Q4 2022 Liberty Energy Inc Earnings Call

Speaker 2: participants that some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses, or profits.

Speaker 3: 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-GAAP financial and operational measures.

Speaker 4: These non-GAAP measures including EBITDA, adjusted EBITDA, adjusted pre-tax return on capital employed, and cash return on capital invested 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

Speaker 5: and the calculation of adjusted pre-tax return on capital employed and cash return on capital invested as discussed on this call are presented in the company's earnings release, which is available on the investor section of its website. I will turn the call over to folks.

Speaker 6: Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2022 operational and financial results. Liberty achieved outstanding returns in 2022 with the highest earnings per share in company history.

Speaker 7: Full year adjusted pre-tax return on capital employed, ROSI, and cash return on capital invested, CROCHI, were each at 31 percent, and both accelerated as the year progressed.

Speaker 8: These results demonstrate the enhanced earnings power of our diversified platform and technology portfolio as well as our profitability potential over the longer duration cycle ahead.

Speaker 9: 2022 revenue grew to 4.1 billion, a 68 percent increase over the prior year. Net income was 400 million or $2.11 fully diluted earnings per share.

Speaker 10: Adjusted EBITDA increased to $860 million.

Speaker 11: Fourth quarter revenue of 1.2 billion increased 3 percent sequentially, and adjusted EBITDA grew 7 percent sequentially to 295 million. As continued momentum from strong execution in the third quarter and strengthening pricing more than offset weather and holiday seasonality.

Speaker 12: pre-cash flow led us to launch and expand a sector-leading return of capital strategy in 2022. We paid our first quarterly cash dividend since the pandemic during the fourth quarter, and earlier this week we upsized our July 2022 share repurchase program.

Speaker 13: from $250 million to $500 million.

Speaker 14: In the second half of 2022, we returned a combined $134 million in share repurchases and dividend payments to shareholders.

Speaker 15: We retired 4.4% of our outstanding shares since last July .

Speaker 16: And we now have 375 million remaining in our authorization.

Speaker 17: We are focused on the opportunistic execution of our buyback strategy and the speed at which we execute on our buyback authorization will be driven by the relative dislocation in our stock price relative to what we believe the intrinsic value of the stock to be.

Speaker 18: Our 2022 financial performance illustrated the value created from our actions over the pandemic years, including transformative transactions, technology innovation, and investment in the extraordinary talent at Liberty for future success.

Speaker 19: Together, the Liberty team achieved new records, whether measured by revenue, pump hours per fleet, frack stages, or tons of sand pumped, all of which were delivered while navigating tight supply and labor markets.

Speaker 20: We always strive to raise the bar of elite service quality and performance in the industry. Today, dependability and efficiency are critical to our customers who contend with meeting development plans in a tight frack market and volatile commodity price environment.

Speaker 21: The frack market is currently tight in all shale basins.

Speaker 22: In any given year, the near-term fundamental picture can ebb and flow, and today, natural gas markets are in focus.

Speaker 23: An increase in natural gas storage levels from a rise in domestic production, moderate winter weather so far, and lower LNG export growth are weighing on gas prices.

Speaker 24: To date, there has not been any significant reduction in activity in the natural gas regions despite a significant drop in gas prices.

Speaker 25: We do expect to see some industry pullback in response to gas prices, and if necessary, Liberty would move any spare capacity to oiler areas where demand for our services significantly outstrips our current supply.

Speaker 26: This issue is not a significant concern for Liberty.

Speaker 27: While markets are preparing for the most widely anticipated recession in nearly 50 years, tumult in global oil supply, coupled with today's rather low spare global production capacity, implies strong need for North American barrels in the coming years.

Speaker 28: Today's low spare production capacity is the inevitable result from years of underinvestment in upstream oil and gas production.

Speaker 29: The gradual reopening of China and rising global travel are expected to drive incremental demand for oil, even if balanced against slowing economic activity.

Speaker 30: Oil supply, on the other hand, growth remains very challenged. As the release of US strategic petroleum reserves subsides, the impact of the Russian oil products export embargo hits next month, and reduced investment across the Russian industry.

Speaker 31: gradually impacts production.

Speaker 32: The fundamental outlook for North American hydrocarbons is the healthiest liberty has seen in our 12 year history.

Against this strong backdrop, we expect many possible bumps in the road like soft, natural gas activity and elevated recession risk.

However, the multi-year outlook for North American activity is robust.

Currently, our customers and competitors are investing with discipline, keeping capacity flat to only very modest growth.

For years, EMP operators, oil and gas alike, have invested in expanding metal inventory, understanding the geology and resource quality, optimizing drilling and completion designs, and assembling their teams to execute on development plans.

Their hard work is now paying off with high rates of return, particularly in oil, even as break-even prices have increased from extreme pandemic lows.

The majors are redirecting capital spending to the attractive risk reward opportunities in North America.

Independents continue their robust shale programs at a minimum to offset natural production declines.

As North American oil and gas production reaches new heights, there is a rising level of frack activity simply required to keep our customers production flat.

Two factors summarize today's frac market. Full utilization of existing frac capacity and strong demand for gas-powered fleets that significantly reduce fuel costs. Natural gas is much cheaper than diesel while driving down frac fleet emissions.

This transition to natural gas-powered fleets is happening at a measured pace, roughly aligned with the attrition of the industry's older generation diesel frac capacity.

There is also a wide variety of performance specs, quality of these next generation fleets, and we are investing to be the technical leader.

