Q1 2022 Liberty Oilfield Services Inc Earnings Call
Again with the Russian invasion of Ukraine.
It began last year when global supplies of LNG simply could not keep up with demand.
The cost of this shortage go far beyond the soaring prices of global LNG, which is spent extended periods above $200 per barrel on an energy equivalent basis.
The World has seen rolling blackouts countless factory shutdown.
Struggling to pay their heating in utility bills and perhaps worst of all we are likely at the leading edge of a global food crisis doing significant part to curtailed nitrogen fertilizer production that is critically critically dependent on natural gas.
Without natural gas synthesize nitrogen fertilizer global food production would drop in half.
Today's crisis is not due to any shortage of energy. It is due to a shortage of energy infrastructure, which in turn is due to a shortage of reality and mainstream energy dialogue and policy we.
We desperately need a more thoughtful sober dialogue on the energy or the human toll will continue to Mount.
Enough on this critical topic.
Turning to my favorite Energy Company Liberty entered 2022 with the right people.
Asset base and strategy to execute in a tightening frac market and we are pleased to deliver strong first quarter results.
This quarter demonstrated the benefits of our vertical integration strategy as we successfully navigated and operationally challenging environment.
Last year, we expanded our services to include wireline and we became a major sand producer obtained two large mines in the Permian basin.
We enhanced our technological advantages through the acquisition of prospects with wet sand handling and industry, leading last mile proppant delivery solutions.
Together with our ongoing development effort effort of DG product electric fleets and many others. These advancements provide our customers with differential Frac services.
The integration of our acquisitions in 2021 came at a short term financial cost, but these actions are already paying significant dividends in 2022.
Revenue for the quarter of $793 million increased 16% sequentially and adjusted EBITDA expanded to $92 million as we executed on our strategy and benefited from increased pricing both the pass through of inflationary costs and higher net.
Service pricing.
We also saw margin growth from our new strategic efforts at both lowered our cost of operations and increased our efficiency.
Liberty also leveraged our vertically integrated portfolio to better mitigate the early quarter impacts of sand and logistics challenges, notably in the Permian Basin.
We are encouraged by the progress we've made in the first quarter.
The transformative work our team accomplished with the integration of one stem and prospects in 2021 is now behind us and paying dividends via an advantaged platform with the scale and vertical integration to better our Frac services.
I want to thank our entire team for going above and beyond.
As the market tightened last fall our customers recognize that the unfolding recovery would increase the importance of having the highest quality partners to navigate turbulent times and still deliver operational excellence.
Today's operational challenges, our top by labor shortages sand supply tightness and logistics bottlenecks.
Liberty customers are seeing differential execution in this challenging environment in part due to vertical integration from our one stem and <unk> acquisitions.
Dan supply tightness, and southern oil and gas basins, including the Permian Eagle Ford and Haynesville impacted industry wide operations.
While many e&ps directly sourced sand, we are seeing a reversal of that trend as no E&P can hook to match the scale and sophistication of Liberty supply chain.
Magnitude of our purchasing power and the strength of our relationships with suppliers provides better surety of supply to support continuous operations.
And supply challenges were exacerbated by truck driver shortages Lynn.
Liberty's logistics Digitization efforts, coupled with a wide network of multiple origins and destinations allowed us to efficiently employ the limited number of truck drivers with dynamic route optimization.
We have now deployed prospects is cross connect software across all our west Texas fleets.
Giving us increased visibility and data analytics we.
We were able to act on real time, proppant consumption monitoring and inventory tracking.
Ultimately supporting the distribution of sand to our fleets and reducing nonproductive time.
Logistics optimization and centralization is critical in today's environment, where truck driver shortages are pervasive across the country.
We still have significant room for improvement here.
But are pleased with our progress so far.
A differential Liberty fleet efficiency requires innovation and continuous improvement.
We continue to see the intensity of Frac work climbing, which is driving up the demands on our equipment, particularly the high pressure pumps.
Maximizing uptime and driving down operating costs are top priorities.
Our stim commander pump control platform is a key component in achieving this goal.
<unk> commander platform allows for full automate automation of the pumping equipment, enabling intelligent rate and pressure control across our entire fleet.
With a digital model of every engine transmission and pump configuration and the Liberty World.
Our software will ensure the optimal execution of any job design on any fleet, including our soon to be deployed did you frac pumps.
Improve safety reduce fuel consumption and emissions improved component life and reduced personnel requirements are benefiting.
Our benefits we are starting to see from the deployment.
As an example, liberty saw a 20% to 30% improvement in power and life. After deployment in one of our districts where high pressure work is prevalent.
The Stim commander software has recently been rolled out on over half of our fleet. So far the remainder will be completed over the coming quarters.
Restrained global investment in oil and gas over the last seven years leaves us supply short.
