Liberty Energy Inc.

Good morning, and welcome to the Liberty Oilfield Services second quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should 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 that 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 risk and uncertainties that can 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 the company's earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures include EBITDA, adjusted EBITDA, and pre-tax return on capital employed or 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 on 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, sir.

Good morning, everyone. As we all know well, the oil and gas industry is cyclical in nature. with down cycles testing the strength and resonance of players across the value chain. The current cycle collapse has been unparalleled in recent history, with an oil demand crash leading to a precipitous decline in rig count and an even more violent decline in completions activity, which for many oil basin producers was a complete halt. In the face of these extraordinary circumstances, Liberty applied its core strategy, tenets, and principles to guide our team in charting a course to meet the current challenges, enable and support our customers and our workforce, and build an even better business for the future. In the midst of chaos, there is also opportunity. What did we do and how did we do it? First and foremost, we stayed in constant dialogue with our customers. Like Liberty, our top-tier customers have built businesses with the ability to withstand the current cycle, and they are working hard to manage their businesses to earn the highest rate of return over the long term. We found that our partners evaluated near-term prospects and made rational decisions to pull back activity. In many cases, they pulled back even more aggressively than others. It was simply the right decision, and we worked with them to assure that operations were wound down safely and planning began immediately for restarting operations. Liberty acted swiftly and in alignment with our partners. As we outlined in our last call, we managed the business around our customers and their expected activity levels over the course of the year. We stood behind our partners and we remained disciplined in the market. and we did not chase fracked activity for the sake of activity. We collaborated and negotiated as partners with our customers and grew market share with all our top customers entering the second half of 2020. Our engineering team has been quite active with our customers, utilizing this lull in operations to advance understanding and optimization of completion practices across customer asset portfolios. Another subject of great customer interest is our efforts to enhance next-generation frac fleets and document the tradeoffs between various technologies and implementation. Liberty's DNA as a data-driven ESG leader is drawing increasing attention. Oil basin frac activity bottomed in late May and has been slowly rebounding since then. June was better than May. July was better than June, and August will be better still. This is not to say that things are okay. Things are deeply stressed, but slowly heading in the right direction. We expect to reach double-digit average active frac fleets later this year. During the second quarter, we also worked decisively to adjust our cost structure to flex with activity levels and enable us to deliver end of year demand expectations from our customers. We implemented tough measures to preserve cash and protect our balance sheet. We are pleased to report that our second quarter results showcase the successful execution of our strategy. We reported cash and cash equivalents of $125 million at the end of the second quarter, representing an increase of $68 million from the first quarter. This exceeds our total debt of $106 million, leaving us in a net cash position of $19 million at the end of the second quarter. Total liquidity at quarter end, including availability under our credit facility, was $207 million. These results came despite an adjusted EBITDA loss of $13 million, resulting from a substantial sequential drop in frack industry activity. most notably in oily basins, which is where we operate. Michael will share our full financial results shortly. The disruptions to our industry have required sacrifice from everyone in the Liberty family and our broader community of customers and suppliers. We are proud of the steadfast resolve the team has exhibited in these truly trying times. This resolve is evidence by the greater than 95% return rate from furlough of the Liberty Frac crews. These folks are rightfully proud of their accomplishments and commitment to Team Liberty, and we're anxious to get back to work. The return crews have delivered simply outstanding operational performance on every metric, efficiency, safe operations, implementation of COVID safety procedures, and making our customers feel confident in their choice to partner with Liberty. I am proud and humbled to be their partner. Where does that leave us today? First, we believe that our competitive advantages, a strong and loyal culture, long-term customer partnerships, a technology-centric asset base, and an innovative engineering approach to completion designs and commercial relationships are central to Liberty and we will continue to build on all of them. These attributes were demonstrated last quarter when we pumped for 97% of the minutes in a day on a plug and perf pad with over 20 well swaps. This performance and customer partnership enables records like this one. In the last downturn, 2015 to 2016, We dug in with our customers to innovate our way to success. We are doing the same thing this time. The depth of the last downturn brought rapid destruction of available frac fleets and frac companies. We are seeing the same thing this time, but at an even faster pace. Two of the top 10 frac companies have already entered bankruptcy, and another has engaged restructuring advisors. Not only is the supply destruction helping to move the market towards balance, it is also highlighting the importance of having the right partners for the long term. We are in dialogues with several potential new customer partners. We have always had a highly variable cost structure to match the cyclic nature of our industry, but this cycle down is the fastest ever. forcing us to make significant adjustments to our cost structure. We quickly took the painful action of halving our staffed frac fleets to 12 fleets, consistent with customer dialogues about activity levels later this year. We also cut our capex plans in half, suspended our dividend, and made comprehensive operating cost reductions, which Michael will elaborate on. Finally, The importance of liquidity remains at the forefront of our decisions. We've always approached our balance sheet with conservatism to both weather and take advantage of downturns. While today is full of uncertainty, I can assure you that we've never been closer to our customers or better positioned to face tough markets and take advantage of profitable opportunities. The continued hard work of the people of Liberty and our unrelenting focus on our customers leave us well-positioned to pursue our goal of long-term value creation for our shareholders. I will now turn the call over to Michael.

