KLX Energy Services Holdings, Inc.
Q3 2019 Earnings Call Transcript

Published: 5 Dec 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the KLX Energy Services Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today Michael Perlman, Treasurer and Senior Director of Investor Relations. Please go ahead sir.

[Michael Perlman:]

Thank you, Sonya. Good morning and thank you for joining us. Today we are here to discuss KLX Energy Services financial results for the third quarter ended October 31, 2019. For comparative purposes, we have presented our financial results adjusted to exclude costs associated with the company's major downsizing program and its non-cash asset impairment charge as described in the company's pre-announcement on November 19. These costs are collectively referred to as costs has defined. The company's earnings news release which was issued earlier this morning presents our results. If you haven't received it, you'll find a copy on our Web site. We will begin with remarks from Amin Khoury, Chairman and Chief Executive Officer of KLX Energy Services; also on the call this morning is Tom McCaffrey, Senior Vice President and Chief Financial Officer.For today's call we will be prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the KLX Energy Services Web site at klxenergy.com. In addition copies of the slides are posted on our Web site for you to refer to.Before we begin, we have some additional information that cover any forward-looking statements that we make are subject to risks and uncertainties as always in our prepared remarks and our responses to your questions. You will rely on the Safe Harbor exemptions under the various securities acts and our Safe Harbor statements and the company's filings with the Securities and Exchange Commission.We will address questions following our prepared remarks at that time the operator will provide Q&A instructions.Now, I will turn the call over to Amin Khoury.

[Amin Khoury:]

Thank you, Michael and good morning everyone. Thanks for joining us today to discuss our third quarter financial results.Rough deterioration in industry conditions which accelerated through the end of our third quarter ended October 31, 2019, reflects an intense focus on capital discipline, free cash flow generation by our exploration and production customers. This led to a sharp decline in sequential quarterly rig count and an unprecedented decline in active frac spreads on the second quarter to the third quarter back there was a significant sequential decline hydraulic fracturing activity during each month of the third quarter.Temporaneously with the abrupt decline in activity, we initiated a comprehensive business review and cost rationalization program will align our cost structure with our current customer demand. Specifically, we implemented an approximate 17% reduction in force, we warm-stacked the vast majority of our Permian-based wireline assets and we aggressively cut cost in every area of our business.Notwithstanding the abrupt change in industry conditions that generated approximately $41 million in cash flow from operations and approximately $31 million of free cash flow during the third quarter increasing our cash balance to approximately $120 million for the quarter ended October 31, 2019. Our $100 million credit facility remains undrawn.Looking forward we will continue to carefully monitor our cost structure to ensure it is aligned with demand. We expect to begin to realize the benefit of our business realignment actions in the fourth quarter of this year. While we have reduced our personnel levels substantially we're also recruiting experienced coiled tubing personnel to join the company as we have begun to receive and deploy five new large-diameter coiled tubing spreads. A continuation and expansion of the company's coiled tubing strategy to gain greater share of customer spend by pulling through our broad range of asset-light services will be a major strategic priority in 2020 along with continued tight cost control, free cash flow generation and further strengthening of the company's balance sheet.On today's call, we will review the current oilfield services market; we will discuss our third quarter 2019 financial performance; and we will comment on our outlook.Let's begin by reviewing the current oilfield services market environment. U.S. land market continues to be under pressure and exploration and production companies rein in, in many cases completely cut off spending. And instead maintain an intense focus on free cash flow generation. This has resulted in significant sequential quarterly declines in completion activity, rig counts and frac spread counts across all major U.S. shale basins. As many E&Ps have either scaled back or have completely shut down operations for the balance of the year.Decline in activity is even more pronounced in the natural gas plays as natural gas prices have multiyear lows and growing supply concerns continue to weigh on activities. Specifically, the second quarter to third quarter decline in the aggregate number of frac spreads in the DJ, Niobrara and Williston Basin's declined approximately 20%. In the gassier basins including the Marcellus, Utica, Woodford and Haynesville, the number of active frac spreads declined approximately 50%. And in the Permian and Eagle Ford shale basins, the active frac spread declined approximately 22%.We expect north of our Oregon drilling and completion activity will decrease further in the fourth quarter as the E&Ps further scaled back their activities, as they maintained their intense focus on cash flow. In addition, we expect budget exhaustion and seasonal issues to further impact fourth quarter activity.Let's turn to Slide 3 and review our third quarter 2019 consolidated results. Third quarter 2019 revenues of approximately a $135 million decreased approximately 18% as compared to the second quarter of 2019. Adjusted operating loss was a negative $4 million compared to second quarter adjusted operating earnings of $11.9 billion. Adjusted EBITDA was approximately $17 million or approximately 13% of revenues compared to second quarter adjusted EBITDA of approximately $33 million or approximately 20% of revenues.Adjusted net loss was a negative $5 million or negative $0.22 per diluted share for the third quarter compared to second quarter adjusted net earnings of $10 million or $0.45 per diluted share.Before we review our third quarter 2019 segment financial results, we would like to mention that the company allocates all corporate costs through its three segments. Cost allocated to each segment for the three-month period ended October 31 whereas follows

[Michael Perlman:]

Thank you, Amin. I'll now turn the call over to the operator for the Q&A portion of today's call. The operator will provide instructions on how to ask the questions. Sonya?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Ben Carl of Simmons Energy. Your line is now open.

