While the broader U.S. land rig count remains relatively flat, KLX Energy Services' Q1 2024 earnings transcript hints at a potential game-changer: the company's strategic positioning for an anticipated surge in natural gas activity.

Despite a challenging Q1 2024 marked by weather disruptions and customer-related safety standdowns, KLX's leadership paints an optimistic picture. April emerged as the company's strongest revenue month since November 2023, fueled by a robust rebound in Rockies activity. This, coupled with expected easing of seasonal factors and cost reduction benefits, underpins KLX's bullish outlook for Q2 and Q3.

The Natural Gas Renaissance: A Rising Tide

KLX's management points to the "highly constructive" forward natural gas strip, driven by the projected doubling of global LNG demand in the next two years. This demand surge is anticipated to fuel increased U.S. onshore natural gas activity, benefiting all players, even those in liquid-focused basins.

KLX's Unique Advantage: Oil and Gas Exposure

KLX possesses a strategic advantage often overlooked: significant exposure to both oil and gas-producing regions. While 84% of their 2023 revenue stemmed from oil-directed activity, their gas-driven portfolio, particularly in the Haynesville and Northeast, presents a potent growth lever.

"During Q4 2023, KLX witnessed a sequential increase in Haynesville revenue, reaching its highest point since Q1 2023. This, combined with their targeted product and service offerings in key gas basins, primes them to capture a substantial share of the expected gas boom."

Haynesville: The Epicenter of the Boom

A resurgence of activity in gas-intensive plays like the Haynesville, known for its high service intensity, will likely exert upward pressure on pricing and utilization across all basins. This scenario, potentially mirroring pre-COVID times, could see service companies return to the Haynesville, seeking higher returns and effectively tightening the service market, even with a flat overall rig count.

KLX's Projected Financial Performance

If KLX meets their guidance of returning to 2H 2023 annualized revenue levels, it implies potential full-year 2024 revenue of $800 million to $850 million. Assuming adjusted EBITDA margins consistent with 2H 2023 (~15%), this translates to potential adjusted EBITDA of $120 million to $127.5 million.

"Adding to the momentum, the full-year impact of the Greene's Energy Group acquisition and successful commercialization of KLX's proprietary dissolvable plug and ERT technology will further boost their revenue and margin trajectory."

Revenue and EBITDA Projections

The Haynesville Factor: Amplifying the Upside

The potential impact of the Haynesville resurgence is significant. With the current rig count at approximately 60, even a modest increase of half the rigs projected by analysts last year (20+ rigs) could significantly boost KLX's revenue and margin profile, pushing their financial performance beyond current projections.

Haynesville Rig Count Scenario

While KLX's management avoids quantifying the precise impact of the gas boom, their message is clear: they are strategically well-positioned to capitalize on this emerging trend, and the potential upside is substantial.

Is KLX Energy Services Undervalued?

As the market focuses on larger players, KLX, with its diversified portfolio, technological edge, and strategic customer relationships, is poised to emerge as a key beneficiary of the impending gas boom. The coming quarters will be revealing. If the gas strip holds and operators allocate capital to gas-focused plays, KLX could see its share price surge. This underdog, armed with strategic foresight and an agile approach, might be on the verge of a remarkable transformation.

"Fun Fact: The Haynesville Shale, a key gas play for KLX, spans parts of Texas, Louisiana, and Arkansas. It holds an estimated 250 trillion cubic feet of natural gas, a significant portion of the U.S. natural gas reserves."