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.

The underinvestment in oil and gas over the last seven years is starting to bite. Most prominently, we see this via the energy crisis in Europe that is also making for significant challenges in Asia. Global LNG prices are so high right now that many fertilizer plants sit idle. This is not good. Fertilizer prices are elevated, and this spring we will see many fields with reduced fertilization, which inevitably leads to reduced crop yields and further pressure on basic foodstuffs later this year. Society cannot thrive without a robust energy supply. Yes, the last decade has seen a disproportionate amount of the shale revolution gains going to energy consumers. We can and should be proud of the benefits global consumers have reached. But our industry, the last 10 years, have brought more pain than gain. But that pendulum is swinging hard now. The industry is poised for years of strong returns, especially for the leaders and those that remain focused on winning in the long term. Operator, we are now ready to take questions.

We'll now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To draw your question, please press star then two. This time, we'll pause momentarily to assemble the roster. First question comes from Iron Jeremy from JPMorgan Chase. Please go ahead.

Yeah, good morning. My first question is I wanted to see if we could walk through how you think the margin progression will be in 2022. If we add back some of the integration expenses that you outlined in the press release, your 4Q EBITDA margins have been in the 6% range. know and not to you know and some of your peers who who provided color on fork here are probably in a low double digit range i know you're still dealing with some integration things but i'm just wondering if you could help us think about um how how you think your ebitda margins could trend this year and maybe give us a little bit of color of the turn you saw in january

Definitely, Arun. I mean, as we move forward, we will see a roll-off of the integration costs through Q1. They'll be sort of relatively low, I think, we expect by the early part of Q2. So we will see margins improve as we step in through Q1, Q2, and there's more price increases as we go into the second half. So, yeah, I expect the margins to get back to sort of what we consider a step-through increase as we go through the

And any more color, Michael, on just thoughts on percentages? Do you expect to be in the double digits as an EBITDA margin this year? Yes. Okay. Okay, fair enough. And just my follow-up, on capital, you guys released an updated view of $300 million to $350 million for capital. I think I heard you as $225 million of growth. and 130 or so are maintenance. Can you provide us a little bit more details on the growth CapEx? I assume that, you know, some of that is the Digifrack fleets, but just give us a little bit of a color on your growth CapEx plans this year.

Correct. The largest, by far the largest side of that is the Digifrack fleets that are under contract for customers. We have some completions in the first half of this year, which is going to be tier four DGB upgrades. numbers of those customers that are upgrading to Tier 4 with those incremental margins and returns that they will provide. The capex itself on the growth side is going to be front-end weighted. If you're looking to model that, I would say it's probably significantly front-end weighted on the year. And we'll adjust as we go through for returns and look at clients and returns for any commitments, any additional commitments to Digifrack that they want to make.

And when we say growth, this is an incremental practice. This is This is really growth and margin. These are incremental upgraded products, things that drive better efficiency, things that command a premium from customers. So growth doesn't mean new practice. It means new technology to build our competitive advantage.

Great. Thanks for clarifying. Appreciate it.

Thank you. Our next question comes from Ian McPherson of Piper Sandler. Please go ahead.

Thanks. Good morning, Chris and Michael. If we're solving for your EBITDA from your free cash flow and CapEx guidance and other pieces on the edges, do you get to that level of EBITDA growth on what kind of activity expansion? We did see that you had some fleet startup cost itemized in Q4, which I know you had a pretty flat fleet cadence throughout most of last year. Is the plan to ramp up into the mid or exit the year in the high 30s of active fleets, or could you talk to that as a component of the outlook?

The Q4 startup cost was actually reactivating one fleet in the satellite camp, so that was that one addition. At the moment, the plan is to still stay relatively modest on fleet additions, with the upgrades and driving, the idea being to drive significant extra margins. Okay.

Okay. So the framework you've guided does not really assume a great degree of net fleet growth activity year over year. Do I hear that correctly?

That is correct. That is not the base framework for the year. Okay.

Okay. That's helpful. Thanks. My other question, we're hearing... from everywhere, that the pricing surge in FRAC has become broader and it's encompassing the full spectrum of assets, even conventional tier two pricing is moving along with everything else. Given that, I assume there's also probably a surge in customer appetite to engage in longer term contract agreements. Can you speak to your appetite on that side of the commercial framework and if you're getting to the point now on leading-edge pricing where you're willing to lock in longer-term agreements apart from what you're doing on Digifrack?

