Q1 2020 Earnings Call
Thursday
good morning, and welcome to Liberty Oilfield Services first quarter 2020 earnings conference call all participants will be in listen-only mode. If you need assistance, please leave a contact specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions. Please note this event is being recorded some of our comments today may include forward-looking statements reflecting the company's view about future prospects revenues expenses or process these matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements these statements reflect. The company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in a company's earnings release and other public filings.
Comments today also include non-gaap financial and operational measures these non-gaap measures including ibadah adjusted ebitda and pre tax return on Capital employed are not a substitute for gaap measures and may not be comparable to similar measures of other companies a Reconciliation of net income to interject, even though in the calculation of pre tax return on Capital employed as discussed in this call are presented in the company's earnings release, which is available on its website.
Oh not like to turn the conference over to Liberty CEO press right, please. Go ahead.
Wow, our industry has been hit with two large shocks since our last quarterly earnings call a market share war that flooded the world with oil at the start of the six and larger shock the covid-19 demek, which is driving by far the largest ever demand contraction for oil this one two punch led to crashing prices and now growing logistical challenges to even move oil at any price. The result is an Abrupt reduction in rig count and an even more about could curtailment of Frac activity than we have ever seen. Fortunately. Liberty was built to survive tough times.
As in the last 2014 to 2016 downturn we plan to emerge on the other side having deeper customer relationships with the industry's leading players in a larger market share and increase competitive advantages getting there. However will involve serious challenges for our whole industry. Let's begin with what most important the health and safety of our people and all those that they touch Liberty was an early mover in this area during February 2020 before June nineteen response team to design and Implement safety procedures and contingency plans at our customers locations and our offices and Facilities that allowed continued delivery of saferacks services while protecting the health of both our customers and employees.
So far we have had only one worker on a frat crude test positive for.
We also have been very proactive in protecting our business during these unprecedented times. Our first step was to immediately reduce executive salaries by 20% off subsequent reductions have reduced executive compensation by roughly two-thirds, which will fall further cut in half during our May June July furlough program as we suspect that. We'll mark a very low trough in Frank activity. Michael will provide more details on our headcount reductions off our first-ever and deeply painful as well as our capex Cuts dividend suspension and operating cost reductions throughout our business.
We designed Liberty.
With highly variable compensation structures to allow navigation through cycles and we are confident in navigating through this cycle.
The focal point of our actions is our customers. What does the collapse in oil prices and storage rapidly filling mean for their future practicum and how can I help all of them? Successfully navigate these challenging times. How can we help them with practice sign changes to become more competitive.
How can we work with them to improve throughput?
We love all our customers that we worked for in 2019 and 2020 and we stand with them during these challenging times.
In addition all of our largest customers meaning our multi Fleet customers are top-tier players that we chose to align with because they have strong balance sheets with high-quality assets and most importantly are managed by great people. All of these customers are active in the Permian Basin. They will be survivors off and likely consolidators at this downturn plays out. We love the profile of our top customers.
We have grown our market share percent of their business with all our top customers this year.
Industry conditions had been declining for several quarters, even before the covid-19 demek during these challenging times operators became even more depending on service quality efficiency safety and Technology Solutions. All of this plays the Liberties favor and those Trends are accelerating now as the mark-up is have dramatically increased.
Our first quarter results reflect both the flight to Quality providers and Liberty's efforts to concentrate more of our capacity with select top team players Liberties q1 revenues grew sequentially 19% to $470 million and net income was two million or two cents per diluted share.
Adjusted even it was 54 million equating to $9 billion annualized even average Active Athlete, which was all 24 of our frat fleets until I got March this performance was driven by strong customer preference for Liberty and outstanding operational execution Liberties. First quarter results, smashed previous quarterly records for number of stages pumped and sand volume pumped both by double-digit percentage increases
Over the last twelve months which have been far from boom times in our industry Liberty delivered a 6% pretax return on Capital employed generated significant cash flow and returned approximately $25 million to our stockholders.
Obviously injury industry conditions have dramatically deteriorated since mid-march what had been a slow grind of shrinking EMP capex to raise returns home combined with an oversupply of fracking industry capacity has transitioned into an Abrupt plunge and customer activity and demand for Frac Services. Today's oil price is below $20 and depending crunch for oil storage capacity have seen demand for Frac service has dropped Like a Stone.
The rapid drop in Frank activity is understandable as many producers are forced to shut in existing production to better align Supply with demand wage storage is rapidly approaching capacity.
Oil demand normally Rises and Falls relatively slowly as it is primarily tied to economic activity never before have we seen a forced abrupt shutdown of such large parts of the global economy the financial crisis or Great Recession saw two to three percent drop in demand for oil spread over several months the coping pandemic land to a twenty to thirty percent drop in demand over only a few weeks.
In the next few months, we expect very low Frac activity in the oil basins us oil producers are now navigating Force production shut-ins due to storage constraints birthday oil production will decline rapidly due to both Wells being shut in and extremely low levels of new wells coming on production where things go next depends greatly on how quickly demand for oil rebounds as world economies reopen and oil begins to be drawn out of storage.
The pace of oil storage drawers and the pace of oil demand rebound from increased economic activity will strongly influence oil prices and therefore producer a tight for Frac Services. These factors may lead to an increase in productivity later this year. Our highly flexible cost structure and strong Liberty culture took us to adapt to whatever unfolds we are strongly focused on preserving Liberty culture and our competitive advantages while always delivering Superior Service to our customers on site and during periods of Hiatus & Frac operations. We innovated our way to success during the last downturn and we are busy doing the same distance up with inventive cost-saving practice and completion design changes to Active Parent child. Well management efforts novel equipment Innovations and software application.
is to optimize Logistics
Michael was summarized the specific cost-cutting and liquidity enhancing measures that we have undertaken before I turn the call over to Michael. I want to highlight several distinct advantages that position Liberty to weather this downturn and come out the other side with a stronger Market position one top-tier customers who will survive and not likely on larger asset portfolios on the other side too strong relationships and Communications with our customers. We are in this downturn together and we will get me through it together.