When the shale revolution expanded to include oil basins as well as gas basins, roughly a dozen years ago, there was a building frenzy of new frack fleets.

The overhang of these excess fleets took many years to overcome.

Today, that overhang is gone and all the large players in Frac are investing with discipline.

Today, frac fleet demands sufficient to keep production roughly flat or drive only very modest growth requires all existing frac capacity.

Tighter labor markets and supply chain challenges are making it hard for the smaller players and lower quality players to keep their existing fleets running and deliver an acceptable quality of service.

Aging frack pumps and limitations to maintenance supply chains promote the attrition of older equipment across the completion market.

Equipment, equipment, in recent years has largely been scrapped or sold for industrial applications in international markets. And we see these trends continuing for the foreseeable future as gap-powered technologies take hold. For more information, visit www.fema.gov

Hence, we view the risk of surging frack fleet capacity.

supply crashing service prices as relatively low.

Of course, we closely monitor frac market conditions and would adjust our behavior if clouds appear on the horizon.

Today's tight frack market creates a sense of urgency among EMP operators to align with top-tier partners for both differential long-term technology and the outstanding service quality required to deliver on their production goals.

Over the past few years, Liberty's team has rapidly innovated to develop the most technically advantaged frac fleet with DigiFrac, and 2022 marks the first commercial deployment of these game-changing pumps.

CIGIFRACT sets the bar for combining the lowest emission fleets in the market with superior design, pump performance, reliability, and cost efficiency.

We are currently undergoing a phased deployment of our first fleet as the modularity of both our pumps and high thermal efficiency power production allows us to commission the fleet on a pump by pump basis while maintaining continuity of operations for our customers.

DC frac pumps are fully compatible with our existing conventional and dual fuel pumps as they all share our proprietary control software allowing optimization of pump operations across the fleet.

Gas-powered pumps are a focus of our innovation efforts as we look to develop technologies that are beyond the scope of what the industry offers today. Next week, we plan to unveil the world's first natural gas hybrid frac pump, part of our Digi platform.

at the SPE FRAC conference in Houston. This technology will have an even lower emissions profile than any electric FRAC fleet technology available today.

Together with our existing fleet, our suite of pump and power technologies will enable fit-for-purpose, customizable solutions.

With the breadth of equipment, we will be able to pair DigiFrak with dual fuel technologies to optimize gas consumption under a variety of circumstances.

Customers will also be able to leverage a combination of available crib power and Liberty's generators to power a fleet and consume any type of gas, including fuel gas, CNG, or LNG.

This suite of new technology developments will allow customers to have an optimized solution to match their needs. All will include a fully electric backside, proprietary quiet fleet technology, and the lowest possible emissions footprint.

We see a multi-year cycle favoring service companies that offer differential technologies.

Fortifying strong customer engagement and competitive advantages.

We enter 2023 with strong competitive advantages that will enable further profitability expansion, including efficiency gains.

Pardon me, this is the conference operator. We appear to have trouble with the speaker's signal. We're going to put you on hold and get back to the, reconnect to the speaker as soon as possible. Thank you. Please stay on the line.

I.

The.

this is the conference rapid. We've rejoined the speaker location. Sir, please go ahead.

Apologize for the interruption and technical difficulties there. I'm going to pick back up where I was.

Our free cash flow potential and strong balance sheet allows us to not only prioritize accretive share repurchases, but also to invest in our future.

The goal is simple, maximize the value of a Liberty sharer.

In 2023, we are targeting approximately 40-50% growth in adjusted EBITDA, with no meaningful change to our fleet count from today's levels.

As we laid out in our investor day in mid 2021, we viewed 2022 and 2023 as years of counter cyclical investment at the start of a longer, strong earning cycle ahead. Our 2023 outlook.

includes potential capital expenditures of approximately 50% of EBITDA. A similar percentage of capital expenditures as 2022.

We would also expect for that to reduce to the neighborhood of 30% of EVADA in 2024.

Our 2023 discretionary capex is driven by strong customer demand for next generation, low emission frac technology in the coming five years.

Our confidence in our long-term strategy and the strength of our operating model has never been higher, and we expect our investments today will lead to strong returns over the coming years.

Our 11-year annual average cash return on capital invested, Croce, of 23% since our company founding was achieved during a relatively tough period for our industry.

And before we had developed a suite of differential technologies and services that we are now rolling out.

Today, Liberty is creating opportunity through ingenuity and innovation, not just in fractal technologies, but also in wet sand handling, logistics software and systems to optimize supply chains, predictive software generating operational efficiencies.

and so much more. We enter 2023 with significant competitive advantages.

that enable strong relationships.

with the best producers and that drive demand for Liberty Services far beyond our capacity to supply.

These factors are likely to deliver rising free cash flow and strong returns to our shareholders in the years ahead. With that, I'd like to turn the call over to Michael Stock, our CFO , to discuss our financial results.

Good morning everybody.

Liberty end of the year was very strong execution. In the fourth quarter, adjusted EBITDA increased by 7% sequentially in a seasonally weaker quarter and we reduced net debt by $55 million while we invested $116 million in capital expenditures and returned $64 million to shareholders.

Our terrific fourth quarter results rounded out a great year for Liberty.

Our team delivered 68% revenue growth, approximately $400 million in free cash flow generation defined as adjusted even though there's capital expenditures.

A nearly 50% free cash flow to adjust an EBITDA conversion ratio.

