Liberty Energy Inc.

Good morning and welcome to the Liberty Oil Field Services first quarter 2022 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 view about future prospects, revenues, expenses, or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures including EBITDA, adjusted EBITDA, and pre-tax return on capital employed are not a substitute for 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 the website. I would now like to turn the conference over to Liberty CEO, Chris Wright. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss Liberty's first quarter 2022 operational and financial results. The world is seeing in searing fashion how critical it is to have a secure, reliable supply of affordable energy. Today's energy crisis did not begin with the Russian invasion of Ukraine. It began last year when global supplies of LNG simply could not keep up with demand. The costs of this shortage go far beyond the soaring prices of global LNG, which have spent extended periods above $200 per barrel on an energy equivalent basis. The world has seen rolling blackouts, countless factories shut down, millions struggling to pay their heating and utility bills, and perhaps worse of all, we are likely at the leading edge of a global food crisis due in significant part to curtailed nitrogen fertilizer production that is critically dependent on natural gas. Without natural gas synthesized nitrogen fertilizer, global food production would drop in half. Today's crisis is not due to any shortage of energy. It is due to a shortage of energy infrastructure, which in turn is due to a shortage of reality in mainstream energy dialogue and policy. We desperately need a more thoughtful, sober dialogue on energy, or the human toll will continue to mount. Enough on this critical topic. Turning to my favorite energy company, Liberty entered 2022 with the right people, asset base, and strategy to execute in a tightening frack market, and we are pleased to deliver strong first quarter results. This quarter demonstrated the benefits of our vertical integration strategy as we successfully navigated an operationally challenging environment. Last year, we expanded our services to include wireline, and we became a major sand producer, obtaining two large mines in the Permian Basin. We enhanced our technological advantages through the acquisition of PropEx, with wet sand handling and industry leading last mile profit delivery solutions. Together with their ongoing development effort of DigiFrac electric fleets and many others, these advancements provide our customers with differential frac services. The integration of our acquisitions in 2021 came at a short term financial cost, but these actions are already paying significant dividends in 2022. Revenue for the quarter of $793 million increased 16% sequentially, and adjusted EBITDA expanded to $92 million as we executed on our strategy and benefited from increased pricing, both the pass-through of inflationary costs and higher net service pricing. We also saw margin growth from our new strategic efforts that both lowered our cost of operations and increased our efficiency. Liberty also leveraged our vertically integrated portfolio to better mitigate the early quarter impacts of sand and logistics challenges, notably in the Permian Basin. We are encouraged by the progress we've made in the first quarter. The transformative work our team accomplished with the integration of OneSTEM and PropEx in 2021 is now behind us and paying dividends via an advantage platform with the scale and vertical integration to better our frac services. I want to thank our entire team for going above and beyond. As the market tightened last fall, our customers recognized that the unfolding recovery would increase the importance of having the highest quality partners to navigate turbulent times and still deliver operational excellence. Today's operational challenges are topped by labor shortages, sand supply tightness, and logistics bottlenecks. Liberty customers are seeing differential execution in this challenging environment, in part due to vertical integration from our one-STEM and PropX acquisitions. Sand supply tightness in southern oil and gas basins, including the Permian, Eagle Ford, and Haynesville, impacted industry-wide operations. While many EMPs directly source sand, we are seeing a reversal of that trend, as no EMP can hope to match the scale and sophistication of Liberty's supply chain. The magnitude of our purchasing power and the strength of our relationships with suppliers provides better surety of supply to support continuous operations. Sand supply challenges were exacerbated by truck driver shortages. Liberty's logistics digitization efforts, coupled with a wide network of multiple origins and destinations, allowed us to efficiently employ the limited number of truck drivers with dynamic route optimization. We have now deployed PropX's PropConnect software across all our West Texas fleets. giving us increased visibility and data analytics. We were able to act on real-time profit consumption monitoring and inventory tracking, all ultimately supporting the distribution of sand to our fleets and reducing non-productive time. Logistics optimization and centralization is critical in today's environment where truck driver shortages are pervasive across the country. We still have significant room for improvement here, but are pleased with our progress so far. The differential Liberty fleet efficiency requires innovation and continuous improvement. We continue to see the intensity of frack work climbing, which is driving up the demands on our equipment, particularly the high pressure pumps. Maximizing uptime and driving down operating costs are top priorities. Our STEM Commander pump control platform is a key component in achieving this goal. The STEM Commander platform allows for full automation of the pumping equipment, enabling intelligent rate and pressure control across our entire fleet. With a digital model of every engine transmission pump configuration in the Liberty world, the software will ensure the optimal execution of any job design on any fleet. including our soon-to-be-deployed Digifrac pumps. Improved safety, reduced fuel consumption and emissions, improved component life, and reduced personnel requirements are benefits we are starting to see from the deployment. As an example, Liberty saw a 20 to 30% improvement in power and life after deployment in one of our districts where high-pressure work is prevalent. The STEM Commander software has recently been rolled out on over half our fleet so far. The remainder will be completed over the coming quarters. Restrained global investment in oil and gas over the last seven years leaves us supply short just as worldwide demand for energy is growing and expected to surpass pre-pandemic levels in 2022. Relatively low and declining oil and gas inventories have led to persistent upward pressure on commodity prices, even prior to the Russian invasion of Ukraine. Although Russian export volumes of oil and gas have been only modestly impacted so far, uncertainty regarding potential future impacts of sanctions and fire aversion to Russian hydrocarbon presents significant risk to future supply and demand balances. And the modest below stated plan increases in OPEC plus supply and the release of global emergency oil reserves are simply not enough to supply a rebounding world economy. North American oil and gas are critical in the coming years. Tight oil and natural gas markets, coupled with geopolitical tensions in many key oil and gas producing regions, have all eyes on North American supply. The North American economy is proving more relevant to today's global challenges in significant part due to a secure local supply of price-advantaged natural gas. North America is well-positioned to be the largest provider of incremental oil and gas supply to power the global economy and, frankly, enable the modern world. The fracked services market is seeing robust activity improvement and a tightening of the supply-demand balance. Drilled but uncompleted well inventory has stabilized after a steep continuous decline from pandemic-elevated levels. Available frac capacity is nearing full utilization as demand has increased and supply is limited due to continued equipment attrition, labor shortages, supply chain constraints, and very low investment in recent years. Today, profitability of active frac fleets across the industry are still below healthy levels, but trending strongly. We need to see, and we will work to drive, healthy returns in the frac industry to match the already robust returns of our customers. Leading edge service pricing is recovering to levels that could support fleet reactivations and we have many long-term partners requesting additional capacity from us. As always, we will be quite disciplined in deploying the additional capacity that we have today from the one-STEM acquisition. We mentioned several quarters ago that we expected to reach mid-cycle returns at some point in 2022. We are on track to hit that target. It is not that we are particularly prescient. It is simply that supply and demand works. Seven years of underinvestment in oil and gas production capacity was accompanied by an even more dramatic drought in investment in new fracked fleet capacity. The brief 2017 to 2019 upcycle was all about redeploying fleets built earlier in the decade with relatively modest new fleet construction. Much of that older equipment has now been scrapped. The emerging cycle is likely to last longer and be characterized by a much slower and more modest rise in active practice. With that, I'll turn the call over to Michael to discuss our financial results in more detail.

