Q2 2022 Liberty Energy Inc Earnings Call
Welcome to the Liberty Energy 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.
<unk>. Please note. This event is being recorded I would now like to turn the conference over to.
And Jolie Borja strategic finance and Investor Relations lead. Please go ahead.
Thank you Dave Good morning, and welcome to the Liberty Energy second quarter 2022 earnings conference call.
Joining us on the call are Chris Wright, Chief Executive Officer.
How long do you think president and Michael Stark Chief Financial Officer.
Before we begin I would like to remind all participants that some of our comments today may include forward looking statements.
I think the company's view about future prospects revenues.
Perfect.
Matters involve risks and uncertainties that could cause actual results to show.
Affirmed materially from our forward looking statements.
These statements reflect the company's beliefs based on current conditions.
Certain risks and uncertainties are detailed in our earnings release and other public filings.
Our comments today also include non-GAAP financial and operational measures. These non.
non-GAAP measures, including EBITDA.
Adjusted EBITDA and pretax return on capital place 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.
Calculation of pretax return on capital employed as discussed on this call are presented on our earnings release, which is available on our website I will turn the call and our first question.
Thanks, Angela Lee.
Morning, everyone and thank you for joining us I'm proud to discuss our second quarter 2022 operational and financial results.
Second quarter was a busy and exciting time at the Liberty team continues to deliver differential quality services.
Today's robots, but operationally challenged environment.
This translated into a notable milestone with fleet financial performance.
Levels that were last seen in 2018 as measured in annualized adjusted EBITDA per fleet.
Our hard work and dedication of our employees combined with deep relationships with our partners across the value chain enabled us to achieve strong operational efficiency and environment still impacted by supply chain challenges.
In the second quarter revenue was 943 million.
The 19% sequential.
62% year over year increase.
Net income for the quarter was 105 million or 55 cents per fully diluted share.
Adjusted EBITDA for the quarter was 196 million, a 114% increase over the prior quarter.
Liberty's first half of 2022 is starting to reveal the value creation from our 2021 acquisition and our insistence upon getting the business integration is done right.
With our focus on long term results.
We've positioned the company to deliver top tier performance through cycles with a focus on free cash flow generation and maximizing returns.
We're driving cash flow expansion.
It allows us to fund compelling organic investments to grow our competitive advantage, while also returning cash to shareholders.
Our strong financial results and a constructive outlook. It's important the reinstatement of our return of capital program, beginning with the board approved $250 million share buyback program or.
Our guiding principle is to maximize the value of our Liberty sure.
We believe the flexibility afforded by a share repurchase program.
It gives us the ability to Opportunistically act on a dislocated stock price calibrated by market and business conditions.
While the global economic recovery outlook has softened on reverberating impacts from higher inflation rising interest rates and the Washington invasion of Ukraine oil and gas markets remain constructive.
Eight years of under investing in upstream oil and gas production exacerbated by enact global policy initiatives.
Cannibalizing in energy transition has created a mismatch of supply and demand.
Today, historically, low global oil and gas inventories limited OPEC spare production capacity and a dearth of refining capacity are colliding with increased energy demand.
Oil and natural gas demand growth is coming from the post pandemic recovery in travel China's emergence from its enforced COVID-19 lockdowns plus seasonal demand factors.
These are all further magnified by the Russia, Ukraine conflict.
Potential for sanctions imposed on Russia oil exports, coupled with Russia's decision to constrained natural gas pipeline exports to Europe .
The greatest risk to our marketplace EBIT severe recession that leads to a drop in global demand for oil and natural gas.
Moderate recession, typically lead to only to a slowing in the rate of demand growth for oil and natural gas, which would likely not be overly disruptive to our customers' activity.
Todays low inventory levels and tightened supply and demand balances.
The recovery in oil supply appears to be under greater threat and oil demand.
North America is positioned to be the largest provider of incremental oil and gas supply.
Day, E&P operators are evaluating the opportunity to deploy incremental capital in North America to modestly grow production, while remaining focused on shareholder priorities.
The fundamental demand call it North American oil and gas supply is strong.
Supply is restricted by a tight frac market, where equipment supply chain and labor constraints limit Frac fleet availability and service quality available to our customers.
Many frac companies are struggling to execute in today's environment.
Moreover, operators desire ESG friendly Frac fleet technologies that provide the opportunity for bolt significant emissions reductions and large fuel savings.
Liberty is uniquely positioned with the technology scale and vertical integration to meet demand for service quality and best in class technology.
The Frac market is near full utilization and few service providers have the fleet capacity and supply chain reach dissatisfied E&P operators goes live.
Operating with discipline and restraining fleet reactivation in the post Covid Covid era of muted returns pricing has now recovered to where liberty in support of our customers' long term development needs is reactivating several of our recently acquired available fleet.
From the one steam transaction.
Importantly, these long term dedicated customers seek additional next generation fleets that are simply not available today in the market.
And Liberty is providing an avenue to serve those customers and simultaneously drive free cash flow from these existing fleets to reinvest in our fleet modernization program and free cash flow.
Liberty is also partnering with key customers on the deployment of two additional D E. Frac electric fleet in early 2023.
Demand is very strong and technically superior design liberty develops throughout the downturn and drive better safety and efficiency.
Rare commodity in a tight market.
The strong frac market and specific conversation with our customers give us confidence in the demand for Liberty services into the coming year.
Third quarter margins are expected to improve from contribution of incremental fleets and modest price improvements, partially offset by ongoing supply chain operational and inflationary pressures.
