Liberty Energy Inc. (LBRT) Q2 2022 Earnings Report, Transcript and Summary

Welcome to the Liberty Energy Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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, Dave. Good morning. And welcome to the Liberty Energy Second Quarter 2022 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer; Ron Gusek, 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 and pre-tax return on capital employed are not a substitute for GAAP measures and they not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of pre-tax return on capital employed as discussed on this call are presented on our earnings release, which is available on our website. I will turn the call over to Chris.

Thanks Anjali. Good morning, everyone, and thank you for joining us. I am proud to discuss our second quarter 2022 operational and financial results. The second quarter was a busy and exciting time as the Liberty team continued to deliver differential quality services in today’s robust, but operationally challenged environment. This translated into a notable milestone of fleet financial performance at levels that were last seen in 2018 as measured in annualized adjusted EBITDA per fleet, the hard work and dedication of our employees combined with deep relationships with our partners across the value chain, enabled us to achieve strong operational efficiency and environment still impacted by supply chain challenges. In the second quarter, revenue was $943 million, a 19% sequential and 62% year-over-year increase. Net income for the quarter was $105 million or $0.55 per fully diluted share. Adjusted EBITDA for the quarter was $196 million, 114% increase over the prior quarter. Liberty’s first half of 2022 is starting to reveal the value creation from our 2021 acquisition and our insistence upon getting the business integrations done right, consistent with our focus on long-term results. We positioned the company to deliver top tier performance through cycles with a focus on free cash flow generation and maximizing returns. We are driving cash flow expansion that allows us to fund compelling organic investments to grow our competitive advantage, while also returning cash to shareholders. Our strong financial results and a constructive outlook support the reinstatement of our return of capital program beginning with the Board approved $250 million share buyback program. Our guiding principle is to maximize the value of the Liberty share. We believe the flexibility afforded by share repurchase program gives us the ability to opportunistically act on a dislocated stock price, calibrated by market and business conditions. While the global economic recovery outlook has softened on reverberating impacts from higher inflation, rising interest rates and the Russian invasion of Ukraine, oil and gas markets remain constructive. Eight years of under investment in upstream oil and gas production exacerbated by inept global policy initiatives aimed at incentivizing an energy transition has created a mismatch of supply and demand. Today, historically low global oil and gas inventories, limited OPEC spare production capacity and a dearth of refining capacity are colliding with increased energy demand. Oil and natural gas demand growth is coming from the post-pandemic recovery in travel, China’s emergence from its enforced COVID lockdowns, plus seasonal demand. These are all further magnified by the Russia/Ukraine conflict and the potential for sanctions imposed on Russian oil exports, coupled with Russia’s decision to constrain natural gas pipeline exports to Europe. The greatest risk to our marketplace is a severe recession that leads to a drop in global demand for oil and natural gas. A moderate recession typically leads only to a slowing in the rate of demand growth for oil and natural gas, which would likely not be overly disruptive to our customers’ activity given today’s low inventory levels and tight supply and demand balances. The recovery in oil supply appears to be under greater threat than oil demand. North America is positioned to be the largest provider of incremental oil and gas supply. Today, E&P operators are evaluating the opportunity to deploy incremental capital in North America to modestly grow production, while remaining focused on shareholder priorities. The fundamental demand call on North American oil and gas supply is strong. Supply is restricted by a tight frac market, where equipment, supply chain and labor constraints limit frac fleet availability and service quality available to our customers. Many frac companies are struggling to execute in today’s environment. Moreover, operators desire ESG-friendly frac fleet technologies that provide the opportunity for both significant emissions reductions and large fuel savings. Liberty is uniquely positioned with the technology, scale and vertical integration to meet demand for service quality and best-in-class technology. The frac market is near full utilization, and few service providers have the fleet capacity and supply chain reach to satisfy E&P operators’ goals. Liberty