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spk00: 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.
spk07: 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.
spk03: 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.
spk07: Thanks, Michael. We read many reports. Surprise! by the rapidity of the surging demand for oil and natural gas. This should not be a surprise. Energy enables every other life activity. As people rebound from COVID, they brim with desire to better their lives and visit their families and friends. Global oil demand last year dropped 8 to 9 percent. Natural gas demand dropped 2 percent, and electricity demand only 1 percent. All three will almost certainly hit record highs next year or in 2023. Energy matters. I thank the Liberty family and the ecosystem that is our customers and suppliers for their efforts that better human lives. I'll now turn it back to the operator to take your questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. To reply your question, please press star then two. The first question is from Ian McPherson with Piper Sandler. Please go ahead.
spk01: Hey, good morning, Chris and Michael. Morning, Ian. Michael, I wanted to, or really, either of you, talk about the moving dynamics in the Q3. You talked about more dedicated work, fewer fleet moves, and probably just a more concentrated calendar for Q3 than you had in Q2. And then we'll also have the reversal of the adverse Canadian seasonality. And you've spoken repeatedly about just the methodical price increases. I would imagine that all of that combines to a healthy rate of top line improvement that we should expect for Q3. I just wonder if you might bracket that for us.
spk03: We can talk about that. As we move towards getting rid of some of the noise out of the calendars, the white space, the utilization improvement, there's going to be a slow improvement as we go through the year. I think that all of that's going to get rung out of the system by early next year as we sort of integrate all the new customers and the new basins. The Canadian seasonality will reverse. You know, I don't think we're probably expected to come back to the sort of the highest of Q1, exactly in Q3, but we will get some positivity from that. And it's the same, we're getting slow and incremental pricing. Yeah, so I think we'll see a slow increase there. I think the slow and steady rooms of race at the moment is what we're looking at this year as we put in probably the correct platform to really, you know, take advantage of where we're going into the cycle in 22 and 23.
spk01: Yeah, and I'm still not hearing you message anything particular with regard to incremental fleet additions in the back half at this point, correct? Correct.
spk07: Yeah, Ian, yeah. Look, our view is we're very loyal to our customers and the partners we have. Economics are still not there for us to want to, you know, chase revenue or new business for new business' sake. So there's many, there's a pretty strong pull right now for new capacity just because market activity is increasing. And for us, it's always a combination of the pricing, the economics, you know, the strategic relationships. So, yes, just because the industry is growing doesn't necessarily mean that Liberty's fleet counter is going to grow. That's just a bottom-up decision for us.
spk01: Understood. Thanks, Chris. But it sounds like Digifrac is indeed moving forward, so that's more likely a first-half 22 commercialization as you see it today?
spk07: End of the first half. End of the first half. We're out in the field commercially operating.
spk01: Got it. Okay. Okay. Thank you both. Thank you. Thank you.
spk00: The next question is from Neil Mehta with Goldman Sachs. Please go ahead.
spk08: Hey, this is Ati on for Neil. So on the missing workers comment, hey, could you provide some color on that? So are you competing with other industries or are there, Just folks trying to look to rejoin the force or have their found jobs. What's really happening there?
spk07: Yeah, it is. Look, this is an economy-wide problem. Labor-intensive industries right now are stressed. And for oil and gas employment, for the field crews, the most important people in our business, you know, two big competing industries is construction and trucking. Both local trucking, think Amazon surging demand for local drivers, and long-haul trucking, and construction. And both of those industries are booming right now. Booming. So, yes, labor market, particularly in the area of our field operations, very tight right now. Yes, thank you. Again, a great question. Liberty's always had, I think, a great place to work and a great culture. We've never been stressed for competition for labor, anything like we are today. Now, for Liberty, I think we've got a great culture and great people, and we'll get through it. But, yeah, it's just a challenge we haven't faced at this level before.
spk08: Great. Thanks.
spk00: The next question is from Connor Reines with Morgan Stiley. Please go ahead.
spk07: Connor, you might be muted. We can't hear anything.
