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.

I just want to extend a broad and heartfelt thanks to everyone in the Liberty family that's worked so hard through these tough times and through this tremendous transformation of our company to all our customers and partners as well. And with that, we'll open it up for questions.

We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please take off your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Blake Gendron of Wolf Research.

Blake, please proceed. Yeah, thanks. Good morning, guys. And Chris, always appreciate your perspective on the macro and the energy outlook at the top of the call here. I wanted to circle back on the path to normalized margins. Seems like things are still pretty competitive pricing-wise, perhaps, you know, an upside biased activity with privates potentially adding in the back half here. That said, it seems like we really need to see either number one, accelerated attrition, or number two, bifurcation of next-gen frack equipment in terms of pricing. Curious, Morris, on the latter, how you think this manifests in terms of your relationship with customers. Is there any sort of pricing mechanism by which you can take down, you know, some economic rent created by GHG emission reduction?

Yeah, look, you're right in that the market today is tough. Look, we've come off an incredibly low downturn. But every quarter, things, supply and demand are sequentially getting better. And yes, people want next-generation fracking equipment. They want to lower, of course, it's not just greenhouse gas emissions, but it's NOx and carbon monoxide and other pollutants that are reduced with modern fleets. So there's a hunger for that. There's also an understanding that our whole industry, the service industry, doesn't have the good returns today that EMPs have recently come back to. So yeah, it's a dialogue. Everybody buying wants a low price. Everybody selling wants a high price. But absolutely, next generation fleets and higher performance and higher opportunities to bring technology to continue to drive performance better, that commands a price premium. And so it takes time. I think of the last downturn, and things were just brutal at the start of the summer in 2016. And two years later, the market was dramatically different, dramatically. Now, that one was driven more by a surging increase in demand. This rebound, we've seen a surge of increase in demand, probably more modest going forward. But the rate of investment in new equipment over the last few years has just been very low. In 2017 and 2018, people were building frack fleets, you know, in a feverish pace. Nothing like that has happened in the last two-plus years. So I think it's mostly supply attrition and a desire for better equipment that continue to pull the economic subtraction in the right direction.

Totally fair. I wanted to switch to wireline bundling. We've seen some companies try to do this in the past with fairly mixed success at various points in the cycle. Wondering what Liberty is seeing in terms of early MPT reductions and the like. I know still very early days and also in this current activity environment, what the receptivity of value added wireline technology is looking like. Is there anything specifically, you know, you'd call out on that front?

Yeah, look, obviously, an integration between frac and wireline as a new liberty. We're early on in that. But yeah, there are opportunities to make those two teams and systems work together better to drive efficiency and lower downtime. Absolutely. You know, clearly, Schlumberger has a number of those paired fleets working together. For us, you know, a bundling is sort of like a price discount. For us, it isn't about that. It's about how do we deliver the safest, fastest, best, most efficient completion service. And that really is a dance on the dance floor between craft and wireline. So we're proud of the teams we have on both sides and very excited about the opportunities about how to make those into one team, not two different teams.

Thanks a lot for the time.

Thank you. Thanks, Mike. Our next question comes from Scott Gruber of Citigroup. Scott, please proceed.

Yes, good morning. Scott. Great to hear that normalized margins are possible next year, and certainly we saw In the quick snapback last cycle, like you commented on, Chris, where would you peg the normalized margins at, given the new combined fleet and the different portfolio composition that you're going to have this next cycle?

Well, Scott, peg sounds way too specific for us, and particularly talking about the future. But look, you know, clearly our cost basis across our fleet, our average fleet is lower now. What we ultimately focus, what we ultimately care about is return on capital employed or measured another way, cash return on cash invested. You know, in our 10-year history, not exactly in stellar years in the industry, we've been above the S&P 500 in that metric, and that's our goal is to continue to deploy cash in a disciplined fashion, and generate a solid return on that. And so that's the ultimate yardstick for us. You know, from an EBITDA per fleet thing, I mean, yeah, that's sort of a wide band, and really depends on a number of factors. But, you know, something in the mid-teens there is probably a broad brush estimate of that. But, again, it's about developing strong returns on capital and a strong balance sheet so we're resilient for whatever comes.

