Liberty Energy Inc. Q1 FY2020 Earnings Call

Good morning and welcome to the Liberty Oilfield Services First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. 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 the company's 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 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 on the calculation of pretax return on capital employed, as discussed in this call, are presented in the company's earnings release which is available on its website. I would now like to turn the conference over to Liberty's CEO, Chris Wright. Please go ahead.

Wow. Our industry has been hit with two large shocks since our last quarterly earnings call: a market share war that flooded the world with oil at the start of the second shock, the COVID pandemic, which is driving by far the largest ever demand contraction for oil. This one-two punch led to crashing oil prices and now growing logistical challenges to move oil at any price. The result is an abrupt reduction in rig count and an even more abrupt curtailment of frac activity than we have ever seen. Fortunately, Liberty was built to survive tough times. As in the last 2014 to 2016 downturn, we plan to emerge on the other side with deeper customer relationships with the industry's leading players, larger market share, and increased competitive advantages. Getting there, however, will involve serious challenges for our whole industry. Let's begin with what's most important: the health and safety of our people and all those that they touch. Liberty was an early mover in this area. During February 2020, we formed the COVID-19 response team to design and implement safety procedures and contingency plans at our customers' locations and our offices and facilities that allow continued delivery of safe frac services while protecting the health of both our customers and employees. So far, we have had only one worker on a frac crew test positive for COVID, which he appeared to have contracted on his days off. Arriving for a new shift, he suspected that he may be infected and immediately quarantined himself and notified the crew. Texas authorities commended the actions of this individual and Liberty, and a full recovery from COVID soon followed. Liberty has continued to improve our processes to protect all involved. We have also been very proactive in protecting our business during these unprecedented times. Our first step was to immediately reduce executive salaries by 20%. Subsequent reductions have reduced executive cash compensation by roughly two-thirds which will fall further during our May through July furlough program as we suspect that period will mark a very low trough in frac activity. Michael will provide more details on our headcount reductions, our first ever and deeply painful, as well as our CapEx cuts, dividend suspension, and operating cost reductions throughout our business. We designed Liberty with highly variable compensation structures to allow navigation through cycles, and we are confident in navigating through this cycle. The focal point of our actions is our customers. What does the collapse in oil prices and filling storage rapidly mean for their future frac demand? How can we help all of them navigate these challenging times? How can we help them with frac design changes to become more competitive? How can we work with them to improve throughput? We love all our customers that we worked for in 2019 and 2020, and we stand with them during these challenging times. In addition, all of our largest customers, meaning our multi-fleet customers, are top-tier players we chose to align with because they had strong balance sheets, high-quality assets, and, most importantly, are managed by great people. All of these customers are active in the Permian Basin. They will be survivors and likely consolidators as this downturn plays out. We love the profile of our top customers. We have grown our market share percentage of their business with all our top customers this year. Industry conditions had been declining for several quarters even before the COVID pandemic. During these challenging times, operators became even more demanding on service quality, efficiency, safety, and technology solutions. All of this plays to Liberty's favor, and those trends are accelerating now as the market stresses have dramatically increased. Our first quarter results reflect both the flight to quality providers and Liberty's efforts to concentrate more of our capacity with select top-tier players. Liberty's Q1 revenues grew sequentially 19% to $472 million, and net income was $2 million or $0.02 per fully diluted share. Adjusted EBITDA was $54 million, equating to $9 million annualized EBITDA per average active frac fleet, which was all 24 of our frac fleets until mid-March. This performance was driven by strong customer preference for Liberty and outstanding operational execution. Liberty's first quarter results smashed previous quarterly records for the number of stages pumped and sand volume pumped, both by double-digit percentage increases. Over the last 12 months, which have been far from boom times in our industry, Liberty delivered a 6% pretax return on capital employed, generated significant free cash flow, and returned approximately $25 million to our stockholders. Obviously, industry conditions have dramatically deteriorated since mid-March. What had been a slow grind of shrinking E&P CapEx to raise returns combined with an oversupply of frac industry capacity has transitioned into an abrupt plunge in customer activity and demand for frac services. Today's oil price is below $20, and the pending crunch for oil storage capacity has seen demand for frac services drop dramatically. The rapid drop in frac activity is understandable, as many producers are forced to shut in existing production to better align supply with demand, as oil storage approaches capacity. Oil demand normally rises and falls relatively slowly, primarily tied to economic activity. Never before have we seen a forced abrupt shutdown of such large parts of the global economy. The financial crisis or Great Recession saw a 2% to 3% drop in demand for oil spread over several months. The COVID pandemic led to a 20% to 30% drop in demand over only a few weeks. In the next few months, we expect very low frac activity in the oil basins. U.S. oil producers are now navigating forced production shut-ins due to storage constraints. U.S. oil production will decline rapidly due to both wells being shut in and extremely low levels of new wells coming on production. Where things go next depends greatly on how quickly demand for oil rebounds as world economies reopen and oil begins to be drawn out of storage. The pace of oil storage draws and the pace of oil demand rebound from increased economic activity will strongly influence oil prices and therefore producer appetite for frac services. These factors may lead to an increase in frac activity later this year. Our highly flexible cost structure and strong Liberty culture allow us to adapt to whatever unfolds. We are strongly focused on preserving Liberty culture and our competitive advantages while always delivering superior service to our customers on-site and during periods of hiatus in frac operations. We innovated our way to success during the last downturn, and we are busy doing the same this time with inventive cost-saving frac and completion design changes, active parent-child well management efforts, novel equipment innovations, and software applications to optimize logistics. Michael will summarize the specific cost-cutting and liquidity-enhancing measures that we have undertaken. Before I turn the call over to Michael, I want to highlight several distinct advantages that position Liberty to weather this downturn and come out the other side with a stronger market position. One, top-tier customers who will survive and likely own larger asset portfolios on the other side; two, strong relationships and communications with our customers; we are in this downturn together, and we will get through it together; three, a tight-knit Liberty culture of trust and partnership that brings out the best in a crisis; four, differential performance that drives outsized demand for Liberty services; five, a strong balance sheet built to last; six, loyal and committed suppliers and partners. I will now turn the call over to Michael to discuss our specific actions and financial results.