Just as worldwide demand for energy is growing and expected to surpass pre pandemic levels in 2022.
Relatively low and declining oil and gas inventories have led to persistent upward pressure on commodity prices, even prior to the Russian invasion of Ukraine.
Although Russian export volumes of oil and gas had been only modestly impacted so far.
Certainty regarding potential future impacts of sanctions and buyer aversion to Russian hydrocarbon.
Presents significant risks to future supply and demand balances.
And the modest low stated plan increases in OPEC plus supply.
And the relief of global emergency oil reserves are simply not enough supply of rebounding world economy, North American oil and gas are critical in the coming years.
Tight oil and natural gas markets, coupled with geopolitical tensions in many key oil and gas producing regions have all eyes on North American supply.
The North American economy is proving more resident to today's global challenges insignificant part due to a secure local supply of price advantaged natural gas.
North America is well positioned to be the largest provider of incremental oil and gas supply to power.
The global economy, and frankly enable the modern world.
Frac services market is seeing robust activity improvement and a tightening of the supply demand balance.
Drilled, but uncompleted well inventory has stabilized after a steep continuous decline from pandemic elevated levels.
Available Frac capacity is nearing full utilization as demand has increased and supply is limited due to continued equipment attrition labor shortages and supply chain constraints and very low investment in recent years.
Today profitability of active frac fleets across the industry are still below healthy levels are trending strongly.
We need to see and we will work to drive healthy returns in the Frac industry to match the already robust returns of our customers.
Leading edge service pricing is recovering to levels that could support fleet reactivation and we have many long term partners requesting additional capacity from us.
As always we will be quite disciplined in deploying the additional capacity that we have today from the <unk> acquisition.
We mentioned several quarters ago that we expected to reach mid cycle returns at some point in 2022.
We are on track to hit that target.
It is not that we are particularly pressured.
It is simply that supply and demand works.
Seven years of Underinvestment in oil and gas production capacity was accompanied by an even more dramatic drought and investment in new Frac fleet capacity.
The brief 2017 to 2019 up cycle was all about redeploying fleets built earlier in the decade with relatively modest new fleet construction.
<unk> of that older equipment has now been scrapped.
The emerging cycle is likely to last longer and be characterized by a much slower and more modest rise in active frac fleets.
With that I'll turn the call over to Michael to discuss our financial results in more detail.
Good morning, everyone.
While we have come a long way and we're only just getting started.
I am so proud of that team for the quarter, we've achieved but more importantly of how we were able to do so after the last two years of managing through the pandemic are rebounding economy that services.
Global supply chain challenges and now an inflationary environment, all while investing in that business is emerging multi year up cycle.
The first quarter of 2022 revenue was $793 million.
$109 million or 16% increase from $694 million in the fourth quarter.
The teams work with their customers to deliver solid solid activity gains. Despite the say the logistics bottlenecks that plagued the industry.
We also sale solid niche service price increases as contracts repriced into the new year.
Of the top growth in top line, approximately 55% was driven by activity in mix and the balance by niche service pricing.
So a good progression through the quarter as saying that logistics bottlenecks eased and a full effective pricing was realized.
Net loss after tax was $5 million in the first quarter convey to $57 million loss in the fourth quarter.
Fully diluted net loss associated with <unk> in the first quarter compared to a <unk> loss in the fourth quarter.
<unk> when they get heavily impacted by $9 million related to the loss on disposal of assets of $5 million.
And a remeasurement of liability on the tax receivable agreements at Cri.
<unk> formerly.
General and administrative expenses totaled $38 million for the quarter, including noncash stock based compensation of $6 million.
G&A was up $3 million sequentially, driven primarily by $2 million of noncash stock compensation expense as full quarter reductions in stock compensation expense contrasted with the annual grounds of the first quarter.
Net interest expense and associated fees totaled totaled $4 million for the quarter.
This quarter adjusted EBITDA increased to $92 million from $21 million in the fourth quarter, reflecting solid incrementals from activity increases and the increase in niche service pricing.
The integration challenges of 2021 are now mostly behind us and we are seeing the value of that scale and that vertical integration strategy as we laid out during face to date last year.
We ended the quarter with a cash balance of $33 million eight days of $179 million.
Net debt was up by $77 million, mainly driven by an increase in working capital.
As of March 30, <unk>, we had $109 million of borrowings drawn on our ABL credit facility and total liquidity, including availability under the credit facility was $222 million.
Net capital expenditures totaled $90 million on a GAAP basis in the first quarter of 2022.
Capex was driven by investments in tier four DGB upgrades and Dizzy Frank a $46 million.
Say logistics and other margin improvement investments of $15 million and the balance related to normal fleet capitalized mining.
Looking ahead.
