Q3 2021 Liberty Oilfield Services Inc Earnings Call
Good morning, and welcome to the Liberty Oilfield services third quarter 2021 earnings Conference call all participants will be in listen only mode.
Should you need assistance. Please signal a conference 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 profits. 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, but 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. These non-GAAP measures, including EBITDA 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 EBITDA and adjusted EBITDA and.
The calculation of pre tax return on capital employed as discussed on this call are presented in the company's earnings release, which is available on its website I would now like to turn the conference over to love to D. C E O. Chris Wright. Please go ahead.
Good morning, everyone and thank you for joining us to discuss our third quarter 2021 operational and financial results.
Our third quarter results.
Solid growth momentum.
12% sequential increase in revenue on both higher activity and service pricing.
Team delivered this growth, while navigating acquisition integration activities cost inflation and it is roughly the impact of the pandemic.
And global supply chain and labor availability.
Third quarter revenues were 654 million compared to $581 million.
Good quarter.
Adjusted EBITDA in the third quarter was 32 million compared to 37 million in the second quarter.
Third quarter benefitted from service price increases at Liberty was not immune to the serious supply chain issues. The world faces today as fast with cost increases more than offset higher prices during the period.
Increased transportation costs and driver shortages maintenance personnel supply chain constraints and integration costs hurt margins in the period.
We estimate and rapidly increasing the JV costs that were not passed through to customers in the quarter were approximately $12 million and maintenance costs were 8 million higher than normal due to integration and COVID-19 related disruptions. We are actively addressing the supply chain logistics.
And integration challenges and are continuing into the fourth quarter.
Moderate their impact on margins.
We all know the Covid pandemic has caused meaningful disruption in the labor market there.
We have taken significant steps to address the effects and we are starting to come out of the other side of these challenges Michael and Bob will expand on these issues and opportunities.
There is now widespread recognition amongst operators not only the availability of next generation equipment.
But even more scale and high quality service partners with best in class efficiency and technical expertise to drive higher performance.
We believe this tightness in the market first quality service providers is important for operators and a recognized as critical to have the right partnerships in place today to be successful over the coming years.
There is significant interest in Liberty Frac Electric fleet we.
We have completed four very successful field trials in over 30 technical and factory deep dive with customers and the response is overwhelmingly positive.
We are excited to announce the execution of this first to multiyear arrangements to deploy E. Frac fleets in 2022 with two of the field trial partners. We are also in active negotiations with the others.
Technical innovation and engineering controls that these blades exhibit combined with the leading emissions profile and Liberty's operational excellence is a combination that is hard to beat.
We are continuing our multiyear deployment strategy centered around choosing the best partners for each practice Wyman and strong returns on incremental capital deployment.
Operational efficiency came to the forefront during the quarter.
In late September, we announced that Liberty Frac and wireline teams, where do culture to achieve 24 hours meeting Tonight and good night.
<unk> with plug and perf pumping time.
We are excited they just one week later 15, it again hitting the ambitious goal of Liberty's operations 14, 40 is an incredible feat deliver.
Delivering a full 14 140 minutes on pumping time with <unk>.
Zero nonproductive and non pumping time.
<unk> is a remarkable effort of coordination and efficiency.
Our team achieved this due to our 10 year focus on real time data tracking and predictive analytics and do our partnership with Kaiser branches and Tammy.
Surveying the macro worldwide economic activity continues to grow driving higher demand for energy. Despite the impact of supply chain disruptions material shortages labor scarcity rising costs and COVID-19 related uncertainty.
Energy demand continues to outpace and gradual return of supply as evidenced by the energy crises in Europe, China and India.
Global oil and gas oil and gas supply remains constrained by Underinvestment in both oil and gas production and the associated infrastructure deeper.
The urgent desire of many to see oil and gas transitioned away is running headlong into reality.
In the year 2000, hydrocarbon supply 86, 1% on global energy.
Boeing by less than 2% to 84, 3% in 2020.
Underinvestment in oil and gas infrastructure, whether it be shrinking the natural gas storage capacity in the United Kingdom or hindering the permitting of U S. LNG export facilities will surely lead to thousands of preventable death. This winter among those unable to afford.
Sky Rocketing heating bills were surging food prices due to a global shortage of natural gas driving up fertilizer prices.
Strong.
And natural gas liquids prices are bolstering demand for Frac services, particularly among private e&ps.
The positive momentum we see is expected to continue in the fourth quarter and into 2022.
Our customers demand monitor environmentally friendly solutions with high performance operations and strong partnerships. We are in a highly advantaged position with top tier technology innovation Engineering program service quality and ESG friendly solutions.
As we continue to look for ways to improve our efficiency and build value. We're very excited to announce our acquisition of prospects a leading provider of environmentally friendly last mile proppant delivery solutions.
<unk> has also been a longtime equipment and service provider to Liberty and dynamic team at <unk> is it.
Great cultural fit with Liberty.
Additional prospects integrate our latest profit delivery technology and software into our supply chain, including their new ESG friendly wet sand handling technology and expertise.
We will continue to bring prospects technology equipment and services to the whole industry.
Together, we believe these solutions will reduce the environmental impact of last mile delivery and lowered our total delivered cost to our customers.
I'll hand, it off to Ron to discuss the significant value prospects will bring delivery organization.
Thank you Chris.
We are excited by the opportunity to both strengthen liberty's logistics efficiency and technology. While also continuing to offer these leading solutions to the industry as a whole whether we're performing the frac services or not.
<unk> is a leading provider of last mile proppant delivery solutions, including containerized sand equipment, well site proppant handling equipment and logistics software across North America.
In the most recent kimberlite survey, 60% of the E&P Survey express a preference for containerized sand handling on their locations.
To date <unk> systems can be found on approximately 25% of all frac locations.
Founded in 2016 as a solution to optimize on road trucking delivery of sand are custom designed for efficiency containerized sand handling equipment for both wet and dry material maximizes delivered load capacity and flexibility.
This system utilizes the widest cross section of trucks in the market.
This has led to logistics efficiency and the environmental benefits from lower delivery rates faster turnarounds fewer trucks required and reduce emissions due to lower idle time.
Liberty has been a longtime customer prospects.
