Q2 2023 Liberty Energy Inc Earnings Call
Welcome to the Liberty Energy earnings Conference call, all participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to Angela for your strategic Finance and Investor Relations lead. Please go ahead.
Thank you Alison good morning, and welcome to the Liberty Energy's second quarter 2023 earnings Conference call.
Joining us on the call are Chris Wright, Chief Executive Officer, Walker, President, Michael Soccer, Chief Financial Officer, and Brian Godley, Chief Accounting Officer.
Before we begin I would like to remind all participants some of our comments today may include forward looking statements.
The company's views about future prospects revenues.
Revenues expenses or profits these.
Matters involve risks and uncertainties that could cause actual results to differ materially from our forward looking statement.
These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings.
Comments today also include non-GAAP financial and operational measures. These non.
non-GAAP measures, including EBITDA adjusted EBITDA.
And adjusted pretax return on capital employed are not a substitute for GAAP measures and may not be comparable to similar measures. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of adjusted pre tax return on capital employed as discussed on this call are presented in our earnings release, which is available.
On the investors section of our website.
Now I'll turn the call over to Chris.
Good morning, everyone and thank you for joining us for our second quarter 2023 operational and financial results, we executed on another quarter with strong financial results and I'm, especially proud of our operations team for safely delivering the highest quarterly average.
Daily pumping efficiency in our history.
High bar raised higher.
Liberty achieved adjusted EBITDA of 311 million and fully adjusted fully diluted earnings per share of 87 cents or.
Our success in growing our long term competitive advantage is illustrated by our trailing 12 month adjusted pretax return on capital employed of 44%.
Strong cash generation enables long term investment.
Together with a strong return of capital program.
In the second quarter, we returned 69 million to shareholders through the repurchase of two 7% of shares outstanding plus our quarterly dividend.
The reinstatement of a return of capital program in July of 2022, including the initial $250 million buyback authorization and our subsequent upsize to $500 million in January we.
We have now returned $287 million to shareholders through cash dividends and the retirement of nine 7% of outstanding shares.
We completed the initial repurchase authorization and now have $240 million of our buyback authorization remaining.
A compounding effect of our last 12 months of share buybacks is evidenced by the 57% year over year increase in fully diluted earnings per share on a 45% increase in net income.
We've created a unique competitive position, where we can take advantage of accretive cyclical and secular investment opportunities generating high returns, while returning cash to shareholders and maintaining a strong balance sheet.
We have a very simple philosophy of investing early in the cycle in strategic areas, where we can leverage our expertise.
Differential technologies and services to our customers improve efficiencies and create future competitive advantages.
Our latest example is the launch of our New Division Liberty power innovations L.
L. P. I provide C N G fuel and feel got gas processing services to deliver a reliable source of natural gas fuel in support of the rollout of our suite of <unk> technologies.
Just as Liberty was founded as a solution to service quality challenges 11 years ago L. P. I wasn't organic idea stemming from the need to find a solution to unreliable gas supply.
L. P. I has made tremendous strides in the last few months.
We have successfully integrated the April acquisition of Ciber and into the L. P. I platform and have already seen a growing customer base for both drilling and completion needs.
We're also on track to meaningfully increase our gas compression capacity in the Permian basin in the third quarter and enter the D. J Basin later this year.
Readying ourselves with enough capacity to execute on our profitable multiyear growth plan.
Yeah.
Our delivery and logistics capabilities are also growing with transportation equipment on order and increasing our fleet of C and D travelers and logistics services to deliver reliable fuel supply.
We also have field gas processing, and treating which began in the haynesville in support of our Frac services. We have since added two additional field gas processing customers in the Permian.
We're excited by the long term business potential will be L. P. I platform now.
Not only will allow us to secure the supply chain of fuel that drives our DG fleet technology transition.
But it also positions us to take advantage of expanded opportunities beyond completions and eventually grow beyond the oilfield.
We're investing today for the future growth of the business by bringing together the right people and right technology to build a differential offering.
Liberty was an early driver in the industry shift from diesel to natural gas technologies, a decade ago and today the importance of natural gas fueled equipment is more widely appreciated as a means to lower fuel costs and emissions.
We continue to transition our fleet towards our natural gas fueled Digi technologies. These technologies expand our earnings potential without meaningfully changing the customers' total well costs with the savings from the diesel to natural gas arbitrage.
As a reminder, we deployed our first debut fleet comprising did you practice electric pumps in the first quarter and we're in the process of deploying our second DC fleet, which is slightly delayed as a result of supply chain challenges, our third and fourth we will follow during the second half of this year.
We're also building digi crime hybrid pumps anchored by the most efficient 100% natural gas engine available.
These capital efficient pumps can be used as the primary source of horsepower on location.
Alongside a few did you frac electric pumps that will manage transient load and precision rate control.
This fleet configuration will have the most sufficient gas consumption and emissions and fleet capital in the market.
These new technologies are liberty's platform for the future.
Frac markets in North America are at a steady healthy activity levels. After moderating a bit from late 2022 as commodity prices retreated from the 2022 peak.
Crude oil prices are now at pre Russia, Ukraine War levels.
Which has spurred private operators in oily basins to reduce activity.
Lower natural gas prices have also led to a curtailment of activity in gas basis.
During the second quarter, we saw reduced frac activity that resulted in increased white space on our calendar, resulting from customers changing development schedules idiosyncratic drilling delays and the redeployment of fleets from gas heater earlier basis, even with these disruptions liberty operations team.
<unk> achieved a new quarterly record and average daily pumping efficiencies.
Our fleets for all locations. Our performance was the best expanded our history with more fleece safely pumping more minutes of the day than ever before looking ahead activity in the second half is expected to be slightly lower than the first half.
Our customer scheduled work reductions become larger we may reduce active fleet count by one to three fleets in the second half of the year to balance demand.
We will consolidate work to maximize the utilization of our crews.
Our goal is to maintain the safest most efficient operations and we will do so by balancing the right numbers of crews to meet E&P customer demand.
