Liberty Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 16 speakers on the call.

Operator

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Angelie Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Speaker 1

Thank you, Alison. Good morning, and welcome to the Liberty Energy Second Quarter 2023 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer Ron Gusek, President Michael Stock, Chief Financial Officer I'm Ryan Gosney, Chief Accounting 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.

Speaker 1

These statements reflect the company's beliefs based on Current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non GAAP financial and operational measures. These non GAAP measures including EBITDA, Adjusted EBITDA and adjusted pretax return on capital employed are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA And the calculation of adjusted pretax return on capital employed, as discussed on this call, are presented in our earnings release, which is available on the Investors section of our Web I will now turn the call over to Chris.

Speaker 2

Good morning, everyone, and thank you for joining us for our 2nd quarter 2023 operational and financial results. We executed on another quarter with strong financial results And I'm especially proud of our operations team for safely delivering the highest quarterly average daily pumping efficiency in our history, A high bar raise higher. Liberty achieved adjusted EBITDA of 311,000,000 And fully adjusted fully diluted earnings per share of $0.87 Our success And growing our long term competitive advantage is illustrated by our trailing 12 month adjusted Pre tax return on capital employed of 44%. Strong cash generation enables long term investment Together with a strong return of capital program. In the second quarter, we returned $69,000,000 to shareholders through the repurchase Of 2.7% of shares outstanding, plus our quarterly dividend, since the reinstatement of our return of capital program In July of 2022, including the initial $250,000,000 buyback authorization And a subsequent upsize of $500,000,000 in January, we have now returned $287,000,000 to shareholders Through cash dividends and the retirement of 9.7 percent of outstanding shares, We completed the initial repurchase authorization and now have $240,000,000 of our buyback authorization remaining.

Speaker 2

The compounding effect of our last 12 months of share buybacks is evidenced by the 57% Year over year increase in fully diluted earnings per share on a 45% increase in net income. We've created a unique competitive position where we can take advantage of accretive, cyclical and secular investment opportunities, Generating high returns, while returning cash to shareholders and maintaining a strong balance sheet. We have a very simple philosophy of investing early in the cycle in strategic areas where we can leverage our expertise, bring differential technologies and services to our customers, Improve efficiencies and create future competitive advantages. A latest example is the launch of our new division, Liberty Power Innovations. LPI provides CNG fuel and field gut fast processing services To deliver a reliable source of natural gas fuel in support of the rollout of our suite of Digi Technologies.

Speaker 2

Just as Liberty was founded as a solution to service quality challenges 11 years ago, LPI was an organic idea Stemming from the need to find a solution to unreliable gas supply. LPI has made tremendous strides in the last few months. We've successfully integrated the April acquisition of CYREN into the LPI platform and have already seen a growing customer base For both drilling and completion needs. We're also on track to meaningfully increase our gas compression capacity in the Permian Basin in the 3rd quarter And enter the DJ Basin later this year, readying ourselves with enough capacity to execute on a profitable multiyear growth plan. Our delivery and logistics capabilities are also growing with transportation equipment on order, Increasing our fleet of CNG trailers and logistics services to deliver reliable fuel supply.

Speaker 2

We also have field gas processing and treating, which began in the Haynesville in support of our frac services. We have since added 2 additional field gas processing customers in the Permian. We're excited by the long term business potential of the LPI platform. Not only will it allow us to secure the supply chain of fuel that drives our Digifleet technology transition, But it also positions us to take advantage of expanded opportunities beyond completions and eventually grow beyond the oilfield. We're investing today for the future growth of the business by bringing together the right people and right technology to build a differential offering.

Speaker 2

Liberty was an early driver in the industry shift from diesel to natural gas technologies a decade ago. And today, the importance of natural gas fueled equipment is more widely appreciated as a means to lower fuel costs and emissions. We continue to transition our fleet towards our natural gas fueled Digi Technologies. These technologies expand our earnings potential Without meaningfully changing the customer's total well costs with the savings from the diesel to natural gas arbitrage. As a reminder, we deployed our 1st Digi fleet comprising DigiFrac electric pumps in the Q1 And we're in the process of deploying our 2nd Digi fleet, which is slightly delayed as a result of supply chain challenges.

Speaker 2

Our 3rd and 4th fleet will follow during the second half of this year. We're also building Digi Prime Hybrid Pumps Anchored by the most efficient 100 percent natural gas engine available, these capital efficient pumps can be used as the Primary source of horsepower on location, alongside a few Digifrac electric pumps that will manage transient load and precision rate control. This fleet configuration will have the most efficient gas consumption, emissions and fleet capital in the market. Digi Technologies are Liberty's platform for the future. Frac markets in North America Are at a steady healthy activity levels after moderating a bit from late 2022 as commodity prices retreated from the 2022 peak.

Speaker 2

Crude oil prices are now at pre Russia Ukraine war levels, Which has spurred private operators in oilier basins to reduce activity. Lower natural gas prices Have also led to a curtailment of activity in gas spaces. During the Q2, we saw reduced frac activity That resulted in increased white space on our calendar, resulting from customers changing development schedules, idiosyncratic drilling delays And the redeployment of fleets from gassy to oilier basins. Even with these disruptions, the Liberty operations team achieved a new Orderly record and average daily pumping efficiencies. When our fleets were on location, our performance was the best it's been in our history With more fleets safely pumping more minutes of the day than ever before.

Speaker 2

Looking ahead, Activity in the second half is expected to be slightly lower than the first half. If our customers' scheduled work reductions become larger, We may reduce active fleet count by 1 to 3 fleets in the second half of the year to balance demand. We will consolidate work to maximize the utilization of our crews. Our goal is to maintain the safest, Most efficient operations and we will do so by balancing the right numbers of crews to meet E and P customer demand. As we look forward, the rig count shows signs of stabilization as E and P operators are already benefiting from lower well costs Are not service price driven, but rather input costs such as drill pipe, steel casing, cement, sand and fuel.

