Greetings, and welcome to the KLX Energy Services Fourth Quarter 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, Ken Dennard. Thank you, Mr. Dennard.

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 fourth quarter 2020 results. With me today are Chris Baker, KLX’s President and Chief Executive Officer and Keefer Lehner, Executive Vice President and Chief Financial Officer..

Thank you Ken and good morning everyone. Thank you for joining us today for KLX Energy Services fiscal fourth quarter 2020 conference call. Let me begin by giving you all an update on the broader market environment during the quarter as well as some of the significant themes impacting our results.

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

During the fourth quarter I'm pleased to say that despite the overhanging issues brought about by COVID-19 we saw a broad-based macroeconomic improvement that benefited most of our geo segments and product lines and it was directly reflected in our financial results.

For the fiscal fourth quarter ended January 31 WTI price rose roughly 43% after having fallen about a 11% during the prior fiscal quarter. Likewise rig count rose 30% over the same period having fallen roughly 19% during the preceding quarter..

Thank you, Chris. Before I begin let me remind you that during our third quarter we changed our methodology for the allocation of our corporate costs which directly impacts our segment presentation.

Since Q3 we have allocated the geographic segments only those corporate costs that directly tied to their operations whereas the remaining unallocated balance now appears as a separate line item in in our consolidated financial statements. With that said I'll now discuss our fourth quarter 2020 consolidated results.

For the fourth quarter ended January 31, 2021 revenues were $86.8 million an increase of $15.8 million or 22% as compared to the revenue for the fiscal third quarter of 2020.

Once again the revenue increase reflects the impact of improving market activity across most of our geo markets and product lines particularly the Rockies Geo and our directional drilling coiled tubing and fishing and rentals product lines..

Thanks, Keefer. Looking back at a highly tumultuous year that saddled us with numerous challenges, I'm thrilled that we were able to rise above the hardships and make KLXE a much stronger company in the process.

By decisively executing on our plans in the merger with QES and successfully integrating our operations in such a short period of time, we've been able to expedite substantial cost savings and synergies, while also building out our product offerings in geographic reach to cement our position as a premier provider of asset-light oilfield solutions.

Despite having a strong balance sheet, ample liquidity and no near-term debt maturities, we will continue to explore opportunities to de-lever during 2021.

As it’s clear that we've made great strides over the past year in creating a leaner, more efficient organization to weather the challenges of the ever-turbulent oil and gas market, but I should emphasize that despite our many cost reduction actions and asset sales, we still remain strongly levered to recovery.

As we have a well-positioned asset base enabling us to quickly provide a wealth of cost-effective solution to serve not just our current well-positioned asset base enabling us to quickly provide a wealth of cost-effective solutions to serve not just our current base of customers, but also new customers looking to ramp up their activity.

This positions KLXE for the future regardless of what may come and it appears that fundamentals and the outlook are becoming more favorable with crude prices up more than 145 year-to-date as of early April. There appears to be a solid foundation for a more constructive outlook and a meaningful increase in activity perhaps later this year or in 2022.

As we look at the supply and demand picture, we have greater numbers of people being vaccinated against COVID as well as a return to economic normalcy for many areas of the US and globally, albeit at varying rates which will drive increased demand for crude over the course of 2021 and 2022.

On the supply side, we have a core production base in the US that is being depleted. It has had declining investment over 2020. At the same time OPEC+ has taken proactive supply side measures to preserve a constructive oil price.

All in all, this makes a compelling case for a potential economic recovery and such a recovery would further spur energy demand within the US and globally and ultimately a greater level from investment and activity in the US land market.

In the interim, it is critical that our industry attained meaningful pricing gains wherever possible and in the case of KLXE, our deployment of additional equipment will be contingent on higher pricing. As it now stands, there continues to be a good deal of irrational pricing behavior by some competitors.

And we coupled with the significant oversupply of equipment in the marketplace creating an unsustainable market dynamic. We further believe that consolidation within OFS along with current macroeconomic trends continuing should allow the industry to come to better balance.

As we've often emphasized in the past one of these adjustments will be the overarching issue of consolidation.

Reducing the overcapacity and inefficiencies in the market via consolidation will be critically important to the long-term health of the industry and the oilfield service industry will have to keep up with a faster pace of M&A set by the E&P industry.

With our own merger now completed we are well-positioned to continue leading the effort to consolidate oilfield services industry. Given our history of successfully executing on mergers and acquisitions we know that we can increase economies of scale, enhance operating efficiency and drive meaningful shareholder value through consolidation.