We are expecting approximately a 10% sequential revenue growth in the second quarter expanding on the solid progress made in the first quarter, we expect to see increased activity levels and a modest service price increases as we move through the quarter.
These factors are expected to support higher EBITDA margins in the second quarter.
Our team worked diligently in the first quarter to educate our customers on the realities of the fast paced inflationary environment, we are operating in.
There was a greater understanding across the broad customer base that inflation is going to be part of that near term environment and increased costs will continue to be pass through as they are good.
We entered the start of the cycle and sales company margins need to return to levels that encourage reimbursement. So that we can continue to support our customers' future success.
Leading edge pricing has shown signs of recovery that could potentially justify limited allstate's tier two diesel fleet reactivation in support of long to customer promise.
As the market has changed the road, what we call happy Valley, the most profitable way to bring a barrel of oil or Mcf of gas and service has changed.
Sales engineering supply chain and operations teams are proactively working with our customers to find ways to mitigate rising costs through optimized completion designs, including innovative solutions around same chemistry and logistics.
Integrated planning to improve efficiency and optimization of the Frac calendar much more.
The Liberty strategy of investing during the early innings of the cycle and focusing on people and partnerships has delivered superior returns on capital and growth over the last 10 years and puts us in a great position to thrive with the upcoming cycle.
I will turn the call back to Chris before we open the funds installations.
There is much to lament about the state of the world today.
There are also things to celebrate the.
The pendulum is starting to swing back towards the energy sobriety.
It is hard to overstate how important this fact is.
Progress will likely be slow and surely much more human damage will be caused by politicians and regulators resistance to reality.
But many positive developments are unfolding punctuated by Germany fast tracking approval of two new LNG import terminals.
Economic growth and bettering human lives go hand in glove with increased energy consumption.
This has been true throughout human history.
It is encouraging to see improving returns moving the last the last sector that has yet to see them in the oil and gas industry energy services.
A healthy robust North American energy industry is required to meet the world's growing demand for energy will.
Look forward to your questions I will now turn the call back to the operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning team and congratulations here on a very good quarter.
Christian in your Analyst day, you put out a mid cycle fleet profitability target of $14 million to $18 million of EBITDA.
Per fleet.
We're at $10 million as of this last quarter. How are you thinking about the path to getting there and do you think theres actually potentially upside risk to this figure.
And how much higher does it need to go before you think the industry is incentivized.
To pursue newbuild activity.
Yeah. Thanks, Neal I think you clearly have to get above mid cycle economics to incentivize people to build a new Frac fleet, we are a long ways away from that.
Build a new frac fleets simply for more capacity.
But the road to get there.
<unk> seen.
Step on that road, but the road to get there is just supply and demand a tighter market right now is driving up net service pricing, it's also making customers.
Cooperative around scheduling our industry needs high utilization high throughput and pricing. It's the combination of those three things that drive profitability.
And.
Were on that road now.
Thanks, Chris.
Fleet profitability remains elevated even for some of the older conventional assets in your portfolio would you consider delaying fleet upgrade capex and deploying equipment at those or is the Capex view over the next few years from your analyst day still the base case.
Yes.
Don't think of anything in the macro plan has changed at all.
Yes, youre seeing elevating profitability across fleet types right now but.
Hi Tech the new Gen next generation fleets that were building those are arrangement those of our arrangements with customers. If we make an agreement we always lived by what we what we agreed to and we're excited about that that's bringing out a next generation of technology theres huge customer interest and that is ultimately going to drive down <unk>.
Operating cost drive down emissions.
Move fleet powering from from diesel to natural gas those are all positive developments.
Thanks, guys.
Thanks Neil.
The next question comes from Arun <unk> with Jpmorgan. Please go ahead.
Yes, good morning, Chris and team.
I wanted to delve a little bit and the one quarter beat.
$92 million the street was in the upper 40, so significant beat relative to expectations.
Ultimately, we're trying to understand is how much of the beat was driven by the pressure pumping business versus some of the benefits from your vertical integration from sand sand logistics and kind of wireline and could you give us a sense of maybe what the EBITDA per fleet was trending in <unk> and then maybe some of the tailwind you're getting.
From the vertical integration.
Very much also I just wanted to start with the.
When you look at it the vast majority of that business as Frank and everything we've invested in and logistics Exane is reading through amazing Frank the vast majority of the sand that comes from that same minds gets delivered through our frac fleets. So that vertical integration, having the control of both the pull points of the Bush points is the key thing that we are in I would sort of like.
To be able to be more efficient as we drove through the quarter with all the bottlenecks that exist in especially in the southern basins. So that was a key part so really it is driven by Frac because you see the underlying results there is some.
Pick up as you are looking at that the difference between Q4 and Q1, obviously is the integration cost that were part of the Q4 story rolled off but yes, dominantly driven by Frank and everything that we do to enable the efficient operations in the field.
