Liberty Energy Inc. (NYSE:LBRT) Q1 2024 Earnings Call Transcript

Liberty Energy Inc. (NYSE:LBRT) Q1 2024 Earnings Call Transcript April 19, 2024

Liberty Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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, Director of Investor Relations. Please go ahead.

Anjali Voria: Thank you. Good morning, and welcome to Liberty Energy’s first quarter 2024 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 adjusted pretax return on capital employed are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of adjusted pretax return on capital employed as discussed on this call are available on our Investor Relations website. I will now turn the call over to Chris.

Chris Wright: Thanks, Anjali. Good morning, everyone, and thank you for joining us to discuss our first quarter 2024 operational and financial results. As we enter the fourth year of what appears to be a durable cycle for North American oil and gas production and development activity, consolidation across the energy industry is pushing larger companies to seek technical solutions and expertise to drive value creation. Liberty’s strong first quarter results demonstrate the continued benefits of leading the industry in technology innovation, service quality and investment in talent. Over the last year, the operations team delivered our highest combined safety performance and average daily pumping efficiency in Liberty’s history.

Our 32% adjusted pretax return on capital employed for the 12 months ended March 31, 2024, represents the continuance of our history of strong returns. I’m proud of the continued outstanding results our team achieved during a period marked by softening industry activity trends. Exceptional operational execution and deep customer engagement drove strong first quarter revenue of $1.1 billion and adjusted EBITDA of $245 million. We generated strong cash flow and distributed $42 million to our shareholders in the first quarter. Since July 2022, we have now distributed $417 million of cash to shareholders through the retirement of 12.5% of shares outstanding plus cash dividends. We remain focused on generating strong returns and free cash flow. We are pairing investment in profitable growth initiatives that increase our competitive advantage with a robust return of capital program.

We are leading a generational shift towards low emissions, capital-efficient natural gas-fueled technologies. Our comprehensive solution from critical power generation to the CNG fuel supply supports our digiFleet deployments and uniquely serves our customers in their development of oil and gas resources. Furthermore, a growing demand for power from AI-driven data centers and reshoring of industrial and manufacturing activity require reliable sources of power, which we believe will be best served by domestic natural gas. Liberty Power Innovations is well-positioned to benefit from these wider opportunities beyond the oilfield. Our customers see tremendous benefit from our direct investment in next-generation pump technology, our ownership of power generation and fuel infrastructure to control critical areas and expansion in our manufacturing.

Together, this complete end-to-end service solution enables a rapid innovation cycle and superior operating efficiency that our customers have come to expect from the best service partners. Seamless integration of our digiTechnologies with advanced cloud-based software for our pumping control systems, power generation and on-site fuel management maximizes operational efficiency and lower fuel consumption. The successful deployment of our first few digiFleets has further strengthened our customer partnerships, which we continue to grow through ongoing engagement to provide customized solutions. For instance, we are enhancing our automated pump control technology with customization that allows optimizing key variables deemed important to our customers, such as rate, pressure, sand and chemicals and fuel efficiency.

This solution responds to reservoir conditions and provides a customized fracture treatment across basins and horizons with innovation. Software optimization drives enhanced execution while minimizing downtime and maintenance costs. The performance of our latest pump technology, digiPrime has been excellent. DigiPrime is the most thermally efficient pump solution in the market, and we have seen natural gas fuel consumption that rivals the best dual fuel systems without any diesel consumption. That means the pump uses less natural gas and no diesel when compared to Tier 4 DGB pumps doing the same work. Technology innovation has been central to our history, including the multiyear design and development efforts of digiFrac and digiPrime. Last year, we decided to expand our internal manufacturing capabilities with the launch of our Liberty Advanced Equipment Technologies division, or LAET.

LAET now encompasses our manufacturing division, formerly known as ST9 and expands our ability to design, engineer and package complete systems. We believe the success of new technology comes through ownership of the engineering design and the ability to rapidly incorporate feedback from field operations in the design and manufacturing process. This can further accelerate the innovation cycle and reduce total cost of ownership. Liberty Power Innovations continues to grow in scope, expanding alongside our dual fuel upgrades and digiFleet deployments. In the first quarter, we launched operations in the DJ Basin with onsite fuel management services and will commence CNG sales this quarter following the commissioning of our compressor facility.

