Q3 2022 Liberty Energy Inc Earnings Call
Welcome to the Liberty Energy earnings Conference call.
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I'd like to turn the conference over engineered right strategic finance and Investor Relations. Lisa. Please go ahead.
Thank you Anthony good morning, and welcome to the Liberty Energy third quarter 2022 earnings conference call joining us on the call are Chris Wright, Chief Executive Officer, Ron <unk>, President and Michael <unk>, Chief Financial Officer, before we begin I would like to remind all participants.
Some of our comments today may include forward looking statements, reflecting the company's view about future prospects revenues expenses or profits.
These matters involve risks and uncertainties that could cause actual results to differ materially from our forward looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non <unk>.
GAAP financial and operational measures. These non-GAAP measures, including EBITDA adjusted EBITDA pre tax return on capital employed and cash return on capital invested are not a substitute for GAAP measures and may be comparable to similar measures of other companies.
A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of pre tax return on capital employed as discussed on this call are presented in the company's earnings release, which is available on the investors section of its website. The calculation of cash return on capital invested as set forth in the comps.
Investor presentation data September six 2022, which is also available on the investors section of the website.
I'll turn the call over to Carl.
Good morning, everyone and thank you for joining us for our third quarter 2022 operational and financial results. We are extremely proud of our team's strong operational execution.
Underpinning the robust third quarter financial results are.
Our strategic plans to deploy six fleets to supply incremental demand from our long term customer partners. When successfully completed ahead of schedule, while navigating challenging labor market and a volatile supply chain.
Our strong customer partnerships vertically integrated delivery model and the strength of our crew leadership with crucial to quickly bring new fleets to market, while maintaining high levels of performance across our entire fleet.
In the third quarter revenue was $1 2 billion or 26% sequential and 82% year over year increase.
Net income for the quarter was 147 million or 78 cents per fully diluted share.
Adjusted EBITDA for the quarter with 277 million up 41% increase over the prior quarter.
Strong results enabled us to launch our return of capital program and repurchased 2.5% of our outstanding shares.
We also announced the restoration of our pre Covid quarterly cash dividend of <unk> per share to be paid in December .
We will maintain a flexible approach to returning capital to shareholders, while maintaining a strong balance sheet and investing in compelling opportunities cap.
Capital allocation is front and center again.
I'm proud to say that our operational execution in the quarter with unparalleled breaking several liberty records, including proppant pumped pump hours technology rollout and more all while deploying fleet acquired in the <unk> acquisition.
The incredible undertaking of bringing six additional fleets online during the third quarter required an extraordinary level of collaboration and coordination between our teams.
And a 90 day period, we hired and on boarded six crews, which is no small feat in a highly competitive labor market.
Our ability to attract and selectively choose from a higher quality pool of candidates, especially in this tight labor environment is a testament to the liberty team and culture.
It is an energized empowering engaging workplace designed to allow our employees to passionately pursue their goals.
Training and Onboarding of new employees to work alongside seasoned cruise will drive high service quality for years to come.
Additionally, our operational readiness was helped by the recent realignment of our teams across the company from Frac crew to maintenance to supply chain and procurement. We now have seen with dedicated teams working together to support crews, allowing specific team.
Two identify goals execute on clear priorities and hold themselves and each other accountable for the delivery of superior service.
We leveraged our extensive supply chain capacity to support the deployment of additional fleets in an environment, where sand and other materials are in short supply.
While Liberty has grown rapidly over our 11 year history, we've worked hard to preserve and build the culture that has created our industry, leading service quality epitomize by the quality and dedication of our employees.
The recent realignment of our teams has created dynamic units within our organization and foster innovation and collaboration.
Our people and the culture that bind them remains our most precious asset.
Deploying the balance of the fleet that we acquired from one standard with a long term strategic decision in support of high quality dedicated customers and only at the appropriate time.
Our customers well economics remained strong even with the recent pullback in commodity prices further.
Further operators remain dedicated to development programs supporting flat to modest production growth.
Frac market is very near full utilization and our ability to deploy fleet for long term debt dedicated customers. When the time was right and a testament to the technology scale vertical integration and supplier partnerships that we have built.
Our customers chose to partner with Liberty not only because of our market leading operational performance, but also because they recognize that technology innovation is an essential component in delivering top tier services today and far into the future.
In the most recent kimberlite survey and independent industry research firm that extensively poll of E&P customers across the industry.
Liberty was ranked the top service provider across the spectrum.
We are quite proud of the results in that survey.
Demand for our next generation E. Frac fleets is strong and will soon be on customer locations starting in the latter part of this quarter.
It will set the standard for the lowest emission technology in the market with superior performance durability and reliability.
We bring our unique solutions driven technology focus to all parts of our business. This quarter. We are rolling out our next level set no logistics automation software that fully integrates with our Oracle cloud ERP systems to continue to improve on our industry.
Leading logistics operations.
Our technology partnerships further our research into areas complementary to our business.
We recently announced an investment in nature on energy, a global pioneer rapidly scaling up an exciting Prussian blue sodium ion batteries battery technology that could have a role further enhancing our <unk> practice leaks.
We believe this technology will be used at maximize uptime and potentially provide peak shaving ability to optimize generator utilization and ensure the lowest possible emissions footprint for onsite power generation for did you frac fleets.
We're also partnering with <unk> to help advance geothermal resource development for dispatch a bowl reliable base load grid power with low carbon intensity.
We will have more to say about this on our next earnings call.
We are continuing to execute on our disciplined leadership of the Frac industry as we seek to drive superior long term financial results and support our customers to deliver a secure supply of reliable affordable and clean energy that the world in a time of global insecurity.
The foundation of technology and long term partnership commitments drive this superior financial results that has enabled liberty over the last 10 years to have an average cash return on capital invested that is triple the OSX and is over 40% higher than the S&P.
500.
Global macroeconomic concerns are mounting with rising interest rates elevated inflation levels, Chinese COVID-19, lockdowns and slowing industrial activity. Despite.
Despite these headwinds oil and gas markets remained tight in the third quarter and remains so today.