Gotcha, gotcha. And just, you know, thinking through the pathway to get to something, you know, in the mid-teens ballpark, you know, is it primarily operationally driven through your, you know, fixed cost absorption and efficiency improvement initiatives? How much pricing, you know, is required to get there if you can kind of split apart the pricing driver from the other drivers?

That would be great. It's a mix of the two. It is a mix of the two. And I don't think we'll go any more specific than that. But you need both. You know, clearly we have greater efficiencies now. Clearly we have efforts underway to continue to drive down our costs and deliver the service. But we just saw a significant, a large pricing compression to work with customers as oil prices compressed. And it was across the whole sector. But yes, we'll need to see some pricing come back. It is. I think our customers are aware of that. Good news for customers and for the industry is pricing doesn't need to come back even near where it was to bring returns back. That's just a continual progress of efficiency across our industry. The cost to drill a well and deliver a barrel of oil has just continued to go down on a secular basis. Cyclically, is that going to bounce up a little bit in the next 12 to 24 months? Sure. But relatively modest amount. Relatively modest amount.

Gotcha. Would you be willing to offer if it's more operationally driven or more pricing driven to get there?

Michael's swinging a baseball bat at me. So, you know, it's hard to make predictions about the future. It's those two things working in concert. Yeah. I will tell.

Understood. Understood. Appreciate the color.

Thanks, guys. Our next question comes from George O'Leary of TPH and Company. George, please proceed.

Morning, Chris. Morning, guys. Morning, George. You all talked a good bit about attrition and kind of marketed supply not being what it may seem on the surface. I'm curious if you could peel back the onion a little bit there and frame what you guys view as the actual marketed supply versus what our perception of that marketed supply might be.

Yeah, look, and again, it's hard to put specific numbers on that because, you know, look, our guess, and I think it's in consensus, we've probably got a border 200 fax lease running today. Is there a lot of parked equipment? Absolutely. I think very little, maybe almost none of that parked equipment is actually staffed. A lot of it, you know, customers get choice when the market loosens, and people want to keep getting better. So there's just a stronger demand for the next generation fleet. There's a fair amount of legacy equipment around, but it's not being reinvested in. You know, it's starting to perform more poorly. So you see a fleet that used to have X number of pumps, and now they're bringing out one and a quarter of that number of pumps just because of maintenance problems and pumps going down and repairs. So it's not like there's an aircraft carrier full of shiny fleets just ready to drive off somebody's yard to go to work. But I think it's too sticky and don't have good enough data quantify that. But the rate of equipment being retired and worn out is dramatically larger than the rate of new equipment being built.

That's very helpful, Chris. And then on the, just with respect to the EFRAC offering, it does seem like there's strong demand for more ESG-ish type offerings that truly add efficiencies in the field out there in the market and you can just see that in utilization numbers of the different technology types. Just at a high level, what do you think differentiates or will differentiate y'all's EFRAC offering from the competitors? Is it largely that ST9 pump or are there other kind of bells and whistles and not looking for specific color? I know you don't want to give away any kind of competitive edge, but just any high level color on what you think makes your offering unique versus the competition.

Yeah, George, this is Ron. I'll maybe give you just a couple of points that we would maybe highlight in that regard. You certainly hit on one of them. We think from the SC9 pump standpoint, we have taken a very, very novel approach to the design there and ultimately believe that that asset is going to be a better performing asset out in the field relative to other approaches that have been taken around squeezing more horsepower through the same size of pump. So we're pretty excited about the innovations there. But I think the other side that we looked at very, very carefully was the power generation side. There had been, we'll call it one very typical approach to powering an electric frack fleet out in the field. And our look at that suggested that that was not the optimal way to be running a frack fleet, an electric frack fleet specifically. That there was a better solution to deliver not only improved fuel savings and better economics on location, but very specifically, a reduced emissions footprint. And so we'll be taking a very different approach to powering our frac leak. We've talked quite publicly about that already, that we'll be using natural gas resip engines rather than a gas turbine on location. And I think we're convinced that delivers better capital efficiency, better redundancy on location, better efficiency as a result of that, and maybe most importantly for some of our customers, a significantly improved footprint relative to the existing solutions.

