Q2 2022 KLX Energy Services Holdings Inc Earnings Call
Greetings and welcome to the Calix Energy services second quarter earnings Conference call.
A brief question answer session will follow the formal presentation.
If anyone should your car I've heard assistance during the conference. Please press star zero from your telephone keypad.
This conference is being recorded.
It's now my pleasure to introduce your host Ken Dennard Investor Relations.
Ken you may now begin.
Thank you operator, and good morning, everyone. We appreciate you joining us for Calix Energy services conference call and webcast to review second quarter 2022 results.
With me today are Chris 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 second quarter and outlook before opening the call for your questions.
There will be a replay of today's call it'll be available by webcast on the company's website at Calix energy Dot com.
Also be a telephonic recorded replay available until August 26, 2022 more information on how to access. These replay features were included in yesterday's earnings release.
Please note that information reported on this call speaks only as of today August 12, 2022, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
Also comments on this call 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 and uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the state 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.
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 <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, we are very excited to discuss our Q2 results, which exceeded the top end of our prior guidance for both revenue and more importantly, adjusted EBITDA margin as well as our go forward outlook.
The broader macro backdrop for <unk> services continued to experience strong demand despite somewhat volatile commodity prices.
Average U S rig count was up approximately 13% during the quarter Frac spread count was up 4% sequentially crude prices averaged over $108 per barrel and natural gas averaged $7 50 per btu.
Additionally, supply chain and qualified personnel constraints continues to support improved pricing.
Fundamental industry backdrop remained strong and certainly feels like we're at the very beginning of a multiyear Oss upcycle.
During the second quarter, <unk> generated $184 $4 million in revenue up 21% sequentially from $152 3 million in Q1.
Which was above the top end of our prior guidance.
<unk>, we generated Q2, adjusted EBITDA of $17 4 million.
Increasing $12 $5 million sequentially, our 255%.
Adjusted EBITDA margin increased to nine 4% from three 2% sequentially are approximately three times higher than Q1, which was also above the top end of our prior guidance.
We continue to benefit from significant operating leverage driven by the 2020 merger with QTS and the associated synergies, but we also experienced higher utilization and more importantly significantly improved pricing across all product and service lines in the second quarter.
In fact, I am proud to say that both revenue and margin increased in every single product line quarter over quarter, except for one.
We continue to experience extremely high utilization across our drilling completion production and intervention businesses due to strong demand for our equipment and services.
Directional drilling charge days were up 15% versus a rig count increase of approximately 13%.
<unk> activity was up 15% accommodations rental days were up 9% and I would add we remain largely sold out in that business line wireline revenue days were up 25%.
Salt were up 55% pressure pumping stages were up 32%.
Rental days were up 19% and tubing rental days were up 29%.
The depth of our product service offerings supports our ability to cross sell and leverage revenue synergy opportunities.
Meanwhile, we continue to have additional asset capacity across several service lines, including coil tubing, frac rentals and wireline to support expanded customer activity and new customers reduce white space, along with improved pricing drove materially improved <unk> results.
Given the supply and demand fundamentals and the Oss industry and demand for <unk> highly qualified personnel and execution in the field. We are in the fortunate position to be able to leverage the value of the <unk> brand across the board.
The labor market remains tight and the reality of the market is increased pricing is required to generate sufficient margins to support the equipment demands required to deliver the efficiencies that U S shale operators have come to expect.
Q2 pricing improved meaningfully across all product service lines, when compared to Q1, increasing from the high single to low double digit percentages sequentially.
While margins are above 2019 levels in some product lines, we have not yet returned to historical 2019 levels and aggregate.
We continue to accelerate the pace of pricing improvements during Q2 and expect another leg up across our service portfolio during Q3.
I will provide additional outlook later in my prepared remarks, however, as we telegraphed on our last call. The prior monthly revenue record did not last long and we continue to see meaningful monthly improvements exiting the second quarter on an upper $700 million revenue run rate with adjusted EBITDA margins.
Trending towards the low double digits.
With that I'll now turn the call over to Keefer, who will review our financial results and I'll return later in the call to discuss our outlook in greater detail keeper.
Thank you Chris good morning, everyone.
I will begin this morning by discussing our second quarter 2022 consolidated results, where we experienced broad based improvement in our revenue and margins across all geos segments and product service lines.
For the second quarter revenues were $184 $4 million, an increase of $32 $1 million or 21% as compared to the first quarter.
Revenue growth was driven by broad increases in our drilling completion production and.
And intervention activity and pricing across the majority of our core geographic markets.
On a product line basis drilling completion production and intervention products and services contributed approximately 28%, 50%, 12% and 10% to revenue respectively for the second quarter of 2022.