Speaker 2

Liberty is working with our customers to help lower their costs while maintaining our margins. Our wet sand handling and delivery technologies are enabling proximity mining, reducing total cost and environmental impact By shrinking the distance and truckloads required to move sand to the well site, while eliminating the use of natural gas from the sand drying process. Our wet sand handling technology is agnostic to wet and dry sand, allowing us to provide our customers With the most cost efficient source of sand for their wells, we also have other logistic initiatives underway To generate sustainable cost reductions for E and Ps and increased returns for our shareholders. More broadly, global oil markets are signaling a constructive outlook on a tightening supply demand balance. OPEC plus supply cuts in recent months are beginning to take hold and markets are anticipating a subsequent draw on global oil inventories.

Speaker 2

In the U. S, slowing production growth, a drawdown of oil inventories and a likely shift to refilling U. S. Strategic petroleum reserves All aid the outlook. Despite recessionary risks, demand for oil remains resilient Given several factors, including global travels trending towards pre COVID levels, robust demand from India And strength in emerging markets.

Speaker 2

China has also reached its highest level for oil demand in history, Despite having grown at a slower pace than predicted a year ago, underinvestment in global production capacity supports a resilient multiyear cycle It's simply offsetting normal production declines. Operators are largely adhering to flat or very modest production growth targets. This combination underpins higher base levels of frac fleet utilization and more insulation from commodity price volatility than in prior cycles. The current more consolidated industry is also better prepared to navigate near term softness in completions activity By reducing active fleet counts to balance the market and protect margins. In the second half of twenty twenty three, Demand for frac fleets is expected to parallel recent rig count trends at approximately a 1 quarter lag.

Speaker 2

Natural gas markets Likely don't meaningfully increase activity until 2024 in advance of rising LNG and Mexico exports. We anticipate North American completions activity will moderate in the second half of the year versus the first half. Service companies are reducing fleets in response, supporting a balanced frac market and largely stable pricing environment. Our internal bottoms up industry analysis already shows a decline of the industry frac demand We're nearly 30 active fleets and the industry has successfully navigated this softer activity. Liberty is well positioned to navigate these Frac utilization has moderated, but still remains high and we see a strengthening macro in 2024.

Speaker 2

We expect continued healthy free cash flow and capital returns to our shareholders through opportunistic share repurchase, repurchases And dividends. With that, I'd like to turn the call over to Michael Stock, our CFO to discuss our financial results and outlook.

Speaker 3

Good morning, everybody. I'm pleased to share that we achieved an improved trailing 12 month pretax ROCE of 44% Despite the utilization challenges in the Q2, we also rounded out our 1st full year of our capital return program reinstated in July 2, with a combined $287,000,000 return to shareholders, dominantly in the form of accretive buybacks. We continued our investment strategy in our differential suite of Digi Technologies and accelerated the launch of LPI, CYREN acquisition in April. We had a busy quarter executing on these initiatives and we expect this to continue for the remainder of the year. In the Q2 of 2023, Revenue was $1,200,000,000 a 27% year over year increase, but a 5% decline from the Q1.

Speaker 3

Relative to the Q1, unplanned customer completion schedule changes, drilling delays, pushed activity on larger pads And fleets shifting from gas to oilier basins lead to softer market conditions and utilization challenges, partially mitigated by the We achieved across the full fleet. 2nd quarter net income after tax of $153,000,000 a 45% increase from prior year, But a decrease from the $163,000,000 in the Q1, fully diluted net income per share was $0.87 A 57% increase from prior year and compares to $0.90 in the Q1. General and administrative expenses totaled $8,000,000 in the 2nd quarter and included non cash stock based compensation of $700,000,000 G and A increased 5,000,000 Due to the higher non cash stock based compensation expense, annual salary adjustments and other miscellaneous expenses. Net interest expense and associated fees totaled $6,000,000 for the quarter. Tax expense for the quarter was $47,000,000 Approximately 24 percent of pretax income.

Speaker 3

We expect the tax expense rate for the full year to be approximately 23% to 24% of pretax income. Cash taxes were $52,500,000 in the 2nd quarter and we expect 2023 cash taxes to Approximately 50% of our effective books tax rate for the year. In 2024, we expected a 20 we expect A 23%, 44% book tax rate and a similar cash tax rate. 2nd quarter adjusted EBITDA increased 59% As a result of the aforementioned challenges during the quarter, we ended the quarter with a cash balance of $32,000,000 of net debt of 256,000,000 Net debt increased by $67,000,000 from the end of the Q1 as we acquired Cyren Energy for $76,000,000 net of cash. We use cash flow to fund capital expenditures, dollars 60,000,000 in share buybacks and $9,000,000 in quarterly cash dividends.

Speaker 3

Total liquidity at the end of the quarter, including availability under the credit facility was $226,000,000 Net capital expenditures were $152,000,000 in the 2nd quarter, which included costs related to DigiBrack Construction, capitalized maintenance spending and other projects. We had approximately $7,000,000 of proceeds from asset sales in the quarter. Net cash from operations Was $240,000,000 for the quarter and returns to shareholders was $69,000,000 for the quarter. Our capital expenses remain on target for 2023 Now way towards the second half of the year. In 2022 July, we have sold a $250,000,000 share repurchase program to Take advantage of dislocated share prices.

Speaker 3

During the Q1 of 2023, we upsized our authorization to $500,000,000 Reflecting our conviction and our ability to generate strong free cash flows. We also reinstated our quarterly cash dividend of $0.05 per share In the Q4 of last year, in the Q2, we returned $69,000,000 to shareholders, including the share repurchase of 4,700,000 shares, Which represent 2.7% of the shares outstanding at the beginning of the quarter for $60,000,000 and the balance in dividends. We have now returned to shareholders a cumulative $287,000,000 in the last 12 months. We continue to differentiate ourselves in an industry with an industry leading return of capital program while reinvesting in high returns opportunities and growing our free cash Looking ahead, we expect North American completions activity will moderate in the second half of the year versus the first, But remain at very healthy levels. Frac activity is expected to stabilize as somewhat quarterly lag to the rig activity ahead of a more constructive outlook Oil and Gas Markets in 2024.

Speaker 3

As we look at the second half, we may reduce active fleet count by between 1 to 2 3 fleets This activity slows further consolidating our planned activity with a highly efficient fleets and thereby improving fleet utilization. As a result of these changes, we're adjusting our full year 2023 adjusted EBITDA outlook to approximately 30% to 40% year over year growth. Our profitability should trend higher in 2024 and free cash flow is predicted to exceed 2023 levels Driven by incremental profitability from our current year investments, continued margin expansion of initiatives and lower capital expenditures. We will continue to deliver on our strategic priorities, including our industry leading return of capital program, a strong balance sheet and continued investment Differential Technologies, the position us well in the coming years. Chris will give some big picture closing comments after Q and A.