Awesome. Thanks for the call, Ron.

Our next question comes from Stephen Gingara of Stifel. Please proceed.

Thanks. Good morning, everybody. Two things. First, you mentioned your fleet count in the low 30s deployed. Are you willing to give us a sense for how many fleets you have which are sort of readily deployed? available to go back to work, and how many would require, you know, material capex to reenter the active fleet?

Yeah, no, as we pointed out, I think when we rolled out the one deal, part of the deal was we had 20 green tags, as described by Sondra, blue fleets ready to go, so there's no capital required for those. Plus, we were running more or less 23, 24 fleets of legacy reents. So, yeah, those two years, basically, our line doesn't need really any particular campaigns.

Okay, great. Thanks. And then, second, as you've sort of gone through the process and integrated some of the Schlumberger assets, the one-stem assets, has anything surprised you about sort of the relative profitability or the relative efficiencies? And have you seen anything which sort of increased your confidence level or changed your views on on integration savings and how they unfold over the next year or two? And how so you libertize their assets?

No, I think, you know, we've been very, very nicely surprised by the efficiency. You know, I think that's one of the things when you get under the hood, you know, so just, you know, incredible amount of pride out there, you know, in those teams, and they're incredibly good. I think they love the fact of sort of working with our team and sort of being let free and being given sort of that responsibility in the best that they can be. So I'd say we are more optimistic about that potential. And when we get to the investor day on June 17th, we'll have some sort of more looks at the integration. But I really think Ron and the technology team have done a great job of really looking at what's going to be the next generation of integrated FRAC. As you know, we make investments for the long term. So I think it's going to be really a coming together of best practices, and I think it's going to be exciting.

Okay, great. Thank you.

Our next question comes from Chris Foy of Wells Fargo. Chris, please proceed.

Thanks. Good morning. I was hoping to touch a little bit more on pricing. I know you don't want to get too detailed, but just compared to, I guess, in February when you described the fact that you had some Pricing increases baked into contracts already that would be showing up in the second and third quarter. Just curious if leading edge has improved at all compared to that, and then whether you expect any pricing uplift from including Digifrack or FraxSense, if they're going to be additive, or how to think about what that might bring as you get into the second half of this year or 2022.

Chris, I think Chris' point, as Chris Wright pointed out, You know, we continue those discussions with customers, and they'll probably have more price increases baked in as we go through the year and into next year. Of course, Digifrag won't affect margins until we come into next year, and we'll have an increasing amount of Tier 4 DGB fleets, which are also sort of in great demand by customers as we get through the back end of this year. So that will help.

Okay, thanks. That's helpful. And then... Maybe on the CAPEX front, so maintenance, or sorry, not maintenance, but CAPEX guidance 145 to 175, how much, how do we evaluate the upside risk to that in the case that, let's say, you know, EMPs get even more hungry for ESG quality fleets and you have to potentially upgrade to, you know, 304 DGB or, you know, I guess FRAC, sorry, Digifrac is not in the near future, but how much upside risk would there be if that becomes even more important to your customers?

It could be upside risk and upside return, so obviously we won't be making those investments without a very, very strong path to those sorts of returns, and when that comes about, we'll let you all know. But I think that's the key. They will be matched, so that'll be a better pricing environment, better returns, and that's what drives our investments. They're looking towards that path of long-term returns.

Okay, thank you. Our next question comes from Ian McPherson with Simmons. Please proceed.

Thanks. Good morning, Chris, Michael. Thank you for all the color. When we look out, you know, make the walk from where you are in Q1 towards normalized margins by next year, starting in Q2, you will have the abatement of the weather impact. I assume that the $25 million of revenue impact that you called out in Q1 would have extremely high EBITDA decrementals associated with it. So there would be a substantial building block there in addition to the reduced transaction costs and presumably the iterative pricing increases coming in. So are all of those factors correct as we start the march from Q1 towards normalized margins next year?

