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 Anjali Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Thank you, Alison. Good morning, and welcome to the Liberty Energy Second Quarter 2023 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer, Ron Gusick, President, Michael Stock, Chief Financial Officer, and Ryan Godney, Chief Accounting 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 views about future prospects, revenues, expenses, or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our 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 adjusted 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 adjusted pre-tax return on capital employed, as discussed on this call, are presented in our earnings release, which is available on the investor section of our website. I will now turn the call over to Chris.

Good morning, everyone, and thank you for joining us for our second quarter 2023 operational and financial results. We executed on another quarter with strong financial results, and I'm especially proud of our operations team. for safely delivering the highest quarterly average daily pumping efficiency in our history, a high bar raised higher. Liberty achieved adjusted EBITDA of 311 million and fully adjusted, fully diluted earnings per share of 87 cents. Our success in growing our long-term competitive advantage is illustrated by our trailing 12-month adjusted pre-tax return on capital employed of 44%. Strong cash generation enables long-term investment, together with a strong return of capital program. In the second quarter, we returned $69 million to shareholders through the repurchase of 2.7% of shares outstanding, plus our quarterly dividends. Since the reinstatement of our return of capital program in July of 2022, including the initial $250 million buyback authorization and a subsequent upsize to $500 million in January, we have now returned $287 million to shareholders through cash dividends and the retirement of 9.7% of outstanding shares. We completed the initial repurchase authorization and now have 240 million of our buyback authorization remaining. The compounding effect of our last 12 months of share buybacks is evidenced by the 57% year-over-year increase in fully diluted earnings per share on a 45% increase in net income. We created a unique competitive position where we can take advantage of accretive, cyclical and secular investment opportunities, generating high returns while returning cash to shareholders and maintaining a strong balance sheet. We have a very simple philosophy of investing early in the cycle in strategic areas where we can leverage our expertise, bring differential technologies and services to our customers, improve efficiencies and create future competitive advantages. A latest example is the launch of our new division, Liberty Power Innovations. LPI provides CNG fuel and field gut fast processing services to deliver a reliable source of natural gas fuel in support of the rollout of our suite of DIGI technologies. Just as Liberty was founded as a solution to service quality challenges 11 years ago, LPI was an organic idea stemming from the need to find a solution to unreliable gas supply. LPI has made tremendous strides in the last few months. We've successfully integrated the April acquisition of SIREN into the LPI platform and have already seen a growing customer base for both drilling and completion needs. We're also on track to meaningfully increase our gas compression capacity in the Permian Basin in the third quarter and enter the DJ Basin later this year, readying ourselves with enough capacity to execute on a profitable multi-year growth plan. Our delivery and logistics capabilities are also growing with transportation equipment on order, increasing our fleet of CNG trailers and logistics services to deliver reliable fuel supply. We also have field gas processing and treating, which began in the Haynesville in support of our frac services. We have since added two additional field gas processing customers in the Permian. We're excited by the long-term business potential of the LPI platform. not only will it allow us to secure the supply chain of fuel that drives our DigiFleet technology transition, but it also positions us to take advantage of expanded opportunities beyond completions and eventually grow beyond the oil field. We're investing today for the future growth of the business by bringing together the right people and right technology to build a differential offering. Liberty was an early driver in the industry shift from diesel to natural gas technologies a decade ago. And today, the importance of natural gas-fueled equipment is more widely appreciated as a means to lower fuel costs and emissions. We continue to transition our fleet towards our natural gas-fueled Digi technologies. These technologies expand our earnings potential without meaningfully changing the customer's total well costs. with the savings from the diesel to natural gas arbitrage. As a reminder, we deployed our first DigiFleet comprising Digifrac electric pumps in the first quarter, and we're in the process of deploying our second DigiFleet, which is slightly delayed as a result of supply chain challenges. Our third and fourth fleet will follow during the second half of this year. We're also building DigiPrime hybrid pumps, anchored by the most efficient 100% natural gas engine available. These capital-efficient pumps can be used as the primary source of horsepower on location, alongside a few Digifrac electric pumps that will manage transient load and precision rate control. This fleet configuration will have the most efficient gas consumption, emissions, and fleet capital in the market. Digitechnologies, are liberty's platform for the future crack markets in north america are at a steady healthy activity levels after moderating a bit from late 2022 as commodity prices retreated from the 2022 peak crude oil prices are now at pre-russia ukraine war levels which has spurred private operators in oilier basins to reduce activity lower natural gas prices have also led to a curtailment of activity in gas basins. During the second quarter, we saw reduced fracked activity that resulted in increased white space on our calendar, resulting from customers changing development schedules, idiosyncratic drilling delays, and the redeployment of fleets from gassy to oilier basins. Even with these disruptions, the Liberty Operations team achieved a new quarterly record in average daily pumping efficiency. When our fleets were on location, our performance was the best it's been in our history, with more fleets safely pumping more minutes of the day than ever before. Looking ahead, activity in the second half is expected to be slightly lower than the first half. If our customer scheduled work reductions become larger, we may reduce active fleet count by one to three fleets in the second half of the year to balance demand. We will consolidate work to maximize the utilization of our crews. Our goal is to maintain the safest, most efficient operations, and we will do so by balancing the right numbers of crews to meet EMP customer demand. As we look forward, the rig count shows signs of stabilization as EMP operators are already benefiting from lower well costs from consumable inputs. and some are evaluating plans to pull forward completions activity. Lower operator well costs are not service price driven, but rather input costs, such as drill pipe, steel casing, cement, sand, and fuel. Liberty is working with our customers to help lower their costs while maintaining our margins. Our wet sand handling and delivery technologies are enabling proximity mining reducing total costs and environmental impact by shrinking the distance and truckloads required to move sand to the well site while eliminating the use of natural gas from the sand drying process. Our wet sand handling technology is agnostic to wet and dry sand, allowing us to provide our customers with the most cost-efficient source of sand for their wells. We also have other logistic initiatives underway to generate sustainable cost reductions for EMPs and increased returns for our shareholders. More broadly, global oil markets are signaling a constructive outlook on a tightening supply-demand balance. OPEC Plus supply cuts in recent months are beginning to take hold, and markets are anticipating a subsequent draw on global oil inventories. In the U.S., Slowing production growth, a drawdown of oil inventories, and a likely shift to refilling U.S. strategic petroleum reserves all aid the outlook. Despite recessionary risks, demand for oil remains resolute given several factors, including global travel trending towards pre-COVID levels, robust demand from India, and strength in emerging markets. China has also reached its highest level for oil demand in history, despite having grown at a slower pace than predicted a year ago. Underinvestment in global production capacity supports a resolute multi-year cycle for oil and gas. Relative to prior cycles, crack demand has a natural floor as the large majority of completions activity is simply offsetting normal production declines. operators are largely adhering to flat or very modest production growth targets. This combination underpins higher base levels of fracked fleet utilization and more insulation from commodity price volatility than in prior cycles. The current, more consolidated industry is also better prepared to navigate near-term softness in completions activity by reducing active fleet counts to balance the market and protect margins. In the second half of 2023, demand for crack fleets is expected to parallel recent recount trends at approximately a one-quarter lag. Natural gas markets likely don't meaningfully increase activity until 2024 in advance of rising LNG and Mexico exports. We anticipate North American completions activity will moderate in the second half of the year versus the first half. Service companies are reducing fleets in response, supporting a balanced frac market and largely stable pricing environment. Our internal bottoms-up industry analysis already shows a decline of industry frac demand for nearly 30 active fleets, and the industry has successfully navigated this softer activity. Liberty is well-positioned to navigate these trends. While Liberty may reduce fleets to adjust to lower activity levels should they persist, we do not expect meaningful change in service prices. Crack utilization has moderated but still remains high, and we see a strengthening macro in 2024. We expect continued healthy free cash flow and capital returns to our shareholders through opportunistic share repurchases and dividends. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results and outlook.

