Q3 2023 Liberty Energy Inc Earnings Call
Good morning, and welcome to the Liberty Energy Earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
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I would now like to turn the conference over to Anja leave Auria strategic Finance and Investor Relations leader. Please go ahead.
Thank you Gary Good morning, and welcome to the Liberty Energy third quarter 2023 earnings conference call joining us on the call are Chris Wright, Chief Executive Officer, Ron <unk>, President and Michael <unk>, Chief Financial Officer.
Before we begin I would like to remind all participants that some of our comments. Today may include forward looking statements, reflecting the company's view about future prospects revenues expenses or profit.
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, but are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings.
Today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA adjusted EBITDA adjusted pre tax return on capital employed and cash return on invested capital are not a substitute for GAAP measures and may not be comparable to similar measures of other companies a reconciliation.
Net income to EBITDA and adjusted EBITDA.
The calculation of adjusted pre tax return on capital employed.
Cash return on capital and stuff that Ive discussed on this call are available on the investors section of our website.
I will now turn the call over to Craig.
Thanks, and good morning, everyone and thank you for joining us to discuss our third quarter 2023 operational and financial results Liberty delivered excellent quarterly financial results, reflecting outstanding operational execution focused customer engagement and agility across us.
Softer North American Frac market record pumping efficiencies drove sequential growth in revenue and adjusted EBITDA, while electing to idle our fleet during the quarter in response to softer market conditions.
Adjusted EBITDA was $319 million.
Our fully diluted earnings per share was <unk> 85.
The industry remained disciplined championing championing steady pricing for quality services, while withdrawing under utilized frac fleets from the market.
Our superior execution combined with expanded vertical integration and technology investments culminated in a trailing 12 month adjusted pre tax return on capital employed of 44%.
I'm proud that our team delivered a milestone achievement and operational efficiency.
We achieved our third consecutive quarter of record average daily pumping efficiencies delivered across our full fleet.
Safely pumping more hours and tons of sand than ever before this success was driven by the unique culture of innovation and excellence at Liberty.
Over the years, our investment decisions have grown our competitive advantage by driving value creation through technology scale and vertical integration today, the latest piece and our <unk> technology suite is demonstrating impressive operating results the comparison commercial deployment of <unk>.
Proprietary Digi Prime units commenced in late September quickly, becoming the crew and customers favorite technology on that location.
We embarked years ago with a blank slate to envision design and build natural gas powered frac fleets that would represent a step change improvement in Frac technology, we didn't choose the easy route to simply extrapolate from existing pumps pumping technology or the partial route where we.
Outsource the power generation part of a Frac fleet.
He took on the whole enchilada with a commitment to build the best damn nextgen practically well the effort was worth it today, we have a truly differential frankly technology that is setting operating performance records, while delivering the highest efficiency lowest emission.
Fleets in the industry.
They say that customer interest in DG as high would be an understatement.
We are supplying did you fleet with robust reliable compressed natural gas delivered and managed on site by our new Liberty power innovations Division.
We are on track to be operating for DG fleet by year end and six D. E fleets by the end of January 2024, we are excited by the strong customer benefits and poll for our Digi. Please.
As we continue to transition our fleet toward more natural gas fuel technologies. We're also maximizing diesel displacement with natural gas across our dual fuel fleets. We have worked in conjunction with our technology providers to develop and deploy control software to significantly increase.
Diesel displacement.
Our year's long effort in predictive and preventative maintenance programs have positioned us to optimize equipment performance and availability, enabling us to run our pumps and optimal operating ranges to achieve maximum gas substitution.
We are also starting to reap the advantage of hurdle vertical integration provided by L. P. I, improving the reliability of gas supply to our Frac fleets. There is much room to run here.
Liberty is focused on asset optimization maximizes the uptime of each part driving higher equipment reliability and operational efficiency, our predictive maintenance programs are better than ever before continually assessing assay health in real time.
By applying advanced analytical tools and processes, such as machine learning and AI, we are addressing issues before they become critical and using this data to prevent issues in the future a year ago, we realigned teams to seamlessly work together on the shared goals of Max.
<unk> operational efficiency and optimizing equipment maintenance today real time data is enabling our teams to execute on these priorities and hold themselves accountable and delivering superior results.
Wireline was a new business added the Liberty and the one steam transaction, we knew our customers would greatly benefit from streamlining our frac and wireline crew interactions onsite to shave extra minutes off the day every minute equals efficiency and translates into a lower cost of producing a bear.
Olive oil for our customers and improved profitability for Liberty.
Today, we have more frac and wireline pared read on Red crews since we first brought wireline into the fold.
We are proud that liberty wireline now ranks as the top service provider. According to the most recent kimberlite survey and independent industry research that extensively poles E&P customers across the industry.
We increased our quarterly cash dividend by 40% in response to the significant growth in our per share earnings and cash generating abilities from our business transformation over the last three years.
During the third quarter, we repurchased 1% of our shares outstanding or accumulative, 11% since our buyback reinstatement in July 2022.
We are focused on the opportunistic execution of our buyback strategy, we will move more aggressively during stock price pullbacks and moderate our pace when the stock runs out.
However, we continue to see a large dislocation in our stock price relative to what we believe is the intrinsic value of our stock.
Our goal remains the same and maximize the value of each liberty share and drive higher total returns for years to come.
Fleets across the industry were idled in response to completions activity softness supporting a better supply demand balance of marketed fleets as compared to prior cycles.
The shale Revolution matures the industry has adapted to a new era in frac markets through consolidation technological process disciplined investment and serving increasingly complex customer needs.
Frac activity has largely stabilized at current levels, representing a base load of practically demand needed to sustain E&P operators flattish production levels.
Fourth quarter trends will likely see seasonal softness winter weather and holiday disruptions. We expect the recent strengthening of commodity prices will drive a modest increase in industry activity beginning in 2024.
