Liberty Energy Inc. (NYSE:LBRT) Q4 2023 Earnings Call Transcript

Liberty Energy Inc. (NYSE:LBRT) Q4 2023 Earnings Call Transcript January 25, 2024

Liberty Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Liberty Energy Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 Anjali Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Anjali Voria: Thank you, Ed. Good morning, and welcome to the Liberty Energy fourth quarter and full year 2023 earnings 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 profits. 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 capital invested 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 calculations of adjusted pre-tax return on capital employed and cash return on capital invested as discussed on this call are included in our press release available on our Investor Relations website. I would now like to turn the call over to Chris.

Chris Wright: Good morning, everyone, and thank you for joining us to discuss our full year and fourth quarter 2023 operational and financial results. Liberty delivered a second consecutive year of record earnings per share. Our portfolio of advanced technology and vertical integration enhanced our superior service quality and drove record-breaking operational efficiencies. We delivered full year adjusted pre-tax return on capital employed of 40% and cash return on capital employed of 34%, both exceeding the prior year. Revenue was $4.7 billion in 2023. Net income of $556 million increased 39% year-over-year, and our fully diluted earnings per share rose by 49% year-over-year to $3.15. Our EPS grew faster than net income due to reduced share count, showcasing the power of our buyback program.

We concluded the year with adjusted EBITDA of $1.2 billion at the high end of our midyear guidance range, and we significantly increased our cash flow. We went public six years ago after a record year in 2017. Since then, we have tripled our revenue, quadrupled our EBITDA and more than quadrupled our pre-tax net income. These financial records were made possible by the simply outstanding operational performance of Team Liberty. Every quarter in 2023 set a new quarterly pumping efficiency record. I couldn’t be more proud to be on this team. Strong free cash flow generation supported our leading return of capital program. Since program reinstatement in July 2022, we have distributed $375 million to shareholders through buybacks and cash dividends.

We have already retired 12% of the shares outstanding when we announced the program in July 2022, equivalent to 33% of the shares issued for the acquisition of Schlumberger’s OneStim business three years ago. We also upsized our share repurchase authorization by 50% to $750 million and increased our quarterly dividend by 40% beginning in Q4 2023. Liberty brings together leading pump technology, mobile power generation and CNG fuel supply, a unique value proposition to maximize efficiency, reduce emissions and lower fuel costs. By the end of 2024, we expect 90% of our fleets will be primarily powered by natural gas. The success of our technology transition is buttressed by dependable natural gas fuel supply through Liberty Power innovations.

We plan to double LPI’s capacity in 2024 to meet rising demand. Liberty is unique in the industry to own the technology and assets for the complete value chain in the move to natural gas and grid-powered frac. Our strong belief is that controlling everything from fuel and logistics to power production and pump technology will drive our competitive advantage further and deliver industry-leading returns. This is a distinctly different approach compared to some frac companies who lease technology and contract power generation and gas supply from other providers. The reason Liberty has been the most successful frac company of the last decade is our ability to innovate faster than the rest of the industry and drive strong returns for both our customers and shareholders.

Natural gas is by far the fastest-growing energy source in the world. Consistent with this is the rising demand to power frac fleets with natural gas. 11 years ago, we deployed our first dual-fuel fleet, recognizing the growing importance of natural gas as a lower emission, lower-cost, reliable fuel source. We then set out to design and build our 100% natural gas-powered digiFleets fit for the rigors of the oilfield. This required a novel approach as some operators desired solutions to match their ambitions of developing a micro grid to augment their oilfield operations, while others aimed simply to lower emissions and fuel costs. Our efforts culminated in two complementary pump technologies that comprise our digiFleets and satisfy these multifaceted demands with the most innovative and capital-efficient solution.

Mobility requirements, coupled with varying power demand based on job design led to our development of digiPower mobile generators that can be scaled up or down, providing the highest thermal efficiency and lowest emissions modular solutions in the industry. Today, there is a lack of natural gas transportation and logistics infrastructure to meet the just-in-time needs of the frac site. We launched in a rapidly growing LPI to solve this challenge and provide a virtual pipeline of natural gas to our fleets and other customer needs. While innovation from pumps to power generation to gas logistics are independently compelling investments, together these comprise a complete infrastructure to deliver a service unmatched in the industry. The success of our digiTechnologies and LPI in 2023 marked a turning point for Liberty.

The demand pull for our digiFleets continues to gain steam. We now have 4 digiFleets deployed across two basins with two more being rolled out as we speak. By the end of the year, the combination of digiFleets and dual-fuel fleets will make that 90% of our total fleet composition, dramatically shifting our diesel to gas consumption and driving demand for LPI services. Entering 2024, the fundamental outlook for the frac industry is stable. Service prices remain relatively steady as the supply of marketed fleets was right sized in response to lower completion activity. Many fleets exited the market, both from accelerated attrition of older equipment and the deliberate idling of underutilized fleets to match customer demand. Operators continue to demand technologies that provide significant emissions reductions and fuel savings.

