Q2 2020 Liberty Oilfield Services Inc Earnings Call
After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
Our comments today may include forward looking statements, reflecting the company's views about future prospects revenues expenses or profits. These matters involve risks and uncertainties that can 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 the Companys earnings release, and other public filings. Our comments today also include non-GAAP financial and operational measures.
Non-GAAP measures, including EBITDA, adjusted EBITDA and pretax return on capital employed or not a substitute forgot measures and may not be comparable to similar measures of other companies.
Hey, a reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of pretax return on capital employed as discussed on this call or presented in the company's earnings release, which is available on its website I would now what they're trying to conference over to Liberty CEO, Chris right. Please go ahead Sir.
Good morning, everyone.
As we all know well the oil and gas industry, it's cyclical in nature with Downcycled testing to strengthen residents players across the value chain.
The current cycle collapse has been unparalleled in recent history.
With an oil demand crashed leading to a precipitous decline <unk> rig count and an even more violent declining completions activity, which for many oil base. Some producers was a complete holt.
In the face of these extraordinary circumstances Liberty applied its core strategy 10, it's principles to guide or team in charting the course to meet the current challenges enable and support our customers and our workforce.
Building, even better business for the future.
In the midst of chaos there was also opportunity.
What did we do and how do we do it.
First and foremost we stayed in constant dialogue with our customers like Liberty or talk to your customers have built business. He is with the ability to withstand the current cycle.
We're working hard to manage their businesses to earn the highest rate of return over the long term.
We found that our partners evaluated near term prospects and made rational decisions to pull back activity in many cases, they pulled back even more aggressively than others.
It was simply the right decision and we worked with them to assure that operations were wound down safely and planning beginning began immediately for restarting operations.
Liberty acted swiftly and even alignment with our partners.
As we outlined at our last call, we manage the business around our customers and their expected activity levels over the course of a year.
He stood behind our partners and we remain disciplined to the market.
We did not chase frac activity for the sake of activity.
We collaborated and negotiated as partners with our customers grew market share with all our top customers entering the second half of 2020.
For engineering team has been quite active with our customers utilizing this low and operations to advance understanding and optimization of completion practices across customer asset portfolios.
Another subject of great customer interest is our efforts to enhance next generation Frac fleets document the tradeoffs between various technologies and implementation.
Liberty's DNA as a data driven E.S.G. leader is drawing increasing attention.
Oil basin Frac activity bottomed in late May and has been slowly rebounding since.
June was better than May July was better than June and August will be better still.
This is not to say that things are okay.
Things are deeply stressed.
But slowly heading into right direction.
We expect to reach double digit average active frac fleets later this year.
During the second quarter, we also work decisively to adjust our cost structure to flex with activity levels and enable us to deliver end of your demand expectations from our customers.
We implemented tough measures to preserve cash and protect our balance sheet.
We're pleased to report that our second quarter results showcase the successful execution of our strategy.
We reported cash and cash equivalents of 125 million at the end of the second quarter.
Representing an increase of 68 million from the first quarter.
This exceeds our total debt of 106 million, leaving us in a net cash cash position of 19 million at the ended the second quarter.
Total liquidity at quarter end, including availability under our credit facility was 207 billion.
These results came despite an adjusted EBITDA loss of 13 million, resulting from a substantial sequential drop in frac industry activity.
Most notably in oily basins, which is where we operate.
Michael will share or full financial results shortly.
The disruptions to our industry you have required sacrifice from everyone in the Liberty family and our broader community of customers and suppliers.
We are proud of the steadfast resolve the team has exhibited in these truly trying times.
This resolve as evidenced by the greater than 95% return rate from furlough of the Liberty Frac crews.
These folks are rightfully proud of their accomplishments and commitment to team Liberty and we're anxious to get back to work.
The return crews have deliberate simply outstanding operational performance on every metric efficiency safe operations implementation of Kobin safety procedures, and making our customers feel confident in their choice to partner with Liberty.
I am proud and humbled to be their partner.
Where does that leave us today.
First we believed that our competitive advantage is a strong and loyal culture.
Long term customer partnerships, a technology centric asset base and an innovative engineering approach to completion designs and commercial relationships are central to Liberty and we will continue to build on all of them.
These attributes.
Demonstrated last quarter, when we pumped for 97% of the minutes in a day on a plug and perf pad with over 20 wells swaps.
This performance and customer partnership enables records like this one.
In the last downturn 2015 to 2016, we dug in with our customers to innovate our way to success.
We're doing the same thing this time.
The depth of the last downturn brought rapid destruction of available Frac fleets and Frac companies. We are seeing the same thing this time, but at an even faster pace.
Two of the top 10 Frac companies have already entered bankruptcy and another has engage restructuring advisors.
Not only is the supply destruction, helping to move the market towards balance. It is also highlighting the importance of having the right partners for the long term.
We are in dialogues with several potential new customer partners.
We have always had a highly variable cost structure to match the cyclical nature of our industry.
But this cycle down is the fastest ever, forcing us to make significant adjustments to our cost structure.
We quickly took the painful action of having our stopped frac fleets to 12 fleets.
Consistent with customer dialogues about activity levels later this year.
We also cut our capex plans in half suspended our dividend and made comprehensive operating cost reductions, which Michael will elaborate on.
Finally, the importance of liquidity remains at the forefront of our decisions.
We've always approached our balance sheet with conservatism to both weather and take advantage of downturns.
While today is full of uncertainty.
I can assure you that weve never been closer to our customers, we're better positioned to face tough markets and take advantage of profitable opportunities.