Good morning, everyone. Wow, we have come a long way and we're only just getting started. I'm so proud of our team for the quarter we've achieved. but more importantly, of how we were able to do so after the last two years of managing through the pandemic, a rebounding economy that pivoted into global supply chain challenges, and now an inflationary environment, all while investing in our business for this emerging multi-year upcycle. The first quarter of 2022, revenue was $793 million, a $109 million or 16% increase from $684 million in the fourth quarter. Liberty teams worked with our customers to deliver solid activity gains despite the sand and logistics bottlenecks that plagued the industry. We also saw net service price increases as contracts repriced into the new year. Of the growth in top line, approximately 55% was driven by activity and mix and the balance by net service pricing. We saw good progression through the quarter as sand and logistics bottlenecks eased and the full effect of pricing was realized. Net loss after tax was $5 million in the first quarter compared to $57 million loss in the fourth quarter. Fully diluted net loss per share was $0.03 in the first quarter compared to a $0.31 loss in the fourth quarter. Results were negatively impacted by $9 million related to the loss of disposal of assets of $5 million and a remeasurement of liability under tax receivable agreements, the TRA, of $4 million. General and administrative expenses totaled $38 million for the quarter, including non-cash stock-based compensation of $6 million. G&A was up $3 million sequentially, driven primarily by $2 million of non-cash stock compensation expense, as fourth quarter reductions in stock compensation expense contrasted with the annual grants of the first quarter. Net interest expense and associated fees totaled $4 million for the quarter. First quarter adjusted EBITDA increased to $92 million from $21 million in the fourth quarter, reflecting solid incrementals from activity increases and the increase in net service pricing. The integration challenges of 2021 are now mostly behind us, and we are seeing the value of our scale and our vertical integration strategy as we laid out during Vesta Day last year. We ended the quarter with a cash balance of $33 million and net debt of $179 million. Net debt was upped by $77 million, mainly driven by an increase in working capital. As of March 31st, we had $108 million of borrowings drawn on our ABL credit facility, and total liquidity, including availability under the credit facility, was $222 million. Net capital expenditures totaled $90 million on a gap basis in the first quarter of 2022. CapEx was driven by investments in Tier 4 DGB upgrades and Digifrag, of $46 million, sand logistics and other margin improvement investments of $15 million, and the balance related to normal fleet capitalized maintenance. Looking ahead, we are expecting approximately a 10% sequential revenue growth in the second quarter, expanding on the solid progress made in the first quarter. We expect to see increased activity levels and a modest service price increases as we move through the quarter. These factors are expected to support higher EBITDA margins in the second quarter. Our team worked diligently in the first quarter to educate our customers on the realities of the fast-paced inflationary environment we are operating in. There is a greater understanding across the broad customer base that inflation is going to be part of our near-term environment and increased costs will continue to be passed through as they are incurred. We are at the start of the cycle and service company margins need to return to levels that encourage reinvestment so that we can continue to support our customers' future success. Leading-edge pricing has shown signs of recovery that could potentially justify limited Ornstead's Tier 2 diesel fleet reactivation in support of long-term customer farmers. As the market has changed, the road to what we call Happy Valley, the most profitable way to bring a barrel of oil or MCF of gas to the surface, has changed. Our sales, engineering, supply chain, and operations teams are proactively working with our customers to find ways to mitigate rising costs through optimized completion design, including innovative solutions around sand, chemistry, and logistics, integrated planning to improve efficiency, and optimization of the freight calendar and much more. The Liberty strategy of investing during the early innings of the cycle and focusing on people and partnerships has delivered superior returns on capital and growth over the last 10 years and puts us in a great position to thrive in the upcoming cycle. I'll turn the call back to Chris before we open the phones for questions.