Liberty's internal analysis shows several natural gas Levered E&P companies are expecting the increased activity into 2024.
Sustained strength in crude oil prices is also stimulating demand for frac fleets amongst smaller private oil producers.
<unk> of modest growth in Frac is within view.
Global oil and gas markets bounce firmer footing during the third quarter driving higher oil and gas prices volatility in commodity markets has emerged from the possibility of an escalating conflict in the middle East and renewed recessionary fears.
Igniting the elevated uncertainty global industry supply and demand trends infer that the delicate balance of oil and gas markets is tilted to the upside given the relatively small spare production capacity today.
The long term demand outlook for secure North American energy anchors are more durable cycle OPEC plus decisions, including the extension of Saudi Arabias production cuts further demonstrate a willingness to support commodity prices underpinning long term investments in North American shale we.
Just saw an industry Titan doubled down on North America's future.
Our positive outlook for North America is leading the consolidation and investment amongst E&P operators focused on long term value creation.
Liberty is uniquely positioned to support our customers' ambitions to unlock value with our superior services next generation technologies integrated footprint and scale today's E&P customer is focused on driving improvement, which can only be achieved with outstanding service partners.
And differential technologies.
Transformative work our team accomplished over the last three years through technology investments vertical integration of wireline sand and logistics and now L. P. I natural gas treating a delivery uniquely positions liberty to address the diversity and complexity of customer needs.
I would like to take a moment to celebrate the Liberty team record performance was a result of the collective effort of all of our 5500 teammates across North America.
I am proud to be your partner.
We outperformed in the third quarter in the face of a softening industry delivering significant operating efficiencies outstanding safety record and attractive returns.
In the fourth quarter activity is expected to slow modestly our normal seasonality and the related impact on efficiency.
For full year 2023, we expect adjusted EBITDA will be at the high end of our guidance range of 30% to 40% growth over 2022.
We continue to deliver superior returns and a differential service for our customers our commitment to excellence and focus on company culture. Our next generation <unk> technology suite and L. P I positions us well to compete in both near term cycles and over the long term.
Best is yet to come.
With that I'd like to turn the call call over to Michael stock, our CFO to discuss our financial results and outlook.
Good morning, everyone.
Liberty's year to date results have been outstanding during a period marked by softening activity trends using a slightly different return matrix. The rosy that Chris mentioned daily yet that we use to benchmark ourselves versus the industry in the S&P 500, our annualized cash return on invested capital is 37% year to date an increase.
From 51% in 2022.
Our third quarter financial results were notable marking a modest increase from the prior quarter and adjusted EBITDA at a modest decrease in net income despite slower any industry activity and the idling of one fleet our results not only showcase the importance of leading reliability technology and service quality to our profile profitability, but also.
Highlight the importance of those features to our customers.
Third quarter revenue of 2023 revenue was $1 2, billion% to 2% year over year increase and a 2% increase from the second quarter.
Relative to the second quarter railroad efficiencies across the full fleet integrated services and a favorable product mix more than offset market headwinds and the odd thing one fleet during the quarter.
In the third quarter, we had the highest come have some sand pumped in the history of the company, even with one fewer fleet in prior quarters.
Third quarter net income after tax of 149 million represented a 1% increase from prior year and a modest decrease from the 153 million in the second quarter.
Diluted net income per share was <unk> 85 cents, a 10% increase from prior year, which highlights the tuition benefits are actually in buyback program and compares to 87 seats in the second quarter.
General and administrative expenses totaled $55 million in the third quarter and included noncash stock based compensation of $9 million G&A decreased $3 million sequentially sequentially as the second quarter miscellaneous expenses did not repeat Nathan.
Net interest and associated fees totaled $7 million for the quarter.
Tax expense for the quarter was $50 million approximately 25% of pre tax income we expect the tax expense rate for the full year to be approximately 25% of pre tax income.
Cash taxes were $7 million in the third quarter, and we expect 2023 cash taxes to be approximately 35% of their effective book tax rate for the year.
In 2024, we expect to be approximately 24% effective book tax rate and a cash a similar cash tax rate.
Third quarter, adjusted EBITDA increased 15% year over year, and 2% sequentially to $319 million.
We ended the quarter with a cash balance of 27 million and net debt of $196 million. It did decrease by $60 million from the end of the second quarter cash flows were used to fund capital expenditures $29 million of XI ebix share buybacks and $8 million of quarterly cash dividends total liquidity at the end of the quarter, including us.
The ability under the credit facility was $322 million.
Net capital expenditures were 161 million in the third quarter, which included costs related to did you fleet construction capitalized maintenance spending and other projects.
We had approximately 12 million of proceeds from asset sales in the quarter.
Net cash from operations was $273 million for the quarter and returns to shareholders with $38 million for the quarter.
Capital expenditures remain on target for 2023, as we expect to deliver did you forget components in the fourth quarter.
In July 2022 January 2023, we installed and then upsize that $500 million share repurchase program.
Basically to take advantage of that dislocated share prices.
We also reinstated our quarterly cash dividend one year ago. We are pleased to share. Our board has approved a 40% increase to our quarterly cash dividend to <unk> per share beginning this quarter, reflecting our conviction their ability to generate strong free cash flow through the cycles.
We also continue at returns to shareholders program without buyback program, including the repurchase of $1 8 million shares in the third quarter, which represents approximately 1% of the shares outstanding at the beginning of the quarter for a total of $29 million. We have now returned to shareholders accumulative $325 million in the past five quarters.
Yes.
We continue to differentiate ourselves with an industry, leading return of capital program, while reinvesting in high return opportunities and growing free cash flow.
Looking ahead, we see north American completions activity to slow modestly in Q4 on normal seasonality and the related impact on efficiency.
We expect activity to increase modestly in 2024 in the third quarter, we reduced our active fleet count by one place consolidating our planned activity with their high efficiency fleets improving utilization.
