Executive Summary / Key Takeaways

• KLX Energy Services is strategically positioned as a diversified provider of specialized oilfield services in key U.S. onshore basins, leveraging proprietary technology and a regional footprint to serve blue-chip customers across the well lifecycle.
• The company recently completed a significant refinancing, extending debt maturities to 2030 and enhancing financial flexibility through a new ABL facility and a PIK option on its notes, crucial for navigating market volatility.
• Despite a challenging Q1 2025 marked by seasonal and operational headwinds leading to lower revenue year-over-year, KLXE demonstrated margin resilience, benefiting from cost controls, favorable service mix shifts, and operational efficiencies.
• Management anticipates sequential improvement in Q2 2025 and expects full-year 2025 Adjusted EBITDA margins to expand (13-15%), driven by continued cost discipline, anticipated normalization of activity, and a strategic focus on higher-margin service lines and gas-prone basins.
• Key factors to watch include the impact of macroeconomic volatility and tariffs on customer spending, the pace of recovery in natural gas-directed activity, and the company's ability to execute on its strategic initiatives, including potential accretive M&A.

Setting the Scene: A Diversified Approach in Onshore Energy

KLX Energy Services Holdings, Inc. operates within the dynamic U.S. onshore oil and natural gas industry, providing a suite of mission-critical services across the drilling, completion, production, and intervention phases of technically demanding wells. Born from the combination and integration of several specialized businesses, including the significant merger with Quintana Energy Services in 2020 and the acquisition of Greenes Energy Group in 2023, KLXE has cultivated a diversified offering and a broad geographic presence across major active basins like the Rocky Mountains, Southwest (Permian, Eagle Ford), and Northeast/Mid-Con (Marcellus, Utica, Haynesville).

The company's strategy centers on delivering engineered solutions that enhance operational efficiency, minimize non-productive time, and provide customized tools for complex well challenges, particularly in the extended reach horizontal drilling environment prevalent today. Operating from over 60 service facilities, KLXE emphasizes the dynamic deployment of its assets and skilled personnel to optimize utilization and profitability across its footprint. This approach, coupled with a focus on disciplined management controls and operating metrics, aims to differentiate KLXE from both larger national competitors and smaller regional players.

A cornerstone of KLXE's competitive positioning lies in its investment in innovative technology and proprietary products. The company maintains an in-house research and development organization and collaborates with technology partners to design specialized tools, resulting in a portfolio protected by 37 issued patents and 7 pending applications. Specific technological differentiators include a suite of proprietary dissolvable and composite plugs, as well as tools like the Oracle SRT (Gen 2 version in development, expected to offer hot hole capabilities and already boasting over 0.5 million running feet downhole as of the Q1 2025 call) and thru-tubing motors. A notable aspect of KLXE's product strategy is the use of contract manufacturers for production, maintaining intellectual property integrity while avoiding significant manufacturing startup costs. Furthermore, many key components, such as plugs, ERT, and thru-tubing motors, are proudly manufactured 100% in the U.S.A., a factor management highlights as positioning KLXE uniquely in the market. These technological capabilities and the strategic approach to their development and sourcing contribute to KLXE's ability to offer differentiated services, aiming for superior margins based on performance quality and providing a competitive moat, particularly in specialized niches.

In the broader competitive landscape, KLXE operates alongside major integrated service providers like Baker Hughes (BKR), Halliburton (HAL), and Schlumberger (SLB), as well as other specialized and regional players. While larger competitors often possess greater scale, more extensive global reach, and deeper R&D budgets resulting in potentially more advanced digital and automation technologies (e.g., BKR's AI-driven tools offering efficiency gains, HAL's integrated solutions providing faster turnarounds, SLB's data analytics leading to lower failure rates), KLXE differentiates itself through its focused regional density, operational agility, and cost-efficient service delivery, partly enabled by its in-house manufacturing capabilities which can lead to lower operating costs for certain assets compared to peers. The company's strong safety performance (industry-leading TRIR, LTIR, and vehicle incident rates in 2024) is also a critical differentiator, required by the blue-chip customers it serves and contributing to operational excellence. Management notes that larger E&P customers increasingly prefer fewer service providers, a trend KLXE believes positions it well to expand its share of wallet by offering a diversified suite of high-spec, differentiated services.