There is much to lament about the state of the world today. There are also things to celebrate. The pendulum has started to swing back towards energy sobriety. It is hard to overstate how important this fact is. Progress will likely be slow, and surely much more human damage will be caused by politicians and regulators' resistance to reality. But many positive developments are unfolding, punctuated by Germany fast-tracking approval of two new LNG import terminals. Economic growth and bettering human lives go hand in glove with increased energy consumption. This has been true throughout human history. It is encouraging to see improving returns moving the last sector that has yet to see them in the oil and gas industry, energy services. A healthy, robust North American energy industry is required to meet the world's growing demand for energy. We look forward to your questions. I will now turn the call back to the operator.

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 keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, team, and congratulations here on a very good quarter. Chris, in your analyst day, you put out a mid-cycle fleet profitability target of $14 to $18 million of EBITDA per fleet. We're at $10 million as of this last quarter. How are you thinking about the path to getting there? And do you think there's actually potentially upside risk to this figure? And how much higher does it need to go before you think the industry is incentivized to pursue new build activity?

Yeah, thanks, Neil. Yeah, I think you clearly have to get above mid-cycle economics to incentivize people to build a new factory. We are a long ways away from that. to build a new practice simply for more capacity. But the road to get there, which you've seen a step on that road, but the road to get there is just supply and demand. A tighter market right now is driving up net service pricing. It's also making customers very cooperative around scheduling. You know, our industry needs high utilization, high throughput, and pricing. It's the combination of those three things that drive profitability. And we're on that road now.

Thanks, Chris. And if fleet profitability remains elevated, even for some of the older conventional assets in your portfolio, would you consider delaying fleet upgrade CapEx and deploying the equipment as is, or Is the CapEx view over the next few years from your analyst day still the base case?

Yeah, I don't think anything in the macro plan has changed at all. Yes, you're seeing elevating profitability across fleet types right now, but the high-tech, the next-generation fleets that we're building, those are arrangements with customers. You know, if we make an agreement, we always live by what we – what we agreed to. And we're excited about that. That's bringing out a next generation of technology. There's huge customer interest in that. It's ultimately going to drive down operating costs, drive down emissions, and move fleet powering from diesel to natural gas. Those are all positive developments.

Thanks, guys.

Thanks, Neil.

The next question comes from Arun Jaram with J.P. Morgan. Please go ahead.

Yeah, good morning, Chris and team. I wanted to delve a little bit in the one quarter beat. You know, 92 million, the street was in the upper 40s, so, you know, significant beat relative to expectations. You know, ultimately, we're trying to understand is how much of the beat was driven by the pressure pumping business versus some of the benefits from your vertical integration from SANS and logistics and kind of wireline and Can you give us a sense of maybe what the EBITDOPR fleet was trending in one queue, and then maybe some of the tailwinds you're getting from the vertical integration?

Very much. I'll take this one to start with. When you look at it, the vast majority of our business is frack, and everything that we've invested in in logistics, in sand, is really to enable frack. The vast majority of the sand that comes from our sand mines gets delivered through our frack fleets. So that vertical integration and having the control of both the pull points and the push points is the key thing that we're able to be able to be more efficient as we drove through the quarter with all the bottlenecks that existed, especially in the southern basins. So that was the key part. So really, it is driven by FRAC, and as you see, the underlying results. There is some pickup as you're looking at the difference between Q4 and Q1. Obviously, the integration costs that were part of the Q4 story rolled off. But, yeah, it's dominantly driven by FRAC and everything that we do to enable the efficient operations in the field.

