Liberty Energy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 16 speakers on the call.

Operator

Welcome to the Liberty Energy Earnings Conference Call. All participants will be in listen only mode. 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 Angie Auvoirier, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Liberty Energy's Q1 2024 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer Ron Gusek, President and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward looking statements reflecting the company's view about future prospects, revenues, expenses or 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 available on our Investor Relations website. I will now turn the call over to Chris.

Speaker 2

Thanks, Angelie. Good morning, everyone, and thank you for joining us to discuss our Q1 2024 operational and financial results. As we enter the 4th year of what appears to be a durable cycle for North American oil and gas production and development activity, consolidation across the energy industry is pushing larger companies to seek technical solutions and expertise to drive value creation. Liberty's strong first quarter results demonstrate the continued benefits of leading the industry in technology innovation, service quality and investment in talent. Over the last year, the operations team delivered our highest combined safety performance and average daily pumping efficiency in Liberty's history.

Speaker 2

Our 32% adjusted pretax return on capital employed for the 12 months ended March 31, 2024, represents a continuance of our history of strong returns. I'm proud of the continued outstanding results our team achieved during a period marked by softening industry activity trends. Exceptional operational execution and deep customer engagement drove strong first quarter revenue of $1,100,000,000 and adjusted EBITDA of 245,000,000 dollars We generated strong cash flow and distributed $42,000,000 to our shareholders in the Q1. Since July 2022, we have now distributed $417,000,000 of cash to shareholders through the retirement of 12.5 percent of shares outstanding plus cash dividends. We remain focused on generating strong returns and free cash flow.

Speaker 2

We are pairing investment in profitable growth initiatives that increase our competitive advantage with a robust return of capital program. We are leading a generational shift towards low emissions, capital efficient natural gas fueled technologies. Our comprehensive solution from critical power generation to the CNG fuel supply supports our DigiFleet deployments and uniquely serves our customers in their development of oil and gas resources. Furthermore, a growing demand for power from AI driven data centers and reshoring of industrial and manufacturing activity require reliable sources of power, which we believe will be best served by domestic natural gas. Liberty Power Innovations is well positioned to benefit from these wider opportunities beyond the oilfield.

Speaker 2

Our customers see tremendous benefit from our direct investment in next generation pump technology, our ownership of power generation and fuel infrastructure to control critical areas and expansion in our manufacturing. Together, this complete end to end service solution enables a rapid innovation cycle and superior operating efficiency that our customers have come to expect from the best service partners. Seamless integration of our Digi Technologies with advanced cloud based software for our pumping control systems, power generation and on-site fuel management maximizes operational efficiency and lowers fuel consumption. The successful deployment of our first few Digi Fleets has further strengthened our customer partnerships, which we continue to grow through ongoing engagement to provide customized solutions. For instance, we are enhancing our automated pump control technology with customization that allows optimizing key variables deemed important to our customers, such as rate, pressure, sand and chemicals and fuel efficiency.

Speaker 2

This solution responds to reservoir conditions and provides a customized fracture treatment across basins and horizons within a basin. Software optimization drives enhanced execution, while minimizing downtime and maintenance costs. The performance of our latest pump technology, DigiPrime, has been excellent. DigiPrime is the most thermally efficient pump solution in the market, and we have seen natural gas fuel consumption that rivals the best dual fuel systems without any diesel consumption. That means the pump uses less natural gas and no diesel when compared to Tier 4 DGB pumps doing the same work.

Speaker 2

Technology innovation has been central to our history, including the multiyear design and development efforts of DigiFrac and DigiPrime. Last year, we decided to expand our internal manufacturing capabilities with the launch of our Liberty Advanced Equipment Technologies Division, or LAT. LAT now encompasses our manufacturing division, formerly known as ST-nine, and expands our ability to design, engineer and package complete systems. We believe the success of new technology comes through ownership of the engineering design and the ability to rapidly incorporate feedback from field operations in the design and manufacturing process. This can further accelerate the innovation cycle and reduce total cost of ownership.

Speaker 2

Liberty Power Innovations continues to grow in scope, expanding alongside our dual fuel upgrades and DG fleet deployments. In the Q1, we launched operations in the DJ Basin with on-site fuel management services and will commence CNG sales this quarter following the commissioning of our compressor facility. Frac industry dynamics remain constructive as relatively steady demand in recent months has focused service companies on disciplined pricing and quality of service. Superior performance and reliability drive higher returns for both E and P operators and service companies alike. Liberty's continual focus on technical innovation in equipment technology and software automation augments our industry leading service offerings, while lowering the total delivered cost to the customer, reinforcing our position as the supplier of choice.

Speaker 2

Global oil and gas commodity prices have diverged and moved materially demand for North American frac services. Oil prices have rallied since early in the year, owing to an improved global economic outlook, ongoing OPEC plus voluntary production cuts and rising geopolitical tensions. Iranian oil exports are at multiyear highs with a nontrivial risk that future Iranian export volumes decline. Natural gas prices have conversely declined considerably since last fall, primarily owing to strong production and mild winter weather, both driving natural gas inventories to well above seasonal norms. Natural gas prices are likely to strengthen in the future with increasing LNG exports and surging domestic demand for power in the years ahead.

Speaker 2

After 20 years of nearly static U. S. Power demand, analyst projections for growth in the coming decade from AI and re shored manufacturing range from several Bcf per day to over 10 Bcf per day of incremental natural gas demand from the power sector alone. Globally, energy demand continues to march higher, supporting a strong North American oil and gas industry in future years. The lucky 1,000,000,000 dollars borrowing Arjun Murti's term, consumed 13 barrels of oil per person per year, while the other 7,000,000,000 dollars consume only 3.