spk02: Hey, thanks. Good morning. This is Dan Onn from Connor's team. How are you guys? Hey, Dan. Doing well, Dan. Hey, so I just wanted to ask, so as you laid out in the press release that One seems kind of transitioning from the integration phase to the operational phase. I was wondering what kind of some of the near-term opportunities are and if you could kind of give a little bit more color on kind of expand a little bit on the operational and capital efficiency opportunities you were talking about in terms of technology integration and automation.
spk07: You bet. I'll start with the human side, always the most important side. You take two very proud teams with different legacies, different histories, different procedures. So one of the big things we wanted to do when we took over, you know, look, we just took this over January 1, not break what's happening. The customers that are slow-merging customers hired those crew, those humans, and those procedures. And they do some things differently than us. Some of the way we do things is better, and we want to move that improvement over their fleets. Some of the ways they do things are better than the way we do things, and we want to move those procedures over to our fleets. But that, you know, that's human culture. That's thousands of people working across the country. So that's a slow methodical process to lead to improvement and minimize the friction of transition and changing processes. But it's incredibly important. And, again, thrilled by the humans, thrilled by the new learnings. There's a number of things, and maybe I'll mostly point you to our investor day where we went in detail in probably at least a dozen technologies. And a key thing there is you can also meet the people that are leading those teams and are doing that work. But, I mean, you know, there's They're simple, straightforward things like engine idle reduction, which is a fuel-saving technology. But diesel engines, you can't just shut them off and turn them on. So you have to have a smart algorithm about when to shut them off, when to turn them on, and under what environmental conditions. In the cold winter, it's a different algorithm, a different answer than it is in heat or dusty or windy or all different conditions. We've got continued progress. in, you know, major iron or monoboard technology, different ways to do that, flexible hoses. We have a project we talk extensively at Investor Day. We call Project 1440. There's 1,440 minutes in a day, and every minute, why aren't we pumping, and what can we do about that? So, look, it's, again, it's technologies and ideas from both sides. Both legacy sides of the company, now there's just one Liberty. So a number of exciting efforts there, and I'd take up the rest of the time if I went down that road.
spk03: I have one point, Dan, as well. The increasing amount of integrated between wireline and FRAC on site, an increased number of red-on-red wireline units with customers, which I think is actually also great for both sides on the learning, as we say, The key things we're focusing on this year is really the sort of integration between the FRAC and the wireline systems to reduce downtime and increase sort of completion throughput as we go through the year. So it's a very specific project that Ron and his team are working on that, which I think is going to be quite good as well. So that's just one other item that I add to Chris's list.
spk02: Yeah, thank you both. That's great color. Quickly on kind of Digifrack and next-gen equipment, so you guys had laid out two scenarios, kind of a slower and faster transition scenario in the Investor Day presentation. I was just wondering if you could go over what the puts and takes are in terms of what might merit a faster or slower transition. Is it more customer-specific or contract terms-specific, or is the macro backdrop kind of a bigger factor and, you know, maybe that answer is different for a new-build DigiPrac fleet versus, you know, kind of just some upgrades to traditional capacity. But, yeah, any color on the puts and takes in those two scenarios you laid out would be great.
spk07: Yeah, but I think we always avoid giving details. I think you laid out the three factors, you know? Who is the customer? What is the future of that customer? What is the depth of the relationship between liberating that customer What are the economics, both short-term profitability of it and commitment and visibility, the long-term efficient employment where we want to practice as many days as possible and get as much done every day as possible? And those are the two dominant drivers. And then, as you mentioned, the macro is a big part of that, too. We're cautious investors when we get late cycle, and we're more aggressive investors when it's the beginning of the cycle. There's just stronger economics to invest early on in a cycle than there is mid or late cycle. But it's, again, I can't give any other specific color. It's not a simple quantitative formula.
spk03: It's relationship, partnership, and returns on capital deployed. And I'll just give a little color on that. It's a combination of what we're doing at the moment. You know, we're continuing with our upgrade, progression to Tier 4 DGB. This year, the plans with our customers are, and we're sort of discussing the next generation of, you know, particular customers moving them to a fully electric sort of natural gas powered fleet. Where you've got, really the key thing there is where you've got great access to fuel gas and potential fuel gas, which drives some of the best sort of cost savings on that side of their business. So, again, it's a combination, as Chris said, and every customer is a little different driver. But, yeah, it's very, really exciting times at the moment as far as having the, what we think is actually by far and away the best technologies in both the flexible dual fuel and the very much pure new generation designed for electricity pump. So I think that combination goes well together.