Great. That's helpful. Maybe to you, Chris, I was wondering if you could maybe characterize the supply-demand balance today in FRAC. You guided to 10% sequential revenue growth in 2Q. I was wondering maybe you could talk about the demand situation, maybe what's unmet as you look at the market today. And for that two Q guide, how much of that is the mix between activity growth versus, uh, you know, net pricing gains?

Yeah, look, the supply-demand market today is quite tight. You know, it was tightening last fall, and I think as we said in our last call, you know, it was meaningfully tighter in December than it was in October, and that trend has continued, and there's just not that much spare capacity left, right? So as you get to the very, you know, very near the end of whatever can easily be deployed is already deployed, you have a tight market, and we have today a tight market. And so our expectation of a 10% revenue gain, something like that, Q over Q, the biggest component of that is just increased activity. Obviously in the first quarter, there's always weather or seasonal issues that shave a few percentage points off revenue. This year, maybe that was magnified a little bit by the, you know, trucker sand struggles, particularly very early on in the quarter. So Q2 is seasonally a better quarter as far as revenue and generally what drops to the bottom line. So I would say activity is the biggest piece, but continued migration of pricing upwards across our fleet is a component of that as well. I don't know if Michael wants to comment any more on that.

No, I think that's very, very clear as to what Chris said there. I think the vast majority in Q2 is going to be activity-driven. There's a slight headwind that comes out of a Canadian operation in Q2 that balances sort of the uptick that you'll see in the USA in Q1. So that sort of mutes a little bit the activity growth. A small amount of the net pricing is going to be going on in Q2 as we go through. And I think we'll see, we'll do some more guidance for the second half of the year as we get to the next call.

Great, thanks a lot.

The next question comes from Chase Mulvihill with Bank of America. Please go ahead.

Hey, good morning everybody. I guess first thing, a lot of discussion around profitability and vertical integration. But if we kind of looked at first quarter numbers and think about kind of optimization on vertical integration and think about kind of where leading edge FRAC pricing is, I don't know if you could kind of talk to kind of, you know, how much of that, you know, where further optimization you have and how much kind of more leading edge price you have to kind of flow through your results versus kind of 1Q and then maybe kind of talk about the momentum that you're seeing on the FRAC pricing side.

You know, look, pricing will continue to migrate higher right now with where we stand. You've got to realize part of that is just inflationary. I mean, to buy parts is more expensive today. To do most everything is more expensive. So that means there's always going to be, and that's historically been true as well, there's always dynamic pricing as our costs or pass-through components change in price. Today, the additional thing is net pricing is going up. And there is starting to be a little bit of a competition for fleets. Not everyone that wants a fleet or wants an extra fleet today, frankly, is going to get one. And so for us, you know, where we allocate capacity and how we work pricing is just very much a partnership dialogue. At the end of the year, we're going to have pretty much the same customer profile we have today and we had at the start of the year. But as market tightens, you know, price will continue to drift upwards. We act as partners to our customers, so we're not, and we may have a competitor or two in this boat, but we're not in the, you know, it's going up 25% on the next pad or we're out of here. You know, that's just not the way Liberty works. But we're a business. And the market is tight, and so pricing will continue sort of gradually to migrate upwards.

Yeah, when you think about the tightness and the pricing moving higher, I don't know if you'd be able to characterize the tightness. Is it more of a function of equipment tightness or labor tightness?

It's both. It's both. The single biggest challenge right now is labor. And everyone knows this, right? This is countrywide, but certainly in our industry, after a big downturn, that pushed a lot of people out of our industry. You know, there's high-paying jobs in more pleasant conditions. So we've unfortunately lost some people out of our industry. We are actively today recruiting people back into our industry, but that's harder today. So labor, particularly, you know, competent, qualified, trained labor is in tight supply. But it's not just labor. There's just not that many frack fleets or frack pumps sitting around. The extra capacity today, again, is the very old stuff, or mostly very old stuff, a lot of which got scrapped and some of which is still parked or is going through auction houses. So it's tight in both areas. And as you know, the logistics are tight. You know, if you, theoretically, you wanted to stand up 10 more fleets in the Permian Basin, well, where are you going to get the sand from? Where are you going to get the truck drivers? How are you going to staff those fleets? And what are those fleets going to be? So it's, you know, the challenges are pretty broad-based.

Yep, it makes sense. Just one quick follow-up on Neil's question on mid-cycle margins. I mean, obviously, you kind of gave us that range at the end, let's say, a few years ago. I think it was, what Neil said, 14 to 18 million of annualized EBITDA per fleet. But since then, you've obviously, you know, you've got Fraxan, PropX, Wireline. So that's going to be additive to that EBITDA per fleet. And you stopped kind of giving us fleets, which is fine. But how should we think about, you know, mid-cycle margins? Should we, you know, I don't know if you want to talk to even up our fleet or percentage margins. I mean, should we think about this as a 20% margin business as mid-cycle or just kind of help us frame, you know, the new liberty and what mid-cycle looks like?