Speaker 2

It is safe to say that global energy demand will grow for the foreseeable future. Liberty's focus is profitable growth through disciplined investment in talent, technology and equipment that leads the industry in efficiency and emissions. We are confident that our strategic investments in DigiFleet plus power and fuel supply through LPI better positions us to deliver superior returns over cycles. We are also excited by our partnerships in the Australian Beetaloo Shale Gas Basin, which exemplify our continued efforts toward growing reliable energy sources worldwide. In the second quarter, we expect low double digit sequential growth in revenue on stable pricing and increased efficiency with corresponding improvement in profitability.

Speaker 2

We continue to expect strong cash flow generation in 2024, supporting our technology transition investments and industry leading return of capital program. 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, everyone. We started the year delivering solid first quarter results, fueled by concerted effort to deliver a superior reliable service to our customers. By focusing on meeting the increased complexities of our larger growing E and P customers, we've been able to mitigate the challenges of a softening industry demand during the last four quarters and deliver a strong return on and return off capital. A more sophisticated customer base requires tailored solutions that are best served by technology investment, scale and integration. And 2024, revenue was $1,100,000,000 compared to $1,100,000,000 in the prior quarter.

Speaker 3

Our results were flat with the prior quarter, in line with our expectations. And as our pumping efficiencies and integrated services offset lower sand and other consumable prices and market headwinds. The first quarter net income after tax of $82,000,000 compared to $92,000,000 in the prior quarter. Fully diluted net income per share was $0.48 compared to $0.54 in the prior quarter. 1st quarter adjusted EBITDA was $245,000,000 compared to $253,000,000 in the prior quarter.

Speaker 3

Frac markets have softened since the height of late 2022 early 2023, but now appear to have stabilized since late last year. Our first quarter results were relatively flat with the 4th quarter, in line with our expectations. General and administrative expenses totaled $53,000,000 in the Q1 and included non cash stock based compensation of $5,000,000 G and A decreased $2,000,000 sequentially as prior quarter performance related compensation was modestly higher than the current quarter. Net interest expense and associated fees totaled $7,000,000 for the quarter, relatively in line with $6,000,000 in the prior quarter. 1st quarter tax expense was $26,000,000 approximately 24% of pre tax income.

Speaker 3

We continue to expect the full year tax expense rate in 2024 to be approximately 25 percent of pre tax income. Cash taxes were $17,000,000 in the 1st quarter, and we expect 2024 cash taxes to be approximately 80% of our effective book tax rate for the year. We ended the quarter with a cash balance of $24,000,000 and net debt of $142,000,000 Net debt increased by $39,000,000 from the end of the Q4 due to the expected rise in working capital. 1st quarter uses of cash included capital expenditures, $30,000,000 in share buybacks and $12,000,000 in quarterly cash dividends. Total liquidity at the end of the quarter, including availability under the credit facility was $315,000,000 Net capital expenditures were $142,000,000 in the Q1, which included investments in Digi Fleets, LPI infrastructure, dual fleet dual fuel fleet upgrades, lap construction, capitalized maintenance spending and other projects.

Speaker 3

We had approximately $3,000,000 of proceeds from asset sales in the quarter. Our capital expenditures remain on target for 2024. We are confident in our ability to generate strong cash flows through cycles and remain committed to our industry leading return of capital program. In the Q1, we repurchased $30,000,000 worth of shares or nearly 1% of shares outstanding and distributed $12,000,000 in cash dividends. Since we reinstated our return of capital program in July of 2022, we have now distributed $417,000,000 to shareholders through cash dividends and retirement of 12.5 percent of shares outstanding at the program commencement.

Speaker 3

We continue to deliver on our return of capital program while reinvesting in high returns opportunities that increase our long term cash flow generation. While oil and gas commodity prices have diverged meaningfully, we see relatively stable demand for Liberty frac services. A slightly better oily demand is offsetting modestly lower gas basin trends. In the Q2, we continue to expect improved activity levels among our customers, primarily owing to higher utilization and favorable weather related trends in most basins that more than offsets spring breakup in Canada. We are now projecting low double digit sequential revenue and adjusted EBITDA growth.

Speaker 3

We are also expecting Digifree deployments to continue rapidly throughout the year, including our 7th fleet later this quarter. We are executing on our 2 pronged growth strategy. 1, investing in next generation Digi fleets that fuel incremental fleet profitability and 2, LPI, which brings a low emission source of power generation of fuel to support the rising domestic power demand across industries. I will now turn it back to the operator for Q and A, after which Chris will have some closing comments at the end of the call.

Operator

We will now open the line up for your questions. The first question comes from Roger Read with Wells Fargo. Please go ahead.

Speaker 4

Yes. Thank you, everybody, and congrats on the quarter. I'd like to just follow-up on the issues of pricing. We did see a competitor say they wanted to go grab market share. You've obviously got a lot of things that will push back against that, the better fuel pumps and everything like that.

Speaker 4

But I was just curious how that market dynamic is working here?

Speaker 2

Yes. Good morning, Roger. Look, the industry conditions probably peaked about 6 quarters ago in the fall of 2022. And it's really just because that's when the fleet count peaked. And the fleet count is sort of gently moved down since then.

Speaker 2

And if the fleet count is going down, you've got incrementally negative pricing pressure. This is compared to any other downturn, this has been a very slow, very modest gradual pullback. And I would say that pricing pressures are in line with that. They've been modest and gradual. And there's much more in choosing who you're going to use than just price, right?

