KLX Energy Services Holdings, Inc. (KLXE) Q3 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the KLX Energy Services 2026 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I'll turn the conference over to Ken Dennard. Thank you, Ken. 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 its third quarter 2026 results. With me today are Chris Baker, President and Chief Executive Officer, and Geoff Stanford, Senior Vice President, Interim Chief Financial Officer, and Chief Accounting Officer. Following my remarks, management will provide commentary on the 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 until November 20, 2026. 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, November 6, 2026. Please be advised that time-sensitive information may no longer be accurate as of the time of any replay, listening, or transcript reading. Also, comments 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 statements made by management. 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 those risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in the quarterly press release, which can be found on the KLX website. And now with that behind me, I'd like to turn the call over to Chris Baker. Chris?

Thank you, Ken, and good morning, everyone. When we spoke in August, I said our focus on the second half of the year came down to 3 things: growing revenue and adjusted EBITDA in line with our guidance, integrating WolfPack, and executing on the equity rights offering to reset the balance sheet. In the third quarter, we delivered on all 3. First, this was a strong quarter for KLX and demonstrated the earnings potential of our platform when activity, mix, and execution aligned. Revenue was $186 million, above the high end of our guidance range and up $18 million or 11% sequentially, comparing favorably to the 7% increase in average Lower 48 land rig count. Adjusted EBITDA increased 33% sequentially to $25 million. Both metrics benefited from a full quarter of Wolf Pack revenue contribution alongside broad-based revenue increases across all 3 of our operating segments. Second, we substantially completed the integration of Wolf Pack into our financial systems, HR, IT, and field operations. The remaining integration actions and the realization of our targeted synergies are fourth quarter priorities. Third, we successfully closed the backstop equity rights offering, which strengthened our balance sheet. The transaction converted $88 million of debt to equity and raised $37 million of new equity. As a result, we ended the quarter with approximately $100 million less debt than at the end of the second quarter and $78 million of liquidity. We appreciate the support of our shareholders and creditors in closing this transformational transaction. The rights offering gave shareholders tradable rights to buy new shares in priority to and at the same price as the credit parties. The credit parties provided the backstop without receiving a backstop fee. For the backstop, we negotiated a bespoke transaction with our creditors to exchange their senior secured position for equity, which reflects their confidence in KLX and our team. We believe this structure was an equitable way to recapitalize the business. Lastly, from a deal fee perspective, the transaction structure provided the most cost-effective deleveraging process we've seen, with total bank and legal fees across all parties totaling less than $6 million. We lowered our annual interest burden by approximately $12 million and reduced net leverage to approximately 2x, excluding capital leases, based on third quarter run rate adjusted EBITDA. We also refreshed our board as part of the recapitalization. Last month, we welcomed Franklin Edmonds, and Dirk Hallen as independent directors. Frank brings more than 3 decades of investment capital markets and corporate governance experience, and Dirk brings more than 12 years in completions-focused oilfield services experience. Turning to the third quarter overview. Again, revenue was up 11% sequentially compared to roughly 7% increase in average Lower 48 land rig count. Adjusted EBITDA margin improved to 13.4% from 11.2% in the second quarter. Last quarter, I pointed to the 12.7% margin we posted in the third quarter of 2025 and said that we expected to improve on that number. Revenue growth was broad-based. All 3 segments grew revenue sequentially, with the Rockies up 15%, the Southwest up 10%, and Northeast/Mid-Con up 8%. Accommodations, tech services, rentals, and wireline were the main contributors to revenue growth. Tech Services has been a bright spot this year driven by our expanding downhole tool portfolio and multi-string coiled tubing services following targeted investments in R&D, equipment, and strategic thinking from our leading subject matter experts to reimagine service delivery to drive completion efficiencies for our customers. The Rockies stood out this quarter as segment-adjusted EBITDA doubled from the second quarter to $12.6 million, and margin moved from 12.4% to 21.5%. Outside of the Rockies, accommodations and tech services led the growth in both the Southwest and the Northeast/Mid-Con, with accommodations in both segments supported by a full quarter of Wolf Pack. Systems integration was completed at the start of the quarter, and we remain on track to achieve the previously targeted $2.5 million of annual fixed cost synergies. By end market, completions represented approximately 50% of third quarter revenue, drilling 25%, production 16%, and intervention services 9%. Drilling share moved up again from 23% in the second quarter. As a reminder, Wolf Pack and our legacy accommodations business are both classified within drilling, so part of the increase reflects Wolf Pack's contribution. Revenue per average operating rig was approximately $323,000 in the third quarter, up from approximately $311,000 in the second quarter. It is worth noting that this is the first time this metric has been above $320,000 since the third quarter of 2024. Adjusted EBITDA per rig improved to approximately $43,300, back in line with where we were in the back half of both 2024 and 2025. The third quarter gave a clear look at the operating leverage across the business. Our focus heading into year-end is to hold the gains we made in the third quarter, control costs, maintain margins through the typical seasonal slowdown, and capture the remaining Wolf Pack synergies. With that, I'll hand the call over to Geoff to go through the quarter, and I'll come back later to discuss the market and our outlook. Geoff?

