Liberty Energy Inc.

Good morning and welcome to the Liberty Oilfield Services first quarter 2021 earnings conference call. All participants will be in list-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, 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-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and certainties 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 gap measures and may not be comparable to similar measures of other companies. Reconciliation of net income to EBITDA and adjusted EBITDA and a calculation of pre-tax return on capital employed is discussed on this call. I'll present it in the company's earnings release, which is available on its website. I'd now like to turn the conference over to Liberty CEO, Chris Wright. Please go ahead.

Thanks, Ian. Good morning, everyone, and thank you for joining us to discuss our first quarter 2021 operational and financial results. We're excited to embark on a new era for Liberty, completing our first quarter with an expanded platform as a fully integrated completion services, engineering, and diagnostics company. We're pleased to report 552 million in revenue and 32 million in adjusted EBITDA in the first quarter. The Liberty One Sim combination has been extraordinary. We've doubled the size of our business while only growing G&A by approximately 15% and depreciated amortization by less than 40% from pre-pandemic levels in exchange for a 37% equity interest. In addition, The enormous growth in our technological expertise has been inspiring. We've brought together a suite of leading edge technologies and two of the top technological teams in the industry. We are excited to bolster our frac technology leadership in many areas, and I will highlight just a few later in the call. We have come a long way since the founding of our company a decade ago. Our focus, however, remains the same. delivering superior returns across cycles to build a differential company with long-lasting competitive advantages. Accomplishing this requires great people and a culture that aligns them to passionately pursue the Liberty mission. We estimate that we currently have a little over 15% of the deployed fleets in the market and are likely completing a little under 20% of North American shale wells. After a rapid rebound off of the COVID bottom, we are now in a slowly improving market. Liberty's number of deployed fleets in the first quarter was in the low 30s and will be similar in the second quarter. We will remain disciplined in deploying additional capacity. Fleets are only deployed to customers with strategic value and that will deliver good returns on capital invested. Overall market conditions today remain challenged, but they are improving as demand for FRAC services grows, and more importantly, supply of quality fleets shrinks. Interest in Liberty Fleets and partnership continues to grow. Our dialogues with customers are becoming even more constructive as both parties seek mutually beneficial long-term partnerships. The demand for next-generation equipment with engineering and diagnostics is quite strong. Pricing dynamics continue to improve across all bases. While current pricing levels remain well below Q1 2020, customer conversations have continued to gain momentum since we last reported. As WTIO oil prices have been relatively stable in the $60 range, and customer economics have substantially improved. our customers are becoming more comfortable with the necessity for a phased approach to price increases. This is a testament to the deep customer relationships our team has developed over the years. The ongoing attrition amongst practice will likely further this discussion as we move through the year. The industry is healing. The market for next-gen equipment has tightened. and the market for next-gen equipment with industry-leading operations and technology innovation is even tighter. Looking forward, we see a pathway to normalize margins for Liberty at some point in 2022. We've already achieved three sequential quarters of margin improvement as activity has built off historic lows in the second quarter of last year. While the rate of growth is slowing sequentially, The trend still looks modestly upward as private EMP companies are reacting to strong commodity prices. Public EMPs, however, are remaining steadfast in their commitment to capital discipline regardless of commodity prices. We fully support this discipline in investing across the whole energy sector as it is required to bring our industry back to full health after the giant upheaval brought by the shale revolution. A year on from the onset of the global pandemic and severe crash in oil markets, I'm pleased that the fundamentals for our industry and business are on an upward trajectory. North American and global economies are decidedly stronger and the world needs more energy. Where will this energy come from? While there are a lot of new and exciting technologies in the market, at the heart of dependable, cost-effective energy access is oil, gas, and natural gas liquids. Hydrocarbons play the anchor role in fulfilling our global energy needs and will continue to do so in the coming decades. Hydrocarbons supplied just over 80% of world energy when we founded Liberty 10 years ago, and they still supply just over 80% of global energy today. The biggest shift in hydrocarbon demand has been natural gas displacing coal market share in electric power generation. In fact, oil and gas are currently at their record market share ever in the United States, at just under 70% of total primary energy supply. Yes, I know that we hear lots of talk about an energy transition that is soon to make us all