Good morning, everybody. I'm pleased to share that we achieved an improved trailing 12-month free tax roasting of 44%, despite the utilization challenges of the second quarter. We also rounded out our first full year of our capital return program, reinstated in July 2022, with a combined $287 million returned to shareholders, dominantly in the form of accretive buybacks. We continued our investment strategy in our differential suite of Digi Technologies and accelerated the launch of LPI Siren Acquisition in April. We've had a busy quarter executing on these initiatives, and we expect this to continue for the remainder of the year. In the second quarter of 2023, revenue was $1.2 billion, a 27% year-over-year increase, but a 5% decline from the first quarter. Relative to the first quarter, unplanned customer completion schedule changes, drilling delays, pushed activity on larger pads, and fleets shifting from gas to oilier basins led to softer market conditions and utilization challenges, partially mitigated by the record efficiencies we achieved across the full fleet. Second quarter net income after tax of $153 million a 45% increase from prior year, but a decrease from the $163 million in the first quarter. Fully diluted net income per share was $0.87, a 57% increase from prior year, and compares to $0.90 in the first quarter. General and administrative expenses totaled $58 million in the second quarter and included non-cash stock-based compensation of $7 million. G&A increased $5 million sequentially due to the higher non-cash Stock-based compensation expense, annual salary adjustments, and other miscellaneous expenses. Net interest expense and associated fees totaled $6 million for the quarter. Tax expense for the quarter was $47 million, approximately 24% of pre-tax income. We expect the tax expense rate for the full year to be approximately 23% to 24% of pre-tax income. Cash taxes were $52.5 million in the second quarter And we expect 2023 cash taxes to be approximately 50% of our effective books tax rate for the year. In 2024, we expect a 23%, 44% book tax rate and a similar cash tax rate. Second quarter adjusted EBITDA increased 59% year over year, but declined 6% sequentially to $311 million. Adjusted EBITDA fell sequentially as a result of the aforementioned challenges during the quarter. We ended the quarter with a cash balance of $32 million and net debt of $256 million. Net debt increased by $67 million from the end of the first quarter as we acquired Siren Energy for $76 million net of cash. We used cash flow to fund capital expenditures, $60 million in shared buybacks and $9 million in quarterly cash dividends. Total liquidity at the end of the quarter, including availability under the credit facility, was $226 million. Net capital expenditures were $152 million in the second quarter, which included costs related to digi-brack construction, capitalized maintenance spending, and other projects. We had approximately $7 million of proceeds from asset sales in the quarter. Net cash from operations was $240 million for the quarter in returns to shareholders was $69 million for the quarter. Our capital expenses remain on target for 2023, now way towards the second half of the year. In 2022, July, we installed a $250 million share repurchase program to take advantage of dislocated share prices. During the first quarter of 2023, we upsized our authorization to $500 million, reflecting our conviction in our ability to generate strong, free cash flow. We also reinstated our quarterly cash dividend of 5 cents per share in the fourth quarter of last year. In the second quarter, we returned $69 million to shareholders, including the share we purchased of 4.7 million shares, which represent 2.7% of the shares outstanding at the beginning of the quarter for $60 million, and the balance in dividends. We have now returned to shareholders a cumulative $287 million in the last 12 months. We continue to differentiate ourselves with an industry-leading return of capital program while reinvesting in high returns opportunities and growing our free cash flow. Looking ahead, we expect North American completion of activity will moderate in the second half of the year, this is the first, but remain at very healthy levels. Frack activity is expected to stabilize a somewhat quarterly lag to the rig activity ahead of a more constructive outlook for oil and gas markets in 2024. As we look at the second half, we may reduce active fleet count by between one to three fleets if activity slows further, consolidating our planned activity with our highly efficient fleets and thereby improving fleet utilization. As a result of these changes, we're adjusting our full year of 2023 adjusted EBITDA outlook to approximately 30 to 40% in year-over-year growth. Our profitability should trend higher in 2024 And free cash flow is predicted to exceed 2023 levels, driven by incremental profitability from our current year investments, continued margin expansion of initiatives, and lower capital expenditures. We will continue to deliver on our strategic priorities, including our industry-leading return of capital program, a strong balance sheet, and continued investment differential technologies that are in this position as well in the coming year. Chris will give some big picture closing comments after Q&A, and I will now turn it back to the operator to open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Derek Podhazer of Barclays. Please go ahead.