As we look forward the rig count showed signs of stabilization as E&P operators are already benefiting from lower well costs from consumable inputs and summer evaluating plans to pull forward in completions activity.
Lower operator, well costs are not service price, driven, but rather input costs, such as drill pipe steel casing cement sand and fuel Liberty.
Liberty is working with our customers to help lower their costs, while maintaining our margins.
Our wet sand handling and delivery technologies are enabling proximity mining, reducing total cost and environmental impact by shrinking the distance and truckloads required to move sand at the well site, while eliminating the use of natural gas from the sand drawing process.
Our wet sand handling technology is agnostic to wet and dry sand, allowing us to provide our customers with the most cost efficient source of sand for their wells we.
We also have other logistic initiatives underway to generate sustainable cost reductions for E&ps and increased returns for our shareholders.
More broadly global oil markets are signaling a constructive outlook on a tightening supply demand balance.
Okay Flash supply cuts in recent months are beginning to take hold and markets are anticipating a subsequent draw a global oil inventories in.
In the U S slowing production growth a draw down of oil inventories and unlikely shift of refilling U S strategic petroleum reserves, all AEP outlook.
Fight recessionary risks demand for oil remains resume given several factors, including global travels trending towards pre COVID-19 levels robust demand from India and strength in emerging markets.
China has also reached its highest highest level for oil demand in history, despite having grown at a slower pace than predicted a year ago.
Our investment in global production capacity supports our resident multiyear cycle for oil and gas.
Relative to prior cycles Frac demand has a natural floor is the large majority of completions activity is simply offsetting normal production declines.
Operators are largely to hearing to flat or very modest production growth targets.
This combination underpins higher base levels of Frac fleet utilization and more insulation from commodity price volatility than in prior cycles.
Current more consolidated industry.
It's also better prepared to navigate near term softness in completions activity by reducing active fleet counts to balance the market and protect margins.
In the second half of 2023 demand for Frac fleets is expected to parallel recent rig count trends at approximately a one quarter lag.
Natural gas markets likely don't meaningfully increase activity until 2024 in advance of rising LNG and Mexico exports.
We anticipate north American completions activity will moderate in the second half of the year versus the first half.
Service companies are reducing fleet in response, supporting a balanced frac market and largely stable pricing environment.
Our internal bottoms up industry analysis already shows a decline in the industry Frac demand for nearly 30 active fleets and the industry has successfully navigated this softer activity.
Liberty is well positioned to navigate these trends.
Liberty may reduce fleets to adjust to lower activity levels should they persist we do not expect meaningful change in service prices.
Frac utilization has moderated but still remains high and we see a strengthening macro in 2024.
We expect continued healthy free cash flow and capital returns to our shareholders through opportunistic share repurchase repurchases and dividends with that I'd like to turn the call over to Michael stock, our CFO to discuss our financial results and outlook.
Good morning, everybody.
I'm pleased to share that we achieved improved trailing 12 month pretax proceeds of 44% despite the utilization challenges.
We also rounded out as this full year of that capital return program reinstated in July of 2022, with a combined 297 million merchants shareholders dominantly in the form of accretive buybacks.
And you'd have a relation strategy that differential sweep does he technologies and accelerated the launch of L. P.
Sovereign acquisition.
We've had a busy quarter executing on these initiatives and we expect this to continue for the remainder of the year.
In the second quarter of 2023 revenue was $1 2 billion, a 27% year over year increase about a 5% decline this quarter.
Relative to the first quarter unplanned customer completion schedule changes drilling delays pushed activity of larger pads and fleet shifting from gas to oil basins. They just softer market conditions and utilization challenges, partially mitigated by the railroad efficiencies, we achieved across the bowl slates.
Second quarter data anytime after tax of 153 million, a 45% increase from prior year, but a decrease from the 163 billion versus water well.
Fully diluted net income per share was 87, six a 57% increase from prior year and compares to 90 seats in the first quarter.
General and administrative expenses totaled 58 million in the second quarter and included noncash stock based compensation a standardized dollars.
G&A increased 5 million sequentially, it's usually not higher noncash stock based compensation expense.
Salary adjustments and other miscellaneous expenses.
Net interest expense and associated fees totaled $6 million for the quarter.
Thanks expense for the quarter was $47 million approximately 24% of pretax income we expect the tax expense rate for the full year to be approximately 23% to 24% of pretax income cash taxes were $52 $5 million in second quarter, and we expect 2023 cash taxes be approx.
At least 50% of our assay effective book tax rate for the year in 2024, we expect to have 20 rigs space a 23% what do you foresee a book tax rate and a similar cash tax rate.
Second quarter, adjusted EBITDA increased 59% year over year.
Safe to say that sequentially to 300 millimeter.
Adjusted EBITDA fell sequentially as a result of the aforementioned challenges during the quarter.
We ended the quarter with a cash balance of $32 million and eight days of 256000.
They didn't they days increased by $67 million from the end of this quarter as we acquired solar energy $76 million edge.
Cash, we use cash flow to southern Catholics vintages $60 million in share buybacks and 9 million vacations total liquidity at the end of the quarter, including availability under the credit facility was $226 million.
Net capital expenditures were 152 million, which included costs related to did you Brad construction capitalized maintenance spending and other projects.
Approximately $7 million of proceeds from asset sales in the quarter.
Cash from operations was $240 million per quarter of riches to shareholders was $69 million for the quarter.
I can't believe saying just remain on target for 2023 now way towards the second half.
In 2022 July we have sold $250 million share repurchase program to take advantage of dislocations cheap prices.
During the first quarter of 2023, we upsize their authorization to $500000, reflecting our conviction and our ability to generate strong free cash flows.
We also reinstated our quarterly cash dividend of five cents per share in the fourth quarter of last year.
The second quarter, we returned $69 million to shareholders.
The share repurchase one 7 million shares which represented two 7% of the shares outstanding at the beginning of it.
The $60 million and the balance in dividends.
We have now returned to shareholders a cumulative $297 million for the last 12 months.
Continue to differentiate ourselves in the industry with an industry, leading return of capital program, while reinvesting in high return opportunities and growing our free cash flow looking ahead we've.
