Q4 2021 KLX Energy Services Holdings Inc Earnings Call

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Okay.

Greetings and welcome to the KL extra energy services fourth quarter 2021 earnings conference call.

At this time all participants are in a listen only mode.

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 you may begin. Thank you operator and good morning, everyone. We appreciate you joining us for the KL ex Energy services conference call and webcast to review fourth quarter 2041 results with me today is <unk>.

Baker, <unk>, 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 pro forma fourth quarter and 2022 outlook before opening the call for your questions.

As a reminder, on September three 2021, the board of directors adopted the fourth amended and restated bylaws of the company to change the company's fiscal year end from January 31 to December 31st effective December 31, 2021 .

As a result.

In this current fiscal year with shortened from 12 months to 11 months and ended December 31, 2021, and is referred to as the transition period.

Alex has changed its reporting cycle to normalize at year end reporting schedule and improve comparability against its peers.

The transition period financials were included in yesterday's earnings release.

During today's call management's comments will focus on pro forma three months comparative results for the periods ended September 30, and December 31, 'twenty to 'twenty one.

In a more meaningful dialogue during the conference call.

Additionally, there'll be a replay of today's call will be available by webcast on the company's website at Alex energy Dot Com and there will also be a telephonic recorded replay available until March 'twenty five 2022 .

More information on how to access. These replay features were included in yesterday's earnings release. Please note that information reported on the call speaks only as of today March 11, 2022, and therefore, you're advised that time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

Also comments on this call contain forward looking statements within the meaning of the United States Federal Securities laws.

Forward looking statements reflect the current views of <unk> management.

Various risks risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the statements made by management.

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 comparable GAAP financial measures are included in the quarterly press release, which can be found on <unk> website.

And now with that behind me I'd like to turn the call over to <unk> 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 fourth quarter 2021 conference call.

121 was a year of positive change for <unk>.

We finalized the successful integration of the QTS merger in the first half of 2021.

Benefited from larger scale, a reduced fixed cost structure as the business end markets have continued to rebound off the 2020 lows.

We have created one of the strongest seen from the industry with a platform delivering a comprehensive suite of drilling completion and production products and services to a large diversified customer base across all major geographic basins.

Post integration, we streamlined our operational footprint modified our product service offering by location to optimize our cost structure and relocated assets geographically to maximize margin.

We've retained what we believe is one of the strongest teams in the industry. It has demonstrated the ability to successfully integrate large scale acquisitions and all of these contributed to our approximate 74% growth in calendar Q4, 2021 quarterly revenue when compared to Q4 2020 levels.

And adjusted EBITDA improved $21 6 million over the same time period on an annualized basis.

From a market perspective.

AI price rig count and Frac spread count improved, 55%, 67% and 76% respectively over the course of 2021.

We experienced a significant decoupling of market activity and commodity prices beginning in Q2 2020, driven by public E&P capital discipline, which has led to the most muted recovery during the industry downturn and moderate oil sales history.

In the last few weeks oil prices have been extremely volatile driven by the Russian invasion of Ukraine.

We keep the Ukrainian people and our thoughts and prayers and believe it is too early to understand the medium and longer term impact on the domestic and global oil and gas market.

Jumping to our strong pro forma fourth quarter results.

The macro backdrop for Q4 continued on a positive trend I'm very pleased to report revenue for the pro forma three months ended December 31, 2021 was $145 million, which represents a 13% sequential increase relative to revenue of 128.

$8 3 million for the pro forma three months ended September 32021.

It came in at the very top end of our previously provided guidance.

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

I'm proud to report in wireline, we group stages completed by more than 12% and our unconventional job count by more than 20% in <unk>.

Tubing, we grew our revenue per operating day by more than 45% and increased pricing on our plugs by approximately 11%.

Okay.

Pro forma calendar Q4, adjusted EBITDA improved for the second consecutive quarter adjusted EBITDA for the pro forma three months ended December 31, 2021 was up 63% to $6 $7 million compared to pro forma adjusted EBITDA of $4 one.

For the pro forma three months ended September 32021.

As we discussed in our last call. We remain highly encouraged about the medium term and long term in the near term we continue to manage through the well documented inflationary pressures in labor fuel raw materials and finished goods and other supply chain issues directly or indirectly impacting our operations.

These variables continue to affect our cost structure and are one of the primary challenges we face as we work to continue to try to expand margins in 2022.

These supply chain issues and other inflationary headwinds started in the second quarter of 2021 accelerated into the end of 2021 and are now further accelerating in early 2022.

The key in 2022 will be to stay ahead of such pressures by providing transparency to our customers and proactively moving our prices before realizing these inflationary pressures.

The Oss industry cannot sustain margin erosion, unless recalibrate prices with our customers, who continue to generate record levels of free cash flow.

The service industry made repeated concessions for the benefit of our customers and lowered prices to record low levels in response to the decline in commodity prices in 2020.