While we expect normal seasonal softness in the fourth quarter, we do not plan to idle any additional fleets due to the demand in Q1 of 2024.
As a result, we will now anticipate reaching the high end that full year 2023, adjusted EBITDA of approximately 30% to 40% year over year growth.
In 2024, we continued we see a continued constructive outlook for the oil and gas market and even more so for Liberty, we anticipate free cash flow will exceed 2023 levels driven by incremental profitability from that current year investments continued margin expansion and efficiency initiatives and lower capital expenditures, we will continue to do.
On our strategic priorities, including our industry, leading return of capital program, a strong balance sheet and continued investment in differential technologies position us well in the coming years I will now turn it back to the operator for Q&A after which Chris will have some closing comments at the end of the call.
We will now begin the question and answer session.
To ask a question you May press Star then one 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 two.
Our first question is from Stephens <unk> with Stifel. Please go ahead.
Hi, Thanks, good morning, everybody.
David.
Two things for me.
The first I'll start with <unk> and I have to ask yourself.
The guidance I mean, you you have you had a really good quarter, a great three quarters to start the year. It feels like it would be hard to not get above the guidance range and I know theres some seasonality, but could you just kind of give.
Give us some any additional color on how to think about the fourth quarter, given youre not laying down anymore fleets.
And youre, etc, healthy level through the third quarter.
Yeah season, Steven Yeah, we've our guidance as you know as always you'll have basically estimate of where you know we're going to come in and we want to be close.
If you look at the fourth quarter seasonality, we've been very very efficient with that customer's plans as we've been through the first three quarters. So you are going to see a little bit of budget maintenance as they sort of completed things a little bit quicker than they would have expected and so as we go through you're going to see seasonal slowdowns with holidays and winter a little bit of budget maintenance management as we go.
Through the year, and then I think youll see everything pick up again in Q1.
Okay.
Thanks, Michael and then as we think about next year.
And your capital spending needs.
How should we think about Capex I think it should fall as a percentage of EBITDA.
It feels like that will lead to pretty robust free cash flow next year and any color you can add on plans for that free cash flow.
We will continue with our stated goal is obviously the first thing is we manage with very very strong balance sheet to make sure that we can weather any situations that could come up in the future. We have incredibly high demand for our next generation technologies and as you see we will have a very very strong return of cash to shareholders.
Graham.
Also they have some interesting business opportunities without liberty power innovations business. So I think we will continue with exactly the way we have invested capital over the last 10 years.
And any ballpark on Capex for next year at this point.
No. We will give you those details in our January call as we always do is we'd like to give it to you once a year.
Thank you lots of free cash flow as you said, Steven we agree very very significant free cash flow next year, yes, I mean, it feels like Capex comes down free cash flow was pretty strong and that's why I asked the question, Thanks, Chris and Michael.
Yes, Thanks Stephen.
The next question is from Roger read with Wells Fargo. Please go ahead.
Yeah, Thank you and good morning.
Just wanted to follow up.
One of the things I think Chris you said was you know customers are obviously going to want more efficiency better performance et cetera, as we talk to some of the E&P companies. They also discuss you know hey, we want the right service company rather than the single cheapest service company. We can get can you give us any insights into how sort of we should think about.
That with pricing, we typically think of pricing power, but but what is the right way to think about that relationship here as to what it can mean for margins and 24.
But you always have some companies in our industry and I would say with Liberty started they may even have been the norm that viewed as a commodity well we bid it out we get a whole bunch of bids in our supply chain team sees who the two or three cheapest star and then we go talk to them.
That was the norm when we launched liberty today that exists, but it's not the norm anymore. I just think people have taken a broader view of shale and on this line item is that liberty number higher well, yes. It is but if you get wells done faster safer more efficiently lower emissions.
And better help on design and execution about how to maximize recovery from those wells Hey, all in value I would say liberty holds a pretty significant differential versus others and why.
One of the things we have rolling out now is this different fleet technology right that that arbitrage between the cost of power fleet with diesel and the cost of power fleet with natural gas, that's a huge cost savings opportunity that benefits, both our customers and us and our fleets not only are burning.
Natural gas versus diesel, but these next generation fleets burned a lot less natural gas than a turbine driven fleet by the same amount of work that higher thermal efficiency.
Virtually zero methane slip so theyre just cleaner cheaper more efficient so that technology allows it to be a win for our customers and a win for us, but ultimately there is always a back and forth dialogue with our customers. He market is softening we're seeing numbers like this but we don't have customers, saying Hey, These guys are 10% cheaper so we're gonna jumbo.
There I would say most of our customers and our partners they get the value and the trust and the relationship working together, we didn't do everything we could have last fall when the market was really tight could we have jacked up prices a little bit more mixed people, but still held the work sure. We could have but we didn't do that we act.
As long term partners with our customers like this business thrives when we when our customers win and over the long term you can generate better efficiency smarter decision, making and come up with new ideas that then should be developed there's just huge benefits and long term partnerships with our customers at <unk>.
Im thrilled look a ton of our achievements our innovations they're not just liberty that's partnerships with long term customers that lead to stuff like that.
No I appreciate that.
Follow up question for you Michael as we think about the combination of the ways to return cash to shareholders dividends versus share repos is there.
Overall framework, we should think about here or is it kind of getting to Steven's earlier question. If free cash flow is up we should just think about that as incremental returns to shareholders.
Well most of it will go there.
Roger but look.
We've been a believer to have a base dividend that's modest it's a very small percent of our cash generation ability and we plan to slowly and steadily grow that with time that sort of a base return that that's going to happen we bumped it a larger chunk this year because they are basically recalibrating it for the much great.
<unk> cash generation ability, we have now than we had three years ago on a per share basis, and then so that's a small piece, but that's sort of the base piece that's always there.
