Liberty Energy Inc.

Good morning and welcome to the Liberty Oil Field Service's first quarter 2020 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. 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 booking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's 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 pre-tax 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 pre-tax return on capital employed, as discussed in this call, are presented in the company's earnings release, which is available on its website. I would now like to turn the conference over to Liberty CEO, Chris Wright. Please go ahead.

Wow. Our industry has been hit with two large shocks since our last quarterly earnings call. A market share war that flooded the world with oil at the start of the second and larger shock, the COVID pandemic, which is driving by far the largest ever demand contraction for oil. This one-two punch is led to crashing oil prices and now growing logistical challenges to even move oil at any price. The result is an abrupt reduction in rig count and an even more abrupt curtailment of frac activity than we have ever seen. Fortunately, Liberty was built to survive tough times. As in the last 2014 to 2016 downturn, we plan to emerge on the other side having deeper customer relationships with the industry's leading players, larger market share, and increased competitive advantages. Getting there, however, will involve serious challenges for our whole industry. Let's begin with what's most important, the health and safety of our people and all those that they touch. Liberty was an early mover in this area. During February 2020, we formed a COVID-19 response team to design and implement safety procedures and contingency plans at our customers' locations and our offices and facilities that allowed continued delivery of safe frac services while protecting the health of both our customers and employees. So far, we have had only one worker on a frac crew test positive for COVID. which he appeared to have contracted on his days off. Arriving for a new shift, he suspected that he may be infected and immediately quarantined himself and notified the crew. Texas authorities commended the actions of this individual and Liberty, and a full recovery from COVID soon followed. Liberty has continued to improve our processes to protect all folks involved. We also have been very proactive in protecting our business during these unprecedented times. Our first step was to immediately reduce executive salaries by 20%. Subsequent reductions have reduced executive cash compensation by roughly two-thirds, which will fall further, cut in half, during our May through July furlough program, as we suspect that period will mark a very low trough in frac activity. Michael will provide more details on our headcount reductions, our first ever and deeply painful, as well as our CapEx cuts, dividend suspension, and operating cost reductions throughout our business. We design Liberty with highly variable compensation structures to allow navigation through cycles, and we are confident in navigating through this cycle. The focal point of our actions is our customers. What does the collapse in oil prices and storage rapidly filling mean for their future frac demand? How can we help all of them successfully navigate these challenging times? How can we help them with frac design changes to become more competitive? How can we work with them to improve throughput? We love all our customers. that we worked for in 2019 and 2020, and we stand with them during these challenging times. In addition, all of our largest customers, meaning our multi-fleet customers, are top tier players that we chose to align with because they have strong balance sheets, high quality assets, and most importantly, are managed by great people. All of these customers are active in the Permian Basin. They will be survivors and likely consolidators as this downturn plays out. We love the profile of our top customers. We have grown our market share, percent of their business, with all our top customers this year. Industry conditions had been declining for several quarters even before the COVID pandemic. During these challenging times, operators became even more demanding on service quality, efficiency, safety, and technology solutions. All of this plays to Liberty's favor, and those trends are accelerating now as the market stresses have dramatically increased. Our first quarter results reflect both the flight to quality providers and Liberty's efforts to concentrate more of our capacity with select top-tier players. Liberty's Q1 revenues grew sequentially 19% to $472 million, and net income was $2 million, or two cents per fully diluted chair. Adjusted EBITDA was $54 million, equating to $9 million annualized EBITDA per average active frack fleet, which was all 24 of our frack fleets until mid-March. This performance was driven by strong customer preference for Liberty and outstanding operational execution. Liberty's first quarter results smashed previous quarterly records for number of stages pumped and sand volume pumped, both by double digit percentage increases. Over the last 12 months, which have been far from boom times in our industry, Liberty delivered a 6% pre-tax return on capital employed, generated significant free cash flow, and returned approximately $25 million to our stockholders. Obviously, industry conditions have dramatically deteriorated since mid-March. What had been a slow grind of shrinking E&P CapEx to raise returns, combined with an oversupply of frack industry capacity, has transitioned into an abrupt plunge in customer activity and demand for frac services. Today's oil prices below $20 and a pending crunch for oil storage capacity have seen demand for frac services drop like a stone. The rapid drop in frac activity is understandable as many producers are forced to shut in existing production to better align supply with demand as oil storage is