The continued hard work of the people of Liberty and or unrelenting focus on our customers leave us well positioned to pursue our goal of long term value creation for our shareholders.
I'll now turn the call over to Michael.
Good morning.
As we discussed on my last earnings call. The covered 19 pandemic, if they don't worldwide oil demand for oil was rapids enter a metric the resulting oil price decline drugs North American shell for juices to shut in production basically Ses fracking for a period in the oil basins, where we operate.
Second quarter results reflect the transition to align that cost structure with a dedicated customers activity levels over the course of the year and execution on the cost reductions outlined on that last earnings call.
We are laser focused on protecting the business as all the bond returns we are setting the stage of the return of profitable activity.
The second quarter 2020 revenue declined 81% to $88 million from 472 million analysis.
Looking at oil basin exposure reactivity levels fell dramatically and the disciplined approach by at top tier customers to reduce activity because of the volatile macroeconomic backdrop.
Net loss after the clock after tax declined to 66 million second quarter compared to a net income of 2 million in the first quarter.
Fully diluted net loss per share was 55 cents in second quarter compared to fully diluted net income this year of two cents this quarter. So.
Severance related costs were 9 million during the quarter fleet lay down in startup costs included in cost of sales were $4.5 million for the quarter.
Second quarter, adjusted EBITDA declined to a loss of 15 million in the second quarter from the solid profitability of 54 million in this quarter. So.
Second quarter adjusted EBITDA was a loss of 8 million after excluding noncash items about $4 million, we believe the second quarter box, a cyclical low point Frank activity.
General and administrative expense totaled 18 million during the second quarter, a 37% production from the first quarter as we an exit swift cost saving measures daily in the quarter.
General and administrative expenses declined actually 45% sequentially. When you exclude share based compensation of 3 million and 3.1 billion accounts receivable ounces of 2.5, and 2.2 million during the first and second quarters, respectively, a significant achievement and the current environment.
The sequential decline in G. and I expenses was primarily due to lower personnel cost tied to reduce variable compensation and flexible filos reduction in IP travel and entertainment facilities and other costs.
Actually 10% to 15% of the savings with structural nature, but the remainder tied to cost initiatives for the jobs with activity and profitability levels net interest expense and associated fees totaled 3.7 million and we recorded an income tax benefit of 11 million for the quarter.
We had robust free cash flow for the quarter and ended the quarter in a strong liquidity position, including a cash balance of 125 million, which increased 68 million from the for this quarter.
Of $57 million.
Total long Tim did have 106 million, we ended the quarter with the positive net cash position of $19 million.
At quarter end, we had no borrowings drawn on air ABL facility and total available liquidity was $207 million, including 82 million available under the credit facility.
During the last earnings call, we outlined several targets to protect the business through cash conservation liquidity management and maintaining balance streets drink.
The rapid deterioration in the Frac activity led us to act swiftly to navigate this unprecedented economic challenge, we built liberty to weather the bad markets and thrive in the good ones.
Mixability and at cost structure, and the strength of our balance sheet enables us to manage the potential macroeconomic risks such as the effects of the resurgence of co that could have on oil demand as well as taking advantage of opportunities that arise in times of distress.
Let's look back at these actions we discussed in the last day school.
Yes.
We reduced desktop Frac fleet count to 12 fleets after discussions with that dedicated customers to match the projected completions demand in the latter part of 2020.
This reduced cost structure by approximately 170 million on annualized basis within fill up the frac crews that would not actively fracking in the quarter.
Hello crews returned to work is it dedicated customers start up the frac activity.
This enabled us to flexibly manage our cost structure to align with revenue. We currently project. The between 10 and 12 crews will be working in the fourth quarter.
Secondly, we suspended bonus plans in the form 10-K match, which coupled with low base salaries and cash compensation for Apple reduced our cost structure by approximately 50 million on annualized basis.
Third we reduced capital expenditures projections to $70 million to $90 million range for the year, which is approximately 50% of the original 2020 budget.
Capital expenditures for the second quarter was $13 million compared to 13 $33 million in this quarter.
Fourth.
Last quarter, we announced the suspension of that quarterly dividends until future business results support Reinstatements.
Fifth.
Supply partners, a pool has been a key part of our ability to weather the cyclical nature of our industry.
We are seeing input cost reductions obtained city percent, which will continue to roll through in the second half of the year.
Six we instituted a temporary fill up program for operational crews and corporate stuff.
These definitive actions set us up to navigate the turmoil in the freight market during the second quarter, a showcase by the strength of our balance sheet exiting this extraordinary period.
We have both the flexible cost structure and the balance sheet to manage through potential challenges in the market and so we'll dig since the uncertainty of because it pandemic.
As we sit on the last call. We are committed to our strategy of disciplined growth returning cash to shareholders, but this requires us to protect the businesses and with that I went out to end the call back to Chris before we open for Q and I.
Cove It has thrown the world for a loop.
Public health impacts are truly heartbreaking.
Fortunately the full force of the modern World is deployed in response, developing therapeutics vaccines and a resting transmission. So that we can put this scorch behind us.
The trajectory of future global oil demand will largely be tied to the success and timing of cobot mitigation.
Over the last several weeks world demand for oil has rebounded strongly and world production of oil has declined significantly.
Mostly due to OPEC plus production cuts.
Further todays very low producer investment levels in the us and around the world will surely lead to significant reductions in the world oil production capacity.
In other words market forces are working to bring oil inventories back in balance.
We look forward to fill the any questions that you may have turn it back over the operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed that he would like to withdraw. Your question. Please press Star then to at this time, we'll pause momentarily to assemble Ross.
And our first question will come from Chase Mulvehill with Bank of America. Please go ahead.