First as part of the integration of <unk>. We are in the process of moving legacy <unk> fleet took profits box systems across North America.
As this is be more efficient and cleaner facilitator of sand transportation in the industry.
The rapid innovation and ingenuity of products continued to date in the nascent web sand business.
Through their ongoing work with early adopter, who will visit prospects has built the equipment and expertise to become the premier provider of this technology.
Wet sand handling technology as a key enabler of the next steps in costs and emissions reductions in the proppant industry.
It is an ESG friendly solution that allows for the delivery of wet sands two operators.
Summarily sand processing required standards to be washed and drive prior to transport.
And the driving is the highest emitting process at San Juan.
Prospects as wet sand handling equipment allows for the transportation and usage of wet sand, eliminating the drying process, reducing costs and emissions.
We view wet sand handling and delivery as a disruptive force in the last mile delivery business in terms of lowering total cost and reducing environmental impact as.
As we look ahead, we see many opportunities for localizing the supply chain with smaller scale wet sand mines, using the profit system, providing real sustainable cost savings across the value chain.
We are also thrilled to have cross connect.
It is real time, and logistics software, which raises efficiency for operators and service providers across the space.
But cross connect well site and software automation platform is available to customers for sale or is a hosted software as a service.
It drives better visibility and automation from source to dispatch to well site and building.
Internally at Liberty, we plan to integrate prompt connect with our Oracle transportation management system and other existing logistics development efforts.
Streamline supply chain delivery and operations.
We expect this integration will modernize last mile delivery enable our driver pay initiatives and brings significant improvements in cost efficiency and optimization.
And early trials of next generation software platform in the Permian enabled a 20% reduction in the number of truckers required to keep our patent supply with proppant through end to end optimization of trustful.
The new platform also enhances liberty's ability to partner with a broader range of trucking providers from the independent owner operator to the largest firms.
They will benefit from clear line of sight to utilization levels and automated invoice workflow speeding payment times two inside of a week.
Safety is paramount for Liberty and driving just the most dangerous activity we undertake.
We believe direct oversight in the last mile space provides us the strongest opportunity to drive continued improvements in this area.
The transaction physicians Liberty as an integrated provider of completion services offerings with proppant equipment logistics and integrated software that will improve liberty's operational efficiency.
It is representative of our relentless focus on building value over the long term.
By integrating the latest proppant delivery technologies and software into our supply chain. We believe we will reduce the environmental impact of last mile delivery and lower our total delivered cost to our customers.
With that I'd like to turn the call over to Michael stock, our CFO to discuss our financial results.
Thank you Ron.
Morning, everyone at quarter results showcase the hardwood <unk>, we delivered a solid top product results improving overall service prices utilization efficiency.
Despite ongoing global supply chain disruptions and integration activities.
Alan just to hit a couple of them they still exist, but we are aggressively managing them to moderate in future results. We're excited by the accretive property acquisitions complement.
They stood at this look at our results in greater detail.
In the third quarter of 2021 revenue increased 12% sequentially to $654 million from 591 statement.
Reflecting the combination of increased activity.
<unk> price pass through and increases prices really new in the lease was approximately a 10% sequential increase relative to SaaS.
Topline growth was achieved despite the supply chain just the challenges that are impacting our industry as a whole any integration issues that liberty is navigating this year once the acquisition.
And these loss after tax was $59 million net loss includes the gain from the Remeasurement that TRA liabilities that positively impacted results by approximately $5 million.
<unk> also included transaction and other costs.
Six months.
Fully diluted net loss per share was <unk> <unk> compared.
Is 2019.
Third quarter, adjusted EBITDA was $52 million compared to $57 with stakeholders.
The decline in adjusted EBITDA was a result of seasonal factors.
So just these costs negatively impacted EBITDA by approximately $12 million from driver shortages transportation costs, we did not come through as quickly as they materialize.
Driver shortages across the country.
And our industry is chemically defeat transportation of same periods.
We are taking measures to streamline.
Thanks, Nathan and pass through fast rising transportation costs.
I just <unk> full integration of the connect.
Software.
Patient management.
The fast paced system with a long term solution to streamline logistics, reducing the quantity of drivers needed reduce cost per model.
Maintenance costs were approximately $8 million positive, which is an integration and COVID-19 related disruptions, including the impact of fuel and maintenance personnel piece related supply constraints.
The rates of maintenance as we transition to <unk>.
Peyton software and industry wide.
Supply chain efficiencies.
As we discussed last quarter, Chris mentioned remarks, the Lai market across the whole country and in all industries challenging place.
Additionally, providing superior service to our customers is driven by the <unk>.
<unk> commitment to <unk>.
Let me start is insulated from the turnover issues that are in concept. This industry over the last few years.
In this quarter, we announced the transition of all of that field start to them to schedule.
Gabriel we believe promotes crew efficiency reduces churn.
Most importantly supports a call would be the Cyprus completions company in North America we've.
We've seen two rate move back towards historical norms.
And that will be financial fruit.
<unk>.
General and administrative expense totaled $52 million and includes $3 8 million stock based compensation.
Excluding stock based compensation, an accounts receivable balance.
G&A expense increased by $5 million.
This increase was driven by the restoration of styles profitability bonuses and compensation increases.
Italy too.
Higher legal provisions as costs of $1 1 billion an increase.
And other cost to support that new larger integrated business post the once the acquisition of $6 million.
Quarterly run rate is a reasonable estimate.
Interest expense and associated fees totaled $4 million.
And we also recorded a non cash adjustment of $2 $1 million place takes receiver.
Okay.
Income tax expense totaled $1 million.
Canadian operational third quarter results.
We ended the quarter with a cash balance of $35 million, reflecting an increase from favorable mix.
It was 106 million those data.
Leasing costs and original issue discount.
It was a $60 million drawn on the ABL facility.
And total liquidity available under the credit facility to 268.
Okay.
I'll tell you that we amended our secured asset based revolving credit facility.
The 16th the maturity date of the facility from September 2022 to October 2020, and provides for $100 million increases aggregating to a total of $350 million.
Conjunction with similar maturity date was extended by two years.
No substantial payment.
The maturity.
2020.
We are excited to announce the acquisition of properties for an aggregate purchase price of approximately $90 million.
