KLX Energy Services Holdings Inc. Downgraded To 'CCC+' As Sector Demand Deteriorates; Outlook Stable

  • We expect the recent collapse in crude oil and natural gas prices will lead to sharply lower capital spending by North American exploration and production (E&P) companies, which will hurt the demand for oilfield service providers.
  • As a result, we have reduced our revenue and cash flow estimates for KLX Energy Services Holdings Inc., a U.S.-based provider of onshore oilfield services and equipment.
  • We are lowering our issuer credit rating on KLX Energy to 'CCC+' from 'B-'. The outlook is stable.
  • At the same time, we are lowering our issue-level rating on KLX Energy's $250 million senior secured notes due November 2025 to 'CCC+' from 'B-'. The recovery rating is '3', which indicates our expectation of meaningful (50%-70%; rounded estimate: 65%) recovery of principal in the event of a payment default.
  • The stable outlook reflects our expectation that KLX Energy will maintain adequate liquidity for at least the next 12 months, with low capital spending requirements and no debt maturities until November 2025.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions listed above.
Demand for onshore U.S. oilfield services collapsed along with oil prices.   The recent fall in oil prices has led many E&P companies to announce material cuts to capital spending plans, leading us to reduce our demand expectations for the oilfield services sector. We now expect oilfield services demand could decline by about 30% in the U.S. in 2020, with further downside risk if the current weak price environment remains for a prolonged period. As a result, we are projecting revenues for KLX Energy to decline by at least 20% in 2020, compared with 2019, and expect that a vast oversupply of equipment and pricing pressure from customers will drive a deterioration in margins and profitability. Although KLX Energy provides a wide range of completion, intervention, and production services, most are highly commoditized, which leaves it susceptible to pricing competition from other oilfield service firms. The lower barriers to entry for services like wireline have resulted in a very saturated market.
The stable outlook reflects our view that KLX Energy will maintain adequate liquidity for at least the next 12 months, given its cash, reduced capital spending level, and lack of debt maturities. We expect cash flow leverage metrics to remain very weak, with average FFO to debt of below 10% in 2020.
We could lower the rating if liquidity weakened or if we expected the company to engage in a distressed debt transaction.
We could consider an upgrade if the company's credit metrics improved to a level we no longer considered to be unsustainable. This would most likely be driven by higher oil prices fueling increased E&P spending, which would increase the demand for oilfield services provided by companies like KLX Energy.
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