And as we look ahead risk to the delicate balance in oil and gas markets comes from both the demand side and supply side.
A mild recession may only modestly impact the global demand for energy and it is likely already reflected in commodity prices, but it is deeper global economic downturn would result in further demand contraction.
The Covid loss challenge in China May also persists longer than expected further pressuring near term commodity prices.
On the other hand constrained global oil supplies are the dominant force behind higher commodity prices and the outlook for needed future supply growth looks highly uncertain.
OPEC plus is preemptive cuts to production quotas are expected to translate into reduced production from the few countries actually producing at their stated quote is mainly Saudi Arabia, the United Arab Emirates and Kuwait.
So far Russian oil exports have only been modestly curve since the Ukraine invasion.
Some exports that were previously set for Europe had been redirected to Asia. However, the impending sanctions on Russia, seaborne crude could meaningfully lower global oil supplies as tanker capacity constrains rushes ability to redirect all the payrolls to Asia where storage.
<unk> is already reaching peak levels in.
In contrast, distillate storage levels in the U S are at 50 year lows.
Myriad supply risks abound from countries like Libya, Nigeria, Iraq and others.
Historically low levels of global spare oil production capacity low worldwide oil and gas commercial inventories.
And low global strategic petroleum reserves.
All the direct a direct result of an eight year period of global under investment in oil production capacity and infrastructure make today's oil market balanced fragile.
Despite the endless happy talk of an energy transition long term global oil demand.
Has been growing steadily over the last 30 years in the 19 nineties demand rose at a one 1% compound annual growth rate in.
In the two thousands the compound annual growth rate was again, 1.1% in the 2000 and hence the compound annual growth rate was slightly higher at one 2%.
This trend was briefly interrupted by Covid, but long term global demand continues to rise and assuming it continues even at a reduced 1% compound annual growth rate over the next decade.
Equates to over 1 million barrels per day.
Per year of incremental demand for oil.
Surveying the global centers of oil production today does not bring high confidence on where these additional barrels will be coming from.
North America is likely to be the leading supplier of these incremental barrels which is quite bullish for liberty's business in the coming years.
The natural gas outlook remains similarly tight dominated by rising demand across the world.
During the first half of 2020 to the U S became the largest exporter of LNG in the world.
A notable achievement since we were the largest natural gas importer, just 15 years ago.
Today U S. LNG exports are significantly higher than last year, despite the Freeport LNG facility outage.
LNG export facilities under construction will expand export capacity by nearly six Bcf per day, an increase of over 40% over the next three years from current export capacity levels.
In today's tight gas markets abroad. These molecules are in high demand as evidenced by the growing energy crisis in Europe , which has led to a rise in competition for LNG gas supplies that typically headed to Asia.
In the U S natural gas demand for power generation is at all time highs and likely continues for the foreseeable future.
Additionally, the demand from the re shoring of energy intensive operations, including within industrial and petrochemical industries supports a strong demand pull for U S natural gas.
Together. These factories are factors are likely to strengthen the demand for secure North American energy.
Combination of capital discipline, among the top public operators and very tight supply chains, particularly the Frac services market are constraining today's activity levels to deliver only modest U S oil production growth.
Today's frac market is relatively tight with near full utilization of available capacity.
At a limited capital being deployed in the Frac market is expected to be primarily directed towards the Buildout of next generation Frac fleet capacity at levels, roughly sufficient to offset aging legacy equipment.
Heightened service supply has made service quality and reliability top of mind for customers.
Next generation fleets are also highly sought after these two factors further strength that liberty's competitive position.
Liberty's outstanding technology operational prowess and customer focus has delivered acceleration in our financial results throughout the year.
We're proud of the Liberty team and our top notch customers and suppliers, we are well positioned today and have an exciting suite of new technology developments underway as we move into a strong market in 2023.
With that I'd like to turn the call over to Michael stock, our CFO to discuss our financial results.
Good morning.
Liberty had an exceptional quarter.
At 26% sequential increase in revenue translated into a 40% increase in net income and a 41% expansion in adjusted EBITDA.
The Liberty team delivered outstanding results on strong execution across the board the cadence of our quarterly results is a testament to the hard work of the entire organization.
Third quarter revenue was $1 2 billion, a $246 million or 26% increase from $943 million in the second quarter our results were.
Driven by strong activity improvement with nearly half of the sequential growth related to the deployment of one stem Maguire fleets. We also benefit from modest pricing improvements during the quarter.
Net income after tax was $147 million increased from 105 by the end of the second quarter.
Diluted net income per share was 78, six compared to 55 seats. This year in the second quarter.
<unk> included a 9 million dollar fleet startup costs incurred for fleet deployments at $29 million non cash charge for the remeasurement of the tax receivable ratings and a $3 million gain on investments.
General and administrative expenses totaled $50 million, including noncash stock based compensation of $6 million.
<unk> increased $8 million sequentially, primarily driven by performance based compensation inflationary egg and activity increases commensurate with the growth of that business, including investment in platform My T systems and other process improvements support our continued expected growth.
Net interest expense and associated fees totaled totaled 7 million for the quarter.
Adjusted EBITDA increased to 277 billion or 41% increase from the $196 million achieved in the second quarter.
In the quarter the tax receivable agreements related to our up sea structure at the time of <unk> IPO were required to be re measured and resulted in a $29 million.
Noncash charge in the third quarter. This resulted in a 17% effective rate on the combined income tax and TRA expense lines.
As a reminder, the second quarter of 2021 prior losses juice. The Covid downturn resulted in Liberty recording a valuation allowance on a portion of deferred tax assets and a remeasurement of the TRA liability as required by U S GAAP as.
As a result of our strong financial results in recent quarters, we believe in the fourth quarter of 2022 and will no longer require a valuation allowance on deferred tax assets will again niche of the Tia right in.
In Q4, 2022, we expect the release of the valuation allowance and the related Remeasurement of the TRA along with a provision for tax for the full year 2022 results to equate to approximately a 24% combined effective tax rate in the quarter.
