Liberty Energy Inc. (NYSE:LBRT) Q3 2023 Earnings Call Transcript

Liberty Energy Inc. (NYSE:LBRT) Q3 2023 Earnings Call Transcript October 19, 2023

Operator: Good morning, and welcome to the Liberty Energy Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anjali Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Anjali Voria: Thank you, Gary. Good morning, and welcome to the Liberty Energy third quarter 2023 earnings conference call. Joining us on the call are Chris Wright, Chief Executive Officer; Ron 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 views about future prospects, revenues, expenses, or profit. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company’s beliefs based on current conditions 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, adjusted pre-tax return on capital employed and cash return on invested capital are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of adjusted pre-tax return on capital employed and cash return on capital invested as discussed on this call are available on the Investors section of our website. I will now turn the call over to Chris.

Chris Wright: Thanks, Anj. Good morning, everyone. And thank you for joining us to discuss our third quarter 2023 operational and financial results. Liberty delivered excellent quarterly financial results reflecting outstanding operational execution, focused customer engagement and agility across a softer North American frac market. Record pumping efficiencies drove sequential growth in revenue and adjusted EBITDA while electing to idle a fleet during the quarter in response to softer market conditions. Adjusted EBITDA was $319 million, while fully diluted earnings per share was $0.85. The industry remained disciplined, championing steady pricing for quality services while withdrawing underutilized frac fleets from the market.

Our superior execution, combined with expanded vertical integration and technology investments culminated in a trailing 12-month adjusted pre-tax return on capital employed of 44%. I’m proud that our team delivered a milestone achievement in operational efficiency. We achieved the third consecutive quarter of record average daily pumping efficiencies, delivered across our full fleet, safely pumping more hours and tons of sand than ever before. This success was driven by the unique culture of innovation and excellence at Liberty. Over the years, our investment decisions have grown our competitive advantage by driving value creation through technology, scale and vertical integration. Today, the latest piece in our digiTechnologies suite is demonstrating impressive operating results.

The commercial deployment of our proprietary digiPrime units commenced in late September, quickly becoming the crew and customer’s favorite technology on that location. We embark years ago with a blank slate to envision design and build natural gas powered frac fleets that would represent a step change improvement in frac technology. We didn’t choose the easy route to simply extrapolate from existing pump technology, or the partial route, where we outsourced the power generation part of our frac fleet. We took on the whole enchilada, with a commitment to build the best dam next-gen frac fleet. Well, the effort was worth it. Today, we have a truly differential frac fleet technology that is setting operating performance records while delivering the highest efficiency, lowest emission fleets in the industry.

To say that customer interest in digi is high would be an understatement. We are supplying digiFleets with robust, reliable compressed natural gas delivered and managed on site by our new Liberty Power Innovation’s Division. We are on track to be operating four digiFleets by year end and six digiFleets by the end of January 2024. We are excited by the strong customer benefits and pull for our digiFleets. As we continue to transition our fleet towards more natural gas fuel technologies, we are also maximizing diesel displacement with natural gas across our dual fuel fleets. We have worked in conjunction with our technology providers to develop and deploy control software to significantly increase diesel displacement. Our year’s long effort in predictive and preventative maintenance programs have positioned us to optimize equipment performance and availability, enabling us to run our pumps in optimal operating ranges to achieve maximum gas substitution.

We are also starting to reap the advantage of vertical integration provided by LPI improving the reliability of gas supply to our frac fleets. There is much room to run here. Liberty’s focus on asset optimization maximizes the uptime of each pump, driving higher equipment reliability and operational efficiency. Our predictive maintenance programs are better than ever before continually assessing asset health in real time. By applying advanced analytical tools and processes such as machine learning and AI, we’re addressing issues before they become critical and using this data to prevent issues in the future. A year ago, we realigned teams to seamlessly work together on the shared goals of maximizing operational efficiency and optimizing equipment maintenance.

Today, real time data is enabling our teams to execute on these priorities and hold themselves accountable in delivering superior results. Wireline was a new business adding Liberty in the one stem transaction. We knew our customers would greatly benefit from streamlining our frac and wireline crew interactions on-site to shave extra minutes off the day. Every minute equals efficiency and translates into a lower cost of producing a barrel of oil for our customers and improved profitability for Liberty. Today, we have more frac and wireline paired [red-on-red] crews since we first brought wireline into the fold. We are proud that Liberty wireline now ranks as the top service provider according to the most recent Kimberlite survey, an independent industry research that extensively polls E&P customers across the industry.