Operator

Our first question today will come from Derek Podhauser of Barclays. Please go ahead.

Speaker 4

Hey, good morning, guys. So your top line was down 5%, but you held in decrementals around 30%, the whole margin Flat quarter over quarter. Can you just maybe talk about the crosscurrents between you mentioned your record pumping?

Operator

It's not on there.

Speaker 4

Sorry, white space, decreased consumable prices and frac pricing? Should we expect similar decrementals for the back half of the year or the second half?

Speaker 2

Look, as we said, When people change schedules and we don't have enough time to fill slots and all that, we end up with a little extra white space as we did. So look, I would say pretty similar in Q2 versus Q1, a little more white space that drove the revenues down, pricing about the same, but when you have White space and you don't get revenue out of that. You still got the same fixed costs. It compresses margin a little bit. I don't know if Michael wants to say anything else, but Yes.

Speaker 2

And you could see that our revenue I think was about the same as Q4, but margins were higher.

Speaker 3

And Derek, I think the team did a very good job. Pricing was basically flat. But we say activity was off, but we did a great job on the efficiency side. Decrementals were 30%, which was very good. We actually managed to sort of mitigate some of the decrementals that you would normally see in a drop of revenue with some of our other business lines.

Speaker 3

So but second half of the year, I think you would see you can potentially see a little higher decrementals. That would be the natural sort of like flow. But we will still work to mitigate it. So I'd say 30% is probably the low end of the decrementals, a little bit higher than that could be expected as well.

Speaker 4

Got it. Okay, great. That's helpful. And then I just want to any more color on your frac your fleet count? I know you previously guided us to a low-forty numbers, Now we have some e fleets coming in.

Speaker 4

You mentioned first, did you flat fleet out? Next one's coming in 3 and 4 back half of the year. You talked about removing 1 to 3 fleets in of the market. But what about your aging Tier 2 pumps? Are you taking those out of the fleet as well?

Speaker 4

I'm just trying to think about Where 2024 is going to start as far as the fleet count for you guys? And maybe even further, what type of a mix should we think about between eFrac, Tier 4 DGB and then just your legacy stuff, some color there would be helpful.

Speaker 3

Generally, I'll take that one Derek. I mean, when we look at it, we probably retire 3 pumps every week when we think about an aging fleet. The average sort of About 10% of the whole industry fleet goes down every year. So it's a very slow sort of incremental process. We are bringing on Digifrag pumps as we go.

Speaker 3

As we said, we'll have 4 fleets of that. Generally, if we're looking at a flat fleet count, That would be replacing Tier 2 diesel. So we're moving up our natural gas percentage. As we said, depending on where Q4 shakes out, which may well they're still sort of they're still working on some of the plans, I think, on the operators and where the second half of that is, maybe some of it is in 1, 3 fleets we may drop Yes, compared to the beginning part of this year, so that's where we would start next year. One would expect those fleets would come back relatively quickly as the strengthening market going into Q1 was a better oil market and then strengthening again, I think you'll see a strengthening market as we go through the gas prices come back.

Speaker 3

So Really pretty good outlook for next year on that, sort of an increase in our gas usage and sort of widening our technology advantage.

Speaker 4

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

Speaker 2

Thanks, Thierry.

Operator

Our next question today will come from Keith Mackey of RBC

Speaker 5

commentary you've put out on the fleet count mirroring or paralleling the rig count drops with a 1 quarter lag. So if we look at the rig count From Q1 to Q2 dropped about 80 at 2.5 rigs per crew. That kind of gets me to 32 fleets, Which maps up, I guess, fairly closely with your bottoms up frac count analysis. But can you just talk a little bit more about where you think the is in relation to dropping those 32 fleets and kind of where are we sitting now in total fleet count from what you can see?

Speaker 3

Yes. I'd say, when we talk about that quarterly lag, I mean, that's just the natural when you think of drilling moving towards frac. The vast majority, it's probably a large amount of that was Exit rate for Q2 or the early part of July. Right. So we sort of, I'd say rig counts probably at that So the stabilized factor now and probably has to go up in the last couple of weeks somewhere around there.

Speaker 3

I would say frac fleets, I think people are slowly The staffing flex fleets, so it's kind of hard to tell exactly where we have active demand, where everybody is In sort of like stacking those sleeves and sort of letting the staff a trip off is a little sort of more amorphous,

Speaker 2

I think that's right.

Speaker 5

Got it. Okay. Okay. Thanks for that color. And just a follow-up on your 30% to 40% revised EBITDA guidance.

Speaker 5

Does that incorporate dropping the 1 to 3 fleets potentially or would that be incremental To the 30% to 40% year over year EBITDA growth guidance figure?

Speaker 3

That includes it. Yes. So that's as we say, to see we're Probably at the top end of that range where the bottom end of our range from where we were, where we were seeing the beginning part of this year. So that includes those That's potential fleet drops if we still see activity roll continue to roll down.

Speaker 5

Got it. Okay. Thanks very much. That's it for me.

Speaker 2

Thanks, Keith. Thanks.

Operator

Our next question today will come from Luke LeMoyne of Piper Sandler. Please go ahead.

Speaker 3

Good morning. Maybe for Ron, could you update us on DigiPrime and where you are with testing? And then is the plan still for these pumps to be And the Digi fleets are rolled out, number 3 and number 4?

Speaker 6

Yes. Luke, we're well into our testing with Digi Prime now, it's on the test stand and running through the program we have laid out for it there. All indications look quite positive at this point in time. So we remain pretty optimistic about deployment of that here in the not too distant future. And yes, certainly expect that to play a role in our rollout of Digi.

Speaker 6

Exactly what that mix looks like will be customer situation just depending on the needs there. But yes, you can expect DigiPrime to be an important part of the base load horsepower, Both in the Digi platform and in some cases probably combined with Tier 4 DGV.

Speaker 3

Got it. Thanks, Ryan.

Operator

Our next today will come from wakar Syed of ATB Capital Markets. Please go ahead.

