Liberty Energy Inc.

Welcome to the Liberty Energy 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. I would now like to turn the conference over to And Jolie Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Thank you, Dave. Good morning and welcome to the Liberty Energy Second Quarter 2022 Earnings Conference Call. Joining us on the call are Chris Rice, Chief Executive Officer, Ron Gusick, President, and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenue, 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 our earnings relief 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 on our earnings release, which is available on our website. I will turn the call over to Chris. Thanks, Angelique.

Good morning, everyone, and thank you for joining us. I'm proud to discuss our second quarter of 2022 operational and financial results. The second quarter was a busy and exciting time as the Liberty team continued to deliver differential quality services in today's robust but operationally challenged environment. This translated into a notable milestone of fleet financial performance at levels that were last seen in 2018 as measured in annualized adjusted EBITDA per fleet. The hard work and dedication of our employees combined with deep relationships with our partners across the value chain, enabled us to achieve strong operational efficiency in an environment still impacted by supply chain challenges. In the second quarter, revenue was $943 million, a 19% sequential and 62% year-over-year increase. Net income for the quarter was $105 million. or 55 cents per fully diluted chair. Adjusted EBITDA for the quarter was 196 million, 114% increase over the prior quarter. Liberty's first half of 2022 is starting to reveal the value creation from our 2021 acquisitions and our insistence upon getting the business integrations done right, consistent with our focus on long-term results. We've positioned the company to deliver top-tier performance through cycles with a focus on free cash flow generation and maximizing returns. We're driving cash flow expansion that allows us to fund compelling organic investments to grow our competitive advantage while also returning cash to shareholders. Our strong financial results and a constructive outlook support the reinstatement of our return of capital program. beginning with a board-approved $250 million share buyback program. Our guiding principle is to maximize the value of a Liberty share. We believe the flexibility afforded by a share repurchase program gives us the ability to opportunistically act on a dislocated stock price, calibrated by market and business conditions. While the global economic recovery outlook has softened on reverberating impacts from higher inflation, rising interest rates, and the Russian invasion of Ukraine, oil and gas markets remain constructive. Eight years of underinvestment in upstream oil and gas production exacerbated by inept global policy initiatives aimed at incentivizing an energy transition has created a mismatch of supply and demand. Today, historically low global oil and gas inventories, limited OPEC spare production capacity, and a dearth of refining capacity are colliding with increased energy demand. Oil and natural gas demand growth is coming from the post-pandemic recovery in travel, China's emergence from its enforced COVID lockdowns, plus seasonal demand factors. These are all further magnified by the Russia-Ukraine conflict and the potential for sanctions imposed on Russian oil exports, coupled with Russia's decision to constrain natural gas pipeline exports to Europe. The greatest risk to our marketplace is a severe recession that leads to a drop in global demand for oil and natural gas. A moderate recession typically leads only to a slowing in the rate of demand growth for oil and natural gas, which would likely not be overly disruptive to our customers' activity given today's low inventory levels and tight supply and demand balances. The recovery in oil supply appears to be under greater threat than oil demand. North America is positioned to be the largest provider of incremental oil and gas supply, Today, E&P operators are evaluating the opportunity to deploy incremental capital in North America to modestly grow production while remaining focused on shareholder priorities. The fundamental demand call in North American oil and gas supply is strong. Supply is restricted by a tight frack market where equipment, supply chain, and labor constraints limit frack fleet availability and service quality available to our customers. Many frac companies are struggling to execute in today's environment. Moreover, operators desire ESG-friendly frac fleet technologies that provide the opportunity for both significant emissions reductions and large fuel savings. Liberty is uniquely positioned with the technology, scale, and vertical integration to meet demand for service quality and best-in-class technology. The freight market is near full utilization, and few service providers have the fleet capacity and supply chain reach to satisfy E&P operators' goals. Liberty was disciplined in restraining fleet reactivations in the post-COVID era of muted returns. Pricing has now recovered to where Liberty, in support of our customers' long-term development needs, is reactivating several of our recently acquired available fleets from the one steam transaction. Importantly, these long-term dedicated customers seek additional next generation fleets that are simply not available today in the market. And Liberty is providing an avenue to serve those customers and simultaneously drive free cash flow from these existing fleets to reinvest in our fleet modernization program and free cash flow. Liberty is also partnering with key customers on the deployment of two additional DigiPrac electric fleets in early 2023. Demand is very strong for the technically superior design Liberty developed throughout the downturn that drives better safety and efficiency, a rare commodity in a tight market. The strong track market and specific conversations with our customers give us confidence in the demand for Liberty services into the coming year. In the third quarter, we expect approximately 10% sequential revenue growth, primarily driven by fleet reactivations and modest net pricing increases. Third quarter margins are expected to improve from contribution of incremental fleets and modest price improvements, partially offset by ongoing supply chain, operational and inflationary pressures. Since the 2020 downturn, We have made the decision to refrain from reactivating fleets without the economics and longevity of business to support the onboarding of a new crew and the capital associated with restoring equipment. Today, we are one of the few players in the market with the equipment available to support a rising demand for frac services. We are also one of the only players with the supply chain capacity to support these services. as sand and other materials remain in short supply. Reactivating fleets is a long term strategic decision. They are not spot fleets, but rather fleets that will go to high quality, dedicated customers that are interested in a road to next generation solutions over time. Today, next generation equipment is in short supply and will remain so for the foreseeable future. To maintain the development program, producers seeking a frack crew are willing to take equipment available to support their operations in the near term. For Liberty, reactivated fleets are largely well-maintained Tier 2 diesel equipment that came with the one-stem acquisition. These fleets are coming online at favorable prices that support the hiring and training of a new crew for the long term, our next generation technology expansion program, and increasing our free cash flow generation. For a minimal capital outlay, the unit economics of these fleets generate free cash flow that provide a source of funding for investment in our fleet modernization program. Over the long term, next generation fleets will replace older technologies. While we already have one of the largest dual fuel fleets available, our equipment makeup will evolve to an entirely next-generation fleet over time. The fleet reactivations are not market share-driven decisions, but are investments in driving the increase in value of a share of Liberty stock by investing at the right time with the right economics. We are also excited to announce a $10 million investment in Furbo Energy, a next-generation geothermal technology company that develops geothermal assets for dispatchable, reliable, baseload grid power with low carbon intensity. With this investment, Liberty expands into supporting geothermal resource development, leveraging our extensive expertise in subsurface engineering and pressure pumping assets to help create dense underground networks to mine the Earth's heat for electricity production. We chose this investment opportunity because of our belief in the concept viability, the quality of FERBO's team, and the size of the potential resource already captured. Unconventional geothermal applications offer a potential pragmatic solution for a reliable source of low carbon electricity, and we're excited to be part of the journey. Our team is diligently working to support a world where we are seeing the greatest threat to energy security, reliability, and affordability in decades. Yesterday, we released our 2022 Veterans Human Lives Report, placing today's global energy security crisis in proper context and showcasing Liberty's leadership in clean energy technology innovation. Our drive is to bring awareness to the importance of energy access, expanding further into the topics of geopolitics, food security, and the four pillars of the modern world, cement, steel, plastics, and fertilizer, all critically enabled by hydrocarbons. ESG has always been part of our DNA since day one, and we bring to focus our innovation and investment in digital technology, engine technology, sand, logistics and supply chains, as well as our robust governance, and the people and culture that bind us. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.

