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 throughoutthe 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 ofMarch 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 ofMarch 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. OnMay 3, 2020 , we entered into an agreement and plan of merger (the "Merger Agreement") with KLX Energy Services Holdings, Inc., aDelaware corporation ("KLXE"),Krypton Intermediate LLC , aDelaware limited liability company and indirect wholly owned subsidiary of KLXE, andKrypton Merger Sub Inc. , aDelaware 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 forU.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 theSEC . 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 ofFebruary 13, 2018 (the "ABL Facility"), with each lender party thereto andBank 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, includingJohn 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 theSEC onMay 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
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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 asSaudi Arabia andRussia 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 pointSaudi Arabia andRussia 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 inthe 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 theCenter 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
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• 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. OnApril 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 followingJune 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 ofMarch 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. InApril 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
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