Liberty Energy Inc.

Good morning and 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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, Gary. Good morning, and welcome to the Liberty Energy Third Quarter 2023 Earnings Conference Call. Joining us on the call are Chris Wright, 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, 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, adjusted pre-tax return on capital employed, and cash return on invested capital, 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 and cash return on capital invested, as discussed on this call, are available on the investor section of our website. I will now turn the call over to Chris.

Thanks, Ange. Good morning, everyone, and thank you for joining us to discuss our third quarter 2023 operational and financial results. Liberty delivered excellent quarterly financial results reflecting outstanding operational execution, focused customer engagement, and agility across a softer North American frack market. Record pumping efficiencies drove sequential growth in revenue and adjusted EBITDA while electing to idle a fleet during the quarter in response to softer market conditions. Adjusted EBITDA was 319 million, while fully diluted earnings per share was 85 cents. The industry remained disciplined, championing steady pricing for quality services while withdrawing underutilized frack fleets from the market. Our superior execution, combined with expanded vertical integration and technology investments, culminated in a trailing 12-month adjusted pre-tax return on capital employed of 44%. I'm proud that our team delivered a milestone achievement in operational efficiency. We achieved the third consecutive quarter of record average daily pumping efficiencies delivered across our full fleet, safely pumping more hours and tons of sand than ever before. This success was driven by the unique culture of innovation and excellence at Liberty. Over the years, our investment decisions have grown our competitive advantage by driving value creation through technology, scale, and vertical integration. Today, the latest piece in our DIGI Technology Suite is demonstrating impressive operating results. The commercial deployment of our proprietary DIGI Prime units commenced in late September, quickly becoming the crew and customer's favorite technology on that location. We embarked years ago with a blank slate to envision, design, and build natural gas powered frac fleets that would represent a step change improvement in frac technology. We didn't choose the easy route to simply extrapolate from existing pump technology or the partial route where we outsource the power generation part of a frac fleet. We took on the whole enchilada with a commitment to build the best damn next-gen frac fleet. Well, the effort was worth it. Today we have a truly differential frac fleet technology that is setting operating performance records while delivering the highest efficiency, lowest emission fleets in the industry. To say that customer interest in DIGI is high would be an understatement. We are supplying DIGI fleets with robust, reliable, compressed natural gas delivered and managed onsite by our new Liberty Power Innovations Division. We are on track to be operating four DigiFleets by year end and six DigiFleets by the end of January 2024. We are excited by the strong customer benefits and pull for our DigiFleets. As we continue to transition our fleet toward more natural gas-fueled technologies, we are also maximizing diesel displacement with natural gas across our dual fuel fleets. We have worked in conjunction with our technology providers to develop and deploy control software to significantly increase diesel displacement. Our years-long effort in predictive and preventative maintenance programs have positioned us to optimize equipment performance and availability, enabling us to run our pumps in optimal operating ranges to achieve maximum gas substitution. We are also starting to reap the advantage of vertical integration provided by LPI, improving the reliability of gas supply to our frac fleets. There is much room to run here. Liberty's focus on asset optimization maximizes the uptime of each pump, driving higher equipment reliability and operational efficiency. Our predictive maintenance programs are better than ever before. continually assessing asset health in real time. By applying advanced analytical tools and processes such as machine learning and AI, we are addressing issues before they become critical and using this data to prevent issues in the future. A year ago, we realigned teams to seamlessly work together on the shared goals of maximizing operational efficiency and optimizing equipment maintenance. Today, Real-time data is enabling our teams to execute on these priorities and hold themselves accountable in delivering superior results. Wireline was a new business, added to Liberty in the one-STEM transaction. We knew our customers would greatly benefit from streamlining our Frac and Wireline crew interactions on-site to shave extra minutes off the day. Every minute equals efficiency. and translates into a lower cost of producing a barrel of oil for our customers and improved profitability for Liberty. Today, we have more Frac and Wireline paired red on red crews since we first brought Wireline into the fold. We are proud that Liberty Wireline now ranks as the top service provider according to the most recent Kimberlite survey and independent industry research that extensively pulls E&P customers across the industry. We increased our quarterly cash dividend by 40% in response to the significant growth in our per share earnings and cash generating abilities from our business transformation over the last three years. During the third quarter, we repurchased 1% of our shares outstanding, or a cumulative 11% since our buyback reinstatement in July 2022. We are focused on the opportunistic execution of our buyback strategy. We will move more aggressively during stock price pullbacks and moderate our pace when the stock runs up. However, we continue to see a large dislocation in our stock price relative to what we believe is the intrinsic value of our stock. The goal remains the same. Maximize the value of each Liberty share and drive higher total returns for years to come. Fleets across the industry were idled in response to completion's activity softness, supporting a better supply-demand balance of marketed fleets as compared to prior cycles. As the shale revolution matures, the industry has adapted to a new era in frac markets through consolidation, technological process, disciplined investment, and serving increasingly complex customer needs. Fract activity has largely stabilized at current levels, representing a base load of fracked fleet demand needed to sustain EMP operators' flattish production levels. Fourth quarter trends will likely see seasonal softness, winter weather, and holiday disruptions. We expect the recent strengthening of commodity prices will drive a modest increase in industry activity beginning in 2024. Liberty's internal analysis shows several natural gas levered E&P companies are expecting to increase activity into 2024. The sustained strength in crude oil prices is also stimulating demand for frac fleets among smaller private oil producers. The resumption of modest growth in frac is within view. Global oil and gas markets found firmer footing during the third quarter, driving higher oil and gas prices. Volatility in commodity markets has emerged from the possibility of an escalating conflict in the Middle East and renewed recessionary fears. Recognizing the elevated uncertainty, global industry supply and demand trends infer that the delicate balance of oil and gas markets is tilted to the upside given the relatively small spare production capacity today. The long-term demand outlook for secure North American energy anchors a more durable cycle. OPEC Plus decisions, including the extension of Saudi Arabia's production cuts, further demonstrate a willingness to support commodity prices, underpinning long-term investments in North American shale. We just saw an industry titan double down on North America's future. The positive outlook for North America is leading to consolidation and investment amongst E&P operators focused on long-term value creation. Liberty is uniquely positioned to support our customers' ambitions to unlock value with our superior services, next generation technologies, integrated footprint, and scale. Today's E&P customer is focused on driving improvement which can only be achieved with outstanding service partners and differential technologies. The transformative work our team accomplished over the last three years through technology investment, vertical integration of wire lines, sands, and logistics, and now LPI natural gas treating and delivery uniquely positions Liberty to address the diversity and complexity of customer needs. I would like to take a moment to celebrate the Liberty team Record performance was a result of the collective effort of all of our 5,500 teammates across North America I am proud to be your partner We outperformed in the third quarter in the face of a softening industry delivering significant operating efficiencies outstanding safety record and attractive returns in the fourth quarter Activity is expected to slow modestly on normal seasonality and the related impact on efficiency. For full year 2023, we expect adjusted EBITDA will be at the high end of our guidance range of 30% to 40% growth over 2022. We continue to deliver superior returns and a differential service for our customers. Our commitment to excellence and focus on company culture Our next generation Digi technology suite and LPI positions us well to compete in both near-term cycles and over the long term. The best has yet to come. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results and outlook.