We expect 2022 cash taxes to be approximately $7 million for the year.
In 2023, we expect approximately a 23% combined effective book tax rate of which we expect to pay about one says that in the U S cash taxes.
We ended the quarter with a cash balance of $24 million and eight days of 230 million, Nick did increase by $17 million from the second quarter due to an activity driven increase in working capital.
And $17 million of cash utilized to execute the share buybacks in the quarter.
<unk> 16 basis, yet, we had $150 million of borrowings drawn under our ABL credit facility total liquidity available.
Under the credit facility was $298 million.
Net capital expenditures totaled 95 million on a GAAP basis in the third quarter of 2022, which include costs related to fleet deployment did your Frac fleet construction and ongoing capitalized maintenance spending.
The fourth quarter, we expect approximately flat sequential revenue growth.
This is primarily driven by a full quarter of contributions from crews deployed in the third quarter basically offsetting normal holiday seasonality.
We also expect relatively flat margins as the contribution of incremental fleets will be offset by ongoing supply chain operational and inflationary pressures.
<unk> and commodities raw materials and labor costs.
As we look forward the global energy supply and demand balance supports a constructive backdrop, but north American production over a longer duration oil and gas cycle.
Let me continue student base in the early part of the cycle to build at a competitive advantage and maximize free cash flow over the long term.
Capital expenditures allows the on track for the full year 2022, there is a potential for some amount of Q4 spending to slip into Q1 of 2023, resulting from supply chain delays.
We reiterate it through the year, we have significant flexibility in adjusting our capital spending targets, depending on economic conditions customer demand.
The expectations.
Our increased free cash flow generation capability of that business supports our capital allocation priorities disciplined investment to expand earnings per share balance sheet strength and return of capital to our shareholders.
Third quarter, we announced a $250 million repurchase share repurchase authorization and in the quarter, we repurchased two 5%.
<unk> 7 million of our outstanding shares for approximately $70 million, we now have $180 million remaining on the authorization.
In addition, we announced the reinstatement of a quarterly cash dividend recover samples or five cents per share.
Beginning with the dividend payable in December 2022, we are confident in our ability to deliver leading return of capital strategy that combines the cash dividends and opportunistic share repurchases to drive significant value for our shareholders with that I will turn it over to Chris before we open the Q&A.
Thanks, Michael.
Recent Russian drone and missile strikes have damaged or destroyed over a third of Ukraine's power stations and numerous fuel depots that targeting is obvious.
<unk>, the country's energy system, and new apparel, everything else, making life much much harder for Ukrainians.
World is rightfully outraged at this cruel strategy.
First of all the Bandra Lion President of the European Commission called these attacks war crimes.
Yes, imperiling, our own energy system through the political process remains a front burner priority for many politicians and actavis.
Surely this is only possible because most people still don't appreciate that increasing roadblocks to hydrocarbon development and infrastructure are highly destructive with no offsetting benefits.
For example, restricting hydrocarbons and heavily subsidizing intermittent weather dependent renewables has severely compromised our electricity grids from California to Texas to New England.
England is warning of blackouts this winter due to potential gas shortages, even though the mother of all shale gas reservoirs is next door.
Got access to this gas is blocked because new York state prevented expansion of the gas pipelines harming tens of millions of Americans.
New England has generated millions of megawatt hours of electricity this year burning oil because sufficient natural gas with either unavailable or unaffordable.
Copious biofuel subsidies and a growing regulatory burden have led to the shutdown or conversion of multiple American refineries.
Contributing to skyrocketing diesel prices and U S distillate inventories now being at their lowest October level in 50 years.
Could go on but you get the point.
That's all checked our desires to be fashionable or here when we talk about energy.
Energy is so critical to human well being that we must speak honestly candidly and frequently.
Come back the increasingly damaging plague of energy ignorance and has taken over our country and much of the western World.
With that I will now turn it over to the operator for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one telephone keypad.
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To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Uh huh.
Our first question will come from some route and well.
Bank of America.
You May now go ahead.
Hi, good morning, guys.
Mike can I just start with a quick one just that we all know in terms of your fleet Count you said do you reactivated six fleets in the third quarter can you can you remind us where you are right now.
Should we include all the peaks or did you frac fleets.
And on top of as well.
Yes, so we don't give that precise numbers, but we were mid thirties before I'd say, we're low forty's fleet count today.
And it's not going to move much from there I think as far as bringing out additional fleets from legacy equipment that's done.
We do have DG projects being constructed.
The first two they come out if that customer relationship.
Horizon for that equipment is compelling and those might be additive fleets.
But only if it's compelling and the other big challenges as you know of course as humans and staff. The humans are what dominate the asset or of a frac crew of a fleet. So our frac fleet count today, and low forties, and probably doesn't move much from there throughout the next year.
Michael you want to elaborate on that or I.
I guess one.
Okay, Okay, no it sounds so gladstone, but it sounds like it just got pulled forward thinking we're talking about low slot. These last quarter as well so that's not bad okay. Good.
And then on the Capex.
Mike you were talking about some capex that should be moving from the fourth quarter to the next deal that all makes sense, but can you quickly update us on what should we expect for next year's Capex because last quarter, you were talking about that being at or slightly below 2022.
There's no real change to that at the moment, that's really where we're expecting thats still the general expectation.
Okay, Okay, perfect and from the bottom up as a pure investment in compelling returns improve.
Improved over the last 11 years of our history.
We will invest in those where they make sense and I think we've done a very good job providing return thresholds.
Right right right, Okay, perfect, Okay, guys who've done it back thanks.
Our next question will come from Derek <unk> with Barclays. You May now go ahead.
Hey, good morning, guys. So normally we're talking about budget exhaustion in the fourth quarter guidance doesn't really suggest that more and more just the typical seasonality can.
Can you remind us what's different this year than years. Prior is there more worry from the e&ps that if they lay down rigs or frac spreads they won't get them back.
We have to remind.
Investors and ourselves that what seasonality looks like and maybe why you won't see that budget exhaustion that we typically see just given the tightness in the market just some thoughts around that I think would be helpful.