We're pleased with our results and which we have now seen revenue growth in each of the last 10 quarters and profitability expansion through each quarter in 2022. At Liberty, our results would not have been possible without the hard work, dedication of our nearly 5,000 employees. Supply chain and logistics challenges.

offer opportunities for some companies while showcasing the vulnerability of others. And the Liberty team came together to deliver industry-leading operational efficiency that customers have come to rely on.

We have a unique combination of leading business and financial strength that reinforces sustainable long-term advantages.

Our 2022 adjusted pre-tax return on capital employed and cash return on capital invested at 31% was the highest in three years and we are on a path to surpass that in 2023.

Our balance sheet strength allows us to focus on our priorities of investing and expanding our competitive advantages while returning a significant amount of capital to shareholders.

Critically, we do not need fleet growth to significantly expand our margins.

We have the tools, the technology, and the people in place.

to expand as year of completion spans.

with our customers through a variety of technology investments we are making today. For the full year revenue increased 68% to $4.1 billion and $2.5 billion in 2021.

Net income totalled $400 million or $2.11 per fully diluted share. Adjusted EBITDA was $860 million, highest in the company history, seven times 2021 results. Our full year results began to show the full potential of the earnings power of our platform that our team has carefully built over the years.

In the fourth quarter of 2022, revenue increased 3% sequentially to $1.2 billion.

We saw healthy customer demand.

And our execution excelled through winter weather challenges and disruptive supply chains.

A full quarter of contribution of third quarter fleet deployment aided our results.

Fourth quarter net income after tax of $153 million increased from $147 million in the third quarter. The net income per share was 82 cents compared to 78 cents in the third quarter.

General and administrative expenses totalled $49 million in the fourth quarter, including a non-cash stock-based compensation of $5 million.

GNA declined 1 million sequentially primary on variable compensation recorded in the quarter.

Net interest expense and associated fees totes $7 million in the quarter.

Fourth quarter adjusted EBITDA increased 7% sequentially to $295 million from $277 achieved in the prior quarter despite the usual holiday weather challenges.

results included non-cash charges for the re-measurement of the tax receivable agreements of $76 million for the full year of 2022 and $43 million in the fourth quarter.

These non-cash charges are all in the noise related to the reversal of the valuation allowances recorded on our deferred tax assets in 2019.

In 2023, we no longer expect the TRA to affect our income statement, we expect 2023 effective tax rate to be approximately 23% and our combined cash taxes and TRA payments to be approximately 10% for the year.

We ended the year with a cash balance of $44 million and net debt of $175 million.

Net debt decreased by $55 million from the end of the third quarter, even with the execution of $55 million of share buybacks and $9 million towards our recently reinstated quarterly cash dividend.

Total liquidity at the end of the year, including availability under the credit facility.

was $351 million.

Earlier this week we amended our AVL facility to provide a $100 million increase in our borrowing capacity to $525 million. In conjunction with our AVL expansion we retired our $105 million term loan, reducing our effective interest rate.

Net capital expenditures were $116 million on a gap basis in the fourth quarter, which included costs related to digifrag fleet construction, capitalised maintenance spending and other projects.

In 2022, we demonstrated that capital investment and high rate of return opportunities and shareholder returns can both be achieved.

We proactively installed a share repurchase program in July of 2022 to take advantage of the dislocated share prices and we seized the opportunity to do so with 125 million in shares repurchased.

in the second half of the year. We also reinstated our quarterly cash dividends in the fourth quarter, equating to another $9 million paid during 2022. Our convictioning and a strengthening outlook and our ability to grow free cash flow positioned us to double the size of our original share repurchase authorization at $500 million this week.

In our 12 year history we have always taken the approach of investing counter-secretly.

in the early stages of the cycle, generating strong feed cash flow, harvesting cash in the late stages.

Our cash return on capital invested has been over two times our cost of capital during our 12 year history.

Looking forward, we are targeting approximately 40 to 50% growth in adjusted EVA now year over year in 2023.

with no meaningful change in our fleet count.

meaningful change in our fleet count from today's levels.

In 2023, our investments are aimed at fully capturing a uniquely Liberty opportunity for differential returns.

We have the Premier design, the latest pump technology in the market. We are investing in the development of these...

We plan to own the value chain with our own power generation, as a frac pump cannot function without this power. As we have proved with SAND and logistics, controlling the full cycle of service provision maximises long term returns. This is a distinctly different approach compared to some frac providers.

who lease technology and contract power generation from other providers. We are targeting capital expenditures of approximately 50% of Iberdade in 2023, similar to 2022.

comprised of maintenance spending and discretionary growth capex, and fleet technologies, power generation, ESG-friendly wet sand handling, and other high return opportunities.

Included in this number is some potentially accelerated early cypher investments...

that lays the foundation of the earnings growth in 2024 and beyond.

As such, we anticipate capital expenditures as % of Iberda will decline to in the neighbourhood of 30% in 2024.

we anticipate capital expenditures as percent of EBITDA will decline to the neighborhood of 30% in 2024 following this infrastructure development.

As we look forward we are well positioned to maximise free cash flow generation to support our capital allocation priorities of disciplined investment to expand earnings per share, balance sheet strength and the return of capital to our shareholders.

That'll see that we've got a little bit of press.

I closed our last conference call speaking about Russia's attack on Ukraine's energy system as their calculated way to inflict maximum human misery.

Regrettably, those attacks continue.

Unfortunately, the politically driven attacks on our own energy system remain ongoing as well.

During the holiday cold snap, New England generated over 20% of its electricity burning oil. Why?

because by far its largest source of electricity, natural gas plants, were unable to secure enough natural gas at peak demand times.