Since the 2020 downturn, we have made the decision to refrain from reactivating fleets, we got the economics and longevity business to support the Onboarding of a new crew and the capital associated with restoring equipment. Today. We are one of the few players in the market with the equipment available.
To support a rising demand for Frac services. We are also one of the only players with their supply chain capacity to support these services as sand and other materials remain in short supply.
Reactivating fleets is a long term strategic decision.
Non spot fleets, rather fleets that will go to a high quality dedicated customers that are interested in a road to next generation solutions over time.
Today next generation of equipment is in short supply and will remain so for the foreseeable future.
To maintain your development program producers seeking a frac crew are willing to take equipment available to support their operations in the near term.
Liberty reactivated fleets are largely well maintain tier two diesel equipment.
Same with the <unk> acquisition.
These fleets are coming online at favorable prices that support the hiring and training of a new crude for the long term. Our next generation technology expansion program and increasing our free cash flow generation.
For a minimal capital outlay or unit economics of these lease generate free cash flow and provide a source of funding for investment in our fleet modernization program.
Over the long term next generation fleets will replace older technologies.
We already have one of the largest dual fuel fleets available. Our equipment makeup will evolve to an entirely next generation fleet over time.
The fleet reactivation are not market share driven decisions, but our investments and driving the increase in value of a share of liberty stock by investing at the right time with the right economics.
We are also excited to announce a $10 million investment in <unk> energy and next generation geothermal technology company that develops geothermal assets or dispatch able reliable base load grid power with low carbon intensity.
With this investment Liberty expands into supporting G. Adult geothermal resource development, leveraging our extensive expertise and subsurface engineering and pressure pumping assets that help create dense underground networks to mine the Earth's heat for electricity production.
We chose this investment opportunity because of our belief in the concept viability are quality affirmed both team and the size of the potential resource already captured.
Unconventional geothermal applications offer a potential pragmatic solution for a reliable source of low carbon electricity and we're excited to be part of the journey.
Our team is diligently working to support a world, where we are seeing the greatest threat to energy security reliability and affordability in decades yesterday, we released our 2022 veteran human lives report, placing today global energy security crisis.
In proper context, and showcasing Liberty's leadership.
Clean energy technology innovation.
Our drive is to bring awareness to the importance of energy access.
Adding further into the topics of geopolitics food security and the four pillars of the modern world cement steel.
Fix and fertilizer all critically enabled by hydrocarbons.
<unk> has always been part of our DNA since day, one and we bring to focus our innovation and investment in digital technology engine technology sand logistics and supply chains as well as our robust governance.
And the people and culture defining deaths.
With that I'd like to turn the coal call over to Michael stock, our CFO to discuss our financial results.
Good morning, everyone.
We are pleased with our second quarter results the entire Liberty family pulled together to provide exceptional execution for our customers and deliver record revenue net income and adjusted EBITDA.
We are navigating just see the advantages the transformative work that team accomplished through the integration of one stem and properties and its already generating returns at a faster pace.
We predicted at or at least a day a little over one year ago.
Successfully achieving scale and vertical integration by doing the integration to the right place has been key to our financial performance and position us well entering into the second half is it right to.
This quarter, we were right.
<unk> annualized adjusted EBITDA is weak levels last seen in 2018, and we believe that we are only at the early stages of the oilfield services upside.
Liberty is a company in a much different scale of integration today and we were in 2018.
We're in an even stronger position to lead the industry in technology and service quality and to expand our profitability.
Based in class Frac fleet technologies, they've evolved to include Liberty's built the business did your Frac fleet that raises in the industry standard on providing the lowest emission technology in the market with superior durability reliability and enhanced automation and controls.
At tier four DGB fleet has grown significantly and Mary's dual fuel pumps automated controls that maximize gas substitution for diesel in an environment with savings from fuel cost arbitrage has increased over the last year.
We have an expanded supply chain.
Two of our own sand mine deeper partnerships with our suppliers.
How us to deliver superior operational execution.
And severely restricted markets riddled with global supply chain challenges.
Also had the privilege of technologies and weight sand handling and last mile proppant delivery solutions through properties. These transformative changes we've made and continue to make at Liberty are critically important drivers of shareholder value at a time when market fundamentals are increasingly constructive for our industry.
The second quarter of 2022 revenue was 943 million, a $150 million or 19% decrease from 793 million this quarter.
Approximately 60% of that top line growth was driven by activity mix and a modest contribution from a fleet reactivation.
<unk>.
Pricing.
Net income after tax.
<unk> 5 million increase from a net loss after tax of 5 billion. This.
This quarter.
Fully diluted net income per share was <unk> 55 cents compared to fully diluted net loss of three cents in the first quarter.
<unk> included $7 million in fleet reactivation costs incurred for both the fleet deployed in the second quarter and the planned phase three.
<unk> deployments.
General and administrative expenses totaled $42 million, including noncash stock based compensation of $4 million.
<unk> increased $4 million sequentially, primarily driven by performance based compensation inflationary and activity increases commensurate with the growth in our business and investment at platform systems and other process improvements to support our continued expected growth.
Net interest expense and associated fees totaled $5 million.
Adjusted EBITDA increased to 196 million more than doubling from 92 million achieved in the finished quarter showcasing solid incremental margin expansion activity and pricing gains.
We ended the quarter with a cash balance of 41 million and eight days of 213.
It did increase by $34 million this quarter, primarily due to an increase in working capital.
As of June <unk>, we had $150 million of borrowings on our ABL credit facility on July 15, we exercised the accordion feature on our ABL credit facility, thereby increasing our borrowing capacity from 350 million to 425 million.
Total liquidity, including availability under the credit facility was $263 million pro forma for equal weight.