We just think north American completions activity will moderate in the second half of it yet. This is a this but remained at very healthy levels.
Frac activity is expected to stabilize somewhat quarterly lag the rig activity a hint of a more constructive outlook oil and gas market in 2020.
When you look at the second half what may reduce the fleet count of between one to three fleets effectively slows it.
Consolidated Atlantic City, they're highly efficient fleets, and thereby improving fleet utilization as.
As a result of these changes we were adjusting our full year 2023, adjusted EBITDA outlook to approximately 30% to 40%.
Both.
Property profitability should trend higher in 2024, and free cash flow to exceed 2023 levels driven by incremental profitability at current urine based on continued margin expansion initiatives and lower capital expenditures.
To deliver on our strategic priorities, including our industry, leading return of capital program, a strong balance sheet and continued basin differential technologies this position as well.
<unk>.
Chris will give some big picture closing comments after Q&A I don't.
Now ill turn it back to the operator to open the line for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
It was all your question. Please press Star then two.
At this time, we will pause for a moment to some of our roster.
Our first question today will come from Derek <unk> of Barclays. Please go ahead.
Hey, good morning, guys. So youre your topline was down 5%, but you held in decrementals around 30% to hold margins flat quarter over quarter can you just maybe talk about the cross currents between you mentioned your record pumping it was not on there huh.
Alright, white space decreased consumable prices and Frac pricing and should we expect similar decrementals for the back half of the year in the second half.
Look again as he said.
When people change schedules and we don't have enough time to fill slots and all that we end up with a little extra white space as we did so look at it but I would say pretty similar in Q2 versus Q1, a little more white space that drove the revenues down pricing about the same but what do you have white space and you don't get.
Revenue out of that you still got the same fixed cost it compresses margin a little bit or if Michael wants to say anything else, but yeah. You can see our revenue I think was about the same as Q4, but margins were higher.
And Derik I think the team did a very good job pricing was basically flat.
Say activity was off but you know we did a great job on the efficiency side Decrementals were 30%, which was a very good you know, we actually manage to sort of mitigate some of the incrementals that you would normally see in a drop of revenue with some of the other business lines. So but second half of the year I think he would say you could potentially see a little.
Hi, Decrementals that would be the natural sort of like flow but.
But we will still work to mitigate itself you know, let's say, 30% is probably the low end of the decrementals I'm, a little bit higher than that could be expected as well.
Got it okay. Great. That's helpful. And then I just wanted to any more color on your your Frac. Your fleet Count I know you previously guided us to a low of 40 numbers, but now we have some E fleets coming in you mentioned first did your flak seed out vaccines coming in three and four back half of the year you.
You talked about removing one to three fleets in response of the market, but what about your aging tier two pumps are you taking those out of the fleet as well I'm just trying to think about where we're 'twenty 'twenty four is going to start as far as our fleet count for you guys and maybe even further what type of mix should we think about between E Frac tier four DGB.
And then just your legacy stuff, but some color there would be helpful.
Generally I'll I'll take that one Derek I mean, we look at it we probably retire three pumps. If we think about 19 planes the average soon.
About 10% of the whole industry fleet goes down every year. So it's a very slow sort of incremental process. We are bringing on did you frac pumps as we go as we say we will have four fleets that you generally we're looking at a flat fleet counts that would be replacing tier two diesel. So we are moving up and natural gas percentage as well.
Yeah, well you know depending on where you are you have Q4 shakes out which may well I still sort of working on some of the planes I think all the operators are waiting taken off of that as well.
Somewhere between one and three fleets, we might drop compared to the beginning part of this year. So that's where we would start next year. One would expect those fleets will come back relatively quickly as the strengthening market going into Q1 with a better oil market and a strengthening of guy and I think youll see a strengthening market as we go through with the gas prices come back so really.
Pretty good outlooks for next year on that.
Sort of an increase in their gas usage, and so they'll go sort of widening out technology and knowledge.
Great perfect I appreciate the color guys learn about.
Thank you Sir.
Our next question today will come from Keith Mackey of RBC capital markets. Please go ahead.
Good morning, just curious so the guidance you've put out or the commentary you've put out on the fleet count mirroring our paralleling the rig count drops with a one quarter lag. So if we look at the rig count from Q1 to Q2 dropped about 80 at two and a half rigs per crew that kind of gets me.
A 32 fleets, which maps up I guess fairly closely with your bottoms up Frac count analysis, but can you just talk a little bit more about where you think the industry is in relation to dropping those 30 to 32 fleets and kind of where where are we sitting now in in total fleet count from what you can see.
Yeah, No I'd say, what we talked about that quarterly lag I mean, that's just a natural easy drilling movies launched spray. The vast majority, it's probably a larger amount of that was the exit rate for Q2. It will be early part of July right. So we sort of I'd say, our rig counts probably at that.
The stabilized faster now and probably I should go out in the last couple of weeks somewhere in somewhere around there I would say frac fleets I think people are slowly destocking flex frac fleets. So it's kind of houses how exactly we are we can't active demand where everybody is in sort of always sort of like sort of like you are expecting those swings.
So living to stop attrit off.
A little sort of more amorphous, but I'd say, a large portion of the day.
I think that's right.
Got it okay. Okay. Thanks for that color and just just a follow up on your 30% to 40% revised EBITDA guidance does that.
Incorporate dropping the one to three fleets potentially or would that be incremental to the to the to the 30% to 40% year over year EBITDA growth guidance figure.
Inclusive yeah. So that's as we say no to see we're probably at the bottom and the top end of that range, where the bottom end of the range from where we were what we were saying at the beginning part of this year. So that includes those that keytruda supposed to be complete trumps, if we still see.
Activity will continue to roll down.
Got it okay. Thanks, very much that's it for me.
Thanks Keith.
Our next question today will come from Luke Lemoine of Piper Sandler. Please go ahead.
Hey, good morning.
Maybe Ron could you update us on did you find and where you are with testing and then as planned still for these pumps to be and that did your fleets are rolled out number three and number four.
Yes Luke.