Good morning, everyone. We're pleased with our second quarter results. The entire Liberty family pulled together to provide exceptional execution for our customers and deliver record revenue, net income, and adjusted EBITDA. We are now beginning to see the advantages of the transformative work our team accomplished through the integration of OneStim and PropX, and it's already generating returns at a faster pace than we projected at our investor day a little over one year ago. Successfully achieving scale of vertical integration by doing the integration the right way has been key to our financial performance and position us well entering into the second half with the right momentum. This quarter, we reached annualized adjusted EBITDA per fleet levels. We were last seen in 2018, and we believe that we are only at the early stages of the oil field services upcycle. Liberty is a company of a much different scale of integration today than we were in 2018. We are in an even stronger position to lead the industry in technology and service quality and to expand our profitability. Our best-in-class FRAC fleet technologies have evolved to include Liberty's built-for-purpose Digifrac fleet that raises the industry standard on providing the lowest emission technology in the market with superior durability, reliability, enhanced automation and controls. Our Tier 4 DGB fleet has grown significantly and marries dual fuel pumps with automated controls that maximize gas substitution for diesel in an environment where the savings from fuel cost arbitrage have increased over the last year. We have an expanded supply chain with two of our own sand mines and deeper partnerships with our suppliers that allow us to deliver superior operational execution in severely restricted markets riddled with global supply chain challenges. We also have the premier technologies in wet sand handling. and last mile profit delivery solutions through PropX. These transformative changes we've made and continue to make at Liberty are critically important drivers of shareholder value at a time where market fundamentals are increasingly constructive for our industry. The second quarter of 2022 revenue was $943 million, a $150 million or 19% increase from $793 million in the first quarter. Approximately 60% of our top line growth was driven by activity, mix, and a modest contribution from paid fleet reactivation, while the remainder came from pricing. Net income after tax was $105 million, increased from a net loss after tax of $5 million in the first quarter. Fully diluted net income per share was $0.55, compared to fully diluted net loss of $0.03 in the first quarter. Results included $7 million in fleet reactivation costs incurred for both the fleet deployed in the second quarter and the planned third quarter fleet deployments. General and administrative expenses totaled $42 million, including non-cash stock-based compensation of $4 million. G&A increased $4 million sequentially, primarily driven by performance-based compensation, inflationary and activity increases commensurate with the growth in our business, and investment in platform IT systems and other process improvements to support our continued expected growth. Net interest expense and associated fees totaled $5 million to the quarter. Adjusted EBITDA increased to $196 million, more than doubling from $92 million achieved in the first quarter, showcasing solid incremental margin expansion on activity and pricing gains. We ended the quarter with a cash balance of $41 million, and net debt of $213 million. Net debt increased by $34 million in the first quarter, primarily due to an increase in working capital. As of June 30th, we had $150 million of borrowings on our ABL credit facility. On July 15th, we exercised the accordion feature on our ABL credit facility, thereby increasing our borrowing capacity from $350 million to $425 million. Total liquidity, including availability under the credit facility, was $263 million pro forma for the accordion. Net capital expenditures totaled $127 million on a gap basis in the second quarter of 22. The CapEx was driven by Tier 4 DGB upgrades, a Digifrack spending of $65 million, sand logistics and other margin-enhancing projects of $29 million, and the remainder relating to ongoing capitalized maintenance spending. In the third quarter, we expect approximately 10% sequential revenue growth. This is primarily driven by fleet reactivation, including one full quarter of contribution from accrued employees in the latter part of the second quarter and modest price increases. We also expect margin improvement primarily for the contribution of incremental fleets and modest net pricing increases, partially offset by ongoing supply chain, operational and inflationary pressures, including in commodities, raw materials and labour costs. As market fundamentals continue to improve for our industry, we are well positioned to support global energy needs by continuing to invest in this early part of the cycle to maximise free cash flow over the long term. We are now targeting capital expenditures of $500 to $550 million before the year 2022. The approximately $200 million increase reflects an additional next generation technology investments, including incremental spending, the additional Digifract leads, and propping sand handling of wet sand equipment, as well as capital investment in the frag fleet reactivation and libertization of approximately $55 to $60 million, including the one fleet deployed in the second half of the year and the balance that will be deployed in the second half of the year. The incremental adjusted EBITDA we are on track to achieve in 2022 relative to the beginning of the year is expected to far more than exceed the additional CAPEX spending in our budget. As a result, we expect to be free cash flow positive for the full year of 2022 after investing in these long-term competitive advantages. We expect to enter 2023 with an active freight fleet count of a lot of 40s. Investments we are making in 2022 will further expand earnings potential in 2023, and our fleet modernisation plan is expected to continue in 2023. We believe capital spending is likely to be at or below 2022 levels in 2023. We anticipate strong 2023 free cash flow conversion of over 50%, driven by both incremental profitability from 2022 investments and a continued margin expansion of those initiatives. We are planning ahead to have a fleet of the latest technologies as we enter what we expect to be a longer duration oil and gas cycle. As we stated at the beginning of the year, we have significant flexibility in adjusting our capital speeding targets, depending on economic conditions, customer demand, and returns expectations. As we look to the future, the increased free cash flow generation capability of our repositioned business, successful one-spin integration, operational execution, and fundamental outlook allows us to meet our capital allocation priorities of disciplined investment to expand earnings per share, balance sheet strength, and the return of capital to shareholders. With that, I will now turn it over to Chris before we open for Q&A. Thanks, Michael.

