> Dot com.

B a telephonic recorded replay available until December 'twenty, four 2021 more information on how to access. The replay features was included in yesterday's earnings release.

Note that information reported on this call speaks only as of today December 10th 2021, and therefore, you are advised that time sensitive information may no longer be accurate as of any.

The time of the replay listening or transcript reading.

In addition, management's comments may contain forward looking statements within the meaning of the United States Federal Securities laws.

These forward looking statements reflect the current views of <unk> management, however, various risks 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.

Current reports on form 8-K to understand certain of those risks uncertainties and contingencies.

The comments today May also include certain non-GAAP financial measures additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the <unk> energy website.

And now I'd like to turn the call over to Calix Energy services, President and CEO, Mr. Chris Baker, Chris.

Thank you Ken and good morning, everyone. Thank you for joining us today for <unk> energy Services' fiscal third quarter 2021 conference call.

Let me begin by highlighting a snapshot of our strong third quarter result, as well as some of the significant themes impacting our business during the quarter.

After this I will turn the call over to Keefer to review our financial performance in greater detail before returning for some final comments.

The macro backdrop for our fiscal Q3 was the most constructive in years.

<unk> price averaged $73 per barrel and we exited our fiscal Q3 with oil 13% higher.

We began the quarter.

Henry hub natural gas prices averaged $4 90 per Mcf and we exited our fiscal Q3 with natural gas, 37% higher than where we began the quarter.

Rig count over the same period expanded 55 rigs or 11%.

Beginning with our fiscal third quarter result, I am very pleased to report that the third quarter revenue increased 24% to $139 million, which was double the high end of our 8% to 12% guidance provided on the Q2 call the.

The sequential increase in revenue was largely driven by an improved commodity price environment and associated increases in utilization market share and pricing across the majority of our drilling completion production and innovation product and service lines.

Fiscal third quarter, adjusted EBITDA was $5 million improving materially relative to Q2 result, and was positive for the second consecutive quarter. Additionally, we ended the quarter with total liquidity of $88 million and available liquidity net of the FCC or <unk>.

<unk> of $70 8 million, an increase of approximately $13 6 million or 24% compared to Q2.

Slight market improvement there are always countervailing forces.

Your monitor and this time is no exception, we are in the midst of an acute link inflationary environment.

We have seen material wage pressure in the labor market as well as both higher cost and longer lead times for critical items in our supply chain.

These variables will and have pressured our cost structure and are one of the primary challenges to expanding our margins.

Early decision and vendor selection as well as whether to pre purchase consumables and inventories at current lower prices where available.

Key going into 2022 will be to stay ahead of such pressures by providing transparency to our clients and moving service pricing ahead of realizing these inflationary pressures not afterwards, the Oss the industry cannot sustain margin erosion on consumables and has to pass these costs directly through to our customers.

Ultimately it will take a partnership approach with our vendors and customers to manage the inflationary pressures.

On the labor front, we discussed it before however, it's disappointing that just when the industry begins to have positive pricing momentum competitors resort to employee poaching attempts at deploying incremental assets rather than focusing on maximizing price and utilization, which are the true key to profitability and cash.

So once again the industry can become its own worst enemy.

The organization.

We have incurred $1 million of cost year to date on COVID-19 testing and treatment.

And in the third quarter incurred material expense related to overtime and contract labor costs due to quarantine crews.

To put some numbers to this from Q2 to Q3 <unk> seen days increased over three ex <unk>.

From over 300 days in Q2 to approximately 950 days in the third quarter.

Covid will continue to be an issue for the industry and we currently have crews in quarantine today.

With all of that said I am very pleased to report that to date, we have been largely successful at staying ahead of these rising cost pressures and have been able to pass on higher prices across our service lines.

This will remain a critical priority going forward as we look to maintain the margin gains we have achieved over the last few quarters.

Operationally, we continue to excel and we have made great strides in augmenting our suite of proprietary products and services. We continue to take share in the Frac plug market with our latest generation composite and Dissolvable plug blood sales volume increased approximately 32% sequentially in the quarter.

We are also now beginning to benefit from our fully integrated R&D organization and are working towards commercializing latest generation technology for our completions customers that will cement our position as a market leader.

Additionally, despite our minimal capital spending our R&D and fabrication teams have done a fantastic job at cost effectively working to electrify portions of our wireline coiled tubing and snubbing operations and we will continue to pursue opportunities to electrify, our equipment, where possible and cost effective.

The macro market has clearly been volatile over the last few weeks. Despite this volatility and concerns over a new COVID-19 variant. We are highly encouraged by our third quarter results and we exited the third quarter on a strong run rate with over $600 million in annualized revenue, which gives us considerable optimism for 2020.

<unk>.

With that I'll now turn the call over to Keefer, who will review our Q3 financial results.

