Q2 2024 Liberty Energy Inc Earnings Call
Welcome to the Liberty Energy earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I would now let's turn the conference over to Anja leave Auria director of Investor Relations. Please go ahead.
Thank you Gary Good morning, and welcome to the Liberty Energy second quarter 2024 earnings call joining us on the call are Chris Wright, Chief Executive Officer Broncos sack, President and Michael Stark Chief Financial Officer.
Before we begin I would like to remind all participants that some of our comments. Today may include forward looking statements, reflecting the company's views about future prospects revenues expenses or profits.
These matters involve risks and uncertainties that could cause actual results to differ materially from our forward looking statements.
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.
Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA adjusted EBITDA adjusted net income adjusted net income per diluted share and adjusted pretax return on capital employed are not a substitute for GAAP measures and may not be comparable to similar measures of other companies are.
A reconciliation.
Net income to EBITDA and adjusted EBITDA and net income to adjusted net income and adjusted net income per diluted share in the calculation of adjusted pre tax return on capital employed as discussed on this call are available on our Investor Relations website.
I will now turn the call over to Chris.
Thanks, Angela good morning, everyone and thank you for joining us to discuss our second quarter 2024 operational and financial results before we begin I'd like to recognize our Houston based colleagues that were impacted by hurricane barrel.
Many were left for several days without power, but they rose to the occasion to meet the needs of our business and support each other and the broader community with remarkable residents I want to thank them for their exceptional efforts.
In the second quarter Liberty delivered strong operating and financial performance demonstrating the value of Liberty's competitive advantage.
Revenue was $1 2 billion and adjusted EBITDA of 273 billion grew by 8% and 12% sequentially, respectively, while industry drilling and completions activity modestly softened over the same period.
Speaker Change: Record average daily pumping efficiencies and record safety performance, coupled with increased utilization of our fleets underpinned the strong results our company culture.
Long term customer partnerships innovative technologies scale and vertical integration allowed us to deliver 28% adjusted pre tax return on capital employed for the 12 months ended June 30th 2024.
We generated strong cash flow and distributed 41 billion to shareholders in the second quarter.
Since the reinstatement of our capital return program two years ago, we have distributed 458 million of cash to shareholders through the retirement of 13, 2% of shares outstanding plus quarterly cash dividends.
We plan to continue strategically deploying capital to expand our competitive advantage and leadership position, while returning capital to shareholders.
Our culture of innovation and Liberty develop technology are at the root of our success to date and the key to our future.
This is reflected in today's highest ever operational execution and safety performance over our 12 year history, we are driving performance by harnessing data and software solutions throughout our organization three specific examples are one.
Our record diesel displacement with data analytics, driving enhanced gas substitution to our preventative maintenance programs.
Extending asset life performance and reliability and third Liberty's custom built AI empowered logistics software platform, we call Sentinel.
Before I highlight these three specific innovations I want to remind everyone that liberty alone has designed and deployed our own custom pump technologies and power generation technologies that allow us to optimize fleet archetype for performance and capital efficiency.
Most importantly, we have built a culture of accountability and awareness around safety that we cease Leslie strive to improve we have driven a 25% reduction in recordable incidents T. Our IR over the last one year alone down to roughly 50% below industry.
Ridges I'm very proud of this fact I believe we are the most competitive most efficient frac company in the sector.
Let me add a few more comments on our recent technology driven enhancements are diesel displacement is now at the highest level in company history from both the deployment of our natural gas fuel Digi fleets.
And record gas substitution with our dual fuel equipment.
Over the past year dual fuel gas substitution levels have increased over 25% for three reasons.
<unk> and automated operating systems increased expertise and visibility with real time data on critical gas parameters plus the coordination made possible by our addition of Liberty power innovations to supply onsite natural gas.
Our predictive in preventative maintenance program, coupled with data visibility and analytics allowed us to increase uptime and run assets at optimal operating ranges both for Frac performance and to achieve maximum gas substitution.
We further enhanced our L. P I portfolio with the commissioning of our operations in the D J basin, including compression capacity and logistics <unk> logistics assets with first C. N G sales in June serving liberty fleets and customer drilling rigs vertical integration drives efficiency.
It is hard to overstate the impact of our advanced Sentinel logistics platform harnessing real time data and AI predictive analytics to both precisely for case forecast onsite proppant demand and inventory and then optimize transportation.
And logistics.
Since inception, we have reduced our already very low downtime due to proppant delivery by 90% and we decreased the truck count and delivery time by approximately 35% each improving collaboration with supply chain partners and ultimately lowering that.
Total delivered costs for our customers less assets less time and improved performance that is why we built the Sentinel system, we launched sat knowing the Permian approximately a year ago and it's now expanded to all U S basins, we will now focus on deploying Sentinel.
Sticks solutions across our L. P I C N G business.
Sentinel is a key tool as we expand our business going forward.
We strive to deploy the right technologies at the right time for the right reasons.
AI is yet another tool that we are now utilizing to enhance our operations.
AI comes full circle for us the massive increase in Datacenters for AI and restoring industry back to the U S is inflicting upwards demand for electrical power and natural gas AI is both enhancing our business and growing the demand for our services. We are excited by the <unk>.
<unk> opportunity to meet that demand through our L. P I business.
Our L. P. I business is starting in the oil field, where we are building assets and expertise to reliably deliver both natural gas and electricity 24, seven in remote areas.
On Frac locations, we rapidly construct of 25 to 35 megawatt power plant fuel and operated and then tear it down roughly once a month and move that plant somewhere else.
Our technology assets and expertise are positioning us very well to expand the playing field for L. P. I.
Global oil and gas where markets remain constructive on favorable multi year market fundamentals. Despite near term volatility in commodity prices in June a decision from OPEC plus to gradually unwind voluntary production cuts beginning in October drove oil prices lower.
Even then prices were well above those supportive of attractive E&P returns.
Oil prices have since recovered on relatively balanced supply and demand dynamics Boeing.
Boeing to relatively resident global economic growth and a rising demand for transportation fuels with summer travel season underway now.
Natural gas prices saw a resurgence from early spring Lowe's as gas producers reduced drilling and completions activity and curtailed production.