Capital expenditures totaled $127 million or I guess basis, the second quarter of 2002, the Capex was driven by tier four DGB upgrades bitchy frac spending of $65 million sand logistics and other margin enhancing projects of $29 billion and everybody to relating to ongoing capitalized maintenance spending.
In the third quarter, we expect approximately 18% sequential revenue growth.
This is primarily driven by fleet reactivation, and one including one full quarter of contribution from accrued towards the latter part of the second quarter and modest price increases.
We also expect margin improvement primary contribution of integrated suites, and modest net pricing increases partially offset by ongoing supply chain operational inflationary pressures included including in commodities and raw materials and labor costs.
Yes.
As market fundamentals continue to improve for our industry, we are well positioned to support globally than she needs while continuing to invest in is really part of the cycle to maximize free cash flow.
Long term.
We are now targeting capital expenditures of 500 $550 million before year translate to approximately $200 million increase reflects an additional next generation technology investments, including incremental spending additional did your frac fleets and property exane handling completes and equipment as well as Katherine based on that the Frac fleet reactivation.
And with the taxation of approximately $55 million to $60 million.
<unk> the one fleet deployed in the state.
Balance that will be deployed in the second half the year.
The incremental adjusted EBITDA, we are on track to achieve in 2022 relative to the beginning of the year is expected to find ones that exceed the additional Catholic speaking in that budget.
As a result, we expect to be free cash flow positive for the full year of 2002.
Investing in these loans compared to the advantages.
We expect to enter 2023 with an active Frac fleet count at the moment.
Investments, we are making in 2022, well further expand earnings potential in 2023.
Our fleet modernization plan is expected to continue in 2023 release capital spending is likely to be well below 2022 20.
'twenty three.
We anticipate strong 2023 free cash flow conversion of over 50% driven by the incremental profitability from 2022 basements and continued margin expansion initiatives.
We are planning ahead is asleep at the latest technologies as we aim to what we expect to be a longer duration or the gas side.
As we stated at the beginning of the year, we have significant flexibility in adjusting our capital spending topics dependent on economic conditions customer demand.
Enriches expectations.
As we look to the future the increased free cash flow generation capability of our reposition business successful once the integration operational execution and fundamental outlook allows us to meet our capital allocation priorities of disciplined investments to expand and earnings per share balance sheet strength and or tier is capped.
The shareholders with that I would add to it over to Chris before we open for Q&A.
Thanks, Michael.
The World is gripped today by serious energy and food crisis is of our own making.
It is not in fact due to any shortage of available resources.
Is due entirely to investment decisions and a growing very added barriers to investment in hydrocarbons, the very hydrocarbons without which the modern world is simply not possible.
It is admirable that the public regulators in our industry, our team to improve the quality and cleanliness of our activities.
Is not admirable.
So many emotionally driven fact free impediments to investments have come from government regulations, NGO mitigation and lobbying and wall Street to often equating lower greenhouse gas with better in all cases.
The blame for the current energy crisis also falls on our industry for two orphan compliant leaf going along with the endless anti hydrocarbon fashion of today.
If it is not for us to speak candidly honestly and loudly about the critical role of hydrocarbons play in the modern world and most critically for those desiring simply did joined the modern world.
And who else will play this role.
Certainly it is not been political leaders actavis academics or celebrities.
Is us that must carry that torch.
Otherwise yes.
Immense human damage, we see today.
Lack of investment in hydrocarbon production and hydrocarbon infrastructure will be only the beginning of a calamitous prices.
Towards that end I strongly encourage everyone to read Liberty's improved and expanded version of battery and human lives that was released on our website last night.
It touches on many critical issues that are either overlooked misunderstood or simply ignored.
We welcome all feedback on this report as we strive to be honest brokers for information on how the world is energized today.
It might be energizing, the future and what inevitable tradeoffs must be made.
Individuals are all entitled to their own opinions, they are not entitled to their own set of facts.
That idea from Daniel Patrick Moynihan.
I will now turn it over to the operator for questions.
Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if 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 please limit yourself to one question and one follow up and then re queue for additional questions. At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Chase Mulvehill with Bank of America. Please go ahead with your question.
Hey, good morning, everybody.
I guess first thing I wanted to hit on just the.
The capex.
Obviously, a big bump here, you've got the new builds.
The incremental new builds but did your frac fleets in the first half of next year.
So could you just kind of split the split up the the Capex of the 500 to 550 between.
Upgrades and reactivation versus new builds.
Maintenance, just so we can kind of get a context of kind of where the capex with Boeing.
Yes, Jason it really.
Yeah. So I'll take you back to instead of what we announced at the beginning part of the year right. At 200 change that was announced if you think about it it can be two newbuild did your Frac fleet is about $120 million.
Probably in the $50 million to $58 million with the reactivation and the balances just to make some additional.
Same handling.
Technologies, and some margin projects that we've green lighted with the fruit pricing.
Yes.
Okay. Let me ask you this the the police that you're reactivating them in the back half of the year are.
Are those upgrade are you spending to upgrade those or are those just going to be kind of tier two fleets.
Yes, I I see it so we're not ready to tier four DGB that price, obviously, you could but they.
Being to some degree limits is to where they are they would be a liberty tier two fleet. So they have longevity wisdom, which will gain support for the.
The long generation moved to those clients through next generation fleets as kind of a flame, but with each of those plants that had a different cadence with every one of them, but during the next five years.
That makes sense.
And if I can ask one on the buyback.
You know if I can kind of poke around this a little bit and try to think about how you're.
Think about pace of that 250 million I know you didn't really kind of commit to at this point.