We increased our quarterly cash dividend by 40% in response to the significant growth in our per share earnings and cash generating abilities from our business transformation over the last three years. During the third quarter, we repurchased 1% of our shares outstanding or accumulative 11% since our buyback reinstatement in July 2022. We are focused on the opportunistic execution of our buyback strategy. We will move more aggressively during stock price pullbacks and moderate our pace when the stock runs up. However, we continue to see a large dislocation in our stock price, relative to what we believe is the intrinsic value of our stock. The goal remains the same, maximize the value of each Liberty share and drive higher total returns for years to come.

Fleets across the industry were idled in response to completions activity softness, supporting a better supply demand balance of marketed fleets as compared to prior cycles. As the Shale Revolution matures, the industry has adapted to a new era in frac markets through consolidation, technological process, disciplined investment and serving increasingly complex customer needs. Frac activity has largely stabilized at current levels representing a baseload of frac fleet demand needed to sustain E&P operators’ flattish production levels. Fourth quarter trends will likely see seasonal softness, winter weather and holiday disruptions. We expect the recent strengthening of commodity prices will drive a modest increase in industry activity beginning in 2024.

Liberty’s internal analysis shows several natural gas levered E&P companies are expecting to increase activity into 2024. The sustained strength in crude oil prices is also stimulating demand for frac fleets among smaller private oil producers. The resumption of modest growth in frac is within view. Global oil and gas markets found firmer footing during the third quarter, driving higher oil and gas prices. Volatility in commodity markets has emerged from the possibility of an escalating conflict in the Middle East and renewed recessionary fears. Recognizing the elevated uncertainty, global industry supply and demand trends infer that the delicate balance of oil and gas markets is tilted to the upside, given the relatively small spare production capacity today.

But long term demand outlook for secure North American energy anchors a more durable cycle. OPEC+ decisions, including the extension of Saudi Arabia’s production cuts, further demonstrate a willingness to support commodity prices underpinning long term investments in North American shale. We just saw an industry tightened double down on North America’s future. The positive outlook for North America is leading to consolidation and investment amongst E&P operators focused on long term value creation. Liberty is uniquely positioned to support our customers ambitions to unlock value with our superior services, next generation technologies, integrated footprint and scale. Today’s E&P customer is focused on driving improvement, which can only be achieved with outstanding service partners and differential technologies.

The transformative work our team accomplished over the last three years through technology investments, vertical integration of wireline, sand and logistics and now LPI natural gas, trading and delivery uniquely positions Liberty to address the diversity and complexity of customer needs. I would like to take a moment to celebrate the Liberty team record performance was a result of the collective effort of all of our 5,500 teammates across North America. I am proud to be your partner. We outperformed in the third quarter in the face of a softening industry, delivering significant operating efficiencies, outstanding safety record and attractive returns. In the fourth quarter activity is expected to slow modestly on normal seasonality and the related impact on efficiency.

For full year 2023, we expect adjusted EBITDA will be at the high end of our guidance range of 30% to 40% growth over 2022. We continue to deliver superior returns and a differential service for our customers. Our commitment to excellence and focus on company culture, our next generation digiTechnologies suite and LPI positions us well to compete in both near term cycles and over the long term. The best is yet to come. With that, I’d like to turn the call over to Michael Stock our CFO to discuss our financial results and outlook.

Michael Stock: Good morning, everyone. Liberty’s year-to-date results have been outstanding during a period marked by softening activity trends using a slightly different return metrics from [indiscernible] Chris mentioned earlier, that we use to benchmark ourselves versus the industry in the S&P 500. Our annualized cash return on invested capital is 37% year-to-date, an increase from 31% from 2022. Our third quarter financial results was notable marking a modest increase from the prior quarter and adjusted EBITDA and a most decrease in net income despite slower industry activity and the idling of fund fleet. Our results not only showcase the importance of leading reliability, technology and service quality to our profitability, but also highlight the importance of those features to our customers.

Third quarter 2023 revenue was $1.2 billion, a 2% year-over-year increase and a 2% increase from the second quarter. Relative to the second quarter, record efficiencies across the full fleet, integrated services and a favorable product mix more than offset market headwinds and the idling of one fleet during the quarter. In the third quarter, we had the highest pump hours of sand pumped in the history of the company, even with one fewer fleet than prior quarters. Third quarter net income after tax of $149 million represented a 1% increase from prior year and a modest decrease from $153 million in the second quarter. Fully diluted net income per share was $0.85, a 10% increase from prior year, which highlights the per share benefits of our share buyback program and compares to $0.87 in the second quarter.

