Liberty Energy Inc.

Good morning and welcome to Liberty Oil Field Service's fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal conference specialists by pressing the SCAR key followed by zero. After today's presentation or be an opportunity to ask questions, please note that this event is being recorded. Some of our comments today may include forward-looking statements reflecting the company's views 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 uncertainties that are detailed in the company's earning lease and other public filings. Our comments today also include non-GAAP financial and operational measures. These not GAAP measures include EBITDA, adjusted EBITDA, and pre-tax return on capital employed and 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, the calculation of pre-tax return on capital employed as the cost on this call are presented 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.

Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2021 operational and financial results. In 2021, we focused on the integration of OneSIM and its customers into Liberties. In the recent downturn, we acquired OneStand to strengthen our platform and technology portfolio, which positions us well for today's rising tide and all future cycles. In our 11-year history, we have seen two deep downturns, 2015 through 2016, and the recent COVID collapse. And we have executed transformative transactions during both of them. In 2016, at the bottom of the downturn, We invested aggressively, both in acquiring San Diego's assets and in upgrading them to Liberty quality. We also launched our Breakthrough Quiet Fleet technology in 2016. These investments set the stage for the outsized returns that we reached in the years ahead. Investment decisions at Liberty are always made with a long-term time horizon. Business integrations are always challenging. and this time was exacerbated by COVID-impacted supply chain and difficult labor challenges. However, the one STEM prize was large, and our team worked in overdrive to bring nearly 2,000 new members into Liberty while continuing to deliver superior service performance to all of our customers, both legacy and new. Our top priorities in 2021 were our customers, our team members, and the safety of everyone that touches Liberty. 2021 was a record year for Liberty. Work performed, whether measured by revenues, frac stages, pounds of sand pumped, et cetera. We also set many operational records during 2021. Record sand pumped in a day by a single fleet was raised several times, including again in January of 2022. Zero OSHA recordable incidents in our wireline business and 75 hours of continuous pumping on a plug-in per pad. All of this was achieved in challenging times and executed with our best safety performance ever. We are only going to do this integration once, and we are going to do it right to the best of our ability. We were simply not willing to sacrifice customer service, employee satisfaction, and safety. each of which is critical to long-term financial success for the sake of short-term financial results. Integration-related costs are still with us today, impacting our bottom-line results. However, January was a very significant turning point in moving these cost pressures behind us. We very much like where we sit today. 2021 revenue grew to $2.5 billion, and EBITDA was 121 million, both a more than doubling of our 2020 results, but still representative of early cycle conditions. Fourth quarter revenue was 684 million, a 5% sequential increase over third quarter on robust activity, offsetting weather and holiday seasonality. Fourth quarter adjusted EBITDA was 21 million, pushed down by over 20 million of continued integration costs that will soon be behind us. Michael will provide more color on the magnitude and nature of these integration costs. The transformative work our team accomplished in 2021 positions us well as our industry begins an upcycle driven by rapidly tightening markets for oil and gas. Seven years of subdued global investment in upstream oil and gas production is now colliding with record global demand for natural gas and natural gas liquids, and likely record global demand for oil sometime later this year. Oil and gas are central to the global economy, which is well along the way of recovering from the global pandemic. A severe energy crisis that has racked Europe over the last several months demonstrates the danger of underinvestment in our industry. E&P customers are responding to the oil and gas price cycles. The publics are maintaining tight discipline and will show only very modest production growth this year. The privates, on the other hand, are reacting more robustly to strong commodity prices. Within the frack market, two years of supply attrition and cannibalization, plus limitations from labor shortages and a secular shift towards next-generation frack fleet technologies has led to tightness in the frac space. Liberty has focused on finding the right long-term partnerships for the coming years, and we have been very disciplined in holding our frac fleet count steady until returns are strong. We are, however, investing to build truly differential competitive advantages in frac fleet technology, digital systems, and logistics optimization, all to enable Liberty to continue our historical track record of well above S&P 500 average returns on capital invested. Competitive advantage is the name of that game. We expect that our investments today will lead to strong returns in the coming years. Let me elaborate a little more about the areas where we are investing today. Practically, technology we talk about quite regularly, so I will be brief on that one. Liberty's focus is to bring the two best technologies available, Tier 4 DGB with automated controls to maximize gas substitution for diesel, and Liberty's DigiPrac that will set a new industry bar, combining the lowest emissions in the marketplace, together with superior pump performance, reliability, and cost efficiency. The modularity of our high thermal efficiency natural gas resip power production systems allows a phased deployment of Digifrac fleets as they are 100% compatible with our existing fleets. Digifrac pumps and gas resips will start deploying into our BRAC fleets early in Q2. We plan to have at least two complete Digifrac fleets operational this year. We display Digifrac at the SBE Fract Conference in Houston last week, and industry interest remains exceptionally high. Repairs and maintenance