Speaker Change: Recent reinstatement of some curtailed production has moved prices downward, but still above recent cycle lows the.
The commissioning of new LNG export facilities and continued growth in power demand are expected to drive higher natural gas demand and eventually firmer natural gas prices than today's.
Rack to industry trends have moderated marginally in recent periods on the heels of slightly softer drilling activity in both oil and gas basins. During the first half of 2024.
Industry wide completions activity has declined to levels consistent with only roughly flat oil and gas production for.
For the U S to deliver rising oil and gas production levels completion activity would need to rise.
<unk> of tightness for quality Frac crews may emerge in 2025 on a demand pull for energy.
The attrition of older equipment from higher intensity Fracs with increased horsepower requirements is reducing the available horsepower to meet an eventual increase in Frac fleet demand.
As E&P operators continue to consolidate their efforts are focused on efficiency gains through partnership with service companies that can deliver superior performance and provide technical solutions to drive value creation.
Liberty: Liberty supply chain has continued to rapidly innovate and drive efficiencies in procurement manufacture and delivery of essential materials for Frac operations.
The resulting a finished efficiencies benefit both our customers and our business Liberty's Danny D. G technologies L. P. I services top notch supply chain scale and integrated services enable us to drive improvements across the board for our customers and grow.
Our industry competitive advantage as.
As we continue to execute on our returns focused value proposition, we are well positioned to deliver strong financial and operational performance.
Strategic investments deepen our portfolio of natural gas fueled pumping and power generation technologies, driving higher earnings and cash flow generation potential.
Interest rate conditions moderated through the first half of this year, we now anticipate that total north American completions activity will be modestly softer in the second half of the year due to budget front loading by some operators power.
However, we expect Liberty's financial performance to be similar in the second half of the year compared to the first half.
We expect to continue investing in our competitively advantaged portfolio deliver healthy free cash flow and returned capital to our shareholders.
We're committed to safely and responsibly, creating long term value for our partners and shareholders with that I'd like to turn the call over to Michael stock, our CFO to discuss our financial results and outlook.
Good morning, everyone.
I'm pleased to share that we have delivered solid financial results for the first half of the year.
Softening industry conditions and activity levels at teams came together to drive outstanding efficiencies during the second quarter safely delivering more pump house more stages and pumping more proppant than ever before we have made significant progress on our investment strategy designing and delivering next generation did your technology.
<unk> that are in high demand, while expanding our L. P. R infrastructure iridium ourselves for growing natural gas demand. We have also continued to deliver on our capital returns program. Two years in we have now returned $458 million to shareholders predominantly in the form of accretive buybacks we.
Expect to continue to execute on these initiatives for the remainder of the year.
In the second quarter of 2020 full revenue was $1 2 billion compared to $1 1 billion in the first quarter, our results increased 8% sequentially and that pumping efficiencies and integrated citizens, all see lower sand and other consumable prices and market headwinds.
Our teams produced wrinkled pumping as Rico stage cabs, and wrinkled proppant pumps bucking the trend of industry activity declines.
Second quarter, they didn't come out to tax of 108 million increase from 82 million in the prior quarter.
Adjusted net income was 103 million compared to 82 million in the prior quarter in recent years, we've made investments in several energy companies such as such as in Oklahoma Tamboura that had the potential to help meet the world's growing demand for energy.
Tamara while it's commenced trading on the New York stock exchange during the second quarter and resulting in a net unrealized gain of $7 million before taxes. As a result, we are providing adjusted net income to exclude items outside our normal operating results to provide a more useful measure of comparison for net income from <unk>.
Its period.
Fully diluted net income per share was <unk> 64 cents compared to 48 cents in the prior quarter. Adjusted net income per diluted share was 61 cents compared to 48 cents in the prior quarter second quarter, adjusted EBITDA was $273 million compared to 245 million in the same prior quarter.
General and administrative expenses totaled $58 million in the second quarter and included noncash stock based compensation of $5 million G&A increased $5 million sequentially, primarily on higher compensation expense annual salary adjustments and other miscellaneous expenses.
Other income items totaled $1 million for the quarter inclusive of the aforementioned 7 million unrealized gain on investments.
Excluding these gains net interest expense of $8 million was relatively in line with $7 million from the prior quarter.
Second quarter tax expense was $33 million approximately 23% of pretax income.
We continue to expect tax expense rate in 2024 to be approximately 24% pre tax income cash taxes were $8 million in the second quarter and we now expect the 2020 for cash taxes to be in Mexico, 70% or effective book tax rate for the year.
We ended the quarter with a cash balance of $30 million and Nic data of $117 million. They did decline by $25 million from the end of the first quarter.
Second quarter uses of cash included capital expenditures, the $80 million of share buybacks and $12 million in quarterly cash dividends.
Total liquidity at the end of the quarter.
Availability under the credit facility was $251 million.
Capital expenditures were 134 million in the second quarter, which included investments in did you fleets L. P. I infrastructure dual fuel fleets upgrades Lat Liberty advanced equivalents technologies facility construction capitalized maintenance spending accelerated maintenance spending on our fleet and transit to Australia and other <unk>.
We had approximately $2 million of proceeds from asset sales in the quarter.
We now expect capital expenditures to be around the high end of the range for 2024 also in the quarter, we invested $16 million in the Beasley basin operators to support this exciting new source of natural gas for the world.
Our ability to generate strong cash flows through cycles enables our commitment to capital returns in the second quarter, we repurchased $30 million of she is only 1% of the she is outstanding.
And distributed $12 million in cash dividends, we can.
Continued to deliver on a two and a capital program, while reinvesting in high return opportunities that increase our long term cash flow generation.
While we've seen a slight moderation in industry activity through the first half of the year Liberty is mitigating these impacts by focusing on meeting the increased complexity of our customers' demands.
We've been able to say forget technology investment scale integration and focus to drive superior results.
Liberty: While continuing to build our competitive advantage in the second half of 'twenty 'twenty four.