Okay.
Hey, good morning to them.
Good morning, Jason.
I guess first does this kind of wanted to talk about.
You know that.
Progression.
And then in there for you.
No. We are you could maybe talk about.
The average.
Correct.
They become color around or maybe maybe expectations here for three years and EBITDA per fleet as we get into your in or more importantly into fourq.
Yes, Jason as we move forward you were going to be ramping up from where we are now where we think we'll be in the fourth quarter, which would be that between 10 and 12 fleets.
And as you've seen this is going to be a slow progression.
As you move sort of with earnings into the fourth quarter as we get to sort of a more reasonable balance of the amount of fleets I really would look at all to sleep basis below a fixed cost that you going ahead as of June and Thats third quarter period.
We should be back into a bit a balanced by the fourth quarter.
Okay all right.
A follow up on the your cleared the 12.
Fleets in the fourth quarter.
Could you maybe just talk to you know how many of those.
10 to 12 fleets are actually working for new customers.
Yes, the vast majority will be existing customers that are coming back to work I would say thats. The large majority of it we are in several dialogues with new customers. So.
There may be one or two or more than that in their body dominantly. It's the same customers we brought to the dates.
Okay, all right I'll turn it back.
Okay.
Our next question will come from Chris Hoy with Wells Fargo. Please go ahead.
Thanks, Good morning.
Morning, Chris.
I was wondering if we could touch on pricing.
Maybe if you can essentially describe how it compares right now second quarter and whether there's any uplift in the fleets that are going work in the third and fourth quarter compared to whatever pricing might about into in second quarter.
I mean look the short summary of pricing is back.
And the reason is what moves the pricing of something is when you have this drop in activity you've got lots of staff to active fleet. When this when the pandemic kits and activity declined and they've got to be pushed out of the marketplace by some mechanism and that's always a combination between price and customer choice.
So boy if you looked at and we did not participate in that market, but if you were may or June and you wanted to be it didnt win a pad to fill a hole in schedule just pricing insane Lee bad.
For US again, we follow that pricing, but we don't really participate in it very much but we have very candid dialogues in discussions with our customers of course, they've been we've been hit by a terrible declining activity and pricing so they.
So they're struggling to meet just I think of what oil prices did in Q2, so pricing reset quite a ways down in Q2, even for the dedicated ongoing fleets.
And for most of that that sort of a negotiation most of that pricing will stay until the ended the year and things will start to move back up in January some pricing will come up before then obviously spot pricing or fill their pricing. It is moving up now because so much capacity is getting pushed out of the.
<unk> marketplace, and I think the uncertainty of having low quality Europe lower grade partners because they were cheap that that calculation. Many made I think is is yes being shown to be maybe maybe not a great trade off.
Okay. That's helpful. So if you wrap all those things together.
Is it fair to assume that the pricing that you expect to have in second half of your is not going to be very far off from where you had in first quarter of 20.
No no no will not be back to the first quarter 20, Theres a reset lower in the second quarter 20.
Yes, well move up much from that this year iOS start to move up meaningfully in January may move a hair up it will move a hair up in the second half, but the big difference between the second half of 20 and Q2 of 20 is more going to be utilization.
Larger number of fleets working fuller schedule better fixed cost absorption.
Got it Okay, and then just one follow up.
I got the 4.6 week last quarter and heading to 10 to 12, but I don't think you've called out how many you have active right now that I missed that.
That's correct, we Havent, we haven't we did not announced that.
As if it's going to move up slowly as Chris pointed out in his prepared comments.
Jim has been of the Jim has been in them by July better than June all this better than July is that moves forward into sort of yet heading into the October time period, and we don't call out this specific numbers.
Mainly because it's not a drop our objective is not to have how many fleets can we get out there. Obviously there are things we can do to grow that number faster. So we tend to call out numbers that are very important source. Our strategy. What is important to US right now is keeping our team our technical Kate.
Well these are equipments strong keeping our relationships with our customers are strong and selectively when they make sense growing our customer partnerships, but it's all the interaction of those things that make the decision whether to deploy a fleet or not.
But it is moving up it's been moving up and it will continue to move up.
Got it thanks, I'll turn it back.
Okay. Thanks.
Our next question will come from Tom Curian with B. Riley FBR. Please go ahead.
Good morning.
For Intel.
Michael for Capex as a percentage of revenue what do you expect for each of the next few quarters and how much room for improvement is there there whats your target run rate level or range for that percentage.
Tom I think really looking at the target run rate over the next two quarters business revenue.
Probably does it doesn't make any sense I mean really I think you're going to look at this long Tim.
We are in the in looking at as maintenance bases. We are in the mid single digits in that sort of six six percentage point range.
And then when we add growth we opted in to the genes.
And is that that's what are the best do you think you could do there or you think there's there's room to take that down a bit further over the long.
Thats on a normalized basis right I mean, when when we look at you thinking about.
Yes that on a.
So a normalized revenue basis.
Okay and then.
Since last quarter's call.
Energy recovery has.
Really dramatic overall, it's commercialization plans to the board Techsystem exiting exclusivity agreement with Schlumberger.
Converting the mistletoe it to a modular single yet skin design, Ron you sounded encouraged by this new skewed models technical performance in a recent simulated well test with the Liberty crew and equipment spread.
Have you resumed actively trying since youre.
Customer.
The open to conducting a life well test with this new.
Good design and what's the early we might see that happen.
Certainly Tom we're back in those conversations we were we were on the verge of doing that before.
The world turned upside down and so we are we are back on that path today. The testing that we did do in the simulated well conditions identified some further opportunities for improvement so those.
