Greetings, and welcome to KLX Energy Services Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today's call, Ken Dennard.

Thank you. You may begin..

Thank you, operator, and good morning everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal third quarter 2020 results. With me today are Chris Baker, KLX’s President and Chief Executive Officer; and Keefer Lehner, Chief Financial Officer and Executive Vice President..

Thank you, Ken, and good morning everyone. Thank you for joining us today for KLX Energy Services fiscal third quarter 2020 conference call. Let me begin by updating you on the broader market environment during the quarter, as well as the progress we've made on the integration.

I will then turn the call over to Keefer to review our fiscal third quarter financial performance before returning for some final comments on our strategy and outlook.

Turning to the fiscal third quarter, the overall market environment remained very challenging, not only due to the volatility in commodity prices, but also the overhanging issue of COVID-19, which has had far reaching impacts on the worldwide economic activity.

I'm pleased to report that despite the persistent impacts of these challenges, fiscal third quarter market activity picked up considerably from Q2, during which time we saw our revenue hit its lowest level in June..

Thank you, Chris, and good morning everyone. Before we review our fiscal third quarter 2020 results, I'd like to bring a few items to your attention.

First, keep in mind that, since the merger completed on July 28th, our combined second quarter results include only three days of results from the legacy QES business and are therefore largely representative of KLX's pre-merger structure.

However, when appropriate, I will highlight sequential comparisons in which Q2 results are adjusted to reflect a pro forma full quarter of QES results rather than the ad filed KLX Q2 results. Second, we are changing our methodology for the allocation of corporate costs this quarter, which will directly impact our segment presentation.

Previously 100% of our corporate costs were allocated across our three geographic segments. However, we will now allocate to the geographic segments.

Only those costs that directly tied to their operations, including AR, AP, insurance, audits, supply chain, HSC and others whereas the remaining unallocated balance will now sit at corporate and appear as a separate line item, and the segment reconciliation.

This presentation method is in accordance with information used in our own performance assessment and resource allocation decisions and also improves compatibility with our peers. Third, we had a handful of extraordinary costs impacting our results in the quarter.

During the quarter, we had $8.5 million in integration costs for expenses to relocate corporate headquarters, integrate the QES business, reduce headcount and consolidate service and support facilities. Merger costs of $1.3 million were incurred primarily for legal and professional fees..

Thanks, Keefer. Well, it's clear that we are still fighting through a tough market. There are signs that the market is on demand. Commodity prices and activity gains in the all service market, particularly in the completion space have been supportive of a gradual but still tenuous improvement in the macroeconomic environment.

And although COVID-19 remains a wild card, the prospect of a viable vaccine give us hope that the situation will improve and energy demand recovery will begin in earnest at some point in 2021. So, the overall picture certainly gives us greater optimism, but we remain cautious due to the near-term uncertainty that surrounds this recovery.

That said, we are concentrating our efforts on those factors that we can control, which we believe gives us a truly differentiated position relative to our peers.

We have been proactive through this downturn completing one of the very few OFS consolidating transactions, providing us with more levers to pull to return to positive free cash flow relative to our peers. However, with that said, we acknowledge that we can't cut our way to prosperity.

Our experience has shown us that consolidation and the synergies that result would drive value for both our customers and shareholders alike.

Back in 2015, we acquired the Archer Wealth Services in space and like the KLX/QES merger that transaction yielded the benefits of added scale, meaningful operation efficiencies, as well as a solid balance sheet.

But perhaps more importantly, it enabled us to deliver an expanded and enhanced service offering to our customer base and to better serve them at lower cost under an improved and more efficient operation. Just as we felt in, we are now seeing the benefits of synergies flowing through our financials as our integration efforts advance.

As we think through our Q3 results, the vast majority of our adjusted EBITDA loss occurred in the first month, as synergies were implemented in late July and August and did not begin to meaningfully impact our profitability until September and October.

Although, the more sizable synergies have already been achieved, there are additional sources of upside that we will continue to pursue.

This includes items such as cross selling opportunities across the organization, in house manufacturing, the reallocation of expertise to the completion from the business, and the continued repurposing of legacy, pressure pumping equipment to our wireline and coiled tubing operations.

We have already begun implementing many of these strategies and are very excited about the significant upside from cross pollinating our machine shop and engineering groups to further reduce tool costs, and advanced development of best-in-class down whole tools, and real time monitoring and automation.

Optimizing these items will further benefit our returns help our bottom line and enable us to better serve our customer base. In a relatively short period of time, we have become a much stronger and financially sound premier provider of drilling completion, production and intervention solutions across all major U.S.

bases, with a broad suite of asset light products and services that span the full lifecycle of a well, and our broad customer base is built on strong, long standing relationships with blue chip customers across the U.S.

As I mentioned earlier, we've seen activity utilization bounce back from the lows experienced earlier in the year, but the pricing side of the equation has yet to respond. We continue to see pricing in some service lines, such as coil tubing and wireline at our below breakeven levels.