Good morning, everyone. Liberty's year-to-date results have been outstanding during a period marked by softening activity trends. Using a slightly different return metric from the ROSI that Chris mentioned earlier that we used to benchmark ourselves versus the industry in the S&P 500, our annualized cash return on invested capital is 37% year-to-date, an increase from 31% in 2022. Our third quarter financial results were notable, marking a modest increase from the prior quarter in adjusted EBITDA and a modest decrease in net income despite slower industry activity and the idling of one fleet. Our results not only showcase the importance of leading reliability, technology, and service quality to our profitability, but also highlight the importance of those features to our customers. Third quarter of 2023 revenue was $1.2 billion, a 2% year-over-year increase and a 2% increase from the second quarter. Relative to the second quarter, record efficiencies across the full fleet, integrated services, and a favorable product mix more than offset market headwinds and the idling of one fleet during the quarter. In the third quarter, we had the highest pump hours and sand pumped in the history of the company, even with one fewer fleet than prior quarters. Third quarter net income after tax of $149 million represented a 1% increase from prior year and a modest decrease from $153 million in the second quarter. Fully diluted net income per share was $0.85, a 10% increase from prior year. which highlights the per-share benefits of our share buyback program and compares to 87 cents in the second quarter. General and administrative expenses totaled $55 million in the third quarter and included non-cash stock-based compensation of $9 million. G&A decreased $3 million sequentially as the second quarter miscellaneous expenses did not repeat. Net interest and associated fees totaled $7 million for the quarter. Tax expense for the quarter was $50 million, approximately 25% of pre-tax income. We expect the tax expense rate for the full year to be approximately 25% of pre-tax income. Cash taxes was $7 million in the third quarter, and we expect 2023 cash taxes to be approximately 35% of our effective book tax rate for the year. In 2024, we expect to be approximately 24% effective book tax rate and a similar cash tax rate. Third quarter adjusted EBITDA increased 15% year over year and 2% sequentially to $319 million. We ended the quarter with a cash balance of 27 million and net debt of 196 million. Net debt decreased by 60 million from the end of the second quarter. Cash flows were used to fund capital expenditures, $29 million of share buybacks, and $8 million of quarterly cash dividends. Total liquidity at the end of the quarter, including availability, under the credit facility was $322 million. Net capital expenditures were $161 million in the third quarter, which included costs related to DigiFleet construction, capitalized maintenance spending, and other projects. We had approximately $12 million of proceeds from asset sales in the quarter. Net cash from operations was $273 million for the quarter, and returns to shareholders were $38 million for the quarter. Our capital expenditures remain on target for 2023 as we expect to deliver certain Digifrac components in the fourth quarter. In July 2022 and January 2023, we installed and then upsized the $500 million share repurchase program, respectively, to take advantage of our dislocated share prices. We also reinstated our quarterly cash dividend one year ago. We are pleased to share our board has approved a 40% increase to our quarterly cash dividend to $0.07 per share beginning this quarter, reflecting our conviction and our ability to generate strong free cash flow through the cycles. We also continue our returns to shareholders program with our buyback program, including the re-purchase of 1.8 million shares in the third quarter, which represents approximately 1% of the shares outstanding in the beginning of the quarter, for a total of $29 million. We have now returned to shareholders a cumulative $325 million in the past five quarters. We continue to differentiate ourselves with an industry-leading return of capital program while reinvesting in high return opportunities and growing our free cash flow. Looking ahead, we see North American completions activity to slow modestly in Q4 on normal seasonality and the related impact on efficiency. We expect activity to increase modestly in 2024. In the third quarter, we reduced our active fleet count by one fleet, consolidating our planned activity with our high efficiency fleets and improving utilization. While we expect normal seasonal softness in the fourth quarter, we do not plan to idle any additional fleets due to the demand in Q1 of 2024. As a result, we will now anticipate reaching the high end of our full year 2023, adjusted even our outlook of approximately 30% to 40% year-over-year growth. In 2024, we see a continued constructive outlook for the oil and gas markets, and even more so for Liberty. We anticipate free cash flow will exceed 2023 levels driven by incremental profitability from our current year investments, continued margin expansion and efficiency 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 in differential technologies. The position is well in the coming years. I will now turn it back to the operator for Q&A, after which Chris will have some closing comments at the end of the call.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question is from Steven Gingaro with Stiefel. Please go ahead.