Those improvements are underway it at energy recovery right now, but but that said we are we are back in dialogue with the same customers. We had been talking within the past and and I think when when things have stabilized and and.
There they've got their feedback underneath them, we'll be well be back looking at love field test and so I hope that happens you know maybe sometime in Q3, if we if we find the right opportunity, but I certainly think no later than early Q4.
Great.
Hi, Thanks for taking my questions.
Okay.
And our next question will come from James West with Evercore. Please go ahead.
Hey, good morning, guys.
James.
Chris how are you thinking about.
Returns in this current environment I mean, obviously.
Q terrible for everybody.
Threeq you want to get some back to work with certain customers in Fourq, you as well, where the pricing is not particularly great. But you want to you want to be there for your customer base and I know you guys think about returns on a over a full cycle basis anyway, but.
How are you managing you know utilization price returns versus the other objectives strategic objectives that you have gaining more customers or aligning with more strategically important customers.
Yes, David.
Thank you hit the right issues there were turns in the long run.
The essential thing is to have the right strategic customers that are willing to change practices and get better not just by a static commodity we don't deliver them and so there are customers. If that's their plan, it's just not a mass for us.
I would say, there's obviously a large avenue upgrade strategic customers for hours, we love the customer base, we have today, but theres no question. It will grow this year.
But yes, that's the metric its a balance between not ridiculous pricing today, we had those very candid dialogues hit your stress were stress weve Where's the right balance to help each other get through this year and then find those partners that through efficiency through technology can get a differential advantage from.
Pretty so they can get an increase in their returns by partnering with us and we can get an increase in our returns by partnering with Dan.
So James you say right that yes, if we wanted to do everything to maximize our returns the whole world only lasted for Q3, we would do very different things and what we do.
Importantly, the world is going to last longer than Q3. So in Q3. It's a key thing is our team we have to shrink our team we've never done that before but all of the crew leaders all of the technical Prowl as all of that is still here, we're going to rebuild those crews back next year, but all of the.
Crude leadership all of it is still here.
But yes, it's finding the right partners that we can have a value proposition to create value together over the long run and then.
In these tough times, helping them get through their plans it through our time and again, we're pretty excited about it the dislocation of the last downturn was also for customer relationships and new partners are liberty that benefited us for years and I think we're seeing that same kind of stop unfold here.
Yes, no doubt about that will open follow up for me on technology, There is limited things coming through the marketplace.
Ron just answered.
My questions on one technology, but theres lot of orders booked out there or.
Now that the the dust somewhat settled or your customers.
Willing to engage in technology conversations try new technologies out do you guys have always been a leader here, but I know for Twoq was just let's hunker down but in Threeq youre starting to see companies. So yes, we'll give that a shot and see if we can get.
Oh, you're better practices butters more stages et cetera.
Yes, absolutely James because I think when you go into a crisis.
When you're.
Cruising along our industry you know, it's always relatively lean and mean on people. So people are following systems. They are implementing operations and you. All these ideas and people I mean, I'm just trying to keep the train on the tracks. So you always have some resistance to get new ideas tried then when the world gets rocked.
And operations, our reduce yet today. It is a fantastic time to say, Hey, God I know you've been bucket asked about that last six months, let's take a look at that let's bring our tech team in lift gather that data. So we are absolutely using this will in frac activity taxi increase technical efforts.
On Frac design on evaluation of properties and variations of reservoirs across the basins.
On different operational technologies. So yes. This is this is a technology in gate rich engagement period right now.
Right, Okay, that's what I figured thanks, Chris.
Thanks, James appreciate it.
Our next question will come from weaker side of Ulta Court capital. Please go ahead.
Thanks for taking my question.
Mike is there.
We do you expect to be EBITDA through kind of positive in the third quarter or fourth quarter.
I would say, particularly by the end of the.
Yeah, we'll have to see I think probably again, you've got fixed cost absorption will like what would make traffic were very tough.
Okay, and when do you expect to have EBITDA grew in excess of maintenance capex.
Again workout classes, so those like again with the middle all sort of the cause of endemic with incredible uncertainty in the market at the moment, so any sort of detail for patients like that really would change within city seasons, because that fee on what happens with oil demand across the world. So we'll have we are again, we manage.
Turning to sort of the based liquidity position that we have the strong balance sheet. The we have this partnerships for that customers and that's the way we are managing business.
Carl Good numbers, we report or the roll off of all the numbers on a crew by crew level. If you look at the incremental economics, there, it's a different scene, but it depends how many crews you have for fixed absorption of the utilization of those crews so pricing probably isn't quite as bad as you think it is but we only report the whole pie.
Fair enough and then for the for the stand up to 12 crews that you expect to have working in the fourth quarter and the pricing being determined for those or is that still a moving target depends on what the supply demand dynamics out into fourth quarter.
For a number of them. It's already has determined that negotiated as fleets are already back up and running and we've sort of agreed will run at this level for a certain time period and generally that's to the ended the year up kind of get through this period together some of those crews are still in dialogue or discussion. So yes, there's certainly some movement.
There that will be somewhat impacted by supply and demand.
Okay Fair enough and then.
For the for next year.
Okay.
Discussions right now.
And when do you think do you expect to have more crews running by first quarter extend to too early.
To make that termination no I think almost certainly we will.
Yes outlook for US next year are actually pretty good pretty good you got to re shuffling of the deck.
Customers and even percent of work for larger customers. So the outlook for US next year, Yes, I would say quite positive yes, let me give a little math will end this year with probably in the oil basins, maybe 100 frac fleets working.
By our bottom up analysis basin by basin Accrues. It takes about a 165 crews in the oil basins to keep us oil production flat and are now projected end of year oil production rate.