<unk>.

Thank you Chris.

Let me begin by discussing our third quarter 2021 consolidated results.

For the third quarter ended October 31, 2021 revenues were $139 million, an increase of $27 million or 24% as compared to the revenue for the fiscal second quarter of 2021 revs.

Revenue growth was driven by broad increases in drilling completion production and intervention activity.

On a product line basis drilling completion production and intervention products and services contributed approximately 28%, 49%, 14% and 9% to revenue respectively for the fiscal third quarter of 2021.

Adjusted operating loss for the quarter was $9 $6 million adjust.

Adjusted EBITDA and adjusted EBITDA margin.

$5 million and three 6% respectively adjusted.

Adjusted EBITDA improved by roughly $4 4 million compared to fiscal second quarter.

On an annualized basis, this would imply a $20 million run rate for Q3 2021 and.

And when compared to our year ago, Q3, 2020 results would imply a $42 million annualized improvement driven by a combination of realized cost synergies as well as a significant rebound in our underlying activity and pricing.

Total adjusted SG&A expense for Q3 was $13 8 million, which equates to roughly 10% of revenue.

Our adjusted corporate and other EBITDA loss for the fiscal third quarter was $5 1 million, which represents only three 7% of revenue.

We believe these metrics highlight the merits of the <unk> merger and the associated cost synergies.

<unk> now has one of the most efficient cost structures and the Oss industry and we believe we can scale further from current levels with minimal SG&A additions.

Turning to review our segment results, let me begin with the Rockies.

Our Rocky Mountains segment fiscal third quarter revenue of $36 5 million increased by $2 9 million or.

Four 9% as compared with the fiscal second quarter of 2021.

The sequential increase in revenue was primarily driven by a material uptick in fishing rentals drilling and our completion oriented services included coiled tubing.

Airline pumping and plug sales.

Offset by modest declines in a few of our smaller completion oriented service lines due to customer scheduling issues.

Adjusted operating loss for the fiscal third quarter was $1 7 million as compared with adjusted operating loss of $2 million in the fiscal second quarter. Adjusted EBITDA was $3 5 million as compared to fiscal second quarter, adjusted EBITDA of $3 $1 million.

Sequential margin improvement was driven by revenue mix shifting to higher concentration of our higher margin service lines in Q3, including rentals and Tech services.

Moving to our southwest segment.

The segment generated Q3 revenues of $45 8 million, an increase of $2 8 million or six 5% as compared to fiscal second quarter of 2021.

Q3, adjusted operating loss for this segment was $3 8 million compared to fiscal second quarter, adjusted operating loss of $3 $6 million and adjusted EBITDA was $800000 compared to fiscal second quarter, adjusted EBITDA of $1 $8 million.

The decline in margin was primarily driven by lower margins in our South Texas region, due to labor constraints, and COVID-19 related overtime and contract labor costs.

Now to wrap up the segment discussion with the northeast and mid Con fiscal.

Fiscal third quarter revenues were up 61% sequentially to $56 $7 million.

The increase in revenue was driven by increases across all drilling completion and production service lines led by directional drilling coiled tubing pumping fishing and rentals.

Adjusted operating income for the fiscal third quarter was $2 1 million as compared with adjusted operating loss of $3 $2 million in the fiscal second quarter.

Adjusted EBITDA was $5 8 million as compared to second quarter adjusted EBITDA of $500000. The material increase in activity and revenue led to a corresponding 25% incremental margin for this segment from Q2 to Q3.

Now I will turn to our balance sheet and cash flow.

Cash increased by $1 4 million or almost 4% sequentially to $48 million.

Our net debt increased by $3 $6 million sequentially to $243 $9 million driven by a slight increase in long term debt and capital leases offset by the aforementioned increase in our cash balance.

For the three months ended October 31, 2021 cash flow used in operations was $5 $8 million and free cash flow was negative $2 5 million.

Net working capital was $44 $4 million.

Compared to Q2, net working capital of $43 million.

Capital.

<unk> for the quarter were approximately $1 $8 million and we're focused on maintenance spending.

We now expect total capex for 2021 to be in the range of $9 million to $11 million, which is down from previous guidance of $14 million to $16 million in part due to the abbreviated fourth quarter.

We also sold $2 6 million of obsolete assets within the quarter, primarily tied to the sale of the company owned aircraft and an obsolete operational location.

And $2 $6 million remains an asset held for sale of.

Of which we expect to close half a million dollars by the end of 2021.

Our borrowing base increased 43% sequentially to $40 million based on increased activity in revenue driving our net AR balance to $102 $9 million. We also reduced our letters of credit as part of our annual insurance renewal during Q3 by $1 6 million.

Or 24%, which has a one for one impact on borrowing base availability.