So one clarification, I think the additional revenue that will roll into Q2 will just have normal increased decrementals. So there's nothing specific about that revenue that will drive, you know, you've still got to have personnel that's limited, you've got to have sand, you've got to have chemicals, and it's going to drive repair and maintenance costs. So there's nothing particularly different other than sort of revenue growth and activity growth for those decrementals. But other than that, yes, you're right. And I think, as Chris said, this is a move towards normalised margins at some point in 2022, right? Yeah, so... making sure that you're not expecting it to come out of the gate on the 1st of January.

Understood. And we're certainly not there, and we're looking and hoping for some upside to substantially below your prior cycle margins next year in our model. Okay. I wanted to get your thoughts. Chris, with regard to competitive structure going forward, you've obviously been a leading protagonist on consolidation, and there is more that could be done. We think there might be, but do you expect more transformational consolidation of some of your, smaller than you, but some of the larger independent pressure pumpers to help improve the market structure over the next several quarters?

Yeah, I don't have any particular insight into that. There's certainly always dialogue. You know, it certainly makes sense. So, you know, I think there's certainly a real possibility that that stuff happens. But, you know, ultimately it comes down to human beings that make decisions. And so, yeah, you know, we hope so, but not hard to predict.

Okay, I understand. Well, looking forward to the event in mid-June. Thanks. Thank you. We look forward to seeing you then.

Next question comes from Mike Tabala of Bank of America. Please proceed.

Hey, good morning, everyone. So you all gave some color on 2Q activity. If we sort of look out a little bit in the back half of the year, think about where just broadly you think the industry goes from here through year end, You know, is there upside? And then, you know, is anybody having conversations around kind of 4Q, budget exhaustion? You know, is it something we need to start thinking about yet or, you know, still too early to tell?

I would say too early to tell. You know, certainly for the publics, you know, they lay out a budget plan and they're going to stick to them. And so, you know, as it typically happened, if efficiency of operations run faster and better than you budgeted for, the possibility of budget exhaustion in fourth quarter is still there, absolutely. Now, some of them were still ramping up, so it's not different to another year. You know, I don't think the Q1 expenditures were, you know, ahead of 25%, maybe a little below. But that's a very real possibility. Publics are not going to overspend their budget, so if that work gets done before December 31, and in a number of cases that's certainly going to be the case, I think there's some roll down there. And then the potential offset is what are oil prices then, or what are oil prices in the fall when privates are making decisions about their magnitude of continuing or picking up activity. But yeah, I wish I had a better answer.

Got it. Yeah, that's fine. I mean, if we were to just kind of step back and think higher level about Liberty strategy, I think you mentioned you all had completed 20% of the shale wells in the U.S. And, you know, we're kind of around this 200 frack fleet number that is, you know, kind of commonly thrown out there as what's maintenance for the industry. You know, when you're thinking about planning for market share with an industry fleet level on either side of what you think is normal? What is normal for the industry? And then how do you approach market share when the industry is running either hotter or colder than you think it's going to be?

Market share for us is always an output, not an input. Um, you know, the decision to work a fleet is, is always bottom up. It's always correct. We don't say we're gonna put five more fleets to work here or whatever. You know, we, we, we just, we don't even talk like that. So for us, it's always about who are our existing partners. How is that relationship? You know, we, we, we have pretty low customer turnover, so we tend to keep working with our existing partners and try to deepen those relationships. So they went from both sides. Then we have dialogues with lots of other partners that we could add a new partner or we could grow market share with existing partners if they're bigger players and want to have a larger percent of their work done by Liberty. So it's really more bottom-up dialogues than top-down dialogues. We've said in the past, certainly at the bottom of, when the market is really hot, returns are awesome and all that, that's certainly the worst possible time to chase after, oh, we can put three more fleets out because the evos are awesome today when the market's really hot. The one thing that's telling you is it's not going to be hot before too long. So in that sort of thinking longer term, we've got to – yeah, but again, it's all bottom-up. I mean, look, our history, our 10-year history has been sort of a slow – growth in market share as the right customers and partnerships have pulled us through, but it's all bottom-up.