Great that's helpful.
Maybe to you Chris I was wondering if you could maybe characterize the supply demand balance today in Frac, you guided to 10%.
<unk> revenue growth in <unk>.
Wondering maybe you could talk about the demand situation, maybe whats whats unmet as you look at the market today and for that <unk> guide how much of that is the mix between activity growth versus net pricing gains.
Yes.
Supply demand market today is quite tight with tightening last fall and I think as we said in our last call was meaningfully tighter in December than it was in October and that that trend has continued and there's just not that much spare capacity left right. So as you get to the very very near the end.
Whatever it can easily be deployed is already deployed.
Yes, you have a tight market and we have today, a tight market and so our expectation of a 10% revenue gain something like that.
Q over Q.
The biggest component of that is just increased activity. Obviously in the first quarter. There is always weather or seasonal issues that shave a few percentage points off revenue. This year, maybe that was magnified a little bit by the trucker sand struggles, particularly very early on in the quarter. So Q2 is seasonally.
A better quarter as far as revenue and generally what drops to the bottom line. So I would say activity is the biggest piece, but continued migration of pricing upwards across our fleet is a component of that as well Michael wants to comment anymore on that.
So I think that is very very very very clear as to what you will what Christy. The vast majority of Q2 is going to be activity driven theres a slide when it comes out of our Canadian operation in Q2, the balances sort of the uptick that you will see.
In the USA in Q1, so it sort of mutes it a little bit the activity growth and a small amount of the new pricing is going to be going on in Q2 as we go through and I think we will see we'll do some more guidance for the second half of the year as we get to the next call.
Great. Thanks, a lot.
Thanks for your question.
The next question comes from Chase Mulvehill with Bank of America.
Please go ahead.
Hey, good morning, everybody.
I guess first thing a lot of them.
Discussion around profitability and vertical integration.
But if we kind of looked at first quarter numbers and think about kind of optimization on vertical integration and think about kind of where leading edge frac pricing is I don't know if you could kind of talk to that kind of how much of that where you further optimization you have and how much kind of more leading edge price you have to kind of flows through your <unk>.
<unk> versus kind of <unk>, and then maybe kind of talk about the momentum that youre seeing on the frac pricing side.
Yeah.
Look.
Bob.
Pricing, we will continue to migrate higher right now with where we stand there you got to realize part of that is just inflationary I mean, Dubai ports is more expensive today to do most everything is more expensive so that means theres always going to be.
Historically been true as well there is always dynamic pricing as our costs are pass through components change in price today. The additional thing is net pricing is going up and there is starting to be a little bit of a competition for fleets not everyone that wants a fleet or what's an extra fleet today frankly.
It's going to get one and so for us where we allocate capacity and how we work.
We were pricing it just very much a partnership dialogue, we're going to get there.
The end of the year, we're going to have pretty much the same customer profile. We have today than we had at the start of the year.
But as market tightens price will continue to drift.
Drift upwards, we act as partners to our customers. So we're not in.
And we may have a competitor or two in this both but we're not in.
Going up 25% in the next pad or we're out of here, that's just not the way Liberty works.
But we are a business and the market is tight and so pricing will continue sort of gradually to migrate upwards.
When you think about the tightness in the pricing moving higher.
I don't know if you'd be able to characterize the tightness is it more of a function of equipment types tightness or labor tightness.
It's both it's both the single biggest challenge right now is labor.
Everyone knows this right. This is country wide, but certainly in our industry. After a big downturn that pushed a lot of people out of our industry and others high paying jobs and more pleasant conditions. So we've unfortunately lost some people out of our industry. We are actively today recruiting people back into.
Our industry, but.
That's harder today, so labor, particularly.
Competent qualified trained labor is in tight supply, but it's not just labor.
It's not that many.
Frac fleets are frac pumps sitting around the extra capacity today again is the very old stuff.
Mostly very old stuff.
That's a lot of which got scrapped and some of which is still parked or is going through auction houses. So there.
It's tightening in both areas.
As you know the logistics are tight.
If you theoretically you wanted to stand up 10 more fleets in the Permian Basin, what are you going to get the sand from where you're going to get the truck drivers.
Staff those fleets and what are those fleet is going to be so the challenges are pretty broad based.
Yeah. It makes sense just one quick follow up on Neil's question on mid cycle margins. I mean, obviously, you kind of gave us that range at the analyst day, a few years ago I think it was split with Nielsen $14 million to $18 million.
Annualized EBITDA per fleet, but since then you've obviously.
Frac sand for Opex wireline.
So that's gonna be additive to that EBITDA per fleet and stop kind of given us fleets, which is fine, but how should we think about mid cycle margins should we.
I don't know if it was helped to EBITDA per fleet or percentage margins I mean should we think about this as a 20% margin business as mid cycle or just kind of help us frame that.