Hey, good morning, guys. So your top line was down 5%, but you held in Decker Metals around 30%. The whole margin's flat quarter over quarter. Can you just maybe talk about the cross-currents between, you mentioned your record pumping.

He's not on there, huh?

sorry, white space, decreased consumable prices and frac pricing? And should we expect similar decrementals for the back half of the year, the second half?

Look, as you said, uh when people change schedules and we don't have enough uh time to fill slots and all that we end up with a little extra white space as we did um so look i would say pretty similar in q2 versus q1 a little more white space that drove the revenues down pricing about the same but when you have white space and you don't get revenue out of that you've still got the same fixed cost it compresses margin a little bit i don't know if michael wants to say anything else but Yeah, and you can see our revenue, I think, was about the same as Q4, but margins were higher.

And, Derek, I think the team did a very good job. Pricing was basically flat. I would say activity was off, but, you know, we did a great job on the efficiency side. Decrementals were 30%, which was very good. You know, we actually managed to sort of mitigate some of the decrementals that you would normally see in a drop of revenue with some of our other business lines. So, but second half of the year, I think you would see, you know, you could potentially see a little higher decrementals. That would be the natural sort of like flow, but we will still work to mitigate it. So, you know, I'd say 30% is probably the low end of the decrementals, a little bit higher than that, you know, could be expected as well.

Okay, great. That's helpful. And then I just want to, I need more color on your FRAC, your fleet count. I know you previously guided us to a low 40 numbers. But now we have some E-Fleets coming in. You mentioned first Digiflac feed out. Next one's coming in three and four back after the year. You talked about removing one to three fleets in response of the market. But what about your aging Tier 2 pumps? Are you taking those out of the fleet as well? I'm just trying to think about where 2024 is going to start as far as a fleet count for you guys. And maybe even further, what type of a mix should we think about between E-Frac, Tier 4 DGB, and then just your legacy stuff? Some color there would be helpful.

Generally, I'll take that one, Derek. When we look at it, we probably retire three pumps every week when we think about an aging fleet. The average sort of about 10% of the whole industry fleet goes down every year. So it's a very slow sort of incremental process. We are bringing on Digifrag pumps as we go. As we said, we'll have four fleets of that. Generally, if we're looking at a flat fleet count, that would be replacing Tier 2 diesel. So we're moving up our natural gas percentage. As we said, depending on where Q4 shakes out, which may well, they're still working on some of the plans, I think, on the operators and where the second half of that is. Maybe somewhere between one and three fleets we may drop compared to the beginning part of this year. So that's where we would start next year. One would expect those fleets would come back relatively quickly as the strengthening market going into Q1 with a better oil market and then Strengthening again, I think you'll see a strengthening market as we go through the gas prices come back. So really pretty good outlook for next year on that. Sort of an increase in our gas usage and sort of widening our technology advantage.

Great. Perfect. Appreciate the call, guys. I'll turn it back.

Thanks, Derek.

Our next question today will come from Keith Mackey of RBC Capital Markets. Please go ahead.

Good morning. Just curious, so the guidance you've put out or the commentary you've put out on the fleet count mirroring or paralleling the rig count drops with a one-quarter leg. So if we look at the rig count from Q1 to Q2, dropped about 80 at two and a half rigs per crew. That kind of gets me to 32 fleets, which maps up, I guess, fairly closely with your bottoms-up frack count analysis. But can you just talk a little bit more about where you think the industry is in relation to dropping those 32 fleets and kind of where are we sitting now in total fleet count from what you can see?

Yeah, I'd say when we talk about that quarterly lag, I mean, that's just a natural when you think of drilling moving towards frack. The vast majority, probably a large amount of that was the exit rate for Q2 or the early part of July. So we're sort of, I think, rig counts probably at that you know, sort of stabilised factor now and probably actually gone up in the last couple of weeks, somewhere around there. I would say frag fleets, you know, I think people are slowly de-staffing frag fleets. So it's kind of hard to tell exactly where we count active demand. Where everybody is in sort of, you know, sort of like stacking those fleets and sort of letting the staff a trip off is a little sort of more amorphous. But I'd say a large portion of it has. I think that's right.

Got it. Okay. Okay. Thanks for that color. And just to follow up on your 30% to 40% revised EBITDA guidance, does that incorporate dropping the one to three fleets potentially, or would that be incremental to the 30% to 40% year of your EBITDA growth guidance figure?

Oh, that includes it. Yeah. So that's, as we say, you know, as you see, we're Probably at the top end of that range, we're at the bottom end of our range from where we were when we were seeing the beginning part of this year. So that includes those potential fleet drops if we still see activity continue to roll down.

Got it. Okay. Thanks very much. That's it for me. Thanks, Keith. Thanks.

Our next question today will come from Luke Lemoine of Piper Sandler. Please go ahead.

Hey, good morning. Maybe for Ron, could you update us on DigiPrime and where you are with testing, and then is the plan still for these pumps to be in the DigiFleets that are rolled out, number three and number four?

Yeah, look, we're well into our testing with DigiPrime now. It's on the test stand and running through the program we have laid out for it there. All indications look quite positive at this point in time. So we remain pretty optimistic about deployment of that here in the not too distant future. And And, yeah, certainly expect that to play a role in our rollout of Digi. Exactly what that mix looks like will be a customer-by-customer situation just depending on the needs there. But, yeah, you can expect Digi Prime to be an important part of the baseload horsepower both in the Digi platform and in some cases probably combined with Tier 4 DGB.

Got it. Thanks, Ron.

Our next question today will come from Waqar Saeed of ATB Capital Markets. Please go ahead.

Thank you. So I just want to understand what would change between what macro things have to change between one and three crude drop. So if rate count stays around 650 or so, Do you get to one crew drop or three crew drop, or how do we go from one to three?

