Business Context and Reporting Period
KLX Energy Services Holdings, Inc. provides drilling, completion, production and intervention services to onshore oil and natural gas producers across major U.S. basins. The filing reports unaudited results for the quarter ended June 30, 2022, with sequential comparisons to March 31, 2022 and selected pro forma comparisons to June 30, 2021.
Key Financial Metrics
| Metric | Q2 2022 | Prior Comparable |
|---|---|---|
| Revenue | $184.4 million | $152.3 million in Q1 2022; $106.6 million pro forma Q2 2021 |
| Net loss | $7.5 million, or $0.67 per diluted share | $19.9 million loss in Q1 2022; $28.8 million pro forma loss in Q2 2021 |
| Operating income | $1.4 million | $11.5 million operating loss in Q1 2022 |
| Adjusted EBITDA | $17.4 million | $4.9 million in Q1 2022; $(1.2) million pro forma Q2 2021 |
| Adjusted EBITDA margin | 9.4% | 3.2% in Q1 2022; (1.1)% pro forma Q2 2021 |
| Operating cash flow | $(8.4) million | $(6.2) million in Q1 2022 |
| Levered free cash flow | $(12.3) million | $(9.4) million in Q1 2022 |
| Capital expenditures | $7.8 million | $5.8 million in Q1 2022 |
For the six months ended June 30, 2022, operating cash flow was $(14.6) million, investing cash flow was $(7.1) million and financing cash flow was $25.2 million. Cash increased $3.5 million from year-end 2021 to $31.5 million.
At June 30, 2022, total debt was $295.4 million, compared with $274.8 million at December 31, 2021. Total liquidity was $70.7 million and available liquidity was $56.6 million, consisting of $31.5 million of cash and $25.1 million of net available ABL borrowing capacity after a $14.1 million FCCR holdback. The Senior Secured Notes bear interest at 11.5% annually. Net working capital was $51.3 million, up from $45.9 million at March 31, 2022.
Material Changes Versus Prior Periods
- Revenue increased 21% sequentially, reflecting higher activity and pricing across all geographic segments and service lines.
- Net loss improved by 62% sequentially, while Adjusted EBITDA increased 255%.
- Rocky Mountains revenue rose 23% sequentially to $53.1 million, with Adjusted EBITDA of $9.3 million.
- Southwest revenue rose 16% to $60.0 million, with Adjusted EBITDA of $6.4 million.
- Northeast/Mid-Con revenue rose 25% to $71.3 million, with Adjusted EBITDA of $11.1 million.
- Available liquidity increased $2.0 million, or 4%, sequentially, although total debt increased from year-end 2021.
- Q2 2022 included $1.2 million of one-time costs, primarily non-recurring legal and restructuring costs, COVID-19 testing and treatment costs, severance and other non-recurring expenses.
Guidance, Outlook, Risks and Unusual Items
- Management expects third-quarter 2022 sequential revenue growth of 9% to 13% and an Adjusted EBITDA margin of 10% to 12%.
- Full-year 2022 revenue guidance was increased to $730 million to $750 million.
- Capital spending guidance remains $25 million to $30 million for fiscal 2022, primarily for maintenance.
- Management believes KLXE may return to positive free cash flow in the second half of 2022.
- The company continues discussions with lenders regarding refinancing options, including amending and extending its ABL Facility.
- Assets held for sale totaled $6.3 million at June 30, 2022; approximately $1.5 million of sales were expected to close in the third quarter.
- Key risks include oilfield-service cyclicality, commodity-price volatility, customer spending reductions, inflation, higher interest rates, supply-chain constraints, the war in Ukraine, COVID-19 impacts, competitive pressures and the company’s ability to refinance debt and maintain liquidity.
- Adjusted EBITDA, Adjusted EBITDA margin, free cash flow and net working capital are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.
Investor Verification Points
- Verify the terms, maturity profile and covenant requirements of the ABL Facility and 11.5% Senior Secured Notes.
- Assess whether improving activity and pricing are sufficient to produce sustainable positive free cash flow after interest and capital expenditures.
- Reconcile Adjusted EBITDA to GAAP operating results and review the nature and recurrence of excluded costs.
- Monitor the timing and proceeds of planned asset sales and the company’s refinancing discussions.
- Evaluate the sensitivity of revenue, margins and liquidity to commodity prices, customer spending, inflation and interest rates.