KLX Energy Services’ Perspective in Q1: KEY Takeaways

KLX Energy effectively utilized a frac spread in Q1 as another spread went through downtime. The company’s activities in the natural gas-heavy Southwest region gathered steam, while crude oil-specific operations decelerated. The company introduced GEN 2 downhole through-tubing in Q1. Higher tariffs can affect its cost structure. Its cash flows turned negative in Q1.

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Key Drivers And Outlook

Our short article discussed our initial thoughts about KLX Energy Services' (KLXE) Q1 2025 performance a few days ago. In Q1, its US operations saw a divergent performance between Southwest and the Rockies & Northeast regions. While Southwest's performance improved, Mid-Con completions deteriorated due to seasonality and a slowdown. This was because one of its two frac spreads faced downtime. The company expects these trends to reverse in Q2. Southwest represented 42% of revenue while the share of the Northeast/Mid-Con declined to 27% in Q1.

In 2025, the company expects the Southwest region to gain market share. It also expects the Rockies to bounce back in Q2. In Q1, completion PSLs in the Rockies made significant contributions. It aims to expand market share across rentals and tech services PSLs. In tech services PSL, it is developing a Gen 2 version of the Oracle SRT (a downhole through-tubing). This technology should position it well in the natural gas basins in the long term.

KLXE plans to take a “cautious approach to the remainder of 2025” as it wades through a volatile and uncertain macro environment. It remains “bullish” on the U.S. natural gas story as it expects natural gas and LNG exports to grow. As new LNG capacity comes online over the next 12 to 24 months, KLXE’s natural gas-focused basin operations should do well. As a result, its pricing and utilization can improve. It can also mitigate the downturn in the crude oil-directed activity as crude oil prices and the operators’ capex cuts materialize.

Tariff Effect and Cost Structure

The increase in tariffs can adversely affect oilfield services. KLXE, in this environment, has natural advantages because its PSL components and products like plugs, ERT, and thru-tubing motors are manufactured in the USA. Nonetheless, short-term disruption and pressure on the cost structure.

Although the company’s SG&A costs increased in Q1 2025 compared to a quarter earlier, investors may note that backing out non-recurring items would equal the costs. Its G&A headcount was down 3% versus a year earlier, following the cost structure changes it implemented in 2024. If costs increase, the company will likely pass along the increased costs to mitigate medium to long-term risk.

A Discussion On Q1 Performance

Quarter-over-quarter, KLXE's revenues in the Rocky Mountains decreased by 11% in Q1. Northeast/Mid-Con saw an 18% revenue fall. Its revenues from the Southwest segment, on the other hand, increased by 6% in Q1 from a quarter earlier.

KLXE's cash flow from operations steeped more into the negative territory in the past year until Q1 2025. Due to a large accumulated deficit and a rise in net loss, its shareholders' equity was negative as of March 31, 2025. Its liquidity was $58.1 million on that date. It expects cash and liquidity to improve in 2025, which would help withstand the cyclicality and volatility of the oilfield services industry.

Relative Valuation

KLXE is currently trading at an EV/EBITDA multiple of 4.3x. Based on sell-side analysts' EBITDA estimates, the forward EV/EBITDA multiple is higher (4.5x).

KLXE's forward EV/EBITDA multiple contraction versus the current EV/EBITDA is less steep than its peers' because its EBITDA is expected to decrease less sharply than its peers in the next year. This typically results in a higher EV/EBITDA multiple than its peers. The stock's EV/EBITDA multiple is lower than its peers' (NINE, PUMP, and LBRT) average. So, the stock is undervalued compared to its peers.

Final Commentary

In Q1, KLXE’s Mid-Con completions deteriorated due to seasonality and a slowdown, leading to effective operating of only one frac spread. It will remain cautious in 2025 as economic and policy-related uncertainty prevails. On the other hand, the Rockies & Northeast regions may continue to improve performances. The company also expects natural gas-directed operations to improve due to natural gas’s long-term growth factors.

However, cash flows more into the negative territory in Q1, which, along with a large accumulated deficit, can spell trouble for KLXE's balance sheet. Regardless, the company expects cash and liquidity to improve in 2025, which would help withstand the industry cyclicality and volatility. The stock is relatively undervalued compared to its peers.

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