Speaker 2

It's quality and technology and way of doing business. So as we've said, there is very modest pressure on pricing, but I would say not meaningful. And we're probably near a bottom in fleet count activity. I don't know that it moves up meaningfully, but when it does start to gradually move up, we'll see sort of pricing pressure modestly in the other direction. So for us in the Liberty world, the pricing story remains relatively boring.

Speaker 4

That's good. And then kind of following on your comment there, I mean at some point gas prices recover here and we get more activity in the gas regions. Any indications from any of your customers where we are in that process or maybe what they need to see to start going the other direction? Is it a change in production? Is it just price driven?

Speaker 4

Is it synced up with the LNG export increases?

Speaker 2

Yes. I think the customers are pretty thoughtful about that, and there is a constant dialogue about that. But I think yes, I think customers need to see that prices have firmed that, that export volumes demand actually is pulling upward in a meaningful rate and that they've got some comfort that the next 12 or 24 months prices are going to be much more constructive than they look today. So that's not imminent. That increase in gas activity, it could be as early as the end of this year.

Speaker 2

It might not be till next year. Okay. Appreciate it. Thank you. Thanks, Roger.

Operator

Our next question comes from Stephen Gengaro with Stifel. Please go ahead.

Speaker 5

Thanks. Good morning, everybody. 2 for me. 1 is just a clarification. I think, Michael, you mentioned the Q2 guide for revenue, but you also said I think you said low double digit EBITDA growth as well.

Speaker 6

And I

Speaker 5

was just I wanted to ask how we should think about sort of incrementals in general, if you don't want to apply it directly to the 2nd quarter because that does I would think EBITDA would grow faster than revenue, but just curious your thoughts on that.

Speaker 3

Yes. I did say low double digits, kind of a similar growth on EBITDA versus revenue. Yes, I mean, as we move forward, there is some change in mix as you go through this process. We're helping our clients as they are moving back to Liberty sourcing some of their consumables, sand and chemicals, which have a lower margin pass through than service revenues. Service revenues is relatively service pricing relatively flat.

Speaker 3

And that's sort of where we get to that sort of 25% to 30% of incrementals.

Speaker 5

Great. And then the second question I had was, when you think about and I'm sure you guys have done some of this math, you think about current U. S. Oil production levels and you think about frac activity and drilling activity, where do you think we stand as far as industry activity versus what's needed to hold production at current levels?

Speaker 2

That's a fine balance. My guess is the activity level today is probably consistent with flat U. S. Oil production. I know we saw a big decline in January.

Speaker 2

I think that's monthly fluctuations. But we're certainly not at an activity that will meaningfully grow U. S. Production. Probably activity today is flat on oil production.

Speaker 2

And look, if prices stay where they are, you're going to see a little bit of incremental activity from privates later this year. And are we ultimately going to end the year with some modest production growth? Probably.

Operator

Our next question comes from Stephen Gengaro with Stifel. Please go ahead. I'm sorry, Neil Mehta with Goldman Sachs. Please go

Speaker 7

ahead. Good morning, team. Really solid Q2 guide. I guess my question was really focused on the back half of the year and as you think about the back half versus the first half to be kind of in that flattish territory versus last year of EBITDA, there would be a ramp. And I think there are a lot of reasons to think we do ramp in the back half.

Speaker 7

So just be curious on your perspective, team, on some of the drivers in 2H versus 1H.

Speaker 2

Yes. I mean, what I mentioned is oil prices. If oil prices stay where they are, I think we'll see more activity from private operators in the second half of the year than the first half of the year. I would say for the larger publics, flat pretty flat activity going forward. Yes, you're going to get the roll off of Canada.

Speaker 3

We've already seen the drop in the gas basins. I think that's already baked in. And that's where we see to get to that flattish guide for the year.

Speaker 7

Okay. All right. That is helpful. And then we didn't talk about return of capital yet. So I just love your perspective.

Speaker 7

The business is starting to generate real free cash flow balance sheet in good shape. So how do you think about returning excess cash to shareholders? And what are other calls on that cash, including the potential for bolt on M and A?

Speaker 2

Yes. Those are decisions we discuss, debate, wrestle with every day. We have a strong core business and key for us there is competitive advantage. We've got it every day, not last year, not last month, every day, we've got to deliver a better service quality than our competitors. And that's humans, that's training, that's culture, that's technology, that's investment and all those things.

Speaker 2

Obviously, we've got this larger scale transition to gas burning activity. I think we've pretty much laid out a plan for that. We're probably at the peak level of that right now. So as you go into future years, we'll continue to invest in new technologies, but the investment in the frac fleet probably gradually rolls down in the coming years. We've got this new LPI business that's quite exciting, but we're going to go at a slow and measured pace this year in this new business line.

Speaker 2

Right now, it's about nailing the technology and the execution of delivering on-site oilfield electricity to run our operations. And then, of course, maybe the most compelling investment we have, although we have to balance it, is to buy back our own stock. We've got a very strong return on capital, an incredible competitive position. We still traded a single digit price to earnings ratio. So yes, of course, we're intrigued by that and don't see that likely changing in the coming quarters.

Speaker 2

But it's always a balance between all those things. We've always got to keep the business so that we have a strong competitive advantage and a bright future ahead of us. We can't ever just look at just this year, we should only do this. So to us, it's always balancing opportunities today and the outlook for the future.

Speaker 7

Thanks again team.