We're well into our bar testing with Digi Prime now it's on the test stand and running through the program. We have laid out for it they're all indications look quite positive at this point in time, So we remain pretty optimistic about deployment of that here in the not too distant future and and yeah certainly expect.
That too to play a role in our in our rollout of Digi exactly what that mix looks like will will be a customer by customer situation just depending on the needs there, but but yeah. You can expect did you brought him to be an important part of the base lower horsepower both imaging platform in some cases, probably combined with tier four DGB.
Okay got it thanks Ron.
Our next question today will come from Waqar Waqar Syed of ATB capital markets. Please go ahead.
Thank you.
No.
I just wanted to understand the what would change between what Mac with things that have to change between one and three crude drop.
If the rig count stands at about $6 50 or so.
Do you get to one to draw for sneaking drop or how.
How do we go from one to three.
Yes.
It isn't really a macro thing for us is to always bought them micro it's just existing customers where fleets are working if a customers reducing activity. So that fleet is no longer fully utilize if we can easily fill those gaps are sparse with roughly equivalent work we'll keep.
The fleets out there but.
But if we have a customer who's cutting.
Cutting activity in half and we've got two fleets running for them that's.
That's quite likely that one fleet is going to go idle.
Now we have today, we havent put any fleets down so I would say, we benefited a little bit from the differential demand for Liberty. There's people that wanted liberty capacity. They didnt have it and have seen a little bit of softening in the marketplace and abuse that.
Take to absorb capacity, we've had come free from these incremental reductions from existing customers. So it's really very much a bottoms up you know what.
What is the best use of that fleet. So that we can say some macro thing, it's sort of very specifics to the calendars of our customers.
Yeah, that's our guess of that range.
Where we are.
Gnostic on what number that is well keep all the people that work for US today, we'll reassign them into other crews some of them will work on test development and stuff natural attrition shrinks employee base anyway, so that employment count can adjust easily to sort of very modest changes in deployed.
Patrick.
Fair enough and Chris in terms of pricing.
Are you seeing some pressure on some of the fleets maybe more like tier two diesel fleets and if so how much would that be if you could put some oh some numbers around it.
Yeah look I think things are things are very you know granular individual customers individual customers, but as these fleets have gone down some of that people got before they put fleets down maybe lobbying cheap prices. They may grab spot work at much big discounts.
And does that create more customer dialogue sure of course it does.
But yes, we are.
Long term partners and generally dedicated work and the way, we're performing right now and our customers were in sort of a happy situation that works for our customers and it works for us and we just we don't have any intention or any need to meaningfully change what we're doing.
Yeah, and just one last question you have.
<unk> presence in Canada, how do you see the outlook in the Canadian market and right now the supply demand fundamentals there.
I would say that the Canadian market, which over the last couple of years, there's probably been an incrementally looser than the U S. Today, they're probably pretty similar.
<unk> pretty healthy markets, we're busy and activity will likely have a record year in Canada. This year.
Okay.
Great. Thank you very much.
Best regards.
Our next question today will come from Stephens, Inc. Garro of Stifel. Please go ahead.
Right.
Thanks, Good morning, everybody.
Two for me just to start.
What's the current sort of price discussion with customers feel like I mean is it is there are a lot of push back is it just I mean, clearly there's a preference for for your higher end assets, but just any color on how those pricing discussions have unfolded.
Stephen as fleets have gone down and that as we said probably 25 to 30 fleets across the industry have become idle over the last six months that absolutely leads the dialogues.
I said you have a car.
Before laying off those people and parking that fleet they'll probably make a few phone calls hey can we get your work you know we go this demand so we have dialogues with our customers.
Well, we're always motivated with our customers to figure out how to enhance their economics and enhance our economics are there a few more dialogues today, all right well I understand.
Quality fleet Youre, not going to lower your service pricing, but.
The chemicals weekend swapped out is there more efficient logistics, we can do what about this wet sand stuff. We've been hearing you guys talk about so theres probably more dialogues.
These exists, but maybe more of them today about alright, what can we do together to drive down our well costs.
And that's that's how liberty roles.
A much larger engineering staff are much higher tech team than our competitors and so I would say that team is aggressively working with all of our partners about how to get more efficiencies out of the system make better decisions on materials, you use in and grow our economics together.
Thanks, Chris.
As a follow up to that I mean.
You've talked about it I think we've talked about it as well and others as far as you've had industry consolidation you've had.
You and how probably acting better or certainly how have some capex perspective versus history.
Is it too early to definitively say, you've seen the impact of that better industry behavior.
On pricing dynamics.
Or you're still waiting to see what I'm, just trying to get a sense because we think it's happening, but it's but from your seat do you think there's evidence to that end.
Oh, absolutely I mean look at look at where we are at least perceptions were three or four months ago. Oh, My God activity is going to shrink pricing collapse, because it always does no little park fleets.
We've seen 25 or 30 fleets go down and no meaningful even measurable change in average pricing. So yeah, I would say tremendously different behavior that we saw in the last two downturns a lot of capacity has been idled I think people operating that capacity he tried to keep it busy at at.
At front of bolt high return pricing and they couldn't do it and they park of weights. So that's absolutely encouraging I think we see a change in that and people are just taking a little bit longer term view of their business now as the shale Revolution has gotten more mature.
And obviously consolidation helps that too, but it is a business now we'll see what the future brings but I mean, my guess is most of the activity decline that we'll see this year has already happened.
And I would say he industry's handled that fabulously.
Excellent. Thank you for the color for the color.
Our next question today will come from Marc Bianchi of TD Cowen. Please go ahead.
Thank you the updated guidance for this year.
For the back half now it seems to imply about a $260 million per quarter run rate I'm suspecting, it's going to decline throughout the back back half of the year, where the fourth quarter is slower than the third but any any steer you can give us on sort of that that progression is it is it a linear progression is it more of a drop off in <unk>.
Quarter.
Any color would be helpful.
We gave you are out of bounds there.
As you see you probably.
Two I 80 on average to get to the top end of the range right.
What are you using the middle end of the middle part of the range. There. So yeah I think so.