These relative contributions are largely unchanged from Q1, and we saw our largest sequential revenue increases in pressure pumping coil tubing directional drilling wireline rentals and accommodations.
Adjusted operating income for the second quarter was $2 $6 million. This is the first positive quarterly result on the adjusted operating income line since Q2 of 2019.
Adjusted EBITDA and adjusted EBITDA margin were $17 4 million and nine 4% respectively.
Adjusted operating income and adjusted EBITDA improved sequentially by $12, 1 million and $12 $5 million or 127% and 255% respectively.
We generated a very strong 39% incremental margin from Q1 to Q2.
Note, we continue to be burdened by $2 $1 million of quarterly lease expense related to leased coiled tubing packages, we do not add this cost back, but it does impact comparability to our peer results.
Total SG&A expense for Q2 was approximately $18 million, which equates to roughly nine 8%.
Q2 revenue.
If you back out nonrecurring G&A expense, we are really at eight 6% of revenue.
As we've discussed on prior calls post the <unk> merger integration Calix now has one of the most efficient fixed cost structures and the Oss industry and we believe we can continue to scale from current levels with minimal fixed cost G&A additions.
Turning now to a review of our segment results, let me begin with the Rockies.
The Rockies segment second quarter revenue of $53 $1 million increased by $9 $8 million or 23% as compared with the first quarter.
The sequential increase in revenue was primarily driven by an increase in activity and pricing throughout the D J basin, Wyoming and Bakken.
Primarily across our coiled tubing directional drilling rentals fishing and wireline offerings.
Adjusted operating margin for the second quarter was $4 1 million as compared with the adjusted operating loss of $700000 for the first quarter.
Adjusted EBITDA was $9 $3 million as compared to first quarter, adjusted EBITDA of $4 $7 million.
The increase in profitability was driven by the previously mentioned increase in activity and pricing across the bulk of our product service lines with rentals downhole products and directional drilling leading the way.
Moving now to our southwest segment.
The segment increased its revenue by 16% sequentially as compared to the first quarter generating revenue of $60 million in Q2. The increase in revenue was primarily driven by increased activity and pricing across the majority of our product service lines with directional drilling coiled tubing and wireline experiencing.
The largest increases.
Q2, adjusted operating income for this segment was $1 8 million.
Compared to first quarter adjusted operating loss of $300000 in adjusted EBITDA was $6 4 million for the second quarter compared to first quarter adjusted EBITDA of $4 $2 million.
The increase in profitability was driven by the previously mentioned increases in activity and pricing across our various product service lines, but led by strong margin expansion across directional drilling coiled tubing wireline and Frac rentals.
Now to wrap up the segment discussion with the northeast and mid Con.
Q2 revenue was up $14 2 million sequentially to $71 $3 million.
The increase in revenue was primarily driven by sequential improvement again in both activity and pricing across pressure pumping rentals coil tubing and accommodations across the region.
Adjusted operating income for the second quarter was $7 4 million as compared with adjusted operating loss of $700000 in the first quarter.
Adjusted EBITDA was $11 $1 million in the second quarter as compared to first quarter adjusted EBITDA of $2 $7 million.
The increase in profitability was driven by the previously mentioned increase in activity and pricing led by meaningful margin expansion across the same product service lines.
I'll now turn to our balance sheet and cash flow.
Our Q2 cash balance increased by $12 1 million to $31 $5 million when compared to Q1.
The increase in cash was largely driven by $20 million of additional borrowings on our ABL facility as well as $5 3 million and share sales under our ATM program and continued monetization of $3 $9 million in obsolete assets and noncore real property.
Offset by $14 $4 million of semiannual interest paid in early may.
We continue to proactively manage working capital and convert cash flow as quickly as possible.
Net working capital was $51 $3 million in Q2 up 12% compared to Q1 net working capital of $45 9 million. The increase in net working capital was largely driven by the 21% increase in revenue, but we were able to negate some of the investment by reducing DSO.
By 4% to approximately 60 days as of Q2 at the same time modestly increasing our days payable outstanding.
Capital expenditures for the second quarter were approximately $7 $8 million and were primarily focused on maintenance spending across our segments.
Going forward, we continue to expect total capex for 2022 to be in the range of $25 million to $30 million and to be approximately 80% focused on maintenance spending.
With that said supply chain issues have slowed deliveries of capex items, so far in the first half of 2022.
But we hope this trend will improve as we navigate through the remainder of 2022.
As of June 30, we had $6 $3 million of assets held for sale related primarily to the sale of real property in the Rockies and southwest segments.