Subject to normal closing adjustments.
As consisting of CHF, one $5 billion in cash.
The $5 8 million shares.
So value at.
At 76 $5 million based on the 60 day average closing price of $15.
Yes.
The $19 million purchase price represents approximately four seven times at.
Stage, one and 2021 EBIT.
As Ron described this acquisition.
The integrated completion services with proppant equipment, just takes an integrated software.
That operation just ticks efficiency.
Directly confronts logistics challenges, we face today is a clear example of that strategy is basically to the future and maintaining a clear focus on technology innovation and efficient operations and strong balance sheet.
Value ratios sort of assignments.
Capital expenditures were $56 million for quotient debt, including approximately $10 million of months.
So the foundation.
As we look at it is we.
We see the momentum we have created this year sets us up well for executing in 2022.
Asking about pricing recoveries speeding up we've addressed these deep personnel challenges of 2021.
<unk> and supply chain continues to be a challenge, but the issues are being addressed the management team continues to be amazed and proud of how the team has performed in these tough times and are excited to see what they can do.
They bank with that I will turn the call back to Chris before we open for Q&A.
Thanks, Michael.
Quarter had some challenges we are very pleased with the trajectory of our business.
I want to thank everyone on team Liberty for their tireless efforts.
Also thank our customers and our suppliers for their partnership.
Back to the operator now to take your questions.
We will now begin the question and answer session.
I'll ask a question you May Press Star then one on your Touchtone club.
Youre using a speakerphone please pick up your handset before pressing the keys.
I will draw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
First question comes from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Bart and Scott.
So Chris you appears have been pushing pricing now for a few quarters and it appears there youre offsetting.
The inflation across the system, but not getting much net pricing.
What's your confidence in securing net pricing in the quarters ahead.
Something we have to wait for the new year for the Msas to reset to really see it.
Come through in your financials and overall just kind of how you think about the potential magnitude of net pricing gains that are possible as we head into next year.
You bet Scott.
Do you feel pretty good about things just remember how slow things some five quarters ago. So we were getting net pricing improvements from a very low though over the last four quarters last quarter definitely a bump in the road, we drove pricing up but not as much as we showed up and then you see the result of that pricings continue.
We can move up in the current quarter, but the larger movement in pricing double digit will be starting Q1 and most of those price moves have already been agreed with our existing customers. So we feel pretty good about where things are going we wish they have moved faster but I.
Thank you go into a good place.
That's great good to hear.
Yes, just digging in a little bit more on kind of what's driving the pricing.
There's still a lot of legacy tier two equipment on the sidelines and obviously there is a preference.
For our low emission kind of Nextgen kit.
But we also have a scarcity of quality crews out there today as Michael discussed.
And that that alone should raise the value it has.
They've experienced crew today can you just parse out a little bit for us kind of what's driving the net pricing is it.
More scarcity of quality nexgen equipment or is it.
True scarcity.
Any color on that front and if it's more driven by cruise scarcity would suggest kind of a less of a phenomenon that we've seen in past cycles, just kind of overall, what does that mean for the kind of potential carry net pricing.
And the magnitude when you talk about double digits.
Kind of what is the.
Scarcity of quality crews mean for pushing pricing.
Yes, it's Scott.
Both of those things and they are in you're right. They are separate forces.
Mostly among the larger or public operators, yes, there is a very strong desire to have lower emission fleet.
Remember lower ambition fleets run on gas versus oil. So they also have a cost savings are in efficiency, there and running.
On natural gas as opposed to diesel.
So that is driving inflation I would say that's driving the differential pricing between next generation fleet down the line and there is really a continuum from tier two to tier two diesel to tier four.
Tier two.
<unk> dual fuel tier four tier four dual fuel and now fully GAAP, earning and maybe at the top of that fact E frac.
So there is.
Pricing differential driven by that but then there is also sort of a macro tailwind.
Tighter market quality crews.
The labor challenges makes the whole market tight, but there is also sort of a differential between the quality of the crude you're getting and yes. It does not take too many incremental fleet that are deployed over the last few months to meaningfully tighten that market. Now today. If you are just standard up to rates and you want it.
On quality Frac fleet today, that's meaningfully more difficult and that was six months ago.
Got it in the 10% improvement that you foresee that kind of across the board on average.
I expect for for Liberty.
Yes.
The more generic is double digit, but yes, we are getting price price rise is net price rises in Q1 across the board.
There is a stronger demand there is probably a growing 500 patients in the ICU get burn for environmentally friendly next generation fleets versus tier two but all of the economics of all of them are floating meaningfully upwards.
And then again is it.
Very gradual so far but youll see a more meaningful jump in that starting next year.
Great to hear I appreciate the color. Thank you.
Yes.
Yes.
Our next question comes from Stephen Carll with Stifel. Please go ahead.
Thanks, Good morning, everybody.
Two things from me one just follow up on the prior line of questioning.
Okay.
When you think about that that level of net pricing improvement.
Double digits.
Theoretically translates to $6 $7 million rising EBITDA per fleet right. Because you can sort of directly falls to the line of it is that a reasonable starting point as you think about next year versus second half 'twenty one.
Yeah.
It's not going to be.
I think your math is reasonable.
It won't be.
Abrupt immediately on January one everything changes most of these are agreed a lot phase in January one.
Summer tiers that will phase in over the year, but are we going to see that much of an increase in EBITDA per fleet year over year absolutely.
Great. Okay. Thank you for that for that clarification and then my second one is it's around prop ex and just go.
Two questions.
One is just how we how we think about how it folds in and I assume it's going to be sort of mesh sand and accretive just to the efficiency of operations.
But given the market share you talked about just curious how you think about.
That business working for third parties and if youre worried at all about cannibalization of work outside of Liberty.
Honestly, we're not that worried about that a lot of prospects is other business is with people in the province is at a lot of direct sourcing for E&P. Some of it certainly is with competitors of ours, but I suspect that business continues on and if it doesn't.
I don't think it's much of a needle mover. So again, we're excited about the promise for two reasons. One is directly integrating our technology development efforts will make liberties.
Should see smoothness safety and ultimately cost to deliver better.
Also we have a third party business.
We suspect we will continue to grow and it's a strong business as well.