was disciplined in restraining fleet reactivations in the post-COVID era of muted returns. Pricing has now recovered to where Liberty, in support of our customers’ long-term development needs, is reactivating several of our recently acquired, available fleets from the OneStim transaction. Importantly, these long-term, dedicated customers seek additional next-generation fleets that are not available today in the market and Liberty is providing an avenue to serve those customers and simultaneously driving free cash flow from these existing fleets to reinvest in our fleet modernization program and free cash flow. Liberty is also partnering with key customers on the deployment of two additional digiFrac electric fleets in early 2023. Demand is very strong for the technically superior design Liberty developed throughout the downturn that drives better safety and efficiency, a rare commodity in a tight market. The strong frac market and specific conversations with our customers gives us confidence in the demand for Liberty services into the coming year. In the third quarter, we expect approximately 10% sequential revenue growth, primarily driven by fleet reactivations and modest net pricing increases. Third quarter margins are expected to improve from the contribution of incremental fleets and modest price improvements, partially offset by ongoing supply chain, operational and inflationary pressures. Since the 2020 downturn, we have made the decision to refrain from reactivating fleets. We got the economics and longevity of business to support the on boarding of the new crew and the capital associated with restoring equipment. Today, we are one of the few players in the market with the equipment available to support a rising demand for frac services. We are also one of the only players with the supply chain capacity to support these services as sand and other materials remain in short supply. Reactivating fleet is a long-term strategic decision. We are not spot fleets but rather fleets that will go to high quality, dedicated customers that are interested in a road to next-generation solutions over time. Today, next-generation equipment is in short supply and will remain so for the foreseeable future. To maintain development program, producer seeking a frac crew, are willing to take equipment available to support their operations in the near term. While Liberty reactivated fleets are largely well maintain Tier 2 diesel equipment that came with the OneStim acquisition. These fleets are coming online at favorable prices that support the hiring and training of the new crew for the long-term, our next-generation technology expansion program and increasing our free cash flow generation. For minimal capital outlay, the unit economics of these fleets generate free cash flow that provide source of funding for investment in our fleet modernization program. Over the long-term, next-generation fleets will replace older technologies. While we already have one of the largest dual fuel fleets available, our equipment makeup will evolve to an entirely next-generation fleet over time. The fleet reactivations are not market share driven decisions, but our investments in driving increase in value of a share of Liberty stock by investing at the right time with the right economics. We are also excited to announce a $10 million investment in Fervo Energy, a next-generation geothermal technology company that develops geothermal assets more dispatchable, reliable, baseload grid power with low carbon intensity. With this investment, Liberty expand into supporting geothermal resource development, leveraging our extensive expertise in sub-surface engineering and pressure pumping assets that help create dense underground networks, combine the earth’s heat for electricity production. We chose this investment opportunity because of our belief in the concept viability, the quality of Fervo’s team and the size of the potential resource already captured. Unconventional geothermal applications offer a potential pragmatic solution for a reliable source of low carbon electricity and we are excited to be part of the journey. Our team is diligently working to support a world where we are seeing the greatest threat to energy security, reliability and affordability in decades. Yesterday, we released our 2022 Bettering Human Lives report placing today’s global energy security prices in proper context and showcasing Liberty leadership in clean energy technology innovation. Our drive is to bring awareness to the importance of energy assets, expanding further into the topics of geopolitics, food security and the four pillars of the modern world, cement, steel, plastics and fertilizer, all critically enabled by hydrocarbons. ESG has always been part of our DNA since day one, and we bring the focus our innovation and investments in digital technology, engine technology, sand, logistics and supply chains, as well as our robust governance and the people and culture that find us. With that, I’d like to turn the call over to Michael Stock, our CFO, to discuss our financial results.