The world is gripped today by a serious energy and food crisis that is of our own making. It is not, in fact, due to any shortage of available resources. It is due entirely to investment decisions and a growing myriad of barriers to investment in hydrocarbons. The very hydrocarbons without which the modern world is simply not possible. It is admirable that the public, regulators, and our industry are keen to improve the quality and cleanliness of our activities. It is not admirable that so many emotionally driven, fact-free impediments to investment have come from government regulations, NGO litigation and lobbying, and Wall Street too often equating lower greenhouse gas with better in all cases. The blame for the current energy crisis also falls on our industry for too often, compliantly going along with the endless anti-hydrocarbon fashion of today. If it is not for us, to speak candidly, honestly, and loudly about the critical role hydrocarbons play in the modern world, and most critically, for those desiring simply to join the modern world, then who else will play this role? Certainly, it has not been political leaders, activists, academics, or celebrities. It is us that must carry that torch. Otherwise, The immense human damage we see today from the lack of investment in hydrocarbon production and hydrocarbon infrastructure will be only the beginning of a calamitous crisis. Towards that end, I strongly encourage everyone to read Liberty's improved and expanded version of Bettering Human Lives that was released on our website last night. It touches on many critical issues that are either overlooked, misunderstood, or simply ignored. We welcome all feedback on this report as we strive to be honest brokers for information on how the world is energized today, how it might be energized in the future, and what inevitable trade-offs must be made. Individuals are all entitled to their own opinions. They are not entitled to their own set of facts. That idea from Daniel Patrick Moynihan. I will now turn it over to the operator for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. 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. Please limit yourself to one question and one follow-up, and then re-queue for additional questions at this time. We will pause momentarily to assemble our roster. Our first question comes from Chase Mulvihill with Bank of America. Please go ahead with your question.

Chase Mulvihill, Bank of America. Chase Mulvihill, Bank of America. Good morning, everybody. I guess first thing I wanted to hit on, just the CapEx, you know, obviously a big bump here. You've got, you know, the new builds, the incremental new builds, the Digifract fleets in the first half of next year. So could you just kind of split up the CapEx of the 500 to 550 between, you know, upgrades and reactivations versus new builds versus maintenance, just so we can kind of get a context of kind of where the CapEx is going?

Yes, James, we really, you know, sort of take you back to sort of what we announced at the beginning part of the year. Really, the 200 change that was announced, if you think about it, there's going to be two new builds to GFRAC fleet, about $120 million, probably in the $50 to $58 million worth of reactivations. And the balance is just some additional waste sand handling technologies and some margin-approved projects that we've green-lighted with the improved pricing. Okay, let me ask you this.

The fleets that you're reactivating in the back half of the year, are those upgraded? Are you spending to upgrade those, or are those just going to be kind of, you know, Tier 2 fleets?

Yeah, they are Tier 2. We're not upgrading them to Tier 4 DGB. You know, at that price, obviously, you could. But they are being, to some degree, limitized to where they are. They would be a limiting Tier 2 fleet. So they have longevity with them. which will then support the long-generation move of those clients to next-generation fleets is kind of planned with each of those clients. But it has a different cadence with every one of them during the next five years.

Okay. That makes sense. And if I can ask on the buyback, you know, if I can kind of poke around this a little bit and try to think about how you think about pacing that $250 million. I know you didn't really kind of commit to it at this point. But, you know, should we think about it? know kind of more matching about kind of how free cash flow evolves or is it kind of more opportunistic buybacks based on kind of how what's your view of intrinsic value versus where the stock's trading yeah entirely entirely opportunistic chase no no formulaic money is going to flow out in x buybacks to us are are opportunities

When you have a balance sheet to support them and you have a large, compelling difference between the intrinsic value of the share and the price at which you can buy shares. So the rate at which we'll buy back our stock is strongly dependent on the magnitude of that dislocation between intrinsic value and market price.