Page flattish financial results, but largely mirror the quarterly cadence of the first half of the year. We're also speaking did you think deployments to continue ratably throughout the year and are on track in the year with close to 90% of the fleets primary primary than pad by natural gas.
I will now turn it back to now turn it back to the operator for Q&A after which Chris will have some closing comments at the end of the cool.
We will now open the line up for your questions to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this.
We will pause momentarily to assemble our roster.
Our first question today is from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Good morning, Scott.
Chris can you provide some color on pricing trends across the various frac technologies today investors have been asking whether the the tier two pricing is just getting yes. So wide kind of versus did you need a new frac that it's starting to exert some negative pressure on it.
Newer technologies.
What are you guys seen in the marketplace today.
Yeah look you know as we've said it's got that the market is the activity level is slowly declining, which which I would say is making the market slowly softer modest changes slowly and look this has been going on for almost two years now from the peak activity in late 2022.
And of course, if you've got your choice of Frac technology than you do today, you know a straight tier two diesel engine. That's the lowest choice. That's the oldest equipment. It doesn't burden the gas it's more expensive to fuel and so for the larger operators with you know large steady programs there's very.
A little of that technology still employed but you've got a lot of smaller companies that don't have a full fleet program, but you know, they're still they're still spending significant capex.
That's where most of the tier two diesel frac equipment is operating but yeah that that market is softer.
And and I think you're seeing the fading away of tier two diesel engines, they're not going to all be gone for probably still several years, but yet they are declining the desirability of them is is lower but again still you know still still many of those fleets running including from Liberty.
And how would you describe the.
The incremental demand for <unk> for US you know how far out of your fleets contracted or no fleets nine to 10 spoken for or are you starting to have the discussions on the early fleets for next year, we're just kind of curious about the.
How those discussions are going and how far out are those discussions today.
Yeah, there are ways out look everything we're ordering equipment for looking to construct in the next year. That's that's spoken for and and you know we're in discussions with many others more than we can supply for fleets that might deploy or start you know when you know first half or middle of next year.
So that's that's a ways out.
That next generation equipment, you know not only is it cheaper to run because it's burning all natural gas versus you know on the extreme all diesel or some mix of the two you know, but it's it's quiet it's precise its high tech I mean, yet demand for that is is quite significant.
Great I appreciate the color I'll turn it back thanks, Greg Scott.
Thank you.
The next question is from Marc Bianchi with TD Cowen. Please go ahead.
Okay. Thanks, I wanted to ask Chris gun on your outlook for sort of the progression into twenty-five you sounded kind of construct is on on the direction of demand just based on where oil production and gas production of our current frac levels, but I think if I look at what E&ps are doing.
Just with you know being in maintenance mode and in consolidation and efficiencies that are happening like they're they're not looking to grow in 'twenty. Five. So is it that you see them changing that plan or is it something coming from private so what are you seeing that kind of gives you the optimism about growth in 'twenty five.
Yeah.
I would say our expectation for growth in 'twenty five as is likely modest, but you know what the current activity today.
Would not support even flat natural gas production.
Does it overshot it overshot, we had very robust gas activity you know it through 2022 I thought that would roll down more in early 'twenty three but it really didnt droll down till later in 'twenty three so gas activity is very low right now that's it and that's not going to reverse next quarter.
Probably not this year, but as you look ahead eventually you've got to have more activity just to keep U S. Natural gas production flat, let alone a little bit of growth we have to be careful of course of too much growth, which has been the mistake in the past and in among the natural gas operators and today's oil production is also pretty.
Flat you know we had a we had.
A chunk of growth last year, but.
But crude production, it's been flattish for six or eight months and we've still seen activity decline a little bit. Since then so the production trends youre seeing today, that's roughly that's reflective of what Frac activity was three to six months ago, we haven't seen a production trends reflective of today's frac activity. It's.
Probably flat at best oil production, so again I'm not predicting a big change next year, but well you know the second half of this year is gonna be a little softer than the first half and the first half of next year will likely be backed up I would say at least to the levels of the first half of this year. So we're not expecting a huge.
Rebound, but from where we are today I think you'll see an increased activity in the first half of next year.
Yep, Okay, and those are those are kind of market comments, not not necessarily liberty comments, but maybe you sort of fall that that trend.
Hunter, 100% there, though those are market comments look at it you know as we said we've had a meaningful you know probably.
25% to 30% decline in active Frac fleet industry wide from two years ago to where we are today and liberty's basically flat through that period. So yeah. We have not followed the industry trend. We haven't added fleets you know well, we don't want to put anything into a soft market, but the interest.
Or desire among operators to work with Liberty is high and look the biggest reason for that is just performance the operational performance of our teams and the way we do business second after that is high tech in next generation equipment, but those things keep demand for liberty high, but but again.
Yeah as conditions soften you you won't see an increasing fleet fleet count from us, but we haven't reduced it as we thought we might just because the customer demand and to continue their relationships has been quite strong.
Yep Yep makes sense and then just just one more on kind of a nearer term progression. So if second half is gonna be similar to the first half is the right way to think about it that you know from an EBITDA perspective third quarter looks like second quarter and fourth quarter. It looks like first quarter. So essentially a mirror image is that is that what we're talking about.
That's that's exactly our guess that's our guests you know of course, we got a pretty good view into Q3, yeah, which looks flattish and Q4, you don't know, but that would be our expectation is probably similar to Q1.
Yeah Super Thanks, so much I'll turn it back thank.
Thank you.
The next question is from Arun Jairam M with J P. Morgan. Please go ahead.
Hey, Chris I was wondering if you could kind of elaborate on some of the trends and growth initiatives you have for for L. P. I N and what what kind of demand trends, you're seeing for that offering.
Yeah, So again Q huge interest there as well you'll look there's just this massive cost savings to burn natural gas instead of burning diesel and then the question is how do you do that that's been going on in the industry for you know Geez I mean second fleet. We built was dual fuel so it's been going on for at least a dozen.
Years, but it's it's been you know hey, we got gas on location. We can power most of the pumps are all of the pumps, but were down for a while our gas, but we'll just burn more diesel and so it's been there, but we've tried to do is just set that bar higher.