That is correct, and that is true. The customer demand today is strong, and with the attrition of supply over the last two years, even at the start of this year, we have a pretty tight frack market. So for us, contracts matter, but it's far more than just contracts, right? Counterparty matters hugely. Who is your partner? Who are you committing long-term to a partnership with? But your point is absolutely correct. There are people that are keen to make sure their needs are met, keen to have the right partner, and we are entering into some longer-term contracts. And some of those, as you implied as well, are not for next-generation equipment.

Interesting. Thank you, Chris. I'll pass it over.

You bet. Thank you. Thank you.

Thank you.

And our next question comes from Neil Meadow of Goldman Sachs. Please go ahead. Good morning, team, and thanks for the comments. The first question is really on the expense side, and can you help us understand what happened in the quarter and what the $20 million was specifically used for as you talk about integration costs? I'm guessing a lot of that was about securing and compensating labor, and how much of that carries forward versus is one time in nature? Because it's been a couple quarters now where we've seen costs surprise us to the upside.

Yeah, thank you. No problems. Of that $20 million that you're discussing in Q4, actually probably about three-quarters of it was related around equipment. If we step back a little bit, you know, through the beginning of the integration, we moved the OneSim team in, you know, under the full of the umbrella in Q2. And then, you know, that's where we got some integration issues, which is changing the maintenance systems, changing systems you have, everybody works together. And, you know, integration side is a problem. The cost of that generally turns up about six months later than your cost of running equipment, right? So, you know, if you're not changing valves or seats quick enough, and you have some of that care and the historical way that you've done business, So the slug of those costs really started turning up in the kind of September, probably hit its height in September, October, and November timeframe. And as we got through the summer and integration got smoother, we're starting to see those numbers roll off in December and January, right? So I think that slug of equipment costs was a good chunk of that. There is also a significant amount of the cost for the two and two schedule over and above that was running through Q4. Now that is definitely going to continue on into next year. But the difference with that is now that those teams have all moved to two and two and contracts are resetting and the efficiency and the way those teams are working together, they're getting back to more towards traditional limiting efficiency and those customer contracts are resetting, we're going to get a return on that extra personnel investment. The extra personnel investment was a big drag on the second half year cost structure and then we'll provide returns as we go through into this year. So, yeah, I think we'll see the full effect of all those personnel costs in, you know, most of it was in Q4, and now that becomes part of our current run rate. But contracts have reset, efficiency rates have reset to support that. So I think that's where that is. We'll see the, we're starting to see the R&M, the slug of costs that relates to some of the longer, you know, the longer-lived, you know, so the older slum share equipment that was delivered to us. and the way those equipment was run, which was a drag-on cost structure in especially the latter part of the fall and the early part of winter.

It just says we calibrate our models. If we saw $20 million in the fourth quarter, is it fair to assume there's going to be minimal impact here in the first quarter as it relates to integration?

In regards to integration, we're still going to have some costs, as we see some of the ad backs there, we've got some costs of some leased equipment that passed over from Somerset that is no use, but that will still stay on the leased costs. That'll be in the sort of $1 to $3 million and a quarter range. And we'll still see some vestiges of that equipment cost run in Q1 as well. So that's where I sort of think you're going to see an incremental improvement in margins in Q1 and then another step change in Q2.

Thanks, Michael. The follow-up is, and this is one that might be tough to opine on, but obviously, Schlumberger owns a substantial amount of the shares, and we've seen them start to make movements around monetization. You guys have a really strong balance sheet, recognizing there's some calls on free cash flow in the near term. Is there anything you can do to offset potential technical pressure to the extent that they do elect to monetize their positions?

Yeah, Neil, capital allocation is certainly a big issue and a central issue here, but we're always evaluating all the tradeoffs and decisions made there, and certainly, yeah, certainly won't provide any guidance or comment on it, but I certainly know what you're hinting at. And I should comment as well. Look, we feel very comfortable about the decisions we've made in progressing through this integration, and we're quite pleased with where we sit today. Do we wish we had had a better crystal ball and been further ahead in seeing the cost impact of some of those decisions? Yes. Have we gained the confidence in us over the last few months? Yes. Would we do anything different in the long-term decisions? No.

Thanks a lot, Chris. Appreciate it.