General and administrative expenses totaled $55 million in the third quarter and included non-cash stock based compensation of $9 million. G&A decreased $3 million sequentially as the second quarter miscellaneous expenses did not repeat. Net interest and associated fees totaled $7 million for the quarter. Tax expense for the quarter was $50 million approximately 25% pre-tax income. We expect the tax expense rate for the full year to be approximately 25% of pre-tax income. Cash taxes was $7 million in the third quarter and we expect 2023 cash taxes to be approximately 35% of our effective book tax rate for the year. In 2024, we expect to be approximately 24% effective book tax rate and a cash – similar cash tax rate. Third quarter adjusted EBITDA increased 15% year-over-year and 2% sequentially to $319 million.

We ended the quarter with a cash balance of $27 million and net debt of $196 million. Net debt decreased by $60 million from the end of the second quarter. Cash flows were used to fund capital expenditures $29 million of share buybacks and $8 million of quarterly cash dividends. Total liquidity at the end of the quarter including availability under the credit facility was $322 million. Net capital expenditures were $161 million in the third quarter which included costs related to digiFleet construction, capitalized maintenance spending and other projects. We had approximately $12 million of proceeds from asset sales in the quarter. Net cash from operations was $273 million for the quarter and returns to shareholders were $38 million for the quarter.

Our capital expenditures remain on target for 2023 as we expect to deliver certain digiFleet components in the fourth quarter. In July 2022 and January 2023, we installed and then upsized the $500 million share repurchase program, respectively to take advantage of our dislocated share prices. We also reinstated our quarterly cash dividend one-year ago. We are pleased to share our Board has approved a 40% increase to our quarterly cash dividend to $0.07 per share beginning this quarter, reflecting our conviction their ability to generate strong free cash flow through the cycles. We also continue our returns to shareholders program with our buyback program, including the repurchase of 1.8 million shares in the third quarter, which represents approximately 1% of the shares outstanding in the beginning of the quarter for a total of $29 million.

We have now returned to shareholders accumulative $325 million in the past five quarters. We continue to differentiate ourselves with an industry leading return of capital program while reinvesting in higher return opportunities and growing our free cash flow. Looking ahead, we see North American completions activity to slow modestly in Q4 on normal seasonality and the related impact on efficiency. We expect activity to increase modestly in 2024. In the third quarter, we reduced our active fleet count by one fleet, consolidating our planned activity with our higher efficiency fleets and improving utilization. While we expect normal seasonal softness in the fourth quarter, we do not plan to idle any additional fleets due to the demand in Q1 of 2024.

As a result, we will now anticipate reaching the high end of our full-year 2023 adjusted EBITDA outlook of approximately 30% to 40% year-over-year growth. In 2024, we continued – we see a continued constructive outlook for the oil and gas markets and even more so for Liberty. We anticipate free cash flow will exceed 2023 levels driven by incremental profitability from our current year investments, continued margin expansion and efficiency 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 in differential technologies that position us well in the coming years. I will now turn it back to the operator for Q&A.

Afterwards Chris will have some closing comments at the end of the call.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro: Thanks. Good morning, everybody. Two things for me. The first I’ll start with, and I have to ask you, is the guidance – I mean you have, you had a really good quarter, a great three quarters start to the year, it feels like it would be hard to not get above the guidance range. I know there’s some seasonality but could you just kind of give us some any additional color on how to think about the fourth quarter given you’re not laying down anymore fleets. And you’re at such a healthy level through the third quarter?

Michael Stock: Yes, Stephen. Yes, our guidance has always is our best estimate of where we’re going to come in, we want to be close. And if you look at the fourth quarter seasonality, we’ve been very, very efficient with our customer’s plans, as we’ve been through the first three quarters. So you are going to see a little bit of budget maintenance as they’ve sort of – they’ve completed things a little bit quicker than they would have expected. And so as we go through, you’re going to see seasonal slowdowns with holidays and winter, a little bit of budget maintenance management as we go through the year and then I think you’ll see everything pick up again in Q1.

Stephen Gengaro: Okay, thanks Michael. And then as we think about next year and your capital spending needs, how should we think about CapEx. I think it should fall as a percentage of EBITDA. And it feels like that will lead to pretty robust free cash flow next year. And any color you can add on plans for that free cash flow?

Michael Stock: We will continue with – as our stated goals, obviously, the first year we managed was a very, very strong balance sheet to make sure that we can weather any situation that could come up in the future. We have an incredibly high demand for our next generation technologies. And as you see, we will have a very, very strong return of cash to shareholders program. We also have some interesting business opportunities with our Liberty Power Innovations business. So, I think we will continue with exactly the way we have invested capital over the last 10-years.