Frac industry dynamics remain constructive as relatively steady demand in recent months has focused service companies on disciplined pricing and quality of service. Superior performance and reliability drive higher returns for both E&P operators and service companies alike. Liberty’s continual focus on technical innovation in equipment technology and software automation augments our industry-leading service offerings while lowering the total delivered cost to the customer, reinforcing our position as the supplier of choice. Global oil and gas commodity prices have diverse and moved materially in recent months. Yet these changes have not materially impacted, although there’s been a very modest softening demand for North American frac services.

Oil prices have rallied since early in the year, owing to an improved global economic outlook, ongoing OPEC+ voluntary production cuts and rising geopolitical tensions. Iranian oil exports are at multiyear highs with a nontrivial risk that future Iranian export volumes decline. Natural gas prices have conversely declined considerably since last fall, primarily owing to strong production and mild winter weather, both driving natural gas inventories to well above seasonal norms. Natural gas prices are likely to strengthen in the future with increasing LNG exports and surging domestic demand for power in the years ahead. After 20 years of nearly static U.S. power demand, analyst projections for growth in the coming decade from AI and reshored manufacturing, range from several Bcf per day to over 10 Bcf per day of incremental natural gas demand from the power sector alone.

Globally, energy demand continues to march higher, supporting a strong North American oil and gas industry in future years. The lucky one billion, borrowing [indiscernible] term, consumed 13 barrels of oil per person per year, while the other $7 billion consume only three. It is safe to say that global energy demand will grow for the foreseeable future. Liberty’s focus is profitable growth through disciplined investment in talent, technology and equipment that leads the industry in efficiency and emissions. We are confident that our strategic investments in digiFleet, plus power and fuel supply through LPI better positions us to deliver superior returns over cycles. We are also excited by our partnerships in the Australian Beetaloo shale gas basin, which exemplify our continued efforts towards growing reliable energy sources worldwide.

In the second quarter, we expect low double-digit sequential growth in revenue on stable pricing and increased efficiency with corresponding improvement in profitability. We continue to expect strong cash flow generation in 2024, supporting our technology transition investments and industry-leading return of capital program. With that, I’d like to turn the call over to Michael Stock, our CFO, to discuss our financial results and outlook.

Michael Stock: Good morning, everyone. We started the year delivering solid first quarter results, fueled by a concerted effort to deliver a superior reliable service to our customers. By focusing on meeting the increased complexities of our larger growing E&P customers, we’ve been able to mitigate the challenges of a softening industry demand during the last four quarters and deliver a strong return on and return of capital. A more sophisticated customer base requires tailored solutions that are best served by technology investment, scale and integration, and we have aligned ourselves with these customers by meeting and exceeding their growing demands. In the first quarter of 2024, revenue was $1.1 billion compared to $1.1 billion in the prior quarter.

Our results were flat with the prior quarter, in line with our expectations and as our pumping efficiencies and integrated services offset lower sand and other consumable prices and market headwinds. The first quarter net income after tax of $82 million compared to $92 million in the prior quarter. Fully diluted net income per share was $0.48 compared to $0.54 in the prior quarter. First quarter adjusted EBITDA was $245 million compared to $253 million in the prior quarter. Frac markets have softened since the height of late 2022 and early 2023, but now appear to have stabilized since late last year. Our first quarter results were relatively flat with the fourth quarter, in line with our expectations. General and administrative expenses totaled $53 million in the first quarter and included noncash stock-based compensation of $5 million.

G&A decreased $2 million sequentially as prior quarter performance-related compensation was modestly higher than the current quarter. Net interest expense and associated fees totaled $7 million for the quarter, relatively in line with $6 million in the prior quarter. First quarter tax expense was $26 million, approximately 24% of pretax income. We continue to expect the full year tax expense rate in 2024 to be approximately 25% of pretax income. Cash taxes was $17 million in the first quarter, and we expect 2024 cash taxes to be approximately 80% of our effective book tax rate for the year. We ended the quarter with a cash balance of $24 million and net debt of $142 million. Net debt increased by $39 million from the end of the fourth quarter due to the expected rise in working capital.