Good morning, everyone. We are pleased with our second quarter results. The entire Liberty family altogether provided exceptional execution for our customers and deliver record revenue, net income and adjusted EBITDA. We are navigating to see the advantages, the transformative work our team accomplished through the integration of OneStim and PropX as already generating returns at a faster pace than we projected out at our Investor Day a little over one year ago. Successfully achieving scale and vertical integration by doing the integration to right place has been key to our financial performance and positioned us well entering into the second half with the right momentum. This quarter, we reached annualized adjusted EBITDA per fleet levels that was last seen in 2018 and we believe that we are only at the early stages of the Oilfield Services up cycle. Liberty is a company in a much different scale of integration today than we were in 2018. We are in an even stronger position to lead the industry and technology and service quality, and to expand our profitability as best-in-class frac fleet technologies have evolved to include Liberty’s built the business digiFrac fleet that raises the industry standard on providing the lowest emission technology in the market with superior durability, reliability, enhanced automation and controls. Our TF4 DGB fleet is growing significantly and there is dual fuel pumps with automated controls that maximize gas substitution for diesel and an environment with savings from fuel cost arbitrage has increased over the last year. We had an expanded supply chain with two of our own sand mine deeper partnerships with our suppliers, allow us to deliver superior operational execution. It’s a feeling restricted markets grilled with global supply chain challenges. We also have a premium technologies in wet sand handling and last mile profit delivery solutions through PropX. These transformative changes we have made and continue to make it Liberty are critically important drivers of shareholder value at a time where market fundamentals are increasingly constructive for our industry. The second quarter of 2022 revenue was $943 million, $150 million or 19% increase from $793 million in the first quarter. Approximately 60% of that topline growth was driven by activity, mix and a modest contribution from a fleet reactivation for the remainder pricing. Net income after-tax was $105 million, increase from a net loss after-tax of $5 million in the first quarter. Fully diluted net income per share was $0.55, compared to fully diluted net loss of $0.03 in the first quarter. Results included $7 million and fleet reactivation cost incurred for both the fleet deployed in the second quarter and the planned third quarter fleet deployments. General and administrative expenses totaled $42 million, including non-cash stock-based compensation of $4 million. G&A increased to $4 million sequentially, primarily driven by performance-based compensation, inflationary and activity increases commensurate with the growth in our business and investment in platform IT systems and other process improvements to support our continued expected growth. Net interest expense and associated fees totaled $5 million to the quarter. Adjusted EBITDA increased to $196 million, well doubling from $92 million achieved in the first quarter showcasing solid incremental margin expansion on activities and pricing gains. We ended the quarter with a cash balance of $41 million and net debt $213 million. Net debt increase by $34 million in the first quarter, primarily due to an increase in working capital. As of June 30th, we had $150 million of borrowings on our ABL credit facility. On July 15th, we exercised the Accordion feature on our ABL credit facility, thereby increasing our borrowing capacity from $350 million to $425 million. Total liquidity including availability under the credit facility was $263 million pro forma for Accordion. Net capital expenditures totaled $127 million on a GAAP basis for the second quarter of 2022. The CapEx was driven by TF4 DGB upgrade and digiFrac spending of $65 million, sand logistics and other margin enhancing projects of $29 million and the remainder relating to ongoing capitalized maintenance speeding. In the third quarter, we expect approximately 18% sequential revenue growth. This is primarily driven by fleet reactivations and one including one full quarter contribution from accrued deployed in the latter part of the second quarter and modest price increases. We also expect margin improvement primarily with the contribution of integrated fleets and modest net pricing increases, partially offset by ongoing supply chain, operational and inflationary pressures, included -- including in commodities of raw materials and labor costs. As market fundamentals continue to improve for our industry, we are well positioned to support global energy needs by continuing to invest in this early part of the cycle to maximize free cash flow over the long-term. We are now targeting capital expenditures of $500 million to $550 million for full year 2022, approximately $200 million increase reflects an additional next-generation technology investments, including incremental spending, additional digiFrac fleets and PropX sand handling of wet sand equipment, as well as capital investment in the frac fleet reactivation and with the transaction of approximately $55 million to $60 million, including the one fleets deployed in the second quarter and the balance that will be deployed in the second half of the year. The incremental adjusted EBITDA we are on track to achieve in 2022 relative to the beginning of the year is expected to far more than exceed the additional CapEx spending in our budget. As a result, we expect to be free cash flow positive for the full year of 2022 after investing in these long-term compared to the past. We expect to enter 2023 with an active frac fleet count in the low 40s. Investments we are making in 2022 will further expand earnings potential in 2023 and our fleet modernization plans is expected to continue in 2023. We believe capital spending is likely to be at or below 2022 limits of 2023. We anticipate strong 2023 free cash flow conversion, about 50%, driven by both incremental profitability from 2022 investments and a continued margin expansion with these initiatives. We are planning that we have a fleet of the latest technologies as we enter what we expect to be a longer duration oil and gas prices. As we stated at the beginning of the year, we have significant flexibility in adjusting our capital spending patterns depend on economic conditions, customer demand and returns expectations. As we look to the future the increased free cash flow generation capability of our repositioned business, successful OneStim integration, operational execution and fundamental outlook allows us to meet our capital allocation priorities of disciplined investments to expand earnings per share, balance sheet strength and return of capital to shareholders. With that, I will now to it over to Chris before we open for Q&A.