Speaker 7

Thank you. So I just want to understand what would change between what macro things have to change between 13 crude drop. So if rig count stays around 650 or so, do you get to 1 crew drop or 3

Speaker 2

Pro thing, for us it's always bottom up micro. It's just the existing customers where fleets are working If a customer is reducing activity, so that fleet is no longer fully utilized, if we can easily fill those gaps or spots with Roughly equivalent work will keep the fleets active. But if we have a customer who's cutting activity in half and we've got 2 fleets running for them, That's quite likely that one fleet is going to go idle. Now we have to date, we haven't put any fleets down. So I would say we benefited a little bit from the differential demand for Liberty.

Speaker 2

There's people that wanted Liberty capacity that didn't happen, That have seen a little bit of softening in the marketplace and have used that to take to absorb capacity we've had come free From these incremental reductions from existing customers. So it's really very much a bottoms up, What is the best use of that fleet? So as we say it's a macro thing, it's sort of very specific to the calendars of our customers. But yes, that's our guess of that range. It will probably and we are agnostic On what number that is?

Speaker 2

We'll keep all the people that work for us today. We'll reassign them into other crews. Some of them will work on test development and stuff. Natural attrition shrinks employee base anyway, so that employment count can adjust easily to sort of very modest changes In deployed capacity.

Speaker 7

Fair enough. And Chris, in terms of pricing, Are you seeing some pressure on some of the fleets, maybe more like Tier 2 diesel fleets? And if so, how much would that be if you could put some numbers around it?

Speaker 2

Yes, I think things are very granular, individual customer to individual customer. But as Fleets have gone down. Some of the people before they put fleets down, they lob in cheap prices, they may grab spot work at much big discounts. And does that create more customer dialogue? Sure, of course it does.

Speaker 2

But it's We have long term partners and generally dedicated work and the way we're performing right now and our customers, We're in sort of a happy situation that works for our customers and it works for us. And we just yes, we don't have any intention or any need to meaningfully change what we're doing.

Speaker 7

And just one last question. You have a small presence in Canada. How do you see the outlook in the Canadian market and Right now, the supply demand fundamentals there?

Speaker 2

I would say the Canadian market, which over the last couple of years has probably been an incrementally looser Then the U. S, today they're probably pretty similar. They're both pretty healthy markets. We're busy in activity. We'll likely have a record year in Canada this year.

Operator

Our next question today will come from Stephen Zengaro of Stifel. Please go ahead.

Speaker 8

Thanks. Good morning, everybody. 2 for me. Just to start, what's the current sort of price Discussion with customers feel like. I mean, is it is there a lot of pushback?

Speaker 8

Is it just I mean, clearly, there's a preference For your higher end assets, but just any color on how those pricing discussions have unfolded?

Speaker 2

Stephen, as fleets have gone down, as we said, probably 25 to 30 fleets across the industry have become idle Over the last 6 months, that absolutely leads to dialogues. As I said to Makar, that before laying off those people and parking that fleet, They'll probably make a few phone calls. Hey, can we get your work? We're going to this and that. So we have dialogues with our customers.

Speaker 2

But we're always motivated with our customers to figure out how to enhance their economics and enhance our economics. Are there a few more dialogues today? All right. Well, I understand, you're quality fleet, you're not going to lower your service pricing, but Hey, are there chemicals we can swap out? Is there more efficient logistics we can do?

Speaker 2

What about this wet sand stuff we've been hearing you guys talk about? So there's probably more dialogues that always exist, but maybe more of them today about, all right, what can we do together To drive down our well. And that's how Liberty rolls. We have a much larger engineering staff, a much higher tech out of the system, make better decisions on materials to use and grow our economics together.

Speaker 8

Thanks, Chris. And then as a follow-up to that, I mean, you've talked about it, I think, we've talked about it as well and others as far as you've had industry consolidation, you've had You and Hal probably acting better or certainly Hal has from CapEx perspective versus history. Is it too early to definitively say you've seen the impact of that better industry behavior on pricing dynamics Or you're still waiting to see it. I'm just trying to get a sense because we think it's happening, but it's but from your seat, do you think there's evidence To that end?

Speaker 2

Absolutely. I mean, look at where we are. Look where everyone's perceptions were 3 or 4 months ago. Oh my God, activity is going to shrink, Pricing will collapse because it always does. No one will park fleets.

Speaker 2

Heck, we've seen 25 or 30 fleets go And no meaningful even measurable change in average pricing. So yes, I would say tremendously different behavior that we saw in the last two downturns. A lot of capacity has been idled. I think people operating that capacity tried to keep it busy at Incredible high return pricing and they couldn't do it and they park the fleet. So that's absolutely encouraging.

Speaker 2

I think We see a change in that. People are just taking a little bit longer term view of their business now as the shale revolution has gotten more mature. And obviously consolidation helps that too. But no, it is a business. Now we'll see what the future brings.

Speaker 2

But I mean, my guess is Most of the activity decline that we'll see this year has already happened. And I would say the industry has handled that fabulously.

Speaker 8

Excellent. Thank you for the color.

Operator

Our next question today will come from Marc Bianchi of TD Cowen. Please go ahead.

Speaker 9

Thank you. The updated guidance for this year For the back half now seems to imply about a $260,000,000 per quarter run rate. I'm suspecting It's going to decline throughout the back half of the year where the 4th quarter is lower than the 3rd. But any steer you can give us on Sort of that progression, is it a linear progression? Is it more of a drop off in 4th quarter?

Speaker 9

Any color would be helpful.

Speaker 3

Yes, we gave you a round there. As you see, you're probably 280 on average if you get to the top end of the range, right. So you're probably using the middle end of the the middle part of the range there. So yes, I think some clarity around Q4. There'll be normal seasonality in Q4, which is 5% to 7% because of holidays.

Speaker 3

But I think operators, sort of where they are and sort of their plans are really just coming into focus as we come into summer, Right. And so that will depend on sort of what part of the range it generally comes in.

Speaker 9

Okay. So At least at the midpoints, the drop is more weighted towards the 4th quarter at this point, with maybe a slight decline in the 3rd quarter.

Speaker 3

And that's where the slight, I'd say the fuzziness is and so therefore, yes, you would say that is correct.

Speaker 9

Yes. Okay. That makes sense. And just to clarify the 1 to 3 fleet potential drop, that's overall fleet count. That's not just Legacy excluding Digifrac?