So Derek I think you said that about right operators biggest concerns right now our security of supply, particularly security of supply of competent reliable crews. So yes. There is a larger hesitant tad suspend operations for the last few weeks of the year then there typically is.
Now for some people that is the right thing to do and that does fit their budgets.
FERC.
Long term.
Key customers of ours, if we've got other places we can temporarily deploy those crews to bridge that gap in today's market, that's not hard to do well see some of that but yes, I think not not the usual amount you typically see in December but theres still a holiday season, one of the things we do at Liberty as we shut down.
Our crews all of them for 24 hours and in some cases twice for holiday parties and celebrations, we got to keep our our people working hard to be pumped up and excited are those are those are important events for us. So there's always a little bit of holiday and weather slowed down even without budget exhaustion.
And we were not as good.
Eric we're returning to more of the pre 2018, the more normalized.
Long term planning of the E&ps, where they've got a steady steady cadence of.
Spending throughout the year I think the change too.
That happened in 2018 kind of caused a ripple effect for two or three years until it was interrupted by Covid, but I think we're back to more normal sort of like standard.
Good.
Planning for the E&P companies.
Okay, No that's helpful and I appreciate the comments there.
My next question I, just wanted to touch on which I think is underappreciated part of this market as the the repricing effect and then the profitability expansion.
Certain investors are worried that if we see a peaking rigor frac crowd frac out maybe that just marks the peak in North America's Donovan, maybe walk us through from now through next year, where that might not be bad for your profitability, whereas you have the repricing effect and maybe the vertical integration to continued profitability expansion, maybe some some thoughts around there is where we can see on lora.
<unk>.
<unk> fleet Count that you just mentioned where the earnings power and expansion can come from as far as the repricing effect of the tail end of your fleet count.
Yes Derrick.
Obviously, the market is tight and it's been floating up pretty at a rapid pace in the first part of this year, they're still a tailwind of pricing pressure pushing up today, but I.
I think most of the reset of price is probably happened still a little bit more and yeah of course, there is some fleets reprice often so they kind of followed the marketplace. Some of them are locked in for longer time periods. So yes, we will have some positive pricing resets happening.
Around the end of the year, but yeah economics are good today for us it's both quality of service how much efficiency, we get done in a day, that's a big driver of profitability and a lot of it is our internal assist internal systems, how can we get more efficient deliver a higher quality service at a lower cost.
And of course, lower means lower than it otherwise would be without technology. There is still that that backdrop of inflation parts and equipment and stuff like that that we're contending with and we continue to focus on expanding the shoulders of air earnings potential as we say, we take more of the wallet of the vertically.
The greater company and a large number of ways and we get more and more efficient in delivering all of our services, we still always a lower cost per lateral foot Tibet customers at a higher profitability for lateral foot of a fleet. If you like for us and I think that's the key thing of what we're doing that continued expansion comes from always being that technology leader and <unk>.
Really as you've seen.
As always it general trained a flight to quality from our customers to the quality providers, who can provide that steady.
Good service that they really need to plan their business and that allows us to have a surety of demand, which means again based on the technology was expands it profitably every year, we didn't keep with the same fleet count and continue to expand our profitability.
Got it thanks, Chris Thanks, Mike I'll turn it back.
Thanks.
Our next question will come from Stephen <unk> with Stifel. You May now go ahead.
Thanks, and good morning, everybody.
The.
Well when you think about I know you don't give us the exact fleet count, but when you think about second quarter to third quarter and I think your step outs.
EBITDA per fleet was about 5 million Bucks give or take can you kind of talk about that bridge and kind of the driving factors of that and then and maybe on top of that is there.
Seasonality is there any reason the pricing youre seeing it shouldnt take that number up next year.
Right. So it's a combination of effect, obviously, you've got a significant amount of fixed costs.
$5 billion company right that as you grow your earnings you absorbed those quicker that's why that's one of the sanctions we had a tailwind of pricing has pricing moved up.
And we also had an amazingly so whilst we're adding six fleets and increase our efficiency and activity from our crews our offerings Ryan's team.
Absolutely and ugly sort of like the performing at top level out there and I think that's a key thing and I think some of the background services, whether it's water et cetera. So there's some of the early struggles with sane water trucking et cetera from the first half of the year, yeah, that's getting lined out and getting a little bit better so.
We gave we're getting population getting contribution from all of those and as it comes to next year No. I mean, I think you've got some fleets now that I said, if you kind of give it a number of fleets that are really at sort of where market pricing is now we've got some that are slightly beyond that a little bit.
Below market pricing that will reprice, but obviously one of the key things about next years, whereas the long term.
Sort of like if the market is going to be as far as the others.
Rising.
Where oil prices go debate that we may have some small headwinds in the short term, but we think there's a very long runway for a strong call on U S oil and gas production, which we think.
The who as well the strong earnings for us for a number of years to come.
Great. Thanks, Michael and then when you think about it.
And I know you talked a little bit about capex, maybe sliding into next year, but even with that I mean, your free cash generation in 'twenty, three and probably 24 looks looks very very strong what do you do with it I mean, assuming there is no acquisitions and obviously you reinstated the dividend, but do you do more.
Aggressively give capital back to shareholders.
A thought process or a framework in mind.
And how investors should be thinking about that.
Well, yes, it's a topic of frequent discussion among the leadership of the company with our board.
Because yes, I do think in the next few years, one of our biggest decisions will be capital allocation what to do with a lot of free cash flow coming.
And again, we will never adopt a formulaic X percent will go here because share buybacks for us depend upon the price at which we can buy stock back and the delta between that price and our estimate conservative estimate of intrinsic value.
Share buybacks are likely going to be a large part of capital allocation in the coming years. Obviously this year there they are the dominant piece.
Returning cash to shareholders, we have restored the dividend we started years ago, and we intend to pay a regular quarterly dividend going forward, probably modest growth rate net dividend as well, but our business is always going to be cyclical. So we're never going to have a huge quarter.
The dividend because our results are.
The results are likely to remain cyclical.