If we're if we're planning to burn dual fuel there we're going to make sure we have reliable gas supply every pump that's operating on location and up and down with the with the with the trends in that Frac activity and because you have to have reliable gas to maximize that displacement of diesel.
So that trend just continues as we were talking to straight diesel fleets are declining.
Liberty: And in there and their percent market share and so hence there's just more every month there is more gas Berg for hydraulic fracturing operations. Then there was the month before that so we are you know we launched that business in the Permian, we still have a lot of growth in the Permian. We are just as we announced it I think just kicked off in the D. J.
Liberty: We're doing some work in the Haynesville as well we're not in the other basins Liberty operates yet, but we will with time most of our gas is is to operate our own frac fleets, but we're also supplying customer rigs that'll broaden into other industry applications and look as you get into next year that.
That sort of virtual pipeline or broaden into just powering electric generating assets, even outside of our industry. I don't think we see that till next year. There's just so much growth in so much to be done within the industry first.
But yeah were.
There, there's just huge huge running room for that business.
Great and I had a housekeeping question on the balance sheet, maybe for Michael Michael can you walk us through the capital lease item on the balance sheet, which are looking at it right. Now is 236 million what is running through capital leases versus capex.
Okay.
Yeah. So yeah, we do we run a number of things through capital leases generally its rolling some rolling stock the interest rates on capital leases are actually sort of lull are they in a slightly lower than our ABL facility at the mother and so it's a very very effective way of sort of sort of arbitraging I kind of have.
Sure Tim Tim loan to fund some of the kind of moving stock that we will.
And what would you like characterizes that moving stock just a little bit more elaborate that on that Oh practice <unk> trial is.
Things of that Brian Okay.
Okay, alright, thanks, a lot.
The next question is from Jeffrey Leblanc with T. P. H. Please go ahead.
Good morning, Chris and team. Thank you for taking my question for my first question I wanted to see if you can give us an update on how much of your capital expenditure is allocated to LTI. This year.
Additionally, given that the LTI Daiichi and extends beyond mobile power generation and historically, the $60 million sticker price or does your fleet included power generation, how should we be thinking about the megawatt capacity that will be in operation by year end. Thank you.
So if we take that one I mean, we're running about 125 megawatts of power generation at the moment, we have probably about you know that more than 50% of that on the construction of a future path generation in the oilfield. Obviously that doesn't include the virtual megawatts that we use with D with Digi Prime.
L. P. I the vast majority of the Capex is being screened at the moment is on moving the molecule.
Liberty: We're really managing the molecule to the Frac fleets languages, which increases uptime increases efficiency increases substitution right. So that comes in the form of CMT trial is the completion that we built in the D. J basin fuel distribution on sides field gas treatment for a number of our larger clause.
Have you guys in the field, so really kind of an integrated solution to be able to sort of manage the molecule into a into like either power or drink drives is pushing stuff down so that's where the majority.
We don't break the capex out between that because the gang, where single segment and its all related to Frac.
Yeah, any power generation outside the industry outside of oil and gas you know, we'll probably talk about maybe the mix cool as we look at those but that will be something that we will discuss separately.
For Pat generation for non oil and gas operations.
Thank you very much and I'll turn the call back to the operator.
Thank you very much.
The next question is from Stephens Young girl with Stifel. Please go ahead.
Thanks, Good morning, everybody.
Steven.
I'm not sure how much you can break this out but I'll ask when we think about your wall Street still doesn't stop math right, we divide EBITA by fleets or wherever you buy fleets to get to a number when we think about you know your revenue or profitability per fleet versus say two or three years ago is there any guide you can give.
Risks.
How much of that is pure track and how much of that is driven by by either.
Oh of newer Frac assets <unk> <unk> and.
And other integrated services.
Yeah, Let me just take that one Steven the rally as you know we're a single segment right. So everything is break or everything everything we do is focused around supporting frac. So it is all related but you are right for the industry for investors to think about the things we've talked a lot about over the last five years, our expansion in that vertical integration right do you think about it.
We own sand mines, you know, we you know we're doing gas delivery. You know we are manufacturing we've dropped that Mike and maintenance costs are we're building a new manufacturing facility in Oklahoma to when we're going to be actually building. Some of that did you prime and some of them had generation equipment to help support the Ah.
Our partners that have historically put our equipment to do that and it seemed to have equipment. Because you know there's just not enough capacity, we own that design everything from the design to the bomb to the actual manufacturing instructions and that helps bring more efficiency into the building of their equipment. So all their investments do you think about that haynesville investments in AR.
So the logistics software, we move about a million approximately wrong about a million truckloads of sand a year I think somewhere in that route cause a huge investment that we've made in this vertical integration you know most of sort of the our clients come to us to provide this aims to provide the chemicals. So we are able to basically my.
And more of the value chain. If you go back all the way to the period before that okay. We're.
The war on shale it was so many layers of profitability. So many people at the trough, taking a profit out of the system right.
Logic Clods now wanting larger oilfield service companies to provide more services more complex more integrated which means more of a wallet share stays with us and that's the unique liberty sort of investment that we've done is we take everything if you think about did you Frank we owned the power generation. We are the gas delivery, we always have pumps.
The only company that has that whole value chain and makes returns off that whole value chain and that is the difference here is the reason, it's all support and frankly, it's all about the teams that are operating at the wellhead, but we make money through that whole value chain.
Great.
That's very helpful color, Mike long distance.
A follow up to that.
No.
Recent kimberlite recent survey came out and we're speaking with them recently and one of them.
Things that stood out to me was there's two companies that have completed or are.
Liberty: Completing wells and seven days or less you in one of your biggest competitors.
Just curious does that what drives that is that the overall integration of the fleet.
Is that just your highest and digital assets that are kind of driving your ability to kind of what kind of lead on that front.
Look I'm going to I'm going to let Ron answer that question, but the short answer is the humans. The people that run Liberty Frac fleets. That's the biggest differential it just that that attitude about how to coordinate the symphony to deliver but I'll, let Ron and liberate elaborate a little more about the technologies and how this is all done.
But really its culture in humans.
