KLX Energy Services is an oilfield services company. This KLX Energy Services Business Quality Report explains my Speculation Quality ranking that KLXE received under my quality ranking system. A full list of companies ranked by the quality of their business is available for exclusive access by DIY Investing members. Sign up here for the DIY Investing Membership program.
Basic Company Information
- Company Name: KLX Energy Services Holdings Inc.
- Ticker: KLXE
- Quality Ranking: Speculation (1)
- Primary Reason: Cyclical
- Size: Small-Cap
- Last Updated: 10/27/2018
- KLXE operates in the highly cyclical oilfield services industry
- KLX Energy Services has proven to be unprofitable during cyclical downturns
- The most recent oil downturn in 2015 and 2016 caused massive losses for KLX Energy Services.
KLX Energy Services Business Quality Description
KLX Energy Services was created from seven different regional oilfield services companies. They were acquired prior to KLXE’s spin-off from KLX Inc. KLX Inc was a holding company that owned an aerospace business and this oil field services business. KLXE was spun-off from KLX Inc on September 14th, 2018.
The oilfield services business is an attractive business in one sense. KLX Energy Services provides a mission-critical service for their customers. Yet, the cost of oilfield services is a small fraction of total drilling and completion expenses. This allows oilfield services companies to operate at high gross margins. This effect is compounded during periods of high demand for new oil wells. However, the oil business is inherently cyclical. Therefore, the quality of an oilfield services business is limited by the company’s ability to remain profitable even during the downturn in the cycle.
Unfortunately for KLXE, they have not performed well during historic oil downturns. Currently, the oil industry is in an upswing and many new wells are being drilled. However, KLX Energy Services was unprofitable as recently as the last 12 months. Even as they begin to now turn a profit, their business is highly capital intensive. As recently as October 26, 2018, KLXE had to issue $250 million in debt. Most importantly, they had to issue the debt with a coupon rate of 11.5%.
Debt issuers tend to be sophisticated investors. Therefore, I expect that high-interest rates correlate well with high potential for default.
I don’t want to be anywhere near equity ownership of a company that even debt issuers expect to default. Therefore, KLXE is purely a speculation. Investors should steer clear.
Why KLXE doesn’t deserve a lower quality rating
KLXE cannot earn a lower quality rating because “Speculation” is the lowest quality rating in my quality ranking system.
Why KLXE doesn’t deserve a higher quality rating
The next highest quality rating is a “bad business.” The minimum threshold that a company must achieve to be rated a bad business is to be profitable with positive free cash flow. KLX Energy Services is neither profitable nor producing positive free cash flow. In addition, they have a history of failing to retain profitability during cyclical downturns in their industry. Consequently, KLX Energy Services is unable to achieve even a bad business rating.
It is possible that this rating may change in the future if KLXE is able to build a moat around their business that can withstand cyclicality. Until that time, KLXE will remain a speculation under my system.