KLX Energy Services - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered modest sequential improvement: revenue rose 3.2% to $159.0M with Adjusted EBITDA up 34% to $18.5M (11.6% margin), aided by stronger completions/production activity and cost controls; GAAP diluted EPS was $(1.04) and Adjusted diluted EPS was $(0.88).
• Versus S&P Global consensus, KLX missed on revenue ($159.0M vs $163.5M*) and Adjusted EPS ($(0.88) vs $(0.62)); S&P’s standardized EBITDA also came in below consensus ($15.0M actual vs $21.8M* est.), reflecting definitional differences vs company “Adjusted EBITDA”.
• Management guided Q3 to be the strongest quarter of 2025 with low-to-mid single-digit sequential revenue growth and continued margin expansion; Rocky Mountains and Northeast/Mid-Con momentum offset softer Permian “white space” in Q2 and should continue improving into Q3.
• Liquidity improved to $65.4M (cash $16.7M + $48.7M ABL availability) and levered FCF was $8.0M, supporting balance sheet flexibility as management balances cash vs PIK interest and curtails 2H25 capex within a $40–$50M gross/$30–$40M net FY guide.

What Went Well and What Went Wrong

• What Went Well

  • Sequential execution ahead of a weaker macro: revenue +3.2% and Adjusted EBITDA margin +260 bps to 11.6% despite US land rig count down ~7% q/q; CEO: “Adjusted EBITDA margin increased by 260 basis points… despite the US land rig count being down (7.3)% sequentially”.
  • Segment rebound outside the Permian: Rockies revenue +13% q/q with Adjusted EBITDA +55% on higher utilization; Northeast/Mid-Con revenue +12% q/q with Adjusted EBITDA +167% as white space eased.
  • Cost discipline and SG&A efficiency: Q2 SG&A $18.0M; CFO noted adjusted SG&A would be ~$15.1M, 12% below prior-year Q2 and 8% below Q1, with adjusted SG&A expected at 9–10% of revenue for 2025.

• What Went Wrong

  • Permian-driven softness: Southwest revenue fell (9.8)% q/q; segment turned to an operating loss with Adjusted EBITDA down (38.5)% on completion holidays and mix/white space.
  • Interest burden and losses: Interest expense of $11.0M drove a GAAP net loss of $(19.9)M (net loss margin (12.5)%), though improved vs Q1; management actively toggled PIK vs cash interest to manage liquidity.
  • Consensus shortfall: Single-analyst S&P consensus implied revenue and EPS above actuals; standardized EBITDA also trailed consensus, highlighting either conservatism or definition mismatch vs company Adjusted EBITDA [GetEstimates – S&P Global, see table note].

Transcript

Speaker 4

Greetings, welcome to the KLX Energy Services second quarter earnings conference call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance, please press star zero from your telephone keypad. As a reminder, today's conference is being recorded. At this time, I'll turn the conference over to Ken Dennard, Investor Relations for KLX Energy Services. Ken, you may now begin.

Speaker 5

Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review its second quarter 2025 results. With me today are Chris Baker, President and Chief Executive Officer, and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide a commentary on its quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at www.klx.com, and there will also be a telephonic recorded replay available until August 21, 2025. More information on how to access these replay features was included in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, August 7, 2025, and therefore you're advised that time-sensitive information may no longer be accurate as of any time of the replay listening or transcript reading. Also, comments made on this call will contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of KLX management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain risks, uncertainties, and contingencies. Comments today will also include certain non-GAAP financial measures.

Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX website. Now, with that behind me, I'd like to turn the call over to Chris Baker. Chris.

Speaker 0

Thank you, Ken, and good morning, everyone. Thank you for joining us today. I'm pleased to report that, consistent with what we outlined on our last call, KLX Energy Services had a relatively strong second quarter, outperforming the market backdrop. Our results demonstrate that we are executing in line with our game plan, driving efficient operations and controlling costs, even as the sector wrestles with persistent commodity price volatility and softness in oil rig and frac spread counts. For the second quarter, we reported revenue of $159 million, up 3% from Q1, and an adjusted EBITDA of $19 million, up 34% from Q1. Revenue increased meaningfully in our Rockies and our Northeast Midtown segments, which more than offset the sequential decline in the Southwest. Adjusted EBITDA margin improved materially, up 260 basis points sequentially to 12%, despite the U.S.

land rig count being down 7% and frac spread count being down 14% over the same period. We experienced meaningful margin follow-through on this revenue increase as a direct result of our focus on maximizing utilization, driving a very efficient cost structure, and leveraging KLX Energy Services' strong reputation for differentiated completion and production services across all key U.S. onshore basins. Our performance was driven by the execution of our operational initiatives, including cost focus, asset rotation, holding the line on pricing where possible, taking market share where profitable, and leaning into higher margin product service lines. As we alluded to on our Q1 call, the second quarter saw significant strength and sequential improvement across our completion and production portfolio, including technical services, coiled tubing, and accommodations, among others.