Liberty’s digiTechnologies, LPI business, integrated service offering and scale position us as the provider of choice. Against this backdrop, demand for Liberty Services is positioned to rise, albeit slowly from current levels. Engineering and innovation have led to improved shale wells via completion design optimization, factor completion and longer laterals, all helping to offset the gradual decline in average reservoir quality being drilled. The trend toward higher intensity fracs raises demand for horsepower, serving to keep frac assets utilized and drive service company returns. Range bound oil prices have not meaningfully changed E&P operator plans to deliver flat or at most modest production growth. As North American oil production reaches record levels, more frac activity will be required simply to offset production declines.

Near-term natural gas markets are under pressure, but domestic power demand growth and increased LNG exports are expected to lead to a more robust 2025. Long-term demand for reliable, affordable energy continues to rise with increasing global living standards. North American operators have been and are likely to continue to be the largest provider of incremental oil and gas supply globally. These trends should support a durable multiyear cycle ahead for services. Looking to the first quarter, we anticipate flattish sequential revenue and adjusted EBITDA, driven by seasonal trends and a cautious start for E&P activity. This is expected to be followed by a modest increase in our activity in subsequent quarters. For the full year, we expect strong free cash flow generation and continued investment in digiTechnologies and our LPI business.

We are confident that our technology transition better positions us to deliver superior services to our customers and durable returns over cycles. Global energy demand continues to rise as the world’s 7 billion less energized aspire to attain the energy-rich lifestyles of the lucky $1 billion. Liberty’s growing technical and service quality progress brings us growing business opportunities to help expand the supply of reliable, affordable energy to meet these demands. Our investment in and partnership with Fervo, an enhanced geothermal energy company, has been going very well. Pioneering the shale revolution ultimately came down to engineering and creating a complex underground plumbing network of hydraulic fractures, dense enough to harvest natural gas and oil from ultra-low permeability rocks.

Several of us at Liberty were lucky to be involved at the beginning in solving this technical challenge that unleashed the shale revolution. The result has been a transformation of the global energy and geopolitical landscape in ways previously unimagined. Shale technology make natural gas the fastest-growing global source of energy over the last 12 years. The shale revolution also made oil the second fastest-growing source of energy over the same time period, more on this in my closing remarks. Our partnership with Fervo, which began informally several years ago, involved the same technical and implementation challenges. To harvest vast quantities of heat from underground rocks also requires a precisely engineered underground network of fractures.

Heat conduction through rock is very slow analogous to ultra-low permeability, but convective heat transfer from fracture faces can be scaled up to high rates. Hence, the solution is a dense network of underground fractures, which connect cold water injector wells with hot water and steam producer wells. Another new large-scale energy resource is becoming accessible via the innovations from the shale revolution. We are excited about our Fervo partnership and how far this next generation of geothermal will travel in the years ahead. Another application of Liberty shale technology expertise is our partnership with Tamboran to crack the code in Australia’s Beetaloo shale gas basin. The geology and geography are different, of course, but the fundamental challenge is the same.

We are excited about the upside if our partnership can succeed in bringing huge new gas resources to Australia and the nearby Asian LNG markets. Liberty history has been all about innovation and partnership. Our future will be too. Earlier this month, we launched the Bettering Human Lives Foundation to address the most urgent challenges of energy access. The Foundation strives to increase access to clean cooking fuels by supporting technology development and entrepreneurs in Africa. We are excited by the prospect of uplifting women, children and communities by improving health, safety and quality of life. 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 delivered outstanding financial results in 2023. We expanded our adjusted EBITDA by 41%, increased our ROCE to 40% and returned $241 million in capital to shareholders while reinvesting in our business for the long term. Over the last 12 years of our company history, Liberty has operated in a series of cycles, including from 2012 to 2015 period, 2017 to 2019 and 2022 to date, interrupted by two exogenous and unusual downturns, the OPEC war on shale and COVID. In our first four years, our average annual adjusted EBITDA was approximately $40 million. By 2017 to 2019 period, we had grown our annual average adjusted EBITDA eightfold, owing to our forward-thinking investments in dual-fuel, Quite Fleet technology and the opportunistic acquisition of Sanjel assets in 2016.

Since then, our annual average adjusted EBITDA in the last two years is now over $1 billion, over 3x the prior 2017 to 2019 cycle, driven by the transformative OneStim acquisition, vertical integration, software development and the scale that bolsters our efficiencies. As we look forward, our strategy is to invest in Liberty Design next-generation fleet technology and own the infrastructure to control critical areas that drive high efficiencies over the next decade, particularly in areas that are not very well developed, like natural gas, fuel supply. Versatility of LPI business provides a potential to diversify our revenue base outside of the industry. These investments reinforce sustainable long-term advantages and expand our ability to drive strong free cash flow.