Clarity around Q4, there'll be normal seasonality in Q4, which is 5% to 7% because all of those but I think operators sort of where they are.
They're you know kind of the the planes are really just coming into focus as we come into summer right and so that will depend on sort of what part of the range. It generally it comes.
Mhm, Okay. So.
At least at the midpoint that the drop is more weighted towards the fourth quarter at this point.
With maybe a slight decline in the third quarter.
We have the slides.
The let's say the Fuzziness is and so therefore, yes youth items for yeah.
Okay that makes sense and just to clarify the one to three fleet potential drop that that's overall fleet count that's not just legacy excluding did your frac.
That is a global fleet our average overall fleet yeah, yes, okay. Okay.
Okay. Thanks, and then.
Another quick one on pricing.
One of the things that investors say a lot is.
We're not going to really know the effect of the pricing until the beginning of next year because of negotiations that occur in the fall and then all the pricing resets in the beginning of next year.
Do you see it playing out that way, where you know the market won't really know what's going to happen with pricing until we get into next year or do you think kind of Chris based on what you were saying to Stephen's question that we kind of already now.
Yeah, I mean pricing is a continual thing I think that's sort of.
There's a few big companies.
With big purchasing departments that are very annually focus, but theyre more the exception than the rule and ultimately, it's just supply demand and desire for who your partner is.
Those negotiations happen, so sunbelt look theres a lot of pricing dialogue going on right now we see how that's playing out obviously the supply demand dynamics will be different.
Three or six months from now than they are now that they might be similar or it might be tighter.
We don't know, but I don't think it's no. We don't know anything about pricing until next year pricing.
That's not how it works you are not going to see a seismic shift as you start into the new year under the new budgets right. This is Christian this is a continuum some.
Some things reprice on an annual basis, but generally everything sort of moves sort of like this.
Slowly sort of more organic fashion.
Yep, great. Thank you very much I'll turn it back thanks, yeah. Thanks for the question.
Our next question will come from Scott Gruber of Citigroup. Please go ahead.
Yes, good morning.
Scott.
Kristen and Michael you guys have been very thoughtful in the building liberty through a series of acquisitions.
But we did at Patterson and let you come together here recently.
And scale was a big focus for the company, they're not just operationally, but I'll.
So in terms of trying to capture increased investor interest. So I'm just curious about your kind of latest thoughts on industry consolidation.
Even greater scale and the importance of those factors moving forward for Liberty.
I mean look yes consolidation no no doubt that's a positive for the industry. It just you just get larger more rational actors in evaluating tradeoffs, we've been different I would say a little bit that we haven't been we haven't mainly been an acquisition company, we really started with a different <unk>.
<unk> be a different way and we're going to do business. We were may be a disruptor.
With a plan to be organic growth. It's just we had.
A brutal downturn in 15, and 16 that just led to a compelling opportunity when there wasn't another buyer and so we did this NGL deal and then COVID-19 in some circumstances, there led to for US a highly attractive opportunity with Schlumberger.
We're not buying nature, an acquisitive company.
We've had two awesome deals and boy, if we get a third opportunity gets tremendous like that of course, we would do it but our fundamental business model isn't acquire and integrate them.
But for some of our competitors it is and that's great. There's all different ways, there's all different ways to participate in this game.
But in general fewer players larger stronger players with more long term thinking management.
Absolutely positive for our industry on the Frac side I would say, it's also a positive for our customers.
What are the Crazy days of 2013, 2014, and that was 70 Frac companies. Let me think of what was the speed of innovation what was the investment looking forward more than three months, you know not not a lot.
So yes. It helps pricing. So you think all that is good for the frac industry, but not good for the E&ps.
Larger more thoughtful players are better able to make rational investments in long term partnerships I think it's making the whole industry healthier both our customers and.
And our space the Frac space, Yeah, and I would just add a little color. Yeah. We obviously see the fact, the steady earnings and a potential large market.
Appreciated by investors and we are building into that organically as you've seen we've built a.
A very large company without the Frac business, which is becoming a much steadier market less cyclical is still going to be.
Cyclical, but less than it has been.
Historically and now building our LTI platform will allow us to boost the Fi that earnings by some take some more noise out of the cycle and grow into so they've got to continue to grow the footprint of that some of that company, even while we're working in a space that may have single digit high single digit growth in the.
<unk> purge notes or the next thing is we've got a much bigger opportunity in front of us with the <unk> platform. So that's how we're growing into that size to satisfy our basis.
No that's all great color I appreciate that.
And then just turning to the Capex comment on 24 that being down the previous discussions of centered around.
Placing around 10% of the fleet.
So the question is is that we have.
The game plan for next year and then.
So where does the decline come from some of the ancillary services.
Or do you disclose the investment in digital Fracs. So I'm, just curious kind of what drives the year on year decline in Capex.
Yeah, when we say that's sort of a base that I sort of like last year. This year, we're very heavy investment cycles, as we sort of being part of the early part of the cycle and it was going to slow down next year, we will still have a place that fleet obviously.
Obviously, you got 10% attrition that will be an upgrade from diesel to digi Frank.
We could see more than that but as we see it next year, rather than being 50% predicted EBITDA yes.
Particularly though which is this year for Catholics, it's more likely to be in the cities.
And I think that's exactly the side, we obviously that would your opinions on opportunities great opportunities with high returns like we've been able to drive over the last two years are always going to be of interest to us, but that's where we see a baseline business moving to which is that and then as we laid out in your Investor day, it's probably between us.
And the city of transmission about hopefully that's what you're saying yeah. I mean, if you look at last this year, we've had some transformative changes that won't happen every year.
Lately different control system software redevelop entirely different logistics networks, and some new logistics technologies, we've talked about both the development and the construction.
Birthday of Digi did you Frac and DG product, we're going to continue to build those technologies, but upfront development of them. So we've had we've done a lot during the last downturn. It started this upturn to prepare ourselves for the next decade.
Continue to have meaningful investments every year, but we've got a pretty concentrated run.
I'd say the last 24 months you know in the next six or six or nine months. So yeah, I think Michael's comment to expect.