Our team in the field did an exceptional job managing headcount and sharing personnel across districts in response to the inevitable white space that is pervasive in this market, where our customers' completion plans are constantly changing. Recall, in general, more than 50% of our revenue occurs post the frac job. Therefore, white space due to customers taking completion holidays, especially in the Permian, makes staffing extremely difficult. Incredible teamwork and alignment across our organization allowed KLX Energy Services to maximize labor utilization and drive improved adjusted EBITDA margins. The macro environment remains challenging given OPEC Plus production increases, tariff policy overhangs, recession risk, and rig count volatility. Yet, as we've shown, our diversified portfolio, strong customer alignment, and diverse geographic footprint continue to drive relative outperformance where and when it counts.

Q2 revenue and adjusted EBITDA per rig were $286,000 and $33,000, respectively, which were 8% and 172% ahead of our results in Q4 of 2021, the last quarter with a similar rig count to today. This demonstrates our materially improved market share and positioning within the industry since 2021. Now, let's look at our geographic results. The Rockies was 34%, up from 31% in Q1. The Southwest represented 37% of Q2 revenue, down from 42% in Q1, and the Northeast was 29%, up from 27%. Rockies completion product service lines made significant contributions to the quarter-over-quarter improvement in top line and margin, led by coiled tubing, tech services, and other completion services. The Rockies benefited from a return to normalized seasonal operating levels and a favorable shift in revenue mix, which we expect to largely continue into the third quarter.

The Southwest battled through customer-initiated breaks, with completion holidays driving white space in Q2 due to commodity price volatility, especially within our frac rentals, wireline services, and flowback services product service lines. Margins saw some compression versus Q1, mainly due to cost absorption associated with the previously mentioned white space and standup costs associated with our through tubing business, but remained in line with 2024 averages, which we expect to continue into Q3. Northeast benefited largely from improved completion activity over the first quarter. The segment experienced a 12% revenue increase sequentially and more than doubled its adjusted EBITDA and adjusted EBITDA margin over the same period. You'll recall this segment was impacted by unforeseen white space in Q1. We expect further improvement in both revenue and margin in Q3. By end market, drilling, completion, and production and intervention services contributed approximately 16%, 56%, and 28% of Q2 revenue, respectively.

Finally, as a follow-up to the evolving tariff landscape, our strategy remains the same: pass along increased costs where possible and adjust sourcing to mitigate short and medium-term risks. With that, I'll now turn the call over to Keefer to review our financial results in greater detail, and I'll return later in the call to discuss our outlook. Keefer?

Speaker 1

Thanks, Chris. Good morning, everyone. As Chris mentioned, Q2 2025 revenue was $159 million, a 3% sequential increase. Consolidated adjusted EBITDA was $18.5 million, with a 12% margin, up from 9% in Q1 2025, demonstrating strong cost discipline and improved utilization and was in line with last quarter's guidance. Total SG&A expense for Q2 was $18 million. Backing out non-recurring items, adjusted SG&A expense would have been $15.1 million, a 12% reduction versus prior year Q2 and an 8% reduction versus Q1 2025, reflecting the full benefit of the cost structure changes we executed in early 2024, plus some additional savings in the first half of 2025. We have remained lean from an overhead perspective and expect adjusted SG&A expense to hover in the 9 to 10% of revenue range for 2025.

Moving to our segment results, the Rockies posted a strong sequential rebound with second quarter revenue of $54.1 million, operating income of $3.3 million, and adjusted EBITDA of $10.4 million. Sequential revenue and adjusted EBITDA increased 13% and 55%, respectively, driven by a return to normalized seasonal operating levels and a favorable revenue mix that combined to drive a 500 basis point increase in segment margins sequentially. In the Southwest, revenue, operating loss, and adjusted EBITDA were $58.8 million, negative $1.7 million, and $7.2 million, respectively. On a quarterly basis, Q2 revenue decreased 10% sequentially, with EBITDA down 38%. Permian rig count decline led the U.S. onshore market lower, declining 9% sequentially. Permian customers reduced activity and took extended completion holidays, which drove lower utilization and increased white space versus the first quarter.