Simply, put it remains a fundamental part of our strategy to become a low cost structure provider of high quality drilling, completion and production services. Also wanted to touch on Q1 and our outlook for 2021.

So far in our Q1 which for KLXE begins in February we were materially impacted by winter storm Uri that ripped through the central US hitting Texas particularly hard in February.

The midcontinent region had been hit quite hard with cold weather for most of the month in the coldest regional weather in 30 plus years got all production roughly 3 million barrels per day due to well shut-ins, flow line outages and disrupted road transportation.

In response to the storm our customers shut-in wealth slid out their drilling and completion schedules. We certainly felt the effects of winter storm Uri on our own operations seeing significant whitespace in our calendar losing seven plus revenue days in February.

We expect this revenue to be made up over the course of 2021 as our customers are not changing their budgets but we do not expect to be able to make up for this lost work during Q1. In closing let me again thank our employees who have been critical in helping us execute and achieve our strategic goals and move forward during these challenging times.

Their efforts have enabled KLXE to successfully adapt to the new realities of the market and execute a milestone transaction that makes us stronger both operationally and financially and positions us very well for the future as the industry recovers. We would also like to thank our customers the value our customer service and execution in the field.

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 the line of Ian Macpherson with Simmons Energy. Please proceed with your question..

Yeah. Hi.

I was – I wanted to probably do more with you know given we're pretty late into your fiscal Q1 maybe a little more specifics on the outlook for consolidated top line growth and EBITDA improvement this quarter notwithstanding the loss of the week I think that we all see you know quite hot drilling and completions indicators which you know would suggest that you would have sequential improvement of a good magnitude.

But I don't know how much of that has been offset by the weather so if you could maybe be just a little more specifics around the April quarter outlook and then if you could also talk about how April compares to the January on a basis, help us frame up the run rate going into your fiscal Q2?.

Yeah. Sure. Good morning. Appreciate your question. Look, as I stated in the prepared remarks, we estimate that we lost about seven revenue days, a number of material districts.

And so, I think all of our peers have already commented on the situation and as you well know that incremental revenue, those seven days is essentially margin because when a situation like that comes out, you can't really cut your call structural, fuel and some of your variable calls goes away. But by and large, your calls for that month is fixed.

Compounding that situation is exactly what you alluded to which was horizontal and directional rig count was up approximately 40 rigs at the point in time the storm hit from year end. So, that's about a 12% increase.

Therefore, the industry, our company et cetera was in a bit of a minor ramp up situation for your call structures actually marginally increasing and then the activity comes to a halt.

So, I guess what I'd say is the last point is of from a schedule perspective is as you well know white space is the bane of olefin existence at this point in your calendar and your calendar never lines up perfectly. So, you'll always end up stacking updates as you come out of those situations. And so, that created a slow start in February.

And we're working every day to mitigate that slow start. I think it's a little too early to tell but we're clearly starting from behind in February. So, we'll see how the quarter plays out. Overall, activity and revenue is continuing to ramp. We believe it will do so going into early summer.

And then ultimately, as you know the margin output will depend on the ability to drive incremental price and maintain utilization. But I would say that our run rate revenue coming out of March at least was north of that January run rate revenue. So, we are seeing that the ramp, it’s just a matter of mitigating the loss in February..

Understood. Thanks, Chris. Given – given the – the healthier baseline of – of activity now and I think probably just a – a shared sense of – of stability at bed levels, you still want better pricing than we have today, but you're clearly you know operating on a – on a higher plan and a better plan than you were six months ago.

Does that make you more encouraged and optimistic with regard to consummating another transformative combination that – that as you point out needs to happen you know for you and for the industry? Do you think that consolidation for small cap OFS is becoming more actionable now at – at these activity levels?.

So I guess I'll hit both just quickly. Look, pricing, we've definitely seen an improvement in commodity prices. There's a historical disconnect as you know between where pricing is. I think we're at $58 WTI.

That's more and the kind of that $60 WTI level and what you would have thought about normalized historical activity from a rig or factory perspective. So we have seen that marginal uptick. The reality though is that our customers are solely focused on free cash flow and return of dividends to – to their shareholders as you well know.

And so, at this point time and especially going through the fourth quarter or third quarter of last year, you're in a unique paradigm where OFS pricing is completely unsustainable and it's really one of the major threats to the industry. We have streamlined our cost structure as have most of our peers over an extended downturn.