But as the market rebound that we have been unable to recoup these reductions fully due in part to service the service industry continuing to be oversupplied after our customer base shifted from drill baby drill to a focus on capital discipline and generating maximum free cash flow.

The service industry today is still largely priced well below 2019 levels, our 2022 pricing strategy and discipline will help to optimize margin across our segments and drive margin expansion as we progress through the year, particularly later in 2022.

Additionally, I am proud to say that we continue to make strides in offering the latest generation equipment and technology and this is a key differentiator in the marketplace.

On the ESG front, we continue to develop ESG friendly initiatives. In addition to our latest generation proprietary composite and Dissolvable plugs that are seeing rapid adoption in the market. We are working to selectively electrify our core equipment fleet of wireline and coiled tubing assets and we believe we are a market leader in <unk>.

Each of these areas.

Dave we are running two fully electric I heard wireline units with two additional units currently undergoing a conversion.

<unk> electric hybrid large diameter coiled tubing unit and one electric hybrid snubbing unit and part of our 2022 Capex program is dedicated to the electrification of additional completions equipment in order to reduce our carbon footprint and meet the needs of our customers.

Alex is constant push to stay on the cutting edge positions. The company to work for a broad customer base, which included 19 of the top 20 operators by rig count in 2021.

In 2021, we had approximately 740 customers are large largest 10 customers represented approximately 29% of revenue and no single customer accounted for more than 6% of revenue.

We worked for a diverse mix of customers comprised of majors public independent sponsor backed private and family owned businesses with exposure to the oil and gas producing basins.

Consolidation amongst our customers over the last two years, we have successfully diversified our customer base leveraging the strength of.

Our broad geographic coverage integrated solution offering deep subject matter expertise, while maintaining our high standards of safety and quality.

We believe that the market backdrop is setting up to benefit the oil service industry for the first time in several years and believe <unk> is particularly well positioned given our strong team with a proven ability to successfully consolidate and integrate our diverse product and service offering broad geographic coverage.

Differentiated technology and Blue chip customer base with that I'll now turn the call over to Keefer, who will review our Q4 financial results and I'll return later in the call to discuss our 2022 outlook in greater detail deeper.

Thanks, Chris.

One macro comment before jumping into the details as Ken mentioned at the start of the call. Please note that we modified our year end to align with calendar year end.

<unk> 31, and as a result, our transition 2021 and transition in Q4 2021 are 11 months and two months respectively.

Due to these transition periods being truncated I will focus the discussion on today's call around the pro forma calendar quarter detail provided in the Q4 earnings release.

I'll begin by discussing our pro forma calendar fourth quarter of 2021 consolidated results.

For the calendar fourth quarter ended December 31, 2021 pro forma revenues were $145 million, an increase of $16 7 million or 13% as compared to the pro forma revenue for the third quarter ended September 32021.

Revenue growth was driven by broad increases in drilling completion production and intervention activity across the majority of our core geographic markets and we experienced modest net pricing gains across the majority of our product lines.

On a product line basis drilling completion production and intervention products and services contributed approximately 29%, 50%, 12% and 9% to revenue respectively from the pro forma fourth quarter of 2021.

Which compares to 27%, 48%, 15% and 10% and pro forma Q3 2021.

Pro forma Q4, adjusted operating loss was $8 $9 million adjust.

Adjusted EBITDA and adjusted EBITDA margin.

Were $6 7 million and four 6% respectively for the same pro forma fourth quarter.

Pro forma Q4, adjusted EBITDA improved by 63% or $2 $6 million when compared to calendar third quarter ended September 32021.

So pharma fourth quarter adjusted EBITDA benefited from standard year end accrual unwind related to PTO and other items on an annualized basis. This would imply a $26 $8 million run rate for Q4, 2021, and when compared to our year ago pro forma Q.

Q4, 2020 results would imply a $21 $6 million annualized improvement driven by a combination of realized merger cost synergies as well as a significant rebound in our underlying activity and to a lesser degree net pricing gains.

Total pro forma adjusted SG&A expense for calendar Q4 was $15 7 million.

Which equates to roughly 11% of revenue.

I would note that in response to the market in early 2021, <unk> suspended its 401K match for the majority of the year. However in order to attract and retain employees, we partially reinstated the 401K match beginning in December 2021 to better align with the market.

Does the merger integration <unk> is one of the most efficient cost structures in the oil industry and we believe we can scale further from current levels with minimal fixed cost additions.

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

Rocky segment pro forma calendar fourth quarter revenue of $35 $3 million decreased by $2 1 million or 6% as compared with the third quarter ended September 32021.

The sequential decrease in revenue was primarily driven by a slight decline in activity across most service lines due to a seasonal slowdown in customer scheduling offset by an improvement in directional drilling and coiled tubing.

Adjusted operating loss for the pro forma fourth quarter was $3 6 million as compared with an adjusted operating loss of $200000 for the third quarter.

EBITDA was $2 $3 million for the pro forma fourth quarter as compared to pro forma third quarter, adjusted EBITDA of $4 $8 million.