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

[Operator Instructions] Our first question comes from Chase Mulvehill with Bank of America. Please go ahead with your question.

Hey. Good morning, everybody. I guess, first thing…

Hi, Chase.

… I wanted to hit on -- hey, just the CapEx, obviously, a big bump here, you have got the newbuilds -- the incremental newbuilds with digiFrac fleets in the first half of next year. So could you just kind of split up the CapEx of the $500 million to $550 million between upgrades and reactivations versus newbuilds and versus maintenance, so we can kind to get a context of kind of where the CapEx is going?

Yes. Chase, we really got some piggyback on sort of what we announced at the beginning part of the year, right, the 200 change that was announced we think about it, there maybe two newbuild digiFrac fleets $120 million, probably, the $50 million to $58 million with the reactivations and the balances just to make some additional wet sand handling, technologies and some margin build for projects that were green lighted with the improved pricing.

Okay. Let me ask you this, the fleets that you are reactivating in the back half of the year, are those upgrade, are you spending to upgrade those, are those just going to be kind of Tier 2 fleets?

If they ask to -- we are not upgrading the TF4 DGB that price obviously you could. But they are being to some degree lemmatized to where they are. They would be a Liberty Tier 2 fleet. So they have longevity with them, which will then support the long generation move of those clients to next-generation fleets that’s kind of that with each of those lines. That has a different cadence with every one of them during the next five years.

Okay. That makes sense. And if I can ask on the buyback, if I can kind of poke around this a little bit and try to think about how you are thinking about pace on that $250 million. I know you didn’t really kind of commit to it at this point. But do we -- should we think about it kind of more matching about kind of how free cash flow evolves or is it kind of more opportunistic buybacks based on kind of how -- what your view of intrinsic value versus where the stock is trading?

Yeah. Entirely opportunistic, Chase, no formulaic money is going to flow out at X, buybacks to us are opportunities. When you have a balance sheet to support them and you have a large compelling difference between the intrinsic value of the share and the price at which you can buy shares. So the way in which we will buy back our stock is strongly dependent on the magnitude of that dislocation between intrinsic value and market price.

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

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

All right. Makes sense. That’s help pretty much everybody thinks about it. All right. I will turn it over. Thanks, Chris.

You bet. Thanks, Chase.

Our next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, everybody.

Hi, Steve.

So two things from me, if you don’t mind. The first, when we think about the fleet reactivations in the back half of the year, you talked about I think exiting next year, starting next year, starting next year with about -- with 40 plus. Are you -- are we coming off of a base of around 35 in the second quarter. I am just trying to calibrate count of the percentage increase you are seeing in the third quarter and how I should think about the digiFrac fleets entering in 2023.

It’s like, Stephen, yeah, we are quite mid-30 and 35 number-ish. We are obviously activating run rate in the second quarter, but then the balance will be activated. So as you go through the year through the end of the fourth quarter. That’s a…

Okay.

…straight line of making model.

Okay. Okay. And then when we think about, I guess, it’s two-part question, but the steep increase in profitability per fleet in the second quarter up to give or take, I think about $23 million of EBITDA per fleet. So did that bridge from the first quarter and I assume its price utilization and is probably some value from the sand business in there I think. How should we think about the sort of the potential of that number? You have given us guidance, I mean is this something like you go to the high 20s as 2023 evolves or is that too aggressive? I mean any parameters around sort of the bridge and where this thing could -- where that could go as we go forward?