Speaker 3

That is overall fleet, average overall fleet, yes.

Speaker 9

Okay. Okay, thanks. And then I had another quick one on pricing. One of the things that investors Say a lot is we're not going to really know the effect of the pricing until the beginning of next year because of Negotiations that occur in the fall and then all the pricing resets in the beginning of next year. Do you see it playing out that way where the market Won't really know what's going to happen with pricing until we get into next year or do you think kind of Chris based on what you were saying to Steven's question that we kind of already know?

Speaker 2

Yes, I mean pricing is a continual thing. I think the sort of there's a few big companies and with big purchasing departments that are Very annually focused, but they're more the exception than the rule. And ultimately, it's just supply demand and desire for Who your partner is as those negotiations happen. So, Bill, look, there's a lot of pricing dialogue going on right now. We see how that's playing out.

Speaker 2

Obviously, the supply demand dynamics will be different 3 or 6 months from now than they are now. They might be similar, they might be tighter. We don't know. But I don't think it's no, we don't know anything about pricing till next year pricing. That's not how it works.

Speaker 3

You're not going to see a seismic shift as you start into the New Year on the new budgets, right? This is as Chris said, this is a continuum. Some things reprice on an annual basis, but generally everything sort of moves sort of like in a slower sort of more organic fashion.

Operator

Our next question will come from Scott Gruber of Citigroup.

Speaker 10

Chris and Michael, you guys have been very thoughtful in building Liberty through a series of Acquisitions. But we did have Patterson and NextEer come together here recently, and scale was a big focus for the company, Not just operationally, but also in terms of trying to capture increased investor interest. So I'm just curious about Your kind of latest thoughts on industry consolidation and achieving greater scale and the

Speaker 2

I mean, look, yes, consolidation, no doubt that's a Positive for the industry. It just you just get larger, more rational actors in evaluating trade offs. We've been different, I would say, a little bit that we haven't been we haven't mainly been an acquisition company. We really started with a Different philosophy, a different way we're going to do business. We were maybe a disruptor with a plan to be organic growth.

Speaker 2

It's just we had a brutal downturn in 2015 2016 that just led to a compelling opportunity where there wasn't another buyer. And so we did the Sanjell deal and then COVID and some circumstances there led to for us a highly attractive opportunity with Schlumberger, But we're not by nature an acquisitive company. We've had 2 awesome deals and boy, if we get A third opportunity gets tremendous like that, of course, we would do it. But our fundamental business model isn't Acquire and integrate. But for some of our competitors, it is and that's great.

Speaker 2

There's all different ways to participate in this game. But in general, fewer players, larger, stronger players with more long term thinking management, that's Absolutely positive for our industry on the frac side. I would say it's also a positive for our customers. In sort of the crazy days of 2013, 2014 and it was 70 frac companies. I mean think of what was the speed of innovation, What would be the investment looking forward more than 3 months?

Speaker 2

Not a lot. So yes, it helps Pricing, so you think that's good for the frac industry, but not good for the E and Ps. Larger, more thoughtful players are better able to make rational investments in long term partnerships. I think it's making the whole industry healthier, both our customers and our space, the frac space.

Speaker 3

Yes. And I would just add a little color. We obviously see the fact that steadier earnings and a potential large market cap We're building into that organically as you've seen, right? We've built a very large company. We've got the frac business, which is becoming a much steadier market, Less cyclical, it's still going to be cyclical, but less than it has been historically.

Speaker 3

And now building our LPI platform will allow us to diversify That earnings base will take some more noise out of the cycle and grow into sort of going to continue to grow the footprint of our company Even while we're working in a space that may have single digit, high single digit growth in the oil patch for the next 10 years, got a much bigger opportunity in front of us with the LPI platform. So that's how we're growing to that size to satisfy our investors.

Speaker 10

No, it's all great color. I appreciate that. And then just turning to the CapEx comment on 24, That being down, the previous discussions have centered around replacing around 10% of the fleet. So the question is, is that sort of the game plan for next year? And then if so, does the decline come from some of the ancillary services?

Speaker 10

Or do you slow the investment in Digifracs? I'm just curious kind of what drives the year on year decline in CapEx?

Speaker 3

Yes. When we set out to our Investor Day, sort of like last year and this year, we're very heavy investment cycles as we saw it being part of the early part of the cycle and it was going to slow down next year. We will still replace our fleet. Obviously, your 10% attrition that will be an upgrade Diesel to Digifrac, and we could see more than that. But as we've said next year, rather than being 50% of projected EBITDA, 50% of projected EBITDA, which is This year for CapEx, it's more likely to be in the 30s.

Speaker 3

And I think that's exactly the same. We obviously that will be dependent on opportunities, Great opportunities with high returns like we've been able to drive over the last 11 years are always going to be of interest to us. But that's where we see our baseline business moving to, which is a and as we laid out in our Investor Day, it's probably between a 5 year and a 7 year transition of our hopefully Yes,

Speaker 2

I mean, if you look at last year, this year, we've had some transformative changes that won't happen every year. We've Completely different control system software we developed, entirely different logistics networks and some new logistics technologies we've talked about, Both the development and the construction, the birthing of Digi, DigiFrac and Digi Prime, we're going to continue to build those technologies, But upfront, there's the development of them. So we've had we've done a lot during the last downturn at the start of this up Turn to prepare ourselves for the next decade. We'll continue to have meaningful investments every year, but we've had a pretty concentrated I'd say the last 24 months, the next 6 or 9 months. So yes, I think Michael's commented to A reasonable reset downwards of CapEx is not inconsistent with the long term plan It is definitely not an indication of slowing the deployment of Digi.

Speaker 2

I mean, the demand there is just tremendous. For us, it's just balancing at what pace do we want to replace those fleets and what's the best homes for them as they come out.

Speaker 10

Got it. And the 30% reinvestment as a percent of EBITDA, should we consider that more like a long term and a normalized level?

Speaker 3

It's again, that's our view into next year, Scott. When we think about baseline business, sort of our base completions business, Yes, 30%, 35%.

Speaker 10

Okay. That's great. I appreciate it. I'll turn it back.

Speaker 2

Thanks, Scott.