A reasonable reset downwards. If capex is is not inconsistent with the long term plan to phase and it is definitely not an indication of slowing the deployment of D. G. I mean, the demand. There is just tremendous for US is just balancing at what pace, we want to replace those fleets, what's the best homes for them.
As they come out.
Got it and then 30% reinvestment as a percent of EBITDA. So we consider that more like a long term kind of normalized level.
Yes.
It's an H score.
When we think about a baseline business sort of a base completions business.
City blocks it.
Okay.
That's great I appreciate it I'll turn it back.
Thanks Scott.
Our next question today will come from Neil Mehta of Goldman Sachs. Please go ahead.
Yeah. Good morning, good morning team Chris.
Chris Michael I want to start off on capital returns and you've talked you've been doing a good job.
Driving down the share count back half of last year have been aggressive in the first half of this year and I think your your mentality has been to buy back stock at dislocated share prices just love your perspective, as we tried to think about your capital return profile in the back half of the year.
Do you still see the opportunity to be aggressive or does the white space in the calendar.
Impact the Mag.
The magnitude of free cash flow available to return to shareholders.
I think as you heard from that sort of broad guidance, Michael gave that still.
Got.
It maybe a little down in the second half of the first half that's still pretty tremendous financial performance.
Got mid Twenty's cash return on cash invested since the day, we started the company and a 44% rosy right now so yeah look we haven't we have a strong business.
Average through the cycle, it's been strong since the day, we started this and for whatever reasons you you probably know better than us we have a stock price today, that's just I mean, what.
When I talked to people outside of our industry I just got a very puzzled look I mean, you trade at four times earnings you Gotta get way better than the S&P 500 return on capital and a growing competitive advantage.
We're in an unusual place and it's not our job to complain or talking you don't hear us talk a whole bunch about the stock price and that's a market.
But what we can do is respond to that marketplace and if the market stays anywhere around where it is now I mean, it just gives us a great opportunity Act, we've shrunk our share count 10% in the last 12 months.
If we continue to have opportunities to do that.
Fantastic well, we'll do it all day long look our goal what motivates US is build a great business, it's going to help empower the world and grow the value per share. So that's making our business more profitable larger and stronger, but if we could also shrink the denominator and heavy chair on a larger percent of the business.
Nick.
Got it. Thanks, Thanks, Chris that's great perspective, and the follow up and I think I know the answer. This question that you effectively an unlevered business at this point if to the extent you feel strongly that the business is dislocated would you ever put debt on the balance sheet.
To really get aggressive in lowering the share count.
Well look we'd always we're always going to keep a strong balance sheet liquidity as he said we've had two what two incredible downturn just in the last eight years. So we'd like to thank all of them can't be another one of those but you never know we always have to have a balance sheet, that's ready for what ever happened not just to survive the downturn, but in.
Those two downturns in both of those downturns, we bought business is bigger than we were.
At very attractive prices, so, we're always going to be ready and able to do things like that.
But you know obviously, we started our buybacks probably in front of our cash flow. We're not formulaic, we're gonna take X amount of money and we are on slide back sort of about how much money. We spent to buy our stock. It is how many shares can we reduce and what was the trade off involved in that buyback of producing those.
Shares so yes, it's not all buybacks are not going to float formulaic Lee with quarterly free cash flow, they're going to be based on share price based on our comfort.
But we'll never will never go way over the skis and compromise our balance sheet.
By back half the shares.
And I remember you know in some big agreement.
We have to have a rock solid balance sheet.
I am proud of repeating myself, I think you'd get our philosophy, no kind of a sense Chris.
Good question.
Our next question today will come from Dan <unk> of Morgan Stanley . Please go ahead.
Hey, Thanks, good morning.
Hum.
So I just wanted to ask on the gas activity side you guys have made some comments in the prepared remarks that you think that.
You'll probably see gas activity start to pick up in 2020 for ahead of all of the LNG liquefaction.
That to me that's coming online later that year and into 2025, given that you guys normally do have a pretty.
Close Paulson and you won on the kind of industry macro do you guys do you have any views or thoughts you can share on where you think that's it.
To get to you know assuming that we're kind of fully ramped on all the.
LNG liquefaction capacity that is in the pipeline as you know if we were to frame it versus where gas that can be started this year. It was 16% higher maybe 20 or 25 rigs, presumably that's you know a dozen or so quiet fleets do you have any views on whether or not we need to get back to that level.
Budwah blah, blah, blah, blah, blah blah or any thoughts you could share on how you think that's accurate.
Thank you.
Yes, I mean look.
But my guess is at some point next year and it might be later next year might be maybe middle of next year is a good guess, we'd probably get back to the gas activity level. We were at six or nine months ago. We may have to go higher than that.
Pretty significant growth in both LNG exports coming on and pipeline exports to Mexico, and part of that pipeline exports to Mexico, what he's going to feed another LNG export terminal out of Mexico. So there are some some pretty positive demand outlook things coming there, but but it's not.
We're going to see a doubling of gas activity from where we were a year ago, even before where you are now you know theres a lot of just awesome gas drilling locations in the U S and you know now activities going to dial back to <unk>.
Gas production flat.
We may even see some decline in gas production.
But at some point next year that will have to transition and of course it'll be gradual.
It starts to get above $3 $54 youre going to see activity creep back into the marketplace. So that you don't.
It'll be a light switch that will turn on but let me see gas above $3 50.
In the outward curve.
And going up from there.
You'll probably start to see some.
Some gas activity coming on that could be late this year that could be early next year, but I bet, we get back to.
Previous gas activity levels by sometime next year, but you know probably probably more in the second half of next year.
Thanks, a lot that's really helpful and then maybe just.
Following up on kind of the M&A and consolidation a minor question from earlier so maybe on the you know putting the core Frac. Martin. This slide is is it fair to assume that Liberty will kind of remain active in the and looking for opportunities to invest whether it's organically or.
Inorganically in kind of businesses that would fit into L. P I or the lower carbon type businesses.
Could you kind of talk through how you would characterize your investment strategy, where for the lower carbon I guess part of your portfolio.