Thanks, Neal.

you next question chase mulvihill bank of america please go ahead hey good morning everybody um so hey i guess first question um you know obviously you've got uh sand in the portfolio today um you know we've heard of sand tightness in the fourth quarter and continuing into this year um you know sand prices uh you know have or 40 a ton or so that's kind of what we're hearing um in the permian basin so I guess maybe can you talk to how much sand, you know, either you're selling externally or using internally, and the tightness of sand and how that's impacting your business?

Hey, this is Ron. Yeah, I'll certainly delve into that a little bit. You know, I think from our standpoint – We went into the sand business obviously recognizing there was some real benefit for Liberty in having those couple of mines available to us. And so, yes, some amount of that capacity is dedicated specifically to Liberty fleets and the support of our customers for whom we are working. But some amount of that sand out of those mines still remains sold directly to customers that may not have a Liberty fleet working for them. So we have relationships on both sides of that and expect that to continue going forward. That said, having that capacity available to us has provided us maybe some additional support we might not have had in the past relying solely on third parties. So I think it's provided us a little more flexibility in terms of how we've been able to manage our supply chain through these challenges. We still have a number of great third-party providers, partners that have been partners of ours for a long, long time on the sand supply side, and I don't expect that to change. Those strong relationships are critical to us. Multiple legs on a stool makes for the best stability. So that's the way we continue to look at it.

Okay, perfect. And follow up here, you know, I'm not sure that I'm going to get very far with this, but I'm going to try. You know, but if we look at the fleet level profitability and look at and split the fleets between, you know, one stem and legacy Liberty fleets, you know, I guess first, is there a difference in profitability if you squint and look at the averages between the two? And if there is and one stem profitability is lower, can you tell us kind of, you know, what are the action items that you need to take to improve the one stem profitability?

Yeah, Chase, I mean, I'll take this one on this one. Yeah, but I think if you look back to last year, yes, there was a difference. And really a lot of that was legacy contracts. You've got to remember we closed this deal on December 31st, right? So bid season for this year, you know, Liberty and Schlumberger were bidding against each other. The deal had been announced. And so, you know, the Schlumberger team, you know, was sort of really, you know, had to fill up with one hand tied behind their back, obviously, because sales couldn't talk. We couldn't, you know, we couldn't compare notes, right? And they, you know, obviously the customers knew that they were being subsumed by Liberty. So I think those contracts were the biggest drag, not necessarily the fleets themselves. I think cost of operations, due to the fact that it's a deferred maintenance, even though when we look back in the rearview mirror, it was higher on those legacy blue fleets, fairly significantly. And I think part of that was the green tax status they came with. They came with high hours and high usage numbers, right? So I think between the capitalized maintenance and the cost of operations or maintenance was higher on blue versus red. Last year, I really don't, you know, that's not something that we would expect going forward as we get through the middle part of this year and going forward. That slug of costs that relate to sort of the fact that there was a year and a half that they were for sales and deferred maintenance. And it had to be green tag, but, you know, there's a level of where Liberty had done their historical maintenance and we were having our fleets ready to go versus when you're transferring fleets. into a new owner. So, you know, there's a cost drag as well for last year. So as we go forward, though, no, we don't expect to really see that difference. There will be differences that will be driven by technology.

Got it. Got it. All makes sense. Thanks, Michael. Thanks, Ron. I'll turn it back over.

Thank you. And the next question, Scott Gruber of Citi. Please go ahead.

Yes, good morning. Morning, Scott. It's a question on the pricing traction. You know, we're hearing similar anecdotes of broadening of pricing improvement. The rate of change on the legacy Tier 2 equipment, is that now moving at a similar pace to what we've seen to date on the ESG-friendly kit, or is that still lagging in terms of kind of the rate of change?

No, I think the rate of change is moving at a similar pace. There's still that significant delta across the portfolio, but, yes, all types of fleets have moved up meaningfully.

Gotcha. And then, you know, at the current pricing, you know, what type of payback would you expect on the DGB fleets?

It's difficult. Relative, it's quick. I don't know if we want to give any more color than that, but, you know, we have been about through our whole history win-win deals. We can bring something better to our customers that achieves objectives for them. They save money just from displacing diesel with natural gas as well as getting lower emissions. And we deploy capital and we get strong returns on that deployed capital. And we also bring technology to that. to get higher substitution rates and safer substitution of processing and burning gas on location?