Operator

Our next question today will come from Neil Mehta of Goldman Sachs. Please go ahead.

Speaker 11

Yes. Good morning, team. Chris and Michael, I want to start off on capital returns. And you've talked you've been doing a good job Driving down the share count back half of last year, been aggressive in the first half of this year. And I think your mentality has been Buyback stock at dislocated share prices, just love your perspective as we try to think about your capital return profile in the back half of the year.

Speaker 11

Do you You'll see the opportunity to be aggressive or does the white space in the calendar impact the magnitude of free cash

Speaker 2

Well, I think as you heard from that sort of broad guidance Michael gave, that's still It may be a little down in the second half from the first half. That's still pretty tremendous financial performance. We've got mid-20s cash return on cash invested since the day we started the company and a 44% ROCE right now. So yes, look, we have a strong business. It's average through the cycle that's been strong since the day we started it.

Speaker 2

And for whatever reasons, you probably know better than us, we have a stock price today that's just I mean, when I talk Outside of our industry, I just get a very puzzled look. I mean, you trade at 4 times earnings and you got to keep way better than the S and P 500 on capital and a growing competitive advantage, it's a we're in an unusual place. And it's not our job to Complain or talking, you don't hear us talk a whole bunch about the stock price, that's a market. But what we can do is respond to that marketplace. And if the marketplace stays anywhere around where it is now, I mean, it just gives us a great opportunity.

Speaker 2

Heck, we've shrunk our share count 10% in Less than the last 12 months. If we continue to have opportunities to do that, fantastic. We'll do it all day long. Look, our goal, what motivates us is build a great business that's going to help empower the world and grow the value per share. So that's Making our business more profitable, larger and stronger, but if we can also shrink the denominator and have each share on a larger percent of the business, fantastic.

Speaker 11

Thanks, Chris. That's great perspective. And the follow-up, and I think I know the answer to this question is, you're Effectively an unlevered business at this point. If to the extent you feel strongly that the business is dislocated, would you ever put debt on the balance sheet To really get aggressive in lowering the share count.

Speaker 2

Well, look, we'd always we're always going to keep a strong balance sheet. Look, as he said, we've had 2 incredible downturns just in the last 8 years. So you'd like to think, oh, there can't be another one of those, but you never know. We always have to have a balance sheet that's ready for whatever happens, not just to survive those downturns, but in those two downturns, In both of those downturns, we bought businesses bigger than we were, at very attractive prices. So we're always going to be ready And able to do things like that.

Speaker 2

But obviously we started our buybacks Probably in front of our cash flow, we're not formulaic. We're going to take X amount of money and we for us buybacks aren't about How much money we spent to buy our stock, it's how many shares did we reduce and what was the trade off involved in that buyback of producing those shares. So yes, it's not our buybacks are not going to float formulaically with orderly free cash flow. They're going to be based on share price, based on our comfort, But we'll never go way over the skis and compromise our balance sheet to buy back half the shares In a it's a big agreement. We have to have a rock solid balance sheet, but I'm probably repeating myself.

Speaker 2

I think you get our philosophy.

Speaker 11

No, it's basically kind

Speaker 4

of sense, Chris.

Speaker 2

Good question. Thanks.

Operator

Our next question today will come from Dan Kutz of Morgan Stanley. Please go ahead.

Speaker 12

Hey, thanks. Good morning. So I just wanted to ask on the gas activity side. You guys have made some comments in prepared remarks that you think that we'll probably see gas activity start to pick up in 2024 ahead of all of the LNG liquefaction capacity that's coming online later that year and into 2025. Given that you guys Normally do have a pretty close pulse and view on the kind of industry macro.

Speaker 12

Have you guys Do you have any views or any thoughts you could share on where you think gas had to be needs to get to, assuming that we're kind of Fully ramped on all the LNG liquefaction capacity that is in the pipeline is if we were to frame it versus Where Gas Act could be started this year, I think it was 15% higher, maybe 20 or 25 rigs, Presumably that's a dozen or so flat fleets. Do you have any views on whether or not we need to get back to that level, above that level, below that level? Or any thoughts you could share on I think that could be my trend next year. Thank you.

Speaker 2

Yes. I mean, look, but my guess is at some point Next year and it might be later next year, it might be maybe middle next year as a good guess. We probably get back to the gas activity level we were at 6 or 9 months ago. We may have to go higher than that. There's a pretty significant growth in both LNG exports coming on And pipeline exports to Mexico and part of that pipeline export to Mexico ultimately is going to feed another LNG export terminal out of Mexico.

Speaker 2

So there's some pretty positive demand outlook things coming there. But it's not like we're going to see a doubling of gas Activity from where we were a year ago even from where we are now. There's a lot of just awesome gas drilling locations in the U. S. And now activity is going to dial back to gas production flat.

Speaker 2

We may even see some decline in gas production. But at some point next year that'll have to transition and of course it'll be gradual. Gas starts to get above $3.54 you're going to see Activity feedback into the marketplace. So that will be a light switch that will turn on. But when we see gas above 350 and In the outward curve angling up from there, you'll probably start

Speaker 7

to see

Speaker 2

Some gas activity coming on. That could be late this year, that could be early next year. But I bet we get back to previous gas activity levels by Sometime next year, but probably more in the second half of next year.

Speaker 12

Thanks a lot. That's really helpful. And then maybe just Following up on kind of the M and A and consolidation line of questioning from earlier. So maybe on the Putting the core frac market aside, is it fair to assume that Liberty will kind of remain active In looking for opportunities to invest, whether it's organically or inorganically in kind of Businesses that would fit into LPI or the lower carbon type businesses that would could you kind of Talk through how you would characterize your investment strategy for the lower carbon, I guess, part of your portfolio?

Speaker 2

Absolutely. And look, we've been outspoken about this. I think lower carbon is government money. So We're not going to chase government money because that can change with policy. But we are looking at the macro, where is the energy world going?

Speaker 2

Where are going to be Growth areas where going to be the opportunities where there's growth, but people don't think there's going to be growth. So yes, LPI Look is a great example of a platform of interest to us that can lead to very broader things. As I mentioned, I think 3 or 6 months ago, Look, we are not making healthy moves on electricity grid. We are going to drive the price of electricity up and Destabilize our electricity grids. We've been doing it for the last few years and we're going to accelerate, we meaning the policy of this of the federal government and the state governments We're going to accelerate that.