Operator

Our next question comes from Luc Lamoine with Piper Sandler. Please go ahead.

Speaker 8

Hey, good morning. Chris, you talked about DigiPrime, just the fuel consumption there versus Tier 4 DTV. But can you just also talk about maybe the first 6 fleets in the field, how those have been performing? And then Michael, I believe, Ted, number 7 is coming later this quarter. If you're still kind of going to 10 fleets by year end, are fleets 8, 9 and 10 already allocated to customers?

Speaker 2

They are. As we've said since the start, the interest there is large. The interest is larger than the amount of fleets we can build. So yes, but yes, those fleets the rest of this year, we know who they're going to and where they're going. So those plans are in place.

Speaker 2

But DigiPrime is a very different technology. So we love the idea. The early operations, I would say, are great, but it's brand new. There's little things. Oops, yes, got to change that.

Speaker 2

So we're tweaking the design or whatever. But the pumps that are out there, yes, the performance is impressive. The power density, that super high thermal efficiency. So you're actually not just burning gas instead of diesel, but less gas. So I think site managers around them.

Speaker 2

Ron, do you want to elaborate or comment anything on that?

Speaker 9

I think you covered it well, Chris.

Speaker 2

Got to come visit someday. We'll take you out to 1.

Speaker 8

Okay. Absolutely. Thanks, guys.

Speaker 2

Thanks, Luke.

Operator

Our next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Speaker 10

Good morning, team. I wanted to see if you could shed a little bit more light on the sequential double digit sequential top line outlook for the 2nd quarter versus 1Q. I was trying to get a sense of if you're going to kind of dissect the drivers of that growth between more efficiency or pumping hours on existing fleets? You've obviously added a couple of DG fleets, I think, in 1Q and also between LPI. Just help us think about what's driving the sequential growth?

Speaker 2

One thing is just calendar, right? At the start of the year, you got weather, you got people with different plans with programs. So probably the single biggest thing is just a fuller, more robust calendar. I'll let Michael add. Certainly, there's other factors, but I think that's the biggest one.

Speaker 3

Correct. We had very, very strong pumping efficiencies, and we'd expect that to continue or as it always does slightly improve, especially as we get into the better weather. And then as Chris said, you're putting that over a stronger calendar with less white space days. You have a little move, obviously, with the technology, which is helpful on the price side of it, offsetting. And then you've got that being offset by, to some degree, as we look and we help our clients save money on sand and consumables and that general market price on those sands has come down, which has been very helpful to our clients.

Speaker 3

So it's a balance of all of those things, Arun.

Speaker 10

Fair enough. Chris, we get a decent amount of questions on LPI. So I was wondering if you could just give us a sense of how big that business is, your future growth opportunities for that segment. And maybe talk a little bit more about the LAT or the Liberty Advanced Technology, which you talked about earlier in your prepared remarks.

Speaker 2

You bet. I mean, look, LPI today is relatively small business. The ID today, it's about building. It's about building infrastructure, a team, technologies, understanding systems. What does LPI do today?

Speaker 2

It delivers natural gas to our on-site electric generation to power our Digi fleets and also to dual fuel fleets and, of course, DigiPrime fleets. And it doesn't supply nearly all of those fleets today. So this is early stage in that business. But I think it's got, as you've heard us say, just tremendous, tremendous growth opportunities. But key to securing that growth is securing the technology, the operations and the supply chain.

Speaker 2

The inbounds we get now for just needs for electricity. I mean, it's just we and look, I've been outspoken about this for many years. We have followed very poor policies in this country for our electrical grid, and we've fragilized our electric grid with constant demand. Demand has grown very slowly over the last decade. And even with very low demand growth, we've driven prices up, reliability down and now that grid and those policies are colliding with rapid growth in demand for electricity.

Speaker 2

So this is going to cause some bumps and struggles for our country. I wish it wasn't, but LPI will be a will be we'll see tremendous business opportunities in providing firm, reliable, affordable natural gas generated electricity. So the future of LPI is tremendous. But is it a big business today in Liberty? No.

Speaker 2

But will it be a big business in the future? We think it will. And LAT is super exciting as well, and I'm going to let Ron tell you

Speaker 9

a little bit about what it is and why we're doing it. Yes. Look, from probably from going back 6 years now, I guess, 2018, we made a pretty conscious decision around getting into some vertical integration around manufacturing capacity. That started with our SD-nine acquisition and a decision design and ultimately manufacture and assembly of a pump. As we fast forward to today, we're in the middle of this transition to next generation equipment.

Speaker 9

We control the design of DigiFrac from the ground up. We've done the same with Digi Prime. And it makes sense for us now to control that entire packaging process and particularly the engineering design and control of that in house. And so, LAD is a very conscious decision for us to do exactly that, which is to be able to take the feedback we're hearing from the field, the input from our customers, opportunities we identify for even advancing the technology beyond where we are today, implementing that in our engineering design and then handling some amount of that packaging internal to our organization. We still have some great third party packagers out there that have been partners for a long time.

Speaker 9

We'll continue to work closely with them as well. But we're going to do some amount of that baseload work internally and particularly retain control over the engineering design and innovation in that side of things.

Speaker 10

Great. Thanks.

Operator

Our next question comes from Scott Gruber with Citigroup. Please go ahead.

Speaker 11

Yes. Good morning. Good morning, Scott. I had a question here. With Waha Gas turning negative, I'm just curious whether you have any frac contracts set up where you supply the fuel costs such that you can directly benefit from negative gas prices?