[Ben Carl:]

All right. Thanks guys. First, just wanted to ask about the trajectory of margins over the coming quarters just given an expectation for the customer activity to decline like you have just said and compared with your cost reduction efforts, I mean kind of qualitatively what should we expect -- should we expect those to offset each other. Just any color there would be helpful.

[Amin Khoury:]

We are not in a position to be able to give out information on margins in the fourth quarter. Important thing I think is in the fourth quarter, we expect that our free cash flow will be more or less breakeven maybe generate a few million dollars or use a few million dollars but our focus right now is on free cash flow managing CapEx very carefully introducing our new coiled tubing assets. So we can execute our strategy. We should be in a position to execute the company's strategy by the end of the fourth quarter of this year. And so, during essentially all of 2020, we should have 7, 2 5/8-inch units and operation in 6 [indiscernible] units in operations essentially all of which are new. And where we are finally in a position to execute our strategy of pulling through a broad range of asset-light services.Our expectation is, we will generate positive free cash flow during 2020 and we will further build our balance sheet. Expect to moderate, but we're not in a position to give any guidance on margins.

[Ben Carl:]

No problem. Thank you for that. And I guess secondly, I just wanted to see if you could just break down your phase and exposure maybe give us some more color on how the variance phasing is performing. And maybe just kind of as the rig count contracts, do you expect a more concentrated exposure in certain areas assets moving around and just kind of your broad strategy with [indiscernible] exposure.

[Amin Khoury:]

Our strongest businesses are in the Rockies followed by Northeast and Mid-Con. Southwestern businesses are weakest. Now I think during the coming quarter or two, we don't have more visibility than that. We should expect to see rough going in the gassier basins in the Northeast, the weakest sector in terms of the oil plays I would say will be in the Mid-Con and the strongest overall business in the Rockies probably the Southwest segment will do a little better in the coming quarter as compared to the prior.

[Ben Carl:]

Great. Thanks. That's all for me.

[Operator:]

Thank you. And the next question comes from Simon Wong of Gabelli & Company. Your line is now open.

[Simon Wong:]

Hi, good morning. The [indiscernible] that you'll be receiving in the fourth quarter. Does those units already have customer commitments or are you bidding for jobs currently?

[Amin Khoury:]

We have -- actually we received two, the third we'll receive in this week. The two we've received have already gone to customers. The one that's coming this week has already slated for our customer. We expect to receive the last two by the end of our fiscal year, by the end of January 31. And both of those units are allocated to customers.

[Simon Wong:]

How are the pricing related to those units relative to let's say the first half of '19?A - Amin KhouryPricing in the first half of '19?

[Simon Wong:]

The pricing of those five units you just received or you're in the process of receiving how pricing…

[Amin Khoury:]

It depends on a number of units that are dedicated versus the number of units that are doing spot work. And that remains to be determined down half the fleet or more will be dedicated units and a smaller portion we doing spot work and where they're doing spot work, they're doing it for customers which are near one another so that we can get the highest utilization responses. The rates on spot work are higher than the rates on dedicated work where you have higher utilization rates.

[Simon Wong:]

Okay. The cost drag that you mentioned related to the startup costs of the coiled tubing in the fourth quarter and first quarter of 2020, can you quantify how much that is?

[Amin Khoury:]

We have taken out about $40 million in cost and will begin to realize the benefit of those cost reductions beginning in the fourth quarter. But at the same time, we will be hiring in something in the neighborhood of 80 to 90 additional folks to rollout our coil tubing spread. So, we won't get the full benefit of the cost reductions which we've achieved until later in 2020 for the coil tubing spreads are operative and pulling through services, at the same time that the business should be growing at that time. And we're maintaining pretty close control of costs.

[Simon Wong:]

I just want to make sure I heard that right, the 40 million annualized cost savings that you've just pulled off out of your company?

[Amin Khoury:]

That's right.

[Simon Wong:]

And okay, that's annualized. Okay. And then, you recently have planned to spend about $90 million to $100 million in CapEx this year. It looks like it have been ramped down in third quarter. Is that related to timing or have you reduced your capital spending for this year?

[Amin Khoury:]

Our CapEx this year will be about $75 million. If we take into account the application of the deposits that we have on the coil tubing spreads, it will come out to about $75 million.

[Simon Wong:]

Okay, great. And then, you have a number for 2020, the CapEx number?

[Amin Khoury:]

It will be obviously a very much lower number than this year. But we won't give out that number until we report our fourth quarter two months from now.

[Simon Wong:]

Okay. My final question is, in your press release and even your [indiscernible] you talk about stock buyback, debt repurchases as well as strategic combinations. Can you rank your free cash flow priority in those -- like those?

[Amin Khoury:]

It'll depend upon what alternative uses we have for cash at the time. So we can't rank them unless we know exactly what we're looking at. And right now we are looking at some alternatives. And we'll make the determination based on what gives our shareholders the greatest bang for the buck or the greatest return on our investment.

[Simon Wong:]

Okay, great. Thank you.

[Amin Khoury:]

You are welcome.

[Operator:]

Thank you. And ladies and gentlemen this does conclude our question-and-answer session. I would now like to turn the call back over to Michael Perlman for any closing remarks.

[Michael Perlman:]

Thank you, Sonya. That concludes our comments for today. Thank you to everyone participating on this morning's call. We look forward to speaking to you again next quarter. Bye.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.