Yeah. Where it could go, which as from my point of view would really more dependent on the demand side of the oil supply/demand equation, right? I think on how -- kind of how any sort of particular recession may affect demand for next year. Generally internal numbers, we will see it from late Q2 that the industry is running maybe around 250 fleets, going to move 275 by the end of the year, kind of mostly may stay flat at this present point in time. So, yeah, there is definitely upside on pricing, but I think that there is still to be seen, there’s -- obviously you see a lot of movement in the market of frac fleets, and in general, the general economy. But I think we need to kind of your take sort of watch it as we go.

Stephen, obviously, we don’t know the future, obviously, that the trends are pretty positive right now, but it’s a combination of how well we perform operationally, what the trends in pricing and then there still migrating positive direction and also or just quality of operations that Michael said some of our capital these margin enhancement there are factors. We are trying to figure out how to run our ambition -- our business more efficiently to get more done at a lower cost in a safer fashion. So there is a lot of moving factors in that. So where all we go shy about predicting the future, in fact we did say a year ago that we return to mid cycle economics this year and that was based on anything specific, it’s just based on where margins are awful, supply shrinks and eventually demand will grow, but just supply shrinkage alone we are going to fix the marketplace given that two years or two and a half years of four frac market conditions.

Great. Very good. Just one quick one, Michael, you mentioned this, but as the market evolves over the next couple of years. Do you view the upgrades and the digiFrac as ultimately replacements for these Tier 2s that you are reactivating and it’s sort of a bridge to newer higher end assets?

Generally what we see among this thing in the market should be based on what has been announced for newbuild. It approximates about what the attrition cycle is for frac fleets. If you think about the 10-year life for some of the older fleets, diesel fleets, et cetera, that still would be announced numbers that are coming out, I feel there are approximately the same. We did pretty balanced market a very disciplined approach by ourselves and we know that for diesel, we think that’s good for the frac market overall.

Very good. Thank you for the color gentlemen.

Thanks.

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

Chris, Michael, good morning, Chris, I was wondering if you could give us a little bit more bigger picture around the scope or the ambitions of your fleet modernization program, you mentioned $500 million to $550 million of CapEx this year and at or a little bit below that kind of next year. I was wondering if you give us a little bit more scope on how long do you expect the higher CapEx trend relative to maintenance to continue and what type of capacity as do you expect over the next couple of years.

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

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

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

Great. Thanks a lot.

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

Great. Chris and Michael, congrats on the solid quarter here. I want to build on some of your comments, you mentioned you don’t expect to add capacity. But broadly speaking, do you see current profitability levels as incentivizing your competitor set about adding capacity as the market overall. I guess where we are going with it is, do you see disciplined fading at all?

We haven’t seen any of that and the property were close to all the equipment builders. There is -- I don’t know of any fleets being built that are not really driven by ESG or stacks. I don’t know of any straight like the capacity adds, they probably are, but if there is, it’s very small, very little. Certainly among the bigger players who are an increasing share of the marketplace these days. Yeah, I don’t think there’s any appetite, look and you couldn’t do it. The markets great today, I want three more fleets. Well, sign up for 15 months and you will get them. But what’s the market going to be in 15 months. And people I think are -- yeah, are obviously burden from overbuilding or redeploying too many idle equipment in the past. So, no, we have not seen a fading of disciplined leasing, a pretty rational dialog between us and our customers in a marketplace today where our customers have just fantastic returns and we are still lagging a ways behind that, but we are moving in that direction as well.

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

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

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

Okay.

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

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

If people -- this is almost all from existing customers, right? They want to get -- either want to do a little bit of incremental activity or maybe they split their work between Liberty and somebody else, and somebody else is struggling and they are not getting consistent throughput, they are not getting things done the way they like them to be done. But if you -- I think that the pull there is, we know you guys, we trust you guys, you can deliver and whatever economics it would take to get a little more…

Right.

…. of that.

Yeah.