Speaker 11

Or is the benefit to Liberty mainly indirect, the rate resiliency for e frac and dual fuel that lower negative gas prices provide and growth opportunities LPI. Just kind of wondering how the benefit flows to Liberty?

Speaker 2

Yes. Today, it's indirect. Today, we don't capture the benefit of that. But will we in the future? You bet we will.

Speaker 2

And think of it even outside the oilfield. We're going to sell electricity. Gas is going to be an input cost, and we're going to sell it in different places and different setups with different commercial arrangements. So yes, we're excited by that. But right now, that benefit well, that benefit goes to our customers, but of course, they also have the downside of selling gas into that market.

Speaker 2

So no, today, we don't benefit from that. But it, of course, is just a further tailwind of why it just makes more sense when you can do it to power large industrial machinery with natural gas instead of diesel. Diesel is an awesome fuel. It powers the world and it will for decades to come. But when you've got infrastructure and when you can bring gas you can take large machinery and power it on gas versus diesel, it's just cheaper, more abundant, lower cost, lower pollutants and lower greenhouse gas emissions.

Speaker 11

Got it. And then I wanted to circle back on your comments regarding privates, potentially picking up activity later in the year. Is that mainly just a kind of function of time with privates needed to accumulate more cash following the rebound in oil? Or is there a egress factor here, particularly in the Permian? Do you think privates wait for Matterhorn to start up and see better egress for natural gas out of the basin?

Speaker 12

Well, look, it's a bit of

Speaker 2

a combination of all of those. But I do think Matterhorn matters because you look in the Permian, incredible basin, but it's a lot of pretty gassy production. So oil drives economics, but gas matters too. So yes, when we get more pipeline capacity and there's value or less negative value from gas, definitely, in addition to oil prices, that will further improve economics of drilling. And look, we're not expecting some huge surge or increase in activity.

Speaker 2

But on the margin, if you were a private operator, would you be more likely to produce later this year than earlier this year? If oil prices were similar, yes, definitely, definitely later this year is going to be a better decision.

Speaker 11

That makes sense. Thanks, Chris.

Speaker 2

Thanks. Yes, good questions.

Operator

Our next question comes from Derek Podhaizer with Barclays. Please go ahead.

Speaker 12

Hey, good morning guys. Wanted to go back to LPI. You talked about the opportunities outside of oil and gas, looking specifically at the AI data centers. Could you help frame this market opportunity for us? And how you think about that potential earnings power over the medium term?

Speaker 12

I mean, will we be talking about decade long PPAs, just more stable earnings? Just a little more how to think about that AI part of the business?

Speaker 2

Yes. It's going to be a different business. But key for us, it's going to take the same expertise and the same technology we're developing today. That for us has always been the excitement of this. We're not taking a flyer on some crazy idea.

Speaker 2

We have always thought for our frac operations, it's just essential to control the power of your fleets. And so for us, we're building that infrastructure to deliver fuel, generate electricity and run our operations. But we've known from the start that, hey, by developing that expertise and that ability to power our own fleets, of course, we can do all sorts of different things with those. And look, it's early on. These are we're in dialogues now, but this year is mostly about developing the technology, the expertise and the delivery of that remote electricity to our frac fleets.

Speaker 2

It's not outside oil and gas. That's not a 2024 thing. We probably see the start of that next year. But to your original question, yes, are they going to be some larger projects? Are they going to be some more stable many, many year contracts?

Speaker 2

Yes, there will be. And so to us, it's development expertise that helps our core business that will always be a key part of our core business. But yes, it's going to give us a leg up and an entree into a marketplace that just that is struggling already with the dearth of power. You've got customers for your data center or for your industrial operations, but it's hard to get affordable near term additional power to any industrial activities in this country. We should not be in this situation, but we are.

Speaker 2

And we're going to be in this situation for years, many years. So for us, yes, we should probably give more color later. But yes, it will be a long term, a little bit more probably a fair amount more stable leg of a high return profitable business for Liberty.

Speaker 12

Understood. That's helpful. Switching back over to frac. Just want to think about the fleet count for the remainder of the year and maybe just the interplay of adding additional Digi fleets. You talked about 6 going to 10, retiring Tier 2 diesel fleets, I think you guys had 100 Tier 4 diesel fleets being upgraded to dual fuel DGB.

Speaker 12

And just getting a sense of what's going towards incremental fleets versus replacement fleets. So just your overall view of high grading the fleet mix as we work through the year and how that may help the ramp that you're expecting in the back half of the year?

Speaker 2

Yes. Today, it's all about replacement fleets. We're not adding new fleet capacity into the marketplace as it is today. And in fact, we don't have any plans to for later this year. So this is about replacing existing equipment with next generation equipment that has a lower operating cost and a higher profitability.

Speaker 2

Ron, do you want to add anything or comment on that? But it's definitely not about going from 6 today to 10 Digi fleets. That's not 4 new fleets going to the marketplace. That's 0 new fleets going to the marketplace.

Operator

Our next question comes from Marc Bianchi with TD Cowen. Please go ahead.

Speaker 13

Thank you. I wanted to first clarify on the EBITDA outlook for the year to be flat. Should we be taking that message as a literal comment? So you did $1,200,000,000 of EBITDA in 2023. Is the expectation that it's $1,200,000,000 in 20 24?

Speaker 13

Or could it be down 5% to 10% and it's still sort of close enough to being flat that it would qualify for that statement?

Speaker 3

Yes. We've been very specific, flattish, Mark, flattish. So yes, yes. So yes, so no, it's not saying it's a literal flat, 1.2 to 1.2. No, it is going to be flattish.