New England and an increasing number of states like California and New York continue to impose both higher energy costs and lower electrical grid reliability on their citizens.

simply because the political and energy regulatory arenas no longer engage in honest, sober dialogue about energy, the environment, climate, and human well-being. The electricity grid is the most important network in the world.

We demonstrated earlier the problems that can arise when a less important network, our telephone network, can struggle as well.

This attacks on our energy system must stop or we will drive down American standards of living and deindustrialize our country just like Europe . That path is not looking too rosy right now.

One is called Zero Poverty 2050, and the other is called Let's Be Honest. The latter video garnered over 100,000 impressions on LinkedIn, but it was removed, censored by LinkedIn three times in 48 hours. A video that simply lays out big picture facts about our energy system and climate change is banned by a business network platform. Either the LinkedIn censors are ignorant in this area, or they are politically or socially motivated to protect the alarmist climate narrative that increasingly permeates our society.

likely some combination of the two. I find this alarming that a Microsoft-owned business is actively working to protect a false and destructive meme about energy and climate.

The video is up now. Apparently, Torquemada approved it the fourth time.

I'll conclude by saying that complacency is surely not a viable strategy going forward if we are to eventually reverse the damaging plague of energy ignorance in our country.

Rent-seeking interest groups will only grow in power as long as subsidies are counted in the tens and hundreds of billions of dollars. 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 1 on your telephone keypad.

If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2.

Our first question is from Derek Podhaser with Barclays. Please go ahead. Hey, good morning guys. Just wanted to expand on the gas market comments. So what would relocating capacity look like? Would you would you expect to displace customer fleets and oilier basins? Or would these be incremental fleets to the market?

Just want to know what this could mean for pricing. Is there any threat to the downside or is there ability to price up as you move fleets over?

First of all, I'd say we view this as pretty unlikely. I think we'll see some modest contraction in industry activity. It doesn't likely impact Liberty's fleets in gas. Less than 20% of our capacity is working in gassy areas. In an extreme case, if it did displace a fleet, it would be a good thing to have a fleet that

it would be quite easy for us to move that to another area. And that would more likely – we've got a lot of people constantly calling and trying to figure out what it would take to get a fleet. So we would have no trouble placing that fleet. Yeah, ultimately that would likely just slot into an existing program where a customer is using a lower quality player that they have no choice but to use.

but just industry as a whole. There's activity not happening because people don't have a fleet. So, yeah, it might be something but not likely meaningful to the frack market.

Got it, okay. That's helpful. I wanted to touch on your EBITDA guide for 2023, so the 40 to 50% growth over 2022. I'm just curious, can you maybe unpack that a little bit? What's locked in today? What gives you the confidence to hit those numbers? Do you have pricing locked in for all 23, or is it just capacity and pricing is more of a moving target? Okay.

I'm just curious what would drive upside to that estimate. Maybe what would drive some downside to that estimate? Just if you could expand on that percentage forecast you put out.

I mean that forecast comes from what we know today. We're never big on seeing wildly different things in a crystal ball. So the market's strong today. That's sort of existing market conditions continuing on.

We have relatively low risk of keeping our fleets busy. We have ongoing internal technology efforts that drive down our cost of operations.

And we'll continue to push those forward. So I think it's sort of an extrapolation of where we sit today. Michael, I don't know if you want to add anything to that. We have great visibility. We have very low customer turnover. And we have kind of strong visibility into our customers' plans about the year. So barring any exogenous change in the world.

those plans will continue. So we have a strong view, as Chris said, I think there's upside is self-help, cost reduction as we move more to sort of expand the shoulders of earnings of the business. Downside is sort of exactly the same as you say, exogenous events that change the world market.

Great, appreciate the color guys, I'll turn it back.

I appreciate the color guys. I'll turn it back. Thanks.

The next question is from Steven Jangara

Thanks. Good morning, everybody.

Two things for me, just to start with, when we think about, I mean obviously you gave some color on 2023, when we think about your positioning in the market and some of the things you've done on the vertical integration side, I mean obviously you got Fraxan from the SLB acquisition, are you seeing, how do you see

because we've been hearing about tightness in the frac sand market recently. Are you seeing that as sort of a competitive advantage and how is that kind of increasing or helping the efficiency at the well site? I'm talking frac sand, but also the other things you've done. So any way to kind of give it a little more color on how those things kind of aid in your execution at the well site.

The primary benefit we have by owning sand capacity, we've invested to expand it a little bit, the primary benefit of it is just surety of supply to our fleets. We saw the benefit of that in Q1 of last year, where there were troubles across the sand space. And we were able to navigate those with less impact than others.

The markets are tight, but I don't think it's slowing down fracking wells. We're not at a disruptive part in the sand market right now.

Great, thank you. And then the other question, and you've talked a little bit about this on fire calls and how you sort of approached the use of the buyback, but clearly you've doubled it and you've been utilizing it. How should we think about your, sort of the pace?

of buybacks over the next 12 months and your willingness to kind of exhaust this as we go forward here, depending on valuation, et cetera.

As we said, the pace at which we buy back the stock is proportional to the dislocation of the share value. And today as we sit here, we're still in an extremely dislocated share price. So we see it as an incredibly attractive investment opportunity right now to buy our stock back. You've seen us walk that walk the last...

five or six months and with share prices in this neighborhood, I think you will continue to see aggressive buybacks.

Okay, thank you, Chris. Thank you.

The next question is from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning.