And there is obviously capex and that's always the biggest balancing decision we have Wow and then again today, that's trickier because the demand for what we have new coming out is just tremendous but we're not going to invest all the cash we generate or even even more than half of it into into capex.
We're going to balance what are the most compelling investments and how do we structure that and then that additional cash the biggest use of bit of last year has been buybacks. That's probably the case I'm sure next year, that's going to be the case as well.
There is there is technology based acquisitions, we're generally not in A&D company, but if there is compelling things, we'll do those and we always think it's critical to just keep the balance sheet very strong because you never know what happens and look I know you know the history, but in that tough downturn in 15 and 16.
And the tough Covid COVID-19 downturn, we werent positioned enable that make us compelling acquisitions.
Massively grew our per share value and ability to generate cash and profitability. So buybacks are still the dominant thing, but we've put for us it's not formulaic and it's not a percent of cash in a quarter. I don't think you should look at cash flow or profitability or any of those things on short term time frame. There are swings to them. So we just take a long.
Term window on that and I'm sure as you've heard before at our buybacks. We have an internal view on intrinsic value versus stock price and the wider that differential is the more aggressive buybacks are going to be.
And if the stock price moves quickly if it moves quickly downward we're going to we're going to pounce on that if it moves quickly upward we're going to caution and take a breath and reflect what's happening not going to stop buybacks. If there's still a large value dislocation, but we're going to be more measured and the approach.
I appreciate that thank you.
Yeah.
Okay excuse me. The next question is from Derek part Hazer with Barclays. Please go ahead.
Hey, I wanted to ask a few questions on your <unk> fleet, So you've talked about getting to four by year end and six by the end of January how should we think about the <unk> fleets as far as incremental versus replacement and then if we look into 2024 and how it's high grade to your overall fleet, how do we think about that expanding your profitability and then finally just a few.
Mix of the did you frac versus the Digi Prime and what do you think's going to be the winner over time.
Great Great questions Derek first of all in the replacement versus additional fleet that just market dependent I think when we talked a year ago. When the market was literally short equipment, we set a probably a balance between the two look at the marketplace now theres no shortage of horsepower out there. So all of these fleets, we're rolling in or just replace.
For our oldest equipment that the cost of maintenance and lowest quality equipment Theyre just replacement fleet off the market stays like it is today no reason to change that strategy.
The fleets themselves that maybe we've communicated less then perfectly here there is not a different DG frac fleet or a DP Prime fleet Theres, a DG fleet. There are two different frac pumps that have different strengths and different weaknesses that together, we've built to make a system that was just compelling and that was <unk>.
Rachel and I'm going to have raw and expand a little bit more on the difference between those pumps and how you configure the optimal fleet fleet, depending upon the customer needs.
Yes, gerrick I like to think of the most complementary not that theres going to be a winner and a loser in these technology. So as Chris noted in his opening remarks did you frac the electric pump for us and so that consists of two components first of all power generation trailers. So the rolls Royce 'twenty cylinder natural gas engine, driving a and <unk>.
Trick generator and then the electric pump itself. It turns that electricity back into mechanical energy that was a five year effort for us to build from the ground up.
Fit for purpose electric.
System and that included both Budd.
Innovation around the power generation side to make sure we deliver the most efficient low emission power generation. We could that was modular that was capital efficient that allowed us to deploy the right amount of power generation to match needs on location to be able to adapt to incoming grid power to the extent, we have that available to us and then to pair that with.
A ground up pump design that we again think brings a whole host of benefits to the table.
But in working through that design and ultimately as we began to have conversations with our customers around the deployment of Digi Frac. There was a recognition that not all of our customers are going to use grid power as part of this and so that led us to recognize we had further opportunity we had an opportunity to make this system more efficient yet.
Which is to say that we were going to remove the conversion of energy from.
Mechanical to electrical and back to mechanical there are losses associated with that and so you burn a little more gas and as a result of a modest amount more emissions to accomplish the same thing and Thats, what led to Digi Prime. So did you prime just removes that conversion mechanism, we take that same natural gas engine.
Credibly efficient lowest emissions profile you can find in the industry and attach that directly to a transmission and a pump now.
Now there is there is a limitation to digi prime in that the engine is a constant speed engine. It runs at one speed and one speed only we have the ability to change gears. So we have some amount of rate control, but when you really want that fine tuning in our frac when you're when you're working up against the high pressure limitations that we might have you want that ability.
Do you have some micro adjustment in rate, we don't get that with Digi Prime we get that with did you frac the electric version of the pump.
And so youll see these two these two different technologies work together is what we'll call a digi fleet.
So it's ultimately going to be a combination of the two and the ratio of those two different technologies on location is going to be a function of whether or not the operator or our customer our partner in this anticipates using grid power. So to the extent, we won't have access to grid power you should expect the <unk> lead to consist of.
Majority Digi Prime pumps and then.
A couple of Digi Frac electric pumps on top of that for for that fine tuning and then to the extent we have an E&P partner who's going to have some grid power on location, we might access have access to five or 10 megawatts of electricity youre going to see the percentage of that fleet. It is did you frac our electric pump creep up a little higher and will have less did.
The prime on that so that's how we'll think about that going forward, it's going to vary fleet by fleet customer by customer depending on the situation we find in the field, but ultimately at the end of the day, we are going to deliver to the customer and unrivaled technology profile with the lowest emissions.
And lowest fuel consumption you can find in the industry.
Great I appreciate that rundown very interesting and very helpful.
Second question I know you talked about your opening comments, but I agree the integration is going to define the winners in a maturing sales cycle.
Can you spend some time on LTI I know is a recent acquisition, but maybe how impactful it was for third quarter or how should we think about it for 2024 and it being a profitability lever as you continue to scale that out across your fleets.
Yes.
In line with other Liberty historical vertical integration, if theres, something thats holding us back slowing down the delivery of our quality of service, we look at how to solve that problem.