I'll add a little bit to that one. So, you know, we look at the lens of all of our investments. If you look at historical results, right, we've averaged better returns than the average of the S&P 500. And for a cyclical industry, you need to provide those returns to provide the values to shareholders. And every new technology investment, we look through that lens and aim at that same target or better of what we've historically done. So I think that's the key thing there. Whether it's a Tier 4 DGB upgrade, a Digifrag, or an investment in a new version of ion control systems, et cetera, they all go through the same lens of financial return metrics of what they need to provide.

Got it. And then just a quick one, you know, again, if you think about kind of EBITDA to free cash, conversion, anything to note on the working capital line, Michael?

No, you know, I think working capital, as we go through, we're going to see growth. We're going to see growth in the top line and expansion of margins. But obviously, with growth in the top line, you know, that will be a slight hit when, you know, that will be a use of working capital. You know, we'll build receivables. Really, you know, working capital generally moves in conjunction with you know, with our revenue top line growth.

Should we expect kind of static days or improvement in days?

Yeah, you know, I think generally our days have been relatively similar for the last five years. But, you know, on a quarterly basis they can move around depending on where customers are, but I think generally static days. The only other big mover there is probably the accrued capex number. You know, anything we, you know, anything capex-wise, that we receive, like, at the end of a quarter, you know, can move your payables numbers, you know, per GAT. That gets re-classed from CapEx to our payable if you haven't made for the cash. So that's when you're in the balance sheet, that'll be that. So we receive, you know, a large number of, you know, sort of like power generation equipment on, you know, the last week of March, you know, that won't have been paid yet, and that will be sort of a bump up in the DPO day. So that can move, you know, around $30 million to $40 million every quarter, you know, easily. So, you know, other than that, no real change for the actual business. Got it.

Appreciate the call. Thank you.

Thanks, my friend. Thank you. And the next question comes from Walker Zayed, ATB Capital Markets. Please go ahead.

Thank you for taking my question. Mike, in terms of the normalized margins, could you provide some guidance on the timing of that? When do you expect to achieve that? And given all the price increases that you're seeing and the strength in the markets, Do you see that timeline to achieve normalized margins move forward, or is it still kind of at the same level as previous guidance? It's similar to previous guidance.

I think you're going to see the additional costs roll off in the first half of this year and getting back to more normalized margins as we get through the second half of the year. Again, if you think about the integration as sort of an 18-month process, I think that will be run out of the system by 2H.

Okay. And then just a broader macro question, would you guys care to comment on the supply-demand dynamics? How many fleets are currently working in the U.S. and Canada, and what do you see the demand is, and what do you expect the trend to be in the coming quarters in terms of demand?

Sure. Well, Carl, I'll do that. So we have an internal bottom-up frack fleet count. We haven't shared the detailed numbers of it yet, but it's been a great new thing for us to know what's going on across all the basins. And it's a trailing count, a count up to today, and also includes a projection for what customer dialogues are and what plans are. So in round numbers, I'll say frack fleets, active right now is in the low 200s, but meaningfully over 200. At that frack fleet level of activity, that leads to production growth. Production growth in natural gas, production growth in oil, production growth in NGLs, not monstrous, but meaningful. And from the plans we know of today, there's probably another 10%-ish growth in active frack fleets from where we are today to where we'll, you know, late this year. So it's not huge upward pressure in new fleets going to work, but it's meaningful. And when you go into an already relatively tight market, the pricing impact of that will be not insignificant.

But the industry itself is adding some new capacity as well, including yourself. Do you think that that delta incremental demand is being met by the incremental supply that's being added?

So those are probably of similar magnitudes, but the offsetting thing is that no new fleet does not mean the frack fleet count is static. Even putting an optimistic liberty running of an asset, you know, maybe you've got a 10-year asset. So 10% of that capacity is going to disappear every year. So the FRAC fleet additions we have this year, they're probably of order offsetting the shrinkage of the FRAC fleet. Maybe not even offsetting, probably not even offsetting the shrinkage of the FRAC fleet. So you still have a late year where demand is higher than it is today, and capacity is probably flat at best, maybe down a little bit.

Interesting. And just one final thing. Any commentary on the Canadian market?

We love Canada, and Canadians like Ron. But Ron, I don't know if he's closer to zero, but he's more.

Well, Carl, I don't think anything dissimilar to what Chris's comments were from a broad scale standpoint. You know, I think we remain optimistic in the Canadian market as well. I think we're going to see growth in frack fleet demand up there and supportive market conditions. And I think you probably heard that from our peers up there as well. So, yeah, we remain excited about the outlook north of the 49th as well.