Thanks. Good morning, everybody. Two things for me. The first I'll start with, and I have to ask you this, is the guidance. I mean, you had a really good quarter, a great three quarters to start the year. It feels like it would be hard to not get above the guidance range. And I know there's some seasonality, but could you just kind of give us any additional color on how to think about the fourth quarter given you're not – laying down any more fleets, and you're at such a healthy level through the third quarter?

This season, Steven, our guidance, as always, is our best estimate of where we're going to come in. We want to be close. And if you look at the fourth quarter seasonality, we've been very, very efficient with our customers' plans as we've been through the first three quarters. So you are going to see a little bit of budget maintenance as they've completed things a little bit quicker than they would have expected. And so as we go through, you're going to see seasonal slowdowns with holidays and winter, a little bit of budget maintenance management as we go through the year. And then I think you'll see everything pick up again in Q1.

Okay. Thanks, Michael. And then as we think about next year and your capital spending needs, how should we think about CapEx? I think it should fall as a percentage of EBITDA. And it feels like that will lead to pretty robust free cash flow next year. And any color you can add on plans for that free cash flow?

We will continue with our stated goals. Obviously, the first thing is we managed to have a very, very strong balance sheet to make sure that we can weather any situation that could come up in the future. We have an incredibly high demand for our next generation technologies. And as you see, we will have a very, very strong return of cash to shareholders program. We also have some interesting business opportunities with our Liberty Power Innovations business. So I think we will continue with exactly the way we have invested capital over the last 10 years.

And any ballpark on CapEx for next year at this point?

No, we will give you those details in our January call, as we always do, as we like to give it to you once a year.

Okay, thank you. Lots of free cash flow, as you said, Stephen. We agree, very, very significant free cash flow next year.

Yeah, I mean, it feels like CapEx comes down and free cash flow is pretty strong. That's why I asked the question. Thanks, Chris and Michael.

Yep, thanks, Stephen.

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

Yeah, thank you, and good morning. Just wanted to follow up. One of the things I think, Chris, you said was customers are obviously going to want more efficiency, better performance, et cetera. As we talked to some of the E&P companies, they also discuss, hey, we want the right service company rather than the single cheapest service company we can get. Can you give us any insights into how we should think about that with pricing? We typically think of pricing power, but what is the right way to think about that relationship here as to what it can mean for margins in 24?

You always have some companies in our industry, and I would say when Liberty started, they may even have been the norm that viewed FRAC as a commodity. Well, we bid it out, we get a whole bunch of bids, and our supply chain team sees who the two or three cheapest are, and then we go talk to them. That was the norm when we launched Liberty. Today that exists, but it's not the norm anymore. I just think people have taken a broader view of shale. And on this line item, is that Liberty number higher? Well, yes, it is. But if you get wells done faster, safer, more efficiently, lower emissions, and better help on design and execution about how to maximize recovery from those wells, hey, all in value, I would say Liberty holds a pretty significant differential versus others. And one of the things we have rolling out now is this different fleet technology, right? That arbitrage between the cost of power fleet with diesel and the cost of power fleet with natural gas, that's a huge cost savings opportunity that benefits both our customers and us. And our fleets not only are burning natural gas versus diesel, but these next generation fleets burn a lot less natural gas than a turbine-driven fleet for the same amount of work. That higher thermal efficiency, virtually zero methane slip, so they're just cleaner, cheaper, more efficient. So that technology allows it to be a win for our customers and a win for us. But ultimately, there's always a back and forth dialogue with our customers. Hey, market is softening. We're seeing numbers like this. But we don't have customers saying, hey, these guys are 10% cheaper, so we're going to jump over there. I would say most of our customers and our partners, they get the value and the trust in the relationship working together. We didn't do everything we could have last fall when the market was really tight. Could we have jacked up prices a little bit more and missed people but still held the work? Sure we could have, but we didn't do that. We act as long term partners with our customers. This business thrives when we win, our customers win, and over the long term you can generate better efficiency, smarter decision making, and come up with new ideas that then should be developed. There's just huge benefits. and long-term partnerships with our customers. And I am thrilled. Look, a ton of our achievements, our innovations, they're not just liberty. That's partnerships with long-term customers that lead to stuff like that.

Now, I appreciate that. Follow-up question for you, Michael. As we think about the combination of the ways to return cash to shareholders, dividends versus share repos, is there a overall framework we should think about here, or as kind of getting to Stephen's earlier question, if free cash flow is up, we should, you know, just think about that as incremental returns to shareholders.

Most of it will go there, Roger. But look, We've been a believer to have a base dividend that's modest. It's a very small percent of our cash generation ability, and we plan to slowly and steadily grow that with time. That's sort of a base return that's going to happen. We bumped it a larger chunk this year because we're basically recalibrating it for the much greater cash generation ability we have now than we had three years ago on a per share basis. And then, so that's a small piece, but that's sort of the base piece that's always there. Then there's obviously CapEx, and that's always the biggest balancing decision we have. Wow, and then again, today that's trickier, because the demand for what we have new coming out is just tremendous. But we're not going to invest all the cash we generate, or even more than half of it, into CapEx. But we're going to balance what are the most compelling investments and how do we structure that, then that additional cash you know the biggest use of it the last year has been buybacks that's probably the case uh i'm sure next year that's going to be the case as well there's there's uh technology-based acquisitions we're generally not an a d company but if there's compelling things we'll we'll do those and we always think it's critical to just keep the balance sheet very strong because you never know what happens. And look, I know you know the history, but in that tough downturn in 15 and 16 and the tough COVID downturn, we were positioned and able to make just compelling acquisitions that massively grew our per share value and ability to generate cash and profitability. So buybacks are still the dominant thing, but for us it's not formulaic. It's not a percent of cash and a quarter. I don't think you should look at cash flow or profitability or any of those things on short-term timeframes. There are swings to them. So we just take a longer-term window on that. And I'm sure as you've heard before about buybacks, We have an internal view on intrinsic value versus stock price, and the wider that differential is, the more aggressive our buybacks are going to be. And if the stock price moves quickly, if it moves quickly downward, we're going to pounce on that. If it moves quickly upward, we're going to caution and take a breath and reflect what's happening. Not going to stop buybacks if there's still a large value dislocation, but we're going to be more measured in the approach.