And then the other.
Big thing is keep a very strong balance sheet, we never know whats coming the next downturn when it arrives probably not going to give us warning of ways in advance. So we're always going to have a strong balance sheet.
That's that's that's served us well and making the last two downturns, both pretty severe making transformative acquisitions.
And then we're always going to invest in technology and things that make our company better and build our competitive advantage versus our competitors that allow us to provide higher quality services.
At a lower cost and in a safer setting so technology investments are there an acquisitions, yeah look we've never been a consolidator per se, but if there are acquisitions that as Michael said broadened our shoulders allow us to increase the profitability per fleet.
The economics of those acquisitions are compelling and we're always looking at that we're obviously not much of an acquirer, but we're always looking when there is compelling opportunities and today. If you if youre going to acquire stock cashes cash is much more attractive than stock given the valuations of our stock right now and our cash generation, but again.
So it is it is a bottom up day by day decision on that.
Not a simple formulaic answer to that.
Alright, great. Thank you for the color Chris.
Thanks Steven.
Our next question will come from our team Motta with Goldman Sachs. You May now go ahead.
Hi, Thanks for taking the question.
Chris and Mike there's been a few new builds that you've been hearing about and there's more fleets being activator now help us understand the shape of the supply.
In terms of the capacity supply curve between these additions and the attrition that you think will and you're going to ADP.
Yeah, I think again, it would be hard to predict the future, but the market is tight and we certainly don't see anything that's that meaningfully change that going forward with good profitability today are people trying to hang on to that last legacy equipment get the last bit of juice out of that show.
Sure, but ultimately I think youre seeing today, some degradation among older lower quality frac companies and their ability to deliver efficient services. That's both a human maybe mostly human challenge in stress in today's marketplace, but also legacy equipment, if not properly invested in.
It has a finite lifetime so.
The.
We think the market stays tight I don't I don't see a meaning unless we have some large drop in commodity prices and a drop in <unk>.
A drop in demand for Frac fleets I think the market stays quite tight really as far as we can see certainly through next year there'll be some new fleets coming out we do keep a count on that could that fleet count be a few more than the amount of capacity that's going to age out it wasn't like a whole fleet will be laid down but one by one.
As pumps go down and the exit permanently I don't think we have much higher active frac fleet count a year from now than we have today and in our bottom up survey of customers. The demand for fleet next year is slightly higher than the active fleets today, but not a lot.
Got it and then talk to us about the neutron investment than what the what that potentially means for your fleet mix over time would you want to eventually entire these kind of one on these kind of technologies and are there other such investments that you are looking at what are the size of our investments or acquisitions do you have in mind.
Well as you can see with the nature of an investment that's giving us a modest investment but it is it's a unique situation with really a different battery technology.
<unk> dominates our variance of that dominate today because it has the highest energy density for this 100 pound box you can store the most energy in that configuration, but its got serious problems with it.
Discharge superfast.
It wears out those batteries don't last very long because those items don't fit fabulously well in that material matrix.
And as you see all the time, it's got a fire risk and a hazard. So look if you want highest energy density that that's the best we got today, but with the crushing blue and sodium ion you've got a different battery configuration that allows a very rapid discharge. So we got to shave a peak off.
During practice, we can draw power out of those batteries very fast.
The sodium ions or just a perfect fit size wise in that Prussian blue Crystal matrix. So you've got what you should have much longer lives of batteries you don't have the thermal instability risks and fires. So we think it's a new technology for us for what we need we're going to run.
One large generators at high thermal efficiencies with minimum emissions.
Deliver a low cost sources of energy and the lowest possible emissions and that's aided by <unk> by.
By shaving off.
Spikes in demand that happen Episodically drove fracs. So yes, we're quite interested in yes, we will see where that goes but again look at it it's a modest investment to be a partner with this neat upstart company and probably an anchor and potentially an anchor customer going forward.
Got it thank you I'll turn it over.
Yeah, let's say on the size of investments as we look we look at all different sizes, but again generally they focus on technology and places where we can get a real technology advantage in what we can bring to the bring to the market.
Yeah.
Got it thanks.
Thanks.
Our next question will come from a room Jairam with Jpmorgan you May now go ahead.
Yeah good morning.
Wondering if you could give us a sense of the vertical integration and what its meaning to your earnings power.
And as you know maybe more specifically.
You know today, how much of your EBITDA would you estimate is generating outside of pure frack between prop ex <unk>.
Wireline sand mines et cetera.
Look it is dominantly Frac frac is the big piece of that business of course, there is additional earnings from those.
Integration companies, but what we did those deals not just for that additional earnings which is not.
Not trivial, but it's dominantly frac, but theyre also to make sure that frac runs at high speed.
Having access to sand is not only profitability on sand, but it is to lower your risk of being ever waiting on sand or having quality problems with their sand supply. So we look at these vertical integrations as businesses in their own right, but at least equally important are important as enablers of the core.
Business of Frac.
As Chris said, you, we really have one segment to our business and that's one segment for reporting and everything else and that is frac because they're all very very interrelated. They final efficiency of delivering that sort of compete that stimulated lost lateral foot.
Got it and just my follow up.
Chris you guys acted.
Pretty aggressively on the buyback you bought back 70.
$1 billion of stock in the third quarter to have $180 million remaining.
The question is from the buy side. This morning, we've been getting is just on the slumber J.
Some are Jason highlighted how it's an ownership of Liberty's noncore, holding I think they own around $400 million of stock today.
Thoughts on maybe using the buyback to mitigate the impact of this overhang.
Yes, I mean, what they decided to do with the shares certainly up to them I don't know, what certainly can't speak for them, but from the from the Liberty side. Our goal with buybacks is to increase the value of each share that's out there. So it's really price dependent.
And without stressing the balance sheet, but yes.
Are we interested in acquiring more shares buying back more shares of Liberty stock at an attractive valuation absolutely, but again, the aggressiveness at which we'll do that just quite price dependent.
Great. Thanks, a lot Chris.
Thank you.
Yeah.
Our next question will come from Waqar.