Thank you very much. Thanks, guys.

Thanks, McCarran. Thanks. Thank you.

Next question, Tyler Zarker, Tudor Pickering, and Holt. Please go ahead. Hey, Chris and team. Thanks for taking my question. My first one, I just wanted to circle back on the CapEx budget, specifically the gross capital piece. I think you said $225 million. So as of today, you've got two full fleets of Digifrac, I guess, long-term contracts secured already. So clearly that's in the budget. on the growth side for 2022. And just hoping you could give us maybe some building blocks as it relates to building up to that $225 million. It feels to me like, you know, obviously you'll have some Tier 4 DGB, but maybe you have some more Digifrac budgeted in there. So just curious how you're thinking about the building blocks behind that $225 million number.

Yeah, the largest portion of it, the largest, biggest portion is Digifrack. Obviously, the next portion is the Tier 4 upgrades, upgrading two fleets of Tier 2 to Tier 4, and some other work that's being done, moving those to quiet. And webcam technology, the significant chunk of that is we're supporting the growth of the PropX business with our customers there, which is going to be great returns on that business. That's another chunk of what we're doing. There's a little bit there, more of probably $20 to $30 million of short-term margin and answer projects, which are key things. Everything from model lines to fixables to a number of other items that we're doing that have a very quick payback and short-term effects on margins. Those are the big items.

Okay, got it. And I just wanted to follow up on the anecdote you gave about a legacy one-stem contract that, from what I gleaned, didn't have inflationary escalator clauses and resulted in a $5 million negative impact in Q4. So just to clarify, as we progress forward, has that contract been sort of reset here in Q1 such that you are able to pass through some of these input cost items onto the customer? And as you look at your broad portfolio of contracts, whether legacy Liberty or legacy one-stem, do you have any more outstanding contract cases similar to that one that you called out where inflationary items might be an issue for you moving forward?

No, we've got one there that's really going to be a little bit, that one will still be a little bit of a drag in Q1. We'll be fixed after that. And that really is the last one that was left. I think some of those, you know, again, I think some historical contracts, the way they contracted were probably okay in a down market and when things were going down, that really turned around and actually became quite a negative in an inflationary environment. So, yeah, generally, liberty contracts historically have been a little more flexible on the openers, and we sort of work with customers on basically up and down cycles. You know, some of them historically had a couple more that were more fixed in nature, and, you know, that was just something that had to get worked through over time. Understood. Thanks, Michael.

Thank you. Next question will come from Tim Curran of Seaport Research Partners. Please go ahead. Good morning.

Good morning. Ron, on Project 1440, would you please update us on the active fleet's average pumping time utilization? So relative to that project starting point of 60%, where did average pumping time come in for 4Q, and what's your target level for 4Q of this year? Where would you like to exit the year at?

Look, I probably won't get into specifics there, but you did hear in Chris's comments, I think, the latest of the record, so 75 hours of continuous pumping. We continue to make tremendous headway from an efficiency standpoint out in the field and look forward to some additional progress there. We have a few other initiatives underway this year that will further contribute to that if we're successful getting them across the finish line. But we certainly did make progress. Last year, we see some more opportunities this year and know that it remains a focus of ours.

And then given the expected, you know, enduring tightness here in the shale labor market and its associated upward pressure on wages, are you seeing or do you expect any acceleration of spread automation initiatives, be it internally at Liberty or perhaps elsewhere within industry or outside? you know, at a smart robotic startup that you're watching?

Yeah, a little bit specific there, but absolutely. Automation, you know, for efficiency of labor use, for safety, for speed of operations is a focus at Liberty.

The only thing I would add to that maybe is it's certainly one of the things we're most excited about as we move towards Digitrack. Those opportunities are not insignificant in the diesel and dual-fuel world, but the opportunities that come with moving to an electric fleet are another step forward yet. So quite excited about the opportunity to get Digitrack out in the field and move forward with a level of automation that we could attain in that environment.

Got it. More of a EFRAC transition technology development. Okay.

And then I'll just close it. But greatest upside in the EFRAC thing. But it's across the portfolio.

Got it. And then just two questions on the Permian. First, are you seeing any rivals starting to pull out or shrink the size of their footprint there, perhaps by closing a district yard or two? You know, we understand that Pioneer may soon be in the market looking to replace some of its spreads on contract. Do you expect to have a shot at those?