Yeah, Steven I think Chris hit on the biggest point there of course, we've always been focused on culture since the beginning and and creating an environment where people wanted to come in and make a career out of it and I think that's that's been demonstrated in our performance now for 13 years I guess.
Hard to put a value on that but I, but I think it plays out very very well in that in that kimberlite report and the responses you see from our customers there around the service quality they get but then I think all the points Michael made earlier.
A pile on to that to help support that of course, we deliver great service in the field, but that is supported by our industry, leading technology developed in house here at Liberty and supported by a team here at Liberty is supported by a world class supply chain organization that ensures we have multiple legs on this.
All that of course, we have some amount of internal support whether that's manufacturing or sand or things like that but also great partners.
From the third party side that are also helping to assist in that ensuring we never are short sand or short chemical or without apart in the field or anything like that you layer on top of that the.
The work we've done in artificial intelligence in terms of understanding both the operation and performance of our equipment the ability to predict when in advance of something going wrong that we need to take care of some maintenance. They are maximizing uptime, we're seeing on on location with the assets each and every day, we have a maybe unrivalled level of visibility.
Into our operation in the field now not only for the equipment itself, but as Chris talked about in his opening comments.
Sentinel logistics platform, and and our supply chain for ensuring that sand and chemical arrived there on a timely fashion.
And then you know I think as you think about the scale of our organization now one of the other things that we've always been focused on is engineering support so.
You know we have engineers out on every location, we have a strong engineering team here that is working side by side with our customers to optimize completion design out there as we are as we continue to improve and that remains an important piece of the puzzle is as we continue to migrate from from acreage of some quality to acreage of of.
Maybe at a slightly lower quality, but ensuring we have a completion design that is optimal for that and so you continue to layer all of those things on them, we continue to find ways to be more and more efficient on location every day.
Speaker Change: Okay now that's great color. Thank you all.
The next question is from Waqar Sayed with a T V capital markets. Please go ahead.
Thanks for taking my question.
Chris This is kind of a big picture type question that I'm, asking and I'm going to throw out some numbers here and if I look at this quarter compared to the year ago quarter. Your revenues are down only 3%, but your EBITDA margins are down 240 basis points EBIT margins are down about 470 basis points.
<unk> quarterly DD&A is up about 25% and a return on capital employed is down from about 30% to 20% now having said that these are still best in class reserves are 20% of them capital employed is still very very attractive.
It seemed to me that all the value that you are adding all the investments that you're making efficiency gains a large portion of that benefit is accruing to the customer.
And you're not getting the fair share that's really of your effort really intense.
Intel is instead, a new type of contracting structure that you could think of the pharma space or have you seen some of the drilling contract its kind of pursue that is there. Some other arrangement that pump is could make where they're making so much investment so much effort, but probably not fully getting the benefit of.
That.
So a car that's a reasonable overview of the numbers and I think the short answer there really is the business remains cyclical.
That what's what's nice is that the cycles now or at least this cycle is much more mellow than previous cycles, where while we're killing it and then you know OPEC fought shale and things collapsed for awhile and it bounces back so what all those numbers you you were counted or that the business.
<unk> have been softening for nearly two years and that's.
We're probably near a bottom they're not changing much right now, but yes, two years ago. The business conditions were fantastic today, they're weaker and if you look across the whole industry, you'll see a pretty big swing a much bigger swing down than you'll see in liberty in that but it's still a slow were more modest cycle, when we and so.
You know that return on capital employed that denominator, yes, we have new assets. Most of these assets are 10, plus year assets that we've just built so all the cost is there burdening us well when we make these investments we're thinking over the cycle. What is the what is the return we're going to get on those assets over.
The next 10 years, that's what drives our investment decision whether to do them or not because you can't just turn that spigot off all the conditions are a little weaker let's stop all investment or conditions are great. Let's hit the gas and you know you know and you know whenever I invest it at a super high rate. That's just we always are looking at it.
Longer term longer game for investment decisions, we do with our partnerships with customers. We do have performance based stuff built in a number of our contracts how can we get better together and how can we win together on that we don't talk about that stuff because it's individual fleet by fleet or customer by customer.
But are we looking at ways to tie our fortunes together and you know when you get better returns on our investment absolutely, but the numbers and you don't know.
Whole team look at is what is the investment over the long term in our assets and in fact, we we may read that the the numbers you just recounted a little different today and say Wow, we've been rolling down for almost two years and our average return on today's assets still pretty strong and <unk>.
But yeah yeah.
Seeing is not really a secular change in contracting and how the industry works. Its just the effect of a slow modest cycle.
But great question Waqar.
Yeah, and just if I may ask another.
Question about completion activity into next year.
Look at the supply demand.
But I spoke us from E. I E are you know it looks like maybe it did all projecting U S oil production to be a liquids production to be up like you know 500000 to 600000 barrels a day year over year in 2025.
Speaker Change: Do you think.
What kind of activity completion activity and fees would be required to get to those kind of production growth numbers.
Well get modest, but definitely an increase definitely an increase from where we are today, but again I don't think it takes a lot of change in increase demand to change the feel of the business cycle a bit I would say that at the edge.
This year as investment levels I'd love to look back at this whole year, we're probably going to see a slight shrinkage in the available supply of Frac equipment.
There's a lot of tier two fleets still running that are not being reinvested in that are shrinking there's new gas powered fleets being built but likely less this year than the attrition are wearing wearing down of fleets. So cyclically the market you know the.
Best bet levels are relatively modest but.
But you know so if you have even just a fiber 10% increase in fleet active fleet count nine months from now than we have today and that might be my guess, that's that's not insignificant for what it would do for market conditions.
Absolutely well, thank you very much thanks waqar.
The next question is from Derek part Hazer with Barclays. Please go ahead.
Hey, I just wanted to go back to Scott's question on the top of the call.
Diesel CND spreads are tightening out there we've talked about tier two diesel pricing coming under pressure, assuming that's going to weigh on your dual fuel assets first is that a is that a valid assessment and then maybe as the goal of investing in L. P. I to drive integration through <unk> is that a way to help protect peer frac pricing along with the rest of your integration strategy, maybe just some comments around.
There please.
Okay.