First quarter uses of cash included capital expenditures, $30 million in share buybacks and $12 million in quarterly cash dividends. Total liquidity at the end of the quarter, including availability under the credit facility, was $315 million. Net capital expenditures were $142 million in the first quarter, which included investments in digiFleets, LPI infrastructure, dual fuel fleet upgrades [indiscernible] construction, capitalized maintenance spending and other projects. We had approximately $3 million of proceeds from asset sales in the quarter. Our capital expenditures remain on target for 2024. We are confident in our ability to generate strong cash flows through cycles and remain committed to our industry-leading return of capital program.

In the first quarter, we repurchased $30 million worth of shares or nearly 1% of shares outstanding and distributed $12 million in cash dividends. Since we reinstated our return of capital program in July of 2022, we have now distributed $417 million to shareholders through cash dividends and retirement of 12.5% of shares outstanding at the program commencement. We continue to deliver on our return of capital program while reinvesting in high-return opportunities that increase our long-term cash flow generation. While oil and gas commodity prices have resurged meaningfully, we see relatively stable demand for Liberty Frac Services. A slightly better oily demand is offsetting modestly lower gas basin trends. In the second quarter, we continue to expect improved activity levels among our customers, primarily owing to higher utilization and favorable weather-related trends in most basins that more than offsets spring break-up in Canada.

We are now projecting low double-digit sequential revenue and adjusted EBITDA growth. We are also expecting digiFleet deployments to continue ratably throughout the year, including our 7th fleet later this quarter. We are executing on our two-pronged growth strategy: one, investing in next-generation digiFleets that fuel incremental fleet profitability; and two, LPI, which brings a low emission source of power generation of fuel to support the rising domestic power demand across industries. 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.

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Q&A Session

Operator: We will now open the line up for your questions. The first question comes from Roger Read with Wells Fargo. Please go ahead.

Roger Read: Yes. Thank you, everybody, and congrats on the quarter. I’d like to just follow up on the issues of pricing. We did see a competitor say they wanted to go grab market share. You’ve obviously got a lot of things that will push back against that, the better fuel pumps and everything like that. But I was just curious how that market dynamic is working here.

Chris Wright: Yes. Good morning, Roger. Look, the industry conditions probably peaked about 6 quarters ago in the fall of 2022. And it’s really just because that’s when the fleet count peaked. And the fleet count has sort of gently moved down since then. And if the fleet count is going down, you’ve got incrementally negative pricing pressure. This is compared to any other downturn. This has been a very slow, very modest gradual pullback. And I would say that pricing pressures are in line with that. They’ve been modest and gradual. And there’s much more in choosing who you’re going to use than just price, right? It’s quality and technology and way of doing business. So as we’ve said, there is very modest pressure on pricing, but I would say not meaningful.

And we’re probably near a bottom in fleet count activity. I don’t know that it moves up meaningfully, but when it does start to gradually move up, we’ll see sort of pricing pressure modestly in the other direction. So for us in the Liberty world, the pricing story remains relatively boring.

Roger Read: That’s good. And then kind of following on your comment there. I mean, at some point, gas prices recover here and we get more activity in the gas regions. Any indications from any of your customers kind of where we are in that process or maybe what they need to see to start going the other direction? Is it a change in production? Is it just price driven? Is it synced up with the LNG export increases?

Chris Wright: Yes. I think customers are pretty thoughtful about that, and there is a constant dialogue about that. But I think, yeah, I think customers need to see that prices have firmed that, that export volumes demand actually is pulling upward at a meaningful rate. And that they’ve got some comfort that the next 12 or 24 months, prices are going to be much more constructive than they look today. So that’s not imminent. That increase in gas activity, it could be as early as the end of this year. It might not be till next year.

Roger Read: Okay. Appreciate it thank you.

Chris Wright: Thanks, Roger.