Okay. Could I ask how you define intrinsic value or how you calculate it?

Well, I mean, obviously I won't share the details, but it's just a commonsensical discounted cash flow incorporating our weighted average cost of capital and a range of possible scenarios going out to the future in our business.

All right. Makes sense. That's how pretty much everybody thinks about it. All right. I'll turn it over. Thanks, Chris.

You bet. Thanks, Chase.

Our next question comes from Stephen Gingaro with Stiefel. Please go ahead.

Thanks. Good morning, everybody. So two things for me, if you don't mind. The first, when we think about the fleet reactivations in the back half of the year, you talked about, I think, exiting next year or starting next year, starting next year with about 40 plus. Are we coming off of a base of around 35 in the second quarter? I'm just going to try to calibrate kind of the percentage increase you're seeing in the third quarter and how I should think about the Digifrac fleets entering in 2023. Yes, Stephen.

Yeah, we're probably mid-30s, mid-35 number-ish. We obviously activated one right at the end of the second quarter, and then the balance will be activated so that they should go through the year through the end of the fourth quarter. Okay. Okay.

Okay. And then when we think about, I guess it's a two-part question, but the steep increase in profitability per fleet in the second quarter up to give or take, I think about 23 million of EBITDA per fleet. So did that bridge from the first quarter? And I assume it's price utilization and there's probably some value from the SAM business in there, I would think. how should we think about sort of the potential of that number without giving us guidance? I mean, is this something that could go to the high 20s as 2023 evolves, or is that too aggressive? I mean, any parameters around sort of the bridge and where that could go as we go forward?

Where it could go, Chase, you know, from my point of view, would really be more dependent on the demand side of the oil supply-demand equation. It depends on how any potential recession may affect demand for next year. Generally, in internal numbers, we would see it from late Q2, the industry is running maybe around 250 fleets, going to move to 275 by the end of the year, kind of modeling that to stay flat at this present point in time. So yeah, there is definitely upside on pricing, but I think that's still to be seen. Obviously, you've seen a lot of movement in the market for freight fleets, and in general, the general economy. But I think we need to kind of take, sort of watch it as we go.

Yeah, Stephen, I'll just add, we don't know the future. Obviously, the trends are pretty positive right now, but it's a combination of how well we perform operationally, what the trends in pricing, and they're still migrating in a positive direction, and also our just quality of operation. As Michael said, some of our capital is these margin enhancements We're trying to figure out how to run our business more efficiently to get more done at a lower cost in a safer fashion. So there's a lot of moving factors in that. So we're always a little shy about predicting the future, except we did say a year ago that we would return to mid-cycle economics this year, and that wasn't based on anything specific. It's just based on when margins are awful, supply shrinks. And eventually demand will grow. But just supply shrinkage alone was going to fix the marketplace given the two or two and a half years of poor frack market conditions.

Great. Very good. Just one quick one. Michael, you mentioned this, but as the market evolves over the next couple of years, do you view the upgrades and the Digifracks as ultimately replacements for these tier twos that you're reactivating and it's sort of a bridge to new markets? to newer, higher-end assets?

Generally, what we see in the market, if you think about what's been announced for new builds, it approximates about what the attrition cycle is of rat fleets. If you think about a 10-year life of some of these older diesel fleets, et cetera, the announced numbers that are coming out are approximately the same. So we see a pretty balanced market, a pretty disciplined approach by ourselves and our competitors. We think that's good for the freight market overall.

Very good. Thank you for the call, gentlemen.

Thanks. Our next question comes from Arun Jharam. Please go ahead with your question.

Chris, Michael, good morning. Chris, I was wondering if you could give us a little bit more bigger picture around the scope or the ambitions of your fleet modernization program. You mentioned $5 to $550 million of CapEx this year and at or a little bit below that kind of next year, but I was wondering if you could give us a little bit more scope on how long do you expect the higher CapEx trend relative to maintenance to continue and what type of capacity ads do you expect over the next couple of years?

You know, we don't have any plans to add capacity, you know, per se. Our plan, and we do have a plan, on fleet modernization is sort of a continued gradual program. Of course, what's actually going to happen is not going to be our plan. It might be accelerated. If the demand pull is there, it might be slowed down. We never put anything in stone. But I would say the migration to next generation fleets, the economics are going to pull that pretty strongly. Both these next generation fleets have meaningfully lower emissions. The very latest next generation fleets are also going to have greater safety, higher reliability, better performance. And then just from a straight numbers perspective, the delta in fuel costs today between burning natural gas and burning diesel is large. It's a big deal. So just the economic driver of fuel cost savings is likely going to have continued customer pull to get next-generation fleet equipment. But again, for us, it's not an expanding, it's not growing our fleet. It's just simply a disciplined, returns-driven upgrade cycle in our fleets that will be and is being pulled by our customers.

Great. I was wondering if you could just follow up. Just give us a sense for the two Digifrac fleets that were to be deployed starting in the third quarter or later this year. Give us a sense of how those deployments are going in terms of timing and perhaps how the contract terms for the latest two new builds are trending relative to your initial two that you plan to put in the field?