Appreciate that. Thank you.

Excuse me, the next question is from Derek Podhazer with Barclays. Please go ahead.

Hey, I want to ask a few questions on your DigiFleet. So you talked about getting to four by year end, six by end of January. How should we think about the DigiFleets as far as incremental versus replacement? And then if we look into 2024 and how this high grades your overall fleet, how do we think about that expanding your profitability? And then finally, just the future mix of the DigiFrac versus the DigiPrime. And who do you think is going to be the winner over time?

Great, great questions, Derek. First of all, the replacement versus additional fleet, that's just market dependent. I think when we talked a year ago when the market was literally short equipment, we said it would probably be a balance between the two. Look at the marketplace now. There's no shortage of horsepower out there. So all of these fleets we're rolling in are just replacement for our oldest equipment. That's the cost of maintenance and lowest quality equipment. They're just replacement fleets. The market stays like it is today, and there's no reason to change that strategy. The fleets themselves, and maybe we've communicated less than perfectly here, there's not a different digifract fleet or a digiprime fleet. There's a digifleet. There's two different frac pumps that have different strengths and different weaknesses that together we've built. to make a system that was just compelling and that was differential. And I'm going to have Ron expand a little bit more on the difference between those pumps and how you configure the optimal fleet depending upon the customer needs.

Yeah, Derek, I like to think of them as complementary, not that there's going to be a winner and a loser in these technologies. So as Chris noted in his opening remarks, Digifrac, the electric pump for us, And so that consists of two components. First of all, power generation trailers. So the Rolls-Royce 20-cylinder natural gas engine driving an electric generator. And then the electric pump itself that turns that electricity back into mechanical energy. That was a five-year effort for us to build from the ground up a fit-for-purpose electric system. And that included both... Innovation around the power generation side to make sure we delivered the most efficient low emissions power generation We could that was modular that was capital efficient that allowed us to deploy the right amount of power generation to match needs on location to be able to adapt to incoming grid power to the extent we had that available to us and then to pair that with a with a ground-up pump design that we again think brings a whole host of benefits to the table and But in working through that design and ultimately as we began to have conversations with our customers around the deployment of Digifrac, there was a recognition that not all of our customers are going to use grid power as part of this. And so that led us to recognize we had further opportunity. We had an opportunity to make this system more efficient yet, which is to say that we were going to remove the conversion of energy from mechanical to electrical and back to mechanical. There are losses associated with that. And so you burn a little more gas, and as a result, have a modest amount more emissions to accomplish the same thing. And that's what led to DigiPrime. So DigiPrime just removed that conversion mechanism. We take that same natural gas engine, incredibly efficient, lowest emissions profile you can find in the industry, and attach that directly to a transmission and a pump. Now, there is a limitation to DigiPrime in that the engine is a constant speed engine. It runs at one speed and one speed only. We have the ability to change gears, so we have some amount of rate control. But when you really want that fine-tuning in a frack, when you're working up against the high-pressure limitations that we might have, you want that ability to have some micro-adjustment in rate. We don't get that with DigiPrime. We get that with DigiFrack, the electric version of the pump. And so you'll see these two different technologies work together as what we'll call a DigiFleet. And so it's ultimately going to be a combination of the two, and the ratio of those two different technologies on location is going to be a function of whether or not the operator, our customer, our partner in this anticipates using grid power. So to the extent we won't have access to grid power, you should expect the DigiFleet to consist of the majority DigiPrime pumps, and then a couple of Digifrac electric pumps on top of that for that fine-tuning. And then to the extent we have an E&P partner who's going to have some grid power on location, we might have access to 5 or 10 megawatts of electricity, you're going to see the percentage of that fleet that is Digifrac, our electric pump, creep up a little higher, and we'll have less DigiPrime on that. So that's how we'll think about that going forward. It's going to vary fleet by fleet, customer by customer, depending on the situation we find in the field. But ultimately, at the end of the day, we are going to deliver to the customer an unrivaled technology profile with the lowest emissions and lowest fuel consumption you can find in the industry.

Great. I appreciate that rundown. Very interesting and very helpful. Second question, I know you talked about the opening comments, but I agree that integration is going to define winners in a maturing shale cycle um can you can you spend some time on lpi i know as a recent acquisition but maybe how impactful it was for a third quarter or how should we think about it for 2024 and it being a profitability lever as you continue to scale that out across your fleets yeah like it's in line with other liberty historical vertical integration if there's something that's holding us back slowing down the delivery of our quality of service