Thank you, Chris, and good morning, everybody. We had a strong third quarter with lots of positives, both trends and transactions. First, I wanted to go over our third quarter 2026 income statement results and then walk you through in more detail our Q3 balance sheet, cash flows, and liquidity. For the quarter, revenue exceeded our guidance, coming in at $186 million. Adjusted EBITDA came in at $25 million, equating to a 13.4% margin, in line with our guidance. Revenue, adjusted EBITDA, and adjusted EBITDA margin all increased sequentially by 11%, 33%, and 20%, respectively, over Q2, and all increased year over year by 11%, 18%, and 6%, respectively. Revenue was up $18 million, and as previously mentioned, includes a full quarter of the contribution from the Wolf Pack acquisition. Cost of revenues excluding depreciation and amortization was $144 million, up from $131 million sequentially and year over year due primarily to the increase in activity. The gross margin improved to approximately 23% from 22%. Our SG&A cost declined sequentially to $18.8 million, or 10% of revenue, down from $19 million, or 11% of revenue. These Q3 costs included approximately $0.7 million of non-recurring costs associated with the amended and restated indenture. Depreciation and amortization was $25 million, flat sequentially and down from $23 million in Q3 of 2025. Interest expense for the quarter was $13.4 million. Of that, approximately $2.6 million was paid in cash, $7.5 million was paid in kind and added to principal, and the balance was non-cash amortization of debt issuance costs and discounts. Net loss for the third quarter is $15 million, or $0.68 per share, compared to net loss of $8 million, or $0.41 per share, in the second quarter. 2 items important to that comparison are: 1, in Q3, a $4 million loss on debt extinguishment tied to the backstop exchange; and 2, in Q2, the $6.5 million bargain purchase gain from the Wolf Pack acquisition. Adjusting for those items, $0.7 million of legal costs associated with the amended and restated indenture, and other 1-time items, adjusted net loss was $10.1 million, or $0.44 a share, compared to $13.2 million, or $0.64 per share, last quarter. Adjusted operating income was a positive $4 million compared to adjusted operating loss of $3 million in the second quarter. 1-time costs mostly comprised of legal and facility costs, totaling $1.8 million, up from $1.2 million in Q2 of 2026. Returning to the segment results. In the Rocky Mountains, third quarter revenue was $59 million, up 15% sequentially, led by wireline, rentals, and tech services. Operating income improved to $7 million from $300,000, and adjusted EBITDA doubled to $13 million for a margin of 22%. Higher utilization drove the improvement. Compared to the third quarter of last year, segment-adjusted EBITDA was up more than 55% on revenue growth of about 15%. In the Southwest, revenue was $71 million, up 10% sequentially, driven by accommodations and tech services. Operating income was $0.6 million, and adjusted EBITDA increased 16% to $9 million, with margins improving to 12%. Year-over-year Southwest revenue is up 25% and adjusted EBITDA is up roughly 73%. Northeast/Mid-Con revenue was $56 million, up 8%, also led by accommodations and tech services. Operating income was $5 million, flat compared to the second quarter, and adjusted EBITDA was $12 million compared to $13 million. Results in the Northeast improved during the quarter, but that was offset by slightly lower utilization in the Mid-Con. As a result, segment-adjusted EBITDA margin was 22% compared to 24% in Q2. Corporate adjusted EBITDA loss was $9 million compared to a loss of $8 million in Q2, reflecting higher personnel costs and Wolf Pack costs. Turning to the balance sheet, our execution of the rights offering and notes exchange significantly deleveraged debt in Q3 by $101 million and boosted liquidity to $78 million at September 30, 2026. $29 million was drawn on the ABL/FILO facility. The company's LTM net leverage ratio at September 30 was 2.5x, significantly down from 3.9x at June 30, 2026. Cash flow from operating activities was $7 million in Q3, down from $11 million in Q2, due primarily to the working capital and accounts receivable build. Q3 unlevered free cash flow decreased to a negative $1 million from a positive $7 million in Q2. Net Capex for the quarter was $11 million, up from $6 million in Q2. Spend was primarily maintenance-related, with maintenance accounting for approximately 87% of gross capital expenditures. We ended the quarter with $2 million of assets held for sale, consisting primarily of 2 facilities. As expected, growth for this quarter required additional working capital as net working capital increased from $19 million to $54.7 million, driven by higher accounts receivable. We expect some working capital to be released as activity moderates in the fourth quarter. Total debt on the balance sheet at Q3 was down considerably by $101 million to $188 million compared to $289 million in Q2. Net debt was $183 million compared to $281 million. We had $5 million of cash and $73.4 million of availability under the ABL. Total liquidity increased $25 million from the end of the second quarter. In addition, as part of the rights offering, on October 13, 2026, we redeemed $6.2 million aggregate principal amount, finalizing the $94 million total reduction in our 2030 senior notes. At September 30, 2026, we are in full compliance with all financial covenants under both the notes and the ABL. On the outstanding share count, the rights offering closed on September 29, so our third quarter weighted average share count of 22.7 million reflects the new shares for the final 2 days of the quarter. We had 105.7 million shares outstanding at quarter end, and the fourth quarter per share results will reflect the post-transaction share count for the full quarter. Also of note, our 5 large coiled tubing unit leases will roll off in the fourth quarter with our final payment in November, resulting in an annualized cash savings of $8.2 million per year. As you look forward to Q4, we will continue to focus on DSO and collections, align capital spending with activity, and manage our interest costs. With that, I'll turn it back over to Chris. Chris?