Right. So if I take that one I'll take the last half this yeah, I mean, our integration.
Vertical integration of investment strategies differently about driving higher returns on our invested capital base right. We're taking the intelligence and renovation of all the people in our company with focusing them on how to make things how does the Arab world in occupancy. It is at a lower cost and a high profitability for Liberty right. So that's key.
That's a key in everything we do so that's that that is at fault because that really makes it there right. Yes does the ability to run the <unk> business you had one of the things. We saw was that we were not running.
Maximum substitution because all the ineffectiveness all the C N G in natural gas supply system that was a key that was a key limited right and as you've moved to 100% natural gas engines that became a major limited because gone is the additional cost of running he says X. These diesel from a dual fuel equipment.
You've got downtime if he doesn't have days right. So that was key for the.
The initial part of the investment in LTI right was really making sure that we drive that efficiency I mean, I think that's a key thing there on how we are sort of managing to keep up.
Softer market.
We've got a 20% decline in activity demand over two year period Liberty is basically flat and has the stronger to the continued strong returns. We have is because we deliver more value every day to our clients. So I think everything we do is focused around managing that and improving that now.
It was chris's as things tighten up and they will eventually.
Cyclical market right you know we're at our lowest point at the moment you know things will site will tighten up you will see the sort of forcing function I think of all that investment in vertical integration will also you should see that improve the bottom line faster as we go forward as the market tightens right. You know these are long.
Tenant base.
The key there Dear and I may have missed the first part of Scott's question, there, but you know I got on a roll so.
No I was just.
Just comments around tier two pricing pressuring dual fuel pricing given the spread tightening between diesel and C. N G. And then with the with the RFP season, coming up and just threat of reopening and seeing some pricing pressure there.
It really is you're seeing you know some of these more and more equipments, becoming dual fuel and then we've got a large amount of attrition in the older equivalent as we've talked about there was a.
Bailey and of equipment that was built probably in the 20 <unk> to 2014 2012 to 2014 area that really is getting to the end of life for the industry right. So therefore, as Chris said I think attrition is actually faster than what we're seeing I think.
What we're seeing is we're seeing people pump at higher rates and more complexity, which Ron can talk about and you know with larger fleets and so think is key is using more horsepower to also achieve an all seen some degradation in Ros why don't you want to add some comments to that yeah, I'd add a couple of things there first of all.
I think important to remember that just because you put a dual fuel fleet out there that doesn't mean, you get to 75% substitution automatically we've we've talked a lot about today.
The progress we've made and in substitution levels and that's that that's due to a an immense amount of focus internally in the organization again around delivering a premier performance, regardless of what that is regardless of whether it's a number of hours pumped in the field or the supply chain or in this case the amount of fuel that we substitute.
We've worked hard to to RMR team with a level of information they havent had before with visibility into the operating performance of the assets. We put out there and then of course with LTI to backstop that and whatnot and so you know I would argue that even amongst dual fuel fleets.
A dual fuel fleet is not a dual fuel fleet is not a dual fuel fleet and so.
I think we will continue to command a.
Our premium as a result of our operational performance not just from a high level of efficiency standpoint, but even in terms of how we operate assets like a tier four DGB pump and then yes layering on top of that the complexity of course, we we continue to see added complexity and the completions you've seen.
What started out as zipper frac than simulcast then try more frac now where we're on our way to Quad Frac. We continue to work in more and more challenging reservoirs and we are of course continually focused on on maximizing productivity per lateral foot. So you layer all of those things on top of their end and I think we continue to deliver a package that.
That will remain the premier choice amongst our E&P partners and as a result.
Minimize that impact from the diesel retirement and the pricing pressure there.
Got it. Thanks next question is maybe just some more color on what's driving that to you to reach the high end of the Capex range.
I know last call you guys are holding out maybe some growth opportunity in the back half of the year from privates. You know obviously, we're not seeing that so I would assume you'd have some softening of capex just with overall activity are you reallocating. Some capex dollar into growth projects, specifically L. P I or maybe your upgrade program from tier four to tier four dual fuel or tier two.
Tier two deal feel just some more comments or what's driving you up to the higher end of that Capex range now.
Yeah, it's really the timing I mean, we've got a few additional growth projects that we're investing in things like building the constructing facilities for the growth, but it's really I mean, the slightly softer activity in this year. It doesn't really affect our Capex program, but we are investing as Christy you know for the next 510 years and Thats what were building equipped before its long life you know it is not necessary.
Unless you would get a shock like Covid or you know you got to think more on child is not necessarily a fleet affected in the short term. It's really it really takes into account our long term view of that capital return opportunities and I would say generally the fact that we continue to be at about 50 Casino I Didnt E&P 500, I think we are continuing to think through.
Right routines are forever.
Obviously, you know we you know we can't reinvest all of our capital.
As you know we have a very very very high bar for capital returns and everything below that we are returning to shareholders.
Thanks, I'll turn it back.
The next question is from Neil Mehta with Goldman Sachs. Please go ahead.
Yeah. Good morning team and thanks for this update I guess the first question is it's always hard for us to get visibility on DUC trends because the data is so noisy so Chris the team would love your perspective on what Youre seeing in terms of drilled and uncompleted wells out in the field any regional color and how does that feed into your view of.
Pressure pumping utilization moving into 2025.
Yeah, Neal I think it is hard to see exactly that data at my my my personal view is the duct story has generally been over inflated you know during Covid. There was a huge building docks during the OPEC fought shale we had some big docs, we've had some major change priorities in Bay.
Speaker Change: And so there's been like episodes, where ducks were meaningful I think today and most of the time ducks as really just inventory of wells in progress at they're not they're not in the cabinet you know waiting for a later date, but when you drill large pads and they take a long time and the way there.
Our counted a lot of ducks are really most of them are just wells in progress.
Yeah, Yeah, Yeah, there's exceptions to that today for sure you know in gas basins because of pricing there, but you know we don't view, so theres a little bit of a DUC building gas, but we don't view that as a big driver of future frac activity or optimism.
Okay. Thanks, Chris and then just a follow up on capital allocation you guys have done terrific job returning capital to shareholders.