Ultimately, we believe the service industry needs to raise prices in order to warrant deployment of additional equipment into the market, as the current pricing regime in many of our service lines is unsustainable to support the industry long-term.

On the strategic front, as we did the size many times in the past, consolidation is necessary for the long-term health of the industry and we believe the service sector needs to continue consolidating to bring the market into equilibrium.

We will continue to explore strategic opportunities to further enhance our platform, drive reserves and free cash flow and accelerate our long-term growth strategy. Our focus will be on well capitalized businesses with strong strategic fit, differentiated technology, a strong track record of returns and achievable cost synergies.

Given our team's track record of successfully seeking out in integrating acquisitions, we believe we will be able to realize a great deal better benefit from future transactions.

And while macroeconomic issues such as COVID-19 and commodity supply demand concerns will certainly continue to be major drivers in the market, KLX is well prepared to handle any challenges that may arise.

We are continuing to rationalize our operations to maximize synergies from our merger, which will certainly benefit the business on a go forward basis.

Although, we may see a seasonal revenue pullback in the fourth quarter, all else being equal, we will see an improvement in both profitability and the bottom line thanks to our rationalization and integration efforts.

In closing, let me express our gratitude to our shareholders who have remained steadfast as we have navigated through market upheaval in an ever shifting industry landscape. I'd like to also thank all of our dedicated team members who have played such a vital role in bringing about some of the most momentous changes in KLXs history.

The blending of our companies and our cultures, both with the history of leading safety performance and outstanding execution in the field has positioned us as a truly premier fulfilled service provider that is well equipped to navigate the current market challenges and ultimately prosper in the North American oil and gas market as global economy recovers.

With that, we will now take your questions.

Operator?.

Thank you. We will now be conducting a question-and-answer session. . Our first question comes from Ian Macpherson with Simmons Energy. Please proceed with your question..

Good morning, Chris, Keefer, how are you?.

Hey, good morning, Ian..

Good morning, Ian..

Chris - hi, Chris, your – everything is obviously still very complex in your world, in our world. Your commentary on fourth quarter outlook revenue-wise, it was rather nuanced, acknowledging some risk of holiday pullback.

But if we simply reserve a bit of pullback from current run rate, we would still see quarter-on-quarter very strong comps for total market drilling and completions activity.

And it was really -- you probably had greater percentage spring to the completions recovery in the third quarter than you might in the fourth quarter, but you have more, I would say, more activity tailwind to drilling in this fourth quarter.

So, what are the considerations for a less vigorous revenue bounce in the fourth quarter? You talked about – is price still a sequential drag on average? Is market share an issue in any of the product lines, maybe just flush that out a little bit more, if you can? Thanks..

Yes, not a problem. I appreciate the question, Ian. Look, some of our revenue, as you well know, as it pertains to well-controlled fishing services, et cetera, is somewhat episodic. But you're right, we did see that balance in the third quarter and would expect to see that going into the fourth quarter.

I think the production side of the business and some of that episodic revenue is more holiday sensitive. Our calendar looks really, really strong coming into the beginning of the New Year in January. And so that should be helpful as we exit the fourth quarter, our fourth quarter ends in January, as you will know, so we’re one-month off cycle.

But at the end of the day, look, cash preservation is key in the current market environment and we're working to reduce combined cost structure as quick as we can. That's why we've been focused on the integration efforts as much as we have in capturing all the identified synergies. We've basically achieved that initial target at this point.

So we're really focusing now on the incremental synergies that we talked about and alluded to as well as operations and pricing. To your point, we've talked about pricing.

Pricing is unsustainable in the current market, but we are pushing price and we're seeing some improvement there, and we think that's going to drive profitability through our base business. We exited Q3 near break-even EBITDA.

With that said, to your question, we did see a slowdown in Thanksgiving on the production side of the business, and we expect the same thing in Christmas. But we do think January is going to pick up pretty tremendously, both on the drilling and completion side.

And then further to your point, all the frac spreads that are being deployed right now, it will impact us January, February, et cetera, on the completion, on the drill out the flow backside, et cetera. So, there is a bit of a lag. I think that what you're hearing in some of the hesitations.

But I mean, despite the holiday slowdown, we do still expect to see a revenue increase of 7% to 14%, along with the increased synergies flowing through the P&L. We would expect to exit Q4 with positive adjusted EBITDA. Clearly, commodity prices, COVID-19, et cetera, potential lockdowns all come into play.

But we do feel really good about our position at this point and how we're going to enter the year. And then lastly, like I said, the revenue mix will come into play somewhat, but we feel like we’ve got some tailwind behind us finally..

Great. That's perfectly helpful. Thanks. And then I also wanted to ask, if you could maybe summarize for us and you don't want to give away all the details.

But just the general state of utilization across some of your big service lines, coil – large diameter coil, wireline and maybe directional and speak to your headroom for taking a more activity without a lot of capital intensity.

