The following discussion and analysis should be read in conjunction with the
historical condensed consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report").
This discussion contains forward-looking statements reflecting our current
expectations and estimates and assumptions concerning events and financial
trends that may affect our future operating results or financial position.
Actual results and the timing of events may differ materially from those
contained in these forward-looking statements due to a number of factors,
including those discussed in the sections entitled "Risk Factors" and
"Cautionary Note Regarding Forward-Looking Statements" appearing elsewhere in
this Quarterly Report.
Overview
We are a diversified oilfield services provider of leading onshore oil and
natural gas exploration and production ("E&P") companies operating in
conventional and unconventional plays in all of the active major basins
throughout the United States. We classify the services we provide into four
reportable segments: (1) Directional Drilling, (2) Pressure Pumping, (3)
Pressure Control and (4) Wireline.
Our Directional Drilling segment enables efficient drilling and guidance of the
horizontal section of a wellbore using our technologically-advanced fleet of
downhole motors and 117 measurement while drilling ("MWD") kits. Our Pressure
Pumping segment includes hydraulic fracturing, cementing and acidizing services,
and such services are supported by a high-quality pressure pumping fleet of
approximately 253,150 hydraulic horsepower ("HHP") as of March 31, 2020. Our
primary pressure pumping focus is on large hydraulic fracturing jobs. Our
Pressure Control segment includes various forms of well control, completions and
workover applications through our 24 coiled tubing units, 11 of which are 2.375
inch or larger ("Large Diameter"), 36 rig-assisted snubbing units and ancillary
equipment. As of March 31, 2020, our Wireline segment included 33 wireline units
providing a full range of pump-down services in support of unconventional
completions, and cased-hole wireline services enabling reservoir
characterization.
Proposed Merger with KLX Energy Services Holdings, Inc. On May 3, 2020, we
entered into an agreement and plan of merger (the "Merger Agreement") with KLX
Energy Services Holdings, Inc., a Delaware corporation ("KLXE"), Krypton
Intermediate LLC, a Delaware limited liability company and indirect wholly owned
subsidiary of KLXE, and Krypton Merger Sub Inc., a Delaware corporation and an
indirect wholly owned subsidiary of KLXE ("Merger Sub"), pursuant to which,
subject to the terms and conditions thereof, Merger Sub will merge with and into
QES in an all-stock merger transaction, with QES surviving as an indirect wholly
owned subsidiary of KLXE (the "Merger"). Pursuant to the Merger Agreement, each
issued and outstanding share of our common stock will be converted into the
right to receive 0.4844 shares of KLXE common stock. It is currently expected
that, immediately following the closing of the Merger ("Closing"), former QES
stockholders will own approximately 41% and KLXE stockholders will own
approximately 59% of the issued and outstanding shares of the combined company.
Following the Closing, the KLXE common stock will continue to be listed on the
Nasdaq Global Select Market ("Nasdaq"). The Merger is intended to be treated for
U.S. federal income tax purposes (1) with respect to the holders of shares of
QES common stock, as a taxable sale of such shares to Acquiror and (2) with
respect to KLXE, as a purchase of the shares of QES common stock from the
holders of such shares by Acquiror.
The Closing is subject to customary closing conditions, including, among others,
(1) the adoption of the Merger Agreement by QES stockholders and approval of the
issuance of KLXE common stock in connection with the Merger by KLXE's
stockholders, (2) the absence of certain legal impediments, (3) the approval for
listing of KLXE common stock issuable in the Merger on Nasdaq and (4) the
effectiveness of the registration statement on Form S-4, pursuant to which the
shares of KLXE common stock issuable in the Merger will be registered with the
SEC.
The Merger Agreement also provides that KLXE will, prior to or concurrently with
the Closing, repay in full all outstanding debt of QES under that certain
five-year asset-based revolving credit agreement, dated as of February 13, 2018
(the "ABL Facility"), with each lender party thereto and Bank of America, N.A.
as administrative agent and collateral agent.
We have agreed to operate our business in the ordinary course during the period
between the execution of the Merger Agreement and the effective time of the
proposed Merger, subject to specific exceptions set forth in the Merger
Agreement, and have agreed to certain other customary restrictions on our
operations, as set forth in the Merger Agreement. Following consummation of the
Merger, the combined company's board of directors will consist of nine
directors, five of whom will be designated by KLXE from the legacy KLXE Board,
including John Collins as Chairman, and four of whom will be designated by QES
from the legacy QES Board. The President and Chief Executive Officer of QES and
the Chief Financial Officer of QES will continue to serve as the President and
Chief Executive Officer, and the Chief Financial Officer, respectively, of the
combined company following the Closing.
Please read "Note 12 - Subsequent Events" and our Current Report on Form 8-K
filed with the SEC on May 4, 2020 for further discussion of the Merger and other
transactions contemplated thereby and Part I, Item 1A. "Risk Factors" of this
Quarterly Report for risks related thereto.