3
A tight-knit liberty culture of trust and partnership that brings out the best in crisis for differential performance that drives outside demand for Liberty Services five strong balance sheet built to last six loyal and committed suppliers and partners. I will now turn the call over to Michael to discuss our specific actions and financial results.
Good morning, everyone as Chris discussed entering into twenty-twenty industry conditions were already charged prior to the emergence of the covert pandemic, but we were very proud to deliver solid 29,000 results and a favorable twenty-twenty outlook on our February earnings call the solid visibility for all 24 of our current Fleet and a twenty fifth Fleet being fully utilized in two thousand. However, the Black Swan event that crushed all Global oil demand and oil prices now crushed demand for Frank Services across the domestic landscape and oil and get all oil and gas prices have been affected.
Regrettably, we announced earlier this month that we reduced our stopped Frank Fleet count by 50% And first for the first time in the company's history, we had to lay off Liberty team members the tone no one separated in prison. Liberty employees has been dramatic and we are truly humbled by the incredible professionalism and understanding that the Liberty family has shown through the implementation of these tough missions.
With that in mind, let me start by celebrating the remarkable achievements of the first quarter which showed everything to the hard work of the entire Liberty team. Our first quarter included a fully utilized Thursday. It's the reactive through mid-march our operation teeth operations team pushed efficiency to new heights. We pumped a company record amount of profit and stages in the first quarter with a double-digit percentage increase from our previous best.
The first quarter of 2020 Revenue increased 19% to 472 million from 398 million to the fourth quarter of 2019. Net income after tax increase the two million in the first quarter compared to a net loss of 18 million in the fourth quarter for me to lose it. Net income per share was two cents per share in the first quarter compared to a fully diluted net loss Prestige of fifteen cents in the fourth quarter of 2019 first quarter adjusted ebitda increased 77% to 54 million from 30 million in the fourth quarter and a name is adjusted ebit up. The fleet was nine million in the first quarter compared to five million in the fourth quarter.
General and administrative expense total $29 million of the first quarter or 6% of revenues and included one-time software costs related to the Erp implementation of 1 million dollars non-cash stock-based. Non-cash stock-based compensation expense of three million dollars and two point five million dollars of accounts receivable allowances net interest expense and Associated fees total 3.6 million an income tax expense was twenty-three million for the first quarter. We ended the quarter with a strong liquidity position where the cash balance of $57 which was down from the fourth quarter of 113 million due to growth and revenue and therefore accounts receivable.
At quarter-end we had no.
Drawn on our abl facility and total liquidity including 202 million available under the credit facility was $259.
In early March do the macroeconomic issues that Chris discussed and after close discussions with their customers about the likelihood of a precipitous decline in Frank activity industry-wide. We acted swiftly as we did the last downturn we began with substantial cut to Executive pay, but the incredibly fast deterioration in the industry conditions during March and the view that the conditions would be challenging for the motion twenty-twenty. Let's the announced when we made earlier this month regarding reductions in a number of Staff Fred fleitz and the necessity to reduce our Workforce to successfully navigate this unprecedented economic challenge. We focused on protecting the business through cash conservation liquidity management and maintaining balance sheet stream. We wanted to make sure that Liberty could weather a wide range of possible challenges ahead of us wage is removed on the other side stronger and well positioned to take advantage of opportunities in the future first, we reduced our staff frankly to nearly April and unfortunately had to review page.
We close by nearly 50% during the second quarter. We now have 12 staff wreck leads and we anticipate this will remain at 12 for the balance of the year with flexible furloughs cutting costs when activity drops down twelve flights as a result. We believe that we have structurally adjusted our cost base to a line with anticipated twenty Twenty Eight of the Outlook. We do not. He further cuts to our staff frankly counts the moment, but we will manage the challenging near to Market by utilizing furloughs the will adjust a direct cost of operations very quickly in parallel with customer demand wage expect annualized cost Savings of $170 million from reduction-in-force measures.
Second we suspended variable compensation and our 401K match from Q2 going forward and reduced base salaries for the executive team and other salaried employees wage us cash compensation for a director's we expect an annualized cost Savings of over fifty million dollars from these measures third. We moved our Capital expenditures to a maintenance only mode of delivery of private Capital commitments earlier this month. We announced a reduction in our plan 2020 Capital expenditures to a range of 72 ninety million dollars, which is over 50% below the age of that previous guidance of approximately 165 million. This includes approximately 33 million. There was incurred in the first quarter of 2020 majority of which was 10,000 which was for the technology and Fleet and husband such as the delivery of T afford your fuel engines and pumps of a previously expected to be used on our twenty fifth Fleet.
The second quarter of 2020 will also include some costs associated with this Fleet while the second half capital of twenty-twenty capital expenditures will primarily consists of Maintenance costs. This stage will not able to provide best-in-class sleep Technologies for our customers who are keenly focused on prioritizing Returns on each dollar of capital spending customer demand for Superior Services have increased in the current climate package and provides us with an opportunity to further solidify long-term relationships with strategic customers.
We suspended at dividend during the quarter of ended March 31st, 2020 the company paid quarterly cash dividends and distributions to stockholders and unit holders of approximately 5.5 million on April 2nd. We announced the suspension of future quarterly dividends for class a common stockholders and distributions for Liberty LLC unit holders until business conditions warrant reinstatement wage believe this temporary measure to adjust our Capital allocation strategy towards cash conservation is prudent to further protect our balance sheet the emphasis on certain backdrop disciplined Capital deployment took a call Liberty principal and we look forward to resuming Dividend payments when appropriate.