What we need 20 fiber 30 crews to run the gas basis, you know to keep gas production roughly flat. So we've got to go from again, if you add in the gas basins, maybe will end. This year hundred 2500, 30 cruise probably need a 192.
Hundred just to hold US production flat you need another 80 or 85 crews to grow you asked production by a million barrels a day.
So, which I do not believe will happen next year I think we've seen tremendous discipline from the customers I think that message and that push to get returns up but the average active frac crew.
Nationwide next year will likely be meaningfully higher than we'll be at the end of this year.
Liberty is market share or whatever activity, if there will probably continue to migrate up.
Nucleus embed analysis of what do you assume with respect to.
Further efficiencies and.
From the pressure pumping crews because you know just from your example alone.
And as feels that the group continued to get more and more efficient.
They do and in our analysis, we assume continuations of increases inefficiencies, because certainly that'll happen for two reasons, one technology and the advancement of our crews continue to get more efficient also believes the efficient the lowest quality crews are disappearing. So you have.
Sort of two effects that are going to move efficiency.
But if you look what car X sort of so yes. Each frac crew next year are going to pump more pounds of sand then it will this year well be sure might be an anomaly because like only the eight there's sort of a lot of 80 plus teams out there what is it will that continue to rise, yes, but there is offsetting factor that way.
Wells that are drilled now which is much more infill drilling less urgent wells you've got movement of Brian. If you look at the last two years of oil new oil production delivered by a frac crew. It rose amazingly fast from the start of Liberty until about 2018 I've spoken about this before both.
Well productivity plateaued has actually declined slightly since then and that declining average well productivity roughly offset in continued efficiencies in frac crews. So the amount of new oil brought to the marketplace from a frac crew is actually plateaued, the last 18 or 24 months.
In likely will be not meaningfully moving next year well have a continued dick little bit declined in the average quality of the location drilled that roughly offset the increase throughput and efficiency of increased crew efficiency. So yes. All of those things are factored into our sort of bottom up macro analysis are both U.S. oil production and.
Demand for Frac crews under various scenarios.
Thanks for the questions will go up.
Okay.
I'm going ask one more.
Go ahead with carbon take that I'll turn to be quicker on the problem that you have right now in terms LCR outlook, Florida.
Through increases the use you think that they go back proportionately to the different basins in the same kind of proportion that'd be solved.
As previously or is it more shifting to was just the Permian and maybe little bit going to Bakken even foot in DJ.
Yes joint be yes, I mean look we started in the Rockies right. So our crew count was you over we have larger market share in the Rockies, but when you have what we said it well prices lower transportation differential tend to matter more so yes activity will shift.
This totally industry activity will probably be a little bit more concentrated in Texas and it was and liberties crew, our representational probably be more in line with the marketplace. So yes, we've had more crews in the Rockies than we've had in the southern regions.
Until this year and going forward, you'll probably see more of our crews will be in Texas down the Rockies, we will shrink market share in the Rockies. It all but more material move that will grow market share in Texas, we're probably at least hold market share on the Rockies and the work will skew a little bit more to Texas. So yes.
You'll see a different a ship a slow shifting following customers and activity level of were Liberty's crews are.
Okay.
Great. Thank you very my this is a very helpful and enlightening as always thanks Mccarthy.
And our next question will come from Georgia, Larry TPH and company. Please go ahead.
Good morning, Chris morning, Michael anywhere on annually.
I wondered if you could help frame, it's tough for us to get insight into Frac count given all the different data sources showed different numbers out there but.
Yes fleet utilization is even more opaque so I wondered if you could help us think through fleet utilization.
As we progressed through the second quarter, and then what you're seeing in June and July relative.
Either that April or May timeframe, but just trying to get a better sense of that fleet utilization and given we don't get much information.
On that.
Yes.
So they should always lower when things are changing right. So in April and May you had fleets that were working that were then shutting down right. So those guys are not gone immediately the day you pump. The last date that equipments got to BD mode in stored and taking care of we don't cannibalize our equipment, we keep all of our equipment and talk shape.
And so we have a little bit of a reverse of it now right people are coming back to work. So accrue goes out but all those folks come there early that equipment is yes, there were working on that equipment therapy.
Working on their processes and planning before they start fracking again, so as you start standing crews back up again, if you start fracking in the middle of July but does it mean that equipments first touched on July 14th for July 15th start right, you've got to get people and stopped ready before that so most of the work we do.
Certainly most of the work we'll do this year is dedicated work, but as you go through that lay down in April and May and standoffs Theres definitely harms to Utilizations will will add some spots the wrong term, but some temporary work if it's we're testing out a new customer we were.
Let's see if theres a good partnership there or if we've got a gap somebody wants to restart their operation summed up the customers want to restart a little slower to we want to finish off this pad and then we got to get stuff ready over here. So we may have some gaps some poor utilization as you get going.
But when you get a month or two into a crew running we should be back to efficient in smooth.
Great that's helpful and then the.
That just a question born out of curiosity more than anything else than 97 minutes in today's practice that incredibly impressive that based on all the work we've done around how many hours a day you could pump in the press funding spread I Wonder if you could speak a little bit.
Enabled you all to execute that if there was a piece of technology that allowed you to do that what limited swapping between well time as just a fascinating stat.
Yes, it's a combination of things first of all think of that crude thats accrue a bunch of supervisors. The guys who were stars in road to leadership.
So that it's a very talent rich crew and of course, the goal and liberty's overtime to build all of our crews every year. The average experience level within Liberty. If those crews is going up so I hope that that awesome ATM allstar team that deliver that that we have.
