Greetings. Welcome to the KLX Energy Services 2026 third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note, this conference is being recorded. I will now 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 20th, 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 6th, 2026, and 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. 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 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 would 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 three things: growing revenue and Adjusted EBITDA in line with our guidance, integrating Wolf Pack, and executing on the equity rights offering to reset the balance sheet. In the third quarter, we delivered on all three. First, this was a strong quarter for KLX and demonstrated the earnings potential of our platform when activity, mix, and execution align. 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 three 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 Backstopped 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 two times, 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 Frank Edmonds and Dirk Hallen as independent directors. Frank brings more than three decades of investment capital markets and corporate governance experience, and Dirk brings more than 12 years in completion-focused oil field services experience.
Turning to the third quarter overview. Again, revenue was up 11% sequentially compared to a 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 upon that number. Revenue growth was broad-based. All three segments grew revenue sequentially, with the Rockies up 15%, the Southwest up 10%, and Northeast MidCon 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 coil 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 MidCon, 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%, 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 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. 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 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 amort 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. Two items important to that comparison are, one, in Q3, a $4 million loss on debt extinguishment tied to the backstop exchange, and two, 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 one-time items, adjusted net loss was $10.1 million, or $0.44 a share, compared to $13.2, or $0.64 per share last quarter. Adjusted operating income was a positive $4 million compared to an adjusted operating loss of $3 million in the second quarter. One-time costs mostly comprised of legal and facility costs totaling $1.8 million, up from $1.2 million in Q2 of 2026.
Turning 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 up $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%. In the Northeast MidCon, 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 MidCon. As a result, segment Adjusted EBITDA margins 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 delevered debt in Q3 by $101 million and boosted liquidity to $78 million. At September 30th, 2026, $29 million was drawn on the ABL/FILO facility. The company's LTM net leverage ratio at September 30th was 2.5x , significantly down from 3.9x at June 30th, 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 quarter two. Spending 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 two facilities. As expected, growth for this quarter required additional working capital, as net working capital increased from 19% 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- $188 million, compared to $289 million in Q2. The 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 13th, 2026, we redeemed $6.2 million aggregate principal amount, finalizing the $94 million total reduction in our 2030 Senior Notes. At September 30th, 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 29th, so our third quarter weighted average share count of 22.7 million reflects the new shares for the final two 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 five 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 we look forward to Q4, we will continue to focus on DSO and collections, align capital spending with activity, and manage our interest cost. 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 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, along with 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-$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 improves 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 will 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 three key takeaways from the quarter. First, operating performance improved, revenue and Adjusted EBITDA increased faster than the rig count, and all three 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 two times, 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 focus is 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.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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. Our first question is from Peter Sidoti with Sidoti & Co. Please proceed with your question.
Hi. Good morning. Thank you very much, gentlemen. Just two 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. I think the balance sheet is materially improved, as we said numerous times through the prepared remarks. When you think about free cash flow break-even EBITDA for 2027, it's materially improved. Depending on how you think about CapEx and working capital builds and just the normal seasonal cycles, you would arrive at, based off adjusted interest costs as well as our expected roll-off in our lease cost on a year-over-year basis, you would expect adjusted break-even EBITDA from a free cash flow perspective to be somewhere in the upper $60 million, low $70 million range. 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 the board and a contingent of the board when it comes to our pricing committee. 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. I guess, in terms of just the turnaround, and particularly on the balance sheet, do you feel you're 90% done, 95% done, 100%? 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 on continuing to delever the balance sheet is through driving free cash flow and performance in the business, right? If you think, so back to the earlier statement, we cut $12 million of interest costs. We cut about $8 million of lease costs, or will cut about $8 million of lease costs by the end of this year. That is improving the business by $20 million on a year-over-year basis from a free cash flow generation perspective. We still have some leverage on a 3Q basis. We are at two times leverage. It is the lowest net leverage ratio we have been at since the KLX-QES merger, materially improved. We still have some amort associated with the notes, although it is de minimis.
Our main focus is continuing to delever via free cash flow. To the extent we find an accretive, attractive M&A opportunity that checks all the boxes from an industrial logic perspective, then we will absolutely evaluate that, and we will 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 the Wolf Pack acquisition.
Okay. I guess that is my question. You are now in a position to go back on the offense. You have 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 bespoke transaction with the Backstopped Rights Offering, is to right the balance sheet and increase market cap so we could use equity and we could go on the offense with counterparties. We will see what that brings in 2027.
Congratulations on the rights offering and protecting your shareholders. Okay, thank you very much.
Yeah. Thank you, Peter.
Our next question is from John Daniel with Daniel Energy. Please proceed with your question.
Hey, Chris. Thanks for including me. Sort of a high-level one 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 am 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 so the challenge goes away?
That's a good question. The simple answer 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 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. I think the OFS industry as a whole has been struggling for the last two 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, can 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.
That is not always easy to do. To your question specifically, what we've seen is where you have differentiated service, 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. We have been effective, I think, in especially 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 and in the industry, where it's hard to move prices where service lines are the most fragmented in the bigger markets.
Right.
Where you have all the competition in the Permian, and 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, you see lots of deals, I am sure, but what is really the interest level on people to think more strategically and combine, whether it be Just your thoughts on the M&A landscape, because I agree with you, it seems like at $100 WTI, you would think there would be a bit more upside to margins and pricing, right, than what we have 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, gross profit margin constraints.
Yeah.
From an M&A landscape of what I think we have also seen is, it has been a bit surprising, we have seen some assets go to auction.
Right.
They do not bring revenue and EBITDA, and we have seen other people closing the door and trying to monetize real estate as a means to drive value. That is around the margin. That is clearly with some of the smaller players.
You need more of that. We've seen other people sell assets into Argentina and Venezuela, and some people moving assets to the Middle East because there are better returns on capital. 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 a 570 rig count environment. Here again, not really a driver of shortage of capacity to drive pricing.
Fair enough. One final one from 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-
No, I know.
PSL-specific level. I think our Q4 guidance is pretty robust when you think about our business as a whole. If you are comparing it on the midpoint at the year-over-year basis, it is a 13.5% year-over-year improvement. That is pretty solid. We would expect-
Yeah
Seasonality in the Rockies as expected.
Right.
But at $100 crude, you have definitely seen certain of the independent operators step up and try to complete wells going into the end of the year. I think that holds true across our completion platform, including frac.
Okay. I have been a hog. I will turn it over to others. Thank you.
Yes, sir. Thank you for the questions.
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.