V we're working with our supplier Partners to reduce the costs of running our business Liberty is always had a partnership mentality with our suppliers as you do with our customers. This downturn is stressful the whole supply chain and the oil and gas industry, but this is an industry. There's always thrived on working together a supply chain Partners you limit as a company they can ride on to work through tough times with and as such in times like these we come together across the table and productively work on cost-savings. This mentality is the same weather as our Sam Partners or our legal and accounting service providers. We are expecting in Palm Coast reductions of a range from ten to 30% depending on the specific cost line sixth in the beginning in late April. We implemented a temporary measure of employee fairly plans in Southfield and corporate office corporate fellows were reduced Personnel costs portion of GNA by almost fifty percent from the current reduced levels during what we believe will be the wage.
of the down-tuned
the second quarter and the early third-quarter time frame operationally, we will have the flexibility to fill those leads as the work schedule demands and this will allow us to react quickly to adjust our cost structure down as a threat calendar demands. We believe these steps set up Liberty to weather the storms that are in front of us and to be successful preparing take advantage of future opportunities. We are managing a business pursuing a free cash flow positive strategy for the remainder of twenty-twenty and we protect end the year with a greater cash balance that at the end of the first quarter.
It's Chris discussed the imbalance in the oil supply and demand has created a challenging market for Fridays. We are committed to our strategy of disciplined growth and returning Capital to shareholders. But this real life is just a particular business in the first and unprecedented down to him the depth and duration remain uncertain but we are confident that we have taken the necessary actions to manage through the down-to-earth importantly. We are well-positioned to react quickly to a rebound and Frank demand activities in these challenging times. We will take this opportunity to work diligently with our customers on providing the best in class this and Engineering Solutions and expect to emerge in a strong more favorable position with higher market share of more intense relationships with our operators. We're deeply focused on being the foundation of a strong Mystic energy industry. And with that. I will now turn the call back to Chris before we open the Q&A.
Thanks, Michael.
Layoffs our hearts go out to these Liberty family members who are integral parts of building our company. We look forward to the days when we can welcome them back to Liberty public thanks to all Liberty team members plus our customers and suppliers who have worked closely together to safeguard the health and safety of everyone during the pandemic nothing ever trumps to help and safety of our people your efforts have been tremendous and we are proud of our record so far, but we can't take our eyes off this ball.
Thanks. Also to the health care workers and First Responders across our country as they lead from the front in battling the pandemic. I want to end with a few broad thoughts energy and data points from the recently released a CIA report on US Energy supply and demand in 2019 1st. 2019 was the first year since 1957 that the US produced more total energy than we consume. This is a huge milestone.
The two fastest-growing sources of energy Supply and 2019 were oil and gas. In fact oil and gas supply just a heavy blow 70% of us total energy consumption in 2019 and all time high for market share.
Our industry is critical in enabling today's world particularly our modern Healthcare System. We are also Central to the world's covid-19 efforts from supplying raw materials for PPE personal protection equipment and other critical hospital supplies to literally fueling hospitals transportation and the rest of our economy. Everyone we are needed
Will now open the line for questions.
We will now begin the question-and-answer session. Ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the Key Bank withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question comes from Blake Gendron with wolf research, please. Go ahead.
Hey, good morning guys. Thanks for taking my questions. The first is I'm working capital and the prior downturn you guys were growing fairly substantially. So it wasn't an appreciable source of cash. But in fact in your free cash flow positive outlook for the remaining three quarters of this year. Just wondering how we should think about the key components of working capital as contributors to the cash flow.
Yeah, like thanks very much. Yeah, we will actually have a significant generation of cash from working capital as you saw we built receivables pretty significantly in q1 Thursday we fuel growth and I think you'll see that will be able to mind that as we go through the I mean, obviously we are targeting balancing cash flow before we're from Capital as closely as possible to zero as well.
My heartfelt thanks to the Liberty Family for their actions during these extremely challenging times. It is with heavy hearts that Liberty had its first-ever.
Okay makes sense sticking with the working capital team here. Um appreciate your comments about align yourselves with top-tier customers would say though, you know, push back from investors. Is that your position in the Rockies and often, um have some challenge customers up there in the current commodity tape. So I'm just wondering you know, what you're doing to mitigate some bad debt risk. Do you have a our insurance? And if so how long you know what percentage of receivables are covered by insurance at this time? Thank you. Yeah. No, we take it. We have a close relationship with all of our customers. We do not have a our insurance or we have no coverage on that at this prison break time. But yeah currently is, you know, everybody did we instituted the new guidance around looking at receivables in the first quarter. And as you saw we took about a two and a half million gallons 1 million of that was related to a small customer that you know filed a year over a year ago finalizing that did so really when we took a look at our receivables wage.
What about a million and a half dollar amount on them? So we feel pretty comfortable where we are at this present point in time. That's it. You know, the market is changing very very quickly for you know, some of the operators
understood appreciate the comments. Thanks guys.
Thanks, please.
Our next question will come from Chris boy with Wells Fargo, please go ahead good morning. Wondering if you can give a little update on on your view of the lower Forty-Eight. There's a wide range of estimates on how low activities going to go. I guess you guys are expecting to be able to maintain 12, but with some flexibility so it gets worse. Can you give any color on what you're expecting for the industry at this point given the fact that you have
Yes, Chris, they look the the the next few months will be extremely low Frac activity in the oil basins. The gas basins clearly will hold up better off but oil Basin Frac activity. I mean if you're shutting in Wells to figure out where you're going to put oil you have to have special reasons to be fracking done and a number do but they'll be very low Frac activity in the next three months and we absolutely will not be keeping 12-pack fleets busy during the next three months the 12 practically to size to where we expect will probably be dead, you know towards the end of this year. We don't know how this rebound unfolds, but I think it's likely that the bottom in Frank activity is the next 3 months.