I mean, those are detailed commercial things. So, yeah, I'm not going to comment on those. But, yeah.

All right.

Well, I had some...

I had to try. Thanks for taking my question.

Thank you. Our next question will come from John Daniels of Daniel Energy Partners. Please go ahead.

Gentlemen, thanks for squeezing me in. Chris, earlier in your commentary, you talked about many minds being game-changing. Can you just elaborate on how many you see and how you see that market developing?

There's a few operating right now that are customers of ours, and there's certainly more opportunities for that. So, you know, it's not an explosion. It's a combination of meeting mine technology and the transport and wetland technology. So it's an evolution that we think has a good runway to bring differential costs and ESG advantages to customers willing to make that commitment and geographically positioned.

Do you see yourself developing your own mini-mines or just let the others do that?

We have the technology to move Wexan and partnerships where we're going to enable the growth of mini-mines is maybe the best way to say that.

Okay. In response to Ian's questions on you cited the longer-term contracts, is that just on Digifrack, or is that on traditional equipment?

It's on both.

And are any of the terms greater than one year on the traditional, can you say? Yes. Okay. Thank you. And then the last one is you called out, and congratulations on this, the record safety performance, which has occurred given, you know, in light of a sharp ramp in activity and a significant and also given that you did a major integration. So it's pretty impressive. I'm just curious if you would attribute that to any one specific initiative. What allowed you to do that in light of the two things I just referenced?

I don't know that there's one specific initiative we would call out, John. You know, I think that's a credit to two very strong teams of operational personnel that came together with a commitment to, number one, provide great service to our customers out there in the field, and number two, to do that as safely as possible. We probably did benefit from the ability to return to some initiatives we did have in place pre-COVID. You know, we had an initiative to put a safety trailer out there in the field to get out face-to-face with our our teams on a regular basis and highlight uh opportunities for focus we had we had of course had to put that on uh hiatus going through uh 2020 but uh initiatives like that some of those things were able to come back last year and so i i i think those things always help but i wouldn't call out any one thing that got us to that spot okay fair enough thank you for letting me ask a few questions thanks john

Thank you. Next question will be from Keith Maggie, RBC Capital Markets. Please go ahead.

Hi, good morning, and thanks for taking my questions. So you certainly have gone through a pretty big year of transformative M&A and bolted on the PropEx deal as well, and talked about some of your internal initiatives with the Logistics Control Center and that kind of stuff. Just curious if there's any other areas along the supply chain where you feel that you need to focus on as well, whether it be organic or inorganic.

Yeah, I think probably our biggest focus this year will still be in the pump vertical, so specifically to our ST9 world. That is a has been a challenging part of the supply chain certainly over the last year. And so it will be an area of focus going forward. It's obviously a huge part of our R&M spend, specifically the pump maintenance side of things, valve seats, fluid ends, power ends. And so that will be a big area of focus for us this year.

Got it. Thanks, Ron. And thank you for the CAPEX guidance. And apologies if I missed it, but for the growth CAPEX, How many Digifrag fleets does that include, and then how many will you have running at the end of the year, assuming you put those into the field?

We've got two under contract, so the two that are currently committed, and then we're in discussions with customers about others.

Okay. Thanks very much.

Thank you.

Thank you. Next question will be being cut. Morgan Stanley, please go ahead.

Hey, thanks. Good morning. So just to follow up on pricing, and I wanted to ask if you guys are kind of seeing a range of customer receptivity to pricing increases or, you know, if customers have kind of largely been amenable to pricing, So pushing to you guys pushing that pricing, I guess, you know, have you guys had to kind of reposition your customer base, your fleets among customers at all to kind of drive the net pricing improvements that you're talking about? Thanks.

Look, you know, amenables, I don't know if that's the right word. Most everything we do with customers is quite synergistic. It's about getting operations more efficient, operations safe, operations planned, practice design, strategic decisions about how to execute programs the best. You know, those are, most of our dialogues are partnership dialogues. But, you know, crisis, crisis is one direction is good for one side and one direction is good for the other side. But I think people do get, if you want a long-term partnership, you know, in the COVID downturn, we did what it took to try and keep our customers going for work plans. We've worked with them in that respect. But, you know, now things have shifted the other way. But, yes, customers want the right partners. Of course, everyone wants the right partner at the most economical price possible. So for us, it's, you know, there's efficiency drivers that we can do that help both of us, but price is a necessary part of returning our industry to health, and I think everyone gets that. So, yes, it's an ongoing dialogue about the magnitude of the price and whether it's all in big one love sum or whether it's a more gradual step up. And, you know, we've got a bit of both.