We are continuing to work through options to monetize those facilities in the near term and based on current status, we expect to close $1 $5 million in Q3, and $2 $4 million of sales in Q4.
Total liquidity as of June 30 was $70 $7 million and our available liquidity was $56 $6 million, which is comprised.
Rise of $31 $5 million in cash and $25 1 million and borrowing availability on the June 30 borrowing base certificate net of a $14 1 million dollar fixed charge coverage ratio holdback.
Okay.
Debt outstanding as of Q2 was $250 million.
And 2025 maturity senior secured notes and $50 million drawn on our $100 million ABL facility that matures in the fall of 'twenty three.
Given expectations around cash generation in the second half, we believe we may be able to reduce our borrowings under the ABL facility.
As we navigate the remainder of 2022.
And given that our ABL facility matures in the fall of 2023, we are in advanced discussions with lenders around various refinance options, including an amend and extend.
As we have emphasized on prior calls the continued management and preservation of liquidity as we support the continued rebound in our underlying business remains top priority.
We remain focused on positioning the company to generate positive levered free cash flow and believe we are close to achieving this goal as we look out to the second half of 2022.
Based on current calendars and pricing trends, we are excited about our outlook for the back half of the year and into 2023.
I'll now turn the call back to Chris who will provide some additional color on our outlook.
Thanks, Keefer before we wrap up I'd like to share some more detail on our outlook and expectations for Q3, and the remainder of 2022.
With operating efficiencies in mind customers are choosing to work with the most experienced and reliable crews and equipment further drilling and completion and production programs.
The tight labor market continues to be a net benefit for <unk> as it continues to be the primary catalyst for further improves pricing.
Plus <unk> is able to attract employees and cruise given our strong reputation the latest generation equipment and technology and longstanding relationships with top operators.
Our pricing strategy and higher utilization should further reduce white space through the remainder of 2022, we continue to evaluate opportunities and have seen success in cross selling and pulling through multiple <unk> product lines across the vast number of wells that we touch.
We will continue to review opportunities from both a pricing and returns perspective by prioritizing the deployment of assets to customers and basins that maximize free cash flow generation.
By deploying our assets in the most profitable basins, we can leverage our operational expertise with improving market dynamics amid a volatile commodity backdrop.
Looking ahead, we are extremely bullish about Q3 in the second half of 2022.
We exited June on a strong run rate and expect to benefit from a favorable macro backdrop with net pricing improvements and are very confident that we will continue to grow our top line and drive margin expansion in Q3 and into 2023.
We expect sequential third quarter revenue growth between 9% and 13% in Q3, adjusted EBITDA margins to be in the range of 10% to 12%.
We are also increasing our full year revenue guidance to a range of $730 million to $750 million and based on the current trajectory and expected result believe we may return to positive free cash flow by year end.
In closing we are very excited about the future for <unk>.
And most importantly, I want to thank our team for delivering superior operational performance in the second quarter.
Eliminating white space and maximizing utilization to drive financial results doesn't come without personal sacrifice and tremendous coordination and planning to maximize revenue and margin opportunities by every single <unk> team member.
<unk> team executed exceptionally well in the second quarter. We believe we are well on our way back to pre pandemic activity and margin levels and <unk> is uniquely positioned to benefit from the current up cycle and deliver improved results in the second half of 2022 and beyond.
With that we will now take your questions operator.
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Thank you and our first question is from the line of John Daniel with Daniel LNG Partners. Please proceed with your questions.
Hey, good morning, guys.
Chris Hey, good morning.
Thanks for putting me on in your prepared remarks, you talked about some of the segments with idle capacity that could still be deployed could you go through that again I missed that and then just elaborate a little bit on what's out there.
Yes, sure look we did not excuse me, we did not give unit counts and that capacity, but I think.
We're trying to provide the market with more transparency on our product lines that are really driving the results right and I think we did a good job of that talking about where assets and day count was up as we think about incremental unit capacity, it's really as you well know the coiled tubing space the wireline space and then.
On our Frac valve rental business, we have assets that are either undergoing refurbishment.
Refurbishment are prepared to be deployed if the market warrants in certain basins and if customers have demand.
We're seeing incremental utilization and we definitely saw improved results materially in Q2 for all of those businesses.
We are evaluating the market before we deploy additional assets.
Okay Fair.
Fair enough because I was doing the monkey math looking at the revenue guidance.
Year to date.
I said this in my head, so I could be wrong here, it sounds driving but I had somewhere in Q4, the implied revenue in that $240 million ish range.
Doing the math.
I'm not mistaken that and so therefore.
That will be up quarter over quarter normally there is some seasonality you guys or have exposure into hot weather prone areas.