So it’s all of that package of course, John. But we buy a lot of sand from third parties as well. Look, we are in a bunch of different basins. So it’s not just that we have sand mines, but it’s that we have relationships and history we are in a tight procurement market. I would say our goal has always been to not just be the preferred provider, but to be the preferred partner to our suppliers as well, so.

A little color on that too. I mean the activation…

Okay.

… is not in one specific basin, right. They are -- it’s pretty popular basins, which…

Okay.

… to some degree helps in the ability to source labor and support those fleets and for supply chain to support those fleets. So the key things you are asking at this present point in time direct revenue in fleet is really is can you source the labor, can you source, can supply chain support them as a key event, because you are putting fleet to work and it’s delayed or have issues, it’s not a great…

Right.

… improvement choice.

Okay. Got it. The other one for me is just that we look at the backdrop, I mean, clearly, demand is good? You guys are obviously performing well. How do we transition -- do you think there is the opportunity, Chris, Ron and Mike, to transition finally to sort of take-or-pay arrangements for these fleets, just what would happen if you went an asset customer today to lock something up. I mean the transition with some dedicated fleets is that in line of sight?

Yeah. I mean there all deals like that today, where the buyer need something and so we will have guarantees of our economics as they struggle on operations and are able to have a frac pace move as fast as we would like, we have some contract protections in there that protect our economics. So those absolutely exist today. But again for us the winning in the long run in this industry is always about how can we win together, not, hey, if things change you are screwed and we win. That’s just -- that’s -- those -- they -- if that exist -- they did exist in our industry, even then we generally did not engage in them.

Okay.

We have always had a partnership mentality. We always will have a partnership mentality. Now I know you are rolling your eyes right now, and say, well, Chris that partnership was harsh for you guys in the last two years or three years and they are similar to that and all the benefits disproportionately going to swing a bit more all way going forward, yes, yes, of course, they are.

Okay.

But we have got to always be prepared to deal with what comes.

Yeah. You have got a camera in my truck. Okay. So, last one from me and hopefully this is best just one, you noted you will start to the year in 2023 with a fleet count in the low 40s, is that assuming two digiFrac fleets and can you say how many in Canada, just remind me?

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

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

Thanks.

Thanks, John. I appreciate you do not have to worry in that truck.

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

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

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

Yeah. Thanks for that. And then maybe as a way to tie that into sort of production expectations as we look to the end of this year and next year. You mentioned earlier in the call challenges for operating efficiency for the industry. Just want to tie in a little bit with the labor issues, but if you think about relatively stable capacity in 2023. I mean does that imply that if we don’t get significant operating efficiency improvements, trained labor, et cetera, that it will be hard to deliver more wells and more production in 2023?

Well, the current activity level, it’s sort of, like the biggest proxy for what’s going to happen in the U.S. oil and gas production is the rate at which pounds of sand are going underground way more important than rig count, way -- frankly better than rig count, but really it’s pounds of sand going underground. That’s the metric. We based production predictions and drive. Now, it’s not straight simple as where is the sand going underground, how is it going, because there is some -- there is details around that, but the current level of activity is driving today modest growth in both U.S. oil and natural gas production. I think we have said in the beginning of this year we expected 700,000 or 800,000 X over X oil production growth this year. I think that’s a reasonable estimate. We might be a bit above that, but we might be a bit below that. I think that’s a reasonable pace at which we are running right now and if you keep going at the current rate, we would see a similar growth rate next year. So I think you will see, again, probably a little less million barrels a day of U.S. X over X rate oil production growth this year, probably on track to see a similar level next year. Now, why based on that, 500 to 1 million barrels a day of X over X growth rate next year probably. And continued to be even more cautious here, natural gas is growing and will -- production rate will grow, but again also at a modest rate and its current activities next year’s plans, I think, it continues to grow next year at a modest rate.

Great. Thank you.

Thanks Roger.

Thanks. Thanks, Roger.

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

Good morning.

Hi, Scott.