But you know do we should we think about it you know kind of more matching about kind of how free cash flow evolves or is it kind of more opportunistic buybacks are based on kind of how what's your view of intrinsic value versus where the stock is trading.
Yes entirely entirely opportunistic chase no no formulaic money you get a flow out at ex buybacks to us are opportunities. When you have a balance sheet to support them and you have a large compelling difference between the intrinsic value of the share and the price at which you can buy.
<unk> shares so the rate at which we'll buy back our stock is strongly dependent on the magnitude of that dislocation between intrinsic value and market price.
Okay can I ask how you define intrinsic value or how you calculate it.
Yeah.
Obviously once you have the details but.
It's just that's common sensical this discounted cash flow incorporating our weighted average cost of capital and a range of possible scenarios going out to the future of our business.
Okay. It makes sense, that's how pretty much everybody thinks about it I'll turn it over thanks guys.
You bet Thanks, Jason.
Our next question comes from Steven <unk> with Stifel. Please go ahead.
Thanks, Good morning, everybody.
So so two things from me if you don't mind.
The first.
When we think about the fleet reactivation in the back half of the year you talked about I think exiting next year, starting next year, starting next year with about with 40 plus.
Are you well, we're coming off of a base of around 35 in the second quarter.
Just trying to calibrate kind of the percentage increase youre seeing in the third quarter and how I should think about.
Did you frac fleets entering in 2023.
It's like yes.
Yeah, we have quite a bit very that 35 number ish.
The activated one rising in the second quarter and then the.
Balance will be activated so they should go through the year, we'll be through the end of fourth quarter.
Okay. Okay. Okay.
Okay.
Okay. Okay, and then when we think about I guess, it's two part question, but the steep increase in profitability per fleet in the second quarter up two give or take I think about 23 million of EBITDA per fleet. So does that bridge from the first quarter.
I assume it's price utilization and there's probably some some value from the sand business and there I would think.
How should we think about the the sort of the potential of that number without giving us guidance. I mean is this something I could go to the high Twenty's as <unk>.
23 evolves or is that too aggressive I mean, any any parameters around sort of the bridge and and where this thing where that could go as we go forward.
Where it could go which as you know from my point of view would really more dependent on.
The demand side of the oil supply demand equation, but depends on how you know kind of how any sort of any potential recession may affect demand for next year generally internal numbers, we don't see from late Q2.
The industry is running maybe around 250 blades going to move to $2 75 by the end of the year kind of broadly stay flat at this present point in time.
So yeah, there is definitely upside on pricing, but I think that is still to be seen as to.
Obviously, you've seen a lot of movement in the market for Frac fleets and in general in the general economy, but I think we need to kind of take sort of watch it as we go.
It's Steven I'll, just add we don't know the future obviously the trends are pretty positive right now, but it's a combination of how well we perform operationally what the trends in pricing and they are still migrating a positive direction and also are just quality of operations as Michael said some of our capital is this.
These margin enhancement.
So we're trying to figure out how to run our ambition or our business more efficiently to get more done at a lower cost and a safer fashion. So there's a lot of moving factors in that so we're always a little shy about predicting the future, except we did say a year ago that we would return to mid cycle economics. This year.
Year and that was it based on anything specific it's just based on when margins are awful supply shrinks and and eventually demand will grow but just supply shrinkage alone we've got to fix the marketplace given that two or two and a half years of four frac market conditions.
Yeah.
Great very good and just one quick one and Michael you mentioned this but as the market evolves over the next couple of years do you view the upgrades and the Digi Frac as ultimately replacement for these tier twos that you're reactivating and it's sort of a bridge too new.
The newer higher end assets.
Generally what we see what we see.
Among the stimulus in the market do you think that's involved with what's been announced for Newbuild.
Proximity is that what the attrition cycle is a frac fleet.
Thinking about a 10 year life of some of these older to these diesel fleets et cetera.
The announced numbers that are coming out approximately designs, we get pretty balanced market, a very disciplined approach by ourselves and the other half basis, and we think that's good for the Frac market overall.
Very good thank you for the color gentlemen.
Thanks.
Our next.
<unk> comes from Arun.
Gerard. Please go ahead with your question.
Chris Michael Good morning.
Chris I was wondering if you could give us a little bit more.
Bigger picture.
Around the scope or the ambitions of your fleet modernization program.
Mentioned $5 million to $550 million of Capex.
This year and at or a little bit below that kind of next year. I was wondering if you give us a little bit more scope on.
How long do you expect.
The higher capex trend relative to maintenance to continue.
And what type of.
Capacity is do you expect over the next couple of years.
What kind of Quebec, we don't have any.
<unk> add capacity.
Per se.
Our plan and we do have a plan on.
On fleet modernization sort of a continued gradual program of course, whats actually going to happen is not going to be our plan it might be accelerated if the demand pull it better it might be slowed down we never put anything in stone.
I'd say the migration to next generation fleets. The economics are going to pull back pretty strongly both these next generation fleets have meaningfully lower emissions.
The very latest next generation fleets are also going to have greater safety higher reliability better performance and then just from a straight numbers perspective.
Delta in fuel costs today between burning natural gas and burning diesel is large it's a big deal. So she has the economic driver of fuel cost savings is likely going to have continued customer pull to get next generation fleet.
Equipment.
But again for us it's not an expanding its not growing our fleet. It's just simply a disciplined returns driven upgrade cycle in our fleet that will be and is being pulled by our customers.
Great I was wondering if you could just <unk>.
Follow up is just give us a sense for the two did you frac fleets that that were to be deployed.
Starting in the third quarter or later this year.