Point Scott a question here with this backdrop of an expanding gas diesel spread I'm curious whether there's any mechanism you know within recent contracts for digifrag or on dual fuel fleets where you can capture some of the incremental fuel savings

that your customers are benefiting from. Is there any direct way that you guys can benefit from the kit that's providing you savings?

your customers are benefiting from. Is there any direct way that you guys can benefit from the kit that's providing you savings? Yeah, absolutely. Thanks, Agee.

I mean, we're bringing the technology and the equipment that enables the realization of this arbitrage. So yeah, I think it's fair to assume that the majority of that arbitrage value will be captured by liberty.

And yes, right now that arbitrage value is growing.

Is it direct, Chris, though, or is it just indirect through your ability to keep a healthy rate structure?

Where is there a direct mechanism that links it somehow to the gas diesel spread?

We are pretty early on in rolling out these technologies. It's a smaller piece. So today I would say it's mostly indirect, but you will probably see an evolution of that structure going forward.

Okay yeah we did the same and Michael just real quick on the CapEx just make sure I got the numbers right the 40 to 50 percent EBITDA growth it's about a 1.25 billion and we think about half of that so around 600 million for CapEx for the year. Is that the right way to think about it? That's correct. reducing the average as we go to 2020

Yes, got it. Okay.

I appreciate the color. Thank you. Thanks Scott. The next question is from Mark Bianchi with Cowan. Please go ahead.

Hey, thank you. I'd like to follow up on that last point there about 24 and I know this could get a little tricky, right, because you probably don't want to give a financial forecast for 24, but I'm just curious on an absolute dollar level, do you see the CapEx Bit.

going lower or going meaningfully lower kind of regardless of what the EBITDA does or how should we think about the absolute amount of capex as we go from 23 to 24.

Our investment in capex markets never ever dislocated from the amount of money we earn or the cash flow we earn.

There are sometimes some time shifts where we see the market strengthening, we invest early in the cycle and then when prices and EBITDA are the highest we'll do low capex because obviously if we see a cycle beginning to cap out. So there's some time shift there and will be some

always relate to the amount of cash flow that we are earning. So just to sort of point that out. But no, in relative terms, in the baseline business at the size and who it is at the moment, yes, on a normalised, per dollar basis, it would be lower in 24 than it would be in 23.

Do you think that level, so if, you know, let's just.

hypothetically say EBITDA is exactly the same in 24. Do you think that level of CapEx is a sustaining level where you can continually pursue these DigiFract deployments and sort of handle attrition that occurs you know every year in the fleet at that level? Yes. Okay, okay super. The other one I had was on

Just the DigiFract deployment maybe you could talk a little bit about expectations for you know a timeline to have a full DigiFract fleet because it seems like we've just got a few pumps sort of mingled in with with conventional pumps in a fleet right now.

As we said in the transcript, we're continuing operations with that first customer port at full speed right now, FRAC operations, which gives us the luxury to roll things in slowly and carefully, test everything, figure out how to optimize everything. So it's a gradual roll in, but I think you'll see...

around the end of the third quarter, maybe early in the second quarter, we should see three Digiproc fleets out there running in full.

Oh, sorry about that. End of the first quarter, beginning of the second quarter. I misspoke, not for the first time today.

Good clarification there. Thanks, Chris. I'll turn it back. Thanks.

The next question is from Adi Modak with Goldman Sachs. Please go ahead.

Hi, good morning team. Just to understand the thought process, in case we do see a strong drawdown in the number of active fleets and pricing does come under pressure, at what level would you say it is better to stack a fleet than accept lower pricing? And then what would you think that the industry on the whole would be willing to do in terms of pricing concessions?

relationships are one-on-one with particular customers. So, you know, look, and you see a softer market. There's also efficiencies. There's other ways to drive well cost down than lowering our net price if the market as a whole to supply we get other materials and run operations.

But you know, we've as I mentioned in our intro, we've gone through sort of eight tough years in frack with a giant frack fleet overhang. Even when activity bounced back strongly in 2017 and 2018, there was just dozens of surplus equipment parked all around. So that was just a different dynamic than than we are today. And we were a younger...

you'll see anything dramatic in the foreseeable future there.

equipment that was available to be reactivated at any given time. So any swing down would be a smaller percentage of the total of fleets available. You've got a much more consolidated market across the board for FRAC and we're as an industry one hell of a lot more disciplined.

So yeah, I think you're going to see a lot more discipline and effect with net pricing kind of not moving, nowhere near in any way the shape that you've seen over the last seven, eight years in these small cycles that were well oversupplied, you know, comparative to what is going to happen in the next five years. That's just my personal view. Thank you. Appreciate the answer there.

it follows revenue, I think you kind of really just you can bottle it with revenue. I think that's a relatively reasonable number. I've given you the cash tax number for next year, it's sort of around 10% of pre-tax net income. And you know, other than that, really capex is the main sort of next main deduction.

It's got very low debts, obviously very low interest. Michael, can you repeat some of that with the years? Next year, do you mean 23 or 24? Next year I mean 23, sorry. Yeah, sorry. 23. So for 2023, cash taxes are around 10% of pre-tax net income. Obviously we see capex around about 50% of EBITDA.

interest is relatively de minimis because we've got a relatively small amount of debt and we're going to have a slight build in working capital as revenue is going to increase from Q4 levels through the end of the year but that will be relatively small.

Thanks guys, I'll turn it over.

Thanks, Gotti. The next question is from Arun Jayaram with JPMorgan Chase. Please go ahead.

