Q3 2025 KLX Energy Services Holdings Inc Earnings Call

Speaker #3: Good morning , ladies and gentlemen , and thank you for standing by . Welcome to the HCL Energy Services third quarter earnings conference call .

Speaker #3: At this time , all participants are in . Listen only mode . A question and answer session will follow the formal presentation . Should you require operator assistance during the conference , please press star zero to signal an operator .

Speaker #3: Please note, this conference is being recorded. I will now turn the conference over to your host, Ken Dennard. Thank you.

Speaker #3: You may begin .

Speaker #4: Good morning everyone . We appreciate you joining us for the Energy Services Conference call and webcast to review third quarter 2020 results . With me today are Chris Baker , President and Chief Executive Officer .

Speaker #4: And Keefer Lehner Executive Vice President and Chief Financial Officer . Following my remarks , management will provide commentary on its quarterly financial results and outlook before opening the call for your questions .

Speaker #4: There will be a replay of today's call and will be available by webcast by going to the company's website at CL . Com .

Speaker #4: I'll also be a telephonic recorded replay available until November 20th , 2025 . For more information on how to access these , replay features , go to yesterday's earnings release .

Speaker #4: Please note that information reported on this call speaks only as of today , November 6th , 2025 , and therefore you're advised that time sensitive information may no longer be accurate as the time of any replay listening or transcript reading .

Speaker #4: Also , comments on this call will contain forward looking statements within the meaning of the United States Federal securities laws . These forward looking statements reflect the current views of management .

Speaker #4: However , various risks and uncertainties and contingencies could cause actual results , performance or achievements to differ materially from those expressed in the statements made by management .

Speaker #4: 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 those risks, uncertainties, and contingencies.

Speaker #4: The comments today will 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 website .

Speaker #4: And now , with that behind me , I'd like to turn the call over to Chris Baker . Chris .

Speaker #5: Thank you . Ken , and good morning , everyone . Thank you for joining us today . The third quarter represents the strongest quarter of the year .

Speaker #5: Overcoming continued market headwinds , including commodity price volatility and a softer offs activity environment . HCL generated revenue of $167 million , up 5% from Q2 and adjusted EBITDA of $21 million , up 14% from Q2 .

Speaker #5: Ahead of our prior guidance . Adjusted EBITDA margin improved materially by 100 basis points sequentially to 13% , despite the average US land rig count declining 6% and average frac spread count being down 12% over the same time period .

Speaker #5: Our results were driven by a 29% revenue increase in our northeast Mid-con segment , which more than offset softer activity in the Rockies and Southwest segments .

Speaker #5: HCL outperformed the industry trend once again by strategically allocating its assets across our broad footprint , focusing on field execution and efficiencies , and tight cost controls .

Speaker #5: Operationally , our completion oriented product lines in the Mid-con northeast , along with a rebound in our accommodations and flowback businesses , contributed meaningfully to this quarter's top line strength .

Speaker #5: HCL is third quarter results are a testament to our team's agility , dedication , and collaboration , effectively managing white space in a difficult market , all while controlling costs .

Speaker #5: The operating environment remains challenging , shaped by Opec+ supply growth and depressed recounts across all major basins . We believe that our diversified asset base , premium customer alignment and diverse geographic footprint will continue to support consistent performance .

Speaker #5: Third quarter revenue and adjusted EBITDA per rig were 318,040 thousand , respectively . 20% and 227% above the levels from the fourth quarter of 2021 .

Speaker #5: The last time industry activity was at similar levels . This underscores the progress we've made in strengthening our competitive standing and driving operational and organizational cost efficiencies over the past several years .

Speaker #5: Simply put , HCL is significantly more efficient today than we've been in prior cycles . Now let's look at our segment results . The southwest represented 34% of Q3 revenue , down from 37% in Q2 .

Speaker #5: Northeast Mid-con was 36% , up from 29% in the prior quarter . And the Rockies was 30% , down from 34% in Q2 .

Speaker #5: The Rockies experienced reduced completion activity in our tech services . Frack rentals and coil tubing product service lines in the southwest . Weaker demand in directional drilling , flowback and rentals driven by the overall reduction in Permian activity and whitespace associated with customer M&A integration initiatives , resulted in a softer top line with revenue declining 4% , albeit still outperforming the segment's average rig count .