Okay. Thanks, Rich.

Thank you. Thank you.

Our next question comes from Waikor Saeed of Alta Corp Capital.

Please proceed. Thank you for taking my question, and congrats on a great quarter, and thank you, Chris, for your comments on the macro. Always appreciate it. I may have missed some of your earlier comments. I was a little late in joining. But on Canada, how many active fleets did you have in the first quarter? And how would seasonality impact second quarter results, the seasonality in Canada?

We're going to give details about where athletes are running. In general, we're running low 30s fleets across the whole complex in North America. Obviously, there's break-up in Canada that will reduce Canada down. We said that we'd have a relatively flat fleet count in Q2, so we've got a little bit of other work elsewhere. So it's going to be relatively flat across the complex. Canada itself will have the normal seasonality. There'll be break-up, and then it'll pick up again in the summer, and then it'll drop. Generally, Canada has a tendency to drop again in the fourth quarter. That's sort of the general rotation there.

We're thrilled to be in Canada, Waqar, so thanks for asking that. Yeah, it's a tremendous American partner in energy and broader picture, so we're very happy to be in Canada and look forward to building and bettering that business going forward.

Oh, absolutely. Yeah, Canada is an attractive market now. Now, in terms of profitability in Canada in the first quarter, how would that compare to the average for what you reported in the first quarter?

You know, obviously we don't break out geographies, you know, but again, one can think, you know, we have a very, very disciplined approach to how we run our business, you know, and again, across all of our basins, as we've said many times before, really we look at them as a whole and, you know, sort of really every decision of putting a fleet to work and having people working, you know, is a decision that's very unique. and so therefore they have to be effective. It's got to be that look of long-term returns, and we think Canada is a very appealing long-term market for us.

Absolutely. And then just a final question. What's your current public versus private mix in terms of number of fleets allocated?

As we've said before, generally, with the one-term acquisitions we talked about last quarter, really our public-private mix is fairly close to about where the industry is, right? I think what you've seen is you've seen a bit of a pickup in the privates. So the beginning part of this year, so yeah, we may be a little heavier to the public, very slightly, because that's where we were going into the beginning of this year. But generally, we are now at the size where we really mirror the markets. If you look at the general market data, that is actually very analogous to us.

Okay, great. Thank you very much. Appreciate the color.

Thanks for coming. Thanks for having me.

Next question comes from John Daniel with Daniel Energy. Please proceed. Hey, thanks, guys.

Congrats on the good interest on Digifract. Just have a question on that. Really wanting to understand the rollout process because, you know, I would assume you guys would seek some contractual support before any type of large-scale build-out. but I'd also assume an EMP company needs to test the system before they would want to sign a contract, so it kind of creates a little bit of a chicken and the egg, if you will. I'm just curious how you think you're going to handle that.

John, it's a balance between those two things. In our dialogue with customers, one of the things certainly is we don't want our customers to take technology risk. They've done that, and in many cases it's not worked out well. It's up to Liberty to deliver to work to the performance specs we believe it will. So we will get contractual commitments, but if our fleet doesn't work, that's not on them. That's on us.

Okay. So I assume it would be performance-based contracts then, so they don't have an out? It would give you the ability to build? Always. Always. Okay.

All FRAC contracts are that way. Well, almost all. There's been some that were done not that way, and I think that's a mistake from both parties.

Okay. And then one comment I think you made, Chris, was the 20% lower emissions on Digifact. Is that relative to the, like, a legacy turbine solution, or is that relative to even, like, the Tier 4 DGB solution? Any color?

That's relative to the data we have for all existing factories.

Got it. Okay, fair enough. And then I guess a last one for me. You mentioned low 30s fleet count in Q1 and Q2. Just knowing there is some lead time to reactivate fleets, are you making any plans now to sort of reactivate fleets to take you into the mid-30s and the back half of the year? I understand if you don't want to say, but just curious.