The stock still trades at a big discount relative to other other things in energy. So just your your perspective, even if we go into a softer environment than maybe some folks would have anticipated in the back half of the year or do you still feel you're saying that you're well positioned to return capital in the form of buybacks to shareholders. While we're on the topic of capital allocation.
<unk> do you see yourself participating in consolidation or do you continue to I think buying back your stock is the best use of the incremental dollar.
Yeah.
Now that the.
Dominant use of that has been buybacks, that's not likely to change we look at everything from consolidation certainly you could think of the gas market's struggling right now with it.
If there are opportunities that present themselves.
The unique value, where a neat additive will move on that sometimes they're small and sometimes you know there are bigger, but but we cant count on that we're always looking but acquisitions have not been a big part of our past and they're likely not going to be a big part of our future they won't be nothing but it's got to be pretty compelling.
We're very much a grow organically develop internally. So you know we look at things that if things are unique we'll do them, but no buybacks. If I look out over the next you know you know three to five years, yeah buybacks are likely going to be a huge use of our free cash flow at the value we have for this.
The stock trade at a single digit price to earnings ratio with as Michael said, you know, 50% higher than the S&P 500.
Long term cash.
Cash return on capital invested it's it's very attractive. So I think you will see a continued meaningful reduction in the in the outstanding number of shares and liberty over the coming years and coming quarters.
That's a good message Chris Thank you.
Great Great question Neal.
Excuse me. The next question is from Tom Curran with Seaport Research partners. Please go ahead.
Good morning, guys.
Uh huh.
Yeah.
On the natural gas side of the market.
I love to get your visibility on this trajectory of incremental structural demand comprised of new LNG export trains in data center capacity growth are you at a point, where you can look to say mid 2026, and our early 2027 translate that gas demand.
To a specific number of Frac spreads and then try to estimate a rough range of the additional spreads just this new secular gas poultry would require.
You know we have done some of that but there is there so much range.
Looking you can look at that.
LNG exports and maybe be a little more quantitative there because we know the projects without even though the projects under construction electricity is the bigger wildcard. There is just such a wide range of what that could be and a lot of it is gonna be availability you know we've just had.
10, plus years, I think a very poor decision, making around the United States electricity grid and as as Germany, and the UK have demonstrated if you make electricity expensive and unreliable people will consume less of it. So I think the biggest hold back and draw for gas.
In our electricity grid is gonna be.
Is gonna be prices and reliability of our electricity I frankly think its embarrassing how long.
Electricity was down in Houston for a pretty moderate store you know we you know 100 years ago. We had storm is massively larger than that and obviously, we didn't have as its sophisticated up a grid, but I think so so the short answer is we talk about it internally we have ranges of it it's not trivial it's.
Not game changing either the amount of fleets that will come but we don't we don't give the numbers because there's just too many assumptions in which trajectory might unfold, we do say and that the outlook is pretty positive for U S. Natural gas demand from for both of those sources LNG electricity demand.
I think we're going to see some more re shoring of manufacturing in the U S and I think we're gonna see.
Over the next several years more of that in Mexico, as well and so I think that connection of U S gas going to Mexico is going to be increasingly important as well. So the macro is positive but this is probably a discussion over dinner or beer, we could sketch sketch sketch out the range of this many more fleets that that many more fleets, but I'm I'm I'm going to.
I'm going to refrain from giving any numbers right now, but I like your thinking.
Speaker Change: Sounds good.
Well, let Rob.
Pick up the tab for beers.
Turning to our L. P I.
Sounds as if a portion of your C and D sales in June were to your customer base for its land drilling rigs.
Speaker Change: Where those land rig C and D deliveries.
A separate third party revenue transaction or a part of a bundled contract my impression has been the liberties on fleet needs.
We're likely to command the bulk adult P ice capacity to hear so I'm, just thinking a clarification and maybe an update on on what the outlook is for L.
L P is external.
Hardy business trajectory.
Yes, so the vast vast majority of our gas deliveries for athletes, we've been delivering for drilling rigs.
Well since the sovereign acquisition right. So for key clients in the basins in both the Permian and in the end.
And the DJ basin, so yeah, delivering you get gas usage for jewelry is much much lower than it is for frankly much much much lower.
But again, it's you know that he is still delivering seen G. With the same equipment. So it's just part of the business. It's all about supporting the overall health of the industry.
Yeah. It's it's a partnership thing you got customers Theyre running rigs out of gas and you know Liberty is the highest cost supplier there they want to use it. So yes, it's not a huge part of our business, but it's but it is a nice part of our partnership.
Got it and then I'll just squeeze one more in here Ron I'm, sorry, if I missed this but did you write an update on.
How many active digi spreads you expect to have deployed exiting the year.
Okay.
No no change in our plans there at all time, where we're still on track to to have operating by the start of next year 10 next generation fleet. So no change in our outlook for that.
Got it thanks for taking my questions.
Speaker Change: The next question is from Keith Mackey with RBC capital markets. Please go ahead.
Hi, good morning.
Certainly vertical integration has been a differentiator for the business and talked about it on the call. So far but just curious if you can give us a little bit more color or even potentially quantify how far along do you think you are in this process and is there a lot more benefit to be realized from from adding service lines or <unk>.
Or growing existing service lines that you've got an O L. P. I is certainly a big part of that but with just some general color on how much of the value chain, you think you've actually been able to capture to date and in tracking and how much more you think there is to go.
You know I look I'd say, we have vertical integration and most of the big items that matter. So yeah, I wouldn't say, there's a huge amount there the biggest focus at Liberty is just how do we get better how do we get better.
As we always say, we didnt do the vertical integration. So we get like add that business line profitability on we do add that business line profitability on but most of them aren't huge we're doing are really just to make frac the core business better more reliable safer more efficient but better.
Better experience a better value add for our customers that's what's driving it as Michael said look the net result is we're capturing more of this profitability, but really we look at it as that whole piece. So we will continue to develop technologies will continue to do things to make our frac offering meaningfully better.
And then all of our competitors that was our goal from day, one and it will never stop but you know but.