New Liberty of what mid cycle it looks like.
Before I turn to Michael I would just say look those.
Wireline is critical to derive efficiency of operations and make things moving.
Cant frac without sand and logistics so all of those are critical.
They're not huge pieces of the puzzle there they're more important as enablers than margin delivers in themselves, although they do deliver margin but.
It's I don't know if Michael wants to give any more color, but the dominant margin. We made the large majority of the margin. We make is frac operations. That's correct, Chris when you look at it case.
When we had the Investor day, all those parts of the business were part of our business plan other than the fact that we didn't nonprofits and really we did use containers and we did the logistics already for the majority of their customers. So that was just additive and the guy and what I can think of it as like Tivo judging the developments that we were already doing in the business. So I think thats the key thing.
I think as Chris said earlier as we move towards mid cycle, but the reality of service company pricing is it needs to get underway decently above mid cycle is too soon.
Soon to move towards reinvestment drive mid cycle is just another step on the way to where we need to go to through cycle mid cycle margins through cycle margins should increase about there. So that's where we're going.
It's a very good quarter.
I think I'd add to that we don't foresee we don't have plans to build 10 more frac fleets, because we need to get more frac fleets because the market's growing we're just not do that.
What we are going to do is when we have did you did you frac is truly differential in operating cost in emissions in quality.
Going to build Digi frac fleets when it makes sense in a bottom up negotiation in partnership with customers.
That's that and we're going to continue to upgrade the existing fleets we have.
But we don't have any oh, geez, we're going to grow our fleet capacity by 50% or 10% or 20%. We don't have any any such plans.
For us, it's just about higher technology and better equipment, we're bringing the location, it's not about capacity growth in building new equipment.
We are already.
In that from the <unk> deal we have additional equipment.
Some of them that we're running not that long ago, but.
Those have been.
Parked and not far from ready to go for a while since we closed the deal a year and a half ago.
Our industry has had a rough.
Really rough last two or three years, but it hasnt been great in this industry for a while and and the dominant driver of that was just overbuilding in the early 2000 tens massive overbuilding, but that's working its way off and we're getting we're heading towards a better balanced market.
Alright that all makes sense appreciate the color, Chris and Michael will talk to you guys.
Thanks, Jeff.
The next question comes from Stephen <unk> with Stifel. Please go ahead.
Thanks, Good morning, everybody.
Thanks, Dave.
I guess two things from me, if we could start in sort of your.
Back to the sort of EBITDA per fleet question is there as you look ahead and you look at net pricing improvements.
Sand prices were to normalize a bit.
They've been elevated.
Is that a headwind or is that neutral for your profitability per fleet from here.
Neutral Steven I mean same prices long term sand prices youll hearing the stories of these spot market prices etcetera, but you've got to remember that when you think about things like the Permian. The majority just passing all of their customers are long term customers. The mass the vast majority of that partnerships from ethane supplies are long term partners.
<unk>, so those crazy sort of spot market prices really on the series of fixing our business as much as what did you see the stuff that you're seeing on the margins.
Okay, Great. Thank you and then my second question and maybe it may be hard in this market because the market is obviously very tight but we've clearly seen industry dynamics change. We've seen consolidation you guys have been involved in.
Are you seeing any change.
In general in the behavior.
And how it is impacting the competitive landscape in pressure pumping.
Yes, there is yes, I would say that the integration and the failure of a number of companies has definitely driven our industry to a better structure and then you got four companies probably with a order two thirds of the Frac capacity.
That's just.
That has just made better industrial decision, making I would say across the board.
It's not perfect, there's always going to be incremental fleets. There is always low lower costs lower quality players. So we have.
Theres, a pallet of companies out there, but the decision making.
Its definitely gotten better in our industry.
Very good thank you.
Thank you. Thank you.
The next question comes from Scott Gruber with Citigroup.
Please go ahead.
Yes, good morning.
Those of you constantly.
Contemplating kind of how quickly kind of incremental pricing to roll through your your book of business.
And so if we just assume that in March you were able to secure something on the order of like 10%.
Incremental net pricing.
How much would you realize.
<unk>, how much in <unk> <unk> and then how much do we have to wait to get some kind of budget season and realize in <unk> of next year, how does how would that.
Kind of impact your your average pricing in the quarters ahead.
It's Steven.
What are you going to look at it the vast majority of fleets kind of reprice really sort of like as we go through the year as a new part of the budget and they increased incrementally from there and then step changes generally happen sort of on annual basis, right. So youre not going to give sort of stiff changes every quarter across the whole fleet. Then you are going to get changes <unk>.
Ms Li and different fleets are different at different times, and so it sort of sticks out as you go through the year, that's really how pricing works.
Gotcha Gotcha.