Okay, that's helpful. Thanks. And then on a follow-up historically you guys had a stance and m&a where you would be open to buying assets, but wanted to preserve the culture of the company and not choir operating companies. This is you know, a pretty extreme situation. Now, I'm curious if your view has shifted at all in terms of opportunistically acquiring anything or other product lines. Just maybe if we could get an update on em, and if there's any shift in how you see it right now, I think in the last certainly in the last call, I don't know before that, you know as the market gets weaker and things they dislocated that's a more likely time for Liberty to do something now. It's still a high bar. You know, it's got a it's got a work it's got to be added on a per-share value. We've gotten a comforter with the cultural risks involved. So yes, we are approached all the time on all sorts of things that you know, it's not impossible, but it deals really gotta suck.
compelling for shareholders of Liberty
Our next question will come from Chase Mobile with Bank of America, please go ahead.
Hey, good morning. Fellas. I guess I guess you just want to follow up on Christmas question here on the m&a side and you know, obviously it needs to be compelling but when you think about the lack of of a potential acquisition, how do you think about you know, the uh consolidation versus kind of adding incremental Services whether it's kind of completion related services or other month?
You know, I don't know that we have any any new color there. You know Frac is is is by far and away the largest and I would say Central service of onshore conventional production. That's our Focus something enables that something you know, it's got to have synergies and strength and growing and building our Frac business making it better but still focused guys.
Okay. All right, and then you know through this downturn mean obviously last downturn, you know, the strategy was to take market share expand the customer base. Is there any changes we think about this downturn as to your strategy?
You know probably know wild changes but look this downturn is different the last downturn sort of ground lower and lower. Right? So we had a certain amount of capacity and it was outperforming others and so as activity ground lower among our existing customers, we incrementally added customers to keep our capacity. This this has got ground lower this drove off a cliff because it was beyond our industry, right our economy's got forcibly shut down that creates a massive dislocation. And when Frank leads are getting pushed out of the market Superfast prices collapsing so simply impractical for us in any reasonable way, you know, could we have kept all our money, but that's that that was not that was not the strategy or goal at all. We took here our goal here number one was to do everything possible. We could to help all of our existing customer.
Navigate a massive disruption, so that's technical things. That's performance. That's all sorts of Business Partnership things. Hope uncoded plans and pandemic. So one of the things that has happened already is growing or market share among our existing customers as as things rebound. I think we'll see a lot of capacity and probably a number of competitors go out of the marketplace. So when there's opportunities to add customers that we think will be good Liberty partners and positive for us. I suspect you'll see some of that money but you know our goal as it always is is to build the long-term value of every share of Liberty stock. We said it our comments. Yeah, certainly we expect we will have a larger market share that in itself is not the goal. The goal is to build our competitive advantages deliver something differential and when there's increased pull on that on that serve.
Or in that differential product that probably will lead to market share again.
All right. Perfect. Appreciate the color. I'll turn it back over Banks Chase.
Our next question will come from what car side with alticor national please go ahead or thank you for a good morning. My my question is how many Cruise do you have working as of today?
Okay. Thanks. I'll turn it back.
So we we never give specific numbers on what's going on. And and in fact, you know today might be a different answer than a week ago or a week from now, but I will say Activity wage has dropped dramatically. So it it is a small number it is certainly single digits and it'll it may drop lower. It's probably going to bounce around them. You know, there are a number of players strong great players good balance sheets going to sell oil, you know at the Wellhead and low single-digit prices. Why do it why do it off so, you know, there's low activity like now we're not out trying to twist anyone's arm to convince them to do stuff. Now that there's lead times. Have you got a big pad and you got to drill it out, you know, when you start counting that oil is not going to come to market for you know, two to four months, but you know, it's low activity right now with car, but we built the business and arranged our cost structure that however people decide wage.
Play these next three months. We're we're good with that. We just stay in constant communication figuring out how we can plan and be supportive for whatever comes next then in terms of your capex budging seventy to ninety million dollars. Um, you know, what number of active leads is embedded in that number any any guidance there?
Yeah, I mean, I think that number was bitter and bit around the 12th fleets running sort of, you know, slightly slower portion of that for the balance of the year. I think there's definitely opportunity that we will reduce that can fix number as we execute. But again, we want to make sure that if we've got conservative estimates as to what we will execute on through your mobile now the the name given what's going on with supplies and everybody else. What's your maintenance capex purfleet? And how does that compare Now versus you know, what what it was a year ago. Yeah, really? What kind of you know, as you say we came into the with a budget of around three million of sleep for this year the beginning of this year when we were going to be fully active for 24 they changes right? I mean a maintenance capex is basically replacement of engines or transmissions and power ends. Obviously, some of that is as we're not running all of our fleets. Yep.
Is able to be just food, right? So, you know, if an engine blows up you can put that pump on the bench and we can use one of the ones that wasn't being utilized before so I'll order them.
Over the next two years it's going to average around about three millions of active at directly. But you know, can we defer some of that over the next nine months into twenty Twenty-One wage is so that's a great thing about the service industry. It's a very flexible business. Okay, and then just a final question that Chris you have a pretty good handle on the Balkan DJ you guys have done work in the Permian, you know, given what you seeing in terms of completion activity. How do you see the decline rates in in those basins and took any any thoughts on where the production could go there in these bases?