Give us a sense of of how those deployments are going in terms of timing and perhaps how the contract terms for the latest two newbuild are trending relative to your initial two that you plan to put in the field.
Already this is Ron.
Obviously customers are excited to see that technology out in the field and we're excited to get it deployed out there. We continue to see strong demand. We are navigating some supply chain challenges not so much on the pump side. We have we have pumps being delivered on schedule, we're struggling a little bit more on the power generation side, So that's holding us back a bit.
We still expect to deploy our first two fleets. This year in Q4 likely in the next two fleets probably in Q1 is our expectation to date and as you think about.
As you think about how that contracting has evolved you kind of want to think about how the business really the market has evolved over time. If you think about when we announced those first contracts we were in a little bit different environment then.
Versus where we find ourselves today.
Leading edge pricing even for a tier two diesel fleet has moved pretty dramatically over the last three or four months and so as we think about contracting next generation fleets to the point, Chris made earlier the fuel savings opportunity. There is massive maybe on the order of $20 million to $25 million annually and so we think about.
Where leading edge tier two diesel pricing is in the fuel savings opportunity there because of course, we want to capture some meaningful piece of as well and that provided guidance as to where we want to set pricing for our next generation capacity were deployed.
Great. Thanks, a lot.
Our.
Question comes from Neil Mehta with Goldman Sachs. Please go ahead with your question.
Great, Chris and Michael Congrats on a solid quarter here.
And they wanted to build on some of your comments here. You mentioned you don't expect to add capacity, but broadly speaking do you see current profitably profitability levels as Incentivising your competitor set about adding capacity in the market overall.
I guess, where we're going with it is do you see disciplined fading at all.
We haven't seen any of that.
And look obviously, we're close to all the equipment builders there.
I don't know of any fleets being built that are not really driven by ESG. Our stack. So I don't know of any straight kind of capacity adds they probably are but if there is it's very small very little certainly among the bigger players who are an increasing share of the marketplace. These days.
Yes, I don't think there's any appetite look a you couldn't do it if the market is great today I want three more fleets well sign up for 15 months and you'll get them, but what's the market going to be in 15 months.
As people I think are obviously burned from overbuilding or redeploying too many idle idle equipment in the past so no we have not seen a.
Ah fading of discipline, we've seen a pretty rational dialogue between us and our customers.
In a marketplace today, where our customers have just fantastic returns and we're still lagging a ways behind that but we're moving in that direction as well.
Just to point out I mean, really if you think about it if it's about 10% of attrition a year now that attrition can be delayed somewhat it is a very strong market.
Actually it comps.
So I think that's one of the things you've got to look at when we look at sort of what is being built and it seems to be balancing with attrition.
Over the long tier.
Okay.
Get perspective, and the follow up is just around labor a year ago. On these calls we were spending a lot of time talking about how tight the labor environment is and just talk about what youre seeing right now or are you still facing labor challenges.
And how are you mitigating some of those risks.
Yeah labor markets remain tight.
I would say you're seeing.
A few more people coming back into the Labor force, so incrementally better than it was six months ago, but still a very tight labor market nothing like we've seen in the last 10 or 12 years, so incremental improvement the right direction.
<unk> focused on is very liberty specific opportunities about why it's a great place to work at Liberty why people love their jobs here, while we have low turnover so but it is in on the ground effort, we're going there.
Great schools, where people are learning to become electricians welders and setting in those groups, having them do internships that liberty, that's having NCAA like signing ceremony that people sign on the joined Liberty, whether it's out of Alabama, Mississippi or somewhere in that may not be right in the middle of the oil patch. So.
It's a huge credit to our recruiting and HR team.
Could you just had to change the game a bit to find and attract people to come in people come in and if you treat them well and they have a great job.
This is an exciting industry. So there are all solvable problems, but yes. It is a challenge and it is a significant constraint I would say others get a.
Turnover in our industry as a whole I would say is probably still quite high and most everything in our industry is short handed today. So I don't want to get too much comfort on the labor problems. They are real but I think liberty can do at a pretty good job navigating that.
Yes, Sir.
Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead with your question.
Oh, hey, guys phenomenal quarter congratulations.
Quick question on the incremental fleets.
How much of that growth is driven by your ability to tie your own sand and access to that sand versus just better overall industry demand.
That gets people. This is almost all from existing customers that wanted to either one that do a little bit of incremental activity or maybe they split their work between liberty and somebody else and somebody else is struggling and theyre not getting consistent throughput theyre not.
They're not getting things done the way they'd like them to be done.
But.
I think.
There is we know you guys be trust you guys you can deliver and what are the economics, it would take to get a little more of that.
All of that package of course, John but we buy a lot of sand from third parties as well look we're in a bunch of different basins. So it's not just that we have sand mines that we have relationships and a history of internet type procurement market.
I would say our goal has always been to not just be a preferred provider, but to be the preferred partner to our suppliers as well so.
A little color on that too.
And not on specific basis.
They are spread across a license.
To some degree it helps in the ability to source labor.
And support those fleets as the supply chain to support locally, but the key things you're asking at this present point in time when you're activating its Lee is really is can you source. The libra can you source it can't supply chain support as a key event, because you're putting a fleet.
And it's delayed or has issues is not doing that but not a good choice.
Okay got it.
The other one for me is just that as a backdrop.
I mean, clearly demand is good you guys are obviously performing well.
How do we really transition do you think there's the opportunity Chris Ron Mike.
Transitioning to pilot to sort of take or pay arrangements.
What would happen if you went in and asked that customer today to lock something out.
Transition away from tactical victory is that.
And line of sight.
I mean, there are deals like that today, where.