Additionally, startup costs and some transitional friction weighed on the quarter as we worked to expand activity within certain completion PSLs. For the Northeast Midtown segment, revenue was $46.1 million, operating loss was $1.3 million, and adjusted EBITDA was $7.2 million. The sequential increase in revenue of 12% and adjusted EBITDA of 167% were largely driven by higher utilization across the vast majority of our completion PSLs, corresponding reduced white space, and targeted expense management across the GS segment. All of this combined to drive a 900 basis point increase in segment adjusted EBITDA margin, and we expect further margin improvement into the third quarter. At corporate, our operating loss and adjusted EBITDA loss for the quarter were $9 million and $6.3 million, respectively, which improved 27% and 14%, respectively, from last quarter as we've continued to reduce overhead and fixed costs.

Now turning to our balance sheet, cash flow, and capitalization. We ended Q2 with $16.7 million of cash on hand and reduced restricted cash from $8.1 million in Q1 to only $600,000 as of June 30. Restricted cash is currently being reduced further to $55,000 in Q3. We ended Q2 with approximately $65 million in liquidity, an increase of 13% from Q1, including $16.7 million of cash and cash equivalents and $49 million of availability on our revolving credit facility, including $5 million on an undrawn file facility. Total debt as of June 30 was $259 million, including $213.7 million in notes and $45 million in ABL, and represents a 1% decrease compared to Q1 levels. We are in compliance with both our net leverage ratio and CapEx covenants as of Q2.

Our bonds require a 2% annual mandatory redemption paid quarterly, and we've continued to make these payments, but we did pick $7.1 million of interest in Q2, and we will evaluate future PIC versus cash pay decisions based on market conditions and company leverage and liquidity. Just last week, we elected to pay a portion of Q3 interest in cash. Even with the PIC interest in Q2, we were able to reduce total debt by $2.3 million versus the prior quarter. Moving to working capital, as of June 30, we had $46 million in net working capital, which decreased almost $14 million sequentially, and our DSO and DPO normalized to 61 days and 51 days, respectively, both in line with longer-term historical averages. We will continue to proactively and prudently manage working capital as we navigate the current market.

CapEx for Q2 was $12.7 million gross and $11.1 million net of asset sales. Spending was focused on maintenance of our pressure pumping, coiled tubing, and accommodation fleets. As of June 30, we had accrued CapEx of approximately $12 million and $2.2 million of assets held for sale, including a property sale for $1.8 million that closed in early August. Looking ahead, we have taken measures to curtail second half spending, and we expect gross CapEx for 2025 in the range of $40 to $50 million and net CapEx between $30 to $40 million. To reiterate our financial objectives, as we advance through 2025, we expect cash and liquidity to improve, supported by our ongoing focus on efficient capital allocation, strategic asset deployment, and proactively managing our debt levels to minimize cash interest costs.

Our team's deep experience navigating sector cyclicality enables us to proactively identify and implement additional measures aimed at continuous cost structure refinement, optimizing our asset footprint, generating sustainable free cash flow, and maximizing financial flexibility. I'll now hand the call back to Chris for his concluding remarks and more color on our outlook.

Speaker 0

Thanks, Keefer. The broader market environment remains volatile, and visibility continues to be opaque, but we are confident that our focus on operational discipline, balance sheet flexibility, and proactive risk mitigation will allow us to successfully navigate the remainder of 2025. Looking forward, Q3 is expected to be the strongest quarter of the year, maintaining a consistent pattern seen in prior years and showcasing our strong positioning with leading customers across the entirety of the U.S. onshore geographic market. We are again targeting a sequential quarterly revenue increase of low to mid-single digits on a percentage basis with continued margin expansion. Despite the noisy macro, this outlook reflects strength in KLX Energy Services' underlying business, recent awards from key customers across our core product service lines, certain customers' completions programs restarting from Q2 breaks, and continued strong operational execution leading to enhanced profitability alongside measured top line growth.

As we look ahead to the second half of 2025, we remain optimistic about the long-term fundamentals for U.S. natural gas, as well as the positive implications for KLX Energy Services. Our significant presence in gas-focused basins positions us well to capture incremental activity as new LNG export capacity ramps over the next 12 to 24 months. On a quarter-over-quarter basis, we saw a 25% increase in our dry gas revenue, the Haynesville plus Northeast, but we are still 40% off of the gas-driven quarterly revenue highs we saw in Q1 of 2023, illustrating that there's ample room to run. We remain committed to deleveraging our balance sheet by appropriately allocating capital on a disciplined and prioritized basis, driving free cash flow and pursuing strategic value-accretive M&A opportunities that support our growth. Plus, our improved debt structure provides the ability to act quickly when compelling opportunities arise.