for frac fleets are both a very large cost driver and absolutely critical to delivering safe, high-efficiency frac services. Liberty has been a leader in this area. However, integrating new team members from one STEM who were using different maintenance systems and procedures led to significant inefficiencies during integration. The downsides of this are readily apparent in our compressed margins in the second half of 2021, but this is also an area for huge improvement going forward. Bringing together legacy Liberty technologies with OneSense plus the combined team's ongoing development efforts will dramatically improve our performance. The early stages of that are already visible in January's results. Success in R&M is controlled by teamwork across operators, supervisors, and mechanics, and also by processes, technology, and parts. We have enhanced our continuous equipment monitoring program with additional sensors to help reduce premature failures and guide optimal preventative maintenance. We are just introducing a virtual equipment digital twin model for each frac pump that helps drive minimum cost of ownership for each and every pump. Increased data and reporting across all Liberty crews is empowering everyone to take ownership of their work. We've already seen meaningful improvements. Although we are not back to our historical rates yet, Of course, our goal is to perform across the whole company at levels well above our historical level. We are also launching an in-house logistics management center that is built around large-scale upgrades to our current profit planning execution model. The recent sand bottleneck challenges in the Permian Basin, both of sand availability and last mile transportation, highlight the importance of this initiative. We've already begun the integration of our PropX, PropConnect software into our Oracle Transportation Management System to further modernize last-mile delivery, enable our driver quick pay initiative, and bring significant improvement to route optimization. Like repairs and maintenance, sand and logistics represent both a large spend and critical link in the chain of operational efficiency and safety. Liberty's expanded team and technologies with the addition of PropX should drive large improvements in efficiency, safety, and cost. Our forecasting prowess and quick pay initiatives should help attract the best trucking partners and long-term loyalty. Liberty's legacy is developing and deploying technologies that help maximize returns for our customers and hence mutually beneficial long-term partnerships. Wet sand handling is at the forefront of disruptive technology in the processing and delivery of sand, and we're excited about the work we are doing with PropEx. This ESG-friendly solution removes the need to dry sand at the mine, thereby removing the highest emitting step in the processing of sand. It further enables smaller-scale, localized wet sand mines to carry a smaller footprint. by moving mining operations closer to the wellhead. PropEx already has multiple active contracts in 2022 to support mini-mines that lower the total delivery cost of sand and meaningfully reduce environmental impact by eliminating the drying process and perhaps biggest of all, reducing trucking needs. We estimate that a 10-mile distance from a local mine to the pad could reduce trucking requirements by over 70% when compared to an 80-mile haul. This is game-changing in key basins. Let me touch on our outlook. We expect high single-digit revenue growth sequentially in the first quarter and significant growth in our margins as integration costs start to fade away. We are benefiting from increased pricing in 2022, driven by a pass-through of inflationary costs and higher net service pricing. We expect continued rises in frac pricing in subsequent quarters. We also expect margin growth as our new strategic efforts begin to pay dividends in lowering our cost of operations and increasing efficiency. We are excited about the opportunity ahead. We have a macro tailwind together with high-quality customers eager to improve their operations and ESG profiles. Every day we ask ourselves, how can we deliver a value proposition that is compelling for our shareholders and customers through commodity cycles? With that, I'll turn the call over to Michael to discuss our financial results in more detail.

Good morning. As we discuss our results in detail and look to the future, I find that it is always good to view them through the lens of how we manage liquidity to focus on shareholder returns through the cycles. At the bottom of the cycle, we look for the opportunity to invest to create maximum benefit from a longer runway to capture returns. Liberty, at its core, is an organic growth company, but we are always looking at potential opportunistic acquisitions, especially with a technology benefit that increases our competitive advantage. In the COVID downturn, we found two unique opportunities, the acquisitions of OneStim and PropX. OneStim fell to becoming the second largest completion service provider with a scale and breadth of technology that positioned us to navigate through the next decade. In our first year with OneStim, revenue increased 156% to $2.5 billion from $966 million in 2020. We added a new basin and complementary sand and wireline businesses. We expanded on Liberty's already strong customer relationships and added historical OneStim customers to the family, This expansion and integration was executed during a pandemic and unprecedented supply chain disruptions. There was a cost to build this platform that we would use to expand long-term shareholder returns that had a negative effect on the 2021 financial results. Net loss for the year totaled $187 million, or $1.03 per fully delisted share. Full-year adjusted EBITDA was $121 million, compared to adjusted EBITDA of $58 million. 