spk07: Yeah, the right answer is very different for different customers, different circumstances, different geographic settings. Liberty was, I would say, the first mover in dual fuel product technology from really the start of our company. Early on, our big effort was to convince customers of the benefit of it, and we had a lot of dual fuel technology that wasn't fully utilized as dual fuel. Now the acceptance of that is very strong, and, you know, now the pendulum has swung the other way. But that's what makes the marketplace fun.
spk02: Thank you. Thank you both. I'll turn it back.
spk00: The next question is from George O'Leary with TPH and Company. Please go ahead.
spk05: Morning, guys. Morning, George. First question is kind of an extension of the prior question. How would you describe customer appetite for contracts associated with eFRAC equipment or your DigiFRAC offering? It seems like some of your peers have gotten some contracts signed up at least optically good economics, but just what's the customer appetite for contracting for even Tier 4 DGB or a new build DigiFRAC fleet?
spk07: Yeah, the customer interest in cutting-edge FRAC technology and fleets is very strong, very strong.
spk03: And I think the willingness for them to sign up for contracts is also there. And I think that depends on the length of time we have with the customer and where we see their runway. That's the depth of that relationship.
spk05: Okay, that's helpful. And then how would you describe what drives the customer decision to pursue an EBRAC solution or a Tier 4 DGB solution? What are kind of the puts and takes of the benefits of one versus the other and, you know, maybe some of the headwinds of one technology offering versus the other?
spk07: Yeah, I mean, it's ultimately, I mean, the interest is driven by two things. You know, one is lower emissions, you know, smaller environmental footprints. Certainly our industry has been moving forward in that direction for decades. This is that continued evolution. I should say three things. A second one is lower long-term operating costs. The cost difference between gas and diesel is pretty large right now. So the more natural gas you're using for energy for your fleets versus diesel, the lower your fuel costs are. And the third is a properly designed next-generation fleet that's more automated and can do more with software behind it. can deliver better operational performance as well. So those are the three factors in varying degrees that drive the interest in the technology. And then the trade-off, of course, everything in life has a trade-off. The trade-off is the costs are a little bit higher. They're not wildly higher, but they're a little bit higher. And time commitment and surety of work needs to be higher as well.
spk05: Thanks very much, Chris and Michael. Thanks, George.
spk00: The next question is from Chase Mulhill with Bank of America. Please go ahead.
spk04: Hey, this is Chase, all for Chase. Good morning, everybody. Hey, Chase. Hey, I hope everybody's doing well. I've got a couple of questions. The first one around pricing. you know, in the press release and obviously in the prepared remarks, you talked about, you know, conversations with customers ongoing about, you know, pushing price. You know, I guess number one, are the conversations around net pricing increases or just enough pricing to offset inflation? And then number two is when should we expect, you know, these pricing increases to show up, you know, in Liberty's results? Do you think it's kind of more of a, second half of this year catalyst, or more so kind of first half of next year?
spk07: It's continual. It's continual. And it's both inflation, pass-throughs, and net pricing. Look, the quarter we just finished, and we talked about struggles, mostly with utilization and calendar. I never like to see that happen, but that's just life. We had 5% increase in sequential revenue. and a 40% increase in sequential EBITDA if you use the same labor cost payments. So pricing is coming through, not hugely in Q2, but we had net pricing improvements in Q2. We'll have more in Q3 and more beyond that in Q4 and probably meaningfully more next year. So it's a continual, gradual process. Continual, gradual process. We worked abruptly in adjusting prices with our customers when oil prices just collapsed. And we worked in that partnership mode, and then a partnership mode coming out the other side. But in the shape of this downturn, the down pricing was abrupt, and the rebound is slow and gradual.
spk04: Yep. And that $8 million of personnel cost increase that you noted here, Was that a full quarter impact in 2Q? And so as we think of 3Q, should that step up from $8 million, or is that fully in margins in 2Q? And so don't really step that up into 3Q.
spk03: And, Chase, that was fully in Q2. So, yeah, on that variable compensation, that really isn't going to step up. That will continue through all the quarters going forward. I think you're going to see in general some – low single digits, increase in labor costs, you know, going through the second half of the year as well. I think in general across the board, I think that's a part of the wider economy.