Hey, Chris. I had some questions on kind of the rollout of DigiFrac. You're taking kind of a modular approach, which makes sense, but I was just wondering if you could comment on how performance has been in the field and what you're seeing in terms of that technology. And just perhaps to clarify, so you'll be adding…

three fleets, did you say at the end of the one queue, but your overall guide is for relatively flat.

Fleet activities are you taking some diesel fleets out of the you know out of the working fleet?

Yes, our plans for DigiFrac rollout this year will dominantly be replacement suites.

Again, market conditions are pending, but that's the plan right now. Dominantly replacement capacity. It's an upgrade, which is an upgrade both in the performance of the fleet, it's an upgrade in reducing our cost of operating that fleet, and of course it's an upgrade in that the pricing for it is better. We bring something better for our customers.

with a lower all-in cost to us. I'll turn it over to Ron to make any more technical comments about that.

Look, as far as performance going well, you know, we always expect when we put new technology in the field, we got a bit of a learning curve with that, but things are going well. We're actually in between pads right now with the operator. We had wrapped up pumping consistently on the last 45 or 50 stages on that with all the pumps that were on location at that point in time.

We'll begin with a slightly bigger fleet on the next pad and excited about getting the rest of that fleet out likely by the middle of February . And then we'll have the other ones follow on quickly after that. Great, thanks a lot Ron. Another question for Chris is, you know, given the retrenchment in natural gas prices including Waha,

Are you seeing, do you expect this perhaps to accelerate the attrition of diesel fleets given the cost competitive?

benefits of running dual fuel plus the

So yeah, that very low Waha prices and outlook, they may stay there for a year or two. Certainly that grows the arbitrage between the two, but the arbitrage was large already. And it's a lot of capital and investment to bring out a new fleet and swap them over.

with ATB Capital Markets. Please go ahead. Thank you. Great quarter.

So my question is with respect to Canada versus US margins, you know, in Q4, what were the margins like between Canada and US, were they far or one was higher than the other?

Generally, as you know, we don't discuss different basins really. Most all of our basins, you know, I love Canada as a country, it's my favorite sport in the world, hockey. But it's the same size as some of our US basins. But in reality, the only real difference between the two markets is that Canadian markets are probably not quite as tight.

Yet as the US market on track supply, that's the only real change, you know, you have differences between the two different markets, right? So other than that, other than that everything else sort of remains, you know, it's pretty similar across the North American onshore and on-competrium And have you added any new capacity into the Canadian market? And then how many maybe TFO fees do you have in Canada?

Yeah, we don't want to give the details on that, but certainly there's optimism in Canada with new pipelines, at least on the horizon of coming in of activity level there. So we're always in dialogue with customers. We never do it on a, we're going to add to this basin or take away from that basin. It's always just a customer specific.

decision we make. Thanks for coming. Another question, if I may. What was the impact of weather on the quarter? Could you maybe quantify that a little bit in terms of revenues or number of jobs or anything?

Yeah pretty normal. I think you guys have all heard me say that kind of like Q4 and Q1 are generally somewhere between 4 and 8 percent depending on the year lower than the summer quarters. So Q4 was a pretty normal year as far as that in the mid-range there and we're expecting Q1 to be about the same.

So probably activity-wise the two winter quarters will be relatively flat, but a bit of a pick-up themselves.

activity-wise the two winter quarters will be relatively flat with a bit of a pickup themselves. Okay, thank you sir, thank you very much.

Please go ahead. Hey, good morning and thanks for taking my questions. Maybe if we could just start out on pricing. It looks like the guide implies EBITDA per quarter roughly what you saw in Q4 and if fleet count remains flat. Sort of implies that you're not building in much more pricing but maybe if you could just talk a little bit about how.

So yeah, there's still some, you know, most all of our pricing is already adjusted. There's a little more adjustments we're getting in in Q4 from older older I mean Q1 my gosh, I gotta get my calendar straight. So again, there's still a little bit of positive action happening there. But, you know,

Well, market is strong, markets are tight, and we're just not making much of a guess on where things go from here. But you know, it looks like things will stay strong. Could you know, are there forces that could push them up further? So, here's the problem.

Perfect, thanks for that. And not to try to steal too much of your thunder from the event next week, but can you maybe just give us a little bit more comment on the hybrid frac pump. What will it be?

involved in these next DigiFrac fleets that you're putting out or what's the timing on that and what's really the business case for for the hybrid pumps now.

Pete, this is Ron. Yeah, I can give you a little bit of color on that. Really the third leg in the stool on our in our GGFRAC platform and probably the quickest and easiest analogy I could give you would be something like the power grid. Chris talked a little bit about that earlier today, but think of this new pump as base load power for sort of like a nuclear power plant on the grid.

So this is basically a little brother to the same power plant we're using on the generator. So 100% natural gas engine, extremely efficient, 44.5% thermally efficient, so very, very good at the use of gas. We chose this engine for the same reason we chose that engine for generating power. Much, much better than a turbine on location either in a direct drive application or a

a fully electric backside. The unique thing about this engine is it's a single speed engine, so it doesn't have throttle control to it. It's made to run at one speed and one speed only.

And so it's not made to deal with transients, which is how it pairs so nicely with our DigiFrac electric pump.

Together, the combination of those things works just like a nuclear power plant with a gas peaker plant on top of that. So we have this combination that delivers flat baseload capacity, strong and steady, incredibly efficient. And then on top of that, to deal with the regular transient load we have in the frac space, we've got digifract. So you'll see those two going out into the field.

in partnership with one another, the exact ratio of those two pumps is really going to be a function of what the customer situation is like, what the FRAC needs are like, what our access to maybe some grid power looks like. All of those things will play into the exact ratio of how we deploy those.