we look at how to solve that problem. And to get onsite delivered natural gas, there's not a lot of options today, and the quality of that service is very spotty. Sometimes it's fine. Sometimes it's not enough gas. Sometimes there's manifolds that can hook up to some of the pumps, but not all the pumps. All of these things just hold back the substitution of natural gas into diesel. So we just decided we're taking that problem into our own hands, And we're going to make sure all of our fleets have reliable, robust gas delivery. If CNG is the right option, that's done via CNG. If there's gas to process out of a pipeline or field gas, we have technologies to process that gas on site and use that. We can blend the two together. So we just decided natural gas is so critical. Look, stepping back, it's the fastest growing energy source on the planet and has been for the last 10 years and likely will be for the next 10 years. So we are talking here about that specific application of using natural gas to power fractal leads, which absolutely is the future for many reasons, cost, emissions, efficiency, abundance of natural gas. Now we're also We want that expertise to build, you know, you can call them virtual pipelines, delivery and moving of natural gas to where we need. We're starting with our natural gas-powered frac fleets, digi fleets that without gas they don't run. Dual fuel fleets, if you don't get gas, they still run. You just burn more diesel, more expensive, higher emissions than you should have been. So we're building LPI first to power our frac fleets. But it's also, of course, going to supply other people's rigs, other operations in the field. There's other oil field applications for that. And ultimately, as you look ahead, what is Liberty generating expertise in? We're generating expertise in having the highest thermal efficiency on wheels, mobile power generation there is. And we're generating expertise in how to move natural gas, how to remotely or onsite process natural gas, to deliver natural gas wherever it's needed and however it's needed. So natural gas is 40% of US electricity generation. And sadly, but unfortunately, we are driving our electricity grid prices up and our grid stability down. So expertise in moving, deploying natural gas and remote power generation is only going to grow in value.

Great. Appreciate all the talk. I'll turn it back.

The next question is from Luke Lemoine with Piper Sandler. Please go ahead.

Hey, good morning. Morning, buddy. The whole Digi initiative seems like it's going extremely well. And I guess specifically on DigiPrime, this was just on the test stand a few months ago. It has now been in the field since the end of September. You guys talked about this being the customer's favorite technology on site. But could you maybe just talk a little further about the feedback and maybe what you've learned as well about having it live on a well location?

Yeah, sure can, Luke. Feedback has been extremely positive since day one. So you have to imagine what really is a pretty big step forward for not only our operations team, but also our customers in terms of what they're seeing here. We're basically talking about power density that's two for one relative to tier four DGB. You know, where to optimize substitution on a Tier 4 DGB engine, obviously this is pressure dependent, but you might see that pump delivering maybe six barrels a minute or so. We've got DigiPrime out there, a single pump, effectively replacing two of those, delivering steady as she goes, day in and day out, 24 hours a day at 12 barrels a minute. And it's doing so, burning less gas, than those two pumps would have combined. So remove the diesel and reduce the gas consumption, and we're delivering twice the rate. So it truly is an incredible step forward. It's fully integrated with our pump control platform, and so to our operations team out there, it is seamless in its operation. But think of it just like a nuclear power plant on our grid. Once it is up and running, it is steady as she goes, and it has been delivering day in and day out since we put it out there The first customer for that is extremely excited and cannot wait to see some more of them out on location.

Okay, great. Thanks, Ron. And then, Chris, I know you don't want to disclose customers, but are there remaining Digi deployments later this year and early next in the Permian, or are these in a couple different basins?

Starting in a couple different basins. Permian is the biggest basin, so, of course, the majority of Digi deployment is in the Permian region. We've got requests and pull into several basins, but at year end, we'll be running DIGI in just two basins. And much room to grow in those two basins, but by the end of next year, that'll certainly be more than two basins. That's one of our big questions we've got to decide, the right partners, the right timing to continue the deployment.

Okay, perfect. Thanks a bunch.

Thank you.

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

Thank you. And first of all, congrats on a great quarter. My question is, in the Q3 results, how many DGE fleets were active during the quarter on average?

Probably two in the weeds to the close. Two is probably a reasonable estimate. Originally, we feather in these pumps into existing fleets. That's one of the key things. The fleet keeps running just like it did, and we feather in this technology. It's only more, and it crossed multiple fleets. It's only more recently that we have fleets running that are entirely digi.

And so when you start running these entirely digi fleets, would the margin on those be accretive to the margins that you get on the other fleet?

They are. There's additional diesel displacement. There's lower cost to our customers and a higher technology solution. So, yes, that benefits Liberty as well as benefiting our customer.

So, taking that thought forward, so once you have, let's say, six of those fleets running in Q2 of next year, nothing else changes. This record high margin that we saw in

uh q3 25.5 percent or so you know a bit of margin you could be higher running higher margin than that in q2 or q3 next year it it's it's absolutely possible wakar and that is acute right that's the internal job we call it self-improvement in liberty we have to always be in a position where if the market is flat our profitability is growing we're growing by doing things better by doing things more efficiently by delivering premium technologies So yes, if the market stayed flat for the next three years, would Liberty's profitability continue to grow through those three years? Absolutely.

So you're saying right now that 2024 could be modestly higher activity. So when we translate that into Liberty's profitability or EBITDA, given that LPI could be contributing more EBITDA, given that you'll have more of these DG fleets running with higher margins. How do you see 2024 EBITDA versus 2023?

Look, again, in a flat market conditions, it will certainly rise. But that bigger factor is swings in what's going on in the marketplace. But I think, as you've seen over the last three quarters, in a gradually softening market, can our self-improvement offset that? It can. But the question is, how much does the market soften? Or how much does the market strengthen? Or does it stay flat? But I think your point is well taken, Wakar, that in a flat market, We have drivers of increased profitability, absolutely. And we will always strive to have that. But that second factor is what does the market actually do? And we don't control that. But you get the feeling that the volatility in that in market conditions is likely to be lower in the next few years than it's been in the last few years. Thanks, MacArthur. Thank you.

The next question is from Arun Jayaram with JP Morgan. Please go ahead.