Speaker 3

So kind of within the rounding era that

Speaker 13

you discussed. Got it. Okay. And then that still would imply some improvement in the back half. And it sounds like from what you're saying, there's a bit of what we just talked about with the DigiPLEAT deployments helping, some sort of customer specific things helping and maybe a little bit of help from higher oil activity or maybe that's not the case?

Speaker 13

If you could just kind of clarify what the macro outlook is in the back half that's driving your results?

Speaker 2

Yes. And so we've talked about Q2 versus Q1. Q3 historically is probably the best quarter of the year. I don't see any reason to expect that to be different this year. But yes, that's why our guidance is flattish.

Speaker 2

We don't have a crystal ball. We don't know what will go on in Q4. We don't know specifically Q3, but if the activity stayed flattish where it is today, for us, we still have some internal improvements in our business and cost efficiencies and new technology deployment. We can still grow EBITDA in that environment. And typically, you face somewhat of a roll down in Q4.

Speaker 2

We probably see a little of that this year, but probably not so much because activity today is sort of flat production at best. So I think activities if there is a bias to change in activity 6 or 12 months from now, it's more likely to be up and down. But that's why our guide was sort of always just flattish. We don't have a crystal ball for the end of the year. But in the current existing marketplace, how would Liberty perform?

Speaker 2

Annual EBITDA would be flattish compared to last year.

Speaker 13

Yes, makes sense. And then Michael, just one more on the free cash for the year. Could you just talk to what we should be thinking of from a conversion of EBITDA perspective? Because Q1 looked like you had a pretty big working cap headwind. And I think earlier in the last call, you said you would expect that to be flat for the year.

Speaker 13

But just if we could talk about it and kind of how many dollars of EBITDA ultimately convert into free cash would be helpful.

Speaker 3

We don't give those details. Things move around. But yes, you always get a build of working capital in the Q1 because of kind of Q4, the last six weeks is always the lowest part of the quarter and the opposite spectrum. We will see with growth in revenue, obviously growth in top line, you're going to see a slight usage, a slight sort of build in working capital in Q2. You're going to see a kind of a release of working capital in Q4.

Speaker 3

So yes, as we said, over the course of the year, working capital will be about sort of flat for the year. But I mean, those free cash flow numbers are not quarterly driven. They have some little bit of sort of up and downs with it.

Speaker 13

Yes. Okay. Thanks very much.

Speaker 12

I'll turn it back.

Speaker 11

Thanks, Michael. Thanks.

Operator

Our next question comes from Keith MacKay with RBC Capital Markets. Please go ahead.

Speaker 14

Thanks. Good morning. Just wanted to start out with customer consolidation. Didn't really hear that as a factor in the outlook, but certainly there is a lot of rig activity that is subject to consolidation, particularly in the Permian. And we have noticed a slight downtick in rigs that are associated with consolidation versus the overall Permian rig count.

Speaker 14

And so certainly they have to run the businesses independently before the deals close, but not necessarily the way they would if there was no deal. So can you just talk about your exposure to customer consolidation and any potential impacts positive or negative that you could see from the upcoming consolidation?

Speaker 2

Look, your comments, I think, are correct. There is a there's been a continual consolidation at some pace the last 12 or 18 months, probably still continues. It does lead to incrementally a little bit less activity. That's probably why our production run rate today is that flattish where last year we grew nearly 1,000,000 barrels a day or over 1,000,000 barrels a day in total liquids production. So a little bit lower activity.

Speaker 2

There'll be an offset of that, of course, because noncore assets are going to be sold off and new privates or existing privates will get bigger and it will fill a little bit of that gap. Not happening today right now. With the bigger customers, bigger, more sophisticated customers on balance that probably benefits Liberty, that's a better match for us than probably for most of the rest of the marketplace. So in these cases, we're much more likely to be more concentrated with the buyers than the sellers in those deals. So yes, it's been a small headwind for the industry and maybe a very small tailwind for Liberty.

Speaker 14

Okay. Thanks for that. Just maybe a little bit on Australia, you talked

Speaker 6

a little bit about the

Speaker 14

Beetaloo Basin. Can you just talk about where you are in that? I think some of the equipment was maybe getting ready to get transported. So just an update there would be helpful. And do you see this as really a one off opportunity or are there other potential international opportunities that you might be looking at as well?

Speaker 2

Look, we've been pitched about international opportunities almost as long as we've been a company. So the interest in having Liberty's engineering prowess in addition to horsepower and equipment and all that, the interest in that, the international market has been strong. Our view in the past has always been we're super loyal and we move slowly. So we're in a basin like we're going to stick with our partners in that basin. We tend to have very sticky customers.

Speaker 2

We've slowly moved to other basins. As we've built more capacity, our existing customers have pulled us there. So we've been more gradual in doing those things. But the Beet Loop sort of checks 2 boxes. 1 is the gas in place is enormous.

Speaker 2

It's this tremendous gas basin that hasn't produced any gas yet, but could and should, and when we talk about and you can read about it in bettering human lives, the fastest growing energy source on the planet over the last 12 years by far is natural gas. That likely continues in the coming decades as well. So Beetaloo is a huge resource base. Australia itself is having struggles with domestic gas prices and gas supply, and the projections there show things getting tighter. So there's a need for that gas there in Australia.

Speaker 2

You're right near the South Asia and Southeast Asia markets for it. So it's a big upside. And with the rollout of Digi Technologies, we've now we're bringing in new fleets and we don't need new capacity. So we've got fleets going out the other side that we can retire or in the case of Filou, or we could send a fleet to Australia. And we've got good partners there, and I think we're levered pretty nicely to upside in that basin.