Although the current market backdrop and our share price create added complexity to potential transactions, we continue to view our business as fundamentally undervalued. Notably, since our March refinancing, a number of potential M&A targets, including some previously reviewed in 2024, are re-engaging. The current rig count environment raises urgency amongst many oilfield services providers on the need for consolidation where the market is challenging both operationally and financially. We continue to believe that meaningful consolidation is necessary for the sector and are ready to capitalize on opportunities that advance our position. In summary, as we enter the second half of 2025, we are confident in our ability to execute our strategy and navigate what is a dynamic and volatile market. Our scale, diversified offering, broad geographic footprint, and strong customer relationships position KLX Energy Services to capture share and continue to drive results.

We appreciate the dedication and contributions of our employees, the partnership of our customers, and the ongoing trust and support of our shareholders. With that, we will now take your questions. Operator?

Speaker 4

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. The first question is from the line of Steve Ferazani with Sidoti & Company. Please proceed with your question.

Speaker 3

Good morning. This is Alex on for Steve Ferazani. Thanks for taking questions.

Speaker 5

Good morning, Alex.

Speaker 3

Good morning. Maybe just to start from us, I know you're guiding for low to mid-single-digit sequential revenue growth in 3Q, which would be typical seasonality. Any concerns about hitting that number given the continued decline in rig count?

Speaker 5

No, look, it's a great question. I think we talked about what underpinned our guidance last quarter. If you step back and look at Q2 specifically, we had a relatively strong quarter relative to the macro background. If you really dig in and look at Q2 on a monthly basis, we really had two out of three solid months. April was weaker than May and June, and that strength exiting Q2 and what we saw in June is a big part of what underpinned our Q3 forecast. As you look at the Q3 guidance specifically, I think rig count is factored in. What's potentially not factored in is unexpected white space from customers.

That being said, we saw a number of operators restart completion programs post some Q2 holidays that they took, and our current schedule and our current 90-day outlook suggest all three months of the quarter should be baseloaded. We've also had some near-term wins, with multiple clients in multiple basins that went through off-season or off-cycle RFQs, post-completing their integration programs associated with recent M&A, and we should benefit from that incremental work as well.

Speaker 3

Great context. Thank you. I know you just touched on this a little bit, but maybe we could expand on opportunities in gas basins and specifically any increased inquiry activity in the Haynesville or the Marcellus, and just geographically, where do you see the best opportunities over the next 6 to 12 months?

Speaker 5

Yeah, it's a great question. Look, we talked about it in the prepared remarks. We've seen rig count ramp about 12 rigs from the bottom in the Haynesville. Our Haynesville revenue increased about 25%, or Haynesville plus Northeast revenue increased about 25% quarter over quarter. The way I would think about those two basins, the Northeast has been fairly stable for us. I would say that in a positive light. Q1 was fairly strong. Q2 continues to hold there. The Haynesville activity continues to ramp, and my prior comments around winning RFQs, we've definitely seen some opportunities where we've won some incremental work going into the second half of the year. We're still off the highs of Q1 of 2023 when we think about the overall gas exposure and revenue coming out of those two basins.

I really think it speaks to the opportunity we have on the revenue level to continue to run as gas rig count continues to expand along with completions activity.

Speaker 3

Thank you for the additional context. Just one more from us. You know, lower CapEx and reduced working capital certainly seems to be supporting the balance sheet. Just a question, given the ongoing weakness, how are you thinking about cash flow in the second half and any potential further asset sales or cost cuts? I know you kind of alluded to some opportunities in the prepared remarks.

Speaker 1

Yeah, hey, Alex, this is Keefer. I'll jump in on cash flow. To your point, we didn't give an explicit guide on free cash flow for the second half of the year, but with that said, we did generate almost $12 million of unlevered free cash flow in the second quarter, and we saw liquidity increase almost $10 million sequentially. We have guided clearly for Q3 to be up from a top line perspective as well as from a margin perspective. I think clearly that's driving higher quarter over quarter EBITDA for the business. From a working capital perspective, Q3 is going to be slightly more intensive than the second quarter was. There are a couple of things driving that. One, obviously an incremental increase in revenue, and two, there are three payrolls in the month of July, and there are no three payroll months in the second quarter.