And so, pricing really can't be reduced any further and has to increase for OFS sustainability.

We feel like some of the irrational pricing behavior that we saw late last year or even early into January is kind of abated and it feels like we found a flaw the question becomes how soon and when can you push and you have to push as you know based off of customer service performance and the value proposition we bring and we try to do that every single day of the week.

With regards to consolidation you know it felt like there was some capitulation last year we talked about this I think on both the third and fourth quarter earnings call where it felt like especially on the private side people were realizing they wanted to be a part of a larger more scalable platform.

I would say as oil price ramped-up we probably saw considerable low in deal flow from the private side in the last couple of months.

And I think part of that is they view it as an opportunity to strengthen their financial statements whether it's their profit or loss statement or their balance sheet and try to improve upon the overall deal economic, so we've seen that flow a little bit I would say we're still seeing imbalance from some of the other small to mid-cap companies and we'll just have to see how that plays out ultimately..

Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question..

Hey, guys I just want to follow Ian’s last question just on the M&A.

Chris what do you think is actually preventing the deals from happening right now because everyone talks about the need for it we just don't really seem to get it done?.

Look I appreciate that comment and understand I'm not sure that I fully can opine on all the roadblocks I think….

Yeah..

…most parties are worried about ultimate shareholder value and all stakeholders and I know you've seen a lot of our peers go through various forms of liability and management, et cetera Of our peers go through various forms of liability management et cetera, I would say if you ask that question as you know, years ago or even six months ago, social issues et cetera all would seem to get in the way I think when you go through the depth of the trough that we’ve been through, everybody is actively trying to right the shift and fix their whole structure as quickly as they can and there becomes disagreements upon the ultimate value and trajectory of each company right.

So the reality of the equation is we've shown the ability to strip out an enormous amount of cost.

I'm very impressed and proud of our team we’ve now closed an idle I think 20 facilities, now 20 plus facilities given what we did with the corporate office last week we just consolidated one corporate office here in Houston, but we closed those 20 facilities rationalized those within nine months, achieved the $46 million synergy target basically $6 million over the original estimate and about one quarter ahead of our original timeline.

And so the synergies are there. The impetus to get something done is there. It's just a matter of bringing some of the consolidated players I think to the table..

Okay.

Just to continue on this, that’s okay, but assuming you're looking at company, but assuming how much is the PPP loan situation impede in the ability to get deals done? Have you come to run into that at all?.

We have run into it. We've seen it. I think the PPP loans have been especially last year a portion of the irrational pricing behavior in the market as people were having personnel our market share unfortunately, we've seen the recent spate of that a little bit within certain business loans.

We have looked at some deals where there's a pretty sizable unknown as to how that is going to be handled. we have listed some deals where there’s a pretty sizable unknown as to how that is going to be handled..

Right..

So, I think company, that’s typically not an issue but on the private size, we’ve definitely seen that on their balance sheet..

Got it. Fair enough.

And then I guess the last one, well, I got two more if that's okay, for Keefer, can you just give us, your thoughts on the bank market and you know haven't for a bit, if you guys did do a deal and required financing, what’s that market like right now?.

Yeah. Good question. I mean we've, we've got an existing credit facility in place so it's, it's not a market that we've been active in..

Okay..

Certainly, we've, some public disclosure from some of the larger bracket banks around alignment and ESG alignment. So, I think broadly there seems to be some question in the market about continued support and activity from some of the larger banks for the oil and gas sector in general.

But likely I think that probably creates a void in the market that some of the larger regional lenders in both the oil and gas producing states, Texas, Oklahoma and others may be able to fill. But I'm speaking not from, from direct experience on that is not just our feeling..

Sure. Right. That’s all, just talking for big picture. Last one will be just on the line, the service lines you guys have.

Can you provide any granularity and some of the specific service lines as opposed to the geographic comment, utilization, anything like, and if you can't, that’s fine?.

Yeah. So, we provided a bit of color in the prepared remarks. But I don't think we'll be able to provide anything additional to what's been disclosed in the remarks..

Fair enough..

And we obviously have disclosures in the filings as well..

Our next question comes from the line of Jamie Perez with R.F. Lafferty & Co. Please proceed with your question..

Good morning. Hi everybody. Most of my questions have been asked and answered. Thank you..

Okay. Thank you, Jamie. Appreciate you tuning in..

This does conclude today's teleconference. I'd like to pass the call back to management for closing remarks..

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

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..