Fair amount of crews that look like that several years from now as the people are.
Season, we've been Liberty.
There's technology, there's customer cooperations, there's some automation we've done on pressure testing in a few other things, but I don't want to say too much except to say that it's the combination of the humans and liberty and a great partnership with a highly efficient customer that since we've started working with that we just continue.
Finally broke their legacy records and I think its fire them up as much as us up to keep breaking those records.
Thank you for the color Chris.
I appreciate your to take care.
Our next question will come from Sean Meakim with JP Morgan. Please go ahead.
Thanks, Good morning.
Morning show.
So a lot of questions on utilization this morning, which makes sense do you, maybe just get a little bit more feedback on how you're trying to manage.
These low levels of activity I was trying to manage.
Across the fleet to maximize utilization in each basin. So you've got varying degrees of challenges across the northern basins and then in the southern ones. Just curious how your try as you look forward in the back half of the year, how you're going to try to achieve sufficient scale and each basin also managing the other parts.
Of how you deploy your fleet.
To maximize uptime.
In this current environment.
Sean It's Ron.
Ill, maybe talk about that from a couple of levels first of all you know I think as we've already said on the call. The vast majority of the work we're going back to do is for our dedicated customers and so they bring to us a pretty complete schedule generally speaking and so that helps an awful lot in in terms of making sure that utilization for those crews remains.
Remains high we've been working closely with them really since April to think about those plans for returning to work and how that's that's going to look for us at with the goal of maximizing utilization as we bring accrue back off or low and put it back to work in the field.
We obviously have some customers that don't have a.
A complete schedule and so you know, we're working closely with them asking them potentially to be a little bit flexible on timing. So that we can we can level load our fleets to the extent possible. So so where we can were shuffling the schedule around a little bit asking somebody to go a bit earlier or little bit later.
Such that we can we can slot them into.
Gaps or opportunities that we have on an existing fleet.
Okay fair enough I appreciate that feedback.
My question Chris.
As you.
We've spoken over the years you all have proven to be counter cyclical and your investment strategy.
Yes, I never feels good to be a contrarian, particularly when times are tough.
You did successfully in 15 and 16, but of course, we would argue that the forward outlook is much more challenging than it was even back then and the industry's outlook has changed perhaps that creates more willing sellers.
Also makes you know putting a bit out there more daunting just curious in terms of like abroad.
Type of environment that you'd like to see are you Didnt vision that would make sense to do something more transformational or just to do something more meaningful on an M&A basis is this type of environment that you'd be looking for.
Or what does have some parameters that would make sense from a macro perspective.
Leaving aside the specifics of.
The deal itself.
You know you use that type of environment.
As Im sure you know virtually not virtually but a large per se. The majority of the stuff. That's out there are companies out there our for sale, so and some aggressively. So so yes, we have been very active in the last few months.
Looking at all sorts of opportunities, but again, we've not been much of an acquirer. So doesn't mean anything is going to happen at all but if something's compelling really don't single metric is can we grow per share value via this asset acquisition or larger transaction or whatever.
But yes, there is a surplus of horsepower. So what does it bring in terms of technology in terms of economics Theres lots of factors and so yes, I guess my short answer is yes. This is the type of environment like we saw in the first half of 2016 does it mean will do anything no but does.
I mean, it's more likely yes.
But I would say just too early to say, but we're very active in that in and I think you will see a number of deals in the industry.
Our Liberty will be in one of those are not I guess only time will tell.
Fair enough really helpful. Thanks, Chris.
Okay.
Our next next question what.
Well come from Blake trends are on of Wolfe Research. Please go ahead.
Hey, Thanks, good morning, guys.
I wanted to follow up on the efficiency comments it seems like the value of marginal efficiency that you deliver is far greater than.
Incremental stage pricing from here underpinning some of your comments in the prepared remarks Im just wondering we've talked about performance based contracts or other parts of the North American oil field I know that pumping does employ some performance metrics in part, but I'm wondering just now as we're hitting sort of a steadier state and U.S. land if there there could be a more concern.
Hi, good shift to a performance based commercial model for pumping and what that would look like.
Fortunately I would say price pumping pricing by its nature is performance based because your paid by a stage.
That you put in the ground. So it's no we don't we don't rent our fleets on a daily rate.
So how much of that time were fracturing impacts our economics, we even have with a number of customers.
We have and even more dramatic performance pricing, where a certain number of stages, our X price in every state beyond that.
At a discount to that price.
We've used that structure a lot to incentivize arc, our partners our customers to hey, if we can figure out how to move faster, we're going to make more money getting more stages done today, and you're going to pay last to get your well done now even without incentive pricing path to certain stage, they still make more money in ESG.
For wells, if they get it done faster, yes, theres tens of thousands of dollars a fix daily costs out there independent of the Frac spread I throw these numbers out there before but we get a pack done 10 or 20 days earlier, yes, that's a nice quarter do a half a million dollars or more on that well.
And brings oil earlier, so what is what are the things we like about the frac business versus the drilling business I think the drilling companies and technology have done awesome stop but that sort of.
Barging by the day model has made it tougher them to capture much of that value not that we don't have challenges capturing value too because our our markets a little too fragmented.
But.
But yes, and we always trying to find other ways with customers to align our incentive better.
So that hey, if we save money we share the savings together, we get done faster, we share that together, but I would say.
I would say, we have pretty I would say very good alignment could always be better on economic incentives that our customers.
Great question.
Sorry.
In general, but Theres, just not many different ways to slide that.
No absolutely and that's on surface vision season, I totally get that you talked about the productivity trends, obviously, that's going to be important moving forward here.