Before I turn to Michael, you know, I'll just say, look, those, wireline is critical to drive efficiency of operations and make things moving. You know, you can't frack without sand and logistics. So all those are critical. But, you know, they're not huge pieces of the puzzle. They're more important as enablers than margin deliverers in themselves, although they do deliver margin. But, you know, it's, I don't know if Michael wants to give any more color, but the dominant margin we make, the large majority of the margin we make is frack operations.

That's correct, Chris. When you look at it, Chase, when we had the invest today, all those parts of the business were part of our business plan, other than the fact that we didn't own products. And really, we did use containers and we did the logistics already for the majority of our customers. So that was just additive. And again, what I think of it is like turbocharging the developments that we were already doing in the business. So I think that's the key thing. And I think as Chris said earlier, as we move towards mid-cycle, but the reality of service company pricing is it needs to get on the way definitely above mid-cycle as to move towards reinvestment, right? Mid-cycle is just another step on the way to where we need to go to through cycle. We have to, mid-cycle margins, through cycle margins should increase above that. So that's where we're going.

And Chase, maybe one other thing I'd add to that. We don't foresee, we don't have plans to build 10 more frac fleets because we need 10 more frac fleets, you know, because the market's growing. We're just not going to do that. What we are going to do is when we have DigiFrac is truly differential in operating costs, in emissions, in quality. You know, we're going to build DigiFrac fleets when it makes sense in a bottom up negotiation and partnership with customers. But that's – and we're going to continue to upgrade the existing fleets we have. But we don't have any, oh, geez, we're going to grow our fleet capacity by 50% or 10% or 20%. We don't have any such plans. For us, it's just about higher technology and better equipment we're bringing to location. It's not about capacity growth in building new equipment. Already – in that from the one steam deal, we have additional equipment. Um, some of them that, you know, we're running not that long ago, but you know, we've, those, those have been, you know, parked and not far from ready to go for, well, since we closed the deal a year and a half ago, you know, our, our, our industry's had a rough, you know, a really rough last two or three years, but it's, you know, it hasn't been great in this industry for a while. And, um, And the dominant driver of that was just overbuilding in the early 2010s, massive overbuilding. But that's working its way off, and, you know, we're heading towards a better balanced market.

All righty. That all makes sense. Appreciate the call, Chris and Michael. We'll talk to you guys.

Thanks. Thanks, Jason.

The next question comes from Stephen Kangaro with Seafold. Please go ahead.

Thanks. Good morning, everybody. I guess two things for me, if we could start and sort of, you know, back to this sort of EBITDA per fleet question. Is there, as you look ahead and you look at net pricing improvements, if sand prices were to normalize a bit, and I know they've been elevated, is that a headwind or is that neutral for your profitability per fleet from here?

Neutral, Stephen. I mean, sand prices, long-term sand prices, You know, you're hearing these stories of these spot market prices, et cetera, but you've got to remember that, you know, when you think about things like the Permian, the majority, just partially all of our customers are long-term customers. The vast majority of our partnerships from our sand suppliers are long-term partnerships. So those crazy sort of spot market prices really aren't necessarily affecting our business as much as what you see, the stuff that you're seeing on the margins.

Okay, great. Thank you. My second question, it may be hard in this market because the market is obviously very tight, but we've clearly seen industry dynamics change. We've seen consolidation. You guys have been involved in. Are you seeing any change just in general in the behavior and how it's impacting sort of the competitive landscape and pressure pumpings?

Yes, there is. Yeah, I would say that the integration and the failure of a number of companies has definitely driven our industry to a better structure. You know, you've got four companies probably with, of order, two-thirds of the frack capacity. That's just, you know, that has just made better industrial decision-making, I would say, across the board. You know, it's not perfect. There's always going to be incremental fleets. There's always lower-cost, lower-quality players. So, you know, we have a – you know, there's a palette of companies out there, but the decision-making has definitely gotten better in our industry.

Very good. Thank you.

Thank you. Thank you, Steve.

The next question comes from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning. So – contemplating kind of how quickly kind of incremental pricing could roll through your book of business. And so if we just assume that in March you're able to secure something on the order of like 10% incremental net pricing, how much would you realize in 2Q, how much in 3Q, 4Q, and how much would we have to wait to get through kind of budget season and realize in 1Q of next year? How would that kind of impact your average pricing in the quarters ahead?

Steven, when you go to look at it, the vast majority of fleets kind of repriced early, sort of like as we turn of the year, the new part of the budget year, and they increase incrementally from there, and then step changes generally happen sort of on an annual basis, right? So you're not going to get sort of step changes every quarter across the whole fleet. then you are going to get changes incrementally in different fleets at different times. And so it sort of steps in as you go through the year. That's really how pricing works.