Absolutely and look.
We could have spoken about that so you know I think lower carbon use government money. So we're not we're not going to chase government money because that can change with policy, but we are looking at the macro whereas the energy world going we're going to be the growth areas. We're gonna be the opportunities where there were where there is growth, but people don't think theres going.
B groh.
So yeah L. P. I look is a great example of a platform that's of interest to us that that can lead to very broader things.
Mentioned, I think three or six months ago.
But we are not making healthy moves electricity grid. We are we are we are going to drive the price of electricity up and destabilize our electricity grids, we've been doing it for the last few years and we're going to accelerate we meaning the policy of this of the federal government and the state governments are going to accelerate that that's unfortunate, but that's going to lead to bid.
Innes opportunities were.
We're not going to be in it just to be in it but if we can have strong returns on capital with technologies, we've already developed and purpose for something else like powering Dizzy fraud for example.
Delivering gas our processing gas do we expect to see broader business opportunities. There I think we do I think we do and Theres. Other it you probably saw an announcement recently about.
A breakthrough at FERC ROE in geothermal with Liberty as a partner there and we've had some new technology in some new approaches there that have had some early unexciting results.
You may hear other areas that are also using liberty technology and expertise.
Change the energy game, a little bit. So yeah. We are I mean, our our company is called energy for a reason we're all in on finding the best business competitively advantaged opportunities for us to play a role in a changing energy landscape.
Great really appreciate the color, thanks, Chris and team I'll turn it back.
I appreciate it.
Our next question today will come from my room <unk> of J P. Morgan. Please go ahead.
Okay.
Hey, Good morning, I was wondering if you could give us a little bit more color.
On the efficiency gains that you're seeing in terms of pumping hours, Chris I think you mentioned there was a record amount of.
Pumping hours he saw the fleet, but could you put some numbers behind it.
350 hours per per fleet, but love to get some more thoughts on that and the sustainability of that as well as you know if you could give us a sense of how did your frac fleets in the field are doing from a pumping hours perspective.
So we don't publish.
They're pumping hours, saying their internal metrics, we track, but we made a decision 10 years ago, we're going to track all that data we work with all our customers individually about how to grow those numbers, but what.
But we don't we don't share them publicly but the metric we reported here was when our fleet is rigged up on location, how many minutes in that day is it pumping.
It's been a thing I think liberty is likely led the industry our entire history in that metric and.
And look as we've grown our fleet count we're rolling out New technology, we've got all the things that might put a little bit of downward pressure on that but nonetheless record ever in last quarter. So that really speaks to the crews our people on location first and foremost, but also we've had breakthroughs and continued software.
And for.
Process innovation, our R&M, how do you keep a pump running as long as possible how do you manage the repair of it quickly.
I mean iron location being done differently. So there is a whole bunch of things that continue continued little innovations that drive that up higher ultimately do.
A few years down the road one of the factors that will help that go even higher he is our new digital fleets. You know these are gas recip engines, they've got much longer lifetimes and longer time between rebuilds and diesel engines.
We've got you know more technology around them that I think is going to help drive that up as well, but these are all sort of slow gradual things that matter, but we don't we don't usually highlight or pound the table during an earnings call.
D. G fleets right now you know software a lot of like new technology deployment issues are being sorted out right now I would say.
Oh, yes, the performance so far I think it's quite nice, but it's not at that it's not a killer yet but that will be there before law will be there before long I think it is going well.
Great and just a follow up you talked about this a little bit earlier I'd love to see if you could talk about what youre seeing in terms of demand for your did your frac kind of technology is one of your peers mentioned, how they sign as many contracts and the then the history in terms of the E fleets I'd love to get your perspective on what you're seeing.
From that.
Yeah look I think demand is huge.
That was a metric we wanted to saying we could sign a lot of agreements this quarter.
But that's that's not how we're viewing it you know we're going to we're going to have a certain rate of capital deployment, which sort of comes up with how many fleets were willing to build and then who are the right partners for those fleets where should they be the configurations. So but yeah. I mean, yeah, maybe just make the obvious point, yes, there's demand the interest.
In that in this new technology is tremendous it's tremendous but our focus right now is with the original customers, we're deploying them on <unk>.
Let's get these things ironed out, let's get that higher level of performance that the technology is designed to deliver a lot of that.
Paul the one <unk> are going to go to the people who get the first one is because the people who see the ones. They want more so right now they're gonna be priorities forgetting that technology.
Scott first movers and first partners in that.
Yeah.
This is quite high finding a home for them that's not a problem.
Great. Thanks, a lot Chris.
You bet I appreciate it.
Next question is from Tom Curran of Seaport Research partners. Please go ahead.
Good morning, guys. Thanks for squeezing me in I've only got two left here. So it seems as if we may be seeing a firming bifurcation of the frac market similar to the dynamic that evolve for the land drilling contractors have you observed a starker difference in metrics, especially bidding behavior and pricing trends.
The top six bumpers, and the rest of the players or between modern equipment.
Defined as E Frac, DGB and Upgradable tier four and then legacy diesel horsepower.
Between those two categorization.
Whereas the demarcation and metrics been sharper.
So it's it's both I think your premise is correct probably among the companies, it's even bigger right because even if you were you were a smaller player.
Got you.
You want the best fleet, you can get you'd love to have natural gas working equipment of course.
But most important is to have a fleet that's going to deliver safely efficiently on schedule operations. So the demand for higher quality humans in crews and maybe characterize by the best players versus.
The newer smaller lower quality players that that differential in today's marketplace City is huge it's just.
Because you got a capital budget, you're going to get something done and and well boy I just took the fleet I got.
Seeing people's faces distress.
Look we're in a problem you know can you help us out here. We are so I'd say the quality of the company in humans is the biggest differential.
But the differential among that next generation frankly of course that speak to but I think most people realize it's a matter of when I'm going to get that fleet.
I may not be that the big guy or the or the efficient partner that that's going to get it. This year I may get it next year or two years from now the interest is there, but the bigger divide as you just said is more among the company's human culture service quality.