Good morning. As we discussed on our last earnings call, the COVID-19 pandemic effect on worldwide demand for oil was rapid and dramatic. The resulting oil price decline drove North American shale producers to shut in production and basically cease fracking for a period in the oil basins. where we operate. Our second quarter results reflect a transition to align our cost structure with our dedicated customers' activity levels over the course of the year and our execution on the cost reductions outlined on our last earnings call. We are laser-focused on protecting the business, and as oil demand returns, we are setting the stage for the return of profitable activity. For the second quarter of 2020, revenue declined 81%, to $88 million from $472 million in the first quarter, reflecting our oil-based exposure, where activity levels fell dramatically, and the disciplined approach by our top-tier customers to reduce activity because of the volatile macroeconomic backdrop. Our net loss after tax declined to $66 million in the second quarter, compared to a net income of $2 million in the first quarter. Foley's eluded net loss per share was $0.55 in the second quarter, compared to fully diluted net income this year of two cents in the first quarter. Severance and related costs were nine million during the quarter, and fleet lay down and startup costs included in cost of sales were $4.5 million for the quarter. Second quarter adjusted EBITDA declined to a loss of 13 million in the second quarter from the solid profitability of 54 million in the first quarter. Second quarter adjusted EBITDA was a loss of eight million After excluding non-cash items of over $4 million, we believe the second quarter marks a cyclical low point in frack activity. General and administrative expense totaled $18 million during the second quarter, a 37% reduction from the first quarter as we enacted swift cost-saving measures early in the quarter. General and administrative expenses declined actually 45% sequentially when you exclude share-based compensation of $3 million and $3.1 million and accounts receivable allowances of $2.5 and $2.2 million during the first and second quarters respectively, a significant achievement in the current environment. The sequential decline in G&A expenses was primarily due to lower personnel costs tied to reduced variable compensation and flexible furloughs, a reduction in IT, travel and entertainment, facilities and other costs. Approximately 10% to 15% of the savings were structural in nature, with the remainder tied to cost initiatives that adjust with activity and profitability levels. Net interest expense and associated fees toted $3.7 million, and we recorded an income tax benefit of $11 million for the quarter. We had robust free cash flow for the quarter and ended the quarter in a strong liquidity position, including a cash balance of $125 million, which increased $68 million from the first quarter of $57 million. With total long-term debt of $106 million, we ended the quarter with a positive net cash position of $19 million. At quarter end, we had no blowerings drawn on our ABL facility, and total available liquidity was $207 million, including $82 million available under the credit facility. During the last earnings call, we outlined several targets to protect the business through cash conservation, liquidity management, and maintaining balance tree strength. The rapid deterioration in the frack activity led us to act swiftly to navigate this unprecedented economic challenge. We build liberty to weather the bad markets and thrive in the good ones. Our flexibility in our cost structure and the strength of our balance sheet enables us to manage the potential macroeconomic risks, such as the effect that the resurgence of COVID could have on oil demand, as well as take advantage of opportunities that arise in times of distress. Let's look back at these actions we discussed in the last earnings call. First, we reduced our staff frac fleet count to 12 fleets after discussions with our dedicated customers to match their projected completions demand in the latter part of 2020. This reduced our cost structure by approximately $170 million on an annualized basis. We then furloughed the frac crews that were not actively fracking in the quarter. The furloughed crews returned to work as their dedicated customers start up their frac activity. This enabled us to flexibly manage our cost structure to align with revenue. We currently project that between 10 and 12 crews will be working in the fourth quarter. Secondly, we suspended bonus plans in the 401k match, which coupled with lower base salaries and cash compensation for our board, reduced our cost structure by approximately $50 million on an annualized basis. Third, We reduced capital expenditures projections to $70 to $90 million range for the year, which is approximately 50% of the original 2020 budget. Capital expenditures for the second quarter were $13 million compared to $33 million in the first quarter. Fourth, last quarter we announced the suspension of our quarterly dividends until future business results support reinstatement. Fifth, Our supplier partners have always been a key part of our ability to weather the cyclical nature of our industry. We are seeing input cost reductions of 10 to 30%, which will continue to roll through in the second half of the year. Sixth, we instituted a temporary furlough program for operational crews and corporate staff. These definitive actions set us up to navigate the turmoil in the frack market during the second quarter. as showcased by the strength of our balance sheet exiting this extraordinary period. We have both the flexible cost structure and the balance sheet to manage through potential challenges in the market until the world exits the uncertainty of the COVID pandemic. As we said on the last call, we are committed to our strategy of disciplined growth and returning cash to shareholders, but this requires us to protect the business first. And with that, I will now turn the call back to Chris before we open for Q&A.