The demand for low-emission, highly efficient solutions is on the rise, and there are very few companies that are truly investing in differential technologies, and there is only one that owns the entire value chain and can chart their own destiny, and that is Liberty. For the full year, revenue increased 14% to $4.7 billion from $4.1 billion in 2022. Net income totaled $556 million or $3.15 per fully diluted shares. Adjusted EBITDA was $1.2 billion, highest in company history and 41% above 2022 levels. Our full year results demonstrate the earnings power we’ve built over the last three years. In the fourth quarter of 2023, revenue was $1.1 billion, a decrease of 12% over prior year, driven by market headwinds, normal budget exhaustion and a full quarter impact of 1 fewer fleet deployed.

On a positive note, we achieved new consecutive quarterly pumping efficiency records safely pumping more hours per fleet than ever before in the quarter. Fourth quarter net income after tax was of $92 million compared to $153 million in the prior year. Fully diluted net income per share was $0.54 compared to $0.82 in the fourth quarter of 2022. Fourth quarter adjusted EBITDA was $253 million compared to $295 million in the prior year. G&A expenses totaled $55 million in the fourth quarter and included non-cash stock-based compensation of $9 million. G&A was $5 million above the fourth quarter of 2022, but flat on a sequential basis. Net interest expense and associated fees totaled $6 million for the quarter. Fourth quarter tax expense was $27 million, approximately 23% of pre-tax income.

We expect tax expense in 2024 to be approximately 24% of pre-tax income. Cash taxes were $10 million in the fourth quarter, and we expect 2024 cash taxes to be approximately 80% of our effective book tax rate for the year. We ended the year with a cash balance of $37 million, and a net debt of $103 million. Net debt decreased by $72 million from this prior year. In 2023, cash flows were used to fund capital expenditures, $203 million of share buybacks, and $38 million of cash dividends. Total liquidity at the end of the year, including availability under the credit facility, was $314 million. Net capital expenditures were $134 million in the fourth quarter and $576 million for the full year, which included investments in digiFleets, LPI Gas Delivery, wet sand technology, capitalized maintenance spending, and other projects.

Our 2023 results showcase our ability to deliver robust return of capital program while investing in high return internal projects to expand our competitive advantage. Since the pandemic, we have meaningfully transformed our business to deliver strong, free – strong cash flow generation through cycles. We reinstated a return of capital program a year and a half ago. Since that time, we’ve now distributed a cumulative $375 million to shareholders through our share buybacks and cash dividends. We continue to strengthen our program. Last quarter, we increased our dividend by 40% to $0.07 a share, and earlier this week, we increased and extended our share repurchase authorization by 50% to $750 million through July 2026. We have $422 million left on this authorization.

We continue to differentiate ourselves with an industry-leading return of capital program while investing in high return opportunities. As Chris shared earlier, we expect a steady start to the year with flattish first quarter revenue and adjusted EBITDA. Liberty’s earnings show remarkable resilience in the phase of a reducing recount in 2023. The last few months of commodity-passed volatility has led to a more cautious start from E&P operators. As we look forward, we expect a modest pickup of Liberty’s specific activity in subsequent quarters. For the full year, we are targeting flatish adjusted EBITDA year-over-year. Our frac service pricing will be relatively flat from the end of the year into the start of 2024 for like-for-like technology.

We are targeting cash capital expenditures of approximately $500 million to $550 million, or approximately 45% of adjusted EBITDA, inclusive of digiTechnologies’ dual fuel upgrades and LPI expansion. Including this number are some delayed cap expense owing to timing of late-2023 equipment deliveries. Our capital expenditures will take our fleet makeup to 90% natural gas fueled technologies. By year-end, the dominant fuel used by accolades will be natural gas supported by LPI. I will now turn it back to the operator for Q&A, after which Chris will have some closing comments at the end of the call.

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Q&A Session

Operator: Thank you. We will open up the line for questions. [Operator Instructions] And the first question today comes from Scott Gruber with Citigroup. Please go ahead.

Scott Gruber: Yes, good morning.

Chris Wright: Good morning, Scott.

Scott Gruber: I’m curious about the flat year-on-year EBITDA, which is great to hear you guys reiterate that. I guess what I’m wondering about is how to think about your investments translating into incremental EBITDA versus that kind of underlying activity growth. Maybe if you can mention that a bit for us, to get to flat EBITDA year-on-year, what type of activity growth do you need in the second half versus the first half, or maybe some dimension on incremental EBITDA from LPI and other investments?