2020. The cost of integration of one-stem businesses that we acquired at the start of the year was amplified by supply chain and labour constraints and the impact of legacy one-stem fixed price customer contracts that were detrimental to margins in inflationary environments. We estimate higher equipment costs, legacy costs from third-party management of sand mines and carrying costs of idle equipment negatively impact full-year results by 150 to 200 basis points. We also moved all of our legacy once-incruised to a two-in-two schedule, an initiative that truly supports the Liberty culture of employee engagement and advances our premium service offering over the long term. That was completed at a time when we were managing through a weak price environment, unfavorable legacy contracts, and integration inefficiencies. In the fourth quarter of 2021, Revenue was $684 million, a 5% increase from $654 million in the third quarter. What stands out here is that we grew our top line despite seasonal weather and holiday impacts. Almost every basin saw an uptick in business, as our crews achieved a high level of efficiency, offsetting seasonal headwinds. I'm impressed with our team's ability to grow the business in this environment, and our crews for keeping our operations efficient while handling the inspiration. Net loss after tax was $57 million in the fourth quarter, compared to a $39 million loss in the third quarter. Fully diluted net loss per share was $0.31 in the fourth quarter, compared to a $0.22 loss in the third quarter. Results included $7.6 million of non-recurring expenses, including transactions, severance and other costs of $3 million, lead to start-up lay-down costs of $2.8 million, and a loss of General administrative expenses totaled $35 million, including non-cash stock-based compensation of $3.6 million. Net interest and other associated fees totaled $4.1 million. Fourth quarter adjusted EBITDA was $20.6 million compared to $32 million in the third quarter, reflecting the full weight of integration, supply chain constraints, cost inflation, and moving our operations to a two-in-two schedule. In the fourth quarter, we estimate integration costs, including elevated parts replacements, primarily on legacy 1-SIM equipment, reduce margins by over 200 basis points in the quarter. The good news is that we instituted measures in October that Chris described earlier that already showed improvement in December and continued further into January. We also moved our final proves to a 2-in-2 schedule, which similarly impacted EBITDA by adding an additional shift to legacy 1-SIM frank and wireline These two dynamics work hand-in-hand. By fostering a better work-life balance, this drives the increased level of engagement and pride that translates into greater efficiency, better care for our customers and our equipment. The return to our historical superior efficiency and utilisation levels in 2022 will support the returns on the investment in moving the crews to a limited schedule. Over the past few months, we have also put our contracts under the lens to assess opportunities for improvements for us and our customers We inherited some contracts with largely fixed pricing, which in a rising inflationary environment represented a drag on margins, and in some cases were generating losses on our bottom line as we progressed. For instance, one customer accounted for a $5 million EBITDA drag in the fourth quarter due to a legacy one-stim contract that did not reset the underlying inflation or the additional cost of higher-pressure designs on our equipment maintenance. However, it's been a great opportunity for both us and our customers to have a collaborative, engaged dialogue on how we can all do things better. We put our sales, engineering, operations, supply chain and finance teams together to work alongside our customers, finding ways to recalibrate operations that will ultimately lead to a win-win for both parties. We ended the year with a cash balance of $20 million and net debt of $102 million. At year end, we had $18 million of borrowings on the APL credit for Sylvester. Total liquidity, including availability of the credit facility, was $269 million. Net capital expenditures totaled $174 million on a gap basis in 2021, as we partially offset our capital investment in next-generation equipment for the upcoming cycle with the planned sale of assets. We were able to capture $25 million in synergies from asset sales, primarily related to monetising of legacy one-stem assets that were not core to our operations. Gross capital expenditures were $199 million, consisting of $140 million of maintenance capex, approximately $20 million of privatisation, and approximately $40 million of Tier 4 DGB upgrades, Digifrack, and other investments in technology. But the majority of the heavy lifting of integration behind us were excited by the opportunity ahead. For the first quarter of 2022, we're expecting strong sequential improvement on higher service prices and activity, and lower integration-related costs. Rack service prices have been increasing meaningfully, and with much of the change you hear evident in January. Our customers are understanding that the fast-paced and stationary environment, coupled with the roll-off of pandemic discounts we receive from our vendors, require higher service prices to meet those costs, and more importantly, to restore reasonable returns in the service sector. Pricing is still below pre-pandemic levels, but moving in the right direction. We also anticipate better utilisation in Q1, following the four The combination of maintenance and logistics actions we've taken will provide tailwind to the months ahead. We see 2022 as an ideal opportunity to reinvest in the early part of the cycle to maximise free cash flow over the site. In 2022, capital expenditures are targeted to be in the range of $300 to $350 million, with the optionality to adjust as the year unfolds. At the midpoint of this range, it includes maintenance capital of approximately $130 million for frack, wire and sand, Next-generation technology investment, including Digifrag with power generation systems, customer demand-driven Tier 4 DGB upgrades, wet sand handling technology, and other margin-generating investments is projected to be approximately $225 million. This is offset by approximately $30 million in synergies, rationalising our equipment and footprint with legacy one-step assets. We have significant flexibility in adjusting our capital spending targets depending on customer demand. Our returns expectations, and we plan to be free cash flow positive in 2022 while investing in our long-term competitive advantage. Looking forward, we're excited for the coming years as we move forward into a robust cycle. We enter 2022 with a sustained focus on technology innovation and investing to build a truly differentiated business with a competitively advantaged portfolio. This is foundational to our commitment to a value proposition designed to reward shareholders and stakeholders alike through the cycles. I will hand the call back to Chris for closing remarks before we take questions.