In other words, can you keep your current level of CapEx in the next year and ramp up those utilization levels with the market without having to redeploy a lot of capital to – with that activity?.

Yes, sure. So, I mean, first of all, as you well know, we're very KPI-driven here. We don't disclose KPIs and utilization stats for the three product lines, but we're tracking all of those. We're also tracking utilization for employees. And I think unfortunately, utilization from an asset-based perspective across the industry is pretty meager.

But we have seen a rebound there. Utilization in coil tubing, since the day we closed the transaction, has basically improved, almost month over month over month.

And so, that's one area where the utilization of coil, along with the pull-through of motors and tools, et cetera, from the legacy KLX side, I would say is - has generated kind of one plus one is greater than two-type opportunities, especially in certain basins. So, we've been very proud of that.

On the drilling side, candidly, as rig count just crashed down, we did lose some market share in May and June-type timeframe of this year. We've seen ourselves claw that back, when rig count falls at the pace that it fell at, everybody just gets shutdown, right? And sometimes there's contracts or preferred providers that they get caught up in that.

And so, we've seen our market share claw back in the last few months. We see continued pace of acceleration there. So, we're excited about that opportunity. But what I would say is, look, just to round it out, we clearly have sufficient incremental assets across every single product line.

You mentioned those two specifically to address those, but whether it's incremental rental equipment, BOPs, frac valves, fishing tools, et cetera, their wireline. There are plenty incremental assets to deploy to drive the revenue base without a substantial amount of incremental capital. I don't want to guide towards next year's CapEx yet.

We're just starting to kind of work on our budgets, given our fiscal year. But obviously, yes, look, we're going to do everything we can to control CapEx and keep it at a kind of a de minimis level consistent with where we've been this year..

Well understood. Thanks, Chris..

Yes, I appreciate..

Our next question comes from Jaime Perez with RF Lafferty & Co. Please proceed with your question..

Good morning, everyone. It's a great quarter, especially in this challenging time and coming off of the merger. I have a question.

As far as COVID related, do you have any -- do you still see any COVID-related slowdown? And what impact did it have on staffing and in the third quarter? You have -- what do you see COVID impact on the fourth quarter? Also my second question is, it seems like you believe you have the right size of assets to manage this current environment.

Maybe you could provide some more color on that, right? Thanks..

Yes. No, good morning. First of all, Jaime, I appreciate the question. So, I guess, I'd address COVID first. Look, I think our company, our HSE staff, our crews have done a phenomenal job in a global pandemic to continue operating across the Board.

We have had more than our fair share of quarantine events as have many companies, local services, states, our guys are out there as essential workers, putting themselves at risk every day of the week to continue to drive revenue and support their families, support the Company and do their jobs, and we very much appreciate that.

But, we have clearly like many other companies had a number of quarantine events, the vast majority of which have been third-party related, all of which have been non-work-related incidents.

And candidly, this whole pandemic and the quarantines that are associated with those drive your cost structure up somewhat, right? Because you ended up quarantining a couple of crews for 14 days and you're wearing that cost, and we have to drive utilization and we have to continue down the road to service our clients.

And so, we know that we're in, I guess, COVID wave 2 or 3.0 at this point in time, depending on which state you're in and how you slice the data. So, I think it's premature. I think there is a plenty of opportunity set, and a lot of bright spots with regards to the vaccines.

I don't want to get into political statements or I'm not a doctor to talk about the timing. But we're going to continue to manage our business to manage the risk appropriately, as we have throughout this entire pandemic and to ensure the safety of our personnel on site. And then your other question around assets, I guess.

Look, it's sort of like I told Ian. At the end of the day, I think we have a very broad suite of products and services that we can deploy to the market. We have some specialized assets that are clearly jobs specific, but we have a very large asset-based pro forma for the QES transaction.

And so, I think, we can experience a significant amount of growth without necessarily adding to the incremental asset base. What I would say is, we absolutely believe in consolidation. We're going to continue to look at consolidating opportunities. I think we're just now starting to see the industry consolidate since we've closed our transaction.

It's really just in the tip of iceberg. I believe we've seen about four different consolidating transactions occurs specifically in the oilfield services space. We mentioned one of those in our prior call that closed right after we closed. The issue becomes our customers.

The E&C space is consolidating at a much greater pace than what the office services spaces has been consolidating there.

And so, we have outside market share with certain operators in certain regions, and we're going to continue to look for opportunities that are synergistic, whether it'd be a cost saving synergies or operational synergies where things are strategic and fit well with the Company.

I think we've got a great track record of managing and integrating transactions, and we're going to continue to look for opportunities to do that..

This concludes the question-and-answer portion of the call. I'd now like to turn it back to management for any final comments..

Thank you once again for joining us on this call and for your interest in KLX Energy Services. We look forward to talking to you again next quarter. Thank you..

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day..