Michael Stock: Yes. Scott, I’ll take that one. Chris can chime in as well. As we said, flattish EBITDA is what we’re targeting for the year. There is a lot of puts and takes. There is a slow start to the year from the E&P operators, as you can see, and we think that’s going to increase for Liberty-specific demand as we go through the years. We know it from our customers, and it relates to some specific basins, if you think of things like the Bakken, which was a strong base in the last year, slowed down to the end of the year, as you’ve seen. That is going to kick back up again in Q2. There is sort of some drags-on earnings that will come from things like reduction in sand price out of our mines, made up by increased numbers out of LPI, so I think you’ve got a generally softer market on average for like-for-like technology on average year-over-year.

If you think about diesel price, the average diesel price will be down year-over-year for a diesel fleet, but we have also been investing in our technology transition, which is offsetting that. There’s a lot of puts and takes, and then Chris may want to give some color on where the macro may go up or down from where we are.

Chris Wright: Scott, I think Michael gave a good summary. Look, we kid ourselves a little bit that we know what’s going to happen at the end of Q3 or Q4 of this year. That’s yet to be determined, but as Michael said, in an overall a little bit softer macro this year. Last year started really strong and then sort of declined throughout the year. About 50 less frac fleets were operating at the end of last year than were 15 months before that, so the industry shrunk a little bit. A little bit of downward pressure on pricing, but I would say the behavior of the industry was outstanding, and that people idled capacity. They couldn’t get good pricing, and the work was there. People idled frac spreads, and that kept pricing, again, down a hair, but pretty flat, and I think we would expect pricing to be flat this year as well.

If a macro changed and oil prices bumped up $10 or so, yeah, you might see a little strengthening or firming, but we don’t have a crystal ball. So we just kind of look at what is the –you can expect Liberty to outperform the macro market conditions, as Michael said, because of that superior technology, and even more important, just better service quality.

Scott Gruber: I appreciate all that, color. And then thinking about the digiFrac rollout, you said two more fleets underway in terms of entering service, is it going to be four total digiFrac additions this year within the budget? And then maybe if you could also provide some color, just on the demand pool for those units, demand still seems pretty strong, but I just wanted to see what you’re hearing from customers, and how far in advance are those units getting contracts?

Chris Wright: Yeah, the interest in digi is just huge. The balance is – the hands in the air to get a digi fleet is just massively more than the amount of fleets we’re going to build, or the rate at which we’re going to build fleets, right? That’s constrained somewhat by or what we think is the prudent rate of capital deployment into that. But yes, so those dialogues go on for a long time, they are ultimately long-term agreements when those go into place, it’s about timing of rolling out those fleets. There is two different pump technologies, what’s the right mix, that’s different for different customers. But yes, interest there is tremendous, yes, the specifics are always bottom-up, more top-down, so I think your numbers for what we’re budgeting are probably about, we ended the year last year with four, and at the end of this year, we’ll probably have, of order, a quarter of our fleet will be digi.

But again, that’s not a top-down thing, that’s a bottom-up thing in dialogues with customers. Ron, I don’t know if you want to give any color on technology, how that’s rolling out, and where we’re going, but the more we see, the more excited we are.

Ron Gusek: Scott, I wouldn’t add too, too much to that, only to say that, as Chris alluded to, we had four out, we were hoping to have six by the end of this month, we’re working on those next two right now, we continue to work closely with our third-party packagers to keep that schedule on track, to meet our customers’ expectations around that, but we’re full-speed ahead on putting that technology in the hands of the customers who have been long-time partners with us in, first of all, developing that, and ultimately getting it deployed to the field. So we’re excited to see that continue this year.

Scott Gruber: I appreciate the color. I’ll turn it back. Thank you.

Operator: Thank you. Our next question comes from Luke Lemoine with Piper Sandler.

Luke Lemoine: Hey, good morning. Chris and Ron, I know you’re not ready to quantify LPI’s size yet, but could you walk us through what kind of investments you’re making in LPI this year, is this more on the CNG distribution side, are you adding a fair amount of DigiPower mobile generators for non-frac uses as well, and then how should we think about this from a returns standpoint?

Chris Wright: Right, Luke, so yes, this year’s focus is really about supporting our Digi and our dual fuel rollout, right. So we are probably doubling the compression capacity of LPI, focused mainly on two basins there. The two main basins, we’re going to be chewing up a lot of gas, which is the Permian and the DJ, we’ll do some fuel gas, a decent amount of fuel gas work over in the Haynesville, and we’ll look at other basins as we go forward from there. And then it’s going to be the CNG trailers and fuel distribution units that really back that up. So nothing is going to be spent regarding at the moment in the plan on mobile power generation outside of the industry, for outside the industry, that’s something that we’re looking at with the board, and that’s going to be, we’re going to be working on that sort of expansion plan as we go through the year, and that probably becomes more of a next year thought process as far as the investment side of that goes.