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

Stephen Gengaro: Thanks. Good morning everybody. Two for me. One is just a clarification. I think, Michael, you mentioned the second quarter guide for revenue. But you also said — I think you said low double-digit EBITDA growth as well. I was just — I wanted to ask how we should think about sort of incrementals in general, if you don’t want to apply it directly to the second quarter because this — I would think EBITDA will grow faster than revenue, but just curious your thoughts on that.

Michael Stock: Yes, I did say low double digits, kind of a similar growth on EBITDA versus revenue. Yes, I mean, as we move forward, there is some change in mix as you go through this process. We’re helping our clients as they are moving back to Liberty sourcing some of their consumables, sand and chemicals, which have a lower margin pass-through than service revenues. Service revenues is relatively service pricing relatively flat, and that’s sort of where we get to that so the 25% to 30% incrementals.

Stephen Gengaro: Great. And then the second question I had was, when you think about — and I’m sure you guys have done some of this math, you think about current U.S. oil production levels and you think about frac activity and drilling activity, where do you think we stand as far as industry activity versus what’s needed to hold production at current levels?

Chris Wright: That’s a fine balance. My guess is the activity level today is probably consistent with flat U.S. oil production. I know we saw a big decline in January. I think that’s monthly fluctuations. But we’re certainly not at an activity that will meaningfully grow U.S. production. Probably activity today is flat on oil production. And look, if prices stay where they are, you’re going to see a little bit of incremental activity from privates later this year. And are we ultimately going to end the year with some modest production growth, probably.

Stephen Gengaro: Okay. Great. Thank you.

Stephen Gengaro: Thanks, Steven.

Operator: Our next question comes from Stephen Gengaro with Stifel. Please go ahead. I’m sorry, Neil Mehta with Goldman Sachs. Please go ahead

Neil Mehta: Good morning team. A really solid Q2 guide. I guess my question was really focused on the back half of the year. And as you think about the back half versus the first half, to be kind of in that flattish territory versus last year of EBITDA, there would be a ramp. And I think there are a lot of reasons, I think we do ramp in the back half. So just be curious on your perspective team on some of the drivers in 2H versus 1H.

Chris Wright: Yes. I mean what I mentioned is oil prices. If oil prices stay where they are, I think we’ll see more activity from private operators in the second half of the year than the first half of the year. I would say for the larger publics, flat — pretty flat activity going forward.

Michael Stock: Yes, you’re going to get the roll off of Canada. We’ve already seen the drop in the gas basins. I think that’s already baked in. And that’s where we see to get to that flattish guide for the year.

Neil Mehta: Okay. All right. That is helpful. And then we didn’t talk about return of capital yet. So I just love your perspective, the business is starting to generate real free cash flow, balance sheet in good shape. So how do you think about returning excess cash to shareholders? And what are other calls on that cash, including the potential for bolt-on M&A?

Chris Wright: Yes. Those are decisions we discuss, debate, wrestle with every day. We have a strong core business and key for us there is competitive advantage. We’ve got it every day, not last year, not last month, every day, we’ve got to deliver a better service quality than our competitors. And that’s humans, that’s training, that’s culture, that’s technology, that’s investment and all those things. Obviously, we’ve got this larger scale transition to gas burning activity. I think we’ve pretty much laid out a plan for that. We’re probably at the peak level of that right now. So as you go into future years, we’ll continue to invest in new technologies, but the investment in the frac fleet probably gradually rolls down in the coming years.

We’ve got this new LPI business that’s quite exciting, but we’re going to go at a slow and measured pace this year in this new business line. Right now, it’s about nailing the technology and the execution of delivering on-site oilfield electricity to run our operations. And then, of course, maybe the most compelling investment we have, although we have to balance it is to buy back our own stock. We’ve got a very strong return on capital, an incredible competitive position. We still trade at a single-digit price to earnings ratio. So yes, of course, we’re intrigued by that and don’t see that likely changing in the coming quarters. But it’s always a balance between all those things. We’ve always got to keep the business so that we have a strong competitive advantage and a bright future ahead of us.

We can’t ever just look — just this year, we should only do this — so to us, it’s always balancing opportunities today and the outlook for the future.

Neil Mehta: Thanks again, team.

Operator: Our next question comes from Luke Lemoine with Piper Sandler. Please go ahead.