The buyer buyer need something and so we will have guarantees of our economics that they struggle on operations and are able to add.
Have a frac pace move as fast as we'd like we have some contract protections in there that that protect our economics. So those absolutely exists today.
But again for us the winning in the long run and this industry is always about how can we win together.
Not pay if things change you're screwed, if we win that shift.
But that is they didn't exist in our industry. Even then we generally did not engage it now.
We've always had a partnership mentality and we always will have a partnership mentality I know you're rolling your eyes, right, now and saying well Chris.
Partnership with horse for you guys. The last two or three years, and there's some truth to that and as far as the or the benefits disproportionately going to swing a bit more our way going forward, yes, yes of course, they are but we've got to.
All we'd be prepared to deal with.
What counts.
He's got a camera on my truck okay.
So.
Uh huh.
Last one for me and hopefully that's not just one but never did youll start there in 'twenty three with <unk>.
Fleet kind of in the low 40 <unk> does.
Is that assuming crude goods and frac fleets in the world.
And can you say, how many in Canada, just remind me.
We don't we don't give fleet breakdowns by basin and all that.
John we've always been careful about that so look forward is this sort of vague, but yeah I would say that it came in a couple of BG frac fleets that are gonna be gotta get me wrong and they will be rolling in in the fourth quarter.
Okay.
Got it thank you guys great quarter again.
Thanks, John I appreciate you draw therefore in that truck.
Okay.
Our next question comes from Roger read with Wells Fargo. Please go ahead with your question.
Yes, Thank you and good morning.
I guess some of these questions have been asked maybe dig in just a little bit deeper on what you're seeing in terms of who's coming to you to bid for potential new fleets or any future reactivation.
No.
Have we seen that is a.
The difference between sort of oil and gas basins I understand you don't like to disclose exactly where the fleets are but as you think about what's going on in the bidding side, what you're seeing from your customers.
I would say its pretty balanced right now it's strong across the sector was strong meaning that the economics are good there's pull for incremental demand, but the poll is for very small incremental demand.
The fleet counts the fleet cap from the start of the year to today.
Navy is named 10% growing a little bit fast at the start of the year, probably moves a few percent from here to the end of the year and we sort of model next year, it's sort of flattish at the end of this year because there simply is it people wanted 20 more fleets next year I simply don't think they're there so we.
We expect to see the continued sort of flattish with a slow creep upwards and active fleet count and I would say reasonably balanced between oil and gas.
End markets in both our are pretty strong right now in both markets everyone across our customer and just friends you are current customers.
The Mexican mindset across everyone is.
It's hard to add incremental supply and it wouldn't be good if we all added a lot of incremental supply that's oil and gas production and frac fleets. So.
It's a pretty.
Disciplined silver state of affairs in the industry today.
Yeah. Thanks for that and then maybe as a way to tie that into sort of production expectations. As we look to the end of this year and next year you mentioned.
Earlier in the call you know challenges for operating efficiency for the industry.
Just what tie in a little bit with the labor issues, but if you think about our relatively stable capacity in 'twenty three.
Does that imply that if we don't get significant operating efficiency improvements.
Trained labor et cetera.
It'll be hard to deliver more wells and more production in 'twenty three.
Well watch.
The current activity level and sort of like the biggest proxy for what's going to happen in the U S oil and gas production and the rate at which pounds of sand or going underground way more important than rig count wavelength, frankly, it's better than rig count, but really how does the sand going underground that's the metric we based production.
<unk> and dry it now its not straight simple is where's the Sam do you want to underground how is it going I mean, theres some theres some details around that.
Our current level of activity is driving today and modest growth in both U S oil and natural gas production I think we've said at the beginning of this year, we expected seven or 800000 exit over exit oil production growth this year.
I think that's a reasonable estimate we might be a bit above that but we might be a bit below that I think that's a reasonable pace at which we're running right now.
And if you keep going at the current rate, we would see a similar growth rate next year. So I think youll see again, probably a little less than a million barrels a day of U S exit over exit rate oil production growth. This year, probably on track to see a similar level next year wide bands on that but.
I want her to 1 million barrels a day of exit over exit growth rate next year probably.
And continued.
No.
It should be even more cautious here natural gas.
He is growing and production rate will grow but again also at a modest rate and current activities at next year's plans I think it continues to grow next year at a modest rate.
Yeah.
Great. Thank you.
Thanks, Roger Thanks, Thanks Roger.
Yeah.
Our next question comes from Scott Gruber with Citigroup. Please go ahead with your question.
Good morning.
Well Scott.
So.
We've talked to investors the last couple of quarters since the general kind of disconnect between the market expectations for Frac fleet utilization and the trajectory of personally profitability. Many initially looked at the 2017 2018 up cycle as a comp.
Okay, and then just a week that that upcycle was and if you look back at 2011 2012 per fleet profitability.
Profitability.
Most of the $30 million is that a level of profitability possible for the the underlying frac business alone more cycling separate from the other businesses or does the partnership model or cost inflation.
Weren't you appears to pushing the.
Frac profitability towards that $30 million level that we saw about a decade ago.
It's certainly possible.
Certainly just bought look it's just supply and demand.
It's yeah fleet profitability low Twenty's now.
Is that likely drift higher I suspect it probably does.
<unk>.
But yes, it's hard to predict where it goes I would say we would hope it doesn't go to $40 million if it goes too outrageously high levels.
That of course will be the start of some unwinding of discipline, but there is still a lag there there's still a risk in there the economics look awesome demand I can't get equipment for over a year.
Still think you'd see some restraint on that but when we see people that really need activity and are willing to pay for it and when we deploy these incremental fleets Navy.