Yes it down significantly downward and and what car is is, you know the further away you are and the higher your transportation cost, right? Everyone's reading about the boc and clearly the bokken is pinch first crack activity declined their first shut-ins or happening there first is what price is compressor those extra differentials from basins further away from the Gulf Coast. They you know on a percentage wise those differentials become a bigger deal. So things compress certainly the in downturns low oil prices Rockies get hit first and get hit worse. That's that's no different this time. It's not just a basin thing though within certain base wage, you know some customers some customers have refineries and dedicated transportation and off-take agreements at their own refineries, you know, they're in a different position to people with different off take different ways. They mark
They're crude and moved their crude. So it's variable but I think you will see a large contraction in oil production in virtually every bass driven simply by economics. I'm a strong balance sheet. Why would I take four bucks at my well ahead if I can shut in that production in wait two or three months. So I think you're going to see u s production artificially contract rapidly because the storage tanks get an earful. We simply have to have today's Supply equal to today's demand today's demand is artificially compressed. Although it's starting to bounce back the last couple of weeks off but only at a slow pace so then you'll see that then I think the next phase after that is you'll see people bring production back on and at the same time you'll probably see people start to Frack. They'll be looking ahead two or three months. You know, what is Where Do We Believe oil prices and oil demands going to go and and it'll come back, but sorry for the long-winded answer but yes, the Rockies are going to be you know, yep.
Earlier and hit a little harder than the other basis, but these same impacts will be across all the basins and we will see multiple millions of barrels a day come out of production this year.
Thank you, sir. Thank you. Thanks for calling.
Our next question will come from John Daniel. What Simmons please go ahead.
Hey guys.
No longer sentence, but that's okay Chris great quarter, by the way in light of the market. So congratulations there, but let's assume that you get back to the steady-state Thursday 12:40 running call it effectively all twelve and knowing that you're probably adverse to giving Financial guidance in this market, but what's a reasonable range from an ebitda purfleet and in that scenario?
Yeah way you see yeah certainly way too early to say to say that John, you know, the pricing dropped hard probably bottom-right, you know just fleets have to get pushed out of the marketplace price and customer preference are the two mechanisms that do that that decide which lease get pushed out. You know, there's very little activity really comes down to customer preference. Then pricing likely is bottomed and then as activity increases, you know, that's the force that will drive price back up, but we're going to be in a challenge bark at this year and you know for it could be several quarters. I suspect it'll be several quarters. So, you know, I I have any crystal ball or so. I don't have any particular.
Prognostication on what even up for unfold over the next few quarters. It'll be low and it'll probably start to move up. You know, we we worry more about the right relationship to the right down the right competitive advantages the right customers, you know the times to to reap cash from our assets that that's not 20/20. That's that's building in twenty-twenty to set that up there enough in terms of working with the right customers. Obviously, a lot of them are going to take the front holidays next couple of months, but do you feel like you have firm disability that does Thursday come back later this year or is it just you know, that's what they think they're going to do, but they don't really know what they're going to do.
No one knows exactly what we're going to do what they're going to do cuz there's so many you know, as well as I do. There's so many just moving pieces, right the single biggest one is how does the economy rebounds. How does the oil demand come back? And then what happens with oil supply around the world, you know with this period of low price. What stress does that cause to push oil out so really activity will come back when I get prices and the ability to hedge future oil prices improves. You know, what what right now it's it's take away and in short-term prices, but no so people have everyone's got plans or ideas. We're constantly talking but everyone's really going to watch and follow what the data sets got it and just last one sort of theoretical big picture for me is kind of have a a clean slate right now are them that you want to do differently with Liberty going forward when the market eventually recovers.
Well, there's lots of things we talked about there's lots of Technology efforts we have going on and and the only a few amount of them we talked with but but to us, I would say really it's doubling down or deepening what we've already said, you know the way to get better in this industry is Partnerships long-term Partnerships with customers to be able to flex together, you know, when when the price of Everything Changes the the optimal design changes new desire for new technologies. Hey, if we can cut twenty per-cent out, you know, and you know and move oil production this way that may make sense in a depressed price, but it may not make sense in a high price range. So for for us it's just to keep getting better, but not just internally in our doors but in our partnership with our customers with our major suppliers, so I guess I got enough to answer for you. That's that's right beside try guys. Thanks a lot.
Our next question will come from and McPherson with Simmons, please go ahead.
Thanks. Good morning. Thanks for all the answers today. I mean, this is more of a compliment that Liberty is Strike me as a experienced cold stacker of equipment and now your your mom and half of your your Fleet for this year. And you know for some quarters what have you picked up with regard to the do's and don'ts from your competitors across the industry with parking equipment for a long time and
How do you envision your plans for your idle your your cold idle equipment, you know through this downturn.
And it's Ron. Yeah, we obviously that's not something we've we've had to do in our past but we have a we have an incredible operations team. They they knock it out of the park in the field each and every day and age guys who have been in this industry a long long time and know how to take great care of an asset. So, you know, we have confidence in the plans. They're putting in place to take those assets and and uh and cold stack them for the foreseeable and ensure that those assets are ready to ready to go when we're ready to to put them back in the field. So they've laid out a comprehensive plan as to where those assets are going to live in our in our world cup. What what what's going to be done to them to ensure that they're ready to go and and we have the utmost confidence that when when we need those assets they'll be ready to perform like Liberty assets always have
Okay. Thanks. Ron. Is it fair to assume that you're marketed plates now or more concentrated around your your clean fleets and quiet fleets.
Yeah, I would say in this downturn right that more assets are going to be in the stronger players. Yes interest interest in that stuff absolutely is growing. So yes, that's a higher percent activity in general is going to migrate to Texas, you know through this downturn our market share our percent of our assets and the Permian will grow meaningfully during this downturn. But but will you know will stand behind all of our customers. But yeah, I think a migration towards Next Generation fleets absolutely is in progress and and the downturns not changing that
Thanks Chris, and it's been danced around a little bit during the conversation this morning. But how much do you think that this most recent leg down his impact that I won't ask you to talk about your price book, but just more industry-wide observation. How much do you think this latest taken The Shins is impacted industry pricing from you know, January to today off immediately meaningfully, you know, look it's it's I think think think of our customers that they're getting way less than half per barrel of oil today than they were getting four months ago, you know, their their margins their activities compressed. So everything compresses all input costs compress margins compress month. So yeah, it's it is it's meaningful.