Yeah, well, Kar, it isn't really a macro thing. For us, it's always bottom-up micro. It's just the existing customers where fleets are working, if a customer is reducing activity so that fleet is no longer fully utilized, if we can easily fill those gaps or spots with roughly equivalent work, we'll keep the fleets active. But if we have a customer who's, you know, cutting activity in half and we've got two fleets running for them, you know, that's quite likely that one fleet is going to go idle. Now, we have to date, we haven't put any fleets down. So I would say we've benefited a little bit from the differential demand for liberty. There's people that wanted liberty capacity that didn't have it, that have seen a little bit of softening in the marketplace and have used that to, take to absorb capacity we've had come free from these incremental reductions from existing customers. So it's really very much a bottoms-up, you know, what is the best use of that fleet? So I wouldn't say it's a macro thing. It's sort of very specific to the calendars of our customers. But, yeah, that's our guess of that range. And we're – we are – agnostic on what number that is. We'll keep all the people that work for us today. We'll reassign them into other crews. Someone will work on test development and stuff. Natural attrition shrinks employee base anyway, so that employment count can adjust easily to sort of very modest changes in deployed capacity.

Fair enough. And Chris, in terms of pricing, Are you seeing some pressure on some of the fleets, maybe more like tier two diesel fleets? And if so, how much would that be if you could put some numbers around it?

Yeah, I think things are very granular, individual customer to individual customer. But as these fleets have gone down, some of the people, before they put fleets down, they lob in cheap prices. They may grab spot work at much big discounts. And does that create more customer dialogue? Sure, you know, of course it does. But it's, you know, we have long-term partners and generally dedicated work and the way we're performing right now and our customers, we're in sort of a happy situation that works for our customers and it works for us. And we just, yeah, we don't have any intention or any need to meaningfully change what we're doing.

And just one last question. You have a small presence in Canada. How do you see the outlook in the Canadian market and right now the supply-demand fundamentals there?

I would say the Canadian market, which over the last couple of years has probably been incrementally looser than the U.S., today they're probably pretty similar. They're both pretty healthy markets. We're busy in activity. We'll likely have a record year in Canada this year.

Great.

Thank you very much.

Our next question today will come from Stephen Gingaro of Stiefel. Please go ahead.

Thanks. Good morning, everybody. Two for me. Just to start, what's the current sort of price discussion with customers feel like? I mean, is there a lot of pushback? Is it just, I mean, clearly there's a preference for for your higher end assets, but just any color on how those pricing discussions have unfolded?

You know, Stephen, as fleets have gone down, and as we said, probably 25 to 30 fleets across the industry have become idle over the last six months. That absolutely leads to dialogues. You know, as I said to a car, you know, before laying off those people and parking that fleet, they'll probably make a few phone calls. Hey, can we get your work, you know, this and that. So we have dialogues with our customers frequently. But we're always motivated with our customers to figure out how to enhance their economics and enhance our economics. Are there a few more dialogues today? All right, well, I understand, you know, your quality fleet, you're not going to lower your service pricing, but, you know, hey, are there chemicals we can swap out? Is there more efficient logistics we can do? What about this wet sand stuff we've been hearing you guys talk about? So there's probably more dialogues today. that always exist, but maybe more of them today about, all right, what can we do together to drive down our wealth? And that's how Liberty rolls. You know, we have a much larger engineering staff, a much higher tech team than our competitors. And so I would say that team is aggressively working with all of our partners about how to get some more efficiencies out of the system, make better decisions on materials to use, and grow our economics together.

Thanks, Chris. And as a follow-up to that, I mean, you've talked about it. I think, you know, we've talked about it as well and others, as far as you've had industry consolidation, you've had, you know, you and how probably acting better or certainly how has some CapEx perspective versus history. Is it too early to definitively say you've seen the impact of that better industry behavior on pricing dynamics? I, I, Or you're still waiting to see that? I'm just trying to get a sense because we think it's happening, but from your seat, do you think there's evidence to that end?

Oh, absolutely. I mean, look at where we are. Look where everyone's perceptions were three or four months ago. Oh, my God, activity is going to shrink. Pricing will collapse because it always does. No one will park fleets. You know, heck, we've seen 25 or 30 fleets go down and no meaningful, even measurable change in average pricing. So yeah, I would say tremendously different behavior than we saw in the last two downturns. A lot of capacity has been idled. I think people operating that capacity tried to keep it busy at credible high return pricing and they couldn't do it and they parked the fleets. So that's absolutely encouraging. I think we see a change in that. People are just taking a little bit longer term view of their business now as the shale revolution's gotten more mature. And obviously consolidation helps that too. But no, it is, this is, now we'll see what the future brings, but I mean, my guess is most of the activity decline that we'll see this year has already happened. And I would say the industry's handled that fabulously.

Excellent. Thank you for the call.

Our next question today will come from Mark Bianchi of TD Cowan. Please go ahead.

Thank you. The updated guidance for this year for the back half now seems to imply about a $260 million per quarter run rate. I'm suspecting it's going to decline throughout the back half of the year where the fourth quarter is lower than the third. But any steer you can give us on sort of that progression? Is it a linear progression? Is it more of a drop-off in fourth quarter? Any caller would be helpful.

Yeah, we gave you a bound there. You know, as you see, you're probably, you know, 280 on average if you get to the top end of the range, right? So, yeah, you're probably using the middle part of the range there. So, yeah, I think some clarity around Q4. There'll be normal seasonality in Q4, which is 5% to 7% because of holidays. Um, but I think operators, um, sort of where they are and sort of their, you know, kind of their, their plans are really just coming into focus as we come into summer. Right. And so that will depend on, you know, sort of what part of the range it generally comes in.

Okay. So at least at the mid points that the drop is more weighted towards the fourth quarter at this point, um, with maybe a slight decline in the third quarter.

That's where the slight, let's say the fuzziness is, and so therefore, yes, you would say that is correct.