So Lee to offset people doing wacky things to get wells online and where they are.
And so.
Yeah.
We don't know where the fleet profitably is going to go are likely to continue to drift higher in the next in the coming quarters, how much or how for how far we will see.
Got it got it.
And then how should we think about the contribution from the non frac businesses look like yet a nice step up in that contribution.
Q. So as we think about three Q4, Q and enter into 'twenty three will the non frac businesses.
Profitability contribution expand at a at a faster pace than the underlying frac business, but more in line how should we think about the cadence of that contribution.
No.
This frac the underlying fragrances over the one that expand it a bit quicker right.
The non fragrances stadia, the majority of that same.
Same lines, we picked up from once then really come together to go through our Frac fleets, yes, that's really a small portion of sort of additional.
Sort of I guess third party sales that go with it. So yeah I would say you know kind of the first half headline frankly is the one that has expanded at a faster rate.
And that would be expected to continue to lead in this sector.
Right.
I think that's a fair assumption.
I think so.
Okay and your relative I appreciate the color.
Our next Scott.
Our next question comes from Connor Lynagh with Morgan Stanley . Please go ahead with your question.
Yes. Thanks.
Just a question around capital allocation.
Frankly asked this a little bit facetiously, but given where your stock is.
And just how cheap devaluation is relative to these leading edge numbers that you're putting up here.
Why spend anything, but the bare level of maintenance capex and divert direct and not divert the rest into into buybacks, what's your thinking around that.
So that is very much a dialogue we have internally very much.
And I think one could make.
You could make an argument for that.
Question is we're always playing for the long term our success are way above average not just already just for you, but the S&P 500 return on capital employed since we launched this business cash return on cash invested.
<unk> is closely tied to the great partnerships, we have with our customers want to work with us for the long run that we want to make long term decisions together with us. So it's very important that we run this business in a way.
It keeps us.
<unk> partner for E&ps available.
Impella is advantage in our business definitely helps keep us to deliver elevated returns over the long run. So we'll always continue to invest and keep that competitive advantage.
Youre right today.
Practice, Fortunately, we're coming into a place where we're going to have to free cash flow to pursue a bit of an all of the above approach, but yes.
Today's valuations stock buybacks are pretty compelling.
Yeah.
And just to clarify about how youre thinking about the balance sheet and executing those buybacks.
Obviously, you've got a fair bit of Capex for the duration of the year here and it sounds like.
A decent amount of the market remained strong in 2023 would you feel comfortable.
Levering up a little bit in order to execute buybacks based on where the share price is trading or is that something you think of it as more of excess free cash flow is what youre going to use for that program.
No.
The opportunity today is compelling.
We know our free cash flow in the very near future. We're quite confident in so no buybacks timing matters I can say the same thing about capex and investment people tend to invest huge Lee and their business is capex and buybacks when their business is just killing it.
Making cash, but that's not the best time to invest in Capex in your business aimed at buybacks. So no you have to be willing to do those.
With a lag we've talked about this since our IPO.
Beginning of cycles is the best time to invest Capex in your business and when the share price is most dislocated is the best time to do buyback as long as youre not taking balance sheet risk right. So at the very start of a downturn you don't know how ugly it's going to be.
Got to be careful or cautious there but.
But but no.
Timing of these things is not Todd.
Got.
Specifically tied to the timing of cash flow.
Yeah.
I appreciate the context I will turn it back.
Thanks Scott.
Yeah.
Our next question comes from Derrick pod Hazer with Barclays. Please go ahead with your question.
Hey, good morning, guys I wanted to hit on pricing a little bit more could you talk about where the reactivated tier two diesel fleets, we're priced relative to the nextgen fleets price at the end of last year and earlier this year how much does this raise the bar for Nexgen pricing re contracting and what run rate do you have now for profitability expansion that these are.
Just in the next six to 12 months.
Yes, I got it.
Cautious, where we always want to be careful about not giving specific projections, because we don't know the future.
Good point Eric.
Now these fees.
Reactivation fleets are obviously contracted at very strong economics very strong economics.
And you said, hey, let's take the exact same market environment and add a next generation fleet with huge fuel cost savings and and.
And lower emissions.
The value of that is is enormous and will that impact from repricing of fleets sure and of course it will.
Got it that's helpful switching over to the digit frac. So youll have four fleets by early next year, you talked about the pressure on the power side would you supplement with third party turbine providers, a grid power or battery power to help get you to where you need to be with those MTV natural gas recip engines.
But look I think we certainly contemplate both of the above Julissa Denver, Irvine, we don't view that as an appropriate solution to put out in the field. So I don't think thats the right answer for us but.
In terms of an opportunity to use some amount of grid power I think thats certainly on the table and the conversations we're having with some of the potential Dizzy frac customers call. It a bit of a hybrid approach in terms of how the power is ultimately provided on location as you know there are some some folks in the third party business that have natural gas recently now kept coming to the same conclusion.
We have around the emissions profile from that technology and so those would also represent a potential option for us as we think about the pace of deployment for <unk> going forward.
Got it that's helpful color last one if I could squeeze it in just on the unconventional geothermal investment can you talk about how big of an opportunity. This could be for you over the next few years three to five could you frame frame that and maybe put some numbers around it for us.
I think too early to do that.
But obviously, we did the investment because we foresaw there was a reasonable chance.
This would be meaningful business.
So we're excited about that opportunity too early to really give numbers around that but yeah. We're obviously not doing it for sure for window dressing we believe in that business. We believe it can grow to some scale.
Got it that's helpful. Thanks, guys I'll turn it over.