Yes, onsite delivered natural gas, there's not a lot of options today and the quality of that service is very spotty, sometimes it's fine sometimes it's not enough gas.
Manifolds that can hook up to some of the pumps, but not all of the pumps. All of these things just hold back the substitution of natural gas into diesel. So we just decided we're taking that problem into our own hands and we're going to make sure all of our fleets have reliable robust gas delivery <unk> the right option via CMG.
There is gas to process out of our pipeline our field gas we have technologies to profit that gas on site and use that we can blend. The two together. So we just decided natural gas is so critical.
Stepping back it's the fastest growing energy source on the planet and has been for the last 10 years and likely will be for the next 10 years. So we are talking here about that specific application of using natural gas to power Frac fleets, which absolutely is the future for many reasons cost emissions efficient.
Bundle of natural gas that we're also.
What we want that expertise to build called virtual pipelines delivery and moving of natural gas to where we need our starting with our natural gas powered frac fleets did you fleets that without gas. They don't run dual fuel fleets. If you don't get gas. They still run you just burn more diesel more expensive higher emissions than you should have been so.
We're building.
L. P. I first empower our frac fleets, but it's also of course going to supply other peoples' rigs other operations in the field. There's other oilfield applications for that and ultimately as you look ahead, what does liberty generating expertise in regenerating expertise and having the highest thermal efficiency on.
Wields mobile power generation there is a.
And we're generating expertise and how to move natural gas had a remotely or on site process natural gas to deliver natural gas.
Wherever it's needed and however, it's needed so.
Electricity natural gas is 40% of U S electricity generation and sadly, but unfortunately, we are driving our electricity grid prices up in our grid stability down.
So expertise at moving deploying natural gas and remote power generation is only going to grow in value.
Great I appreciate all the color I'll turn it back.
The next question is from Luke Lemoine with Piper Sandler. Please go ahead.
Hey, good morning.
On the whole Digi morning, Digi initiatives seems like it's going extremely well and I guess specifically on digit Prime. This was just a lot of testing in a few months ago.
<unk> been in the field.
Timber you guys talked about this being the customer's favorite technology on site.
Could you maybe just talk a little further about the feedback and maybe what you've learned as well about having it lives on on.
Well location.
Yes, sure Ken look at feedback.
Feedback has been extremely extremely positive since day, one so you have to imagine.
What really is a pretty big step forward for not only our operations team, but also our customers in terms of what they're seeing here. We're basically talking about power density that's two for one relative to tier four DGB. So.
To optimize substitution on a tier four DGB engine. Obviously this is pressure dependent but but you might see that pumped delivering maybe six barrels a minute or so we've got D. G. Prime all they're a single pump effectively replacing two of those delivering steady as she goes day in and day out 24 hours a day at 12 barrels a minute.
It's doing so burning less gas.
Those two pumps would have combined so remove the diesel and reduce the gas consumption and we're delivering twice the rate. So it truly is an incredible step forward, it's fully integrated with our pump control platform and so to our operations team out there it is seamless and its operation, but you can.
Think of it just like a nuclear power plant on our grid once it is up and running it as steady as she goes and it has been delivering day in and day out since we put it out there.
First customer for that is extremely excited and cannot wait to see some more of them out on location.
Okay, great. Thanks, Ron and then Chris I know you don't want to disclose customers for the remaining Digi deployments later this year and early next and the Permian are these in a couple of different basins.
Starting in a couple of different basins Permian is the biggest basin. So of course, the majority of DG deployment is in the Permian.
We've got requests and pull into several basins, but but.
At year end will be running DG in just two basis.
And much room to grow in those two basins, but by the end of next year that'll that'll certainly be more than two basis. That's one of our big questions. We've got to decide the right partners the right timing to continue to deploy it.
Okay perfect. Thanks, so much.
Thank you.
The next question is from Waqar Sayed with a T V capital markets. Please go ahead.
Thank you and first of all congrats on a great quarter.
My question is like in the Q3 results how many digi fleets were active during the quarter on average.
Probably too in the weeds to close to two is probably a reasonable estimate but originally we feather in these pumps into existing fleet. That's one of the key things we deplete keeps running just like at Dana we feather in this technology.
Totally more and across multiple fleets, it's only more recently that we have fleets running that are entirely digi.
Yeah.
And so when you start running these entirely did your fleets would the margin on those be accretive to the margins that you get another fleet.
They are they are there's additional diesel displacement there is lower cost to our customers and our higher technology solution. So, yes that that benefits liberty as well as benefiting our customer.
So.
I'm, taking that talk forward. So once you have lets say six of those fleets running in Q2 of next year.
If nothing else changes.
Record high margins that we saw in <unk>.
Q3, 25, 5% or so.
EBITDA margin you could be high running I imagine then that in Q2 Q3 next year.
It is absolutely impossible with car and that is a right. That's the internal job we call. It self improvement in Liberty, we have to always be in a position where if the market is flat our profitability is growing we're growing by doing things better by doing things more efficiently by delivering premium technology. So yes.
If the market stays flat for the next three years with Liberty's profitability continued to grow through those three years absolutely.
So you're saying right now the 2024 could be modestly higher activity.
So you know when do you start cross state that into Liberty's profitability EBITDA given that at a P. I could be contributing more EBITDA given that you'll have more of these <unk> running with high.
Margins.
How do you see 2024 EBITDA was <unk> 2023.
Look again.
Flat market conditions.
Well it will certainly rise, but that bigger factor is swings in what's going on in the marketplace, but I think as you've seen over the last three quarters and are gradually softening market can ourself improvement offset that.
It can but the question is how much is the market software or how much of the market strength or does it stay flat, but I think your point is well taken what card that in a flat market. We have drivers of increased profitability absolutely.
We will we will always strive to have that but.