Speaker 2

But it's small. That's a multiyear thing for that to become meaningful. But could it become meaningful? I think we think it could. I'll let Ron update you a little bit more about like what's going on timing wise and how that's going.

Speaker 2

But yes, it's exciting new opportunity for us.

Speaker 9

Yes, just a quick update there, Keith. So we isolated a fleet of equipment, identified the assets that we're going to head over there. They've gone to a central facility for us. They're basically done their refurbishment program at this point in time, making sure that fleet is ready to operate in a remote environment. So as we wrap that up, that fleet will ultimately move down to the Gulf Coast and we'll have that loaded on a boat sometime here in the middle to latter part of Q2 and it'll find its way to Australia should arrive there in early maybe mid Q3.

Speaker 9

And then we'll have to work our way through customs and whatnot there before we have that on the ground and ready to work, but that's where we stand today.

Speaker 6

Okay.

Speaker 14

Thank you very much. Thanks.

Operator

Our next question comes from mokhtar Syed with ATB Capital Markets. Please go ahead.

Speaker 7

Hi.

Speaker 15

We saw the data from EIA and North Dakota Oil and Gas Commission. It shows that completion activity in North Dakota, Bakken was down about 24% quarter over quarter in Q1. And also in Wyoming, Colorado area, it was also down about 22%. Did you experience declines in work in those areas? And how do you see that kind of changing in Q2 and going forward?

Speaker 2

Yes, absolutely the case. The Bakken historically has a very meaningful winter downturn and absolutely did this year as well, as you just pointed out in that data. So absolutely, reduced activity in the Bakken in Q1 and also some reduced activity in Wyoming and Colorado. So yes, that data is true. I think we'll see yes, and that activity will rebound a little bit for the quarters for the rest of the year.

Speaker 15

Now so that's a pretty big change in activity. How would the incrementals behave as a result? Wouldn't that be pretty strong tailwind to incremental margins as that happened in Q2?

Speaker 2

Well, the other thing is all of our assets are on wheels. So when activity declines in the Bakken, there's just less fleets working. We drive those fleets elsewhere.

Operator

Our next question comes from Saurabh Pant with B. O. A. Please go ahead.

Speaker 6

Hi, good morning, Chris, Ron and Mike. Maybe I want to start on the efficiency side of things. Like you noted in your press release, in your comments, over the past 12 months, efficiencies have been really strong, right? And the obvious question is how much running room do we have, right? But as a follow through on that, how much of the incremental efficiencies do you think come from pumping companies like yourself?

Speaker 6

And how much of that do you think is in the hands of the E and PC operators in terms of maybe logistics or just the way they design the jobs and line up the supply chain, if you can just talk to that a little bit?

Speaker 2

Yes. It very much requires both sides. You're on location. It's a dance between wireline and frac and your customer and logistics and supply chain and operations. It's also, I would say, one of the advantages Liberty has had.

Speaker 2

If you deliver the best quality you get, you can work with the best customers. So it is absolutely a coordination of all of those. And I'll turn it over to Ron, who's certainly been a leader in the engineering innovation, the way to think about this and to find the opportunities to move progress.

Speaker 9

Yes, we obviously we continue to work on that. You saw we made progress incremental progress each and every quarter one after the other. And so that's a credit to the operations team, to our technical development team as we continue to find ways to understand more and more about how our equipment is operating to be proactive around things that could move the needle, could put us could have us deal with some downtime. We're finding ways to identify those and react to them before they happen. And so that's a credit to the whole operations team out there.

Speaker 9

There's still opportunity there. We continue to find ways to move the needle on that. But the low hanging fruit is gone a long time ago. These are going be modest incremental improvements as we continue to take equipment to the next level. Even as you think about Digi, our next generation technology, the time between overhauls on these gas engines look meaningfully different than it does on a diesel engine.

Speaker 9

As we automate the operation of the pumps, we can ensure increased longevity of components out there. So less time required for maintenance. As we work closely with partners around things like hot swap technology, the ability to get a pump in and out of the red zone without having anybody step into place there around zero time between moving from wireline to pumping on a wellhead. Strong partnerships, as Chris mentioned, both with the E and P side of things, but also with other service providers out there that are bringing supportive technology to the table. And then also for us, of course, speaks to the vertical integration we continue to work on as we work on improving our logistics platform, the introduction of LPI and removing that reliance on third party for natural gas, all of those sorts of things from an integrated services offering help us to ensure the highest possible efficiencies on location and we'll continue to try to find little ways to eke out a bit more in that quarter after quarter.

Speaker 6

Right, right. No, that's very helpful. And then just one unrelated one, I am just thinking about the medium term, not just the very short term. But I think if I remember correctly, Chris, Ron, you talked about 90% of your fleet being gas fired by the end of the year. And some of your competitors have talked about similar numbers, not exactly 90%, right, but a large majority of the fleet being gas fired.

Speaker 6

How should we think about that if we think a couple of years out from now and a lot of the working fleets at least maybe not the total inventory, but the working fleet is gas fired. At what point do we think about more gas on gas competition versus just displacing diesel like we are at this point?

Speaker 2

Absolutely. But we talk about fleet technology a lot. That's a positive development for the industry. It lowers costs and all that. But it's not determinative.