Yeah, okay. That makes sense. And just to clarify, the one to three fleet potential drop, that's overall fleet count. That's not just legacy excluding Digifrac.

That is overall fleet, average overall fleet count, yes. That's correct.

Okay. Okay, thanks. And then I had another quick one on pricing. One of the things that investors say a lot is we're not going to really know the effect of the pricing until the beginning of next year because of negotiations that occur in the fall and then all the pricing resets in the beginning of next year. do you see it playing out that way where, you know, the market won't really know what's going to happen with pricing until we get into next year? Or do you think, kind of, Chris, based on what you were saying to Stephen's question, that we kind of already know?

Yeah, I mean, pricing's a continual thing. I think the sort of You know, there's a few big companies and, you know, with big purchasing departments that are very annually focused, but they're more the exception than the rule. And ultimately, it's just supply, demand, and desire for who your partner is, you know, as those negotiations happen. So, no, look, there's a lot of pricing dialogue going on right now. We see how that's playing out. Obviously, the supply-demand dynamics will be different. three or six months from now than they are now, they might be similar. They might be tighter. We don't know. But I don't think it's no, we don't know anything about pricing until next year pricing. That's not how it works.

You're not going to see a seismic shift as you start into the new year under the new budgets, right? As Chris said, this is a continuum. You know, some things reprice on an annual basis, but generally everything sort of moves sort of like, you know, in a slower, sort of more organic fashion.

Great. Thank you very much. I'll turn it back.

Yeah, thanks for the question.

Our next question will come from Scott Gruber of Citigroup. Please go ahead.

Yes, good morning. Chris and Michael, you guys have been very thoughtful in building Liberty through a series of acquisitions. Um, but we did have Patterson and next year come together here recently. Um, and scale was a big focus for the company. Um, you know, not just operationally, but also in terms of, you know, trying to capture increased investor interest. So I'm just curious about your kind of latest thoughts on industry consolidation and, and achieving greater scale and the importance of, of those factors moving forward for Liberty.

I mean, look, yeah, consolidation, no doubt that's a positive for the industry. You just get larger, more rational actors in evaluating tradeoffs. We've been different, I would say, a little bit in that we haven't mainly been an acquisition company. We really started with a different philosophy, a different way we were going to do business. We were maybe a disruptor with a plan to be organic growth. It's just we had a brutal downturn in 15 and 16 that just led to a compelling opportunity where there wasn't another buyer. And so we did the sand gel deal, and then COVID and some circumstances there led to, for us, a highly attractive opportunity with Schlumberger. But we're not by nature an acquisitive company. We've had two awesome deals, and, boy, if we get a third opportunity that's tremendous like that, of course we would do it. But our fundamental business model isn't acquire and integrate. But for some of our competitors, it is. And that's great. There's all different ways to participate in this game. But in general, fewer players, larger, stronger players, with more long-term thinking management, that's absolutely positive for our industry on the frack side. I would say it's also a positive for our customers. you know, in sort of the crazy days of 2013, 2014, and it was 70 frac companies. I mean, think of what was the speed of innovation? What was the investment looking forward, you know, more than three months? You know, not a lot. So yes, it helps pricing. So you think, oh, that's good for the frac industry, but not good for the EMPs. Larger, more thoughtful players are better able to make rational investments in long-term partnerships. I think it's making the whole industry healthier for both our customers and our space, the FRAC space.

Yeah, and I would just add a little, Carlo. We obviously see the fact that, you know, steadier earnings and a potential large market cap are appreciated by investors. You know, we're building into that organically, as you've seen. We've built a very large company. We've got the FRAC business, which is becoming a much steadier market, less cyclical. It's still going to be cyclical, but less than it has been historically. And now building our LPI platform will allow us to diversify that earnings base and take some more noise out of the cycle and continue to grow the footprint of our company, even while we're working in a space that may have single-digit, high single-digit growth in the oil patch for the next 10 years. We've got a much bigger opportunity in front of us with the LPI platform. So that's how we're growing to that size to satisfy our investors.

No, it's all great color. I appreciate that. And then just turning to the CapEx comment on 24, that being down, the previous discussions have centered around replacing around 10% of the fleet. So the question is, is that the game plan for next year? And then if so, does the decline come from some of the ancillary services? or do you slow the investment in Digifract? So I'm just curious kind of what drives the year-on-year decline in CapEx.

Yeah, when we set out, you know, sort of our invest today, sort of like last year and this year were very heavy investment cycles, as we saw it being part of the early part of the cycle, and it was going to slow down next year. We will still replace our fleets. Obviously, you've got 10% attrition. That'll be an upgrade from diesel to Digifrack. And we could see more than that. But as we said, next year, rather than being 50% projected EBITDA, 50% of projected EBITDA, which it is this year for CapEx, it's more likely to be in the 30s. And I think that's exactly the same. Obviously, that will depend on opportunities, great opportunities with high returns, like we've been able to drive. over the last 11 years are always going to be of interest to us. But that's where we see our baseline business moving to, which is a... And that, as we laid out in our investor day, is probably between a five- and a seven-year transition of our, hopefully, to Digiframe.

Yeah, I mean, if you look at last year, this year, we've had some transformative changes that won't happen every year. You know, we've, you know, completely different control system software we've developed, entirely different logistics networks, and some new logistics technologies we've talked about, both the development and the construction. You know, the birthing of Digi, DigiPrac and DigiPrime. We're going to continue to build those technologies, but up front, there's the development of them. So we've had, you know, we've done a lot during the last downturn at the start of this upturn to prepare ourselves for the next decade. We'll continue to have meaningful investments every year, but we've had a pretty concentrated run, you know, I'd say the last 24 months, you know, the next six or nine months. So, yeah, I think Michael's comment to expect, you know, a reasonable reset downwards of CapEx is is not inconsistent with the long-term plan to phase in. It is definitely not an indication of slowing the deployment of Digi. I mean, the demand there is just tremendous. For us, it's just balancing at what pace do we want to replace those fleets and what's the best homes for them as they come out.