Car speed with HEB capital markets you May now go ahead.
Thank you and first of all congrats on a great quarter.
Chris you've got you've got about 8 million tons of Frac sand capacity could you maybe tell us like what's the utilization level right now you're running 100% odd.
What is that level.
Yeah again, we don't bring.
Again, the details of that but yeah, absolutely, 100% we've done.
Some modest investments to optimize throughput to optimize the cost of mining, but yes. The sand resources, we operate are running full out.
And just just broadly.
I don't need a specific number and how much of that is running through liberty and how much is running to third parties.
So the vast majority of that sand runs through Liberty fleets.
A big move years ago, they're all the E&ps, we're gonna be self sourcing of sand and look we were we were skeptical of that idea then and will remain that way and the reason is think of our business. We've got over 4000 employees logistics is central to our.
Yes.
If every aspect of logistics isn't running the frac fleets not running so I think it's just it's much more core to our business into our customers' business. So yes. The vast majority of the sand Liberty pumps and Thats not just in the Permian, but elsewhere is sand. That's that's purchased delivered and handled by Liberty not all of it but.
The vast majority of it is.
Okay, and then in terms of how you charge your customers on that sand that's running through the system is that all on what the spot rate is today or do you have some.
Contracts, that's keeping those sand prices the current debt.
That's a portion of that sand is not really rising spot prices.
But in almost all of our business, we're not a spot player. We're a long term partnership player with our customers on Frac and usually sand is together with frac.
So yes that is not riding they're playing the spot market. That's long term committed partnerships with our customers on.
Price of course adjust with time and with college sort of pointed out that the vast majority of all sand that's pumped in the oilfield.
Is pumped on long term contracts right you hear Joe here about spot pricing in West, Texas, and other places et cetera, but the reality of the fact that it's the minority of a of the vessel of the leading edge of a minority of sadness pumps. The majority of stuff that the big sand company, so not to us and not service companies will become self sources.
Is all sold on long term.
Contracts, there's a very different price the spot price that you hear about so I think that's something that the I think it's probably a little misunderstood in the industry.
Sure. So just just on that topic, if you could generally just describe what portion.
Well what is the gap between where the spot prices are today versus what you realized pricing is at today.
For us I'll talk generally as far as the market goes right. I mean, just if you think about west, Texas, I mean people over here spot prices, probably average in the mid Forty's ish, maybe a little maybe mid to high voice and I will say if you. If you polled the whole of West, Texas, I think youll find that the majority of the sand average.
Is probably being pumped at the mid twenties less tons, that's a price per ton at the mine heat right. So and generally that you asked about where the general Sandbaggers I think if you ask any of the exempt provided let's say silicon or a few others I mean, I think you'll find you get roughly those numbers.
Thanks Scott.
Thank you.
Thanks sure.
Yes.
Okay.
Our next question will come from Scott Gruber with Citigroup you May now go ahead.
Yes, good morning.
Good morning.
Just had a question how you think about the kind of multi year investment.
Did you correct.
And if it's demand is kind of flattish next year.
It's kind of flattish in 'twenty, four but rates are holding at these healthy levels.
The pace of the <unk> investment continue.
You know call it four four points a year.
Does it moderate how should we think about that kind of a multiyear investment and thank you Frank.
In a flattish environment.
Yeah I get it all those decisions are just wanted to time bottom up but yeah.
Three or four fleets a year is it.
Again, it could be much less than that it could be more than that but that's probably.
That's not out of the realm of reasonable we're doing individual decisions with customers with partners.
One one at a time.
But yes, I think that the long term economics of these fleets and the long term performance of these fleets.
Are likely to prove quite compelling to customers and therefore compelling delivery.
But we got to balance that because it is just one possible use of capital.
Yeah got it got it got it and can you discuss what you're seeing from an inflation perspective with respect to maintenance recently heard from <unk>.
A land driller.
Closed.
A pretty sizable step up in maintenance for next year. What are you guys seeing and how should we how should we think about it.
Yes, well, we didnt cannibalize generally this significant amount of inflation over the last year or two.
Really we are trying to hold that steady their historical levels due to technology instead of design changes, except for Scott, but yes, I mean, obviously, you know about sort of the inflation rates that are going out there related to steel and everything else. So we're still sort of tracking sort of as a general same sort of historical range that we have.
And again I think we really did invest during the downturn, we didn't capitalize some of our older equipment. So we don't have any sort of like early spike like they were talking about.
Thanks.
Got it thank you.
Our next question will come from Marc Bianchi with Cowen you.
You May now go ahead.
Hey, thanks.
I wanted to ask on the did you frac deliveries that you have upcoming it seems like that's slipped a little bit from the original plan. It sounds like partially due to supply chain, but maybe you could talk to the confidence that you have in those now being delivered in the later part of this quarter and then when they're delivered I, if we just assume they're incremental.
Should we be seeing an immediate uplift in.
Profit from those fleets or is there sort of a shakedown period, what gives you confidence in kind of.
Getting cash flow out of those on day one.
Right, Yeah, no you're very confident in the delivery.
<unk> supply chain issue that sort of really sort of put those back a little bit.
Body was fighting no it didn't even though they're going to be incremental right. These those teams theres going be a transfer as well as that equipment transfers into that team and so when you're thinking about modeling incremental I would.
Do anything from that which was taken at older equipment, and then moving it to another customer in or you or extension with that customer and then <unk> got in the next quarter, because you've got a high that people think the way to look at it from a modeling perspective.
Okay, and just from a industrial perspective is there a is there a period of you know.
Making sure that these things are working as expected or.
What gives you confidence around kind of the ability for the first of a kind fleet to be fully operational as you expect.
We've got pilot pumps out there right now pumping the performance has been outstanding it is a new system, where things coming together are there going to be issues that we're going to have to iron out Kinks on absolutely.
And of course, we're going to face EMEA, they're going into a fleet that's already running while at the same humans that will run the new fleet.