obsolete. That is simply not so. Let me put things in perspective. Wind and solar today supply roughly 2% of global energy concentrated in the electric power sector, which collectively supplies less than 20% of global energy. In absolute terms, the trillions invested in wind and solar do produce a great deal of energy. But in relative terms, they are still quite modest, even compared simply to the growth in energy demand the world will see in the next decade alone. The only way out of poverty is increased energy consumption. Hydrogen is rightfully full of buzz these days, but it is not an energy source. Hydrogen is an alternate method of energy storage. It takes more energy to produce hydrogen than is released when it is consumed. It has great potential to create zero-carbon liquid fuels. A hydrogen adoption will grow, not shrink, the global need for energy. Climate change concerns are the driver behind the energy transition dialogue. Climate change is a serious, sizable, and global challenge. To date, natural gas displacing coal in the power sector has been the largest factor bringing U.S. per capita greenhouse gas emissions to their lowest levels since the 1950s. Continued progress will require significant contributions from many areas across the energy space, including continued contributions from our industry and likely large-scale carbon capture utilization and storage. Liberty will both continue and expand our efforts in lowering greenhouse gas emissions. The oil and gas industry is not shrinking, but rather it's maturing into a steadier, slower growth, and cleaner business. We believe the US and Canada will continue to play leading roles as both major energy producers and drivers of improved technology and practices globally. The world faces a second and frankly more urgent global energy challenge, energy poverty. One-third of humanity still lacks access to modern energy that enables the healthier, opportunity-rich lives that we all treasure. Millions die every year simply for lack of clean cooking fuels and reliable access to electricity. Sadly, this global crisis gets very little political attention because it only affects people in low-income countries and the lowest-income folks in wealthy nations. Surging U.S. exports of propane and other natural gas liquids are helping hundreds of millions gain their first access to clean cooking fuels. U.S. LNG exports are also helping bring electricity access to the 1 billion people who currently lack any electricity access, and another billion with only unreliable, intermittent, low-wattage electricity. Electricity in lower-income countries comes predominantly from hydrocarbons or hydropower. While the shale revolution has helped accelerate the rise for so many of poverty, More than 2 billion people remain in these dire circumstances. Unfortunately, policy decisions to restrict capital access for hydrocarbon energy development in low-income countries is a growing headwind. You could read much more about these two global energy challenges and Liberty's wide-ranging efforts in our sustainability report that will be released on June 1st. Two weeks after that, on June 17, Liberty will host an investor day in Denver to provide deep insight into Liberty people, technology development, business processes, fracked operations, strategic efforts, and new energy avenues. We hope that you can join us in Denver or via video conference. In the first quarter, our operations teams executed at the highest level, navigating weather disruptions across the southern regions and in Canada. working quickly to minimize weather impacts on our customers. Our sales teams drove new business above expectations, successfully embracing the strengths of both our legacy red and blue sales organizations. It goes without saying that we achieved a record quarter for total profit pumped, topping our previous mark set in Q1 2020. What is notable is that our fleet efficiency levels collectively strong with both red and blue fleets near the top of our efficiency leaderboard. Of course, we have work ahead of us to raise efficiencies of many acquired fleets to Liberty standards, but it is notable that we have strong results across the combined fleets. Overall, the integration has been an incredibly positive experience. Our team worked in overdrive, handling the challenges of integration to deliver a seamless transition for our customers with no disruption to operations. What a testament to the hard work of folks across supply chain, IT, HR, finance, and importantly, our crews in the field. Again, our crew efficiency has been commendable given the naturally disruptive nature of a large-scale integration, and the hard work continues. We are moving towards the collective best practices, which are coming both from Legacy Liberty and our new Liberty Blue Fleece. This effort will drive continuous improvement that is Liberty's DNA. We've combined our maintenance operations for both frac and wireline, but the integration isn't over yet. We continue to work on personnel integration, finalize the transition of our ERP and internal systems, and manage the challenges associated with the closed Canadian border. Technology initiatives are an exciting part of the progress. The rich history of both red and blue legacy businesses is positioning us attractively to push forward opportunities for automation. In the near term, we've already identified ways to streamline the number of people we have on location. We are deploying a new version of sod extract chemical management automation. a liberty developed electronic system of sensors to track chemicals with high accuracy and precision. Automation of equipment control systems