We're in business, Ron. Yeah, obviously customers are excited to see that technology out in the field, and we're excited to get it deployed out there. We continue to see strong demand. We are navigating some supply chain challenges. Not so much on the pump side. We have pumps being delivered on schedule. We're struggling a little bit more on the power generation side, so that's holding us back a bit. We still expect to deploy our first two fleets this year in Q4 likely, and the next two fleets probably in Q1 is our expectation today. And as you think about how that contracting has evolved, you kind of want to think about how the business, really the market has evolved over time. If you think about when we announced those first contracts, we were in a little bit different environment then. versus where we find ourselves today, leading-edge pricing even for a Tier 2 diesel fleet has moved pretty dramatically over the last three to four months. And so as we think about contracting next-generation fleets, to the point Chris made earlier, the fuel savings opportunity there is massive, maybe over $20 million to $25 million annually. And so we think about where leading-edge Tier 2 diesel pricing is and then the fuel savings opportunity there that, of course, we want to capture some meaningful piece of as well, and that provides guidance as to where we want to set pricing for our next generation capacity we're deploying.

Great. Thanks a lot.

Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead with your question.

Great. Chris and Michael, congrats on a solid quarter here. I wanted to build on some of your comments. You mentioned you don't expect to add capacity Broadly speaking, do you see current profitability levels as incentivizing your competitor set about adding capacity to the market overall? I guess where we're going with it is, do you see discipline fading at all?

We haven't seen any of that. We're close to all the equipment builders. I don't know of any fleets being built that are not really driven by ESG or SPACs. I don't know of any straight kind of capacity ads. They probably are. But if there is, it's very small, very little. Certainly among the bigger players who are an increasing share of the marketplace these days, you know, I don't think there's any appetite. Look, A, you couldn't do it. Oh, the market's great today. I want three more fleets. Well, sign up for 15 months and you'll get them. Well, what's the market going to be in 15 months? And people, I think, are obviously burned from overbuilding or redeploying too many idle equipment in the past. So no, we have not seen a fading of discipline. We've seen a pretty rational dialogue between us and our customers. in a marketplace today where our customers have just fantastic returns, and we're still lagging a ways behind that, but we're moving in that direction as well.

Just to point out, I mean, really, if you think about it, there's about 10% attrition a year. Now, that attrition can be delayed somewhat. It's a very strong market, but eventually it comes, right? So I think that's one of the things you've got to look at when we look at sort of what is being built, and it seems to be balancing with attrition over the long term.

That's a good perspective. And the follow-up is just around labor. A year ago on these calls, we were spending a lot of time talking about how tight the labor environment is. And just talk about what you're seeing right now. Are you still facing labor challenges? And how are you mitigating some of those risks?

Yeah, labor markets remain tight. I would say you're seeing a few more people coming back into the labor force. So incrementally, better than it was six months ago, but still a very tight labor market. Nothing like we've seen in the last 10 or 12 years. So incremental improvement, the right direction. What we've focused on is very liberty-specific opportunities about why it's a great place to work at Liberty. Why people love their jobs here, why we have low turnover. But it is an on-the-ground effort. We're going to trade schools where people are learning to become electricians and welders and setting in those groups, having them do internships at Liberty In fact, having NCAA signing ceremonies as people sign on to join Liberty, whether it's out of Alabama or Mississippi or somewhere that may not be right in the middle of the oil patch. So I give huge credit to our recruiting and HR team who just had to change the game a bit to find and attract people to come in. But people come in, and if you treat them well and they have a great job, you know, this is an exciting industry. So they're all solvable problems, but, yes, it is a challenge, and it is a significant constraint. I would say others... Yeah, turnover in our industry as a whole, I would say, is probably still quite high. And most everything in our industry is shorthanded today. So I don't want to get too much comfort on the labor problems. They're real. But I think Liberty's been doing a pretty good job navigating that.

Thank you, sir. Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead with your question.

Hey, guys, phenomenal quarter. Congratulations. Quick question on the incremental fleets. How much of that growth is driven by your ability to tie your own sand and access to that sand versus just better overall industry demand?

Look, it's people – this is almost all from existing customers, right, that either want to do a little bit of incremental activity or maybe – they've split their work between liberty and somebody else, and somebody else is struggling, and they're not getting consistent throughput. They're not getting things done the way they'd like them to be done. But, you know, I think that the pull there is we know you guys, we trust you guys, you can deliver, you know, and what are the economics it would take to get a little more of that. It's all of that package, of course, John, but we buy a lot of sand from third parties as well if we're in a bunch of different basins. It's not just that we have sand mines, but it's that we have relationships and a history in a tight procurement market. I would say our goal has always been to not just be the preferred grant provider, but to be the preferred partner to our suppliers as well. A little color on that too.

I mean, the activations are not on one specific basis, right? They are actually spread across all the bases, which to some degree helps in the ability to source labor and support those fleets and for supply chain to support those fleets. But the key things you're asking at this present point in time when you're activating a fleet is really is can you source the labor? Can you source, can supply chain support them? That's a key event because you're putting a fleet to work and it's delayed or it sort of has issues. It's not a good choice.

Okay, got it. The other one for me is just look at the backdrop. I mean, clearly demand is good. You guys are obviously performing well. How do we transition? Do you think there's the opportunity, Chris, Ron, Mike, to transition finally to sort of take or pay arrangements for these fleets just What would happen if you went in and asked that customer today to lock something up? I mean, to transition away from dedicated fleets. Is that in line of sight?