Stephen Gengaro: And any ballpark on CapEx for next year at this point?

Michael Stock: No, we will give you those details in our January calls as we always do as we like to give it to you once a year.

Stephen Gengaro: Okay. Thank you.

Chris Wright: A lots of free cash flow as you said, Stephen, we agree very significant free cash flow next year.

Stephen Gengaro: Yes, I mean, it feels like CapEx comes down and free cash flow is pretty strong. That’s why I ask the question. Thanks, Chris and Michael.

Chris Wright: Yes, thanks Stephen.

Operator: The next question is from Roger Read with Wells Fargo. Please go ahead.

Roger Read: Yes, thank you. And good morning. Just wanted to follow-up. One of the things I think Chris, you said was, you know, customers are obviously going to want more efficiency, better performance, et cetera. As we talk some of the E&P companies, they also discuss, you know, hey we want the right sort of company rather than the single cheapest service company we can get. Can you give us any insights into how sort of we should think about that with pricing? We typically think of pricing power but what is the right way to think about that relationship here as to what it can mean for margins in ’24?

Chris Wright: You always have some companies in our industry, and I would say when Liberty started, they maybe when the norm that viewed frac as a commodity. Well, we bid it out, we get a whole bunch of bids, and our supply chain team sees who the two or three cheapest are, and then we go talk to them. That was the norm when we launched Liberty today that exists but it’s not the norm anymore. I just think people have taken a broader view of shale. And on this line item, is that Liberty number higher? Well, yes, it is. But if you get wells done faster, safer, more efficiently, lower emissions, and better help on design and execution about how to maximize recovery from those wells. Hey, all in value, I would say Liberty holds up a pretty significant differential versus others.

And one of the things we have rolling out now is this different fleet technology, right – that arbitrage between the cost of power fleet with diesel and the cost of power fleet with natural gas. That’s a huge cost savings opportunity that benefits both our customers and us. And our fleets not only are burning natural gas versus diesel but these next generation fleets burn a lot less natural gas than a turbine driven fleet for the same amount of work. The higher thermal efficiency, virtually zero methane slip, so they’re just cleaner and cheaper, more efficient. So that technology allows it to be a win for our customers and a win for us. But ultimately, there’s always a back and forth dialogue with our customers. Hey, market is softening. We’re seeing numbers like this.

But we don’t have customers saying, hey, these guys are 10% cheaper. So we’re going to jump over there. I would say most of our customers and our partners, they get the value and the trust in the relationship working together. We didn’t do everything we could have last fall when the market was really tight. Could we have jacked up prices a little bit more and missed people, but still held the work? Sure we could have. But we didn’t do that. We act as long-term partners with our customers like this business thrives when we win, our customers win and over the long-term, you can generate better efficiency, smarter decision making and come up with new ideas that then should be developed. There’s just huge benefits in long-term partnerships with our customers.

And I am thrilled like a ton of our achievements, our innovations, they’re not just Liberty, that’s partnerships with long-term customers that lead to stuff like that.

Roger Read: No, I appreciate that. Follow-up question for you, Michael, as we think about the combination of the ways to return cash to shareholders, dividends versus share repos, is there an overall framework we should think about here, or is kind of getting to Stephen’s earlier question. If free cash flow is up, we should just think about that as incremental returns to shareholders?

Michael Stock: Most of it will go there, Roger, but look, we’ve been a believer to have a base dividend that’s modest, it’s a very small percent of our cash generation ability. And we plan to slowly and steadily grow that with time, that’s sort of a base return, that’s going to happen. We bumped it a larger chunk this year, because we’re basically recalibrating it for the much greater cash generation ability we have now than we had three years ago on a per share basis. And then so that’s a small piece. But that’s sort of the base piece that’s always there. Then there’s obviously CapEx and that’s always the biggest balancing decision we have. Wow. And then again, today, that’s trickier. Because the demand for what we have new coming out is just tremendous.

But we’re not going to invest all the cash we generate or even more than half of it into CapEx but we’re going to balance what are the most compelling investments and how do we structure that. And then that additional cash? No, the biggest use of it, the last year has been buybacks. That’s probably the case, I’m not sure next year, that’s going to be the case as well. There’s – technology based acquisitions are generally not an AMD company. But if there’s compelling things, we’ll do those. And we always think it’s critical to just keep the balance sheet, very strong because you never know what happens. And look, I know, you know the history, but in that top downturn in ’15 and ’16 and the top COVID downturn, we were positioned and able to make just compelling acquisitions, that massively grew our per share value and ability to generate cash and profitability.