Speaker #5: Decline of 9% . The Northeast Mid-con segment was a standout in Q3 , with our completions oriented product lines delivering sequential growth for both revenues and margins , demonstrating our ability to capture incremental activity by basin .

Speaker #5: Focusing on crew and equipment allocation throughout the footprint . And we expect continued momentum into Q4 by in-market drilling completion and production intervention services contributed approximately 15% , 60% , and 25% of Q3 revenue , respectively .

Speaker #5: Based on current customer calendars , we expect a healthy Q4 despite typical seasonality and budget exhaustion . This reflects recent market share gains .

Speaker #5: The solid execution of our strategy and a steady focus on long term value creation , all of which positions HCL for increased activity anticipated in 2026 .

Speaker #5: I'll now turn the call over to Kiefer to review our financial results in greater detail , and I will return later to discuss our outlook .

Speaker #5: Kiefer .

Speaker #6: Thanks , Chris . Good morning everyone . As Chris mentioned , Q3 2025 revenue was $167 million , a 5% sequential increase , but 12% lower than Q3 2020 .

Speaker #6: Four . Average rig count was down 6% over this period , and frac spread count was down 12% over the same period . Our Q3 sequential results were driven largely by strong growth in the northeast segment , which saw a 20% 29% quarter over quarter .

Speaker #6: Top line increase . The outperformance was complemented by disciplined management of fixed costs , resulting in consolidated adjusted EBITDA margin expansion to 12.7% from 11.6% in Q2 , and was in line with last quarter's guidance and approaching Q3 2024 .

Speaker #6: Margin levels of 15% . Despite a market environment measured by rig count , that is down 7% over the same period . Total G&A expense for the quarter was $15.6 million , excluding non-recurring items , adjusted SG&A expense came to $14.8 million , representing a 30% reduction from the same period last year and an 18% improvement sequentially .

Speaker #6: These reductions reflect the full impact of the cost structure initiatives implemented in 2024 , supported by incremental efficiency gains realized throughout 2025 . Reduced third party spend and settlement of a legal claim .

Speaker #6: Looking ahead , adjusted SG&A is expected to remain in the 9% to 10% of revenue range for the year . Moving to our segment results .

Speaker #6: The Rocky segment had Q3 revenue of $50.8 million and adjusted EBITDA of $8.1 million . Sequential revenue and adjusted EBITDA decreased 6% and 22% , respectively , mainly due to a slowdown in completions activity due to discrete customer scheduling , particularly in tech services .

Speaker #6: Frac rental and coil tubing . As we move into Q4 , we've seen some choppiness to customer schedules and expect typical holiday slowdowns in the southwest segment .

Speaker #6: Revenue and adjusted EBITDA were $56.6 million and $5.1 million , respectively . On a quarterly basis , Q3 revenue decreased 4% sequentially , with EBITDA down 29% .

Speaker #6: As expected , given the 9% decline in southwest rig count and 18% decline in permanent frac spread count . The Southwest experienced lower activity across directional drilling , flowback and rentals , which drove a corresponding downward pressure on margins during the period for the northeast , Mid-con segment , revenue was $59.3 million and adjusted EBITDA was $14.5 million .

Speaker #6: The sequential increases in revenue of 29% and adjusted EBITDA of 101% were largely driven by higher utilization across our completions portfolio , reduced whitespace in our calendar , and targeted expense management across our various cells operating within this segment .

Speaker #6: At corporate , our operating loss and adjusted EBITDA loss for Q3 were $8 million and $6.6 million , respectively . With our operating loss improving 11% from last quarter and our adjusted EBITDA loss was within $300,000 of Q2 2025 .

Speaker #6: Turning to our balance sheet cash flow and capitalization , we ended the third quarter with approximately $65 million in liquidity , in line with Q2 , including $8.3 million of cash and cash equivalents and $56.9 million of availability on our revolving credit facility , which includes $5.3 million on an undrawn Philo facility .

Speaker #6: Total debt as of September 30th was $259.2 million , including $219.2 million in notes and $40 million in ABL borrowings , and is also largely in line with Q2 levels .

Speaker #6: We remain in compliance with our debt covenants , our bonds require a 2% annual mandatory redemption paid quarterly . We've continued to make these payments , but we did pick $6 million of interest in Q3 , and we will evaluate future pick versus cash decisions based on market conditions and company leverage and liquidity .