You know vertical integration I would say the bigger prospect for US you know growth in the next five or 10 years is going to be taking the tools and technologies that we've developed for example, you know remote power generation with natural gas and a virtual pipeline to supply it.
That's that's that's a way bigger growth in Liberty's business you know over the next five years then.
Then there are likely expanding of our vertical integration, but it's it's not likely to be I would say meaningful for the size of our business, but more important is again ultimately go into electricity business and just a maniacal focus on getting better getting better getting better that's the big story.
Uh huh.
Okay, very good and you have.
Investments in businesses outside of Frac, you know talked about Oklahoma in timbre N is the impact on on earnings per share and you've also got a few others can you just talk about maybe the one or two most important insights or lessons you've learned from having investments in.
Energy businesses outside of the Frac.
Yeah look as career energy Nerds, we get.
As to Investor as to advise other entrepreneurial energy companies a lot.
We get pitched on a million things, but I I think maybe a little bit of our differential advantage. There is what we just look ahead, if its operated well where could this business be most of the new venture energy businesses and in our opinion, even if everything went right.
Like they they don't have a prospect to be a meaningful positive addition to the global energy system, which means there are better on subsidies and we're just not we're not takers of those bets, we're not believers in that and we just we don't want to bet on the government. We wanted that only on these fundamental.
Technologies or things that are doing could be a great player in the future energy system. So we've been disciplined we've only made a few of them and we've generally only made them, where we can bring something to the table you know I'll close a great example, its just like the REIT nuclear technology, the right business model.
The technology is fantastic, but bringing energy to a marketplace and putting all those packages together and then getting the right commercial terms man, we've been doing that for for our whole careers. So I think we add some real value to a thing that's just an awesome curdle and tambor and of course, its even simpler to look at.
It's Matt I remember the excitement of the Barnett shale 25 years ago like you know the.
Aggress every year my God, we're going to figure. This out look we didn't appreciate that how big it would be but just to have an awesome resource in place in a geographically desirable location like that's that's a solvable challenge that could have a big impact on Australia.
Our domestic consumption and for exports and I think liberty could be very helpful. In making that successful and I think the upside the upside for us is quite large there yes, we view this as very asymmetrical bet.
Little downside.
And a lot of upside.
Okay. Thanks for the comments that's it for me.
Thanks.
I will now turn it back to Chris for closing remarks.
Alright, everyone feel free to drop off if you want but I'm going to talk a little bit more about energy with.
With the benefit of 2023 energy data, which is now available. Thanks to the Energy Institute recent publication of the Statistical review of World Energy I want to take a moment as we close to provide an update on the so called energy transition.
Energy Institute's work to quantify global primary energy is quite valuable to all energy nerds like us at Liberty. However, we made two important adjustments to the energy institutes number within our bettering human lives report first the EI does.
Not account for developing country use of traditional biomass in their primary energy numbers.
This traditional biomass energy is the source of the world's largest energy problem. Hence we believe it is critical to always include this in all of the energy reporting traditional biomass serves as a cooking and heating fuel for $2 3 billion of our fellow humans. They suck.
Or in grinding poverty are bettering human lives Foundation works to help these $2 3 billion people transition to clean cooking fuels to allow longer healthier more opportunity rich lives that is a real energy transition that we need to hasten as quickly as possible.
Can't eradicate what you don't attempt to measure.
Second the EI employees and input equivalent methodology that grossly inflates the primary energy from electricity produced by wind solar hydro and nuclear a multiply it by two four times and their conversion of Terawatt hours to exit.
Jules we reversed this adjustment and simply convert reported terawatt hours to energy equivalent exit jewels, which is the actual energy delivered to and consumed by consumers. We discuss this more in the bedroom human lives report.
But for US it's critical to be honest in the reporting on energy on climate change and human progress.
Incidentally the U S energy information agency recently reversed its long standing practice of using an input equivalent methodology and is now in step with us and its reporting nice to see the U S E. I E make this change.
So with those adjustments corrections, we find that over the past 50 years Global primary energy consumption has more than doubled.
It's up 126% and we've seen a 1.6 compound annual growth rate in energy consumption over the last 50 years.
Energy additions from hydrocarbons over that 50 years or nearly six times higher than all other energy sources combined.
Hydrocarbon share of primary energy was 85% 50 years ago, and it's 85% today.
Since just since the start of this century global primary energy consumption is up nearly 50% or slightly higher one 7% compound annual growth rate.
Thanks to the American shale Revolution energy additions from fossil fuels are over seven times greater than all other energy sources combined during the last 24 years hydrocarbon share of primary energy their share of primary energy increased by one 4%.
Up to the 85% or 50 years ago.
We look at just the last year Global primary energy consumption increased by one 6% in line with trends energy additions from hydrocarbons were nearly four times higher than all other energy source combined oil was the largest.
<unk> addition by source and cole with second over just the last year natural gas has been the biggest over the last decade or so.
Hydrocarbons remain at 85% of primary energy wind and solar combined for a share of two 6% our primary energy last year.
I will close with a plea yet again.
To all my colleagues in the industry, particularly the analysts and bankers to stop using the deceptive and destructive term energy transition.
First because it is simply wrong the share of hydrocarbons in the global energy supply stack has not shrunk in 50 years in fact hydrocarbons have actually grown their market share over the last 24 years, yet the incessant repeating of the simply false term energy transition contributes to.
A serious misunderstanding of the global energy system with destructive consequences, including damaging political energy policies.
Chris Lee Misinforming kids in our schools and most relevant for today's audience. It is perhaps driven down investor valuation of hydrocarbon companies due to the impression that our industry is soon fading away, even though the numbers do not support this view.
Energy is far too important to get wrong 7 billion people are striving to achieve highly energized lives just like us in the Lucky 1 billion, let's not use deceptively destructive language that impedes them, realizing their dreams of affordable reliable energy access.
We should all strive to speak accurately and honestly, we need to stop using the false term energy transition and instead use energy addition.
We would also be better served not to use the deceptive marketing terms renewable and clean energy is there also not supported by facts, how about new energies or alternative energies. The term that we used before we got off track.
Have a great day everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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