Got it makes sense, Chris and then up for Liberty power innovation.
How would you characterize the remaining M&A landscape of just specifically alternative fuel and power solution prospects out there you know.
Possible targets and would you say that's L. P. I does actively remain on the acquisition front.
Well when we bought <unk>.
It is well it was not intended to acquire it was like a liberty ideas. It was an organic idea within organic team with an organic approach.
And then we saw a newer smaller player.
Vaccine that fit nicely with what we were doing it we were able to get.
Price.
And the cultural accumulative.
That was compelling for us so.
So yes, we're look we're pissed all the time, we will look at everything it's acquisitions are certainly possible, but it's again, it's not a central part of the strategy.
Okay.
Thanks for including me guys I'll, let you wrap.
Thanks I appreciate it.
Our next question is from John Daniel of Daniel Energy Partners. Please go ahead.
Hi, all thank you for including me I've, just got a few quick ones for you.
I think Michael first you mentioned retirement I think when one stem close you had like two and a half million horsepower.
You said you were retiring three pumps, a week or something ballpark does that should we then extrapolate and assume you've got two to $2 2 million.
Horsepower today ballpark.
Right.
Its costs, but I was really putting the example that it's not a sleep. It goes down like this week, we're going to select multiple outlays every rohit.
So they get reviewed.
Engine blew off its not with rebuilding so I'm trying to you know kind of like when we talked to in basis. It's really it's an old Danny when we talk about Kimpton nutrition is not something that happens in blocks and something that happens organically. That's what we're talking about a job. So yes, yes.
I wanted to pay debt.
Indicator of our horsepower.
Fair enough.
And third on this stuff so I apologize I'm just trying to be close.
Okay.
You guys I mean, you work for best of breed E&P companies and so if you have one to three fleets go idle.
Whatever it is I don't care I mean that seems more like budget massaging on their part as opposed to so therefore coming back next year.
Post to like shutting down is that fair enough fair enough.
Well, there's a little bit of that there's a little bit of that but probably the bigger piece is still just what the projects or deals.
Hi.
But there are still big players in the marketplace.
And I.
I think mostly because of the economics, they they're not stopping activity, but they just pulled back activity some of them have salt right. You've seen some of this is just M&A, reducing activity company, a buys company b and together they are running seven fleets and together theyre going to run five fleets.
Some of that consolidation. It is just the very biggest people are just steadier.
Very biggest stars and they're solely.
Steadily growing their activity.
Small software companies.
Okay.
As you alluded I think you said you stated not any fleets have gone down for you, but call. It 25 to 30 across the industry.
If we assume 1% to three fleets that's about call. It 5% of your fleet should we extrapolate that to the broader U S. Frac market or is this just more nuanced when it simplistically should we see expect another 10 to 15 fleets.
Across the U S goes down.
It's more nuanced John because I sort of made that point like a lot of pizza have already gone down and we haven't had any.
It's not a macro thing for US yeah for sure. It's just a micro bottom up.
Where is your fleet now what is it doing if you had a small number of customers now didn't change your plan for your fleet count would change.
But so it's very granular bottom up with kind of what's going on in our world. Yeah, We bear and what we had was based on a calendar.
Have you out of the back end of Q2.
As we are working with our customers and seeing what they have evolved and plans for the second half of the year up allows us to vein.
Sort of.
To put that word onto a fewer number of fleets right. So it was just it's just being very judicious about how we manage athletes.
But the we think with <unk>.
And a final one for me I know you can't you're not going to get into the granularity of the pumping hours per day, but.
When you do have the data you're tracking the improvements as you've seen the improvements recently.
I mean, how much is something that that you guys have done versus maybe a new product or service from a third party or just better planning and scheduling by your customer if there's any if you could just add some color that'd be helpful.
Yes, I mean, the recent changes I wouldn't say, it's a revolutionary New third party thing.
Okay.
Well swaps things that came out a while ago that excellent, but that's that's been around for a while it's really just better.
More experienced people getting better at what they do and just tighter relationships with customers, saying, Hey look we do think this way if we did it together that way, we get more minutes out of the day. So it's incremental process human partnership improvements I would say John that dominated.
Okay. Thank you for letting me ask questions, let me get that thank you.
Yes, I appreciate all your time in the field John Thank you.
At this time, we will conclude the question and answer session I'd like to turn the conference back over to Chris Wright for any closing remarks.
Three days ago, the Wall Street Journal ran a sobering article by Tom Fairless, titled Europeans are becoming poor.
Punch line of the story is the dramatic divergence in prosperity between the U S and the European Union over the last 15 years in 2008, each represented roughly 25% of global consumption.
Today, the U S has risen to 28% and the European Union has shrunk to only 18% in <unk>.
<unk> terms the European economy has grown by a paltry, 6% over the last 15 years versus 82% for the U S.
What might explain this startling contrast, and fortunes between two close allies and trading partners.
A word energy.
For the last 15 years, the American shale Revolution has transformed the U S from the world's largest importer of energy to a net energy exporter, who leads the world in both oil production and natural gas production.
The result has been enormous energy cost savings for American consumers and businesses.
<unk> are energy intensive industries with high paying blue and white collar jobs. This trend could surely accelerate if we stopped building impediments.
The energy story in the European Union is quite the opposite.
EU oil and gas production has dropped by over a third coupled with high taxes and regulations. This is delivered ever increasing energy prices to consumers and businesses alike.
The net result has been an exodus of energy intensive manufacturing from the EU, mainly to Asia, but also to America <unk>.
The party manufacturing jobs take high paying blue collar jobs and start many supporting industries.
Expensive energy impoverished European citizens Squelch is optimism and further suppresses fertility rates.
Of course, many other factors played a role in the EU American divergence over the last 15 years, but I believe the core issue is energy.
Artemis often mistakenly mistakenly view energy as just a sector of the economy. Instead energy is the sector of the economy that enables every other economic sector.
Energy is also essential to keeping citizens warm in the winter.
All of this summer and it enables affordable secure food supplies get energy wrong and suffering is sure to follow.
Thank you for your interest today, and we look forward to talking to everyone next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.