So our new DG product pump and generator will come in and work together with the existing fleet. So there'll be sort of phased in as the fleet has converted over but youre right. Its a new technology and a new system that we've spent years developing so are there going to be wrinkles and challenges and I mean, that's happening right now absolutely.
Our goal has always been that to the best fleet at the end of the day don't don't cut corners to be a little bit faster or meet some timeline we want to.
The idea is to build something truly differential here.
Yes.
Makes sense, Chris Michael if I could just squeeze one more in real quick on the tax and the cash taxes for next year.
I hear you on the third of that.
The book tax how long would you what's your cash taxes be below the book tax if sort of twenty-three continued forever just trying to understand the runway. There generally say youll probably be just that I mean, really 2024 hours about where their balance.
We slightly below because of the TRA sightings et cetera, but that I think the a couple of percentage points. So I would model in being even from 2012.
Super Thanks, so much I'll turn it back thanks.
Thanks.
Our next question will come from Roger read with Wells Fargo. You May now go ahead.
Yeah. Thank you good morning.
Right.
Chris maybe a question for you kind of follows up a little bit on the last one you talked about integrating some of the.
Frank did you Frac stuff in there I was just curious as you look at the pricing you are putting through the net pricing you're achieving.
And the new equipment do you think you're at this point close to pricing.
Did you Frac brings to the market or is there an uplift there relative to conventional approach.
I mean look this Doug.
The obvious thing is issued the difference between diesel and natural gas pricing as a power source. Today is just huge I mean, that's it so number one two to the customer there is just a dramatic cost savings and remember that this is a highly high thermal efficiency, it's actually going to burn much less gas than the small turbines that are out.
They're powering fleets. So there is a meaningful cost saving advantage in digi frac.
A huge interest in that there is a lower emissions component and ultimately we think.
There's going to be also a meaningful performance uplift, but probably a fully realized value of all of those pieces, that's going to take some time, we got to get them out there approve them shouldnt see them I mean people are paying a premium for them today, but will that premium likely grow in the next 12 months I think I think are highly likely.
So definitely some some things to think about on the longer term there.
Changing gears, a little bit Michael for you as we think about the big build and.
Working capital this quarter following up on sort of the cash tax question, how should we think about.
Seasonal slowdown potentially affecting that or are we just.
Ms ramping out there for a period of general consumption of cash on the balance sheet.
Yes, generally our working capital amounts to follow that revenue right. So Q4 is going to be relatively flat working capital will be relatively flat.
We will have growth next year working capital will grow in line with that top line growth and really it comes down to at DSO is unchanged at <unk> two major drivers as it really as you think about it you can just model those in line.
That's it for me thank you.
Thanks, Ron.
Our next question will come from Luke Lemoine with capital One Securities you May now go ahead.
Hey, good morning Piper Sandler.
Chris just a question on your next Gen fleet investments kind of on a go forward basis can we assume that these are almost all does your frac or is there still a component of customers asking for tier four DGB upgrades.
It will be a mix of the two we're still doing fleet upgrades tier two to tier two dual fuel tier four to tier four DGB. So look it's it's probably gonna be dominantly skewed too dingy frac, but not necessarily exclusively thank.
I think of it like this when you're completely blow up in engines youre going to replace it with like a tier four engine, you're going to replace it with a tier four dual fuel.
So it's more of an incremental boost.
Is that a part by part basis.
Okay got it thanks, so much.
Thanks Luke.
Our next question will come from Keith <unk> with RBC capital markets. You May now go ahead.
Hey, good morning, and thanks, I just wanted to maybe start off on your customer makeup and any commentary you can give on the publics versus privates and your current fleet count and how does that marry up with the results of your customer survey, calling for slightly higher fleet demand next year versus this year.
Yes.
We don't obviously published are the Liberty Frac fleet Count region by region, but you know look I think you're seeing.
Where our fleets are deployed reasonably reflective of who are running drilling rates private scenario like 55% of the loan rates are 55% of the activity.
<unk>.
We're a very small slice they grew a little bit.
A fair amount during COVID-19, they're probably coming back slower than the others. So yes, maybe theyre going to be a little bigger contributor to growth going forward than private solar projects keep running hard out of the gate.
So there'll be a little change of the mix next year for sure, but not a huge not hugely.
Got it thanks for that and maybe just follow up stepping back a little further would you say the last six months has altered your view on what you see is a mid cycle profitability per fleet and kind of that $14 million to $18 million, whether its core pumping profitability or opportunity to increase vertical integration through time.
Oh, Yeah, I mean, there's well there's one is sort of the supply and demand in the market conditions that drive that cycle and we're mid cycle isn't yet right now things are strong and the outlook still is pretty good. So yes. There is.
It could be a more positive macro cycle.
Then the last one or two we don't know.
There's a good chance that answered, but it looks like it so far and then there's also this sort of self help things that we can continue to improve internally to just have a better differential model than our competitors and that's also an inflator and our profitability.
But I, probably shouldnt comment any more beyond that Michael do you want to add you know the other thing is obviously our investment in next generation fleets, which drives down.
Cost of operation and drives down fuel costs I mean, that's all in place, but the technology is being driven by US based on the capital is bias. So obviously that will accrete to us and therefore increase at mid cycle.
Perfect. Thanks very much.
Appreciate it.
Our next question will come from Dan <unk> with Morgan Stanley You May now go ahead.
Hey, Thanks, good morning.
I just wanted to ask I guess about the labor portion of the supply chain.
But you guys were able to staff those six.
Incremental seats I think you said in.
A 90 day period should we read that as.
That kind of had some labor challenges are abating somewhat.
I'd be able to accomplish that in spite of not really seeing relief on that front.
Well the labor challenges definitely are abating, a little bit I mean nine.
Nine months ago, 12 months ago, just crazy hard I would say labor market today is still very tight still.
If you got rid of the last two years I would say, it's probably the toughest hiring market. We've been in since we started the company.
That's the caveat was it was worse. It was worth 12 months ago was worth six months ago. So labor problem is slightly improving.
Ed.
So that is true, but also I. Thank god, our dedicated recruiting team and maybe just the character of the crew leaders all of the people leading these crews new cruise they've all been with Liberty for a while.