Hey, Chris. I wanted to start with maybe a bigger picture kind of question. We've seen some recent consolidation in the Permian Basin with Exxon and Pioneer. And Exxon's key thesis is to significantly raise resource factors. And they cited two-thirds of the expected synergies to come from higher recovery factors. And a lot of that is driven by frack. So I wanted to get your thoughts on the ability of the industry to raise recovery factors. We have heard of some producers more recently touting a new kind of completion design. And I wanted to get your thoughts on that. an ability to maybe, if you can, increase recovery factors, the ability to improve economics in tier two and tier three wells, which I think would have positive implications for your business.

Yes. So look, that has certainly been the story of the shale revolution, is this continual innovation. We say design of the plumbing underground to increase recovery. Liberty was certainly an early mover and maybe first publisher of this extreme limited entry. We got to get more fracks within each frack stage, more contact area. We've seen a continual march up in innovation, really ultimately recovery factors in shale well productivity. What's been masked over the last five years is probably a slightly declining average quality of location being drilled. And then this improvement, incremental improvements of recovery, have offset that to at the beginning have slowly increasing recoveries per foot. Now those increases generally are not happening anymore overall because the average decrease in rock quality is slightly outrunning this incremental improvements in technology. Now look, Exxon is a tremendous technological powerhouse. So if Exxon have their efforts maybe more than incremental views of how to change recovery, I wouldn't bet against Exxon. We work with a lot of partners on some are incremental, some are more testing or investigating game changing ideas for recovery. So yeah, a lot of that going on. Yes, you're gonna see continued technological improvement in recovery from wells and some will be incremental and some will be bigger changes. But obviously your bigger picture question is really a question for Exxon. But yeah, our industry's moving forward, will continue to. And there could be some exciting things in the next few years.

Great, thanks for that. And shifting gears a little bit, Chris, we are in RFP season, talking to my E&P coverage around having discussions with frac operators around 2024 needs. I was wondering if you could maybe characterize the tone of those discussions, obviously, and maybe give us a sense of how you think pricing will play out this year versus last year when the supply-demand balance was quite a bit tighter.

As I said, our dialogues are generally one-on-one with our customers. We don't submit a whole bunch of bids and then wake up in December and find out who we're going to be working for next year. That's never been the way our business works. Almost all of our business is continuing to work with existing customers. Do the bigger ones of those RFP it? Absolutely. Do they get market checks? Absolutely. Might they ship their fleet composition? Absolutely. Generally, less with Liberty Fleets. We tend to continue to work with our existing partners, and we have dialogues about what's going on in the marketplace and what are reasonable responses to that. Yeah, were market conditions much stronger 12 months ago than today? Absolutely. But are market conditions bad today? Absolutely not. As you've seen with our results and where we're pumping, people want the right partners. We also, most of our dialogue with customers isn't so much about line item liberty pricing. It's what can we do together to drive down well costs? How can we move faster? How can we change the design? How can we swap out a chemical that we thought we needed with a cheaper example? How can we deliver sand more efficiently? Hey, the price of sand is going down. Does that change our frac design? That's driving well costs down. The price of steel and tubers are going down. The price of plugs is going down. There's some technology innovations. So look, always a dialogue around this kind of stuff, but it's not as black and white, you know, like they win, we lose. On price, there is a little bit of that, but the broader dialogue is how do we get more efficient and improve both of our economics? And look, so in the spot market, is it soft right now? Is there idle equipment? Yes. But for quality, dedicated fleets, is there a huge surplus of that? No. So no, I think pricing will probably continue to be relatively boring. You know, it hasn't moved a lot over the last 12 months and probably not going to move a lot over the next 12 months. That's my guess.

Great. Thanks a lot, Chris.

Thanks. Good questions.

The next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Yeah, thanks so much. And, Chris, I want to stay on the topic of the macro. I think you've said that you expect demand for frack fleets to parallel recent rig counts at approximately – a one-quarter lag, is that still your thinking? And if so, how are you thinking about the rig count, which is showing some signs of stabilization, but your views around that, as that'll feed into the demand view as well.

Yeah, from what we hear from our customers, and it's obviously no secret, I think rig count is probably bottoming now. I think you're going to see rig count grow over the next, you know, six to 12 months. But in our new boring shale industry, it's probably going to grow much slower, much more modestly. People are disciplined in investments. Publics are loathed to change their plans too much. Privates are the more reactive ones. Drilling economics are quite good today for oil. So are we going to see an increase in private activity? Absolutely. Natural gas, we're going to see growth in activity there. But people, I think, are wisely more waiting for the right market signals. Gas prices have firmed a little bit. Let's see what the winter does. Huge new demand starting late next year through the couple years after that from LNG export capacity. So definitely going to see rising gas activity. But in frac, maybe that starts in Q2. Could be some a little bit sooner than that. If the winter's warm and prices stay low, it could be Q3. But, yeah, so a little bit of upward momentum in gas, a little bit of upward momentum in oil for privates. And publics are pretty slow and steady.

That's helpful. And staying on the macro, you know, we've talked about consolidation through the lens of your customer. We've also seen consolidation in the U.S. frack industry. What has that meant for discipline and your ability to sort of hold pricing in a softening market?

It's absolutely helpful. The big companies just by nature have a longer term time horizon. So if they retire a small frack fleet company that they acquire that may be struggling and my gosh, parking the fleet, they make nothing. They already bought those equipment. If they get them out there and they generate just some gross margin, it's a positive for them. But if those assets get acquired by a bigger company, You know, they just spent money to buy those assets. They're playing the long game. So they're just going to be managed, you know, more intelligently, more disciplined, and with a longer-term time horizon. So absolutely, technology consolidation has led to more disciplined investment, more disciplined commercial arrangements, and it's allowed those few bigger companies to invest in the future and try to drive the improvements I think the whole industry wants to see.