And just thinking about the macro backdrop here, obviously, it's been good on the oil side and got better recently.
But natural gas prices, obviously have had spiked here in the U S. Recently do you think we're going to see an incremental pool and demand for Frac services from that.
The gas basins, given the price action here.
There was a little bit of that happening for sure right now so.
So the increasing activity, which again is not crazy, but the increasing it just feels crazy because of the tight market a little bit of extra Paul.
It's more impactful, but there is increasing activity in the <unk>.
Particularly in the Haynesville right, where the takeaways, there and youre closer to ports activity activity is increasing there in response to higher prices.
Got it.
Is it for me thanks.
Thanks Scott.
The next question comes from Ian Macpherson with Piper Sandler. Please go ahead.
Thanks, Good morning, congratulations team.
Thanks Ian.
Another gas question.
It seems to me that we're you know.
Given the.
Takeaway constraints.
The northeast can't grow because of various reasons and we've obviously got infrastructure constraints.
In the Permian, which puts all of the growth.
Burden on the Haynesville, but within the Permian I would expect that youre going to have a widening fuel arb for dual fuel fleets with wahhab versus Henry hub.
And I guess that that's probably a key point of contract negotiation sharing that.
Saving with customers can you speak to that dynamic and how that might be.
A benefit or maybe more pocket upside as.
Is that dynamic probably expands in the future.
Yes, I mean that could be incremental positive getaway into various agreements, we have theyre structured different ways, sometimes they could be a hypothetical look at the fuel savings and then the pricing is just set based on that so the changes in the actual fuel savings.
May or may not flow through to us.
And I think what.
When does takeaway capacity get very tight in the Permian and therefore, we have the wall hop blowout.
A lot of opinions on that when that may happen and how that might happen out you probably saw on the kinder announcement.
Yes, good possibility theyre going to take a pipeline or tooling add extra compression so.
Let's let's hope that the Permian takeaway capacity situation evolves more gradually and we don't have just a blowout in basis and a collapse in local gas prices not impossible.
And in.
In a small number of fleets if that did happen would have benefited a bit sure.
Would it be material would you know it would we talk about it in a conference call no.
It wouldn't be meaningful.
Got it thanks, Chris Michael.
Yes.
Into today, when we had a different view of EBITDA for Liberty This year at least.
My my outlook was for limited free cash flow for the company. This year you.
You had negative free cash flow in Q1, with some working capital investment, but now that we're reframing EBITDA higher than we thought.
Could you refresh us on how we should think about free cash flow and really we know that you've sort of pledge to be going back to liberty standards of returning cash through the cycle, but we were previously thinking that would probably be more of a 'twenty three.
And the 'twenty two event. So just wanted to check in with you on that.
So have you had to change the enemy as we say that in our Investor day, basically a year ago right. We're seeing the early part of a loan cycle, we're investing in new technologies to support our customers' ESG.
And efficiency, Brian and this really is an investment year again, yes, obviously sort of EBITDA is rolling higher.
Obviously demand for sort of that next generation fleets is also sort of being pushed by some of their clients. So we will.
We'll give an update on capex and free cash flow at the next earnings call.
Okay.
Sounds good thank you guys.
The next question comes from Taylor Zurcher with.
Tudor Pickering Holt. Please go ahead.
Hey, Chris and team. Thanks for taking my question first one on pricing, how you're talking about mid cycle.
Margins pricing levels at some point in 2022 since it sounds like we're well on our way there and so I guess my question is how.
Why or why not.
Do we reach.
Peak cycle pricing by 2023, it sounds to me like the industry's super tight today, knowing that in capacity. So you know this tightness dynamic is going to continue to move continue.
Continue to persist moving forward. So just curious your thoughts on potential peak cycle pricing by 2023.
Yes, it's certainly a real possibility.
I've always wanted to be.
You hear us talk about the future. We're just thinking about supply and demand is sort of broader trends and yes. Those that continues to look pretty positive right now, but how that actual pricing dynamics will unfold.
I, certainly don't hesitate to predict but I think your your logic and idea is not unreasonable.
Alright, good to hear a follow up just on did you frac out.
Got two fleets hit.
Hitting the market here I think over the next couple of quarters.
So just curious on the outlook for incremental fleet.
Fleet orders above and beyond those two how are discussions with customers progressing.
How is the.
The economics of it.
The potential third or fourth fleet addition, sort of evolving as pricing for the base business is just skyrocketing higher all sorts of questions on those two fronts I'd love to hear.
You bet, yes, because of the interest in DG Frac. It yes, as you said before has been huge so we're in dialogue with multiple partners about that.
Certainly we're going to build more than two the timing of.
Those builds.
I'll leave more of that to Michael but for us It is.
It's never a while this year, we're going to build actually next year, we're going to build why it's just engage with our partners engage with them and if we can find the right partner that wants to fleet. We can get the right length of commitment structure of commitment profitability and balance sheet wise and investment wise. It makes sense then we will.