Got it. Nate, 30% reinvestment as a percent of EBITDA. Should we consider that more like a long-term and a normalized level?

You know, again, that's our view into next year, Scott. When we think about baseline business, you know, sort of our base completion business, you know, 30%, 35%. Okay. That's great.

I appreciate it. I'll send it back. Thanks, Scott.

Our next question today will come from Neil Mehta of Goldman Sachs. Please go ahead.

Yeah. Good morning. Good morning team. Uh, Chris and Michael, I want to start off on capital returns and you've talked, you've been doing a good job, uh, driving down the share count back half of last year, been aggressive in the first half of this year. And I think your, your mentality has been to buy back stock at dislocated share prices. Just love your perspective as we try to think about your capital return profile in the back half of the year. Do you still see the opportunity to be aggressive, or does the white space in the calendar impact the magnitude of free cash flow available to return to shareholders?

Well, I think as you heard from the sort of broad guidance Michael gave, that's still – maybe a little down in the second half and the first half. That's still pretty tremendous financial performance. You know, we've got mid-20s cash return on cash invested since the day we started the company and a 44% ROCE right now. So, yeah, look, we have a strong business. It's averaged through the cycles. It's been strong since the day we started it. And for whatever reasons, you probably know better than us, you know, we have a stock price today that's just – I mean, when I talk to people outside of our industry, I just get a very puzzled look. I mean, you trade at four times earnings, and you got way better than the S&P 500 return on capital and a growing competitive advantage. We're in an unusual place. And it's not our job to complain or talk. And you don't hear us talk a whole bunch about the stock price. That's a market. But what we can do is respond to that marketplace. And if the marketplace stays anywhere around where it is now, I mean, it just gives us a great opportunity. Heck, we've shrunk our share count 10% in less than the last 12 months. If we continue to have opportunities to do that, fantastic. We'll do it all day long. Look, our goal, what motivates us is build a great business that's going to help empower the world and grow the value per share. So that's making our business more profitable, larger, and stronger. But if we can also shrink the denominator and have each share on a larger percent of the business, fantastic.

Thanks, Chris. That's great perspective. And the follow-up, and I think I know the answer to this question, is you're effectively an unlevered business at this point. to the extent you feel strongly that the business is dislocated, would you ever put debt on the balance sheet to really get aggressive in lowering the share count?

Well, look, we're always going to keep a strong balance sheet. As you said, we've had two incredible downturns just in the last eight years. So you'd like to think, oh, there can't be another one of those. But you never know. We always have to have a balance sheet that's ready for whatever happens, not just to survive those downturns, But in those two downturns, in both of those downturns, we bought businesses bigger than we were at very attractive prices. So we're always going to be ready and able to do things like that. But, you know, obviously we started our buybacks probably in front of our cash flow. We're not formulaic. We're going to take X amount of money and You know, for us, buybacks aren't about how much money we spent to buy our stock. It's how many shares did we reduce and what was the tradeoff involved in that buyback of reducing those shares. So, yes, it's not, you know, our buybacks are not going to float formulaically with orderly free cash flow. They're going to be based on share price, based on our comfort. But we'll never go way over the skis and compromise our balance sheet, you know, to you know, buy back half the shares in a, you know, in some big agreement. We have to have a rock solid balance sheet, but I'm probably repeating myself. I think you get our philosophy.

Good question.

Thanks.

Our next question today will come from Dan Cutts of Morgan Stanley. Please go ahead.

Hey, thanks. Good morning. So I just wanted to ask on the gas activity side, you guys have made some comments in the prepared remarks that you think that you'll probably see gas activity start to pick up in 2024 ahead of all of the LNG liquefaction capacity that's coming online later that year and into 2025. Given that you guys normally do have a pretty close pulse and view on the kind of industry macro, have you guys, do you have any views or any thoughts you could share on where you think gas activity needs to get to? You know, assuming that we're kind of fully ramped on all the LNG look of fashion capacity that is in the pipeline is, you know, if we were to frame it versus kind of where gas activity started this year, like it was 15% higher, maybe 20 or 25 rigs, presumably that's a dozen or so flat fleets. Do you have any views on whether or not we need to get back to that level, above that level, below that level, or any thoughts you could share on how you think gas activity might trend next year? Thank you.

Yes. I mean, look, But my guess is at some point next year, and it might be later next year, it might be maybe middle next year is a good guess. You know, we probably get back to the gas activity level we were at six or nine months ago. We may have to go higher than that. You know, there's a pretty significant growth in both LNG exports coming on and pipeline exports to Mexico. And part of that pipeline export to Mexico ultimately is going to feed another LNG export terminal out of Mexico. So there's some pretty positive demand outlook things coming there. But it's not like we're going to see a doubling of gas activity from where we were a year ago, even from where we are now. You know, there's a lot of just awesome gas drilling locations in the U.S. And, you know, now activity is going to dial back to, you know, gas production flat. We may even see some decline in gas production. But at some point next year, that'll have to transition. And, of course, it'll be gradual. You know, if gas starts to get above $354, you're going to see activity creep back into the marketplace. So, you know, it won't be a light switch that'll turn on. But when we see gas above $350 and in the outward curve, you know, angling up from there, you'll probably start to see some gas activity coming on. That could be late this year, that could be early next year, but I bet we get back to previous gas activity levels by sometime next year, but probably more in the second half of next year.

Thanks a lot. That's really helpful. And then maybe just Following up on kind of the M&A and consolidation line of questioning from earlier, so maybe on the, you know, putting the core frack market aside, is it fair to assume that Liberty will kind of remain active in looking for opportunities to invest, whether it's organically or inorganically, in kind of businesses that would fit into LPI or the lower carbon type businesses? Could you kind of talk through how you would characterize your investment strategy for the lower carbon, I guess, part of your portfolio.