A second factor is what is the market actually do and we don't we don't control that but we are you get the feeling that the volatility in that in market conditions is likely to be lower in the next few years than it's been in the last few years.
Thanks Scott.
Thank you.
The next question is from Arun Jairam with J P. Morgan. Please go ahead.
Hey, Chris I wanted to start with maybe a bigger picture question. We've seen some recent consolidation in the Permian basin.
With Exxon in pioneer.
And exxon's.
Key thesis is to significantly raise resource sectors.
And they cited call. It two thirds of the expected synergies to come from from higher recovery factors.
So let me get you in and a lot of that is driven by Frac. So I wanted to get your thoughts on.
The ability of the industry to raise recovery factors.
We have heard of some some producers more recently touting a new kind of completion design and I wanted to get your thoughts on that and the ability that maybe if you can increase recovery factors with the ability to improve economics in tier two and tier three.
Wells, which I think would have a pause.
Does it have implications for your business.
Yes.
So look that it's certainly been the story of the shale Revolution is this continual innovation, we say design of the plumbing underground to increase recovery Liberty was certainly an early mover in maybe first publisher of this extreme limited entry, we got to get more fracs with in each frac stage more contact area.
So we've seen a continual march up.
Innovation really ultimately recovery factors in shale, well productivity and what <unk>, what's been mapped over the last five years is probably a slightly declining average quality of location being drilled and then this improvement incremental improvements of recovery have offset that to at the beginning have slowly.
Increasing recoveries per foot now those increases generally are not happening anymore overall, because the average decrease in rock quality is slightly outrunning. This incremental improvements in technology now look Exxon is tremendous technological powerhouse so as Exxon have their efforts.
Maybe maybe more than incremental views of how to change recovery.
I wouldn't bet against axon.
We worked with a lot of partners on some are incremental some are more testing or investigating game changing ideas for a recovery. So yeah, a lot of that going on yes, youre going to see continued technological improvement in recovery from wells add them in.
Some will be incremental and some will be bigger changes but.
But obviously your bigger picture question is really a question for Exxon, but yeah, our industry's moving forward, we will continue to.
And there could be some exciting things in the next few years.
Great. Thanks for that and just shifting gears a little bit Chris we are in the RFP season talking to my E&P coverage around.
Having discussions with Frac operators around 2024 needs I was wondering if you could maybe characterize the tone of those discussions obviously and maybe give us a sense of how you think pricing will play out this year versus last year when when the supply demand balances was quite a bit tighter.
Yes.
They said look our our dialogues are generally one on one with our customers. We don't submit a whole bunch of bids and then wake up in December and find out who we're going to be working for next year. That's never been the way our business works almost all of our business is continuing to work with existing customers do the bigger ones of those rfps.
Absolutely do they get market checks, absolutely Mike they ship their fleet composition absolutely.
Generally less with Liberty fleets, we tend to continue to work with our existing partners and we have dialogues about what's going on in the marketplace and what's what are reasonable responses to that yes, where market conditions much stronger 12 months ago than today, absolutely, but our market conditions bad today, absolutely not.
As you've seen with our results and where we're pumping people want the right partners.
We also most of our dialogue with customers isn't so much about line item Liberty pricing. It's what can we do together to drive down well cost how can we move faster how can we change the design how can we swap out a chemical that we thought we needed with a cheaper example, how can we deliver sand more efficiently prices Sam's going down does that change are.
Frac design, that's driving well costs down the price of steel in tumors are going down the price of plugs is going down there are some technology innovations. So look always a dialogue around this kind of stuff, but but it's not as black and white like Dave when we lose.
On price there is a little bit of that but the broader dialogue is how do we get more efficient and improve both of our economics and.
So the in the spot market is it soft right now as they're idle equipment, yes.
For quality dedicated fleets is there a huge surplus of that no.
No I think pricing will probably continue to be relatively boring.
It Hasnt moved a lot over the last 12 months and probably not going to move a lot over the next 12 months. That's my guess.
Great. Thanks, a lot Chris.
Thanks, good questions.
The next question is from Neil Mehta with Goldman Sachs. Please go ahead.
Yeah.
Thanks, so much and Chris one stay on the topic of the macro I think you've said that you expect demand for Frac fleets to parallel recent rig counts at approximately.
A one quarter lag.
That still your thinking and if so how are you thinking about the rig count which is showing some signs of stabilization, but your views around that is that will feed into the demand view as well.
Yeah from what we hear from our customers.
Obviously, no secret I think rig count is probably bottoming now.
I think youre going to see rig counts grow over the next.
Six to 12 months.
But in our new boring shale industry, it's probably going to grow much slower much more modestly people, our disciplined investments publix or lows to change their plans too much.
Privates are the more reactive ones drilling economics are quite good today for oil. So are we going to see an increase in private activity absolutely.
Natural gas, we're going to see growth in activity there, but people I think are I think are wisely more waiting for the right market signals gas prices have firmed, a little bit let's see what the winter does huge new demand starting late next year through the couple of years after that from LNG export capacity, so definitely going to see right.
In gas activity, but in Frac, maybe that starts in Q2.
Could be some a little bit sooner than that if the winter is warm if prices stay low it could be Q3, but yes, so a little bit of upward momentum in gas a little bit of upward momentum in oil for privates.
And Publix are pretty.
Slow and steady.
That's helpful in and staying on the macro you know we've talked about consolidation through that lens of your customer, which also seeing consolidation.
In the U S. Frac industry, what has that meant for for discipline and your ability to sort of.
Hold pricing.
Yeah.
In a softening market.
It's absolutely helpful. The big companies just by nature have a longer term time horizon.
Retire a small frac fleet company they acquire that may be struggling in my gosh parked in the fleet. They make nothing they already bought those equipment. If they can get them out there and they generate just some gross margin it's a positive for them.
Get acquired by a bigger company.
