Liberty Energy Inc.

Good morning and welcome to the Liberty Oilfield Services Second Quarter 2021 Earnings Conference Call. All participants will be in 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 this event is being recorded. Some of our comments today may include forward-looking statements reflecting the company's views about future prospects, revenues, expenses, or profits. These methods involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's earnings release and other public filing. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA, and pre-tax return on capital employed, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of pre-tax return on capital employed, as discussed 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.

Good morning, everyone. And thank you for joining us to discuss our second quarter 2021 operational and financial results. We have a little problem with the audio today, so we apologize if the quality is not up to the usual standard. Liberty delivered another quarter of solid improvement as we start to exit the COVID downturn. The second quarter marks the anniversary of the extraordinary events of a year ago. where business activity plunged on the back of a collapse in oil demand. I want to first thank the Liberty family for navigating this downturn with the utmost tenacity, dedication, and commitment throughout these trying times. We are now starting to see the strength of our business one year out from the depths of the cycle with the transformative actions we've taken over the past year, including the one-STEM acquisition. Second quarter revenue was $581 million, representing a 5% sequential increase, or approximately a 9% increase when excluding seasonality in Canada, where basin activity was impacted by spring breakup. With the acquisition of OneSim, this is the first year in our history we've had geographic exposure in Canada, where the spring breakup seasonality will now impact our sequential revenue comparison. Adjusted EBITDA in the second quarter was $37 million, compared to $32 million in the first quarter. Results included the restoration of field personnel variable compensation one quarter ahead of our plan, resulting in $8 million increase to personnel costs. Excluding this cost, adjusted EBITDA would have been $45 million. This equates to a 41% sequential increase in profitability adjusted for the variable compensation restoration on a 5% gain in revenue. While the results improved at higher activity levels with staff leads still in the low 30s, we were also navigating the macroeconomic supply and demand shocks triggered by the pandemic and related reopenings that are creating supply chain constraints and labor shortage. A swift economic recovery is leading to strong demand for workers across many industries with not enough folks to fill open positions. There are several million workers still out of the labor force that were in the labor force pre-COVID. The effect of these missing workers is causing disruption in many labor-intensive sectors of our economy. Supply chains in many industries were also disrupted or overwhelmed by a lack of components or shortages in raw materials. As customers, both legacy and new, ran during the quarter, effective completion crew scheduling was challenging, with producers and service companies dealing with supply chain interruptions, staffing, and transportation shortages. Liberty was not immune from staffing issues and the industry supply chain challenges. For example, trucking shortages. Trucking is strained by the dual impact of high demand for licensed drivers across several industries, coupled with scheduling changes due to completion delays from some customers. Within our customer base, We are also seeing operators transitioning from completing ducts or drilled but uncompleted wells to new well construction, leading to its own challenges that gave rise to difficulties in calendar coordination and above-normal inter-basin fleet movements. All in, we are not yet back to Liberty's usual executional efficiency in the field, but is improving every month. This opportunity motivates and excites us. The transitory impacts of the pandemic-driven supply demand shocks on labor and supply chain challenges will pass. The robust demand in global energy demand and supportive commodity price environments is increasing the demand for FRAC services, and we believe we are in the early innings of an upcycle. The Liberty team worked hard to welcome a hugely expanded customer portfolio, but we still have work optimizing our calendar and streamlining service delivery. As we look to Q3, we anticipate benefits from continued progress in these areas, and as a larger percent of our work migrates to fully dedicated fleets and fewer inter-basin fleet movements. Some customer relationships are expanding, as we can now work with key customers across North America, given our expanded geographic reach and a premier technology service offering. As I mentioned earlier, we restored our variable compensation programs one quarter ahead of pace. The reopening of the economy is happening faster than folks are returning to the labor force. Ultimately, wages are rising, and we opted to reinstate our variable compensation plan one quarter ahead of schedule to remain competitive in the labor market. Importantly, we also recognize that our employees made significant sacrifices throughout the last year. Their dedication and commitment to the Liberty family during these trying times was foundational to maintaining our partnerships with customers and suppliers, and also helping other folks navigate a challenging time. Looking ahead, the improving macroeconomic backdrop should support these compensation increases. The industry has seen market improvement over the past year since the depths of the downturn. Global economic growth continues strong. The forward outlook is also strong as countries more fully reopen, partially offset by the impact of global supply chain constraints and virus variant concerns. Commodity markets remain constructive as sustained economic expansion drives rising energy demand, while years of relative underinvestment in the energy sector can strain supply outside of OPEC+. In fact, the rapid rebound in oil demand has already passed pre-pandemic highs in major Asian countries. This is evidenced by the recent significant draws in global oil inventories. Looking forward, the recent announcement by OPEC Plus for a gradual reinstatement of prior oil supply through the rest of 2021 and