Good enough good enough. Thanks for all the answers. Appreciate it. Thanks again. Appreciate it.
Our next question will come from Shawn me come with JPMorgan, please go ahead.
Thank you morning. Good morning show.
Of course. I was hoping maybe to come back to you know, I want to say the m&a question but the m&a topic from a different perspective. So, you know for for a long time now multiple Cycles wage pressure pumping has been the fastest-growing product line in olive oil field services has also been the most fragmented with the weakest Market structure. If you were to fast forward a couple of years ahead even be on the next 12-18 months that could be quite difficult, you know, do you see this as a time frame in which it's realistic to suggest that that Frac could get solid a to a point where it has a healthier Market structure. So, you know, we recognize the extent that Liberty may or may not be a participant in that consolidation of a time that used to have a willingness if the parameters of returns meet your thresholds, but I'm thinking more an industry level.
Is it realistic to think that in a world in which large cap Diversified Services or formerly large-cap are not necessarily interested in being home all day tours in this product line can uh, the relatively smaller midsize players in this phase consolidate to what the healthy Market structure love just kind of hear your thoughts on what's realistic wage and whatever comes up the probability distribution of outcomes for this this Market over the next, you know, 18 or 36 months.
So she's on my short answer is yes. I think we we believe that that's exactly what will happen. No, no, no inside and how that will come about but I believe that home. I think you characterized our industry that passed very well incredible growth. She'll revolutions transform the world fracas. Then the engine behind it grown massively long as I used the analogy like the.com revolution. Awesome for the world not awesome for the participants in the business in the last decade. But but if we had some positive already and one is higher specs for equipment Next Generation fleets, there's a huge interest in that just a higher bar around performance and safety package that was bleeding capacity out. That was that was causing the lower-tier players to shrink and become under stress obviously stresses are very significant right now dead.
So I I very much subscribed to your premise. I think we will have dramatically fewer players in the Space 2 years from now dramatically increased concentration and fundamentally a better business that will take time that will be an ugly process. They'll be bankruptcies. They'll be mergers. They'll be just shut down some business lines. We've already seen twice at least two companies already just got out of the business and park to the trucks. So yes, I I think it's painful as these downturns are and this one's I need one. It will lead to some very positive structural changes in our industry. And I think the industry has a whole lot overall might be smaller two years from now. I think I'm a competitive Marketplace and structure of the business. They'll be meaningfully better.
I appreciate that. So then the other thing I would pause it to you is that historically this business has never been able to fix itself from a supply perspective. Right? It's a flight engineer or sticky. So meaning that where we've seen step changes and utilization is typically the demand either demand underwhelmed the supply for a reason or in some cases. There's been a step change in demand. Well a supply it's been many years since that was the case, but we have seen it as you think about that consolidation scenario. Um, you know, is there is there a threshold of Demands that we need to see eventually or again thinking nothing about the near-term but on an intermediate to long-term basis what types of threshold of crude a man or something along those lines. Would you need to see in order to get the industry back to where it's functioning at? A healthy level can just more of a hypothetical but like to hear how you see that that piece on an intermediate log?
basis
Yeah, we we we have talked about that a fair amount. You know, what of course the the honest answer is we don't know he's simply don't know but if you were oil production the way it's going from right now, there's not much growth and there's a lot of countries that are meaningful oil producers that are in trouble. So I think if you look forward looking past the next two years, I don't know how fast I'm going to bounce back from covid-19 and and we certainly do not but I think the call on U soil is likely to be meaningful in the next 3 to 10 years. I think our industry overall will be smaller fewer players, maybe even gross capex dollars. I doubt ever get back to 2014 levels. I doubt that, you know total industry practice leads. It might only be 200 or 250 fleets three or four years from now remember fleets are getting higher efficiency and bigger throughput so that can still do a lot of work but the new technologies
Do you in the higher level of performance? There's just a lot of incumbent players that I I don't think they'll be a spot for on the other side and you're right our industry historical been very bad at managing Supply on this end. That's absolutely true which is why the week or conditions we have last year in the weaker conditions be expected to have this year and long as you and I have talked we knew that productive the lower quality players literally were you know, we're going cash flow negative and capacity actually was leaving our industry. I thought this might have been our first years where demand might have been flattish without the we would still would add a fourth quarter fall off demand might have been flattish, but the market was going to incrementally get better because the lower quality players and talk to your equipment was Jeff getting pushed out. But yeah to have meaningful discipline. We probably got to have a smaller number of players in a more Consolidated sector birth.
And I do believe we do believe in a couple of years. We should have something like that.
That's really awful lot to chew on there. Thank you, Chris. Thanks Shawn.
Our next question will come from partner with Morgan Stanley, please go ahead.
Yeah, thanks. I was wondering if you guys could help us put together all the pieces on your margin. It sounds like you've got a lot of you know flexibility built into your home structure. Now, you're also expecting some input cost savings. If we were to look at second quarter and say, you know activities 6 leads or activity is 12 plates how difficult of what's your gross profit margin that we may be able to focus their to keep it simpler or or put a different way. What would you expect your incremental margins all like relative? I think yeah calling to see a little bit too much detail, but the reality is, you know, I think the way we've set up our flexibility other than fixed District over time, you know, gross margins just gross profit margins will stay relatively flat something take the fixed cost of the 6th District cost South, you know, they will be
The you know relative relatively flat whether we're running three fleets online fleets. Oh, no, we're not going to be running cloth seats in Q2. So I think that's the case. Obviously you then you've got a significant difference in your GI absorption and you fixed, you know district. Is the key thing there? I think that's that's generally how it's okay. The the third policy is going to be we were working will have Crews working off about 6, you know with a 9 fleets work and we're going to have you know of water, you know, eight hundred people out there in the field work and you know, if we've got four slots work and we're going to have of order 355. So, I think that that's going to be a key thing.