To the degree that you can measure the productivity impact of the data, especially the you leverage would there.
This scenario in which you could participate from a productivity standpoint in these stages demonstrating that you add a certain amount of productivity per stage.
I don't know, how you'd measure that or even even demonstrate that you seemed a better graspable, what's going on the subsurface and most of your your peers.
So we've been less successful bear not not completely unsuccessful, but I would say less successful. It's come early on we had some very different ideas CMV, particularly the Bakken that didn't have now been.
I wanted to use it or not normal the Bakken, but there was resistance to an early on we were brand New company, we did bring to bring to two customers a deal that if we don't deliver X amount of productivity increase.
We'll give you the extra completion costs money back.
But if we do you know here's the pricing for that sort of risk.
Sort of insured Frac design.
But of course, they work swimmingly. So after people know they work well I don't need to buy insurance anymore.
So we did a little bit of that I would say the biggest benefit we get today is really just more in the stickiness of customer relationships, if we're bringing better ideas and we're making customers wells better. They know technology is going to continue to evolve they're going to go and develop in different areas and I.
I think they get a comfort factor that it's better to be partnered with Liberty.
And just thinking this matters to us because if we have one customer through a three or four year period. We can just do so much more efficiency wise, which helps our profitability and our customers profitability. Then if we've got to different customer each year event that fleet fully utilized with three different customers over three years, that's not the same.
Value proposition for us as a fleet with the same customer for three years. So we get indirect benefits, but what we're not getting up per cent of the increased profitability from our operators from better frac designs, but I mean, they put the money out they own the land they ultimately make a decision.
We get it we want that up and I think we get some of it indirectly, but thats just part of our partnership there in the business maximizing.
There were turns on the acreage they lease and we want to help them do it.
Yes, that's totally fair.
One more if I could sneak it in shifting gears a little bit it seems like the tenor of the legislative conversation in Colorado is shifted.
As of late you know the governor came out and said you'd rather less Senate Bill 181.
Kind of work its course as opposed to some of the.
Some of the other regulatory frameworks and been proposed.
I'm just wondering because it may have been lost in sort of the noise, a pandemic and decreasing activity in the Rockies specifically is what you're hearing now a major step change and is it a big deal for your customers and you by design just moving forward over the medium to longer term.
Yes, I want to overstated, but it's a meaningful positive we've had.
Better dialogue with many different.
Ways in parties throughout it all but but yes, I think were politically we're definitely in a better place now that we were three months ago in that we were 12 months ago.
Yes.
Colorado, the best place to drill a gas wells, but we're not there.
What did you positive development for sure I think we have some more certainty it more clarity it over and over the next few years. So yes, if it's very positive add down and I think yes. It's a good thing to get go really appreciate the time the answers. Thanks, guys. Thanks, Mike. Thanks.
Our next question will come from Ian Macpherson what segments. Please go ahead.
Good morning, Thanks, Chris you laid out a a good case for demand recovery.
Next year based on the requirements of.
Production thresholds.
And in order to get pricing back in a in a better place the other.
Consideration of course will be calling supply.
So if we had.
I don't know 20 million horsepower in the U.S. at the beginning of this year at having already called the fleet by 20% or so.
Late last year.
Maybe we could quibble around those numbers, but how much of that capacity do you think is going to be challenged.
Politically as we get back in the cycle next year and also maybe if you were around could share any thoughts around how the useful life of some of your critical components in the.
The pumps and the power side, maybe adjusting with more slack in the market. Thank you.
Yes, I'll start and then I'll turn it to roll on to talk about some of the efforts. We've made on technology to expand useful lives and reduce the total cost of ownership of equipment.
But yes, Theres look there has been relatively low investment in equipment. The last few years bolt in.
Much smaller number of new build fleets, then then attrition.
Ed, Yes people and of course people now we do not do this but I would say its normal industry practice to cannibalize parts all the parked equipment today, so like you know.
So that's again, where we just take us longer term focus our numbers for certain quarter reflect.
A certain way, we run our equipment and others might reflect a very different way.
Manage their equipment, it's really just time shifting its not cost reducing.
Yes, Theres a lot of attrition in the marketplace will continue to be well, there's still be issues of too much frac capacity you know in first quarter next year, yes.
Be better than it is today, yes, well it will it'll be a lot better than it was 30 or 60 days ago. So theres progress being made but I think we're going to move towards a market that will be a little bit from equipment specs bifurcated.
The larger players are there just a growing push coming out of this downturn to have I want to minimize my environmental and community impacts that's a liberty sweet spot we've been working on that Adam So theres going be growing desire for that and I think it's us very small number of players that will have offerings to deliver there.
And so you know we hear from now hopefully there will be sort of legacy equipment markets that they will still be largely it will still be the biggest piece of the market and then they'll be sort of next generation.
Mid market that'll that'll that'll be the supply and demand pricing will be different to knows the other thing that will help with pricing is everybody had to shrink right. We talked about our shrinkage wheel by the end of this year as they say, we'll probably have a 100 or so fleets running well that's a lot better than we were a month ago, but.
It's still very low and then as you know as I made that math out you're probably going to see 50 to 100 fleet more on average needed next year. So those fleets have to stand up even if their legacy equipment.
Sitting around like Theres no humans on that fleet are you going to go higher brand, new and staff a Frac fleet, you know Ted Ted build that team at driving out there for the crappy pricing of today no no. So the next big driver pricing moving is.
When demand passes the fleets that are easily staff from people that are on your team already might be in furlough, they might be inverters comp, but that's one level of bring back when you're hiring new people and that's what it will take that Doesnt mean that will be starting late this year for most people.