into 2022 is expected to be more than offset by projected increases in global oil demand. This should support a continued increase in demand for North American completion services. Expiration of production capital spending likely increases in 2022 as operators work towards attaining modest oil growth next year. They will need to address both the decline in the inventory of ducts and the impact of decline curves on their production base. A modest increase in U.S. oil and gas production requires an increase in frac activity from today's levels. The combined impact of improved D&P economics with greater potential for free cash flow generation, increased completion service demand, and tightness in next-generation frack equipment is expected to underpin a more disciplined frack market and continued modest rises in service prices. The economic rebound across North America, coupled with supply constraints in the labor force and some supply chains, have led to a rise in inflation and wage growth. It is important that FRAC service pricing continues to rebound from the extreme pandemic lows. The backdrop for pricing discussions with our customers has strengthened throughout the year. Just as our team sacrificed over the past year to support our customers, the partnership works both ways, and we are committed to remaining disciplined in the current environment. We continue to have positive dialogues with our customers to both pass through incremental inflationary costs in addition to net pricing increases. This process is gradual, and we expect gradual improvements to continue phasing in over the next 12 to 18 months. It is noteworthy that service prices tend to lag broader inflationary increases across the value chain, but the increases are necessary to facilitate the next phase of growth and technology investment. Technology, backed by a distinguished team of engineers and innovators, has been amongst the key differentiators that has allowed us to grow into the second largest North American frack company from our founding only a decade ago. During the second quarter, we held our first investor day, where we spent a day exploring the technology that makes Liberty special. from our in-depth downhole technologies to how we create operational efficiencies and the evolution towards next-generation equipment. For those of you who have not seen this, I would encourage you to spend some time viewing the webcast available on our website and get to know our team, our technology, and our unique culture that drives innovation and collaboration. We also announced a successful field test of our Digifrac electric rack pump during the quarter. The results were incredible. Final field testing was completed on a three-well pad with 24 operations in the Delaware Basin. Digifrac represented around 10 percent of the pumping capacity. The work of building the industry's first purpose-built, fully integrated electric rack pump truly shines. as the system became the preferred capacity for rate changes and adjustments made in real time. Digifrac allows quick, easy, precise adjustments of pumping rate using our micro-control system. What does this mean? It means that it allowed for on-demand precision rate control that was simply not possible before. Digifrac quickly became the go-to pump from precise rate control on location. This is the value of owning and developing the technology to have the motors, the gears, the drive train fully integrated into the pump. With the electric backside from the one-stem acquisition, we will provide a fully electrified solution for our customers, agnostic of the power source, whether it's the grid or Liberty's gas reciprocating engines or both. Importantly, Digifrac will also drive ESG objectives for our customers as they continue to look for ways to minimize their footprint, offering at least 20% less emissions relative to the next best technology on the market. Together, having high power density, precise control, and a noteworthy reduction in emissions makes Digifrac the best in the market, and our customers are taking notice. We've already begun the commercialization process for Digifract in 2022 with deep collaboration and conversations with customers for fleet rollout. In early June, we released our inaugural ESG report entitled, Bettering Human Lives. Liberty's leadership in ESG is well known as it has been part of our DNA since day one. However, we wanted to broaden the conversation around ESG by going far beyond the narrow focus of our company and asking only how we can reduce negative impacts. Of course, maximizing positive impacts is a critical part of the balance for an evaluated process. Our report provides an overview of where the world gets energy and how that has changed over time. We also cover the huge problem of energy poverty and the cost to human well-being of rising energy prices or falling energy reliability. We directly discussed the role of fossil fuels in modern society. And how are we, as a company, advancing human liberty? I'm humbled by the response this report has garnered. The conversation spurred by our report has been enriching and uplifting. We're proud of the efforts of our industry and our company in being a part of the solution towards reaching billions of underserved people with lower-cost energy. By looking at the data, we know progress in the human condition has been enabled by the surge in plentiful, affordable energy, saving lives, and it is important to recognize the unintended consequences of climate change mitigation with a realistic lens. We welcome the market's focus on ESG as it aligns with the principles we've long held at Liberty. But it is critical to bring the same analysis supported by data to ESG decisions, just as we do in other areas. Our team's focus on digital technology has been critical to the immense improvements in shale well productivity and efficiency over the last decade. And we continue to strive to advance our customers' ESG goals as well. We take these responsibilities very seriously and will continue to drive the conversation going forward. We are excited by the opportunity ahead of us. I'm so proud of the Liberty team coming together through a year of incredible change. We created opportunity in the face of adversity, and we believe we are now going through an inflection point. Our focus is on operational execution through the rippling effects of the pandemic and harvesting gains as we embrace the early innings of the cyclical recovery. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.