It was really good and so any color there.
How do you get there from Q4 versus Q3, if my math is right.
It's the way our contracts.
Yes. So look we did not guide on Q4, yet we're still evaluating to your point seasonality, we brought up last quarter Theres always the potential for fourth quarter budget exhaustion, we're not seeing or hearing that from our clients and in fact, we're actually seeing the opposite we're seeing a lot of RF queues for especially on the smaller operators.
Syed for incremental fourth quarter activity.
Yes, the revenue guide.
Effectively 9% to 13% up quarter over quarter for Q3.
If youre extrapolating further into Q4 potentially you get there I think if seasonality hits it.
That's still TBD at this point in time.
Okay.
I.
I guess the last one.
Most of the companies that have reported strictly on the drilling side talked about the inquiries for.
2023.
Incremental equipment from customers.
Big picture of what customers are asking you if you prep for 'twenty three any color would be appreciated.
Yes, so look we've heard about that I think more on the drilling and the completion side, specifically within Frac, where you typically see contracted service lines right.
We are in the initial throes of talking to customers on RF Skus for wireline and others completion type services, the frac rental business et cetera.
But we're definitely having conversations with customers where they are starting to talk about programs that kicked off at the end of this year and are going to run flat out through next year as.
As you well know, it's well before budget.
Season for our E&P clients and so theyre all initial conversations right.
Okay, well, that's all I had thank you for taking my questions.
Not a problem I appreciate it John Thanks, John .
Keefer, we've received a number of email questions for people that.
We're going to be on the call or typically don't ask questions out loud on the call, but the first one was related to M&A and it says looks like Ofa Oss consolidation has picked back up with recent transactions in coiled tubing and directional drilling.
How are you thinking about the M&A landscape for services and how does <unk> fit into the equation.
Yeah appreciate it Ken I'll jump in here.
So we saw a few deals get done in Q2 and early Q3 in both coil and directional drilling.
Candidly, it's nice to see non distressed deals getting done as consolidation as we talked about previously is desperately needed in this space our customers have done a fantastic job of consolidating the industry.
Specialty in the Rockies in the Marcellus, but the service sector candidly is not kept.
Pace.
So we think that consolidation is needed.
Candidly, we think it improves our marketplace, whether we're a participant in that consolidation similar to the recent deals.
Are not it's not just going to improve the marketplace for the target or the acquirer. So we think <unk> is well positioned to continue to participate in consolidation and we think our improved financial results and long history of successfully integrating acquisitions and growing through consolidation proves out that strategy.
Thanks.
The next question came regarding ESG and wanted to know what steps or calix.
To address the ESG and climate change in the field and strategically.
Yeah. Appreciate it Ken I mean look we've we've evaluated a number of opportunities on the ESG front.
Our history, including carbon sequestration methane containment and how our assets might be able to participate in some of those markets as well as looking at drilling geothermal wells, what I would say our primary focus on the ESG front today is really the continuation of electrifying various components of our fleet, where that makes sense via conversion.
Or otherwise and so we've talked about in the past, but at this point in time, we've got two electric hybrid wireline units. We're currently undergoing conversions for two additional unit, we've actually converted one of our units in one of our snubbing units to electric electric hybrid units and we're adding electric trucks to our fleet.
As available where appropriate so.
We've had conversations with a couple of specific customers in one basin that we'd like to have a fully electric KLM spread on the footprint in the very near future.
Additionally, we just commercialized our gen III dissolvable plug and have numerous other initiatives in R&D that will assist with our ESG goals along the way.
So from a regulatory and compliance standpoint were working to stay ahead of all the regulatory bodies in order to make sure that we collect analyze all the required data for <unk> and our customers but.
But we expect to know more of formal reporting requirements. Later this year early next year. Thank you.
The key for this one is probably coming to us and the next question here about credit was given the significant improvement in EBITDA. How are you thinking through options with the balance sheet for both the ABL and the notes.
Yes, Thanks, Ken.
If you look at June 30 balance sheet and borrowing base certificate, we exited Q2 with gross availability of about $71 million.
If you back out.
The structural holdback related to our fixed charge coverage ratio.
Thats, a springing covenant in the ABL Doc that hold back was $14 million you get to about $57 million of available liquidity as of the end of the second quarter.
Regarding that ABL facility. It does mature in the fall of next year. So.
So we continue to advance options with lenders in order to address that maturity prior to the facility going current.
Including an amend and extend option.
On the node side of your question.
The notes don't mature until the fall of 2025.
And based on our run rate Q2 results. We're now below four times net leverage ratio.