So as we talked to investors the last couple of quarters, we felt a general current disconnect between market expectations for frac fleet utilization and the trajectory of per fleet profitability many initially looked at the 2017, 2018 up cycle as a comp now saying just weak that up cycle was if you look back at 2011, 2012 per fleet profitability got closer to $30 million. Is that a level profitability possible for the underlying frac business alone this cycle separate from the other businesses or it is a partnership model or cost inflation, prevent you appears to pushing the frac profitability alone towards that $30 million level that we -- you saw about a decade ago?

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

Got it. Got it. And then how should we think about the contribution from the non-frac businesses, it looked like you had a nice step-up in that contribution in Q. So as we think about 3Q and 4Q and into 2023, would the non-frac businesses profitability contribution expand at a faster pace than the underlying frac business, the more in line? How should we think about the cadence of that contribution?

So I think the frac -- the underlying frac business is probably one of the expanded a bit quicker rate. The non-frac business are a little steadier, the majority of sand, the same mines we picked up from OneStim, really comes to go through our frac fleets, that’s really a small portion of sort of additional sort of, like, let’s say, third-party sales would go there. So I would say, kind of the first half, the underlying frac that’s the one that’s expanding the faster rate.

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

I think it’s a fair assumption. I think so.

Okay.

Maybe relative to…

Appreciate the color.

Thanks Scott.

Our next question comes from Connor Lynagh with Morgan Stanley. Please go ahead with your question.

Yeah. Thanks. Just a question around capital allocation and I frankly asked this a little bit of facetiously, but given where your stock is and just how cheap the valuation is relative to these leading-edge numbers that you are putting up here. Why spend anything but the level of maintenance CapEx and divert the rest -- not divert the rest into buybacks, what’s your thinking around that?

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

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

No. We will -- the opportunity to give is compelling. The window of free cash flow in the very near future we are quite confident in. So, no, you get -- buybacks timing matters. I can say the same thing about CapEx and investment. People tend to invest hugely in their business in CapEx and buybacks when their business is just killing it and then it making cash, but that’s not the best time to invest in CapEx, in your business and in buybacks. So, no, you have to be willing to do those with a lag. We have talked about this since our IPO. At the beginning of the cycle is the best time to invest CapEx in your business and when the share price is most dislocated is the best time to do buyback as long as you are not taking balance sheet risk, right? So the very start of the downturn you don’t know how always going to be, but you got to be careful or cautious there. But, no, the timing of these things is not tied. There is not specifically tied to the timing of cash flow

Appreciate the context. I will turn it back

Thanks, Connor.

Our next question comes from Derek Podhaizer with Barclays. Please go ahead with your question.

Hi. Good morning guys. I wanted to hit on pricing a little bit more. Could you talk about where the reactivated Tier 2 diesel fleets are priced relative to the next-gen fleets priced at the end of last year and earlier this year? How much does this raise the bar for next-gen pricing re-contracting and what run rate you have now for profitability expansion that these are re-priced in the next six months to 12 months?

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

Got it. That’s helpful. Switching over to the digiFrac. So you will have four fleets by early next year. You talked about the pressure on the power side, would you supplement with third-party turbine providers or grid power or battery power to help get you to where you need to be with those MTU Natural Gas Research engines?

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

Got it. That’s helpful color. Last one if I could squeeze it in. Just on the unconventional geothermal investment. You talked about how big of an opportunity this could be for you over the next few years, three years to five years, could you frame that and maybe put some numbers around it for us?

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

Got it. That’s helpful. Thanks guys. I will turn it over.

Thanks.

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

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

Yeah. And so we will give you specific numbers, it’s definitely less than half, maybe meaningfully less than half, but it’s still a meaningful flex.

Okay. Got it. Thanks for that. And under next year’s initial look at CapEx of close to 2022 levels. Can you talk a bit more about how many digiFrac fleets that might contemplate?

The majority -- we look at that. The majority of that CapEx above or beyond maintenance CapEx is kind of at moment soft cycle to digiFrac. I gave you those numbers to give you kind of a general idea where things could go, obviously those plans, we will actually be made one customer at a time, maybe we will answer as we go. But, yeah, the majority out of the maintenance CapEx, the majority of that will be spent on the digiFrac complex.