                                       18

--------------------------------------------------------------------------------

Table of Contents




COVID-19 Pandemic and Market Conditions Update
The impacts on our business of both the recent significant decline in commodity
prices due to the recent actions of foreign oil producers such as Saudi Arabia
and Russia and the COVID-19 outbreak are unprecedented. We will continue to
focus on our customer base and maintaining safe and reliable operations and are
working with our customers to further align activity and volume expectations.
Market Conditions. The COVID-19 pandemic and related economic repercussions have
created significant volatility, uncertainty, and turmoil in the oil and gas
industry. Oil demand has significantly deteriorated as a result of the virus
outbreak and corresponding preventative measures taken around the world to
mitigate the spread of the virus. In the midst of the ongoing COVID-19 pandemic,
OPEC and other oil producing nations ("OPEC+") were unable to reach an agreement
on production levels for crude oil, at which point Saudi Arabia and Russia
initiated efforts to aggressively increase production. The convergence of these
events created the unprecedented dual impact of a global oil demand decline
coupled with the risk of a substantial increase in supply. While OPEC+ agreed in
April to cut production, downward pressure on commodity prices has remained and
could continue for the foreseeable future.
The recent decline in commodity prices adversely affected shale producers in the
United States, including our customers. The outlook for high-cost producers,
smaller operators and those companies with high levels of debt appears to be
more challenging as we progress through 2020; especially as the operators
simultaneously cope with a low oil-price scenario, lower demand for crude and
refined products resulting from the 25-30 million barrels per day destruction
associated with the global COVID-19 pandemic, a shifting strategy for operators
to remain within cash flow, limited storage capacity for production and the need
to shore up revenue and manage debt obligations.
In response, our customers have significantly reduced their 2020 capital
investment programs, which is expected to result in a decline in demand for our
services. The commodity price environment is expected to remain depressed based
on over-supply, decreasing demand and a potential global economic recession. In
addition, our customers are experiencing significant downstream capacity and
storage constraints in the near term. If constraints continue such that storage
becomes unavailable to our customers or commodity prices remain depressed, they
may be forced or elect to shut-in some or all of their production or delay or
discontinue drilling plans, which would result in a further decline in demand
for our services.
Current and Future Expected Impact to the Company. The COVID-19 outbreak and the
related significant decrease in the price of oil resulted in a decrease in
demand for our services in the last part of the first quarter, a trend we expect
to continue into the second quarter and beyond. Additionally, the risks
associated with the virus have impacted our workforce and the way we meet our
business objectives. We have provided information regarding our current status
and expectation regarding impact to our Company below, however, we cannot
reasonably estimate the period of time that the COVID-19 pandemic and related
market conditions will persist, the extent of the impact they will have on the
Company's business, liquidity, consolidated results of operations and
consolidated financial condition, or the pace of any subsequent recovery.
•      Decline in Demand and Pricing for our Services - The COVID-19 outbreak and
       the related significant decrease in the price of oil, along with the mix
       of moderated 2020 budgets, a shifting strategy for operators to remain
       within cash flow, and reduced overall activity levels created a decline in
       demand and pricing for our services. The financial results for the first
       quarter of 2020 reflect some of the reduced activity experienced towards
       the latter part of the quarter, and we expect significant further declines
       to accelerate in the second quarter and lower pricing and activity levels
       to continue until there are clear signs of a commodity price recovery.