Speaker 2

That's unfortunate, but that's going to lead to business opportunities. We're not going to be in it just to be in it, But if we can have strong returns on capital with technologies we've already developed and purposed for something else like powering Digifrag, for example, And delivering gas or processing gas, do we expect to see broader business opportunities there? I think we do. I think we do. And there's other You probably saw an announcement recently about a breakthrough at FERVO in geothermal with Liberty as a partner there.

Speaker 2

And we've had some New technology and some new approaches there that have had some early and exciting results. And you may hear other areas that are So using Liberty technology and expertise to change the energy game a little bit. So yes, we are I mean, Our company is called Energy for a reason. We're all in on finding the best business Competitively advantaged opportunities for us to play a role in a changing energy landscape.

Speaker 12

Great.

Operator

Our next question today will Come from Arun Jayaram of JPMorgan. Please go ahead.

Speaker 2

Hey, good morning. I was wondering

Speaker 13

if you could give us a little bit more Color on the efficiency gains that you're seeing in terms of pumping hours. Chris, I think you mentioned there's a record amount of Pumping hours you saw as a fleet, but could you put some numbers behind it? Is it 3.50 hours per Fleet, but love to get some more thoughts on that and the sustainability of that as well as if you could give us a sense of how The Digifrac fleets in the field are doing from a pumping hours perspective?

Speaker 2

So we don't Publish the pumping hours thing. There are internal metrics we track, but we made a decision 10 years ago, we're going to track all that data. We work with all customers individually about how to grow those numbers, but we don't share publicly. But the metric we reported here When a fleet is rigged up on location, how many minutes in that day is it pumping? It's been a thing I think Liberty has likely led the industry our entire history in that metric.

Speaker 2

And yes, look, as we've grown our fleet count, we're rolling out new technology. We've got all things that might put a little bit of downward pressure on that, but nonetheless record ever in last quarter. So that really speaks to the crews, The people on location 1st and foremost, but also we've had breakthroughs and continued software and process Innovation on R&M, how do you keep a pump running as long as possible? How do you manage the repair of it quickly? I mean iron on location being done differently.

Speaker 2

So there's a whole bunch of things that continue little innovations that drive that up higher. Ultimately, do we think a few years down the road, one of the factors that will help that go even higher Is our new Digi fleets? These are gas reship engines. They've got much longer lifetimes and Longer time between rebuilds and diesel engines. We've got more technology around them that I think is going to help drive that up as well.

Speaker 2

But these are all sort of slow gradual things that matter, but we don't usually highlight or pound the table during an earnings call. The Digi fleets right now, software, a lot of like new technology deployment issues are being sorted out right now. Would say the performance so far I think is quite nice, but it's not at the killer yet, But we'll be there before long. We'll be there before long. I think it's going well.

Speaker 13

Great. And just a follow-up, you talked about this a little bit earlier. I'd love to See if you could talk about what you're seeing in terms of demand for your Digifrac kind of technologies. One of your peers mentioned how They signed as many contracts in the history in terms of their eFleets. I'd love to get your perspective on what you're seeing from that.

Speaker 2

Yes. Look, demand is huge. If that was a metric we wanted to think, we can sign a lot of agreements this quarter, But that's not how we're viewing it. We're going to have a certain rate of capital deployment, which sort of comes up with how many fleets we're willing to build And then who are the right partners for those fleets? Where should they be the configurations?

Speaker 2

So but I mean, yes, I can make it Just to make the obvious point, yes, the demand the interest in that in this new technology is tremendous. It's tremendous. But our focus right now is With the original customers we're deploying them on, let's get these things fired out. Let's get that higher level of Performance that the technology is designed to deliver, a lot of that follow on digis are going to go to the people who get the first ones because the people who see the ones, Well, they want more. So right, and they're going to be priorities for getting that technology, because that's first movers and first partners in that.

Speaker 2

But yes, the interest is quite high. Finding a home for them, that's not a problem.

Speaker 13

Thanks a lot, Chris.

Speaker 2

You bet. Appreciate it.

Operator

Next question is from Tom Curran of Seaport Research Partners. Please go ahead.

Speaker 14

Good morning, guys. Thanks for squeezing me in. I've only got 2 left here. So It seems as if we may be seeing a firming bifurcation of the frac market similar to the dynamic that evolved for the land drilling contractors. Have you observed A starker difference in metrics, especially bidding behavior and pricing trends between the top 6 pumpers and the rest of the players Or between modern equipment, defined as e frac DGB and upgradable Tier 4 and then legacy diesel horsepower.

Speaker 14

Between those two categorizations, where has the demarcation in metrics been sharper?

Speaker 2

So it's both. I think your premise is correct. Probably among the companies, it's even bigger, right? Because Even if you're a smaller player or you don't have a you want the best fleet you can get, you'd love to have natural gas burning equipment, Of course. But most important is to have a fleet that's going to deliver safely, efficiently on schedule operations.

Speaker 2

So the demand for higher quality humans and crews and maybe characterized by the best players versus The newer, smaller, lower quality players, that differential in today's marketplace today is huge. Because you got a capital budget, you got to get something done. And well, boy, I just took the fleet I got seeing people's faces and stress Look, we're in a problem. Can you help us out? Here we are.

Speaker 2

So I'd say the quality of the company and humans is the biggest differential. But the differential among the next generation frankly, of course, that's big too. But I think most people realize It's a matter of when I'm going to get that fleet. I may not be the big guy or the efficient partner that's going to get it This year, I may get it next year or 2 years from now. The interest is there, but the bigger divide, as you just said, is more among the company's Human culture service quality.

Speaker 14

Got it. Makes sense, Chris. And then before Liberty Power Innovations, How would you characterize the remaining M and A landscape of just specifically alternative fuel and power solution prospects out there, You know, possible targets. And would you say that LPI does actively remain on the acquisition hunt?

Speaker 2

Well, when we launched LPI, it as well was not intended to acquire. It was like all Liberty Ideas, it was an organic idea with an organic team, with an organic approach. And then we saw a newer smaller player That seemed that fit nicely in what we were doing and we were able to get a price and a Cultural human fit that was compelling for us. So yes, look, we're pitched all the time. We'll look at everything.