Those two things combine to drive marginally higher working capital intensity, at least in the third quarter. Some of that will likely unwind in the fourth quarter. Thinking through the other building blocks of free cash flow, if you just use kind of the midpoint of our full-year net CapEx guide, it would imply about $15 million of second half net CapEx. Based on current accruals, I think it's safe to assume that there's going to be some shape to that with Q3 capital spending being higher than capital spending in the fourth quarter. Put all that together, I think, to reiterate what we said in the prepared remarks, we do expect liquidity/cash to continue to improve as we navigate the second half of 2025.

Speaker 3

Very helpful context. Thank you. That's all from us.

Speaker 5

Thank you, Alex.

Speaker 1

Thanks, Alex.

Speaker 4

Next question is from the line of John Daniel, Daniel Energy Partners. Please proceed with your question.

Speaker 2

Good morning, Chris, Keefer. Thanks for having me. Chris, in your prepared comment, you touched on what I took as elevated M&A discussions. What would you say is the driver of that, and do you think that the people that you might be speaking with have more realistic valuation expectations?

Speaker 5

I think the driver of it is somewhat capitulation. Look, the reality is some of the smaller service companies are really struggling in this environment where they perhaps don't have the SOP requirements, the safety initiatives, HSE programs to work for some of the blue-chip majors. For maybe the first time in a long time, we're seeing a bifurcation of performance, and I think some of the smaller guys are really struggling in certain basins. Whether there's capitulation on price and value is very much TBD, but we are definitely seeing deal flow and a bit of capitulation where people are coming back asking to come to the table and see if the art of the possible is there.

Speaker 2

Okay. You just touched on the SOP requirements. That was something that some field guys shared with me a couple of weeks ago on a trip. I'm just curious, does that apply to all of the various OFS service lines, or are there certain ones that are maybe immune from that? Can you just elaborate on the significance of that?

Speaker 5

I think it's highly significant when you think about the blue-chip majors that have been the primary drivers of the wave of consolidation we've seen over the last couple of years. When you think about those names, their HSE requirements, their SOP requirements, consistency of performance in the field is very, very important. Are there operators and are there certain service lines when you talk about non-pressure control surface rental equipment or otherwise that don't have those requirements, you know, light plants, other things? Sure, there's leniencies there, especially when you get to some of the smaller private operators. When you're talking about pressure-related equipment, coiled tubing, frac, etc., yes, I think you have to have all the appropriate levels of procedures in place to work consistently for the larger operators.

Speaker 2

Okay. You've been doing this a long time. Did you get the impression, Chris, that the enforcement of these things has had a step change, if you will, versus maybe what those majors would have done five to seven years ago?

Speaker 5

If you harken back to our Q1 call of last year, we talked about a couple of operators completely shutting down certain basins and districts for a month. I think that speaks to the level of sincerity they have around doing things the right way. I think there has been a step change. Are there anomalies? There's always anomalies. There are exceptions in the field, etc., and I won't belabor or go into some of those specifics here calling anybody out. I think by and large, the 80-20 approach, yes, I think there's been a step change.

Speaker 2

Got it. Okay. The last one for me, just on the gas markets, and I know visibility sometimes is limited in this space, but would you expect a less severe seasonal impact in Q4 this year in the gas markets than maybe prior years, or would you just say normal at this stage?

Speaker 5

It's a good question. I think we continue to probe with our clients around how they're feeling with the current strip. If you rolled the clock back a couple of weeks ago, the strip was materially stronger than where it is today, right? Yet at the same time, they don't seem to be getting cold feet. We continue to see incremental rigs coming into the Haynesville along with incremental completion crews. It doesn't seem like there's going to be any significant fourth quarter budget exhaustion in the Haynesville. I think the Marcellus Utica maybe is a little bit different, only because it felt like activity was very robust on a seasonally adjusted basis in Q1 of this year and has continued to be. If you look at rig count, right, it's very stable in those two plays and has been not a lot of growth, but a lot of stability.

The question becomes, is it that stability and quick start to the year in Q1? Do they have some budget exhaustion in Q4? We're not hearing about that yet, but it's clearly a concern that we'll try to stay abreast of.

Speaker 2

Fair enough. Okay, that's all I have. Thank you for including me.

Speaker 5

Appreciate it, John. Thank you.

Speaker 2

Thank you.

Speaker 4

This now concludes our question and answer session. I'd like to turn the floor back over to management for closing comments.

Speaker 0

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

Speaker 4

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