Speaker 2

A fleet is in a good fleet or a bad fleet based on what it burns. That's just one factor. The single biggest factor by far and away is the humans running that fleet, the quality of operations, the quality of the supply chain. We don't talk too much about this, but we've had certainly multiple examples where a Liberty diesel fleet is displacing a 100% gas burning fleet. And it's just for quality of operations and people.

Speaker 2

Customers

Speaker 12

just it's not just the fuel it

Speaker 2

takes, that's just one factor. It's mostly about humans and service quality. And so yes, that is a spec but not v spec.

Speaker 9

And I would maybe go a step further than that and say it's also important to remember that not all gas fleets are created equally. There are significant technology differences between the opportunities out there to consume gas. We have been very, very specific about the technologies we have chosen to invest in and deploy in the field both in Digi Prime and DigiFrac around ensuring that the gas burning technology we deliver in the field is the highest efficiency, lowest fuel consumption and as a result lowest emissions footprint on location. That's not true for all gas burning technologies.

Speaker 6

Yes. No, I think that makes sense. Execution often tends to be the unsung hero. And then Ron, I think you talked about that on the LAT side as well, right? So it makes sense.

Speaker 6

Okay, guys, I'll turn it back. Thank you.

Speaker 2

Thanks, Ron.

Operator

Our next question comes from John Daniel with Daniels Energy Partners. Please go ahead.

Speaker 12

Hey, guys. Thanks for including me. Just, Chris, given the demands for power over the next basically decade, how far out are you guys having to place orders for content on your equipment and for LPI?

Speaker 2

Supply chains are tricky. Supply chains are tricky. There's a lot of dialogue going on about that. I probably I won't comment on any specifics there, John, but you do identify a real issue. It's there is not a surplus of such equipment.

Speaker 12

Okay. Do you and I don't know if you can answer this, but I'll ask it anyway. Is there any risk that the major OEMs pivot and allocate more product to data centers directly and to the detriment of oil and gas?

Speaker 2

That's happening today. That's happening today. It was one of the reasons, John, as you know, we've held this belief of what's going on with the electricity market for years. So when we got into building our Digi fleets, it was if we count on a third party that's going to do that, that third party is not necessarily an oil and gas company. If the market switches and they can drop all those things over to data centers or for manufacturing thing, Now we're at the mercy of a business that's not ours.

Speaker 2

And we just decided that was a risk we didn't want to take.

Speaker 12

Okay. Makes sense. Thank you for indulging me.

Speaker 2

Thanks, John. Take care.

Operator

This concludes our question and answer session. I will now turn it back to Chris for closing remarks.

Speaker 2

Thanks, everyone. In early February, we released our comprehensive report, Bettering Human Lives 20 24, that covers energy, climate change, poverty and prosperity. I spent many weekends and evenings writing this report. But what I am most proud of was not written by me. It was the words in the letter from Anne Hyer, the Executive Director of our newly formed Veterans Human Lives Foundation.

Speaker 2

The BHL Foundation is the culmination of our studies into the world's biggest solvable problems and our passion to play a meaningful role in changing the lives of 1,000,000. Anne's letter says it best, and I will read the full text now. Despite significant cultural and geographical differences among countries in Sub Saharan Africa, the scenes outside the window as I drive from town to town are remarkably similar and all include women and girls standing in lines at water pumps, walking in groups in search of firewood and cow dung and carrying heavy loads of firewood and water filled buckets. Whether in Malawi, Burkina Faso, Ethiopia or Kenya, I pass clusters of homes and see women cooking amidst harmful smoke from open fires that are fueled by wood or cow dung. We are in the year 2023.

Speaker 2

How is this acceptable? I feel so disheartened that the daily lives of women and girls in many lower income countries continue to be filled with tedious, physically demanding and often dangerous tasks of collecting fuel and water for cooking, cleaning, laundry and heating homes. I'm a nurse midwife, and I've spent 30 years working to improve quality health services for women during pregnancy, childbirth and the postpartum period. For 25 years, I worked primarily in Southeast Asia, where access to energy and economic growth contributed to visible progress in improving health and quality of life. For the past 5 years, my work has shifted to Sub Saharan Africa, and I have encountered a very different reality.

Speaker 2

Governments and donors have made huge investments in health over decades, and yet most countries in Sub Saharan Africa remain far from reaching global targets for development in any social sector, including maternal and newborn health. I continually ask myself, how can a woman possibly enjoy a healthy pregnancy, access health services and demand better quality services when she spends her time collecting firewood, cooking over polluting stoves and missing out on education and revenue generating activities that ultimately translate into her ability to make decisions and take actions to improve her family's well-being. Better health services are essential, but far from sufficient. There is a great need to tackle more fundamental problems that perpetually can strain women and their families. A clean burning cook stove, such as those powered by liquefied petroleum gas, LPG or propane, can be a life changer for families, particularly women and girls.

Speaker 2

It liberates them from the drudgery of collecting fuel and cooking in smoke filled spaces, affording them time for school or other income generating activities. It immediately improves their health, safety and quality of life. Through the Bettering Human Lives Foundation, Liberty will mobilize financial and human resources to support LPG and cookstove entrepreneurs and innovators in Africa and in Asia with one goal in mind, get a clean cook stove into 1,000,000 households. As a midwife and a mother, my heart breaks when I see postpartum mother and her newborns inside dark smoke filled homes. I'm eager to get on a more impactful path toward bettering human lives.

Speaker 2

Thank you, everyone, for your time today for the call, and we hope you'll join us in supporting our efforts at the Bettering Human Lives Foundation. We'll talk to you all next quarter.

Operator

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

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Earnings Conference Call
Liberty Energy Q1 2024
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