Yeah, John, I mean, of course, we're in all sorts of dialogues with existing partners, potential new partners. So, you know, no, there's no macro plan of what our fleet level is going to be. Right. But, again, you know, relationships drive it all, drive it all. For sure, as you well know, for sure, we will be disciplined. If there's strong demand pull from customers and partners, that could creep up. It's not going to scream up. It could stay flat. So, yeah. We truly, we don't know, but we, you know, we continue the same partnership mentality we've always had.

Fair enough. Thank you for putting in the Q&A.

Thanks, John. We look forward to seeing you out on the road. Appreciate it.

Yes, sir.

Our next question comes from Chris Boyd of Wells Fargo. Chris, please proceed.

Just one more follow-up here. I'm curious if you could maybe just give some color around the contribution from the sand mines. Obviously, you know, a different setup now compared to previously. Just curious if you can break out, you know, if that was a meaningful contribution or profitability or a percentage of revenues, any color around that so you can think about the contribution going forward.

Chris, we think of it as one integrated, you know, delivery to our customers. So, you know, we really aren't breaking those down. At the moment, I think that is probably the key thing. It's not sizable enough to be broken out as a segment. So I think you've got to look at the complex as a whole.

Okay.

Thank you. Our last question comes from Frank Reppenhagens of Concentric Equity Partners. Please proceed.

Hey, guys. Great job improving the business in a very tough market. You know, as we remember the Sangel acquisition transforming the company in 2016, I know that we're going to look back on one stem as just a transformational event for both this business as well as for the entire market. And as demand comes back, we're going to capture more than our fair share of quality customers. A question for Chris or Ron on that is fleet deployment increases. Can you guys comment a little bit on the labor market? I know a lot of CEOs that we talk to are reporting a hard time recruiting and retaining field workers and enhanced unemployment benefits, creating a lot of friction, bringing people back into the workforce. How does Liberty see scaling up the workforce over the course of 2021?

Yeah, great, great comment, Frank. And that is indeed the case. It's the case for Liberty. It's the case for the industry. And in fact, as you've seen, it's the case for the broader economy. I've been in a lot of dialogues with business leaders outside of oil and gas on this issue. But look, we have right now about 6 million people out of the labor force that were in the labor force, but they don't currently intend to return to the labor force right now. And then you have fiscal and monetary stimulus that, of course, particularly the fiscal part, that's going to drive growth in economic activity. So we have sort of an accelerator on supply and an incentive and self-reporting of a reduction. I mean, in demand for labor, we have an acceleration and we have some constraints on the supply of labor that hopefully end in September, but we'll see what Washington does on the unemployment benefits. So, yes, for hotels or restaurants or whatever, that problem is dramatically worse But yes, it is an issue, it's an issue we are facing as well. Fortunately, we have a good sell and a good culture, but hiring today is much harder than you would think from the outside, and you're well aware of that.

I just want to put a little color on there, Frank. I mean, I think that's one of the things that's underappreciated as a limiter on supply of Frank's services in general. That's one thing that will help a little bit on the pricing side. It is actually very, very difficult to get people into the marketplace, right? Really a key amount of the people that we, the labor force we pull from, you know, can really also work in two industries that are booming at the moment. One of them is construction, and the other one is trucking with Amazon, et cetera, right? So when people, people always think about our industry and think only in the fact that it's sort of like the empire of heavy equipment, the real, real limiter in supply of freight services is the ability to get good, qualified people. So that will help as sort of like circling back from our other questions a little bit, that is actually one of the things that's driving the pricing dynamic of customers.

Thanks for your comments, guys. Look forward to seeing you in June.

Appreciate the thoughtful comments, Frank.

This concludes the question and answer session at this time. I'd like to turn the call back to Chris Wright for any closing remarks.

We thank everyone for their time and interest in Liberty, and we'll get back to work, the whole Liberty family. Thanks for joining us today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.