And theoretically.
Im just a little bit.
One of the key technology enablers for the future here is that we've maintained in the business right. I mean, that's a key differentiator as we move forward I think we can be working with ordinary E&P clients on there is another way that we can be focused on driving down the ESG footprint of frac industry for our launch.
Lines across the border it doesn't look everywhere, but the areas where it is going to be great. It will be on the guidance really take trucks off the road and Mason both sides of it takes emissions out of the year. This is these are these things that probably it has been moving on we're really what we're doing is we're giving them a bigger megaphone.
Our biggest bank to take this to market that help the whole industry will sell to everybody whether it's the Frac company E&P company same company secrets.
Excellent. Thank you for the color.
Our next question comes from Taylor Zurcher with Tudor Pickering Holt. Please go ahead.
Hey, guys. Thanks for taking my question. My first question is on the supply chain.
You talked about kind of two buckets logistics and maintenance.
<unk> costs ramp pretty notably sequentially, the logistics side, it's pretty straightforward to me and so my question is really on the maintenance side of it when you were talking about $8 million of extra maintenance cost and is that really raw materials cost inflation on things like fluid ends or whats going on there.
In Q3, and how should we think about that piece of the equation for Q4 and beyond.
Let's say this is a great question Angie there is a lot of them.
General inflation, that's rolling through the cost structure of everybody in the Montney, we didn't highlight those units and to some degree normal course, I mean, I'll just throw out one as an example, you know high prices around team right I mean significantly dropping prices.
Issues around supply chain. So those places we didn't lap, but I think one of the things we were trying to focus on D. C. When you look at our business. We as these two places we had integration cost personnel issues and maintenance prices et cetera, a whole sort of come together as two places you can do that is one is efficiency and the.
<unk> is our operating teams and the amazing job with the integration issues around supply chain.
<unk>.
The other place that you see that that rolls through your financial statements is really cost of operation with frankly or maintenance cost strategy on how you run the equipment has been how much it's going to cost now that is something that when you get to know when you get integration we changed systems.
<unk>.
Spike, but it doesn't have a one to one run is no matter. How you run. This month is going to change your cost is most of what we're doing is we're seeing sort of the banking is away from the start of the integration into the <unk> issues out of the summer really get in Q3, So I'm really going to hit in Q4, and then roll ups in Q1.
Actively on increasingly mitigating those assignments, but again I think thats, where you see it in the financial statements and we've called that to try and explain to people having works.
I think Michael it's Super helpful and my follow Up's on Digi Frac encouraging to see you guys.
<unk> arrangements.
I guess my question is.
Looking about arrangements here should we translate that.
Sort of terminology as Ben.
Now it gets to a firm contract for these first two fleets and then.
Part two.
Any color that you'd be willing to provide on the economics behind these two fleets, whether I mean, I know you talked earlier about double digit pricing improvement next year I'm sure did your fracs and a big piece of that and I suspect at the high end of that but just looking for any sort of color on the economic returns that you are expecting from this incremental did you frac.
Equipment in 2022.
You bet tailored so yes, there are contracts E, but as we've always been we never talked about the details of our commercial arrangements, but for us.
Pocket was careful to choose the right partners that have a long long runway in front of them that have been partners of us for a while and of course. The economics are strong very strong return on the new deployed capital for us.
Yes, those are the two things that matter the right the right partners the right windshield in front of how long that equipment to work and very strong returns on incremental capital D. C. Frac deals we've agreed and there were many more discussions obviously theres a lot of interest in partners. We're excited about them because they are big wins for both sides there are huge.
ESG and EBIT operational performance improvements for our customers.
Great efficiencies, Madame Theres lower fuel costs and of course, Theres very strong economics for Liberty.
<unk> got incremental new capital.
Alright, good to hear thanks for the answers.
Thank you and we can win.
Yeah.
Our next question comes from Connor Lynagh with Morgan Stanley. Please go ahead.
Yes. Thanks.
Just a clarifying question to start here I might've missed but I was just curious did you give any sort of earnings contra.
Contribution expectations for the prospects assets or just any sort of high level framework for how we should think about it affecting your sort of mid cycle EBITDA per fleet.
Yes, as far as we stage when you look at the <unk> with the <unk> program in 2021 and was about four seven times EBITDA with the valuation.
Kind of back calculate today.
Obviously being an equipment, mostly the equipment rental business you don't have yet go down probably lower than iqos luxury the Lowe's rides are they going to rebound a little bit from there, but obviously not as fast as Frac company than it is incremental improvements for me, but we wanted to give kind of peak months of a hand.
For a moment.
Okay got it. Thank you maybe just a higher level one Harry obviously with the acquisition of one stem and now prospects you have definitely become more integrated and sort of broader than your completions equipment offering. So I'm curious are there any other areas you feel are necessary or potentially just value accretive for you too.
Pursue and the completion of the supply chain or do you feel like the footprint as it stands right now is the right way to be for.
Coming cycle here.
So we're always looking at deals you rarely hear about them because we don't do many of them, but we're always looking at deals I think the industry reviews Liberty is a nice acquirer I think people like our culture and the way we do business. So we get approached a lot.
Are there other technologies other enabling things might be a good fit for liberty.
Certainly possible, we don't really think necessarily it sounds like we need to buy anything else, but we continually evaluate and if we think it's accretive to our earnings going forward and helps us build a stronger competitive advantage then were interesting and then it goes down Tvs is a good cultural fit we can get them to pull it off.
So theres a lot of factors there, but we're always we're always looking.
It's certainly not impossible to see more things like this going forward.
Yes.
Got it and just just to clarify that comment there. It sounds like you would probably be more interested in pursuing more sort of technology focused acquisitions as opposed to.
Capacity or how are you thinking about that as where valuations are right now.
I think your comments generally Brian we look at everything we look at everything but yes.
<unk> things that make us better.
The most appealing.
Yeah.
Understood Thanks very much.
Thanks.
Yes.
Our next question will come from Chase Mulvehill with Bank of America. Please go ahead.
Hey, good morning.
I guess a few.
Follow up questions here.
First maybe I'll just follow up on <unk> question.
Thinking about further integration.
