KLX Energy Services Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended July 31, 2021. The company provides oilfield services and products to onshore oil and gas operators across U.S. basins. Unless noted, figures are in millions of U.S. dollars. The QES acquisition closed July 28, 2020, so the prior-year quarter included QES results for only the final three days; year-over-year comparisons are not fully like-for-like.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $111.9 | $36.2 | $202.7 | $119.2 |
| Operating loss | $16.9 | $12.8 | $45.8 | $248.4 |
| Net loss | $25.0 | $20.4 | $61.8 | $263.5 |
| Diluted loss per share | $2.98 | $4.12 | $7.39 | $55.00 |
- Quarterly revenue rose 209.1%; six-month revenue rose 70.1%. Growth reflected higher activity and the inclusion of QES in the 2021 periods, particularly in drilling and completion services.
- Cost of sales was 88.7% of revenue in Q2 versus 104.7% a year earlier; for six months it was 92.6% versus 96.4%. Management attributed improvement to integration synergies and better asset and personnel utilization. SG&A was $14.3 in Q2 and $29.3 for six months, down from $39.1 and $55.5, respectively.
- Q2 net loss widened year over year, partly because the prior-year quarter included a $41.1 bargain purchase gain. Six-month net loss improved substantially, principally because 2020 included $208.7 of impairment and other charges.
- Operating cash flow was negative $37.4 for six months, versus negative $15.5 in 2020, primarily due to working-capital investment, including higher receivables as activity and revenue increased. Investing cash flow was positive $2.9, including proceeds from asset sales; financing cash flow was positive $26.8, largely from ABL borrowings.
- Cash was $39.4 at July 31, down from $47.1 at January 31. Management reported total liquidity of $57.2, including $17.8 of ABL availability net of a $10.0 covenant holdback.
- Debt included $250.0 principal of 11.5% senior secured notes due 2025 and $30.0 outstanding on the ABL facility. The ABL rate was approximately 4.75%; $6.6 of letters of credit were outstanding. The company had a stockholders’ deficit of $28.2.
Material changes, outlook, and risks
- Management said approximately $46.0 of annualized merger cost savings had been implemented by the end of Q1, with an additional $4.4 of annualized savings implemented by the end of Q2 and expected to benefit results fully beginning in Q3. Further integration savings may be possible.
- Management reported increased activity during the first half, following 2020’s market downturn, but noted that Winter Storm Uri caused at least seven days of lost revenue in February. It expected further activity and service-price improvement for the rest of fiscal 2021 if pandemic impacts lessen, economic activity grows, and commodity prices remain strong. No specific revenue or earnings guidance was provided.
- Expected fiscal-year capital expenditures were $14.0–$16.0; $5.7 was spent in the first six months. Management said current cash, ABL availability, potential ATM proceeds, and forecast cash flows were expected to fund operations and planned capex for at least 12 months, while cautioning that sustained positive operating cash flow was uncertain.
- The company may issue up to $50.0 of common stock through an at-the-market program. It sold 60,216 shares for approximately $0.6 gross proceeds during the period and incurred $0.6 in establishment fees and expenses.
- Although the ABL’s springing fixed-charge coverage covenant was not triggered because availability remained above its threshold, the company’s fixed-charge coverage ratio was below 1.0 to 1.0 at July 31. The company stated it was in compliance with its credit facility.
- KLXE reserved the full $4.6 owed by Magellan for blowout-response services after Magellan filed Chapter 7. Insurers dispute coverage for some claims; recovery remains uncertain. The filing also identifies industry cyclicality, oil and gas price and activity volatility, COVID-19 effects, customer credit risk, access to capital, and operating and regulatory risks.
- Future minimum operating lease payments were approximately $66.6. Management reported no impairment indicators for the quarter and stated disclosure controls were effective as of July 31, 2021.
Key facts for investors to verify
- Whether improving activity, utilization, pricing, and announced merger savings translate into better operating margins and cash generation.
- Cash burn, working-capital needs, ABL borrowing-base availability, and the risk of triggering the springing covenant if availability falls.
- Debt-service burden, particularly the 11.5% notes, and any refinancing or capital-raising requirements.
- Potential dilution and net proceeds from further ATM stock sales.
- Recovery prospects for the fully reserved $4.6 Magellan receivable and any material developments in the insurance and bankruptcy proceedings.
- How comparable-period effects from the QES merger and prior-year bargain gain and impairments affect interpretation of reported trends.