As of October 31, 2021, our total liquidity was $88 million, which was comprised of $48 million in cash and $40 million in available borrowing base and our available liquidity was $70 $8 million less a $10 million fixed charge coverage ratio hold back.

Liquidity increased $13 6 million or 24% sequentially, which is almost equivalent to a semiannual interest payment.

Subsequent to the end of Q3.

We made our second semiannual interest payment of 2021 in early November utilizing cash on hand as.

As we have emphasized in the past the continued management and preservation of our cash and liquidity to support the continued rebound in our business remains a top priority.

Once we complete Q4, we will file a transition 10-K, when with an 11 month period and we'll begin fiscal 2022 on January one.

As part of this transition we also plan to share pro forma results for calendar and periods with that I will now turn the call back to Chris.

Thanks Keefer.

Close the call by discussing the current market environment and notable changes taking place there is as well as our forward outlook and our efforts to achieve higher returns via pricing gains.

Following this trend pricing continues to plot and upward path and the rate at which pricing is improving is continuing to accelerate which bodes very favorably for our business and the industry as a whole through 2022.

This positive outlook is clearly tenuous as we've experienced recently on black Friday due to the AUM across various however, thus far we have not seen any of our customers materially alter their plans and it seems like <unk> is regaining steam as more is learned about <unk>.

As you know I've spoken in the past about how rising commodity prices have disproportionately benefited E&P companies in the early stages of the market up cycle.

Conversely, this has largely come at the expense of oilfield services companies is the fragmented nature of the industry and surplus of available equipment kept prices depressed.

However, we are now at a point where demand is absorbing a greater proportion of the available supply of equipment and more importantly available crews as a result, we are able to attain greater levels of pricing power. There was possible in the past few quarters and we believe this trend will accelerate into 2022.

As operator activity continues to increase.

The simple reality is pricing has to continue to increase due to supply chain challenges.

I will now provide some color and guidance on Q4 and 2022.

For the abbreviated two months quarter, we expect revenue to be in the $90 million to $95 million range.

The pro forma three months fourth quarter period ended December 31, we expect to generate revenue between 140 and $145 million.

Looking ahead to 2022, we are very optimistic about the prospects for all of our businesses.

We have already been awarded sizable packages of activity and materially improved pricing across a range of product and service lines, but we are still waiting on or many of our customers to finalize their 2022 capital plans.

In our favor.

In closing, let me once again, thank our employees customers and shareholders as.

As market conditions.

<unk> results improve we are confident that even better times are ahead for <unk> energy services. The combination of our experienced personnel comprehensive portfolio of specialized equipment and tools and a strong focus on technological innovation positions <unk> to generate.

Higher returns and deliver superior operational performance from our comprehensive portfolio of products and services with that we will now take your questions operator.

Thank you.

To ask a question. Please press star one on your telephone keypad.

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One moment, while we poll for questions.

I would like to turn the conference back.

We do have a question from John Daniel from Daniel Energy Partners. Please proceed.

Yes.

Please go ahead, Sir Hey, Jonathan.

John are you still there did you drop we lost you we can't hear you speaking.

Mr. Daniel Lee Shenton Sanjay.

Your line is muted.

Nathan.

Alright, I'm not mean, hey can you guys hear me now.

Yes. Good morning, we've got you John.

Alright, I am in the middle of Nowhere, Texas, and I've got terrible service, but I'm trying hard to listen to you guys.

The question is just a comment on assets that are sort of against the cost to reactivate those should activity continuing to ramp just what we should be thinking about in terms of reactivation costs.

So as you know it's a very good question because there are plenty of assets still special within Florida throughout the industry. What I would say is we're very much still in the process of finalizing our budget for next year.

Have a specific number because it's very product line specific.

That being said I mean, I think the phenomenal job this year of offsetting reactivation costs via asset sales et cetera.

We still have some assets held for sale, probably about $2 $6 million that we expect will close at some point in time next year, if not even in the fourth quarter of this year. So.

There is as you would expect no way that we can curtail capex to the levels. We crystallize. It at this year that being said the economics of standing up the incremental assets in the face of what we've seen recently, which we're very optimistic about which is double digit price increases start to finally makes sense.

And so.

Were finalizing that process today, but I would say, we're pretty well situated when it comes to incremental activity, especially on the rentals, the frac valve side et cetera.

Actually spent a lot of that money this year.

And we're pretty well situated for incremental activity going into Q1.

Okay, great well good job on top line this quarter.

Thanks for taking my call.

Yeah anytime absolutely appreciate it.

That concludes our question and answer session I would like to turn the conference back over to management for closing remarks.

Thank you operator, we're very optimistic about the macro outlook for the remainder of 2021 and into 2022. Thank you once again for joining us on the call today and for your interest in KLA energy services.

Look forward to next quarter.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Q3 2021 KLX Energy Services Holdings Inc Earnings Call

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