Do it and so but the interest there is huge we're excited about that and we're particularly excited in the next few months to get some pumps out there and not just <unk>.
Prototype ones, but commercial pumps and fleet in operation I think when people see that and what we learn from that.
Interest will grow even more so it's really more a capital deployment.
Our pace of capital deployment decision more than anything else. The interest the interest is very large.
Thanks.
Yes. Thank you.
The next question comes from John Daniel with Daniel Energy Partners.
Please go ahead.
Hey, guys. Thank you for including me.
Christopher grew up with <unk>.
It was strong.
If I was a customer of yours and I've signed the contract.
What's the lead time look like.
Yes, let Susan Canadian void.
Good morning, John .
Good morning.
If you were to sign a contract for our fleet right now you'd be looking at delivery into 2023 points.
Okay and then.
You guys mentioned.
Don't want to just grow quicker.
Drilling fleet sake, but Ron how are you approaching that.
Let's just assume you're correct.
And that will be more we know that.
Or are you retiring legacy fleets, what's the process or in terms of your fleet count and take those crews on legacy fleets put them on that is correct. Chris If you could just walk us through that dynamic.
Yeah, John I think the strong.
Strong pull across the board today look at the market was was moderate.
Our plan was parked that equipment that was running and yet the same humans that are on that crew that have that relationships. They will run the digi Frac fleet in today's market.
<unk> is quite strong so yes that was first to digi frac fleets.
I would say, it's very likely that that that legacy equipment, that's being phased out that'll be recruit in that fleet will be deployed elsewhere.
Okay.
And then.
<unk>.
I had one other one on having a green.
<unk> here.
Coming back on.
Question I apologize.
Thanks, John Thanks, John Okay. So you guys good quarter.
The next question comes from Waqar Sayed with HEB capital markets. Please go ahead.
Thank you congratulations on a great quarter.
So first of all just on.
Modeling questions what was the cash consumption from working capital we estimate around $60 million is that in the ballpark.
But now instead of in the point Pleasant.
Plus it's closer to actually what our increase in net debt was in the <unk> forecast.
Yeah.
It makes sense and then.
Could you talk about like what was the active fleet count in Q1, and it's likely to be in Q2.
Basically it's got to be flat.
As you know as soon as that moves up and down with the Canadian market et cetera.
As we've stated algorithm into anything that's about the general guidance, we give.
Look around that.
There isn't a major it.
Okay. So in Canada is likely to go down, but maybe couple of crews. So you are picking up some crews in the U S to offset that if you're staying flat.
I was really talking about the sort of like how utilized fleet today with <unk> I think it's generally using the same denominator whatever your calculation side is probably right.
Okay.
And then yes in the last like sometimes back.
Crew work like 25 days, a month that used to be a good number whats. The good number. These days for you guys at 27 28 days a month.
We have a consider.
Anywhere from depending on the type of crude 80% to 85% of days, we can set a fully utilized including rig up a breakdown.
Okay.
Thanks for taking a level and we're kind of at this time.
Pad sites, yes, thanks Luca.
Yes.
Okay.
The next question.
From Dan Kurtz.
With Morgan Stanley . Please go ahead.
Hey, Thanks, Good morning, guys and congrats on the quarter.
Okay.
So I just wanted to confirm and sorry, if I missed this in the prepared remarks.
But.
You guys have kind of caught up to $20 million integration cost headwind in the fourth quarter and that that would kind of roll off.
In 2022.
Can you help us think about what.
Whether that did kind of.
We fully roll off in the first quarter or if there were still some integration cost there.
There are some inspected.
Moving forward.
Yes, I'd say, we were a hit we were ahead of schedule for Q1, and the majority of it basically all in the roll to roll off.
Perfect. Thanks.
Sure.
Maybe so appreciating that.
Guys, probably uncomfortable some specifics, but can you just.
Help us think through how kind of the profitability delta between some of your highest quality.
Assets in the field and kind of some of the.
Lower quality assets in the field is trending is that gap widening or.
Or shrinking.
Maybe kind of help us think through some of that from the different factors that are impacting profitability there.
And as these things move through the year, you've got to remember the it's interesting because obviously your high quality seats with the.
In the most demand during last year's RFP.
RFP season, probably contracted earlier than some of your lowest fleets. So again, you've probably got a little bit of a flattening of that cycle. At this present point in time ultimately as you've seen with ways that we are investing for the long term ultimately that sort of get will re normalize as we go into next year right, but I think it comes down to.
There was a big change in the contracting cycle. When you think about Adm's garnering from October to anything that was say finally contracted in February so we're in a very dynamic pricing market.
That's the background to that.
Got it that's really helpful. Thanks, a lot I'll turn it back.