Speaker #6: It's worth noting that our most recent pick election was 100% cash paid interest . Moving to working capital as of September 30th , we had $50.1 million of net working capital , and our DSO held steady at a normalized level of 61 days .

Speaker #6: And our Days Payable Outstanding (DPO) increased slightly to approximately 50 days, both roughly in line with long-term historical averages. We remain focused on disciplined and proactive management of working capital to ensure flexibility and resilience in the current market environment.

Speaker #6: Our capital expenditures for the quarter were $12 million and $7.8 million , net of asset sales , down 6% from Q2 , and we expect a further decline in Q4 in line with our focus on further capital efficiency .

Speaker #6: Year to date capital spending trends suggest a full year gross CapEx of 43 to $48 million , with net CapEx of 30 to $35 million .

Speaker #6: When you include asset sales as activity declined , headcount was reduced approximately 2% sequentially , supporting overhead control and increased operating leverage . Also , we completed the sale of facility in Q3 and expect additional asset sales to close in Q4 .

Speaker #6: We continue to monitor and respond to asset performance and our finance leases are beginning to transition . As older vehicles roll off in Q4 , contributing to increased operational agility in into 2026 .

Speaker #6: And our portfolio of finance leased coiled tubing units will be owned outright in late 2026 , which will drive a meaningful improvement in free cash flow profile .

Speaker #6: Going forward . I'll now hand the call back to Chris for his concluding remarks and more color on our outlook .

Speaker #5: Thanks , Kiefer . While the broader market conditions remain mixed and near-term visibility is limited , we are encouraged by recent signs of stabilization in rig activity and the emergence of sustained and incremental activity in the natural gas basins .

Speaker #5: We continue to emphasize operational discipline , margin optimization , and proactive capital stewardship sustained by close coordination across our operating regions to weather current market volatility with improved overhead efficiency , a disciplined cost structure , and a flexible balance sheet .

Speaker #5: We are confident in our ability to navigate the remainder of 2025 successfully and capture upside as the market strengthens . As we look ahead , we anticipate typical budget exhaustion to moderate activity through the fourth quarter , yielding a mid-single digit revenue decline from Q3 to Q4 .

Speaker #5: This signals a less pronounced Q4 reduction than in years past . Importantly , we expect continued stable adjusted EBITDA margins , aided by ongoing cost discipline , year end accrual dynamics , vehicle turnover and regional activity mix .

Speaker #5: Our fourth quarter guidance reflects steady demand across our core product service lines , supported by new project awards from key accounts . Operationally , our diversified portfolio , prudent capital discipline and proven operating leverage continue seasonality and drive strong execution , helping to offset macro volatility in commodity noise .

Speaker #5: In addition , KL stands to benefit as natural gas demand accelerates , underpinned by new LNG export capacity and increased data center activity .

Speaker #5: On a quarter over quarter basis , dry gas revenue rose 15% . Building on the 25% increase we saw in Q2 . Haynesville activity rebounded by six rigs in Q3 , and we continue to monitor demand across the board with close to 11 BCF per day of new LNG export projects scheduled to come online over the next five years , including key capacity additions along the Gulf Coast , the US is well positioned to strengthen its role as a global energy supplier .

Speaker #5: Our internal planning highlights continued relative stability in completion focused service lines , along with a modest Q4 bounce in drilling activity combined with incremental benefits from strategic cost controls already underway .

Speaker #5: These strengths reinforce our confidence in delivering profitable growth in 2026 . Our strategic capital stewardship ensures we remain ready for both measured top line expansion and sustained margin strength .

Speaker #5: In summary , unused fleet capacity and minimal white space have allowed us to adapt operations efficiently and support margin expansion even in periods of softer activity .

Speaker #5: KL is now better situated from an overhead efficiency standpoint than at any time in our post history , empowering us to strategically capitalize on future opportunities .

Speaker #5: KL has significant operating leverage to a rebound in market activity , and similar to prior cycles , we will ensure we are best positioned from a personnel asset and technology standpoint to maximize our upside in future periods .

Speaker #5: We appreciate the ongoing dedication and commitment of our team members . The partnership of our customers , and the support of our stakeholders .

Speaker #5: Empowering us to deliver value and drive forward . With that , we will now take your questions . Operator . .

Speaker #3: Thank you . At this time , we will be conducting a question and answer session . If you'd like to ask a question , please press star one on your telephone keypad .