Okay. Thanks very much. I will turn it back

Thanks, Keith.

Our next question comes from Waqar Syed with AltaCorp Capital. Please go ahead with your question.

Thank you. Congrats. Gentlemen, great quarter first of all. Michael just quick housekeeping questions, number one, do you envision some fleet startup costs in Q3, and if so, what would be the size and H2 would that be -- second half would that be a source of cash from working capital or still use of cash?

Sorry, Waqar, you broke up while you were asking. I think can you make sense by the question.

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

Yes. We do and I think the order it will be probably similar to Q2 was -- between Q3 and Q4, I would say.

Okay.

And a little.

And then working capital do you expect that to be a source of cash in H2, second half?

It will be a slight use of cash.

Slight use of cash.

Probably balances in Q4. Yeah, it will have the seasonal -- the normal seasonal role as a seasonal way rollover. Yeah, it might be a small use of cash in Q3 and possibly it more benefit in Q4.

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

No. Nothing there. I don’t think pull back has been significant enough and in the out years, it’s not meaningful, so there’s no changes, yeah.

Okay. Thank you very much. That’s all from me.

Thanks, Waqar.

[Operator Instructions] Our next question comes from Marc Bianchi with Cowen. Please go ahead with your question.

Hi. Thanks. I wanted to go back to the 2023 CapEx, if it is flat or slightly down. Michael, could you just give us the buckets, because I am assuming that the maintenance number is going up because of just the active fleet counts going up, but maybe just level set us on the three buckets or however you want to describe it for 2023?

Yeah. It’s really a soft circle, Marc. I think you used sort of as your rough rule of thumb of $3.5 million of fleet got in that low 40s. Obviously, we have got -- you have got the inflationary pressures on the maintenance CapEx, et cetera. But that’s getting as we improve equipment at scale, we are doing our best to offset that. I think if you check those binders, I think the balance is really a soft circle on for decisions that we have made customer-by-customer, the majority will be spent on digiFrac.

Got you. Okay. Great. And one other…

They could change.

Pardon, go ahead.

They could easily change, I mean market changes. We have a lot of flexibility in kind of moving CapEx, adjusted CapEx as markets change.

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

Yeah. Well, cash tax is relatively minimal. Second half of year probably in the order of $10 million to $15 million and is probably not too similar from book taxes. Obviously, we have got a very large valuation allowance related to the TRA that protects that 2023. Well, probably, it’s all about that the mix, as I had modeled it out, it has been little time with my tax return on some of the interplay there.

Okay. But not a meaningfully different number, perhaps, in the second half as we are just trying to triangulate on cash flow?

Yeah. I would say, in general, I think, so we will begin cash tax payment situation next year. So what sort of, again, I think…

Yeah.

… next year will be a drag on cash flow that to the extent we haven’t modeled yet.

Yes. Okay. Super. And then the last one for me is just kind of higher level on customer budgets here. I mean E&Ps have absorbs a lot of inflation over the course of the year and there’s at least for the publics there is a commitment to not increased CapEx too much. Are you seeing any customers adjust plans and activity because of the amount of inflation that they have seen and how are you thinking about that interplay into 2023?

I would say if people goals are based on what they want to do with their production. Do they want to keep production flat? They have very modest production growth. I think that’s generally the targeted activity levels and then they want to work as efficiently as they can to get those activity levels done. And obviously, frac pricing is a piece of that, we shift the piece, right? You can pay a higher frac pricing, book pricing, Liberty versus someone else, but the wells come on sooner and the efficiency of operation is greater. There is some onset in cost savings from that. So, no, I think, what producers are keeping relatively anchored is their activity and production plans.

Got you. Okay. Thanks. I will turn it back.

Thanks, Marc.

Thank you.

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

Yeah. I just want to say thanks for everyone’s time today for following Liberty’s business and for being involved in the energy business. Huge shout out to everyone on team Liberty that 24x7 is working hard to make our business successful and make the world go round. Thanks also to our customers and suppliers and everyone. We will talk to you next quarter.

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