rapidly approaching capacity. Oil demand normally rises and falls relatively slowly, as it is primarily tied to economic activity. Never before have we seen a forced, abrupt shutdown of such large parts of the global economy. The financial crisis, or Great Recession, saw a 2-3% drop in demand for oil spread over several months. The COVID pandemic led to a 20 to 30% drop in demand over only a few weeks. In the next few months, we expect very low frack activity in the oil basins. U.S. oil producers are now navigating forced production shut-ins due to storage constraints. U.S. oil production will decline rapidly due to both wells being shut in and extremely low levels of new wells coming on production. Where things go next depends greatly on how quickly demand for oil rebounds as world economies reopen and oil begins to be drawn out of storage. The pace of oil storage draws and the pace of oil demand rebound from increased economic activity will strongly influence oil prices and therefore producer appetite for frack services. These factors may lead to an increase in frack activity later this year. Our highly flexible cost structure and strong Liberty culture allow us to adapt to whatever unfolds. We are strongly focused on preserving Liberty culture and our competitive advantages while always delivering superior service to our customers on site and during periods of hiatus and frac operations. We innovated our way to success during the last downturn and we are busy doing the same this time. with inventive cost-saving FRAC and completion design changes to active parent-child well management efforts, novel equipment innovations, and software applications to optimize logistics. Michael will summarize the specific cost-cutting and liquidity-enhancing measures that we have undertaken. Before I turn the call over to Michael, I want to highlight several distinct advantages that position Liberty to weather this downturn and come out the other side with a stronger market position. One, talk to your customers who will survive and likely own larger asset portfolios on the other side. Two, strong relationships and communications with our customers. We are in this downturn together and we will get through it together. Three, a tight-knit liberty culture of trust and partnership that brings out the best in crisis. Four, differential performance that drives outsized demand for Liberty Services. Five, strong balance sheet built to last. Six, loyal and committed suppliers and partners. I will now turn the call over to Michael to discuss our specific actions and financial results.

Good morning, everyone. As Chris discussed, entering into 2020, industry conditions were already challenged prior to the emergence of the COVID pandemic, but we were very proud to deliver solid 2019 results and a favorable 2020 outlook on our February earnings call, with solid volatility for all 24 of our current fleets and our 25th fleet being fully utilized in 2020. However, the black swan event that crushed global oil demand and oil price has now crushed demand for frack services across the domestic landscape, and all oil and gas basins have been affected. Regrettably, we announced earlier this month that we reduced our staff frack fleet count by 50%, and for the first time in the company's history, we had to lay off Liberty team members. The toll on separated and present Liberty employees has been dramatic, and we are truly humbled by the incredible professionalism and understanding that the Liberty family has shown through the implementation of these tough measures. With that in mind, let me start by celebrating the remarkable achievements of the first quarter, which owed everything to the hard work of the entire Liberty team. Our first quarter included a fully utilised schedule of 24 fleets that were active through mid-March. Our operations team pushed efficiency to new heights, We pumped a company record amount of profit in stages in the first quarter, a double-digit percentage increase from our previous best. For the first quarter of 2020, revenue increased 19% to $472 million from $398 million in the fourth quarter of 2019. Net income after tax increased to $2 million in the first quarter compared to a net loss of $18 million in the fourth quarter. Fully diluted net income per share was $0.02 per share in the first quarter compared to a fully diluted net loss per share of $0.15 in the fourth quarter of 2019. First quarter adjusted EBITDA increased 77% to $54 million from $30 million in the fourth quarter. And annualized adjusted EBITDA per fleet was $9 million in the first quarter compared to $5 million in the fourth quarter. General and administrative expense totaled $29 million for the first quarter or 6% of revenues and included one-time software costs related to the ERP implementation of $1 million, non-cash stock-based compensation expense of $3 million, and $2.5 million of accounts receivable allowances. Net interest expense and associated fees totaled 3.6 million, and income tax expense was .3 million for the first quarter. We ended the quarter with a strong liquidity position with a cash balance of $57 million, which was down from the fourth quarter of $113 million due to growth in revenue and therefore accounts receivable. At quarter end, we had no borrowings drawn on our ABL facility, and total liquidity, including $202 million available under the credit facility, was $259 million. In early March, due to the macroeconomic issues that Chris discussed, and after close discussions with our customers about the likelihood of a precipitous decline in frack activity industry-wide, we acted swiftly. As we did in the last downturn, we began with a substantial cut to executive pay, but the incredibly fast deterioration in the industry conditions during March and the view that the conditions would be challenging for the most of 2020 led to the announcement we made earlier this month regarding reductions in our number of staffed frack