Thanks, Geoff. I'll start with the macro overview. The market is improving, but the recovery remains uneven. Overall, land activity increased. The average U.S. land rig count rose to 575 in the third quarter, up from 538 in the second quarter and 531 in the first quarter. That is a clear step change, and we are in a healthier market than in the first half of 2026. However, operators continue to allocate capital selectively, and their response to higher commodity prices remains more disciplined than in prior cycles. On the natural gas front, gas-directed activity remains tenuous. We've seen a plateau and, more recently, a decline in the Haynesville rig count alongside deferred completion activity. Given the current natural gas strip, we expect gas-directed activity to continue to fluctuate. Oilfield services demand is increasingly favoring high-spec equipment, differentiated technology, and service quality. While available completion capacity appears tighter, pricing across most service lines has not improved enough to justify the incremental capital needed to add meaningfully to supply. Lastly, the typical fourth quarter seasonal slowdown should be less severe this year than in recent years, although customer schedules will remain fluid through the holidays. For KLX, the takeaway is straightforward. Market signals are improving, but conditions remain uneven. We are focused on protecting utilization and pricing where our services are differentiated. For the fourth quarter, we expect revenue of $172 million to $184 million. At the midpoint, that represents approximately 14% growth from the prior year period and a reduced sequential seasonal decline relative to the third quarter. We expect customer schedules, weather, and holiday activity to create some variability across product lines and geographic mix. Our priorities are clear: protect the margin progress achieved in the third quarter, manage costs through the fourth quarter seasonal period, improve performance in the product lines that did not fully participate in the third quarter growth, and complete the remaining Wolf Pack integration actions. Beyond the fourth quarter, our improved balance sheet puts us in a better position to manage our business strategically, execute on growth opportunities, and evaluate M&A opportunities with a focus on consolidation, margin enhancement, and further deleveraging. As previously disclosed, the annual interest savings and maturity of our legacy coiled tubing leases improve free cash flow on a 2027 basis by approximately $20 million. We have a handful of additional cost structure initiatives that should further improve annual free cash flow, which we'll discuss as part of our fourth quarter call in March of 2027. All of these initiatives better position KLX to continue to delever via free cash flow generation and participate in consolidation. In closing, there are 3 key takeaways from the quarter. First, operating performance improved, revenue and adjusted EBITDA increased faster than the rig count, all 3 segments grew sequentially, and the Rockies demonstrated significant operating leverage. Second, the recapitalization materially improved our balance sheet and expanded our financial flexibility. KLX is better positioned today than any time since the KLX-QES merger. Our run rate net leverage ratio stands at 2x, and we have rebounded to $100 million of run rate adjusted EBITDA. Our improved financial position creates a more resilient financial foundation for KLX, gives us greater flexibility to invest in the business, support our customers, pursue disciplined growth, and create long-term shareholder value. Third, our fourth quarter focuses on protecting margins, converting earnings to cash, and completing the remaining Wolf Pack integration work. Before we move to Q&A, I want to thank our employees for their execution this quarter, driving revenue and improving our HSE initiatives simultaneously, especially the teams that brought Wolf Pack into the KLX fold while maintaining the high level of customer service that we expect. I also want to thank our customers, our shareholders, our lenders, and the backstop parties for their support through the rights offering. With that, we will now take your questions. Operator?