Speaker #3: Confirmation tone will indicate your line is in the question queue . Do you wish to remove your question from the queue ? Please press star two .

Speaker #3: Our first question is from Steve Ferazani with Sidoti and company .

Speaker #7: Good morning Chris . Morning , Keefe . Appreciate all the detail on the call .

Speaker #5: Good morning Steve .

Speaker #6: Steve .

Speaker #7: Gotta start with the northeast Mid-con , which , you know , we expected it to trend higher for you . But those numbers were way past our expectations that your northeast mid-con margin was the highest .

Speaker #7: It's been in three years . And three years ago , natural gas prices were over eight bucks . Can you can you indicate the performance because it's impressive ?

Speaker #5: No . Look , I appreciate that . Our northeast , you know , if you really dig into it , our northeast business within the northeast Mid-con remain relatively stable , predominantly driven by rentals and fishing .

Speaker #5: You dig into the Haynesville , we were able to . Capture revenue increases in accommodations and flowback . Specifically . And , you know , I think perhaps most importantly , we saw less white space overall in our mid-con PSL .

Speaker #5: And so when you think about the positive operating leverage of just being base loaded , you see a lot of margin expansion . And so I wish we were back in a market where , you know , we were at $8 gas price .

Speaker #5: We're not I don't expect to go there anytime soon . I do think a macro theme , though , is as a whole is just more efficient today than we were in the period you referenced .

Speaker #5: And I think that's shined through in our North Mid-con performance .

Speaker #7: Is it also fair to say you're gaining market share?

Speaker #5: Well , look , I think rig count was up , what , six rigs quarter over quarter on average in the Haynesville . So you can think about that on a percentage basis where once again , we drove quarter over quarter revenue just from a dry gas perspective of 15% , 25% in the prior quarter .

Speaker #5: If you recall , our Q2 discussion . And so I think within certain product lines , yes , we've gained market share .

Speaker #7: And then flipping to the other side, which was the Rockies, we know the drilling and completions are trending down. But you did outperform our estimates.

Speaker #7: Was there anything specific going on in that market in the three ? Q beyond the the general macro ?

Speaker #5: No , I think specific in nature . Look , recount to your point , was really flat in the Rockies quarter over quarter .

Speaker #5: There were puts and takes in the various basins within the Rockies . But overall , Rockies was generally flat . However , what we did see was some very episodic completion programs with an overall decline in kind of refrac activity .

Speaker #5: And we saw a lot of refrac activity in 23 and continuing into parts of 24 . And so I think the episodic nature of those completion programs is , you know , back to the point with the Mid-con , it really highlights the negative operating leverage when your cost structure is relatively fixed in the short term and a current market pricing levels .

Speaker #5: And so when you get a last minute delay in a completion program that pushes revenue out of the schedule , or maybe out for a month , it's really hard to adjust your cost structure in the short term .

Speaker #5: And so the negative operating leverage , you know , really impacts margin .

Speaker #7: That's helpful . Thanks . When you're indicating the slower year end slowdown , you're certainly not the first company to say that during earnings season , what is it you're hearing from operators .

Speaker #7: And how does that make us think about next year when obviously a lot of folks are concerned about oil oversupply and pressure on WTI ?

Speaker #5: Yes , I think there's there's really two questions there . First , Q4 , you know , we stated a mid-single digit revenue decline on a on a percentage basis .

Speaker #5: That's materially below the 13% quarter over quarter decline we saw last year . The the declines largely going to be driven by holiday slowdowns .

Speaker #5: I think less pronounced budget exhaustion versus prior periods . I would note that on a monthly basis , our October revenue was flat to September .

Speaker #5: Whereas if you look at 2024 , we saw a 7% decline . October versus September in the same period . And so we're already off to kind of on a relative basis , a better start on the margin side , we expect margins to hold up despite declining revenue really just due to cost controls .

Speaker #5: We've got our typical Q4 accrual unwinds relative to PTO and and other accruals . And , you know , we also talked about the fleet turnover in our prepared remarks that typically occurs in Q4 .

Speaker #5: And so that's how we're set up on Q4 . As we sit here today .

Speaker #7: Okay . And then and then thoughts ? Good .

Speaker #5: Yeah . I was going to say on next year , look , it's still too early to give firm guidance from a 2026 perspective .

Speaker #5: We've seen , you know , puts and takes with operators saying their CapEx budget for next year is going to be flat , flat to slightly down .