And so between recruiting and those crew leaders.
We think a little bit of a different atmosphere to welcome people into so my hats off to our team that did a great job in a challenging market.
Great.
Got it.
And then maybe just.
Kind of thinking about the other components of the supply chain and you guys have made some comments on some of those.
Comments already but just wondering if you can kind of roll up any trends that youre seeing in some of the other parts of the <unk>.
Supply chain, whether things are improving moving sideways getting worse, just any general thoughts outside of labor would be great.
There is still meaningful challenges.
<unk> equipment.
Engines and engine rebuilds, which are a big part of our industry. They are they're still on allocation. They are happening, but there is still there's still challenges there there are still challenges there.
Slight improvement in the sand logistics market over the road trucking rates have come down so you've got some more truckers that have come back to the <unk> coming back to the oil patch. So we're seeing some relief there I'd say chemical markets reasonably flat probably.
They're better than they were earlier in the year and that's sort of the main issue I would say probably the biggest struggle is still those sort of heavy equipment style electronics pods that we shared with a large amount of the other economies.
The other parts of the parts of the economy.
Great. Thanks, a lot guys. Thanks for squeezing me in I'll turn it back.
Given that Havent given.
Our next question will come from John Daniel with Daniel Energy Partners.
Got it.
Hey, guys. Thank you for including me in for going over the hour.
Just I just want to go back to the vertical integration questions that were raised earlier.
Just it sounds like you guys called out a competitive advantage, which would seem reasonable to me and I'm. Just wondering if it is a competitive advantage.
I'd say like the sand.
<unk> Liberty.
Look at.
Bolstering our sand presence outside of the Permian to support the other geographic basins you're in or.
Or should it extend into other products such as chemicals, just your thoughts.
Yeah.
Again.
It's a bottom up thing not a top down philosophical thing. So look if we've got reliable sand.
At reasonable economics, we don't have to be owning part of the supply chain, but if it looks like it's going to add to the security of supply of our business and the economics are compelling it's not impossible, we would do something like that but we haven't made some decision that we're going to own X percent of all the sand we pump we just always yes.
Philosophically, we want to make sure our fleet can keep running and we can deliver a differential performance versus what others in our industry are going to provide to customers and for us. It's what's what is necessary to deliver that.
Okay.
Well going back to sand, Chris can you guys are there any efforts to expand your capacity just with the existing operations and the Permian.
We are doing that we have done that and we'll continue.
Okay Fair enough and then the six fleets that were deployed in Q3.
I think you said all of your fleets that operate today are dedicated or I don't know if I misheard that.
If you could.
Talk about that and then the second the follow up is.
Are any of these fleets that are being reactivated or they've been viewed as a like a red term a bridge for that next for the Digi Frac such that those would go.
Back to the yard at some point and that's it for me.
Yes.
Yeah.
We don't as I said, we don't play in the spot market, which is true so but.
With the efficiency of our fleet today, there are certainly good solid sizable customers out there that are less than a full frac fleet to work, we will do all of their frac work will balance it maybe it would be call. It a multi customer fleet will balance it from others, where we may have a key customer than their workload is one five fleets and we will do.
All of that and then we'll balance that other half.
With another another customer or customers to fill that so we're not like.
Bidding on 22 things to see what we can get the best pricing on the go we don't really play that game, but we do have fleets that are moving between multiple customers and then things happen gaps open up you know somebody's got logistical problem or supply chain problem or drilling problem or an offset pad problem. So we try to always keep a suite of people that would like to.
Liberty on location that we can call up on shorter notice and moved those fleets.
Two different pads.
It hiccups happen and of course, hiccups happened and they're happening a little more than normal I would say these days and because of all the stuff we've been talking about with supply chain.
On the reactivation, yet there are customers that really want a DG frac fleets before they get a frac program going now so of course, there are some where that we've got a different fleet working for them now and add the <unk> becomes available and those things go in those those fleets will be phased out yeah, I don't think theyre good got it.
Growth in the Liberty your fleet count going forward.
Fair enough and I am just squeeze one more in for Michael. This is I don't know if you would have this data in front of you, but the addition of the six fleets and all those people.
It is pretty impressive and I'm curious as the new hires have been hired.
How many of the folks are coming that are not part of the industry already they are truly new to the oil and gas versus guys that might be our gauss switching from one service company to another.
Any color you might have handy.
Yeah.
So I'd say generally the majority of our hires from outside of I haven't done the numbers for this $3 six fleets with kind of that was.
A larger version of extensive experience we picked up a lot of experienced people with Liberty has actually seen is probably the best place to work I belief.
In the.
The industry for that for a number of different reasons the culture the schedule et cetera. So it's always a balance between the two but we have a lot of we have a low veterans, we a lot of people coming off bombs or people coming out of other industry scale coming and joining us.
Fair enough alright, Thank you all very much thanks.
Thanks, Joe Thanks, John .
Our next question will be a follow up from Stephen <unk> with Stifel. You May now go ahead.
Oh, thanks for taking the follow up gentlemen, just a quick one.
Can you give us a sense where is spot pricing now versus the prior peak.
Any sense.
We're not we're not the right guy to ask because we're not that plugged into the spot market, but.
If you're buying it means to me is there a different way the frac pricing today think of longer term or dedicate a bigger piece of fracking, it's still well below what it was four years ago.
If you are an E&P operator, there is still efficiency gains in our industry that are meaningful in driving down the breakeven cost per barrel of oil prices dropped crazy low in the COVID-19 downturn, all downturns, but and they bounce back so our profitability is back as good as it ever was but the all in pricing to a.
Customer on the other end is still well below where it was.
That's why I was asking because the profitability has gotten to such a strong level I was just curious how that relates to price. So that's helpful.
Thanks, Dan Thank you.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Chris for any closing remarks.
I, thank everyone for their time and thoughtful questions today and most importantly, thank everyone in the Liberty family and our customers and suppliers and everyone out there working 24, seven every day to make the world a better place to live I. Appreciate all of you we will talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.