We believe, however, that there are several catalysts that could potentially
increase demand for our services from their current levels in the future,
including a more constructive commodity price environment, a material inventory
of drilled but uncompleted wells and eventual recovery of the market as the
impacts of COVID-19 diminish and activities return to normal.
•      Focus on Workplace Safety - Our business is considered "essential" in all
       of our areas of operation. To protect our workforce in the wake of
       COVID-19, we have taken steps to keep our people safe by supporting those
       affected, mandating that as many employees and contractors as possible
       work from home, and monitoring those who cannot do so and are required to
       be at work, as well as monitoring the Center for Disease Control ("CDC"),
       national, state and local guidance in preparing and responding to the
       outbreak in our areas of operations. We have also implemented certain
       protocols should an employee become sick with COVID-19. Thus far, working
       remotely has not significantly impacted our ability to maintain
       operations, including use of financial reporting systems, nor has it
       significantly impacted our internal control environment. We have not
       incurred, and in the future do not expect to incur, significant expenses
       related to business continuity as employees work from home. However, our
       continuing operations and management of the immediate and contingent
       safety measures for our employees would likely become increasingly
       difficult if employees are infected by COVID-19 and the practical
       difficulties of social distancing impact productivity.



                                       19

--------------------------------------------------------------------------------

Table of Contents



•      Decline in Share Price / NYSE Delisting - We have experienced a sharp
       decline in our share price over the first quarter 2020, a condition that
       is consistent across our sector. We do not have any debt covenants or
       other lending arrangements that depend upon our share price or continued
       listing compliance. We are in compliance with the covenants contained in
       our revolving credit facility. On April 27, 2020, we received written
       notice from the NYSE advising us that we no longer satisfied the continued
       listing compliance standards set forth under Rule 802.01C of the NYSE
       Listed Company Manual because the average closing price of our common
       stock fell below $1.00 over a period of 30 consecutive trading days. We
       can regain compliance if, at any time in the six-month period following
       June 30, 2020, the closing price of our common stock on the last trading
       day of any month is at least $1.00 and the 30 trading-day average closing
       price of its common stock on such day is also at least $1.00. We are
       considering various options we may take in an effort to cure this
       deficiency and regain compliance. If our common stock ultimately were to
       be suspended from trading on, and delisted from, the NYSE for any reason,
       it could have adverse consequences including, among others: lower demand
       and market price for our common stock; adverse publicity; and a reduced
       interest in our company from investors, analysts and other market
       participants. In addition, a suspension or delisting could impair our
       ability to execute on our operational and strategic goals, raise
       additional capital and attract and retain employees by means of equity
       compensation.


•      Impairment - We performed impairment assessments on property, plant and
       equipment. During the first quarter of 2020, we conducted a review of all
       of our segment asset groups in consideration of the completion of our
       first quarter 2020 forecast which provided additional insights into
       expectations of lower growth and margins for the Pressure Pumping,
       Pressure Control and Wireline segment asset groups. As a result of our
       review, we determined that the sum of the estimated undiscounted future
       cash flows of these asset groups was below their respective carrying
       amounts and thus were not recoverable. As a result, we performed an
       impairment assessment for these asset groups as of March 31, 2020 and
       impaired the carrying value to estimated fair value and recognized a
       non-cash impairment loss of $9.3 million.

Given this market environment, we are focused on prioritizing free cash flow and protecting our balance sheet and mitigating the impacts of COVID-19 summarized above to our business, liquidity, consolidated results of operations and consolidated financial condition. In response to this environment, we executed the following elements of our business continuity plan: • Implemented Further Operating and G&A Cost Reductions - The Company


       recently implemented a series of additional cost reductions in response to
       declining customer activity and commodity price instability. In April
       2020, the Company took the following actions to reduce its cost structure
       and protect its balance sheet:

• Made significant reductions in compensation expense;

• Implemented a workforce reduction in order to align with market demand; and

© Edgar Online, source Glimpses