Yeah, it makes sense. Thanks. And then a question on, I guess, kind of following up on the next generation fleet transition scenarios that you guys had laid out at your investor day last year. I'm wondering if you can kind of help us think about Now that we're through 2021 and you've kind of thought through your 2022 capital framework, how would you characterize where you're at in kind of the two, you know, the higher case faster next gen transition scenario versus the, you know, the slower transition scenarios that you laid out? Is it somewhere in between or is it kind of more tracking closer to one of those two scenarios? Thanks.

To me, I would say somewhere in between. It's a very active dialogue with a number of parties. You know, I think it's not if we're going to do something with them, it's how and when. But, yeah, it's got to make sense. It's got to make sense for both parties. You know, for us, not just for returns, balance sheet, appropriate funding of it. For customers, it's got to make sense, too. And we're not in a rush. You know, we're rolling out a new technology that, frankly, we think is going to be a pretty big deal. So it's a balance of a lot of factors. But I would say things are going excellent.

Great. Thanks for the call. I'll turn it back.

Thanks, Jim. Thanks. Thank you. And, again, if you have a question, please press star then 1. Next question comes from Mark Bonacci of Cohen. Please go ahead.

Hey, thanks. Good morning, guys. I wanted to ask about other cash items just building off of the CapEx for this year. So if we're $300 to $350, you mentioned the working cap earlier. I don't know if I assume $50 million there, maybe $15 million of interest. Based on the range here, it would appear you need to have kind of like high 300s to over 400 million of EBITDA just to kind of get to the free cash positive. Is there anything I'm missing in that bridge? Any extra cash coming in or other items that we should be considering?

I think you've really covered the majority of that. You know, and I think the – you know, we think of working capital will build – will either become a – will become a build or, you know, or a – either a use or a provider of cash. So when you think about the free cash flow numbers, really thinking about operational returns, right? You know, sort of even less capex, you know, and covering interest. So you really don't, you know, when I speak about that, I don't really think about, I don't really characterize the working capital bill in there, but that's close.

Okay. And from what it sounds like, just based on the trajectory into the first quarter and first half here with the integration and stuff, you'd be below consensus as it stands right now in the first and the second quarter and probably above consensus just to get to those types of numbers we were talking about in the second half for the year. It's a pretty big ramp. I don't know if you disagree with that kind of trajectory. But what Investors may be skeptical of that type of ramp. I'm curious what you can tell them to get them more confident in the ability to get there, and will we see any evidence of that, or are we just going to have to wait until second half when you deliver on the results?

Yeah, Mark, I really don't have a comment on consensus, right? I don't have a copy of your models and sort of how you guys are running, where those are. So, yeah, I mean, I think we've sort of laid out what our expectations for the year are, and I think in general we've had a long-term history of delivering. And I think that's, as you say, I think we're going to see a ramp-up as we roll off of integration costs. We'll see a bit in the second half when we go to the first half, and that's really the guidance that we gave there.

Okay, super. Just one last one, if I could. It looks like the implied EBITDA per fleet is kind of improving from a mid-single-digit number annualized to mid-double digits, mid-teens or something by the second half, so call it $10 million of improvement throughout the year. I think you mentioned earlier there's a combination of pricing and throughput in there. Care to just decompose that a little bit more? Is it kind of half pricing, half throughput? How much of that pricing is sort of already set in contracts versus how much you kind of need to get from further improvement in the market?

Mark, I really can't comment on your math, but I'm not sure I agree with it. Even after sleep numbers, I'm not sure we're getting those. I'm not sure we're doing those, so we won't comment on that. But as I say, as we go through the year, it's going to be an increase in activity, is going to come and probably the biggest fall through is going to be the change in price when you look year over year change.

Great. Thanks so much, Michael. Turn it back.

Thanks.

Thank you. This concludes our question and answer session. I'll turn the call back over to Mr. Griswright for closing remarks. Please go ahead.

Thanks, everyone, for joining today, and appreciate your interest. Understand the critical comments. We feel good about where we are. We appreciate your partnership. Everyone have a great day.

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