Speaker #5: I think we're set up where the gas market is going to be very consistent and everybody's projecting a full year over year increase in activity .

Speaker #5: And we would expect that to hold true for us . We continue to see consolidation . We saw a major consolidation transaction earlier this week .

Speaker #5: We know these transactions can lead to episodic white space and growing pains . As you know , they integrate their portfolios . Net net we are typically the beneficiaries as we've talked about before , of consolidation .

Speaker #5: But it still can create some some puts and takes . I will say we've received some recent wins from an RFQ perspective on the award front , which we think are supportive of both Q1 and 2026 overall .

Speaker #5: And then lastly , I think to the last part of your question , you know , the EIA just posted a report earlier this week saying I think it was on Tuesday saying we're going to have to ramp up us activity to sustain US crude production .

Speaker #5: And so it's it's very circular . I think it's a if and when , but when production declines , take over . That is supportive of commodity prices and higher commodity prices is supportive of activity .

Speaker #5: And so it feels like it's a question of when , not if activity rebounds in the oil basins . You know , I think there's some optimism building around the second half of 26 into 27 .

Speaker #5: We'll just have to see how it plays out .

Speaker #7: Fair enough . That's very helpful . Thanks , Chris . I do want to touch on the balance sheet 65 million in liquid available liquidity for Q tends to be a strong cash flow quarter .

Speaker #7: But then Q1 is the , you know , working capital builds again , more dramatically . I'm just trying to think about your flexibility .

Speaker #7: You haven't used the pick option yet . You have that at your disposal , which can help , you know , depending on , you know , how the first part of next year plays out .

Speaker #7: Generally speaking , and you've been selling some equipment . I think you talked about some facility sales . Can you just give us a general overview about and you've done a great job trying to protect the balance sheet during this downturn .

Speaker #7: Just generally how you're thinking about that without knowing exactly how activity plays out . You know , first part of next year .

Speaker #6: Yeah . Good . Good question . And lots of moving pieces obviously in there from a free cash flow perspective . You know , first on the pick .

Speaker #6: So we did pick a portion of our our Q3 interest . We picked about $6 million of interest in the third quarter . But in the prepared remarks we did say that our most recent , our cash pick election that we submitted last week , we did do a 100% cash pay .

Speaker #6: There , but we will continue to evaluate pick versus cash decisions , you know , through the lens of managing the balance sheet from a leverage and liquidity standpoint .

Speaker #6: So nothing's going to change . There as it relates to to free cash flow . You're spot on . That Q4 is is typically a strong free cash flow quarter for us .

Speaker #6: You know , we had 11 million or so of Unlevered free cash flow in Q3 . We did guide Q4 down . You know , on a mid digit percentage basis .

Speaker #6: With that said , working capital should unwind , given that decline , Q4 does not also have the extra payroll that we have in the third quarter .

Speaker #6: So those two things combined should should lead to improved free cash flow generation in the quarter , largely due to working capital trends .

Speaker #6: DSO has been holding in pretty consistently around 6061 days . I would expect that to hold going forward on the DPO side , we've been kind of trending in the low 50s again .

Speaker #6: I would expect that to hold going forward . As you think about CapEx , and it's , you know , impact on free cash flow , we're , you know , guiding to a much lower kind of minimal net CapEx spend in Q4 , obviously , kind of growth spending will be down , but that will be offset by some of the asset sales that that we mentioned .

Speaker #6: And you alluded to in your question . So I think all those things combined to Q4 being , you know , a strong quarter .

Speaker #6: And that's why we continue to reiterate that we expect liquidity to continue improve as we navigate the remainder of this year . As you turn into 2026 , I think the quarterly trends there , as you point out , we'll continue to play out to some extent .

Speaker #6: I will say that I expect Q1 2026 to to be less burdensome from a working capital investment standpoint compared to the 24 to 25 transition .

Speaker #6: Just given what we know today .

Speaker #7: Excellent . Really helpful . Very well , very well . Thank you . Thanks , Chris . Thanks , Kiefer .

Speaker #5: Thanks , Steve . Appreciate it .

Speaker #3: Ladies and gentlemen , we have reached the end of the question and answer session . I would like to turn the call back to Chris Baker for closing remarks .

Speaker #5: Thank you . Operator . Thank you once again for joining us on the call today and your continued interest in CLL . We look forward to speaking with you again next quarter .