Trying to get that. Yeah, that makes sense. And and could I ask when you when you combine the impact that the price degradation for yourselves, but also the input cost money. How much would that affect it gross profit margin absent these sort of overhead absorption effects. It's just to like it just seemed a tables in the account, press and talk about the comments on okay fair enough with the try last name for me it could you could you quantify and I apologize if I missed this but just how significant the drop in G&A we should expect in. The second quarter is from the actions. We take him there. I mean fairly significant, right? We we will be of order this one time, the first one but you know of order 30%
All right, perfect. Thanks guys.
Our next question will come from Mark binici with Palin, please go ahead.
Thanks. Hey, hey guys, you know recognize we don't know where things are going to go from here, but I was curious if you could just talk about April and maybe you know what the fleet count and profitability kind of looked like and then maybe we can make our own assumptions about what happens in this in the next couple of months.
Yeah bar coming again. We won't give any details, but you can imagine things. I said go off a cliff but it's not a completely vertical Cliff right? It's a very more like a five 7 club that at 5:10. And so there's some time. As it runs down that Cliff. So if we went into the start of April, you know, you know much higher flat Fleet count. So certainly the fleet plants going to be meaningfully hire an April than it's going to be, you know in May and June.
Right, okay and reasonable to think that the profitability purfleet would also be following that trend.
Oh, yeah, you've got fixed cost absorption little you know, that that obviously changes massively when you get down to very very low fleets running.
Yep, okay, in terms of the sort of geographic distribution of the fleet's you guys have been focused on the oily basins and been pushing towards Permian over the past couple of years. But yeah, the there is a bright spot right now. It seems like in the gas basins, um where you historically haven't had exposure. How do you think about you know, the opportunity them or or interest in repositioning some fleets as a result of some of those Dynamics, you know, we we've been approached by gas players, you know for the last few years and maybe even more recently we've watched those basins. Obviously. They're they're they're awesome change the world natural gas supply but they've been dead reason we didn't go into the gas basins to begin with was it's just simply easier to produce gas than oil so that the US was just so gas-rich and we still are and that and the ramp up
For productivity said Wells was just simply awesome. But it meant you know, really a falling market for five at least five years. That's been shrinking Frank Market in the gas stations, but still sizeable but shrinking but yeah have those markets maybe bottom as as demand for fracking them. There's a good chance they have em, so yeah the macro there is definitely more attractive to us now than it's been in the past. But the caveat to that is we tend to move slowly right? We're about customer relationships and Partnerships. And so, you know, it's it's it's possible. It's not imminent. It's very possible. Nothing happens. We don't move into a new base infringe another year or two. He's probably we eventually will but you are focused right now for sure top focus by far is our existing customers. How do we get our market share with them and Ed?
Them not just survive, but thrive on the other side of this downturn and we getting a lot of inbound calls from customers that have providers that that back to your futures. And so, you know, we are starting dialogues with different players. That's a plus. But yeah, that's about all I can say but I I agree. I agree very much Mark with your comment that the the relative performance of the gas stations through this downturn is definitely going to be better. And yeah those basins don't look the way they did years ago.
Okay, great. Thanks Chris. That's helpful perspective alternate back.
Thanks. Thanks Bart.
Our next question comes from George O'Leary with Tudor Pickering holding company, please go ahead. Yeah, just going to try to get it. It's something I think some others are trying to get at earlier, but from a higher level perspective. It sounded like the Lion's Share of the free cash flow for this year is going to come from kind of a working capital online is as revenues expected to decline and I thought I heard a comment earlier in the prepared remarks that was along the line to trying to run the the rest of the business, you know at or above cash flow break-even. So, you know, when did I hear that correctly? And should I think of that cash flow break-even at what you're trying to keep the business at or above as you know an adjusted ebitda less maintenance capex level or or how should we think about that long? Yeah, George me. That's exactly right. I mean, you know, you know the target obviously is to make sure that you know, you're you know, you're eating enough of your fleets or absorbing your DNA. Are you covering your maintenance Capital wage?
Um, you know, there is no guarantee that it's going to be possible this year. I mean, you know again, we don't know where the market is going for the next few months. Um, and then how quickly the rebound wage to happen real wins or the restrictions get lifted Windows oil to mind get back. But obviously that's the way you want to at least it's a days in ages. That's the way you want to manage your business for this what I would consider almost like a stone building building the foundations for where for what you're going to take advantage of into twenty Twenty-One and to rebound
Got it. Got it. That's super helpful. And then it's sticking with the geographic line of questioning the last few questioners. How do you think they your geographic distribution of fleets will look versus what it's kind of historically more or less look like, uh, you know over the next six to twelve months and then to the point on fix District overhead Thursday opportunity to reduce that whether it's be up eliminating consolidating facilities lowering your lease rates or real estate fees. Um, is there is there a way you can reduce costs structurally on that front Georgia. I'll let I'll let Michael take the cost side of that but on the same Geographic Basin, yeah, there's no doubt or the
Geographic distribution of us was changing already, right? We were shrinking in the Rockies, but we were growing in the Permian Permian the biggest if she was off for me, it's the biggest bass that we have and we'll it's and certainly it will become not just our biggest Basin but by far our biggest Basin through this downturn. Yeah, she asked more Assets in Texas a larger percent of our activity will be in Texas than the Rockies this year and next year than before but I could have said that in nineteen and eighteen as long but in accelerated Geographic transformation is happening not leaving any of the Rockies basins. There are huge and important long-term Partnerships. We're here from we're here for the count. We got great faith in ships there or not. It's fantastic operations, but I'm creating percent of activity is going to be in Texas and so are we
And when I talk about the the cost side of it with obviously we don't have like huge numbers.