They've got to spend money to buy those assets. They are playing the long game. So theyre just going to be managed more intelligently more disciplined with a longer term time horizon. So absolutely technology consolidation has led to more disciplined investment more disciplined commercial arrangements and it's allowed those few bigger companies too.
Invest in the future and try to drive the improvement I think the whole industry wants to see.
Thanks, Tim.
Thanks.
The next question is from Marc Bianchi with TD Cowen. Please go ahead.
Hey, thanks.
I guess another one on kind of the guidance and pricing commentary I mean, if pricing is boring as you say.
It sounds like the decline implied by your fourth quarter your guidance for the year for fourth quarter is all customer budget exhaustion. It would seem like first quarter EBITDA should be able to get back to third quarter levels would you agree with that.
You, obviously, we don't guide in detail for the quarter upcoming but I mean in general if you had a flat market.
Quarter does have some weather effect compared to your summer quarters. So even if you had if you had a dean flat market for the first quarter would be slightly lower than your summer quarters.
So that's where we are but again I think next year is going to be slightly better than this year in total.
Okay. The.
The other one was on <unk>.
Liberty.
The spending that you're anticipating over maybe in 2024 and beyond and how should we think about kind of the efforts to supply your own fleet versus.
Perhaps supplying to third parties.
Okay.
We have a third party they do some third party deliveries there but.
Bulk of the probably the first year to year and a half with a growth of LTI will be to support. This did you roll out and our expansion and improvements in our natural gas usage across the rest of athletes.
Exciting business and we'll talk more about it in the January call and we'll talk about spending as we sort of look at that market going forward, but again, the vast majority will be supporting athletes and the initial point.
Okay any book ends around the spending just.
To maybe set some early expectations for people.
That will put a chat about that in January I think thats, the best way to look at that one mark.
Okay. Thanks, Michael I'll turn it back.
The next question is from Keith Mackey with RBC capital markets. Please go ahead.
Hey, good morning, just wanted to follow up a little bit on the Digi, our electric fleet contracts.
Some in the market I've talked about those as being sort of multiyear type take or pay contracts as you full fold in more of the <unk> fleet.
Have you learned about the contract structure for those would you agree with the with the multi year type of type of contract and and if so if not how is how is the contract structure generally evolving.
Yes look if you're going to build a new fleet deploy new capital that's different than deploy existing equipment. So yeah. Those are those are multiyear agreements.
Okay, perfect and and maybe if we could just talk a little bit about the sand market things have come off of peak levels.
But is what youre seeing for sand demand in the Permian roughly commensurate with well completion count or are you seeing other things other trends like higher intensity for example, maybe acting as a buffer on sand demand overall.
Yes.
I think overall, certainly it's relatively well aligned with completion count.
That's certainly a good way to think about things, we continue to see movement in the amount of sand pumped.
Pumped in a well we continue to have operators, who who are experimenting with alternatives to current design and so that will have some modest implication, but at the high level Youre, absolutely right thinking about it just well count to volume consumed.
Okay. Thanks, so much.
The next question is from Dan Kutz with Morgan Stanley . Please go ahead.
Hey, Thanks, good morning.
Maybe maybe to just piggyback on that last line of questioning, but broaden it out a little bit.
Outside of Frac and also outside of L. P I could.
Could you just comment on what.
On the other businesses like sand and prop ex S. T nine wireline just just directionally.
Whether those.
It had been.
Kind of moving consistent with the Frac in OPI.
Earnings or maybe moving a little bit lower in and appreciating that the benefits of vertical integration will be an earnings driver for the overall business, but just if you were to isolate those other businesses anything you can comment on in terms of the trends that you've seen there.
Yes.
You made a key comment if you can isolate like we never isolate those businesses because we're in them because they make our core business better. They are actually good businesses in their own right and I'll, let Michael if you want to comment anymore on that but yes. We are in those businesses because they make the whole system work more efficiently we have of Liberty.
Wireline crew on our Liberty Frac fleet, we have meaningfully lower downtime and when we have a liberty Frac crew and a third party wireline. So look our wireline is and I think we mentioned in the release. It is now ranked number one by customer services and quality. So that makes that a good business in its own right, but even better it makes the whole labor.
In wireline and Frac operate more efficiently deliver faster results to our customers and better profitability to us Michael anything you want to comment on the business leaders of those teams that focus focusing on those businesses and do an incredible job.
And I would say, there's a decent amount of competition between all that business leaders and you know at the moment I would say they all racing across the line Nathan Nick right, they're all kind of traveling at about the same pace and doing very very well.
Great.
Makes a lot of sense. Thank you and then.
Maybe just a question on how.
Debt pay down.
<unk> ranks in the capital already with I know you guys you guys.
The term loan earlier this year and and then you guys had.
A decent sized chunk of the revolver and the.
The ABL in the third quarter.
But just wondering if.
If there's anything that you could share in terms of whether you think that youll, maybe just kind of continuing to chip away at the ABL balance or if there's potential for knocking out a big slug of it just kind of how does that stack and the capital priority list relative to you know capex and.
And buybacks.
Yeah, we had very small knit neighborhood with very very comfortable with gateway and also where they are at this present point in time.
So it really.
Our ABL naval floats with our other uses of capital in that given quarter.
Fair enough makes sense. Thank you both I will turn it back.
Thanks.
The next question is from Sara <unk> with Bank of America. Please go ahead.
Hi, good morning.
Mike.
Good morning.
Yeah.
Thanks.
Let me start with a little bit of more color on the BD side, because clearly there is strong demand or whether you would be at full fleet by the end of the euro six by the end of January I'm sure. There's more demand, but when you look at the demand that's out there as I'm sure you are not trying to meet and beat demand point rate do you need to keep your capex in mind do you need to keep your returns in mind that I contract.
Chuck to your customer and all of that.
How do you think about how much potential demand might be out there if you would not be disciplined.
I'm, just trying to see the demand out there.