Gotcha, gotcha. And just thinking about the macro backdrop here, obviously it's been good on the oil side and got better recently. But natural gas prices obviously have spiked here in the U.S. recently. Do you think we're going to see an incremental pull in demand for frac services from the gas basins, given the price action here?

You know, there's a little bit of that happening for sure right now. You know, so, you know, the increasing activity, which again is not crazy, but the increasing, it just feels crazy because in a tight market, a little bit of extra pull, you know, is more impactful. But there is increasing activity in the, you know, particularly in the Haynesville, right, where the takeaway is there and you're closer to ports. You know, activity is increasing there in response to higher prices. Got it?

Yeah, that was it for me. Thanks.

Thanks. Thanks, Scott.

The next question comes from Ian McPherson with Piper Sandler. Please go ahead.

Thanks. Good morning. Congratulations, team.

Thanks, Ian.

Another gas question. It seems to me that we're, you know, given the takeaway constraints, I mean, the Northeast can't grow because of various reasons, and we've obviously got infrastructure constraints in the Permian, which puts all of the growth burden on the Haynesville. But within the Permian, I would expect that you're going to have a widening fuel arb for dual fuel fleets with Waha versus Henry Hub. And I guess that's That's probably a key point of contract negotiation, sharing that saving with customers. Can you speak to that dynamic and how that might be a benefit or maybe more pocket upside as that dynamic probably expands in the future?

Yeah, I mean, that could be incremental positive. But, you know, in the various agreements we have, they're structured different ways. Sometimes they could be a hypothetical look at the fuel savings, and then the pricing is just set based on that. So the changes in the actual fuel savings, you know, may or may not flow through to us. And I think what, you know, when does take away capacity get very tight in the Permian and therefore we have the Waha blowout. A lot of opinions on that, when that may happen and how that might happen. You probably saw in the Tinder announcement that, yes, good possibility they're going to take a pipeline or two and add extra compression. So let's hope that the Permian take away capacity situation evolves more gradually and we don't have just a blowout in basis and a collapse in local gas prices. Not impossible. And you know, in a small number of fleets, if that did happen, would it benefit us a bit? Sure. Would it be material? Would you know it? Would we talk about it in a conference call? No. It wouldn't be meaningful.

Got it. Thanks, Chris. Michael. Going into today, when we had a different view of EBITDA for Liberty this year, at least my outlook was for limited free cash flow for the company this year. You had negative free cash flow in Q1 with some working capital investment. But now that we're reframing EBITDA higher than we thought, would you refresh us on how we should think about free cash flow? And really, we know that you've sort of pledged to be going back to Liberty's standard of returning cash through the cycle, but we were previously thinking that would probably be more of a 23 event than a 22 event. So just wanted to check in with you on that.

So how have you had to change, Ian? I mean, as we set out in our investor day basically a year ago, right? We're seeing the early part of a long cycle. We're investing in new technologies to support our customers' ESG efforts and efficiencies. right, and this really is an investment year. You know, again, yes, obviously sort of EBITDA is rolling higher. Obviously demand for sort of our next generation fleets is also, you know, sort of being pushed by some of our clients. So we'll give an update on CapEx and free cash flow at the next earnings pool.

Okay. Sounds good. Thank you, guys.

The next question comes from Taylor Zurcher with Tudor Pickering and Holt. Please go ahead.

Hey, Chris and team. Thanks for taking my question. First one on pricing. You're talking about mid-cycle margins, pricing levels at some point in 2022. Sounds like we're well on our way there. And so I guess my question is, why or why not do we reach peak cycle pricing by 2023? It sounds to me like the industry's super tight today. No one's adding capacity. So, you know, this tightness dynamic is going to continue to move, continue to persist moving forward. So just curious, you know, your thoughts on potential peak cycle pricing by 2023. Thanks.

Yeah, it's certainly a real possibility. You know, I've always wanted to be, you hear us when we talk about the future, we're just thinking about supply and demand and sort of broader trends. And yes, those, that continues to look pretty positive right now. But, you know, how that actual pricing dynamic will unfold, you know, I certainly will hesitate to predict, but I think your logic and idea is not unreasonable.

All right, good to hear. Follow-up just on Digifrack. I know you've got two fleets hitting the market here, I think, over the next couple quarters. So just curious on the outlook for incremental fleet orders above and beyond those two. How are discussions with customers progressing? How is the economics of a potential third or fourth fleet addition sort of evolving as pricing for the base business is just skyrocketing higher? All sorts of questions on those two fronts I'd love to hear.