[Operator Instructions] Our first question is from Peter Sidoti with Sidoti & Co. Please proceed with your question.

Just 2 quick questions. One is the balance sheet now seems much more stable than it has in the past. Are you now comfortable with your equity position, and will you continue to use the ATM program?

Good morning, Peter, and thanks for joining the call, and condolences to Steve. Look, I think the balance sheet is materially improved, as we said numerous times through the prepared remarks. When you think about free cash flow breakeven EBITDA for 2027, it's materially improved. And so depending on how you think about cash, Capex, working capital builds, and just the normal seasonal cycles, you would arrive at, you know, based off adjusted interest costs as well as our expected growth in our lease cost on a year-over-year basis, you would expect adjusted breakeven EBITDA from a free cash flow perspective to be somewhere in the upper $60 million, low $70 million range, right? So materially improved balance sheet. As far as the ATM, we still have the program out there. We have limited available shares to use, and that's governed by, you know, the board and a contingent of the board when it comes to our pricing committee. And so I think, clearly, there's been a lot of carnage in the market in the last few days, and our share price has suffered like many others have. So I think that's TBD in the future, and we'll see how the share price continues to react to market news and our performance.

Okay, and I guess in terms of just the turnaround, and particularly on the balance sheet, do you feel you're 90% done, 95% done, 100% done? In an ideal situation, going into next year and the following year, what do you feel your biggest limits are at this point in time? Or what's limiting your flexibility the most at this point?

No, right, appreciate the question. I think, look, the primary means and focus is on continuing to delever the balance sheet through driving free cash flow and performance in the business, right? And if you – so back to the earlier statement, we cut $12 million of interest costs. We cut about $8 million of lease costs, or we'll cut about $8 million of lease costs by the end of this year. So that's improving the business by $20 million on a year-over-year basis from a free cash flow generation perspective. And so we still have some leverage on a 3Q basis. We're at 2x leverage. It's the lowest net leverage ratio we've been at since the KLX-QES merger, and so materially improved. We still have some amortization associated with the notes, although it's de minimis, and so our main focus is continuing to delever via free cash flow, and to the extent we find an accretive, attractive M&A opportunity that checks all the boxes from an industrial logic perspective, then we'll absolutely evaluate that, and we'll have to see what the consideration mix is and where the share price is, whether we can use equity at that point in time or whether we finance it in other creative ways similar to what we did with the Wolf Pack acquisition.