Would you think about kind of being further integrated and fluid ends or aftermarket or perf guns or anything like that where you could save.
Costs there.
I mean.
Look we acquired MTI in years ago. So we already made fluid ends and power and valves and seats.
Young business. So we're excited about continued improvements in both performance and cost efficiency in those areas.
But yes, so we've already we've already done that yes, I would say that that's one of the ways. We look at things changes. We look we look at technology add ons, where because of improved ridges frac customers improve that business. We've licensed in the supply chain will be seen that we really like to have more control.
Okay.
Sort of like one speed technology improvements will reduce costs and kind of a key place that we would look at I think you sort of the original purchase reasoning behind <unk> bank, obviously than a huge technology advantage with the <unk> Frac design I think you see that when we took the freedom province business, along with the ones that business, rather OSP wastage.
The same.
The same thing to some degree from the segments.
As Youll see the same thing with profits right. We've got a key supplier for us in sort of a one stop shop is what we need to make sure. We have access to that and we can help them make reduce some of the cost of these key containers and handling equipment, but also it's a huge technology portfolio with the nascent with same technology, which is another key driver horizon also what Youll see is.
Cost savings improving EBITDA immediately accretive plus room to build in technology for the future Thats generally how we like to look at.
Acquisitions.
Yes.
Moving over to kind of the Newbuild you, obviously you announced.
Did you Frac electric fleets.
How do you think about adding capacity today into a market. That's oversupplied now I know that there's a higher demand for next gen equipment.
But how do you think about adding because obviously competitors are doing the same.
And one would argue that the market doesn't need incremental capacity.
Our U K.
Are you.
Scrapping capacity on the low end as you add new capacity or is this kind of new.
Net additions to your overall capacity.
It will look but right now demand for Frac fleets is growing at.
And the available number of fleets able to work is actually shrinking.
You hear announcements of electric Frac fleets being built that number is way below the amount of equipment just from attrition on an annual basis. That's happening right. Now. So we have two trends in the industry right now growing slowly, but growing demand for frac fleets and shrinking supply of Frac fleets.
That's sort of the macro we're in right now which is what's driving the continued improvements that actually improvements to a pretty good place.
Time next year.
So for US we never look at that like top down next year will run X number of fleets, we're going to add or subtract why that's just not the way we do it it's always a bottom up customer by customer dialogue is that customer strategic what needs do they have what are the economics forward. How are we going to staff that are worth it.
So write down from our existing partners and some newer partners. Yes, there was a strong pull for Liberty right now I'd say, we've been quite disciplined in not just saying, yes, everyone is bringing tons of new fleets out in fact, we've held the line on fleets for a long time right now, but next year and certainly with the DG Frac.
Lee are they likely to be incremental for liberty.
They will be they will be.
Yes.
Fly in demand, it's a different situation right now than it was three quarters ago that look when we report results that's all.
<unk> mirror and with prices change today, just usually for tomorrow Thats. Further ahead. So our results are always just a lag look into what's going on in the marketplace.
Yes, the real you around the real proof point at the moment is truly trained effective personnel right. There's the issue around free.
Usually right.
Logistics and because <unk> is really the touch point.
The amount of steel.
Steel and you can.
To be sitting on the sidelines.
Yes, It makes sense, one quick follow up and in the press release, you were pretty pretty.
Candid about that.
The activity levels, and you see increasing activity in the kind of <unk> in 2022.
So I guess.
Specific to <unk> do you think that you see any seasonality or budget exhaustion or anything like that and then when you look out to 2022 do you think the ramp is kind of more first half or second half weighted.
Well I'll take Q4 and all good.
Next year, even if they are looking for us to make.
When we look at <unk>, obviously going to be seasonality right you can see.
Christmas Christmas Thanksgiving holiday breaks and all board Thats, usually is sort of in the mid single digits slowdown in activity internally. Once we go positive this budget exhaustion over the last three years, which was abnormal.
Over time, so I think that's going to happen I think that's going to get all state for us by sort of increased activity in some increase of scheduling really about a few board Doug <unk> CEO.
See a slight uptick already top line in Q4, the expectation yes.
Yes.
What is the next year publics are still a very disciplined and again, we applaud that we applaud that prices are going to be higher next year. Their cash flow is going to be higher, but I think capex levels will still be quite modest production.
Probably mostly around maintenance.
Maintenance production levels for the publics, which still means an increase in capex.
But the private it is a response to the strong economics, so I would say there is that.
Measured, but continual increase in that capex and that activity level.
So look we're probably going to get next year I think the numbers you read around 20 plus percent total increase in Capex next year, that's probably a reasonable guess, but again think of that 27% spend.
Half of that is price.
So there'll be increased activity levels next year, its not a stair step in January I think it's probably more gradual and spread out over a year, depending upon commodity commodity prices.
Okay. Thanks, I'll take the over on the 20% though.
Thanks, Chris.
Thank you Jake yes, you're probably right.
Thanks, Michael.
Our next question will come from how to even low tech with Goldman Sachs. Please go ahead.
Hey, guys.
Could you maybe maybe at a high level could you provide any color on the frac equipment supply demand picture looks like today.
What do you estimate the utilization rate is like and what the supply look like as you go into next year, because there are a lot of the things we're talking about.
Not necessarily electric fleets.
Just any color around that.
Yes, it's harder with frac fleets that with drilling rigs.
What's happened is.
The intensity of Frac work has continued to migrate up people economics are poor so people when they have a frac fleet sitting in an engine go down are the major component there is a lot of.
Each year, there is a lot of pilfering apart and competitors so.
You can't just fly over and count how many parks frac fleets, there are but I will tell you the excess capacity of steel is definitely shrinking.
So that equipment is being borne out.
As Michael said Youll, probably the single biggest challenge is if youre going to deploy a new frac fleet or even keep the one you've got delving into the skilled labor that can work efficiently and safely. The human side is probably the biggest pinch point in frac leaks, but the steel and quality.
<unk> is also getting tighter there is visibility into that.
As well we keep.
And internal and I think in just the last few months are pretty high quality frac.
On the active frac fleets by basins and across North America.
And we have Colombia three months projected ahead of what's going to happen with that due to basic.
Basic dialogues with evergreen running frac fleets.