You bet. The interest in Digifract, as you said before, has been huge. We're in dialogue with multiple partners about that. Certainly, we're going to build more than two. The timing of those builds, I'll leave more of that to Michael, but for us, it's never, well, this year we're going to build X and next year we're going to build Y. It's just engage with our partners, engage with them, and if we can find the right partner that, you know, wants the fleet, we can get the right length of commitment, structure of commitment, profitability, and balance sheet wise and investment wise, it makes sense, you know, then we'll do it. And so, but the interest there is huge. We're excited about that. And we're particularly excited, you know, the next few months to get some pumps out there and not just, The prototype ones, but commercial pumps and fleets and operation, I think when people see that and when we learn from that, you know, the interest will grow even more. So it's really more a capital deployment, pace of capital deployment decision more than anything else. The interest is very large.

Thanks.

Yeah, thank you. Thanks.

The next question comes from John Daniel with Daniel Energy Partners. Please go ahead.

Guys, thank you for including me. Chris, it's good to hear Digifrack interest is strong. If I was a customer of yours and I signed a contract today for a fleet, when would I get it? What's the lead time look like?

You're going to let that soothing Canadian voice. Morning, John.

Certainly, if you were to sign a contract for a fleet right now, you'd be looking at delivery into 2023.

You guys mentioned that you don't want to just grow fleets for growing fleets sake, but Ron, how are you approaching it? Let's just assume it's only two 55 fleets and it'll be more. We know that. Are you retiring your legacy fleets? What's the process? or in terms of your fleet count, do you take those crews on legacy fleets, put them on a Digifrac cruise? If you could just walk us through that dynamic.

Yeah, John, I think with the strong pull across the board today, you know, look at the market was moderate. Our plan was park that equipment that was running, and yet the same humans that are on that crew that have that relationship, they will run the Digifrac fleet. In today's market, the pull is quite strong. So, yeah, those first two Digifract fleets, I would say it's very likely that that legacy equipment that's being phased out, that'll be recruited and that fleet will be deployed elsewhere.

Okay. Got it. And then I had one other one. I'm having to brain fart here. I'll call you guys off on it. I forgot my question. I apologize.

Thanks, John. Thanks, John.

Okay. See you guys. Good quarter.

The next question comes from Waqar Syed with ATB Capital Markets. Please go ahead.

Thank you. Congratulations on a great quarter. So first of all, just on some modeling questions, what was the cash consumption from working capital? We estimate around $60 million. Is that in the ballpark?

No, it was sort of closer to actually what our increase in net gap was in the 70s. Okay.

All right. Makes sense. And then could you talk about what was an active fleet count in Q1 and where it's likely to be in Q2?

Basically, it's got to be flat. As you know, it moves up and down with the Canadian market, et cetera. But as we said, we're in the mid-30s, and that's about the general guidance we give. And it sort of moves around that mark. No sort of major ads.

Okay, so in Canada, it's likely to go down by maybe a couple of crews. So are you picking up some crews in the US to offset that if you're staying flat?

I was really talking about sort of like our utilized fleets there with power. So I think generally using the same denominator for whatever your calculations are is probably right. But thanks.

Okay. And then in the last, sometimes back, if a crew worked like 25 days a month, that used to be a good number. What's the good number these days for you guys? Is it 27, 28 days a month?

Generally, I would consider anywhere from, depending on the type of crew, 80% to 85% of days we consider fully utilized, including rig up and rig down. Okay.

Thanks. Thanks a lot, Makar. Thank you. Thanks, Makar. Thanks.

The next question comes from Dan Kutz with Morgan Stanley. Please go ahead.

Hey, thanks. Good morning, guys, and congrats on the quarter. I just wanted to confirm, and sorry if I missed this in the prepared remarks, but you guys had kind of called out the 20 million integration cost headwind in the fourth quarter and that that would kind of roll off in 2022. Can you help us think about, you know, whether that did kind of effectively fully roll off in the first quarter or if there were still some integration costs there and if there's any expected, you know, moving forward?

Yeah, I'd say we were ahead of schedule for Q1 and the majority of just Basically, all of them have rolled off better than that. Perfect. Thanks.

And maybe so appreciating that you guys probably aren't comfortable sharing specifics, but can you just help us think through how kind of the profitability delta between some of your highest quality assets in the field and kind of some of the lower quality assets in the field is trending? Is that gap widening or... or shrinking, you know, maybe kind of help us think through some of the different factors that are impacting profitability there.

Dan, as these things move through the year, you've got to remember, it's interesting because obviously your high-quality feeds were the were in the most demand during last year's RFP season, probably contracted earlier than some of your lower fleets. So, yeah, you've probably got a little bit of a flattening of that cycle at this present point in time. Ultimately, as you've seen with ways that we're investing for the long term, Ultimately, that sort of gap will renormalize as we go into next year, right? But I think it comes down to that there was a big change in the contracting cycle when you think about anything that was contracted from October to anything that was, say, finally contracted in February. So we're in a very dynamic pricing market. So that's the background of that.

Got it. That's really helpful. Thanks a lot. I'll turn it back. Thanks, Jim.