spk04: Got it. And then, you know, last one here, when we think about, you know, fleet reactivations, I mean, obviously it doesn't sound like you've got any of the back half of this year, but as we step into 2022, I would assume that, you know, modest increase in activity that you pointed to would mean you have to reactivate some fleets. So, you know, when we think about this, Can you maybe talk about how much capital or CapEx will be required to reactivate some fleets in 2022? And maybe, I don't know, if you just want to kind of characterize, like, what it would cost to reactivate your next 10 fleets.
spk07: Yeah, I mean, look, the fleet reactivation is not a, you know, yes in January 1 and no before then. It's just, for us, everything's always bottom-up. There's customer dialogue. There's a lot of pull right now. The most important thing about a lot of pull right now is it accelerates the movement of pricing. Still not huge, still going to be phased in, not abrupt, but that's a pull for increase in pricing. And if the pricing is meaningful enough and the customer is the right customer, we'll reactivate. We have capacity. But it's just about the full picture economics for us. And I'll turn it over to Michael to comment a little bit on reactivation costs.
spk03: Really, Chase, the re-activation cost for the next few fleets is going to be minimal. You know, I think there won't be any real cost. They came over from Somerset in a green tank, fully ready to go position. You know, we might incur probably a couple of million dollars as we move them to monoball and some of the next generation iron equipment, but that would be about it.
spk04: Yep, perfect. I'll turn it over. Appreciate the call-out.
spk00: Again, if you have a question, please press 7-1. The next question is from John Daniel with Daniel Energy Partners. Please go ahead.
spk06: Hey, thank you, guys. Just two for me, and the first one's housekeeping, but when you refer to the staff fleets in the low 30s for both Q1, Q2, when during Q2 with the Canadian breakup, were those still considered staff fleets, or did you let the How did you treat the crews in that, for definitional purposes?
spk03: That roll-down is sort of an annual roll-down. So, yeah, we consider them staff fleets. You do actually staff Canadian fleets slightly different on that, where you have an underlying base of full-time employees, and you do have a number of contractors that come in and out. I mean, often from the East Coast, sort of the Brunswick, Nova Scotia area, sort of a combination of folks that help run those crews during the busy periods. Staffing does ramp up a little bit, up and down with those fleets as they come on, but you've got an underlying sort of long-term, 10-year-plus experience base that go there continually.
spk06: But did your staffed Canadian fleets drop in Q2 just given breakup, or would you treat it the same, flat?
spk03: You had a small drop in personnel cost on, but, John, we still consider them an available fleet. Okay, perfect.
spk06: And then the next one is just on Digifrac. You did the successful pad. Does that customer then keep that unit? Do you send it back to Magnolia for touch-up work, or does another customer take it to test it out? How does that play out over the next couple quarters with testings?
spk07: So, you know, that particular pump, yeah, it will go to another customer. You know, it will be doing some demo runs. Of course, we're taking a ton of data on it for, you know, how we can tweak and further improvement.
spk03: But, yeah, it's... And then ultimately it will get rebuilt into a final commercial pump where the majority of it gets reused, but it will get broken down. Think about rebuilding, you know, If you're taking your engine apart and rebuilding it, but you're reusing the majority of it.
spk06: Okay. But if you look at the multiple customers that tested and the success that you had on the first pad, would you envision, Chris, maybe it might be too optimistic, but a bidding war for that first fleet from some of the customers that trial it?
spk07: Well, I think so. Yeah, bidding would be the wrong way to look at it. But, yes, the pull is significant. And for us and for customers, you know, for us it's a big decision about, you know, who's going to get the first few fleets, what are the terms and conditions, and who's the right partners. But, yeah, look, the interest for Digifrack, you know, number of hands in the air will certainly be well above the number of fleets we'll build in the near term. We find the right partners.
spk06: Yeah. Okay. Perfect. Guys, thanks for putting me in.
spk07: John, thanks so much. Appreciate it. Great.
spk06: So do you, John.
spk00: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk07: Thanks for everyone's time today. Interest and liberty. We look forward to talking to you in three months. And let's keep power in the world. Take care, everyone.
spk00: The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.
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