I mean, there are deals like that today where, you know, the buyer needs something, and so we'll have guarantees of our economics if they struggle on operations and aren't able to have a frack pace move as fast as we'd like. We have some contract protections in there that protect our economics. So those absolutely exist today. But again, for us, winning in the long run in this industry is always about how can we win together? Not, hey, if things change, you're screwed and we win. That's just, that's They did exist in our industry. Even then, we generally did not engage in them. We've always had a partnership mentality. We always will have a partnership mentality. Now, I know you're rolling your eyes right now and saying, well, Chris, that partnership was harsh for you guys the last two or three years. And there's some truth to that. And are the benefits disproportionately going to swing a bit more our way going forward? Yes. Yes, of course they are. But we've got to always be prepared to deal with, you know, what comes.

I'm scared. You've got a camera in my truck.

Okay.

Last one for me, and hopefully you guys can get this one. But you noted you'll start the year in 23 with a fleet count in the low 40s. Is that assuming two Digifact fleets in the – and can you say how many in Canada? Just remind me.

We don't give fleet breakdowns by basin and all that, John. We've always been careful about that. So low 40s is sort of vague, but, yeah, I would say that's taking in a couple of digifract fleets that are going to be rolling, and they will be rolling in the fourth quarter.

Okay. Got it. Thank you, guys. Great quarter, Ben.

Thanks, John. I appreciate you driving everywhere in that truck.

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

Yeah, thank you. Good morning. I guess some of these questions have been asked, maybe digging just a little bit deeper on what you're seeing in terms of who's coming to you to bid for potential new fleets or any future reactivations. And, you know, have we seen that as a – a difference between sort of oil and gas basins, understanding you don't like to disclose exactly where the fleets are, but as you think about what's going on in the bidding side, what you're seeing from your customers.

You know, I would say it's pretty balanced right now. It's strong across the sector. Well, strong meaning that, you know, the economics are good, there's pull for incremental demand, but the pull is for very small incremental demand. You know, the fleet count from the start of the year to today, you know, maybe has moved 10%, growing a little bit fast at the start of the year, probably moves a few percent from here to the end of the year. And we sort of model next year as sort of flattish at the end of this year because there simply isn't. You know, people wanted 20 more fleets next year. I simply don't think they're there. So we expect to see the continued sort of growth. flattish with a slow creep upwards in active fleet counts, and I would say reasonably balanced between oil and gas. The end markets in both are pretty strong right now, but in both markets, everyone across our customer and just friends who are current customers, the mindset across everyone is It's hard to add incremental supply, and it wouldn't be good if we all added a lot of incremental supply. That's where the gas production infract leaves. So I think it's a pretty disciplined, sober state of affairs in the industry today.

Yeah, thanks for that. And then maybe as a way to tie that into sort of production expectations as we look to the end of this year and next year, You mentioned earlier in the call challenges for operating efficiency for the industry. This would tie in a little bit with the labor issues, but if you think about a relatively stable capacity in 23, does that imply that if we don't get significant operating efficiency improvements, trained labor, etc., that it'll be hard to deliver more wells and more production in 23?

Well, Roger, the current activity level and sort of like the biggest proxy for what's going to happen to U.S. oil and gas production is the rate at which pounds of sand are going underground. Way more important than rig count, practically it's better than rig count, but really it's pounds of sand going underground. That's the metric we base production predictions and drive. Now, it's not straight, simple as where's the sand going underground, how is it going? I mean, so there's some details around that. But the current level of activity is driving today modest growth in both U.S. oil and natural gas production. I think we've said at the beginning of this year we expected 700,000 or 800,000 exit-over-exit oil production growth this year. I think that's a reasonable estimate. We might be a bit above that, but we might be a bit below that. I think that's a reasonable pace at which we're running right now. And if you keep going at the current rate, we would see a similar growth rate next year. So I think you'll see, again, probably a little less than a million barrels a day of U.S. exit over exit rate oil production growth this year, probably on track to see a similar level next year. Now, wide bands on that, but, you know, 500 to a million barrels a day of exit over exit growth rate next year, probably. And continued, you know, I should be even more cautious here. Natural gas is growing, and production rate will grow, but again, also at a modest rate. And in current activities and next year's plans, I think it continues to grow next year at a modest rate.

Great.

Thank you.

Thanks, Roger. Thanks, Roger.

Our next question comes from Scott Gruber with Citi Group. Please go ahead with your question.

Good morning.

What's up?

So, as we've talked to investors the last couple quarters, we've sensed a general kind of disconnect between market expectations for fracked fleet utilization and the trajectory of per-fleet profitability. You know, many initially looked at the 2017-2018 upcycle as a comp, not realizing just how weak that upcycle was. If you look back at 2011-2012 per-fleet, profitability got closer to $30 million. Is that a level of profitability possible for the underlying FRAC business alone this cycle, you know, separate from the other businesses? Or does the partnership model or cost inflation, you know, prevent you and peers to pushing the FRAC profitability alone towards that $30 million level that we saw about a decade ago?

It's certainly possible. It's certainly possible. Look, it's just supply and demand. It's, you know, yeah, whatever. Fleet profitability is in the low 20s now. Does that likely drift higher? I suspect it probably does. But, yeah, it's hard to predict where it goes. I would say we would hope it doesn't go to $40 million. You know, if it goes to outrageously high levels, That, you know, that of course will be the start of some unwinding of discipline, but there's still a lag there. There's still a risk in there. The economics look awesome, but man, I can't get equipment for over a year. You know, I still think you see some restraint on that, but when we see people that really need activity and are willing to pay for it, and we've deployed these incremental fleets, maybe partially to offset people doing wacky things. to get wells online and where they are. And so, yeah, we don't know where the fleet profitability is going to go. Likely to continue to drift higher in the coming quarters. How much or how far, we'll see.