Absolutely. And look, we've been outspoken about this. You know, I think lower carbon is government money. So we're not going to chase government money because that can change with policy. But we are looking at the macro. Where is the energy world going? Where are going to be the growth areas? Where are going to be the opportunities where there's growth? But people don't think there's going to be growth. um so yeah lpi look is a great example of a platform that's of interest to us that that can lead to very broader things as i mentioned i think three or six months ago you know look we're we are not making healthy moves on electricity grid we are we are we are going to drive the price of electricity up and destabilize our electricity grids we've been doing it for the last few years and we're going to accelerate we meaning the policy of this of the federal government and the state governments are going to accelerate that. That's unfortunate, but that's going to lead to business opportunities. We're not going to be in it just to be in it, but if we can have strong returns on capital with technologies we've already developed and purposed for something else, like powering Digifrack, for example, and delivering gas or processing gas, do we expect to see broader business opportunities there? I think we do. I think we do. And there's other, you probably saw an announcement recently about a breakthrough at Furbo in geothermal with Liberty as a partner there. And we've had some new technology and some new approaches there that have had some early and exciting results. And you may hear other areas that are also using Liberty technology and expertise to change the energy game a little bit. So, yeah, we are, I mean, our Our company's called Energy for a reason. We're all in on finding the best business competitively advantaged opportunities for us to play a role in a changing energy landscape.

Great. Really appreciate the call. Thanks, Chris and Team Alternative.

Yeah. Thank you. Appreciate it.

Our next question today will come from Arun Jayaram of J.P. Morgan. Please go ahead.

Hey, good morning. I was wondering if you could give us a little bit more color on the efficiency gains that you're seeing in terms of pumping hours. Chris, I think you mentioned there was a record amount of pumping hours you saw as a fleet, but could you put some numbers behind it? Is it 350 hours per fleet? But I'd love to get some more thoughts on that and the sustainability of that, as well as if you could give us some sense of how the Digifrac fleets in the field are doing from a pumping hours perspective?

So we don't publish the pumping hours thing. They're internal metrics we track. But we made a decision 10 years ago. We're going to track all that data. We work with all our customers individually about how to grow those numbers. But we don't share them publicly. But the metric we reported here was when a fleet is rigged up on location, how many minutes in that day is it pumping? It's been a thing, I think. Liberty has likely led the industry our entire history in that metric. And, yeah, look, as we've grown our fleet count, we're rolling out new technology. We've got all the things that might put a little bit of downward pressure on that. But nonetheless, record ever in last quarter. So that really speaks to the crews, the people on location first and foremost, but also we've had breakthroughs in continued software and process innovation on R&M. How do you keep a pump running as long as possible? How do you manage the repair of it quickly? I mean, iron on location being done differently. So there's a whole bunch of things that continue, continued little innovations that drive that up higher. Ultimately, do we think a few years down the road, one of the factors that will help that go even higher is our new digi fleets. You know, these are gas reshift engines. They've got much longer lifetimes and longer time between rebuilds and diesel engines. We've got, you know, more technology around them that I think is going to help drive that up as well. But, you know, these are all sort of slow, gradual things that matter, but we don't usually highlight or pound the table during an earnings call. The digi fleets right now, you know, software, a lot of, like, new technology deployment issues are being sorted out right now. I would say – Well, the performance so far I think is quite nice, but it's not at the killer yet. But we'll be there before long. We'll be there before long. I think it's going well.

Great. And just to follow up, you talked about this a little bit earlier. I'd love to see if you could talk about what you're seeing in terms of demand for your Digifract kind of technologies. One of your peers mentioned how, you know, they find, you know, as many –

contracts uh in the in the history in terms of their e-fleets i'd love to get your perspective on what you're seeing from that yeah demand is huge you know if that was a metric we wanted to think you know we we can sign a lot of agreements this quarter um but that's that's not how we're viewing it you know we're gonna we're gonna have a certain rate of capital deployment which sort of comes up with how many fleets we're willing to build and then who are the right partners for those fleets Where should they be, the configurations? So, but, I mean, yeah, maybe to just make the obvious point, yeah, the demand, the interest in this new technology is tremendous. It's tremendous. But our focus right now is with the original customers we're deploying them on, let's get these things deployed. ironed out, let's get that higher level of performance that the technology is designed to deliver, a lot of that follow-on digis are going to go to the people who get the first ones because the people who see the ones, well, they want more. So, right, and they're going to be priorities for getting that technology because that's first movers and first partners in that. But, yeah, the interest is quite high. Finding a home for them, that's not a problem.

Great. Thanks a lot, Chris.

Get back. Appreciate it.

Next question is from Tom Curran of Seaport Research Partners. Please go ahead.

Good morning, guys. Thanks for squeezing me in. I've only got two left here. So it seems as if we may be seeing a firming bifurcation of the frack market, similar to the dynamic that evolved for the land drilling contractors. Have you observed a starker difference in metrics, especially bidding behavior and pricing trends, between the top six pumpers and the rest of the players, or between modern equipment defined as EFRAC, DGB, and upgradable tier four, and then legacy diesel horsepower. Between those two categorizations, where has the demarcation in metrics been sharper?

So it's both. I think your premise is correct. Probably among the companies, it's even bigger, right? Because Even if you're a smaller player or you want the best fleet you can get, you'd love to have natural gas burning equipment, of course. But most important is to have a fleet that's going to deliver safely, efficiently, on schedule operations. So the demand for higher quality humans and crews that may be characterized by the best players versus the You know, the newer, smaller, lower quality players, that differential in today's marketplace is huge. It's just huge. Because you've got a capital budget. You've got to get something done. And, well, boy, I just took the fleet I got seeing people's faces and stress. Look, we're in a problem. Can you help us out? Here we are. So I'd say the quality of the company and humans is the biggest differential. But the differential among the next generation, practically, of course, that's big too. But I think most people realize it's a matter of when I'm going to get that fleet. I may not be the big guy or the efficient partner that's going to get it this year. I may get it next year or two years from now. The interest is there, but the bigger divide, as you just said, is more among the companies, human, culture, service quality.

