KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) is a growth-oriented provider of diversified oilfield services to leading onshore oil and natural gas exploration and production (E&P) companies operating in both conventional and unconventional plays in major active basins throughout the United States. The company delivers mission-critical oilfield services focused on drilling, completion, production, and intervention activities for technically demanding wells.

Business Overview

KLX Energy Services was initially formed from the combination of seven private oilfield service companies acquired during 2013 and 2014. The company continued to selectively acquire regional and product line-specific businesses through 2019 to expand its service capabilities and broaden its geographic presence. In 2020, KLX merged with Quintana Energy Services, helping establish the company as an industry-leading provider of asset-light oilfield solutions across the full well lifecycle.

In March 2023, KLX acquired Greene's Energy Group, LLC, a leading provider of wellhead protection, flowback, and well testing services. This acquisition augments KLX's frac rental and flowback offering, providing the company with a broader presence in the Permian and Eagle Ford basins.

KLX operates in three segments on a geographic basis: the Rocky Mountains Region, the Southwest Region, and the Northeast/Mid-Con Region. The company's expansive operating areas provide access to a number of nearby unconventional crude oil and natural gas basins, allowing it to efficiently deploy assets and respond quickly to customer needs.

KLX offers a variety of targeted services that are differentiated by the technical competence and experience of its field service engineers and the deployment of a broad portfolio of specialized tools and proprietary equipment. The company's innovative and adaptive approach to proprietary tool design has resulted in 38 patents and 10 pending patent applications, which it believes differentiates it from regional competitors.

Financials

For the full year 2023, KLX reported annual revenue of $888.4 million, annual net income of $19.2 million, annual operating cash flow of $115.1 million, and annual free cash flow of $58.0 million.

In the first quarter of 2024, the company reported revenue of $174.7 million, a 27.1% decrease compared to the prior year period. The overall decrease in revenues reflects a decline in activity during the quarter, leading to lower demand for the company's services. Lower weighted average price contributed to approximately 37% of the decrease, and lower weighted average volume contributed to the remaining approximately 63%.

On a segment basis, the Rocky Mountains segment revenue decreased by 32.8%, the Southwest segment revenue decreased by 5.4%, and the Northeast/Mid-Con segment revenue decreased by 39.3%. The decreases were driven by a combination of lower weighted average price and lower weighted average volume.

Cost of sales for the first quarter of 2024 were $144.0 million, or 82.4% of sales, compared to 75.5% in the prior year period. The increase in cost of sales as a percentage of revenues was primarily due to a decrease in revenue days, which led to lower leverage of fixed costs during the quarter.

Selling, general, and administrative (SG&A) expenses for the first quarter of 2024 were $21.6 million, or 12.4% of revenues, compared to 10.9% in the prior year period. The increase in percentage of revenues is due to the lower revenues and lower leverage of fixed costs during the quarter, as SG&A has decreased on a dollar basis compared to the prior year period.

Operating loss for the first quarter of 2024 was $13.1 million, compared to operating income of $18.9 million in the prior year period, due to the reduction in activity and pricing. The operating results across the three geographic segments declined as a function of lower revenues compared to the prior year period.

Net loss for the first quarter of 2024 was $22.2 million, as compared to net income of $9.4 million in the prior year period, decreasing primarily as a result of the lower revenues.

Liquidity

As of March 31, 2024, KLX had $84.9 million in cash and cash equivalents and $42.7 million available on its asset-based revolving credit facility, resulting in a total liquidity position of $127.6 million.

The company's material cash commitments consist primarily of obligations for long-term debt and related interest, as well as leases for property and equipment and purchase obligations as part of normal operations. KLX's ABL Facility and its 11.5% senior secured notes due 2025 mature in 2025.

KLX has taken several actions to improve its liquidity position, including closing its Florida legacy headquarters, eliminating redundancies and duplicative functions, issuing equity under its ATM Offering, executing debt-for-equity exchanges, and monetizing non-core and obsolete assets.

Outlook and Guidance

For the second quarter of 2024, the company expects revenue to be in the range of $180 million to $200 million, or roughly 5% to 15% higher than the first quarter, with adjusted EBITDA margins of 9% to 11%. The company anticipates a stronger performance into the third quarter of 2024.

KLX believes the E&P industry's ongoing consolidation and the growing need for certified equipment at higher specifications will benefit the company, as it has outsized exposure to the largest, most active customers across its geographic regions. The company also expects to benefit from increased investment in LNG, which is expected to drive incremental U.S. onshore natural gas-directed activity and support elevated service pricing and utilization across all basins.

Risks and Challenges

KLX faces several risks and challenges, including the cyclical nature of the energy industry, fluctuations in oil and gas prices, increased competition, regulatory changes, and the potential for operational disruptions. The company's ability to refinance its debt as it becomes due and maintain sufficient liquidity are also key risks to monitor.

Conclusion

KLX Energy Services is a well-positioned, diversified oilfield services provider with a strong presence across major U.S. onshore basins. The company's innovative technology, broad service offerings, and strategic geographic footprint have allowed it to serve a blue-chip customer base and capture a greater share of customer spending. While the company faced some headwinds in the first quarter of 2024, its outlook for the remainder of the year is positive, with expectations of sequential improvement in revenue and profitability. With a focus on cost management, liquidity preservation, and strategic growth initiatives, KLX appears poised to navigate the current market environment and capitalize on the industry's recovery.