Got it, got it. And then how should we think about the contribution from the contract businesses? You know, it looked like you had a nice step up in that contribution in Q. So as you think about 3Q, 4Q, and into 23, will the non-FRAC businesses, you know, profitability contribution expand at a faster pace than the underlying FRAC business or more in line? How should we think about the cadence of that contribution?

So, you know, I think, you know, the underlying frankness is probably the one that expanded at a quicker rate. You know, the non-franknesses are a little steadier. The majority of our sand, you know, the sand mines we picked up from Wanston, you know, really come to go through our frank fleets. You know, so that's really a small portion of sort of additional sort of like, let's say, third-party sales that go there. So, you know, I would say, you know, kind of the first half, the underlying frankness is the one that's expanded at a faster rate.

And that would be expected to continue to lead in the second half?

I think that's a fair assumption.

I think so. Okay.

Appreciate the call. Our next question comes from Connor Linaugh with Morgan Stanley. Please go ahead with your question.

Yeah, thanks. Just a question around capital allocation, and I frankly ask this a little bit facetiously, but given where your stock is and just how cheap the valuation is relative to these leading-edge numbers that you're putting up here, why spend anything but the bare level of maintenance capex and not divert the rest into buybacks? What's your thinking around that?

So that is very much a dialogue we have internally, very much. And I think one could make, you could make an argument for that. The question is, we're always playing for the long term, right? Our success, our way above average, not just our industry, but the S&P 500 return on capital employed since we launched this business, cash return on cash invested, I think is closely tied to the great partnerships we've had with our customers that want to work with us for the long run, that want to make long-term decisions together with us. So it's very important that we run this business in a way that keeps us the best partner for E&Ps available. That competitive advantage in our business definitely helps keep us to deliver elevated returns over the long run. So we'll always continue to invest and keep that competitive advantage. But you're right, today, the attractiveness, fortunately, we're coming into a place where we're going to have the free cash flow to pursue a bit of an all of the above approach. But yes, at today's valuations, buybacks look pretty compelling.

And just to clarify about how you're thinking about the balance sheet and executing those buybacks, obviously you've got a fair bit of CapEx for the duration of the year here, and it sounds like probably a decent amount of the market remains strong in 2023. Would you feel comfortable levering up a little bit in order to execute buybacks based on where the share price is trading, or is that something you think of as more of excess free cash flow is what you're going to use for that program?

No, the opportunity today is compelling. The window of free cash flow in the very near future, we're quite confident in. So no, buybacks, timing matters. I can say the same thing about CapEx and investment. People tend to invest hugely in their businesses, CapEx and buybacks. when their business is just killing it and minting cash. But that's not the best time to invest in capex in your business and in buybacks. So no, you have to be willing to do those with a lag. And we've talked about this since our IPO. At the beginning of cycles is the best time to invest capex in your business. And when the share price is most dislocated is the best time to do buybacks as long as you're not taking balance sheet risk, right? So at the very start of the downturn, you don't know how ugly it's going to be. You've got to be careful or cautious there. But, no, the timing of these things is not specifically tied to the timing of cash flow.

Appreciate the context. I'll turn it back.

Thanks, Connor. Our next question comes from Derek Podhazer with Barclays. Please go ahead with your question.

Hey, good morning, guys. I wanted to hit on pricing a little bit more. Could you talk about where the reactivated Tier 2 diesel fleets were priced relative to the next-gen fleet's price at the end of last year and early this year? How much does this raise the bar for next-gen pricing, recontracting, and what runway do you have now for profitability expansions that these are repriced in the next six to 12 months?

I've got to be cautious. We always want to be careful about not giving specific projections because we don't know the future. But you make a good point, Derek, that right now these reactivation fleets are obviously contracted at very strong economics, very strong economics. And if you said, hey, let's take the exact same market environment and add a next-generation fleet with huge fuel cost savings and lower emissions, yeah, the value of that is enormous. And will that impact repricing of fleets? Sure. Yeah, of course it will.

Got it. That's helpful. Switching over to the Digifrax, so you'll have four fleets by early next year. You talked about the pressure on the power side. Would you supplement with third-party turbine providers or grid power or battery power to help get you to where you need to be with those MTU natural gas reset engines?

Look, I think we certainly contemplate most of the above listed, never a turbine. We don't view that as an appropriate solution to put out in the field, so I don't think that's the right answer for us. But, you know, in terms of an opportunity to use some amount of grid power, I think that's certainly on the table and a conversation we're having with some of the potential Digifrac customers, call it a bit of a hybrid approach in terms of how the power is ultimately provided on location. As you know, there are some folks in the third-party business that have natural gas recid now, have come to the same conclusion we have around the emissions profile from that technology. And so those would also represent a potential option for us as we think about patient deployment for DigiTrack going forward.

That's helpful, Collar. Last one, if I could squeeze it in, just on the unconventional geothermal investment. Can you talk about how big of an opportunity this could be for you over the next few years, three to five? Could you frame that and maybe put some numbers around it for us?

I think too early to do that, but obviously we did the investment because we foresaw there was a reasonable chance that this would be meaningful business. So we're excited about that opportunity. Too early to really give numbers around that. But, yeah, we're obviously not doing it for show or for window dressing. We believe in that business. We believe it can grow to some scale.