The decline in EBITDA and EBITDA margin was driven by a combination of lower revenue white space and a short term shift in revenue mix away from some of our higher margin service lines.

Moving to our southwest segment.

The segment generated pro forma calendar Q4 revenues of $52 million, an increase of $6 5 million or 15% as compared to the third quarter ended September 32021.

The sequential improvement in revenue was driven by increases in directional drilling and completion activity, including wireline and coiled tubing and was modestly offset by a slight decline in rental activity.

Pro forma calendar Q4, adjusted operating loss for the segment was $600000 compared to pro forma third quarter, adjusted operating loss of $4 $1 million and pro forma adjusted EBITDA was $4 $2 million.

Pro forma Q4 compared to pro forma third quarter adjusted EBITDA of $600000.

The sequential increase in revenue contributed to a 55% incremental margin for this segment from pro forma Q3, the pro forma Q4.

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

Pro forma fourth quarter revenues were up 26% sequentially to $59 $5 million increase in revenue was driven by increases across almost all drilling completion and production service lines led by directional drilling pumping fishing and rentals.

Adjusted operating income for the pro forma fourth quarter was $2 7 million.

As compared with adjusted operating income of $100000 in the pro forma third quarter.

Fourth quarter adjusted EBITDA.

$6 2 million as compared to pro forma third quarter, adjusted EBITDA of $3 $6 million the material increase in activity and revenue led to a corresponding 21% incremental margin for this segment from Q3 to Q4.

Now I'll turn to our balance sheet and cash flow.

Despite making a $14 4 million semi annual interest payment in early November our cash balance only decreased by $12 8 million to $28 million when compared to fiscal Q3, our net outstanding remain constant with $250 million of face value of 2025 maturity notes and $30 million up.

Standing on a $100 million 2023 maturity ADL.

We continue to proactively manage working capital and our focus on efficiently converting net working capital into cash as quickly as possible.

Net working capital was $39 $8 million, which declined approximately 10% compared to fiscal Q3, net working capital of $44 $4 million.

Capital expenditures for calendar Q4 were approximately $3 5 million are primarily focused on maintenance spending.

Capital spending for pro forma 12 months 2021 was only $11 4 million or two 4% of revenue going forward. We expect total capex for 2022 to be in the range of $25 million to $30 million and to be approximately 80% focused on maintenance oriented spending.

We continue to have $1 $9 million of assets held for sale and current assets and are evaluating additional opportunities to further rationalize our operating footprint.

During the transition fourth quarter, we had aftermarket sales of approximately 250000 shares which yielded proceeds of approximately $1 million net of expenses.

As of December 31, 2021, our total liquidity was $74 million and our available liquidity was $60 $4 million, which was comprised of $28 million of cash on hand, and $32 $4 million in available borrowing base net of a $10 million fixed charge coverage ratio holdback.

As we've emphasized in prior calls the continued management and preservation of our liquidity as we support the continued rebound in our business remains a top priority with that I will now turn the call back to Chris.

Thanks Keefer.

I will close the call by discussing our forward outlook.

Looking at the first quarter of 2022 and full year, we believe that a constructive commodity price environment is here to stay.

Despite the current geopolitical climate amid the Russian invasion of Ukraine. It has helped drive energy prices materially higher the macro supply and demand fundamentals, we're setting up to drive material incremental activity in the U S onshore drilling and completions market before the recent turmoil. This fact combined with the fact that.

Quality assets and crews will be at a premium as the market continues to expand due to asset attrition supply chain issues and a tight labor market makes us optimistic about 2022.

We have been awarded sizable packages of activity and materially improved pricing across a range of product and service lines given.

Given the positive momentum we have built through extensive cost rationalization via synergy realization are improving customer mix and the strides we are making in R&D and technology. There is significant operating leverage in the platform today that we expect will position <unk> for material improvement as market activity.

<unk> pricing continues to move in our favor as we navigate through 2022.

2022 got off to a slow start due to seasonally slow activity in January and normal Q1 weather issues in February coupled with supply chain disruptions and AUM across Covid Orientate. However, we have settled into a considerably more active market. The Q4 2021 and are bullish.

The remainder of 2022.

As we progress through the remainder of 2022, we expect strong sequential growth and expect to generate a 35% to 45% revenue increase compared to pro forma calendar 2021.

In closing, let me once again to thank our employees customers vendors and shareholders. We are encouraged by the macro backdrop and believe <unk> is uniquely positioned to deliver superior operational performance and generate improved returns in 2022 and beyond with that we will now take your questions.

Operator.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your 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.

Thank you speaker.

<unk> equipment and may be necessary to pick up your handset before pressing the star key.

At this time it appears there are no questions in the queue I'd like to hand, the call back to management for closing remarks.

Thank you operator, we are very optimistic about the outlook for the remainder of 2022 I'd like to reiterate my appreciation to our team in the field, who continue to drive our business forward.

Thank you once again for joining us on the call today and for your interest in <unk> Energy services. We look forward to speaking to you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.