We don't publish that we probably never will but that gives us kind of an insight where things are going and obviously a dialogue with customers.
Every every day across many people liberty kind.
It reinforces our field ability to get quality crews today, it's harder than it was three months ago much harder than it was six or nine months ago, and I think probably a widespread belief it will be harder still three to six months from now.
Yes.
I'll comment on the upgrade cycle.
The same value equation.
It is interesting, but what we're seeing now as you are seeing people when liberty as well as agents come into the five year. The 10 year, Richard Wright the upgrades, you're getting upgraded maybe getting upgraded to the tier four.
Decent differences the do some things with the cooling systems et cetera.
<unk> will review the getting upgraded into dual fuel DGB.
Blood testing with it had been slowly right. There is a supply chain that's relatively small.
So they cannot happen very quickly, but I do think over the $5 50 is what you'd see is you're going to see that sort of got the bottoming in the rumblings about diesel fleet.
Lot of attrition on the back end of the older tier twos. The stuff that was built 10 years ago and then the beta versions of those tier twos recently built.
And then sort of.
<unk> five <unk>.
Probably migrate up into the tier four DGB site.
Ron you might agree with say 510 years from now it'll be mostly in there so the tier four DGB.
<unk> hundred three ground kidneys from now.
Great I don't think Thats fair statement Mike.
Got it. Thanks, that's very helpful. And then the next question around.
Did you Frac so great to see the development, obviously, but could you provide any updates around the capex plans around those fees that you have under agreement now.
Yes, I can go sort of as you can see with Saudi this means money on these these arrangements as you correctly youll, probably see approximately about $25 million of spending in Q4 rolling into the Q4 numbers.
It will depend on deliveries, so capex numbers will be towards.
Towards the high end of our range plus about a $25 million of Digi Brexit can be a lot in line with that range.
For the full year Eastland and maintenance those so I think the rest of that Youll see roll into the majority of that in Q1, and even a little bit into Q2 that they start getting ready for deployment. So that takes out of the range. The long term I think what Youll see is probably Youll Goldman conference in January I think we'd probably be debased place to talk about.
<unk>.
The kind of a long two claims once we get through the end of this year.
Talking about our long term deployment phase, we're going to give a view into the full view of the achieved capex et cetera.
Around the beginning of the contract space.
Great. Thank you looking forward to that I'll turn it over.
So we're looking forward to seeing you own Jayson.
Yes.
Our next question comes from Ian Macpherson with Piper Sandler. Please go ahead.
Hey, good morning, Thanks, Chris you mentioned that your.
<unk> held the line on fleet deployments through the year, which I know we saw in prior quarters from that would we deduce that your 12% revenue increase in the third quarter was basically pricing and utilization improvement on basically a constant.
Lloyd fleet count.
Yes.
Yeah, Okay. So.
A.
A gradual probably two or three part recovery of the margin headwinds that you encountered in the third quarter. What would you hazard you could recover of that $20 million from Q3 into Q4.
Or is that.
Not guide at all at this point.
I think it's obviously tough to guide at this present point in time, but I think a number of logistics calls will get pass through declines.
Managing through the sort of maintenance noise. That's driven by this is now well be similar in Q4, and then drop off in Q1.
But that will get a little more clarity over the next month.
Okay.
Since I've been so quick I'll squeeze in a third one if I may on prop ex wet sand is still fairly embryonic in their industry, yes, and so I would imagine that the.
Further penetration of that would be an angle of incremental accretion above and beyond sort of a trailing accrue.
Accretion for that business would you confirm that and then what do you think the.
The runway is for Max mummer or realistic penetration of wet sand across your fleet over the next couple of years.
Ian I think you've got that exactly right I think it's early days and that technology has been a little while coming to fruition, but now I think we're in a position where it's fully commercial.
And lots of upside opportunity there I think as you look at.
And it won't apply every place of course, there are environments, where it's probably not going to make sense, but there are certainly a number of environments and I'm guessing you can think of a few where.
When you think about longer last mile hauling distances for example, and ready availability of material nearby well sites that we could process with a mobile line.
It will allow us an opportunity to.
It can dramatically reduce trucking distances dramatically reduced the number of drugs.
<unk> heard a story.
Yesterday the day before about one.
One of these early mobile mine operations, what used to be 22 trucks servicing a well site is now down to five so just a dramatic step forward in terms of that reduction in cost and emissions and we see that as a as an opportunity not every place put in but in a number of places and certainly in some of the core basins, where a lot of the fleet is deployed.
Got it. Thank you Ron Thanks, Tim I'll pass it over I appreciate it.
Yes.
Okay.
Our next question comes from Roger read with Wells Fargo. Please go ahead.
Yes, Thank you and good morning.
Maybe to just follow up.
The last question you had had their your answer to it is we're trying to think about.
Just the recovery of the inflationary issues here, but also the net pricing commentary about 'twenty two.
Given that we're winning so many costs out. The addition of the wet sand handling another factor in that how should we think about sort of top line and bottom line performance as we look at 'twenty two versus say back looking at.
<unk> 18, or 19, and I know, that's a little tough because the company has changed quite a bit but I'm just trying to understand some of the productivity and efficiency issues relative to what.
Let's say the baseline business is capable of generating here. So it's a broad question probably for you, Chris but I just wanted to sort of understand what the company can generate.
Yes, I'll take this one Roger a little bit I mean, I think one of the things you would look at it.
Between top line bottom line and depending on how much the reduction in the cost of operations production same reduction.
Based on say in Sandy Sandra.
Providing their frac lines that really becomes a bit of a pass through right. So you've already seen bottom lines, one Keith banks to the average.
Lateral foot.
Stage two patented.
That's why we've always thought about this things were two spaces on EBITDA for the income generating unit will cabin category expansion, which we call fleet. So I think what we do as we get back to that just yet.
Takes a while to be backed by 2018 is driving me sort of go ahead.
Yes.
Structurally smaller industry that had been a little structurally under supplied I think what you see but it just seems a really good starting to see some discipline in the industry right, which obviously brings about costs, we started to see some <unk>.
Acquisitions that are actually reducing the amount of buyers. So I think what we're doing is into a structurally better industry that we would get back to those mid cycle margins and we can do well that you'll probably see that happen on a relatively lower costs through well. So these were lower topline.