fleets, and the necessity to reduce our workforce. To successfully navigate this unprecedented economic challenge, we focused on protecting the business through cash conservation, liquidity management and maintaining balance sheet strength. We wanted to make sure that Liberty could weather the wide range of possible challenges ahead of us and to emerge on the other side stronger and well positioned to take advantage of opportunities in the future. We reduced our staff frack fleets in early April and unfortunately had to reduce our workforce by nearly 50% during the second quarter. We now have 12 staff frack fleets and we anticipate this will remain at 12 for the balance of the year, with flexible furloughs cutting costs when activity drops below 12 fleets. As a result, we believe that we have structurally adjusted our cost base to align with anticipated 2020 activity outlook. We do not foresee further cuts to our staff frack fleet count at the moment, but we will manage the challenging near-term market by utilizing furloughs that will adjust our direct cost of operations very quickly in parallel with customer demand. We expect annualized cost savings of $170 million from reduction in force measures. Second, we suspended variable compensation and our 401k match from Q2 going forward and reduced base salaries for the executive team and other salaried employees, plus reduced cash compensation for our directors. We expect an annualized cost savings of over $50 million from these measures. Third, we moved our capital expenditures to a maintenance-only mode after delivery of prior capital commitments. Earlier this month, we announced a reduction in our planned 2020 capital expenditures to a range of $70 to $90 million, which is over 50% below the midpoint of our previous guidance of approximately $165 million. This includes approximately $33 million that was incurred in the first quarter of 2020, the majority of which was for technology and fleet enhancement, such as the delivery of Tier 4 dual fuel engines and pumps that were previously expected to be used on our 25th fleet. The second quarter of 2020 will also include some costs associated with this fleet, while the second half of 2020 capital expenditures will primarily consist of maintenance costs. This strategy will enable us to provide best-in-class fleet technologies for our customers who are keenly focused on prioritizing returns on each dollar of capital spending. Customer demand for superior services have increased in the current climate and provides us with an opportunity to further solidify long-term relationships with strategic customers. Fourth, we suspended our dividend. During the quarter of end of March 31st, 2020, the company paid quarterly cash dividends and distributions to stockholders and unit holders of approximately $5.6 million. On April 2nd, we announced the suspension of future quarterly dividends for Class A common stockholders and distributions for Liberty LLC unit holders until business conditions warranted reinstatement. We believe this temporary measure to adjust our capital allocation strategy towards cash conservation is prudent to further protect our balance sheet against this uncertain backdrop. Disciplined capital deployment is a core Liberty principle, and we look forward to resuming dividend payments when appropriate. Fifth, we're working with our supplier partners to reduce the costs of running our business. Liberty has always had a partnership mentality with our suppliers, as we do with our customers. This downturn is stressful for the whole supply chain in the oil and gas industry, but this is an industry that has always thrived on working together. Our supply chain partners view Liberty as a company they can rely on to work through tough times with. And as such, in times like these, we come together across the table and productively work on cost savings. This mentality is the same whether it's our SAM partners or our legal and accounting service providers. We're expecting input cost reductions that will range from 10 to 30% depending on the specific cost line. Sixth, in the beginning, in late April, We implemented a temporary measure of employee furlough plans in the field and corporate office. Corporate furloughs will reduce personnel cost portion of GNA by almost 50% from the current reduced levels during what we believe will be the worst of the downturn. The second quarter and the early third quarter timeframe. Operationally, we will have the flexibility to furlough fleets as the work schedule demands, and this will allow us to react quickly to adjust our cost structure down or up as the frack calendar demands. We believe these steps set up liberty to weather the storms that are in front of us and to be successful preparing to take advantage of future opportunities. We are managing the business, pursuing a free cash flow positive strategy for the remainder of 2020, and we project to end the year with a greater cash balance than at the end of the first quarter. As Chris discussed, the imbalance in the oil supply and demand has created a challenging market for fracks. We are committed to our strategy of disciplined growth and returning capital to shareholders, but this requires us to protect the business first in an unprecedented downturn. The depth and duration remain uncertain, but we are confident that we have taken the necessary actions to manage through the downturn. Importantly, we are well positioned to react quickly to a rebound in freight demand activity. In these challenging times, we will take this opportunity to work diligently with our customers on providing the best-in-class service, and engineering solutions, and expect to emerge in a strong, more favorable position with higher market share and more entrenched relationships with our operators, who are deeply focused on being the foundation of a strong domestic energy industry. And with that, I will now turn the call back to Chris before we open for Q&A.