Good morning, everybody. We are pleased with the performance of our team in the second quarter, delivering solid results while continuing to integrate the one-step business and managing a ramp in customer activity. This marks the first quarter we've operated entirely under the Liberty umbrella after a cutover from Schlumberger to Liberty internal systems at the end of February. It's incredible to see what a difference a year has made. Just one year ago, the second quarter, we were sitting at only $88 million of revenue on the back of a dramatic drop worldwide of all demand. Widespread shut-ins from shale producers and a near halt in North American trackings. Revenue in the second quarter of 2021 is over six times what it was a year ago. I'm so proud of the Liberty team that has navigated the roller coaster of the last 12 months with dedication and focus as we have ramped up our frack activity and made such great progress in our one-stim acquisition integration. Now let's take a deeper look at the results of the quarter. In the second quarter of 2021, revenue increased 5%, to $581 million from $552 million in the first quarter, reflecting the combination of increased activity across all U.S. basements, more than offsetting Canadian spring break-up seasonality impacts. Excluding Canadian seasonality, revenues saw an approximate 9% sequential increase on relatively flat starts in Cleveland County. As our team worked diligently to bring new basin activity online with operators, the underlying business improvement was encouraging and supports a picture of continued improvement, despite utilization challenges arising from supply chain challenges and the labor shortages, as Chris described. Importantly, our teams are reinvigorated by the activity increase, and we expect utilization to show continual improvement in the third quarter as we streamline customer scheduling and actively manage through labor challenges. and net loss after tax was $52 million. Net loss included a valuation allowance adjustment on certain deferred tax assets and related TRA impacts, negatively impacting results by a net of $21 million. These accounting adjustments were necessary in applying GATT standards and were primarily driven by COVID-19-related losses. The results also included transaction and other costs of $3 million $0.7 million increase in bad debt reserve. Fully diluted net loss per share was $0.29 in the second quarter compared to $0.21 in the first quarter. The quarter was negatively affected by approximately $0.12 per share by the deferred tax asset valuation allowance adjustments. Second quarter adjusted EBITDA increased to $32 million in the first quarter. The improvement of adjusted EBITDA primarily reflects an increase in business activity in the second quarter. The second quarter of adjusted EBITDA would have been 45 million, but we elected to restore variable compensation one quarter ahead of projected pace due to the impact of tight labour markets on our industry. Labour supply is very tight, and we're competing for labour with a variety of other sectors as economic activity increases. Federal administration totaled $29 million and included $5.9 million in stock-based compensation and $0.7 million from accounts receivable amounts. Excluding these items, underlying G&A expense only increased modestly by $1.3 million for the first quarter, despite IT and other costs related to the onboarding of Legacy One student employees. Net interest expense and associated fees totaled $3.8 million for the second quarter, we also recorded an adjustment of $3.3 million related to the tax receivable gain that was related to the deferred tax valuation I referred to earlier. Income tax expense totalled $16 million. The gain, reflecting the impact of the valuation adjustment, resulted in a $24 million tax expense, more than offsetting what would have been a projected $8 million tax benefit related to operational and secondary results. We ended the quarter with a cash balance of $31 million, reflecting a decrease from first quarter levels as working capital increased. Total debt was $106 million net with deferred financing costs. There were no borrowings drawn on the ABL credit facility and total liquidity available under the credit facility was $277 million at the end of the quarter. In June, Riverstone successfully monetised the final part of a temporary position in Liberty, through a secondary stock offering, culminating in a 10-year partnership with our firm. This transaction effectively completes Liberty's evolution to a fully publicly traded company with only 1% of shares not traded in public markets. We are grateful for the commitment of our longest 10-year shareholder over the years and are excited to enter the next chapter of Liberty. Capital expenditures were $38 million for the quarter, and we're focused on being disciplined timing of investment during the recovery, balancing second quarter EBITDA and capital expenditures at nearly equivalent levels. We continue our disciplined approach for investing into the upside, with capital expenditures targeted for technology investment, maintenance capex, and growth capex towards next generation. As we discussed at our investor day, we have a strong foundation to build upon to successfully execute in the next cycle. Our philosophy remains the same. to grow and support our business and our people with a disciplined approach to investment while maintaining balance sheet strength and to drive higher long-term returns for shareholders over cycles. As we look forward, we are excited by the core strengths of our business, our geographic diversity and integrated service offerings. Supported by our best-in-class electric pump Digifrack, impressive fleet of next-generation dual-fuel equipment, unmatched subsurface technologies that drive customer engagement and the unwavering focus on automation and operational efficiency through Project 1440. This unique combination of assets will drive financial results in the coming cycle. With that, I will now turn the call back to Chris before we open the Q&A.