And Roger just a follow up from a customer perspective.
Yes look what well costs are going to drift up next year from what they were but nowhere near to where they were just two or three years ago. The shale Revolution has continued.
To be lean and mean and continue to develop more efficiencies. So I mean look it's really economics for our customers right now has never been better in the shale Revolution and and.
Next year, they will still be outstanding.
It may be single digit probably all in increase in well costs.
A strong commodity prices.
I think we'd love to see the industry continuing to get more efficient, but again, it's a different cycles. Our customers are already there and the great return world and we're still not quite there yet.
Okay I appreciate it and just one follow up on the maintenance part of the cost issues in the third quarter as we think about what that was was that you couldn't get equipment.
Or replacement pieces spare parts et cetera.
The cost of that is a combination and how do you.
We are seeing any improvements in that overall supply chain at this point or just continues to be a headwind.
Our supply chain continues to be a headwind right. There is obviously.
<unk> moved up a maintenance biopsies they drift.
That team has done a good job of maintaining that and so if I can reasonably reasonably effective label on the key thing we would highlight India really is more of a failure rate issues. The failure rate really comes down to how you run the equivalent buyback comes with turmoil that comes with some integration that comes with employees in aggregate for that are going on but I think that goes away.
Over the next.
Two quarters.
But generally yes, I mean inflation is going to be an issue in that underlying consummated highlighted one of the tightest gets going up by 10%. The Ctrip I think you're going to see some real supply chain constraints as you're seeing the issues with gone off the blue lumpy, just as really thinking everybody and adjust in time sort of a delivery system that we all get used to it it was <unk>.
<unk> vision is deeply theyre going to be times, when there are key paths.
Equipment is just going to be suddenly become unavailable.
Frankly fundamentally stable net yes.
Yes.
Maybe a few things on that just to add a little more color to what Michael said.
Cost of operations.
As we work through this transition we moved from.
Two different maintenance plus platforms ultimately working to consolidate on one as much as we aim to make that as seamless as possible. There were a few hiccups in the road and those things.
Things ultimately impacted impacted maintenance.
And so we'll get past those things we will get to.
We will get to a place where that is back to the way. It has always been and Liberty's history, and I think we will see those improvements coming.
Honestly through.
Through the remainder of the year, but really into next year from a from a supply chain standpoint, as Michael said, we're really starting to see.
Some some potential issues with component availability things like air filters and berries are starting to show up as potential supply chain issues and so.
So <unk> been working hard on that to make sure we mitigate.
Any operational impact, but I don't think sometimes come with a pricing effect.
Absolutely. Thank you.
Our next question comes from Keith Mackey. Please go ahead.
Yes.
Hi, good morning, and thanks for taking my question today.
Just wanted to start out with.
With net pricing and your outlook for 2022 can you maybe just break that down a little bit in terms of how that would compare.
The U S versus Canada.
Look the U S.
Some lower than in Canada, there's more players in the U S. There's more violent swings in the level of activity.
But yes look.
Pricing improvement going on in the U S theres pricing improvement going on in Canada.
Movement, a little more dramatic in the U S probably soon.
Okay got it thanks for the color and just finally on the let's say the one skin integration just in terms of people and equipment processes. Now there were some additional maintenance starting this quarter can you just maybe comment on how far along that that integration process is in <unk>.
Either percentage of completion or inning of the beginning of the game, if you will and just.
Then when we should start to expect to see some of that stuff.
Drop off.
Yes, I mean, I would say it didn't move very right I think it depends on where you are sort of thinking about the IP intellectual property trades.
We are probably in the fourth inning.
Rounding to base, we're doing well, but he has a long way to go a lot of data or was some transitions going on I think operationally I think it was either enrollment enrollment probably say wouldn't be the same day.
Things are going well, we're integrating crews you can move between the two has become through the end of the year is a key part of that as we entered Q1 the growth to more on the operational on the maintenance side.
Yes, I think to Michael's point, certainly from the operations side, where we're moving along well there and getting to the latter readings in the game.
It is a bit of an analogy I think we've got the we got the integration from a maintenance standpoint, we've got the.
He is working closely together there we're getting over a lot of them a lot of those early hurdles with understanding the differences between the assets.
As a simple example, we use <unk> on a fluid end to use oil.
We're getting those differences and coming to the right spot together as a team on those things. So that's been a lot of that stuff is behind us. We've got a lot of new initiatives from the tech development team that are ultimately going to take us to a better place going forward artificial intelligence predictive analytics things like that.
Theyre going to bring a theyre going to bring us to another level, even yet from a maintenance standpoint.
I would say of incentives side as well, but I think we were at the bottom of the ninth.
I think we'd go league elements that we will see the reason we're doing well.
I think it is going well I think that will be sort of really complete this year, I think thats going well.
And I think engineering is probably pretty much the same way right I think the same thing on chemicals.
Some of the things we've been doing on the design side with it.
Just to follow a broad point into tax development, which was one of the exciting things for us.
So leveraging like us invest long term in technology, disrupting that's not a three month or even a 12 month turnaround that's a multiyear turnaround and we saw some opportunities with the efforts. They reviewing plus the efforts we were doing and what we could do together that would be a big deal. So those teams are feverishly work.
Together as one team on that but those technologies and that technology hitting our business. That's still that's still one to three years out, but we're excited about that stuff, but you will see it on the ground in our business for another one to three years.
Perfect. Thanks, very much appreciate the color.
Great Great question. Thanks.
Our next question comes from John Daniel with Daniel undertake partners. Please go ahead.
Hello, Thank you for putting it in.
And I got on a little bit late so congrats on this earlier.
I apologize, but on the 24 hours of continuous pumping time.
As we've gone back and looked at that.
The success of that how much of that was driven by you and your operations versus how much was customer planning third party services performing well just what's your analysis tell you of what might that allowed that to happen.
Yes, maybe get key thing is it's a dance all of those things together.
Everyone's got to be able to do that.
It's high rate pumping in the Permian water supply.
Quality of the wellhead, it's got it has not had a hiccup.
Switching from wells the wells Perforating operations Frac operations, So John I would say that the only can get something like that every piece works.