Performance Under Pressure: Navigating Market Headwinds

KLXE's recent financial performance reflects the challenging, volatile market environment, particularly evident in the first quarter of 2025. For the three months ended March 31, 2025, the company reported revenue of $154.0 million, an 11.8% decrease compared to $174.7 million in the prior year period. This decline was primarily driven by a reduction in overall activity, with lower weighted average volume accounting for approximately 97% of the decrease and lower weighted average price contributing the remaining 3%.

Despite the top-line pressure, KLXE demonstrated notable resilience in its cost structure and margins. Cost of sales decreased to $123.8 million (80.4% of sales) in Q1 2025 from $144.0 million (82.4% of sales) in Q1 2024. This improvement in cost of sales as a percentage of revenue was primarily attributed to better leverage of fixed costs, a 2.6% decrease in labor costs per employee, and an 11.1% decrease in repair and maintenance costs as a percentage of revenues. Selling, general and administrative (SGA) expenses remained flat year-over-year at $21.6 million but increased as a percentage of revenue to 14.0% due to the lower revenue base. The operating loss widened to $17.7 million in Q1 2025 from $13.1 million in the prior year period, reflecting the impact of reduced activity and pricing.

However, adjusted EBITDA, a key metric for the company, showed improvement year-over-year, increasing by 15% to $14.0 million in Q1 2025, resulting in an adjusted EBITDA margin of 9.0%, a 30% increase from 7.0% in Q1 2024. This margin expansion amidst lower revenue highlights the impact of cost structure optimization initiatives implemented in 2024 (approximately $16 million annualized savings realized from late Q1/early Q2 2024 onwards) and a favorable shift in service mix towards higher-margin offerings like rentals and tech services, particularly within the Southwest segment.

Segment performance in Q1 2025 was mixed. The Rocky Mountains saw a 4.8% revenue increase year-over-year, driven by volume, but reported an operating loss of $0.2 million. The Southwest segment, a key area of strength, experienced a 6.1% revenue decrease year-over-year but posted operating income of $3.0 million and its strongest quarterly results since Q3 2023, benefiting from robust completion and production activity in rentals and tech services. The Northeast/Mid-Con segment faced significant headwinds, with revenue down 31.3% year-over-year and an operating loss of $8.1 million, impacted by lower price and volume, exacerbated by seasonality and an unforeseen operational issue that caused material downtime for one frac fleet, resulting in an estimated $6 million to $7 million of missed scheduled revenue.

Looking back at 2024 for context, the company reported full-year revenue of $709 million and adjusted EBITDA of $90 million (13% margin). Q4 2024 revenue was $166 million (down 15% YoY), with adjusted EBITDA of $23 million (14% margin), demonstrating significant margin improvement year-over-year despite lower activity, largely due to cost controls and mix shift. The annualized Q2 and Q3 2024 combined adjusted EBITDA of approximately $110 million illustrated the company's earning capacity despite market softness.

Strengthening the Foundation: Liquidity and Capital Structure

A pivotal development for KLXE was the successful refinancing of its debt structure, completed on March 12, 2025. This involved issuing approximately $232.2 million of Senior Secured Floating Rate Cash PIK Notes due 2030 and entering into a new Asset-Based Revolving Credit Facility (ABL) due March 2028. The new ABL provides a $125 million commitment, a $10 million First-In-Last-Out (FILO) facility, and a $25 million committed incremental loan option.

This refinancing achieved key strategic objectives: extending debt maturities (Notes to 2030, ABL to 2028) and significantly enhancing financial flexibility. The 2030 Senior Notes bear a floating interest rate (Term SOFR plus an Applicable Margin) payable in cash or, at KLXE's election, as paid-in-kind (PIK) interest with a 100 basis point premium. This PIK option proved valuable almost immediately, utilized in early April 2025 during a period of heightened market uncertainty and oil price declines, deferring approximately $2.4 million to $2.5 million of monthly cash cost and preserving liquidity. The new debt structure also includes mechanisms for deleveraging, such as a 2% per annum mandatory quarterly redemption on the 2030 Notes and an Excess Cash Flow sweep.