We didn't explicitly guide Q3, adjusted EBITDA guidance, but we did forecast <unk>.
Rental revenue growth as well as an uptick in margins.
To be 10% to 12% in the third quarter, which would imply that on a run rate basis, our net leverage ratio should continue to improve going forward.
So I think with that said, we're rapidly approaching a much more normalized credit profile certainly on a run rate basis today.
And then lastly.
In addition to just the continued improvement in our underlying business and our financial results.
We continue to have optionality.
And opportunities to augment our credit profile.
Liquidity position and then just from a strategic positioning perspective as well.
Utilizing both our ATM program as well as the planned asset sales that Chris mentioned during the prepared remarks.
Thanks.
Speaking of margins next question says.
Peers, you've extreme excuse me. It appears you experienced very strong sequential margin.
From Q1 to Q2, how do you think about operating leverage and margins going forward.
Yeah, So Ken I will jump in the gross keefer can add as necessary I think.
To put things in perspective rig count averaged 7% or four rigs during Q2, we generated.
Annualized adjusted EBITDA of about $70 million at a nine plus percent margin. The last time rig count was at this level for a quarter was actually Q1 of 2020 and at that point, we were generating annualized EBITDA of approximately $16 million at a 3% margin for that period. So I think the burner.
<unk> fixed cost reductions that we've seen associated with the merger are permanent they're real and it should be readily apparent I think win.
Reader or somebody is doing the math comparing our current performance to historical I would say the delay in drag in realizing some of that candidly has been similar to many of our peers as you unstack assets off the fence line et cetera, R&M expenses increased.
And some of that takes a little while to normalize until you reach a certain revenue scale and consistent utilization and so we saw some of that normalized I would say in Q2, and so we've got a tremendous amount of operating leverage in the business, we continue to push price as well as deploy redeploy existing assets as the market.
Warrants from an ROIC perspective.
Revenue was up about 21% however.
However, head count was up in the low single digits. So we're a very labor intensive business. So as you think about effective crew utilization and how we pushed price significantly over the same time, that's really the driver of the margin. So we've always been laser focused on crew utilization as opposed to kind of focusing on asset utilization.
And we focus on allocating assets to customers, where they are going to maintain utilization for 24 days alone and so what you end up seeing is a small change in crew utilization as a very material impact on margin.
I guess the last thing I would add to that is yes.
I'll just remind you if you think about 2019 pro forma EBITDA, including the synergies from the <unk> deal that would have been in excess of $150 million. So there is still significant room to run to get back to 2019 levels and we're clearly a much leaner and efficient organization is key for pointed out in his prepared remarks around SG&A.
So if we were operating in that 2019 market today, we would likely outperform the.
The legacy <unk> business.
Thanks, Chris.
Thank you.
We have a follow up question coming from the line of John Daniel Daniel Energy Partners. Please proceed with your question.
Hey, guys. Thanks for putting me back in and sorry about my math must I caught my math there earlier Chris.
Chris a question for you on the <unk>.
And then smaller basins that we never really hear about anymore, but given where commodity prices are.
Places like the Barnett, San Juan Basin, Utah.
Thing that Youre seeing that would lead you to believe there might be a step change in activity into next year.
And Andrew question reposition assets near if Youre not there.
Yes look so I guess two things one no probable the math and like I said before we haven't given Q4 guidance.
I assumed you were doing some extrapolation and exponential math, so not a problem.
Look I think we're a very diversified completion drilling completion production intervention company as you well know and we talked about on our last call that we are redeploying assets and it's taken a little while through the integration process.
In certain business lines like flow back and Frac rentals, we really tried to get scale within certain basins.
In other business lines like rentals, and fishing wireline PNA et cetera. Every one of the basins. You mentioned we are active in.
Look let's be honest Henry hub is really supported the incremental activity and so I don't know.
Project, what happens to natural gas next year, but I would say is we've seen natty hold in north of $5, let alone <unk> been sitting in the last couple of weeks in the seven to $8 range.
Those operators in the smaller basins have definitely become active.
And we're trying to take advantage of deploying assets into that those spaces.
Okay, great. Thank you very much.
Yes, Sir I appreciate it John Thanks, John .
It looks like we're coming to the end of the call I just wanted to let the listener or reader know that management will be at Barclays in it.
C Wainwright in September so sign up in.
You see them in person up at those conferences and then for final comments in closing the call Chris taken away. Yes. Thank you Ken. Thank you once again for joining us on our call today and your interest in <unk> Energy services, we look forward to speaking to you again next quarter.
Thank you ladies and gentlemen, thank you for your participation. This does conclude today's teleconference.
Your lines at this time and have a wonderful day.