Got it. That's helpful. Thanks, guys. I'll turn it over. Thanks.

Our next question comes from Keith McKay with RBC Capital Markets. Please go ahead with your question.

Hey, good morning and thanks. Just curious if you can talk a little bit more about what portion of that low 40s fleet count would be non-next generation fleets under your definition, which I think is Tier 2 dual plus.

Yeah, it's definitely less than half, maybe meaningfully less than half, but it's still a meaningful slice.

Okay, got it. Thanks for that. And under next year's initial look at CapEx of close to 2022 levels, can you talk a bit more about how many Digifrac fleets that might contemplate?

When we look at that, the majority of that capex above and beyond maintenance capex is kind of, at the moment, soft circle to Digifrac. I gave you those numbers to give you kind of a general idea of where things could go. Obviously, those plans will actually be made one customer at a time. Maybe we'll announce them as we go. But yeah, outside of maintenance capex, the majority of that will be spent on the Digifrac complex.

Okay, thanks very much. I'll turn it back.

Thanks, Steve. Our next question comes from Vakar Sedh with Alta Corp Capital. Please go ahead with your question.

Thank you. Congrats, gentlemen. Great quarter, first of all. Mike, just a quick housekeeping question. Number one, do you envision some fleet startup costs in Q3? And if so, what will be the size? And number H2, would that be, second half, would that be a source of cash from working capital or still use of cash?

Sorry, Avotai, you broke up while you were opting. Can you repeat the first part of the question?

Yeah, so in Q3, do you expect any fleet startup costs, and if so, what size?

Yes, we do, and I think it'll be probably similar to Q2, between Q3 and Q4, I'd say. Okay.

And then working capital, do you expect that to be a source of cash in H2, second half? No, it'll be a slight use of cash.

Slight use of cash. probably balances in Q4, you know, as we've had the seasonal, the normal seasonal rollover, seasonal weather rollover, you know, it might be a small use of cash, use of cash in Q3, possibly a small balance in Q4.

Okay, thank you. And just, Chris, just one last question from me. With this recent pullback in oil prices, have you seen any change in discussions with your customers in terms of the direction of leading edge pricing and or in any way other concerns about reducing activity, anything like that, anything negative on pricing and activity?

No, nothing there. I don't think the pullback has been significant enough, and in the out years it's not meaningful. So no changes yet.

Thank you very much. That's all from me.

Thank you, sir.

Again, if you have a question, please press star, then 1. Our next question comes from Mark Bianchi with Cohen. Please go ahead with your question.

Hey, thanks. I wanted to go back to the 23 CapEx, if it is flat or slightly down. Michael, could you just give us the buckets? Because I'm assuming that the maintenance number is going up because of just the active fleet counts going up, but maybe just level set us on the three buckets or however you want to describe it for 23.

Yeah, it's really a soft circle, Mark. You know, I think you used sort of our rough rule of thumb of 3.5 million of fleets. you know, kind of in that low 40s. Obviously, we've got, you know, you've got inflationary pressures on the maintenance cap, et cetera. But, you know, that's getting, you know, as we improve equipment, we're doing our best to offset that. I think if you take that as maintenance, then I think the balance is really a soft circle on, you know, for decisions that we make customer by customer, the majority would be spent on 50 francs.

Gotcha. Okay, great. And one other...

Pardon, go ahead. The market changes. We have a lot of flexibility in moving capex, adjusting capex as markets change.

Yeah, we saw that this quarter, right? I guess the other one for you, Michael, is the 2022 and 2023 cash taxes. Can you give us any sense of what we should be assuming there? Because I'm assuming that's quite a bit different from the book tax. We'll see.

No, cash tax is relatively minimal. Second half of the year, probably, I've ordered 10 to 15 million. You know, and it's probably not too dissimilar from bulk taxes. Obviously, we've got a fairly large valuation announcement related to the TRA that protects that. 2023, we'll probably talk about that at the next, you know, because I haven't modeled it out. I'm going to spend a little time with my tax director on some of the interplay then.

Okay, but not a meaningfully different number perhaps than the second half as we're just trying to triangulate on cash flow.

Yeah, I would say in general, I think we will be in cash tax payment situation next year. So again, I think next year will be a drag on cash flow to the extent we haven't modeled yet.

Yep. Okay, super. And then the last one for me is just kind of higher level on, you know, customer budgets here. I mean, the EMPs have absorbed a lot of inflation over the course of the year. And, you know, there's, at least for the publics, there's a commitment to, you know, not increase CapEx too much. Are you seeing any customers, you know, adjust plans and activity because of the amount of inflation that they've seen? And how are you thinking about that interplay into 23?

I would say people's goals are based on what they want to do with their production. You know, they want to keep production flat, they want to have very modest production growth. I think that's generally the targeted activity levels. And then they want to work as efficiently as they can to get those activity levels done. And obviously, frack pricing is a piece of that. But each shift of piece, right, you could pay a higher frack pricing, book pricing to you know, liberty versus someone else, but the wealth come on sooner and the efficiency of operations is greater, there's some offsetting cost savings from that. So, no, I think what producers are keeping relatively anchored is their activity and production plans.

Got you. Okay, thanks. I'll turn it back.

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

Yeah, I just want to say thanks for everyone's time today for following Liberty's business and for being involved in the energy business. Huge shout out to everyone on Team Liberty that 24-7 is working hard to make our business successful and to make the world go round. Thanks also to our customers and suppliers and everyone. We'll talk to you next quarter.

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