Perfect good deal. Thanks very much.

The next question is from Tom Coran with Seaport Research Partners. Please go ahead.

The next question is from Tom Coran with Seaport Research Partners. Please go ahead. Good morning.

I was hoping you could assist us with just some market capacity framing. What percentage of the increased active fleet is diesel models, regardless of the tier? And when it comes to that pure diesel horsepower, what are your expectations for upgrades to DGB vis-a-vis new build replacement? In other words, to the extent we see a portion of the diesel power being replaced, what are

of that industry diesel horsepower convert over the course of 2023, what would you expect the mix to be between new build replacement versus upgrade and maybe an idea of just how much you are expecting? There is still a large amount of diesel capacity out there, it's still the dominant.

The longer term thing, I think as you were hitting at, is going to be what happens to those tier 2 diesel engines basically, which are all, you know, 5, 6 years old and the average age of them is probably a decade old. So those are falling out and as you said, you can either take that same pump and buy a new tier 4, more likely tier 4 DGB dual fuel engine.

and put that on the deck. Or you can build a brand new natural gas powered fleet technology. So most of what's going to happen I suspect in the industry for those that are investing for the next thing is going to be taking those tier 2 engines and making them tier 4 engines.

The bigger players have electric options. You know, for us, we're trying to develop, and I believe we have developed technologies that for us will be both cheaper and better. And that's why we spent years doing it. You know, the history of Electra Factory Leach has actually been more expensive.

where we sit.

Understood. Let me give Ron some more airtime. Two-part question for you, Ron. First, um...

for the three DigiFract spread you expect to have deployed by 2Q, which do we expect those to be powered by? Will they be on the Rolls Royce MTU gas gen sets? And then, you know.

Maybe I'll push for a bit more of a sneak preview on your upcoming event, but under Operation 1440, could you give us updates on two technology initiatives, preemptive maintenance and then automation?

Yeah, so to your first question, absolutely, you're 100% right. Those fleets are all going to be powered by the 20V4000, the Rolls Royce natural gas precip engine. We like that power plant. It's the most efficient power plant in the space and so it'll be paired with every one of the Digi-Frac pumps that we put out in the space.

is as you think about the preventative maintenance side of things, we launched a team in January last year with a strong focus on moving forward in that preventative maintenance side of the world. I would say we made huge strides and we saw that in our cost of maintenance last year, our ability to...

to run our equipment at, well, at really flat maintenance costs in the face of very, very strong inflationary pressures. So that's a credit to that team and the work they've done from a predictive maintenance standpoint. The amount of intelligence we have or insight we have on our equipment today probably orders of magnitude beyond where we had been in, you know, maybe three or four years ago.

Huge strides there. Artificial intelligence, of course, we're moving rapidly towards full deployment of our next generation fleet operating software, really a piece of software that effectively enabled us to tell the fleet what rate we want to achieve and the maximum pressure that we can pump at. And the software is making all the decisions about how to run those pumps optimized for gas substitution.

or whatever we might ask of it, but those decisions are all driven by a computer going forward.

Great. I appreciate all the detail. Thanks, guys.

The next question is from Sarab Pont with Bank of America. Please go ahead.

Hi, good morning guys. I want to just quickly go back on the 2023 guide, just to keep it up 40 to 50%. Well, I think you said you're pretty much extrapolating current market conditions, but I think I heard you say pricing is stepping up a little bit in the first quarter, which is again expected, right? But again, if you can quickly walk through.

or 2023, how should we expect activity and even more so pricing moving from the first quarter to the fourth quarter because it sounds like you are assuming things pretty flat. But I want to make sure we understand the assumptions especially on pricing through 2023 in that guide.

Right, so yeah, so pricing relatively, in those numbers pricing is relatively flat through 2023. Activity obviously your winter quarters are in that 4-8% lower activity wise than your summer quarters.

the standard you should all be modeling you know just for winter weather and holidays and yeah it's really not a huge amount of kind of fleet number changes or a better space into those numbers okay okay okay so the flattest fleet count and flattest tracing after after first quarter a that's what you're bringing it

That's what it gives you, yep.

Yeah, okay, okay, perfect. And then a little bit of a clarification on CapEx. Obviously, the implied number is in that 600 to 650 range. It's stepping down in 2024. That makes sense. But can you quickly walk through the different components in that 2023 CapEx number between maintenance, new digifrag fleets, any upgrades that you are doing to the traditional fleets and the...

sort of between three and a half in the fleets, plus 25 each million for the other ancillary business lines, et cetera. And then really we haven't given the breakdown on the other side of it, Mr. Rutt. And the majority of that obviously goes to margin expansion projects. Obviously the big dog on that one is the electric fleet.

Digi equipment that we're rolling out. As I sort of alluded to, some of that with supply chain is in a little bit of an accelerated build for things that will come online early in 2024, you know, as margin expansion for 2024 where the Catholics will appear in 2023.

Okay, okay, perfect. And just a quick clarification before I turn it over. Should we assume DigiFract build cadence to remain the same in 2024 as in 2023? Or should we assume it can change depending on the market conditions?

It will change depending on market conditions obviously. Everything depends on market conditions whether it's the earnings that we're going to end up with EBITDA, the amount we will spend on CapEx, and the speed at which we roll out DigiFract. Okay, perfect Mike. Thanks for the answer. I'll turn it back.

The next question is from Dan Cutts with Morgan Stanley . Please go ahead. Hey, thanks. Good morning.