Legacy sort of inactive bikes but a lot of the historical players have you know again, we've been very very focused and so the other areas that we have set up shopping and we kind of way we can continue to work and that said we are working on bringing down our fixed costs for the balance of the embracing working with basically real estate providers and number of other fixed cost providers, whether it's gap insurance and other providers to try and bring down those fixed G&A costs. We have no, you know, we have no sort of clarity on to that. And again, these are costs of the generally not as flexible, but I thought the part of it being a worldwide pandemic and a worldwide economic collapse it is it is actually much more much easier to have those conversations with those providers and I think they look at this prison point in time like they could be fruitful, but we have no details.
Thanks very much guys.
Thanks, Rich.
Our next question will come from Frank reppenhagen with concentric, please go ahead.
Chris Chris, Michael Ron is a quick thank you to you and the entire leadership team for really walking the walk. We all know that furlough is the last resort and disrespect guys for cutting your own, and really leading on culture. So thank you and then Chris if you wouldn't mind commenting, I mean there's obviously been a rapid push for a conversion to renewable energy over the last couple of years. How do you see this pandemic impacting the pace of that or fundamentally changing any of those variables?
Your break. I'm not sure that it fundamentally changes anything certainly in the short term, you know, when unemployment slow and things are good, you know people people focus is tend to grow on issues not as immediate and so certainly right now, you know, what do people worried about most a job there in Cup drinking low-cost energy, you know reliability. So, you know, maybe there's a little bit of a slowing of that, you know, there's a shrinkage and total Capital to be invested but I don't I don't know that that's fundamentally changes that the Outlook there, you know, as I said that the the past Trends are just different. I I made that point oil and gas as a percent of total package supplied to the US was a higher percent last year ever nothing last five years or to ever so, you know, the the the energy dead.
Transitions are very slow. In fact, in fact the world another way to look at it. The world's never had an energy transition the amount of energy we get from from just biomass. Um, it is not gone down the world consumption, you know trees and sticks and would that powered the world that has not shrunk actually and we added another layer on top of it all the additional energy sources to date have always been additive with actually no displacement at all that that is changing a little bit right now cold looks like a total usage right now is sort of plateaued. It may actually shrink a bit. It looks like it will shrink. So we'll see a little bit of displacement from it's still the dominant source of worldwide electrician call. Dominant gases is taking market share in the largest percent of any other source there wind is also taking electricity market share. Yep.
and those when I say cool dominant for electricity electricity is 19% of
World energy 81% of the energy humans consume has nothing to do with the electricity Grid electricity. So in any case, you know, I think it changes people's focus in the short run, but is it a long-term Trend change or I would guess not.
Thank you. I'll turn it back. Thanks, Frank. Thanks.
Our last question will come from Tom Curran with B Riley FBR, please go ahead.
Morning, guys. Thanks for choosing me insulate.
So I'm curious when we get to the other side of this Chasm and oil consumption and and customer behavior and spending starts to normalize. What is the one technology if if possible that you would have wanted to either add or that you already have but would ideally have significantly augmented?
Look, I I would say there's two sides of that one and you've heard us talk about it and and these efforts progress is how to fundamentally change wear and tear on pumps wage. That's something we've worked on for years. That work is moving forward. And so yeah by the other side of this might we have a fundamentally different way or at least fundamentally change the cost structure of maintaining and operating pumps. That's very possible. That's the single biggest operating cost. And so yes might we have no change in that by the other side. I think there's very reasonable chance of that and the other, you know, there's lots, but the other has been the massive stuff we've done in big data and Analysis, you know as the industry is thinned out and leaned up a lot of the technology and research and effort on Frac has disappeared, you know people
People love to say hey, we're we're a manufacturing company now and there's a lot of manufacturing like things about what we do in the oil and gas business. But the the rock underground we're not built in a factory. There's enormous heterogeneity and variability in the Rocks the fluids the stresses The Faults the cracks. These are very complex systems that are two miles through the Earth. So the the the smart engineering Big Data analysis optimization is huge. That's I think Liberties made big strides in that the last nine years and I think we'll make huge strides in the next nine years. But again, it's fundamentally a harder problem than big data for Amazon Co behaviors. I get a certain number of skus in a certain number of transactions. We don't know everything about The Rock The Rock changes as you take fluids out of it and you put sand into it so it's dead.
Very complicated problem that requires empirical data.
And empirical data that has to be normalized through these heterogeneities to any case that's a big problem. But I do think you will see a few years from now on the other side of this meaningful Advanced Vera's. Well, those are probably the two I would have liked.
And then just as a quick follow-up there and and Ron if you has thoughts of your own on it, I'd be you know interested in hearing them. But when it comes to m&a would be open to a bolt-on mainly or purely driven by technology. And and if we were to see that would it most likely be in in that second category Chris, you know big data Maybe industrial internet of things related.
Yeah, yeah, I'll take that one. Yeah, absolutely. I think I think both of those areas would be of interest to us. You know, I think we've always said that that issue where opportunity arises that that that fits with our the ability to make our Core Business better, which is Frac without without detracting too much attention from being focused off track. We would be interested in that and so whether that was a a technology provider that that did something to improve the asset we put out in the field or the ability of those of those assets to operate at a lower cost base wage be interested in that and absolutely on the data side of things we we we continue to find ways to innovate there and if we could find a unique partner that was a great fit for a liberty, we would absolutely consider that
It's good to hear. Good luck. Thanks for taking my questions. Yeah, great question. That sounds like you've been in a few of our our internal meetings month. Take care.