One of those I think the second one we did the 20th Broward midnight to midnight, they get actually continued for like 35 hours.
Okay.
That's a lot of things going and they're well, but if you got one weak link in that chain it doesn't happen it doesn't happen.
That's an aspiration, we want to get to more and more but.
That's a long ways from being standard operating procedure, but.
I think it's great. It pushes every aspect of the things on location, where is that whereas the weak link in logistics. So the weak link in keeping the pumps online and the weak link in maintaining the blenders designs that the controls we're seeing different things for different stages, and we want to respond to those so.
I can't really allocate percentages.
It's a team effort and concert I wish I had John.
John John and I would probably just.
Yes, I think.
The neat thing about that story as it is truly built on 910 years of our Liberty Foundation now we've been measuring every minute of every day since the day, we started we talked about that over and over and over again.
Is that that has provided us the level of understanding around the things we need to be focused on to get there.
If you don't measure it you can't you can go out and address it and so I think we put ourselves in a position to understand where those opportunities where we needed to be focused on it and ultimately.
The partners, we needed to bring to the table to achieve that success.
We will email customers hey, congrats we wanted to be disbursed.
Yes, yes.
Additive dynamic both our frac crews among our customer partners.
But that's what animates progress here.
Well, it's it's remark.
Well I just you know you guys because.
Because of some of the attributes with having a wireline having your slide I didn't know if those fleets was because it was all U.
Or if it was the case versus new fracking and another person the wireline.
Third party sand.
So I was trying to drive at like how much right.
I don't know for sure. It helps for sure that we're a large part of it.
Supply chain, we have control over a wider number of their relevant dance partners on that location.
Yes.
Yes, probably not an incident that happened now and not not 12 months ago.
I wanted to come back to just the active activity.
Lots of different views on what is the most active fleet count is and what the working counters.
But if you kind of take that 20% E&P capital spending up year over year and outgrowth versus probably higher.
Now my dumb Guy math since that would suggest.
20 to 30 incremental fleets is that.
From where we are today does that passengers smell test articles.
Just your thoughts.
Got it thanks.
Yes.
And then the last one on housekeeping, so I apologize, but the two multiyear agreements with digi.
It's two agreements, but as it once was and each agreement or is that multiple fleets.
Once we in each of those agreements.
Okay. Thank you very much for the time.
Thanks, John.
Okay.
Our next question comes from R. J.
<unk> with Jpmorgan. Please go ahead.
Yeah good morning.
Chris I was wondering if you could maybe elaborate on the bidding process.
Secured the new contracts for the two Frac fleets can you talk about the.
Competitive nature of those.
What sealed the deal you think for Liberty and maybe just the overall broad investment criteria are utilizing and.
Under supplied market how are you thinking about.
Adding additional.
Did the frac fleets and to this environment.
Yeah, I don't know if I'd call it.
All of our markets are competitive for sure, but the deals we make and most of everything we're going to do next year is just an ongoing dialogue with existing partners.
We throw in 80, bibs and hope we win 25 of them for something right right Liberty's way. Almost every thing is we've got an existing partner or we've got a partner we want to add your comment.
So, it's mostly back and forth discussions among two parties for sure they are getting competing numbers, neither solicited or unsolicited thrown in.
But we don't we the dialogue with all of these things the technology of what did you frac is versus the others. The quality of the people at Liberty the way, we stand by our agreement.
Come Hell or high water what happened what we just saw with Covid Oh My God. The best laid plans can get disrupted by something happening. So I think it's mostly a two way back important negotiation the funny right.
Of what a big win for our partner, but makes compelling sense for Liberty to do is to deploy a meaningful amount of new capital in today's marketplace.
Economics, better be strong the comfort Inn.
Long lasting nature of that better be strong. So all of those pieces are there, but I think with DG and with Liberty's history, there's lots of opportunities for that so our biggest decision is going to be how many of them.
And again, that's a customer.
Customer by customer partnership by partnership constrained, obviously, my balance sheet and investments and returns but it is.
Yeah.
Got it.
Fields close fingers crossed and then.
One answer is.
Yes.
That's helpful.
And just for my follow up.
Chris how are you thinking about.
More inflationary pressure supply chain challenges for the industry broadly raw material inflations, etc. How should we think about your sustaining or maintenance Capex per fleet as we go into 2022, if we wanted to take a conservative approach historically, we've been kind of modeling around 3 million.
A fleet, but what is how is that evolving.
As you see things for next year.
Yeah, let me take it a little bit of new wrong can chime in on this one yet decently below inflation in the system right. I mean, I think if you look at it when steel prices. We think probably has peaked but really they probably haven't.
The cost.
All of the policy it Brian is probably right.
I mean steel prices are up about 60 plus percent room.
Yes.
Michael pointed I think we've seen that.
We've seen the plateau of that but that Hasnt run all the way through to us yet or at least our supply chain is probably five to six months longer something like our <unk>.
I think we're also going to feel inflation is as companies work to deal with these supply chain challenges off the coast, we continue to hear.
Significant inflation in shipping rates and trucking rates and Thats, all ultimately got to flow through to <unk>.
So the end customer and so I think we will continue to feel some of that is part of our <unk>.
Capex cost heading into next year.
Given with the amount of steel, it's probably in the low double digits or do you think thats probably rolling through.
Most of the activity.
Equipment Pops across all industries I haven't seen it leads you to see some of the leading schools come half in cash.
The transcripts, but I would assume probably.
Policy.
And we can all see some of that with efficiency. They don't see some of that with longer lives within design. The mix that is the goal of enrolling in lanes technical teams of the engineering, that's going on at the moment.
One of the reasons, we have leases in <unk> nine so we can control that supply chain all the way back to the fluids.
Some of that heavier steel partners. So those will those are the moves that we are making to make sure that we can kind of it would be great.
Do debates.
But.
We get along due to inflation.
Great. Thanks, a lot.
Ladies and gentlemen, this will conclude our question and answer session I'd like to turn the conference back over to Chris Wright for any closing remarks.
Hey, Thanks, everyone for your time today and thoughtful questions in these very interesting times, but it is interesting times.
It's challenging for us, but certainly opportunities as well look forward to talking to you again in three months.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.