Speaker 2

Acquisitions are certainly possible, But it's again, it's not a central part of the strategy.

Speaker 14

Okay. Thanks for including me, guys. I'll let you wrap.

Operator

Our next question is from John Daniel of Daniel Energy Partners. Please go ahead.

Speaker 15

Thank you for including me. I just got a few quick ones for you. I'll go to Michael first. You mentioned retiring I think When one stem closed, you had like 2,500,000 horsepower.

Speaker 2

I think

Speaker 15

you said you were retiring 3 pumps a week or something ballpark. Does that should we then Extrapolate and assume you've got 2,000,000 to 2,200,000 horsepower today ballpark?

Speaker 3

It's close, but I was really putting the example that it's not a fleet that goes down like this week we're going to like mock for like whole fleets. Every week, pumps go in, they get reviewed, their engine blew up, it's not worth rebuilding. So I'm trying to kind of like when we talk to investors, it's really It's an organic. When we talk about 10% attrition, it's not something that happens in blocks, it's something that happens organically. That's what we're talking about there, John.

Speaker 3

So Yes. Yes.

Speaker 2

Don't take any one indicator of our horsepower. Yes. Fair

Speaker 15

enough. I'm A nerd on this stuff, so I apologize. Just trying to be close. You guys I mean, you work for best of breed E and P Companies. And so if you have 1 to 3 fleets go idle, whatever it is, I don't care.

Speaker 15

I mean, that seems more like budget massaging on their part as opposed to So therefore coming back next year as opposed to like shutting down, is that fair enough?

Speaker 2

Well, there's a little bit of that. There's a little bit of that, Probably the bigger piece is still just what the privates are doing. Okay. These privates are still big players in the marketplace. And I think mostly because of the economics, they're not stopping activity, but they just pulled back activity.

Speaker 2

Some of them have sold, right? You've seen some of this is just M and A reducing activity. Company A buys Company B and together they're running Seven fleets and together they're going to run 5 fleets. So some of the consolidation, it isn't that the very biggest people are just steadier. The very biggest partners and they're slowly sort of steadily growing their activity.

Speaker 2

Yes. Why not the small store companies?

Speaker 15

Okay. As you alluded, I think you stated not any fleets have gone down for you, but call it 25 to 30 across the industry. If we assume 1 to 3 fleets, that's about, call it, 5% of your fleet, should we extrapolate that to the broader U. S. Frac market?

Speaker 15

Or is this just more nuanced? And what I mean should we expect another 10 to 15 fleets

Speaker 2

across the U.

Speaker 15

S. Go down?

Speaker 2

It's more nuance, John, because as I sort of made that point, like a lot of fleets have already gone down and we haven't had any yield. It's not a macro thing for us or for our competitors. It's just a micro bottom up. Where is your fleet now? What is it doing?

Speaker 2

If you had a small number of customers, now didn't change their plans, but your fleet count wouldn't But so it's very granular bottom up with kind of what's going on in our world.

Speaker 3

Fair enough. We had white space on our calendar Sort of the back end of Q2, as we are working with our customers and seeing what their long term plans for the second half of the year up allows us to Yes. So to put that work onto a fewer number of fleets, right? So it's just being very judicious about how and where we manage our fleets And but the we didn't work.

Speaker 15

Got it. And a final one for me. I know you can't you're not going to Get into the granularity of the pumping hours per day. But when you do have the data, you're tracking the improvements. As you've seen the improvements recently, I mean, How much is something that you guys have done versus maybe a new product or service from a 3rd party or just better planning and scheduling by your customer.

Speaker 15

If there's any if you can just add some color that would be helpful.

Speaker 2

Yes, I mean the recent changes, I wouldn't say it's a revolutionary new 3rd party thing. The WellVX, the WellSwap thing that came out a while ago, that's excellent, but that's been around for a while. It's really just Better, more experienced people getting better at what they do and just tighter relationships with customers saying, hey, look, we do things this way. If we did it together that way, we get more minutes out of the day. So it's incremental process human partnership improvements, I would say, John, that dominated.

Speaker 15

Okay. Thank you for the litany of questions. Let me get them in. Thank you.

Speaker 2

Yes. Appreciate all your time in the field, John.

Speaker 15

Thank you.

Operator

At this time, we will conclude the question and answer session. I'd like to turn the conference back over to Chris Wright for any closing remarks.

Speaker 2

3 days ago, The Wall Street Journal read a sobering article by Tom Fairless Titled Europeans are becoming poorer. The punchline of the story is the dramatic divergence in prosperity between the U. S. And the European Union over the last 15 years. In 2008, each represented roughly 25% of global consumption.

Speaker 2

Today, the U. S. Has risen to 28% and the European Union has shrunk to only 18%. In dollar terms, the European economy has grown by a paltry 6% over the last 15 years versus 82% for the U. S.

Speaker 2

What might explain this startling contrast in fortunes Between 2 close allies and trading partners, in a word, energy. Over the last 15 years, The American Shale Revolution has transformed the U. S. From the world's largest importer of energy To a net energy exporter who leads the world in both oil production and natural gas production, The result has been enormous energy cost savings for American consumers and businesses, A reshoring of energy intensive industries with high paying blue and white color jobs. This trend could surely accelerate If we stop building impediments.

Speaker 2

The energy story in the European Union is quite the opposite. EU oil and gas production has dropped by over a third. Coupled with high taxes and regulations, this has delivered ever increasing energy prices to consumers and businesses alike. The net result has been an exodus of energy intensive manufacturing from the EU, mainly to Asia, but also to America. These departing manufacturing jobs Take high paying blue collar jobs and starve many supporting industries.

Speaker 2

Expensive energy impoverishes European citizens, Squelch is optimism and further suppresses fertility rates. Of course, many other factors play a role in the EU American divergence Over the last 15 years, but I believe the core issue is energy. Economists often Mistakenly view energy as just a sector of the economy. Instead, energy is the sector of the economy That enables every other economic sector. Energy is also essential to keeping citizens warm in the winter, Cool in the summer and it enables affordable secure food supplies.

Speaker 2

Get energy wrong and suffering is sure to follow. Thank you for your interest today. We look forward to talking to everyone next quarter.

Operator

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

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Earnings Conference Call
Liberty Energy Q2 2023
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