As of March 31, 2025, KLXE had $14.6 million in cash and cash equivalents and $8.1 million in restricted cash (largely tied to the ABL transition, with $6.1 million subsequently unrestricted). Total liquidity stood at $58.1 million, including $43.5 million of ABL availability. The cash balance decreased by $68.9 million in Q1 2025, impacted by cash used in operations ($37.6 million), investing ($10.2 million), and financing ($21.1 million), including approximately $33 million in refinancing costs. Negative operating cash flow in Q1 was influenced by the net loss and changes in working capital (increased days receivable outstanding to ~60 days, decreased days payable outstanding to ~43 days), consistent with Q1 typically being the most working capital-intensive quarter. This contrasts with significant working capital improvements seen in 2024, which included streamlining processes and achieving a historic low DSO at year-end.

Capital expenditures in Q1 2025 were $15.0 million gross and $10.2 million net of asset sales, focused primarily on maintenance. For the full year 2025, the company expects gross CapEx between $40 million and $50 million, and net CapEx between $30 million and $40 million, a reduction from original estimates. This spending prioritizes maintenance and investments in higher-margin service lines with quick paybacks (rentals, fishing, thru-tubing). KLXE has historically monetized $10 million to $12 million in assets annually, a trend expected to continue. The company also has flexibility to curtail second-half CapEx if needed. The ATM Offering was amended in March 2025 to increase the aggregate offering price up to $57.75 million, with $0.5 million in gross proceeds raised in Q1 2025 for general corporate purposes, including debt refinancing, CapEx, and working capital.

Overall, the refinancing has provided KLXE with a more stable and flexible financial foundation to navigate ongoing market volatility and pursue strategic opportunities.

Competitive Dynamics and Strategic Positioning

KLXE operates in a competitive U.S. onshore OFS market characterized by a mix of large, diversified players and smaller, specialized firms. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, KLXE holds an estimated 2-5% aggregate market share in U.S. onshore OFS. Compared to top-tier competitors like BKR, HAL, and SLB, KLXE operates at a smaller scale and generally exhibits lower profitability margins (e.g., KLXE's TTM EBITDA margin of 11.43% trails HAL's 17%, SLB's 17%, and Weatherford (WFRD)'s 17%, though it is comparable to BKR's 11%). Similarly, return metrics like ROIC and ROE for KLXE (estimated 4-6% ROIC, 5-8% ROE) are typically lower than those of its larger peers.

However, KLXE possesses distinct competitive advantages. Its regional density and diversified service offerings across drilling, completion, production, and intervention provide operational agility and the ability to dynamically deploy assets, contributing to customer loyalty and potentially better asset utilization compared to less focused competitors. The company's in-house manufacturing capabilities for certain proprietary tools offer a cost advantage, potentially leading to 10-15% lower operating costs for rentals and tools, which translates into margin resilience, as demonstrated in Q4 2024 and Q1 2025. This capability also helps counter the high R&D costs borne by larger, technology-focused peers like BKR. Furthermore, KLXE's strong safety record is a critical requirement for blue-chip customers and a competitive differentiator.

Despite these strengths, KLXE faces vulnerabilities. Its technological offerings, while proprietary, may lag the cutting-edge digital and automation solutions developed by larger competitors, potentially resulting in higher operating costs (e.g., 10-15% higher energy consumption for certain tools compared to BKR's advanced offerings). This technological gap could limit market share gains in innovation-driven segments and pressure margins. Additionally, KLXE's revenue remains susceptible to market volatility, as evidenced by the Q1 2025 decline, although its diversified model and post-frac revenue contribution (approximately 50% of total) offer some degree of resilience compared to peers heavily weighted towards drilling or initial completions.

KLXE strategically positions itself by focusing on serving the largest, most active, and well-capitalized operators who increasingly prefer consolidating their service providers. By offering a broad portfolio of high-spec, differentiated services and demonstrating strong operational execution and safety performance, KLXE aims to expand its share of wallet with these key customers. The company is also actively pursuing accretive, deleveraging M&A opportunities, leveraging the flexibility provided by its new debt structure. Management believes the OFS market needs meaningful consolidation and sees opportunities to combine with quality companies, ideally using equity consideration to align interests and facilitate deleveraging.