Thanks, Tim. Thanks.

The next question is from Mark Bianchi with TD Cowan. Please go ahead.

Hey, thanks. I guess another one on kind of the guidance and pricing commentary. I mean, if pricing is boring, as you say, it sounds like the decline implied by your guidance for the year for fourth quarter is all customer budget exhaustion. It would seem like first quarter EBITDA should be able to get back to third quarter levels. Would you agree with that?

Obviously, we don't guide in detail for the quarter upcoming. But, I mean, in general, if you had a flat market, your first quarter does have some weather effect compared to your summer quarters. So if you had a dead flat market, your first quarter would be slightly lower than your summer quarters. But that's where we are. But, again, I think next year is going to be slightly better than this year in total.

Okay. The other one was on Liberty Capital. power innovation, what is the spending that you're anticipating over maybe in 2024 and beyond? And how should we think about kind of the efforts to supply your own fleet versus perhaps supplying to third parties?

So, yeah, we have a third party, they do some third party deliveries here, but the bulk of the Probably the first year to year and a half worth of growth of LPI will be to support this digi-rollout and our expansion and our improvements in our natural gas usage across the rest of our fleets. It's an exciting business, and we'll talk more about it in our January call, and we'll talk about spending as we sort of look at that market going forward. But again, the vast majority will be supporting our fleets in the initial point.

Okay. Any bookends around the spending just to maybe set some early expectations for people?

We'll put a chat about that in January. I think that's the best way to look at that one, Mark.

Okay. Okay, thanks, Michael. I'll turn it back.

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

Hey, good morning. Just wanted to follow up a little bit on the Digi or electric fleet contracts. Some in the market have talked about those as being sort of multi-year type take or pay contracts. As you fold in more of the digi fleets, what have you learned about the contract structure for those? Would you agree with the multi-year type of contract? And if so, if not, how is the contract structure generally evolving?

Yeah, look, if you're going to build a new fleet, deploy new capital, that's different than deploying existing equipment. So, yeah, those are multi-year agreements.

Okay, perfect. And maybe if we could just talk a little bit about the sand market. You know, things have come off of peak levels, but is what you're seeing for sand demand in the Permian roughly commensurate with well completion count, or are you seeing other things, other trends like higher intensity, for example, maybe acting as a buffer on sand demand overall?

Yeah, you know, I think overall certainly it's relatively well aligned with completion count. That's certainly a good way to think about things. We continue to see movement in the amount of sand pumped in a well. We continue to have operators who are experimenting with alternatives to current design, and so that will have some modest implication. But at the high level, you're absolutely right thinking about it, just well count to volume consumed.

Okay, thanks very much. The next question is from Dan Cutts with Morgan Stanley. Please go ahead. Hey, thanks.

Good morning. Maybe to just piggyback on that last line of questioning, but broaden it out a little bit. So outside of Frac and also outside of LPI, could you just comment on what some of the other businesses like Sand and PropX, ST9, Wireline, just directionally, whether those have been, you know, kind of moving consistent with the FRAC and LPI earnings or maybe moving a little bit lower and appreciating that the benefits of vertical integration will be an earnings driver for the overall business. But just if you were to isolate those other businesses, anything that you'd comment on in terms of trends that you've seen there?

Yeah, look, you made a key comment. If you can isolate, like we never isolate those businesses because we're in them because they make our core business better. They are actually good businesses in their own right. Michael, see if he wants to comment any more on that. But, yeah, we are in those businesses because they make the whole system work more efficiently. You know, when we have a Liberty wireline crew on a Liberty frack fleet, we have meaningfully lower downtime than when we have a Liberty frack crew in a third-party wireline. So, look, our wireline is, and I think we mentioned in the release, it's now ranked number one by customer services in quality. So that makes that a good business in its own right, but even better, it makes the whole wireline and frack operate more efficiently, deliver faster results to our customers, and better profitability to us. Michael, anything you want to comment on?

The business leaders of those teams are focusing on those businesses and do an incredible job. You know, and I would say, you know, there's a decent amount of competition between all our business leaders. And, you know, at the moment, I'd say they're all racing across the line neck and neck, right? They're all kind of traveling about the same pace and doing very, very well.

Great. That all makes a lot of sense. Thank you. And then maybe just a question on how debt paydown ranks in the capital priority list. I know you guys... knocked out the term loan earlier this year, and then you guys paid off a decent-sized chunk of the revolver of the ABL in the third quarter. But just wondering if there's anything that you could share in terms of whether you think that you'll maybe just kind of continue to chip away at the ABL balance or if there's potential for knocking out a big slug. Just kind of how does that back in the capital priority list relative to, you know, CapEx and – And buybacks.

Yeah, we have very small net leverage, so we're very, very comfortable with debt levels where they are at this present point in time. So really, our ABL level floats with our other uses of capital in that given quarter.

Fair enough. Makes sense. Thank you both. I'll turn it back. Thanks.

The next question is from Saurabh Pant with Bank of America. Please go ahead.

Hi, good morning, Chris, and Mike.

Morning.

Thanks. I guess I'll start with a little bit of more color on the BG side because clearly there's strong demand over there. You would be at four fleet by the end of the year, six by the end of January. I'm sure there's more demand. But when you look at the demand that's out there, right, I'm sure you're not trying to meet every demand point, right? You need to keep your capex in mind. You need to keep your returns in mind, the right contract structure, customers, all of that. How do you think about how much potential demand might be out there if you were to not be disciplined? Just in theory, right? I'm just trying to see the demand sent out there. How would you characterize that?