Thanks.
Our next question comes from Keith <unk> with RBC capital markets. Please go ahead with your question.
Hey, good morning, and thanks, just curious if you can talk a little bit more about.
What portion of that low Forty's fleet count would be non next generation fleets under your under your definition, which I think is tier two dual.
Yes.
Okay.
Yes, Sir.
The specific numbers, it's definitely less than half maybe meaningfully less than half what it is but it says.
It's.
It's still it's still a meaningful slice.
Okay got it thanks for that and in under next year's initial look at Capex of close to 2022 levels.
Can you talk a bit more about how many did you frac fleets that might contemplate.
Josh when we look at that the majority of that Capex above and beyond maintenance Capex is.
It's kind of it's abundant source vehicles to the Frac I gave you those numbers to give you a kind of a general idea of where things could go obviously those planes will actually be made one customer at a time.
And we'll announce them as we go.
Outside of the asset and maintenance get the majority of that at least based on the.
Thank you Frank.
Colleagues.
Okay. Thanks, so much I'll turn it back.
Thanks, Steve.
Our next question comes from with car said with Alta Corp Capital. Please go ahead with your question. Thank.
Thank you congrats gentlemen, great great quarter for us.
Mike just a quick housekeeping questions number one do you envision some fleets out of costs in Q3, and if so what could be the size and the.
H two would that be second half would that be a source of cash from working capital as a use of cash.
Sorry, I will tell you broke up while you were asking I think to your physical integration.
Yeah. So in.
In Q3, do you expect any fleet startup cost and if so what size.
Yes, we do and I think the order.
It will be probably similar to Q2.
During Q3 and Q4.
Okay.
Very little.
And then working capital do you expect that to be a source of cash in H two.
Second half it'll be it'll be a slight use of cash.
Okay.
Probably balances in Q4, yes, we would like the seasonal normal seasonal rollout is seasonal with the rollout of the it might be a small use of cash use of cash in Q3 deposit rates more benefit in Q4.
Okay. Thank you and just Chris just one last question from me.
With this recent pullback in oil prices have you seen any change in discussions with your customers.
In terms of the direction of leading edge pricing.
Or in any way other concerns about.
Reducing activity or anything like that anything negative to.
On pricing and activity.
No.
Nothing there I don't even pull back spend significant enough in the out years, it's not meaningful so no changes no changes yet.
Yeah.
Thank you very much that's all from me.
Hey, Oscar.
Yeah.
Again, if you have a question. Please press Star then one our next question comes from Marc Bianchi.
With.
Cowen. Please go ahead with your question.
Hey, thanks.
I wanted to go back to the 'twenty three capex if it is flat.
Or slightly down Michael could you just give us the buckets.
Because I'm, assuming that the maintenance numbers going up because of just the active fleet count is going up but maybe just level set us on.
The three buckets or however, you want to describe it for 23 years, it's really a soft circle Bob.
Yes, I think you used under that you'll have a rough rule of thumb of $3 million to $5 million of fleet.
And that low Forty's, obviously, we've got you've got an inflationary pressures on the maintenance Capex etcetera.
But that's getting as we as we improve equipment at scale, we're doing it based to offset that but I think if you take the guidance and then I think the balance is really a source it alone.
And we might customer by customer the majority will be spent on the G frame.
Got you, Okay, great and I think.
One other.
Go ahead.
It easily change if the market changes, we have a lot of flexibility kind of moving at pace.
Adjusting capex as market change.
Yeah, we saw that this quarter right.
I guess the the other one for you Michael is the 'twenty 2022 and 'twenty 'twenty three cash taxes can you give us any sense of what we should be assuming there because I'm, assuming that's a quite.
Quite a bit different from the book tax we'll see.
No I can't fix is relatively minimal.
Sticking out here, probably in the $15 million.
And it's pretty similar.
Both Texas, obviously, we've got a.
Clearly large valuation allowance related to the TRA. That's it takes that 2023, we'll probably talk about that.
As I haven't bought into that.
We have a little time with my tax rates on some of the interplay there.
Okay, but not a meaningfully different number perhaps in the second half.
We're just trying to triangulate on cash flow.
Yes, I would say in general I think we will be in cash tax.
Payment situation next year, so what was sort of a yes, I think mix will be.
It will be a drag on cash flow.
As you've seen we have a molecule.
Yep, Okay Super and then the last one for me is just kind of higher level one.
Customer budgets here.
E&ps have absorbs a lot of inflation over the course of the year.
You know there's at least for the public's theres a commitment.
That increased capex too much or are you seeing any.
Customers.
Adjust plans and activity because of the amount of inflation that they've seen and how are you thinking about that interplay into 'twenty three.
I would say people goals are based on what they want to do with their production.
Want to keep production flat with very modest production growth I think that's generally a targeted to activity levels and then they want to work as efficiently as they can to get those activity levels done.
Obviously in Frac pricing a piece of that but it shifts the piece right you get you can pay a higher frac pricing book pricing.
Liberty versus someone else, but the wells come on sooner and the efficiency of operations is greater there're some offsetting cost savings from that so no I think what producers are keeping relatively anchored as their activity and production plans.
Got you okay. Thanks, I'll turn it back.
Thanks Mark.
This concludes our question and answer session I would like to turn the conference back over to Chris Wright for any closing remarks.
Yes, I just wanted to say thanks for everyone's time today for following Liberty's business that FERC being involved in the energy business huge shout out to everyone on team Liberty that 'twenty four seven is working hard to make our business successful and to make the world go round. Thanks also to our customers and suppliers and everyone. We'll talk to you next quarter.
<unk>.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.