How would you characterize that.
We looked at that.
Land is gigantic right.
Yes.
Seven years running we've been the top ranked from customers Frac company and the quality of the services, we deliver and now we have the lowest emission highest efficiency all natural gas burning fleets, we've actually longer lifetimes likely higher uptime higher performance. So yes, there is.
No cap on the interest in that right. So the question for US is it's always a partnership decision. It's not a top 50, a month a lot yet we could put them to work tomorrow, we wouldn't do that and we never do that like theyre going to be built individually for specific customers under specific conditions that have been partners and will remain partners.
Alright, great no that makes sense, because we do hear that there is a lot of demand right and again.
Satisfy all the demand points.
Great.
So I get that but just a quick follow up I think it will not take question on the RSV season, how is that going yes.
So a question on that in terms of how you think about contracting the duration of the contract how quickly pricing resets within that contract are you are you thinking about that differently. When you think about 'twenty 'twenty forward versus what you have in your portfolio right now for 2023.
No.
Getting new builds they have long terms they may have different sort of structure is a little bit.
But no in general no no no no different this year than last year, and we just continue in that sort of partnership mindset existing customer base not a lot of change in the Liberty customer makeup.
Okay Awesome and then just one last quick one just a clarification I think I'm not going to ask that question I think Mike you.
You said that you expect next year to be slightly better than this year. So 2023.
Was that an EBITDA comment I just want to be sure of that.
Thank you.
We had general expectation.
Okay. Okay. Okay perfect. Okay. Thank you I'll turn it back.
Thanks, Rob.
The next question is from John Daniel with Daniel Energy. Please go ahead.
Hey, guys. Thanks for keeping let me get on the call.
I guess.
First one is just any supply chain or labor concerns as we head into 'twenty four.
No those challenges that were big a year ago 18 months ago don't look to be challenges today.
Got it and then Chris how does the borings mature market influence your acquisition strategy, because you should have a lot of free cash flow next year.
I mean, yes, we are.
Our outlook is for a lot of free cash flow and he's just competing uses so yes acquisitions are certainly a possibility you've seen we're not highly acquisitive, but if something is compelling sure sure.
Okay.
And I guess the last one for me I'm, assuming the initial rollouts involve the digi technology, you're going to you.
Larger and higher quality customers, if you will.
At this point or any of the smaller E&P operators enquiring about the technology or when do you see those folks.
Wishing to learn more and possibly moving forward.
Oh, absolutely no they are fired up about it.
Fired up about it.
Really just gets down to that long runway right to do a deal for something like that you've got to have a pretty clear plan of what your next two or three years are going to are going to unfold and for some of the bigger private.
Got that.
Yeah, that's that's not years away, but yes. The interest is quite large there as well, but you are right. The original deployment is not going to be in that sector.
Okay. That's all I had thank you for including me.
Tremendous barbecue John .
This concludes our question and answer session I would like to turn the conference back over to Chris Wright for any closing remarks.
Thanks to everyone for joining today.
Lee another global conflict because burst on the scene with heartbreaking scenes of death and destruction.
Or is this all this time, but that does nothing to lessen the horror of its ravages war as a destroyer of security personal security food security property security economic security and our vision for a secure future that we all crave.
Often speak of energy as the enabler of all human progress. It is but it is also essential to satisfy our base needs like security in all forms now that the spotlight is again on the United States. The most promising source of security for the World how are we doing.
We promptly sprung to action on the military diplomatic and humanitarian fronts.
But what about the energy front it underpins everything I would posit that we are not shining in this area. The area are critical to our long term future.
Two quarters ago, I spoke about government policies that are raising up our electricity prices, whilst also stabilizing our electricity grids, hence we are not doing well in the power grid area.
While electricity grids are arguably the most important networks in the world in total they deliver only 20% of global energy.
What about the total energy pie.
Oil and gas today represent a record high of just below 70% of total U S primary energy consumption.
Fortunately, we are today, the world's largest producer of oil and natural gas.
Are we maximizing these resources to uplift Americans and provide security to our citizens and our allies.
We have blocked the completion of large pipelines already under construction.
We have dramatically reduced the granting of leases and permits on federal lands.
We drained half our strategic petroleum reserves not in a crisis, but simply to short term lower gasoline prices.
We have used a myriad of regulatory bodies to impede the funding and development of our oil and gas resources, having the obvious.
And presumably intended impact of reducing U S oil and gas production at the margin and therefore, raising prices to consumers and businesses.
But there is no stopping the rise in demand for oil and natural gas as everyone. Not just Americans wants to raise their standard of living and expand the opportunities available to their children.
So what is filling the gap created by suppressing American oil and gas production IRA.
We have effectively stopped enforcing the oil export sanctions on Iran.
<unk> at a roughly 700000 barrels of oil per day increase in Iranian oil exports over the last 12 months nearly all flowing to China.
The same is coming true for Venezuela.
Is having more oil coming from Iran. As opposed to the United States beneficial to the security of the United States and our allies.
Is it better for air quality and greenhouse gas emissions that these incremental barrels are produced in Iran versus the world's cleanest production practices in the United States.
The answer to all is obvious.
Liberty's mission is to better human lives by improving the energy system in North America and the world.
We do this primarily by driving improvement and innovation in hydraulic fracturing of oil and gas wells the dominant source of energy in the U S and Canada.
We took an ownership stake in <unk> energy last year to partner in bringing next generation geothermal into our energy system things are going quite well there.
We took a smaller stake in nature on energy.
To help bring sodium ion batteries to market and they offer distinct advantages to our energy system.
After years of watching and investigating we have recently invested $10 million in Oklahoma, which we view as the most promising of the small modular reactor companies.
Why invest in nuclear.
It had the energy density reliability and scalability required to economically meet the world's growing demand for energy.
The world needs more energy.
<unk> energy thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
[music].
Okay.
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Sure.