will also allow us to streamline operations and reduce costs. We are launching a new direct frac diagnostic measurement, FracSense. This grows our portfolio of frac design and monitoring technologies that help optimize weld spacing, tube development, and tailor frac designs and perforating strategy. This is a highly complementary technology to our well-watched diagnostic and our extensive suite of proprietary software tools and engineering expertise that power our efforts to help customers lower the cost to produce hydrocarbons. Our focus on empirical data, real measurements, expands significantly with FracSense. This fiber-optic-based direct measurement of fracture geometry allows calibration of our frac models and better optimization tools for our customers. FracSense measurements provide information about fracture azimuth, state spacing coverage, perforation cluster design, and its impact on cluster efficiency, fracture length, and fracture height calibration through volume to first response. That is a mouthful. It also produces a direct way to measure frac hits in a complementary fashion with Liberty's WellWatch. Digifrac has also gained significant momentum in recent weeks. We've hosted numerous customer tours at our FT9 facility in Magnolia, and the enthusiasm is electrifying. With Digifrac, we can drive a reduction in greenhouse gas emissions of at least 20%, compared to all other existing Fract Elite designs, and customers are taking notice. This has been the number one draw for customer engagement, as EMP priorities are shifting to minimizing emissions output while maintaining operational efficiency and safety. To date, we've completed over 250 hours of high-pressure durability testing on our pump and have plans for field testing next month. We also have a team in place for commercialization as customer interest has exceeded our expectations. This is truly the next wave of technology in FRAC Fleet design, and we're excited to lead the industry in this endeavor. The rate of DD FRAC Fleet deployment is highly dependent on economics and the same prudent capital deployment strategy that we have always followed. As we look at the year ahead, our view on oil markets has become more constructive. Buoyed by vaccinations, massive fiscal and monetary policy actions, and strong fundamental leading economic indicators, global demand for oil is expected to continue to rise through the year. In the U.S., five states have already recovered from the pandemic recession on a GDP basis, with others soon to follow suit. surging covid cases in certain countries such as india brazil and some eu nations are raising concerns for oil demand in those areas but a steady draw of global oil inventory stock suggests the measured increases in opec plus oil production output is being absorbed by higher global demand resulting in a tightening of the oil supply and demand balance over the last three quarters North American frac activity has rapidly increased towards supporting maintenance production levels. Hence, public EMPs are now at roughly maintenance run rate frac activity. Private EMPs, on the other hand, are more responsive to current oil and gas prices, which continue to support modestly increasing demand for frac services in line with their recent rise in rig activity. Importantly, E&P companies are maintaining capital discipline and moderating long-term growth, aiming to increase commodity price stability and enhance sector attractiveness. We believe that this approach is a positive for the industry going forward. North America is a critical energy supplier of the globe, and we need a healthy industry. I'd like to pass the call over to Michael to discuss our detailed financial performance.

Good morning. We are pleased with our first quarter results. I'd like to take a moment to thank our entire team for going above and beyond expectations. They came together to deliver solid results while encountering operational challenges arising from unusual winter weather and added responsibilities through the sizable integration of our one-stem acquisition. We're off to a great start. Executing on our strategy, we expect to drive the next phase of financial growth and superior returns. We are already seeing early-stage benefits from our teams leveraging a full suite of completion services, including FRAC, Wireline, and SAN, along with engineering and diagnostic tools unique in the industry, to drive increased engagement with new and existing customers. As Chris reviewed, we are also working very hard on integrating our technology development efforts to improve efficiencies throughout the supply chain. and drive the next phase of innovation in the freight business. In the first quarter of 2021, revenue increased 114% to $552 million from $258 million in the fourth quarter, reflecting the inclusion of Onestim and New Customer Winds that exceeded expectations. Revenue gains were partially offset by weather disruptions during February in the South and in Canada. We estimate a net reduction of first quarter revenue of approximately $25 million for weather As one third of the activity disruption was partially restored by March, the remainder of the revenues are expected to be completed in the second quarter. Net loss after tax decreased to $39 million in the first quarter, compared to $48 million in the fourth quarter. Fully diluted net loss per share was $0.21 in the first quarter, compared to $0.41 in the fourth quarter. Results of the quarter included $7.6 million of non-recurring transaction-related costs, and there were no reported complete startup costs during the quarter. The first quarter adjusted EBITDA, which excludes non-cash stock