And certainly early next year that will be a meaningful move up on pricing across the fleet types.
Maybe just a few more thoughts on your on your question just in terms of of.
Longevity for the various components on the pump.
Yes.
I think we've said this in the past, we probably think about that in two different ways. There are some components on the bump that we.
We split so specifically select from a certain manufacturer.
And in transmission for example, based on our experience with them and our belief that they are the best asset to put in the field and for those particular assets and then it then comes down to how we operate them and so we continue to think about the best possible way to run an engine and the transmission ultimately a bump up in its entirety.
To to optimize the lifespan for those assets and and to achieve the law lowest possible cost of ownership for those and then as you move further down the pump, particularly to the fluid end of the power in itself, we've maybe inserted ourselves a little further into that world. We saw opportunity there to go a bit further back in the in the supply chain and.
And work closely with the manufacturers there to optimize the design of those and so we've been working over the last.
12, 24 months, maybe even a little longer than that on.
Metallurgy and fluid end for example, and exactly what that stainless steel should be what the internal design of that should be how fluid should flow through a fluid end to.
The best optimize the life of that fluid end in the valves and seats that are in it and then the same thing with the power and thinking about exactly why it is a power in sales and what we could be doing to that power ends and make it a better asset and so our exercise there has been a little different than it has been for the other components in that.
Working closely with a key partner there were a bit further back into that design and engineering process and and I think results are are quite positive and I think we continue to expect to see opportunity for further improvement there.
That's great. Thank you both in Ron It doesn't sound like a stretch senior hours.
Borrowing more rotational capacity on site has really been part of your strategy to do I infer that correctly.
No. That's absolutely correct. We you know if you drove past one of our yards you would see that we have parked our our fleets in pristine condition and those fleets remain fleet. So a fleet is out in the field today is the same as a fleet that was out in the field in the past were not.
We're not having to take a fleet from 20 bumps that 30 pumps to improve efficiency.
Thank you guys for all the answers today appreciate it.
Thanks.
And our next question will come from Scott Gruber.
Citigroup. Please go ahead.
Yes, good morning, everyone well Scott.
So Chris just continuing on on the pricing question, we agree is likely improvement when.
Pumps need to be reactivated I guess the concern is at the margin will still be fairly weak you by historical standards and relative to the returns that the.
You look for.
On your equipment, just given the competition out there.
Do you think there'll be a time, where you simply need to draw the line in the San say, we're premier operator, you want an incremental spreads from us you're going have to pay a premium. So we can earn a fair right for our services rendered maybe even if it.
Got you in it in the spot where you may have to sacrifice some share.
And if you think thats going to be needed kind of what level of.
Fleet activity do you think you'll have to make that decision.
So I would say we've been doing that since the day, we started the company.
Yes. It did is there an increase desire for liberty versus the other people absolutely. If we had a customer that viewed us the same as all the other puffers they're just.
It wouldn't be a customer that's just wouldn't be a fit for liberty. So so Scott I would say look we are doing that but are we are we getting get to a place where we have posted price list and it never changes no.
And we don't want to you because we have a partnership mentality some our customers for years ago getting $100 for the Royal under the getting $25 for the well another getting 60 and 50. It changes every day. So we went into a cyclical business knowing it was a cyclical business and we're knocking at we're not going to de sickness side.
So we just have to live with that which is why you know we look at things like our compensation for the executives in our bonuses. The company there about return on capital employed over longer time periods. We've got to mid Twentys of return on cash employed in our business over the history of our company. So.
No.
And do we think that will go way down in the next decade, no absolutely not alone is a low right now.
Yes, yes, but no I don't think I don't think our industry is actually getting structurally worse.
I would I would yes, just to guess that that next five years will actually be structurally meaningfully better than the last five years I think yes for just supply and demand forces that are affecting players in our industry, but we'll see but I'd say, we are coming from Scott, but if you just got to think of the people on the other side of the table is.
Well so it's it's a partnership.
No I understood and we agree that infrastructure should get better, especially as people capitulate on growth I guess the Genesis of the question is really will there be a time needed.
Sure.
Basically you and and other premier operators just have to draw a line in the sand.
I don't think we're going to get back to a pricing structure that.
<unk> is really adequate.
For for your services you did the premier operators just have to draw a line into saying, let's say we need.
Differentiated pricing your incremental to kind of what you're getting these of either your competitors. Today is that is that something that can naturally happen or is it that you're going to more have to actively pursue.
Well I.
I would say you could even say dialogues we have we've a lot of obviously friends in the industry and they'll tell us exactly what they you know they bid out 13 Frac companies and this is what we see and now the better company hope it out 13, they buy bid out six or eight or something like that but no. The I'd say there is a key.
Right now where you may see a clumping a pricing for.
The top tier players and then you may see meaningfully in some cases dramatically lower pricing from people that are just there just trying to cling on and I would say we hear more today, yes, they were 20% cheaper than everyone else, we're not going to use that's not we don't consider those prices were looking here, but.
I think among the better players I think the discipline today is actually reasonable given the state of the market it's reasonable.
Better than it.
Three or four years ago in the last downturn.
Certainly encouraging great appreciate the color Chris. Thank you thanks cannot take care.
This concludes our question and answer session I would like to turn the conference back over to Chris right for any closing remarks. Please go ahead Sir.
Thanks, everyone for your time today.
Sorry, My answer is really a long winded, but this is our once a quarter time to talk through some of the issues. We appreciate all your interest in Liberty. We appreciate the Liberty family and our customers in our suppliers that we wish everyone, a health and wellness in coming months and we'll talk to you in the fall.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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