Luke Lemoine: Hi, good morning. Chris, you talked about digiPrime, just the fuel consumption there versus Tier 4 DGB. But could you just also talk about maybe the first six fleets in the field, how those have been performing? And then Michael, I believe you said number seven is coming later this quarter, if you’re still kind of going to 10 fleets by year-end are fleets eight, nine and 10 already allocated to customers?

Chris Wright: They are. They are. As we’ve said since the start, the interest there is large. The interest is larger than the amount of fleets we can build. So yeah — but yes, those fleets through the rest of this year, we know who they’re going to and where they’re going. So those plans are in place. But digiPrime is a very different technology. So we love the idea. The early operations, I would say, are great, but it’s brand new. There’s little things. Oops, yeah, got to change that. So we’re tweaking the design or whatever. But the pumps that are out there, yeah, the performance is impressive. The power density, that super high thermal efficiency. So you’re actually not just burning gas instead of diesel but less gas. So I think [indiscernible] around there. Ron, do you want to elaborate or comment anything on that?

Ron Gusek: I think you covered it well, Chris.

Chris Wright: You got to come visit someday. We’ll take you out to one.

Luke Lemoine: Okay. Absolutely. Thanks guys.

Chris Wright: Thanks, Luke.

Operator: Our next question comes from Arun Jayaram with J.P. Morgan. Please go ahead.

Arun Jayaram: Good morning, team. I wanted to see if you could shed a little bit more light on the sequential double-digit sequential topline outlook for the second quarter versus 1Q. I’m trying to get a sense of if you’re going to kind of dissect the drivers of that growth between more efficiency or pumping hours on existing fleets, you’ve obviously added a couple of digiFleets I think in 1Q and also between LPI. Just help us think about what’s driving the sequential growth?

Chris Wright: One thing is just calendar, right? At the start of the year, you got weather, you’ve got people with different plans with programs. So probably the single biggest thing is just a fuller, more robust calendar. I’ll let Michael add — so are these other factors, but I think that’s the biggest one.

Michael Stock: Correct. We had very, very strong pumping efficiencies, and we expect that to continue or as it always does, slightly improve, especially as we get into the better weather. And then as Chris said, you’re putting that over a stronger calendar with less whitespace days, you have a little move, obviously, with the technology, which is helpful on the price side of it, offsetting. And then you’ve got that being offset by, to some degree, as we look and we help our clients save money on sand and consumables and that general market price on those sands has come down, which has been very helpful to our clients. So it’s a balance of all of those things Arun.

Arun Jayaram: Fair enough. Chris, we get a decent amount of questions on LPI. So I was wondering if you could just give us a sense of how big that business is your future growth opportunities for that segment? And maybe talk a little bit more about the LAT or the Liberty Advanced Technology, which you talked about earlier in your prepared remarks.

Chris Wright: You bet. I mean, look, LPI today is relatively small business. Today, it’s about building. It’s about building infrastructure team, technologies, understanding systems. What does LPI do today? It delivers natural gas to our on-site electric generation to power our digiFleets and also the dual fuel fleets and of course, digiPrime fleets. And it doesn’t supply nearly all of those fleets today. So this is early stage in that business. But I think it’s got — as you’ve heard us say, just tremendous, tremendous growth opportunities. But key to securing that growth is securing the technology, the operations and the supply chain. The inbounds we get now for just needs for electricity. I mean, it’s just we — and look, I’ve been outspoken about this for many years.

We have followed very poor policies in this country for our electrical grid, and we fragilized our electric grid with constant demand. Demand has grown very slowly over the last decade. And even with very little demand growth, we’ve driven prices up, reliability down and now that that grid and those policies are colliding with rapid growth in demand for electricity. So this is going to cause some bumps and struggles for our country. I wish it wasn’t, but LPI will be — we’ll see tremendous business opportunities in providing firm, reliable, affordable natural gas generated electricity. So the future of LPI is tremendous. But is it a big business today in Liberty? No. But will it be a big business in the future? We think it will. And LAT is super exciting as well, and I’m going to let Ron tell you a little bit about what it is and why we’re doing it.