Outlook and Risks: Cautious Optimism in a Dynamic Market

Looking ahead, KLXE anticipates sequential improvement in the second quarter of 2025. Based on current schedules and customer conversations, the company is targeting a modest sequential revenue increase, expected to be up low to mid-single digits on a percentage basis, accompanied by margin expansion. This expected improvement is driven by the anticipated normalization of seasonal activity in the Rocky Mountains and the bounce back in the Northeast/Mid-Con segment following the operational issue experienced in Q1. Management expects continued strength in the Southwest segment.

For the full year 2025, KLXE expects revenue to be flat to slightly up compared to 2024. More importantly, the company anticipates expanding its adjusted EBITDA and adjusted EBITDA margin, projecting margins to range between 13% and 15%. This expected margin expansion is underpinned by the full-year benefit of cost structure controls implemented in 2024, a favorable shift in revenue mix towards higher-margin PSLs, and the impact of known customer wins and contract renewals. Management believes that, excluding the transitory impacts of Q1 2024, the annualized Q2 and Q3 2024 adjusted EBITDA run rate of approximately $110 million illustrates the company's earning capacity in the current market environment.

Longer term, KLXE is cautiously optimistic about 2025 and beyond. This optimism is fueled by the expectation of increased activity driven by customers completing integration initiatives post-consolidation and, significantly, an anticipated increase in natural gas-directed activity. Management is bullish on the U.S. natural gas macro story, citing robust future demand from LNG export volumes (expected to approximately double by 2030, with significant capacity coming online in the next 12-24 months) and data centers. They believe this will drive incremental activity in gas-prone basins (Haynesville, Northeast, South Texas), potentially lifting service pricing and utilization across their core markets and helping to offset potential softness in crude-directed activity. Management also suggests that drilling and completion efficiency gains may plateau in 2025, implying that sustained production increases would necessitate higher activity levels.

Despite the positive outlook, significant risks and challenges persist. The macro environment remains highly volatile, influenced by factors such as OPEC+ actions, dynamic U.S. tariff policy, geopolitical conflicts (Ukraine, Israel-Gaza, Iran), and fluctuations in commodity prices. The sharp drop in oil prices in early April 2025 following tariff announcements and OPEC+ news underscores this volatility. Smaller operators, who are more exposed to tariff impacts and less hedged against price swings, may react quickly to price drops by delaying projects, which can disproportionately impact KLXE when affecting multiple service lines. The company also anticipates some short-term disruption and pressure on its cost structure due to the evolving tariff landscape. Management is taking a cautious approach to the remainder of 2025 to maximize financial flexibility, actively monitoring customer plans and cost structure in real time, and utilizing the PIK option on its notes to preserve liquidity when needed.

Conclusion

KLX Energy Services operates in a challenging yet opportunity-rich U.S. onshore oilfield services market. The company has strategically positioned itself as a diversified provider leveraging proprietary technology, a focused regional footprint, and strong customer relationships. While facing market volatility and competitive pressures from larger, more technologically advanced peers, KLXE has demonstrated resilience through operational execution, cost structure optimization, and a strategic focus on higher-margin service lines.

The recent refinancing has significantly improved KLXE's financial flexibility, extending maturities and providing tools like the PIK option to navigate uncertain periods. Despite a difficult Q1 2025, the company's ability to expand margins year-over-year highlights the effectiveness of its cost controls and strategic positioning. Looking ahead, KLXE is cautiously optimistic, anticipating sequential improvement in Q2 2025 and expecting full-year 2025 margins to expand, driven by operational efficiencies and a favorable service mix. The potential for increased natural gas-directed activity, fueled by growing LNG export and data center demand, represents a significant upside catalyst for the company, particularly given its exposure to key gas basins.

For investors, the KLXE story is one of a company working to leverage its core strengths and strategic initiatives to capture market share and improve profitability in a dynamic environment. While macroeconomic volatility and competitive pressures remain key risks, the company's enhanced financial flexibility, disciplined capital allocation, and positioning for potential growth in the natural gas market provide a basis for cautious optimism. The execution on strategic M&A, if pursued, could further reshape its competitive standing and accelerate deleveraging.