Got it. Makes sense, Chris. And then for Liberty Power Innovations, how would you characterize the remaining M&A landscape of just specifically alternative fuel and power solution prospects out there, you know, possible targets. And would you say that LPI does actively remain on the acquisition hunt?

Well, when we launched LPI, it as well was not intended to acquire. It was like all Liberty ideas. It was an organic idea with an organic team, with an organic approach. And then we saw a newer, smaller player that fit nicely in what we were doing, and we were able to get a price and a cultural human fit that was compelling for us. So, yeah, look, we're pitched all the time. We'll look at everything. Acquisitions are certainly possible, but, again, it's not a central part of the strategy.

Okay. Thanks for including me, guys. I'll let you wrap.

Thanks. Appreciate it.

Our next question is from John Daniel of Daniel Energy Partners. Please go ahead.

Hey, all. Thank you for including me. I just got a few quick ones for you. Michael, first, you mentioned retiring. I think when one stem closed, you had like 2.5 million horsepower. I think you said you were retiring three pumps a week or something, ballpark. Should we then extrapolate and assume you've got 2 to 2.2 million horsepower today, ballpark?

You know, it's close, but I was really putting the example that it's not a fleet that goes down like, you know, this week we're going to mock all our whole fleets. Every week, pumps go in, they get reviewed, you know, their engine blew up, it's not worth rebuilding. So I'm trying to, you know, kind of like when we talk to investors, it's really, it's an organic. When we talk about chemistry and attrition, it's not something that happens in blocks. It's something that happens organically. That's what we're talking about there, John. So, yeah.

Don't take it as a quantitative indicator of our horsepower.

Fair enough. I'm a nerd on this stuff, so I apologize. Just trying to be close. um you guys it looks i mean you work for best of breed emp companies and so if you have one to three fleets go idle uh whatever it is i don't care i mean it's that seems more like budget massaging on their part as opposed to so therefore coming back next year as opposed to like shutting down is that fair enough fair enough well there's a little bit of that there's a little bit of that but you know probably the bigger piece is still just what the projects are doing you know

Privates are still big players in the marketplace. And I think mostly because of economics, they're not stopping activity, but they've just pulled back activity. You know, some of them have sold, right? You've seen some of this is just M&A reducing activity. You know, company A buys company B, and together they're running seven fleets, and together they're going to run five fleets. So some of it's just consolidation. It isn't – the very biggest people are just steadier, the very biggest players, and they're sort of steadily growing their activity. Why do that to small-scale companies?

As you alluded – I think you stated not any fleets have gone down for you, but call it 25 to 30 across the industry. If we assume one to three fleets, that's about – call it 5% of your fleet. Should we extrapolate that to the broader U.S. frac market, or is this just more nuanced? Simplistically, should we expect another 10 to 15 fleets across the U.S. go down?

It's more nuanced, John. That's why I sort of made that point. A lot of fleets have already gone down, and we haven't had any. It's not a macro thing for us. It's just a micro bottom-up. Where is your fleet now? What is it doing? If you had a small number of customers and they all didn't change their plans, well, your fleet count wouldn't change. But so it's very granular bottom-up with kind of what's going on in our world.

Yeah, we have white space on our calendar, sort of the back end of Q2, as we're working with our customers and seeing what their long-term plans for the second half of the year are, allows us to then sort of put that work onto a fewer number of fleets, right? So it's just being very judicious about how and when we manage our fleets. And but the within working Got a final one for me.

I know you can't you're not going to get into the granularity of the pumping hours per day But when you do have the data you're tracking the improvements as you've seen the improvements recently I Mean how much is something that that you guys have done? Versus maybe a new product or service from a third party or just better planning and scheduling by your customer There's any if you can just add some color that would be helpful

Yeah, I mean, the recent changes, I wouldn't say it's a revolutionary new third-party thing. You know, the wealth swap thing, that came out a while ago. That's excellent, but, you know, that's been around for a while. It's really just better, more experienced people getting better at what they do and just tighter relationships with customers saying, hey, look, we do things this way. If we did it together that way, we'd get more minutes out of the day. So it's incremental process human partnership improvements, I would say, John, that dominated.

Okay. Thank you for the litany of questions. Let me get them out. Thank you.

Yep. Appreciate all your time in the field, John.

Thank you.

At this time, we will conclude the question and answer session. I'd like to turn the conference back over to Chris Wright for any closing remarks.

Three days ago, the Wall Street Journal ran a sobering article by Tom Fairless titled, Europeans Are Becoming Poorer. The punchline of the story is the dramatic divergence in prosperity between the U.S. and the European Union over the last 15 years. In 2008, each represented roughly 25% of global consumption. Today, the U.S. has risen to 28%, and the European Union has shrunk to only 18%. In dollar terms, the European economy has grown by a paltry 6% over the last 15 years versus 82% for the U.S. What might explain this startling contrast in fortunes between two close allies and trading partners? In a word, energy. Over the last 15 years, the American shale revolution has transformed the U.S. from the world's largest importer of energy to a net energy exporter who leads the world in both oil production and natural gas production. The result has been enormous energy cost savings for American consumers and businesses, a reshoring of energy-intensive industries with high-paying blue- and white-collar jobs. This trend could surely accelerate if we stop building impediments. The energy story in the European Union is quite the opposite. EU oil and gas production has dropped by over a third. Coupled with high taxes and regulations, this has delivered ever increasing energy prices to consumers and businesses alike. The net result has been an exodus of energy intensive manufacturing from the EU, mainly to Asia, but also to America. These departing manufacturing jobs take high-paying blue-collar jobs and starve many supporting industries. Expensive energy impoverishes European citizens, squelches optimism, and further suppresses fertility rates. Of course, many other factors played a role in the EU-American divergence over the last 15 years, but I believe the core issue is energy. Economists often mistakenly view energy as just a sector of the economy. Instead, energy is the sector of the economy that enables every other economic sector. Energy is also essential to keeping citizens warm in the winter, cool in the summer, and it enables affordable, secure food supplies. Get energy wrong and suffering is sure to follow. Thank you for your interest today. We look forward to talking to everyone next quarter.

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