Okay, so I guess that's my question. You're now in a position to go back on the offense. You've been playing defense for the last couple of years.

That is absolutely the intent, and it was part of the driver of the opportunistic engagement that we did with kind of a bespoke transaction with the backstop equity rights offering to right the balance sheet and increase market cap so we could use equity and we could go on the offense with counterparties. And we'll see what that brings in 2027. Thanks.

And congratulations on the rights offering and protecting your shareholders. Okay, thank you very much.

Yes, thank you, Peter.

Our next question is from John Daniel with Daniel Energy. Please proceed with your question.

Sort of a high-level 1 for you, but it seems like some of the OFS service lines out there and even some geographies are having an easier time pushing price versus others. I'm just curious if you could give us your high-level thoughts on where you think the pricing improvements will come most easily for you. And for those where it might be a bit of a challenge, what do you think needs to happen before the challenge goes away?

That's a good question. You know, the simple answer is: is pricing where it needs to be? All caps, no, it is not. We talked about back in Q2, I think you saw the reset of pricing coming out of the 2025 RFQ season. And I think in our Q1 results and many others, you saw pricing kind of rear its ugly head and it impacted many competitors and companies and many PSLs. So I think the OFS industry as a whole has been struggling for the last 2 years from a pricing standpoint. On a relative basis, this is probably the toughest pricing regime that we've seen in a $100 oil environment. That being said, look, when you make decent margins, I think our Q3 results prove that you can when your calendars are perfect and you don't incur a lot of unabsorbed costs and white space, right? And that is not always easy to do. And so to your question specifically, what we've seen is where you have differentiated technology and services and applications where you can increase pad efficiency, increase safety, eliminate the potential of NPT, that's where we've been able to successfully move price, along with where we've got kind of niche market positions geographically and regionally with certified equipment. So we have been effective, I think, especially in the second half of this year of moving price around the margin. But it's not fulsome across the portfolio. To your last question, I think you're probably seeing this with many of our peers in the industry, where it's hard to move prices where service lines are the most fragmented in the bigger markets. So where you have all the competition in the Permian where the business lines are most fragmented and don't have really true technology differentiators, that's where it's difficult.

Do you think on those fragmented service lines, I mean, basically you see lots of deals I'm sure, but like, what's really the interest level of people to think more, you know, strategically and combine, whether it be, you know, just your thoughts on the M&A landscape? Because, I agree with you. It seems like at $100 WTI, you would think there'd be a bit more upside to margins and pricing, right? Than what we've seen thus far for the industry.

No doubt. I think when you look across the industry, to a large degree pricing is what has adjusted EBITDA margin and gross profit margin constrained. And so, from an M&A landscape, and what I think we've also seen is, it's been a bit surprising, we've seen some assets go to auction, right, so they don't put revenue and EBITDA. We've seen other people closing the door and trying to monetize real estate as a means to drive value. And so that's around the margin. That's clearly with some of the smaller players. You need more of that. Other people sell assets into Argentina and Venezuela, and some people move assets to the Middle East because there are better returns on capital. So all of that is helpful. In the latter instance, a lot of that equipment has been equipment that's come off the fence line, so it's not really coming out of the supply-demand dynamic and what we're seeing in the active market in any rig count environment. So here again, not really a driver of shortage of capacity to drive pricing.

Fair enough. One final 1 for me, and then I'll let you be. Can you just give us the outlook for the frac business? How's the job board look over the next few months?

Look, I think what I would say is we typically don't provide guidance on a PSL-specific level. You know, I think our Q4 guidance is pretty robust when you think about our business as a whole. And, you know, if you're comparing it on the midpoint on a year-over-year basis, it's a 13.5% year-over-year improvement. So that's pretty solid. We would expect seasonality in the Rockies as expected. But, you know, at $100 crude, you've definitely seen certain of the independent operators step up and try to complete wells going into the end of the year. And I think that holds true across our completion platform, including frac.

I've been a hog. I'll turn it over to others. Thank you.

Yes, sir. Thank you for the question.

We have reached the end of the question and answer session. I would like to turn the floor back over to Chris Baker for closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.