Thanks, Tim.
The next question comes from Roger read with Wells Fargo. Please go ahead.
Yes, thanks, good morning, and well done on the quarter guys.
Hum.
To come back and I've missed some of the call. So if I ask a question that's already been hit I I apologize, but I wanted to understand a little bit better kind of the.
Margin performance in Q1.
If I sort of normalize for what I think incremental margin ought to be quarter to quarter, if things are going well I'll call it roughly 35% to 45% which would imply.
Kind of $50 million to $60 million of <unk>.
EBITDA would've been about right, which would say there was 20% to 30 million that kind of came from something else and I was just wondering if you think about it that way what's the right way to think about the 20 to 30, I know integration costs come out, but was there anything else and as we think about sort of the sustainability and the starting point for <unk>.
Future quarters.
What kind of that starting point would be good for what the base is and then my follow up question is going to be.
In terms of the pricing dynamics and the cost that you're dealing with the inflationary pressure I know it's different things. This time in prior cycles, but has the ability to push pricing and the ability to deal with underlying cost inflation effectively the same as prior cycles or is there anything you would.
You would call out.
Does exist question Greg.
Yes, you had the rollout of integration costs.
Because of the change in pricing because pricing was relatively weak last year and the step change in pricing. So you've already had higher incrementals in Q1 than you would expect on your Incrementals going forward that was the key thing there on the second one yes, I do think that the cycle is a little different this time right you've got to remember we are in you.
Gotta be as always may or Chris, sometimes just sort of like lived through an inflationary environment right. So a lot of that.
Now I think the broad base of customers. Our understanding is that we live in a pool by sort of an inflationary environment and that these costs are going to be dynamic and relatively to moving quickly. We havent done that through the last 10 years of this of this sort of like a shower evolution cycle right. So, but I think that's what was challenging.
I think for the service industry. This is the E&P industry last year, there wasn't they broke price understanding of where things are going and I think now we've got it we felt that the fed has come out I think everybody understands where inflation is and what's happening and it is moving quickly and is being <unk> on it.
So that means our customers are becoming more I guess I'll, let's call it accepting of a higher price environment for services.
Absolutely look they're running a business just like we are I think we're lucky to be a pretty good partnerships.
But yes, I think they fully get it now but to Michael's point.
The process because think of the short period of the shale Revolution during that short periods of shale Revolution, not only was inflation in the U S.
Sorry, low I think averaged just below 2%.
But in our industry, we were in a meaningfully meaningfully deflationary environment. The entire shale Revolution makes one of the things we celebrate and there are a lot of that efficiency and technology, we cut the cost of a well almost in half and doubled well productivity. That's the story of the last 12 years.
But it's different right now that's low hanging fruit.
Drive down the cost of all the inputs, that's mostly been blocked and now we have a macro inflationary environment and we have relatively tight markets for the supply of the various things, we need like engine parts or sand or chemicals, so yeah different world today, but I think I.
I think customers get it.
Alright, good luck guys. Thanks.
Thanks Robert.
The next question comes from Keith Mackey.
Mackie with RBC capital markets.
Please go ahead.
Hi, good morning, and thank you I just have a question around your sleep distribution I realize the market is tight pretty much everywhere, but just curious how content you are with where your equipment is situated based in basin by basin and or do you see material opportunities to to move equipment around.
Either between basins are between customers.
We tend to move more slowly maybe get everybody because again its targets all around our customer partnership so.
None of our customers yet have said, they're moving their Permian oil all into the <unk>.
Market. So our fleet moves are.
Relatively slow during the softer times, you know to keep our fleet booked we might've moved it from a basin that had a seasonal slowdown or not so we do a little bit of that but mostly we're sticking with the customers. We've got we're slowly either growing with them or maybe adding another customer, but I don't think a big shift there as we discussed in the fourth quarter.
Last year of how they gave was basically taking the combination of the liberty customers in the old Schlumberger once the customers and as you've repositioning sort of at least the way we thought they were going to be the right place for the right customers going into this year and we sort of discussed at a relatively it and we were very happy about where they are I think you will find that our fleet distribution.
Other than the northeast is really sort of got very sort of like sort of very much like the market. The market averages right. So I think it is very sustainable.
Yes.
Thank you and maybe just a quick follow up.
Assuming that still holds true if youre, if youre thinking about moving potential under utilized fleets or older fleets from from the U S and into Canada as well.
We don't want to use it like how do we utilize we have fleets of completely utilize at this point in time.
Do not have a plane to move out of leaks in Canada, I think Canada, we will treat like any other great basin and support them with.
The fleets and the types of technologies that we support all of that license.
Okay. Thanks very much appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Chris Wright for any closing remarks.
Thanks, everyone for joining us today, and we wish you all a great highly energized day take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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