compensation expense, increased to $32 million from $7 million during the fourth quarter. The improvement in adjusted EBITDA primarily reflected the higher absorption of fixed costs with the inclusion of one system. General and administrative expense totalled $26.4 million for the quarter and included non-cash stock-based compensation expense of $4.3 million. G&A is approximately 31% higher relative to the fourth quarter on a 114% sequential increase in revenue. G&A costs essentially flat with Q1 2020 levels, the last pre-pandemic quarterly benchmark, despite the doubling of our business with the Winston acquisition and the addition of new service lines, basins, and our entry into the Canadian market. We doubled our available frack equipment, added wireline in the Permian sand mines, and depreciation and amortization was $62 million per quarter. only 35% higher in the fourth quarter of $46 million. Net interest expense and associated fees toted $3.8 million in line with prior quarters. We ended the quarter with a cash balance of $70 million, approximately flat with fourth quarter levels, and a total debt of $106 million, net of deferred financing costs and OID. There were no borrowings drawn on the ABL credit facility, and total liquidity, including availability under the credit facility, based on the financial statements as of March 31st, 2021. Capital expenditures were $42 million for the quarter. We reiterate that our capital expenditures for the year are expected to be in the $145 to $175 million range, including maintenance, data synergies, technology investments, and libitization outlined in the last quarter. Importantly, we plan to be free cash flow positive in 2021 while continuing to invest for the future. Integration's proceeding is planned, and we cut over one simply to the Liberty internal systems at the end of February, with no disruption of customer operations. Schlumberger provided transition administration services in the first quarter, which made up the bulk of the $7.6 million transaction services and other cost line. We expect there will be some trailing transition costs of less than $3 million in the second quarter, related to the cutover. The integration was a significant logistical challenge to the Liberty team, both legacy and new, planned for, and executed incredibly well. Bringing together a team of approximately 3,000 dedicated individuals across 15 locations in two countries during a pandemic with remote working requirements, social distancing was something we did not undertake lightly. The women and men of Liberty rose to the challenge, and we are now operating one living, breathing organism with a single goal to build and grow the best-end service company, period. The management team and I are humbled by their hard work innovation, and character, and strive to live up to the example they have set. We will see the fruits of our labour as we exit the challenging market background of the last 12 months. Our increased scale will provide significant financial leverage as the market improves. We should see increase absorption of fixed costs at both base and corporate level. Prior to the COVID downturn, G&A cost for approximately $100 million per year. We have doubled the scale of the company and expect G&A to increase by approximately 15% over pre-pandemic levels. All through net income will be held by the fact that depreciation and amortization only increase by approximately 35%. We will leverage our new broad technology platform to bring to market tools that increase efficiency and reduce cost of operations. Enhanced supply chain is underpinned by the North American wide operations and increased scale will drive economies and deeper partnerships with our vendors to lower cost of operations. We're excited to talk more about these opportunities at our investor day on June 17th and to see the results over the next few years. In a highly cyclical business, we believe it's imperative that long-term returns need to provide shareholders with reward that is commensurate with risk. At Liberty, our approach is simple. Strike the right balance between sustainable growth opportunities, balance sheet strength, and returns to shareholders. Looking forward, we are now navigating a significantly larger business in a rising market with fundamentally stronger market systems. We have a distinct advantage with our best-in-class technology and completion services, driving deeper customer partnerships. We are already seeing pricing increases secured with more customers in the coming quarters, driven by the long-term value added by our industry-leading technical knowledge and services that help customers lower their overall cost of barrel of oil or MCF gas. Our leading-edge equipment technology by achieving greater operational efficiency and lowering emissions output. Lead economics have not improved to a point where it makes sense to accrues yet, but our customers have seen meaningful improvements in their economics. Industry attrition and accelerating customer interest in our leading-edge services will allow us to reach that level earlier than others in our space. Importantly, we have the balance sheet flexibility to act swiftly should conditions improve meaningfully. Liberty is committed to creating long-term stockholder value via our balanced strategy of compounding shareholder value by reinvesting cash flow at high rates of return and returning cash to shareholders as appropriate. While the market remains challenging, this does not change the fundamental principles upon which we manage the company. With that, I will hand the call back to Chris for closing comments before we open for Q&A. Thanks, Michael.