The next question comes from Roger Reed with Wells Fargo. Please go ahead.

Yeah, thanks. Good morning, and well done on the quarter, guys. I'd like to kind of come back, and I've missed some of the calls. So if I ask a question that's already been hit, I apologize. But I wanted to understand a little bit better kind of the margin performance in Q1. You know, if I sort of normalize for what I think an incremental margin ought to be quarter to quarter, if things are going well, I'll call it, you know, roughly 35 to 45%, which would imply kind of 50 to 60 million of even DAO would have been about right, which would say there was 20 to 30 million that kind of came from something else. And I was just wondering if you think about it that way. what's the right way to think about the 20 to 30? I know integration costs come out, but was there anything else? And as we think about sort of the sustainability and the starting point for future quarters, you know, kind of that starting point would be good for what the base is. And then my follow-up question is going to be in terms of the pricing dynamics and the costs that you're dealing with, the inflationary pressure, I know it's different things this time in prior cycles, but is the ability to push pricing and the ability to deal with underlying cost inflation effectively the same as prior cycles, or is there anything you would call out?

I think the first question there, you know, really, yes, you had the roll-up of integration costs, and you had, because of the step change in pricing, because pricing was relatively weak last year and that step change in pricing, so you probably had higher incrementals in Q1 than you would expect on your incrementals going forward. That was the key thing there. On the second one, yeah, I do think that the cycle's a little different this time. Right, you've got to remember, we are in, you know, you've got to be as old as me or Chris sometimes to sort of like live through an inflationary environment, right? So a lot of, you know, but now I think our broad-based customers are understanding the fact that we live in a broad-based sort of inflationary environment, and that these costs are going to be dynamic and relatively to move in quickly. We haven't done that through the last 10 years of the sort of like the shale revolution cycle, right? But I think that's what was challenging, I think, for the service industry versus the EMP industry. Last year, there wasn't that broad-brace understanding of where things were going, and I think now we've got it. We've got the Fed has come out. I think everybody understands where inflation is and what's happening, and it is moving quickly, and it's being very dynamic.

So that means that customers are becoming more, I guess, let's call it accepting of a higher price environment for services.

Absolutely. Look, you know, they're running a business just like we are. I think we're lucky we have pretty good partnerships. But yeah, they fully get it now. But to Michael's point, that was a process. Because think of the short period of the shale revolution. During that short period of the shale revolution, not only was Inflation in the U.S., you know, very low. I think average just below 2%. But in our industry, we were in a meaningfully deflationary environment the entire shale revolution. I mean, it's one of the things we celebrate. Now, a lot of that efficiency and technology, we cut the cost of a well almost in half and doubled well productivity. That's the story of the last 12 years. But it's different right now. That low-hanging fruit to drive down the cost of all the inputs, that's mostly been flocked. And now we have a macroinflationary environment, and we have relatively tight markets for the supply of the various things we need, like engine parts or sand or chemicals. So, yeah, different world today, but I think customers get it.

All right. Good luck, guys. Thanks.

Thanks, Roger.

The next question comes from Keith Mackey with RBC Capital Markets. Please go ahead.

Hi, good morning and thank you. I just have a question around your fleet distribution. I realize the market is tight pretty much everywhere, but just curious how content you are with where your equipment is situated, basin by basin, or do you see material opportunities to move equipment around either between basins or between customers?

You know, we tend to move more slowly, maybe than everybody, you know, because again, it's tough. It's all around a customer partnership. So, you know, none of our customers yet have said they're moving their Permian oil all into the, you know, the Bakken. So our fleet moves are relatively slow. During the softer times, you know, to keep a fleet booked, we might have moved it from, you know, a basin that had a seasonal slowdown or not. So we do a little bit of that, but mostly we're sticking with the customers we've got. We're slowly either growing with them or maybe adding another customer, but I don't think a big shift there.

As we discussed in the fourth quarter, last year part of the headwinds was basically taking the combination of the Liberty customers and the old Schlumberger-Wunsten customers and actually repositioning our fleets to where we thought they were going to be the right place for the right customers going into this year. And we discussed that and we were very happy about where they are I think you'll find that our fleet distribution, other than the Northeast, is really sort of very much like the market averages, right? So I think it's very sustainable. But thanks.

Thank you. And maybe just a quick follow-up. I'm assuming that still holds true if you're thinking about moving potential underutilized fleets or older fleets from the U.S. and into Canada as well?

You know, we wouldn't use sort of like how to utilize. I mean, our fleets are very, you know, completely utilized at this present point in time. You know, we do not have a plan to move all the fleets to Canada. I think Canada, we will treat like any other great basin and support them with, you know, sort of the fleets and the type of technology that we support all of our basins.

Okay, thanks very much. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Chris Wright for any closing remarks.

Thanks, everyone, for joining us today. And we wish you all a great, highly energized day. Take care.

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