I mean, look, the demand is gigantic, right? Think about that. Seven years running, we've been the top ranked from customers frack company in the quality of the services we deliver. And now we have the lowest emission, highest efficiency, all natural gas burning fleets with actually longer lifetimes, likely higher uptime, higher performance. So yeah, look, there's no cap on the interest in that. So the question for us is it's always a partnership decision. It's not a top. We have 50 of them on the lot. We could put them to work tomorrow. We wouldn't do that, and we never do that. They're going to be built individually for specific customers under specific conditions that have been partners and will remain partners for.

Right, right. No, that makes sense because we do hear that there is a lot of demand, right? And, again, you don't want to satisfy all demand points. That's not the right way to work. So I get that. Just a quick follow-up. I think Arun asked a question on the RFP season. How is that going? Just a follow-up question on that. In terms of how you think about contracting, the duration of the contract, how quickly pricing resets within that contract, are you thinking about that differently when you think about 2024 versus what you have in your portfolio right now for 2023? No.

You know, again, new builds, they have long terms and they have different sort of structures a little bit, but no, in general, no. No different this year than last year, and we just continue in that sort of partnership mindset existing customer base. Not a lot of change in the Liberty customer makeup.

Okay, okay, awesome. And then just one last quick one, just a clarification. I think Mark asked that question, and I think Mike – You said that you expect next year to be slightly better than this year, so 2023. Was that an EBITDA comment? I just want to be sure of that. That would be a general expectation. Okay, okay, okay, perfect. Okay, thank you. I'll send it back. Thanks, Rob.

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

Hey, guys, thanks for keeping letting me get on the call. I guess the first one is just any supply chain or labor concerns as we head into 24?

No. Those challenges that were big a year ago and 18 months ago don't look to be challenges today.

Got it. And then, Chris, how does a boring, mature market influence your acquisition strategy? Because you should have a lot of free cash flow next year.

I mean, yes. Our outlook is for a lot of free cash flow, and it's just competing uses. So yeah, acquisitions are certainly a possibility. You've seen we're not highly acquisitive, but if something's compelling, sure, sure.

OK. And I guess the last one for me, I'm assuming the initial rollouts of all the digitechnology are going to larger and higher quality customers, if you will. At this point, are any of the smaller EMP operators inquiring about the technology, or when do you see those folks wishing to learn more and possibly moving forward?

Oh, absolutely. No, they're fired up about it. They're fired up about it. It really just gets down to that long runway. To do a deal for something like that, you've got to have a pretty clear plan of what your next two or three years are going to unfold. For some of the bigger privates, they've got that. So it's, yeah, that's not years away, but yeah, the interest is quite large there as well. But you're right, the original deployment's not gonna be in that sector.

Okay, that's all I had. Thank you for including me.

Tremendous barbecue, John.

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

Thanks, everyone, for joining today. Sadly, another global conflict has burst on the scene with heartbreaking scenes of death and destruction. War is as old as time, but that does nothing to lessen the horror of its ravages. War is a destroyer of security, personal security, food security, property security, economic security, and our vision for a secure future that we all crave. I often speak of energy as the enabler of all human progress. It is. But it is also essential to satisfy our base needs, like security in all forms. Now that the spotlight is again on the United States, the most promising source of security for the world, how are we doing? We promptly sprung to action on the military, diplomatic, and humanitarian fronts. But what about the energy front that underpins everything? I would posit that we are not shining in this area. the area critical to our long-term future. Two quarters ago, I spoke about government policies that are raising up our electricity prices whilst also destabilizing our electricity grids. Hence, we are not doing well in the power grid area. While electricity grids are arguably the most important networks in the world, in total, they deliver only 20% of global energy. What about the total energy pie? Oil and gas today represent a record high of just below 70% of total US primary energy consumption. Fortunately, we are today the world's largest producer of oil and natural gas. Are we maximizing these resources to uplift Americans and provide security to our citizens and our allies? We have blocked the completion of large pipelines already under construction. We have dramatically reduced the granting of leases and permits on federal lands. We drained half our strategic petroleum reserves, not in a crisis, but simply to short-term lower gasoline prices. We have used a myriad of regulatory bodies to impede the funding and development of our oil and gas resources, having the obvious and presumably intended impact of reducing US oil and gas production at the margin and therefore raising prices to consumers and businesses. But there is no stopping the rise in demand for oil and natural gas, as everyone, not just Americans, wants to raise their standard of living and expand the opportunities available to their children. So what is filling the gap created by suppressing American oil and gas production? Iran, predominantly. We have effectively stopped enforcing the oil export sanctions on Iran, resulting in a roughly 700,000 barrels of oil per day increase in Iranian oil exports over the last 12 months, nearly all flowing to China. The same is coming true for Venezuela. Is having more oil coming from Iran, as opposed to the United States, beneficial to the security of the United States and our allies? Is it economically better for our citizens and allies that this incremental oil production and related economic activity and tax revenues flow to Iran instead of the United States? Is it better for air quality and greenhouse gas emissions that these incremental barrels are produced in Iran versus the world's cleanest production practices in the United States? The answer to all is obvious. Liberty's mission is to better human lives by improving the energy system in North America and the world. We do this primarily by driving improvement and innovation in hydraulic fracturing of oil and gas wells, the dominant source of energy in the US and Canada. We took an ownership stake in Fervo Energy last year to partner in bringing next generation geothermal into our energy system. Things are going quite well there. we took a smaller stake in Natron Energy to help bring sodium ion batteries to market as they offer distinct advantages to our energy system. After years of watching and investigating, we have recently invested $10 million in Oklo, which we view as the most promising of the small modular reactor companies. Why invest in nuclear? Because it has the energy density reliability and scalability required to economically meet the world's growing demands for energy. The world needs more energy, better energy. Thanks for joining us today.

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