The next question is from Dan Cutts with Morgan Stanley . Please go ahead. Hey,

So I just wanted to ask any appetite for dividend increases or is the idea to use the buybacks as the flywheel for shareholder returns? What would you kind of contemplate a dividend increase or what would you need to see to do that or you know again is the

is to buy back the flywheel? Well, buy back is definitely the flywheel. You know, you just look at the different investment opportunities we have today and some of these technologies we've talked about, the outlook for them is simply tremendous and buy backs are just simply tremendous opportunity today. That's the big dog of where capital will go.

We are believers in dividend. We paid a dividend before the COVID downturn as well. But you know, we're a cyclical business. It's always going to be cyclical. We want to have a base dividend that's barring a global pandemic that stays and gradually grows with time. So I do think you'll see growth in our dividend.

but it's not a major swing based on market conditions or better or this and that. It's as steady as she goes, but certainly the outlook we have today, it likely continues to grow.

Great. Thanks, Chris. And then, maybe just kind of a high-level one. You know, some fundamentals.

for the industry definitely still appear very strong. And I guess I just wanted to ask what would you view as kind of the biggest near-term risk to your outlook? You mentioned that you think Nat gas activity declines is a relatively minor risk but like you know would a deeper than anticipated recession?

be it demand concern or a faster supply-side response, what kind of metrics would you suggest investors pay attention to? Assuming they play out as expected, that would mean that your outlook remains intact.

Yeah, we hear a lot about the faster supply side response, but as we hit, we view that as a relatively low risk. It's hard to grow fractionate capacity. It's going to grow a little bit, but it isn't going to grow a lot. The thing that can change the market faster, as we've seen in the last downturns, is a collapse in commodity prices.

The risk, you know, the risk to our business is a collapse in oil prices.

And so, think of the financial crisis, right? We had a very large scale, a very rapidly unfolding collapse with the financial crisis. And it took a tight oil market with oil prices over $100 and it crashed them to $30. And it actually made two or three not great quarters for the industry and things came right back.

because going into that recession, supply and demand was tight. And supply and demand is probably at least as tight, probably a little bit tighter today than it was then. So I think a huge rapid economic contraction would certainly soften the industry, but even then, probably not for too long. So it's really oil to bear.

So watch oil prices. If oil prices go to $40, activity is going to drop. Great. Thanks a lot, Chris. And team, I'll turn it back.

The next question is from Sean Mitchell with Daniel Energy Partners. Please go ahead.

Hi guys, thanks for working me in here. I know we're getting long in the morning. But just really quick, one of the questions earlier was around diesel versus electric frac. Maybe I'm going to frame the question a little different. What's the optimal mix of digifrac in the Liberty portfolio?

I guess number one. And then number two, remind us what the average expected life of a DigiFrac unit is versus a traditional unit.

I think the general working life of these diesel pumps is 10 years. You know, that's rebuild, there's a lot of maintenance goes on after that, but pumps that are more than 10 years old, the technology is obsolete, the cost of maintaining them and running them is there. So they're generally falling away. You may see a 12 year old pump out there. There's some, you know, there's some. You know, there's a lot of maintenance going on after that. You know, there's a lot of maintenance going on after that.

There's some stuff barely hanging on. With DigiFrak, we definitely expect meaningfully longer live than for a diesel engine. It's just simply, the engine life on our thing, Ron, is maybe 2x? Time between rebuild is probably 3x, Sean. So we're going from maybe somewhere in the 20, 25,000 hour range to a time between overhauls of maybe 84,000 hours at the...

is the nameplate number for that Rolls Royce engine. And the thing you should think about there is more reduction in capitalised maintenance than a long-term engine of the life of the equipment.

The likely equipment might be longer, that's correct, but really what it does is it affects the annualised capital maintenance and brings it down.

That's the key thing. You want to deliver a better quality pump, a better quality fleet at lower long-term costs.

Got it. And then the optimal mix of Digifrac in the Liberty portfolio?

That's going to evolve with time. I believe we're there or we'll certainly be there at having a solution that's ultimately cheaper and better. So if you're going to build, you're probably going to build what's cheaper and better. But our build pace is going to be, as Michael said, dictated by the marketplace, but it's going to be slow and gradual.

it's got to make sense. You've got to have compelling economics. You've got to have a willing to allocate X amount of capital there. So our fleet probably slowly migrates to all of whatever's cheapest and best.

Thank you. And then maybe one more. Just I think earlier in the call, this was mentioned, but I don't know that we got clarification. Just sand facilities and any efforts to expand capacity there or existing of your existing facilities and or your desire to build new ones.

in the current market? Look, Sandy is a key ingredient for FRAC. That's our focus on sand. We've got to keep our fleets and our customers' wells on time, you know, and without interruptions to operations. So yes, we've invested a little bit in de-bottlenecking, increasing our throughput in there.

We'll make investments to what it takes to secure that Liberty's operational performance and delivery to our customers is the best in the industry. That's what drives our decision making there.

We'll make investments to what it takes to secure that Liberty's operational performance and delivery to our customers is the best in the industry. That's what drives our decision making there. OK. Thanks, guys. Appreciate it.

Thanks, appreciate that. This concludes our question and answer session. I would like to turn the conference back over to Chris Wright for any closing remarks.

Thanks everyone for your time today and interest in this business, Liberty and our industry. As we demonstrated, networks matter and sorry about the problem with the phone network. We'll prevent that from happening in the future. Everyone have a good day and we look forward to talking to you at the next call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

The.

S number nine o two nine twosix four six three two 1, six