Good morning everyone. As Chris discussed, entering into 2020, industry conditions were already challenged prior to the emergence of the COVID pandemic, but we were very proud to deliver solid 2019 results and a favorable 2020 outlook on our February earnings call with solid visibility for all 24 of our current fleets and our 25th fleet fully utilized in 2020. However, the black swan event that crushed global oil demand and oil prices has now crushed demand for frac services across the domestic landscape and all oil and gas basins have been affected. Regrettably, we announced earlier this month that we reduced our staffed frac fleet count by 50%, and for the first time in the company's history, we had to lay off Liberty team members. The toll on separated and present Liberty employees has been dramatic, and we are truly humbled by the incredible professionalism and understanding that the Liberty family has shown through the implementation of these tough measures. With that in mind, let me start by celebrating the remarkable achievements of the first quarter, which owed everything to the hard work of the entire Liberty team. Our first quarter included a fully utilized schedule of 24 fleets that were active through mid-March. Our operations team pushed efficiency to new heights. We pumped a company record amount of proppant and stages in the first quarter, a double-digit percentage increase from our previous best. For the first quarter of 2020, revenue increased 19% to $472 million from $398 million in the fourth quarter of 2019. Net income after tax increased to $2 million in the first quarter, compared to a net loss of $18 million in the fourth quarter. Fully diluted net income per share was $0.02 per share in the first quarter, compared to a fully diluted net loss per share of $0.15 in the fourth quarter of 2019. First quarter adjusted EBITDA increased 77% to $54 million from $30 million in the fourth quarter, and annualized adjusted EBITDA per fleet was $9 million in the first quarter compared to $5 million in the fourth quarter. General and administrative expense totaled $29 million for the first quarter or 6% of revenues and included one-time software costs related to the ERP implementation of $1 million, noncash stock-based compensation expense of $3 million, and $2.5 million accounts receivable allowances. Net interest expense and associated fees totaled $3.6 million, and income tax expense was $0.3 million for the first quarter. We ended the quarter with a strong liquidity position with a cash balance of $57 million, which was down from the fourth quarter of $113 million due to growth in revenue and therefore accounts receivable. At quarter end, we had no borrowings drawn on our ABL facility, and total liquidity, including $202 million available under the credit facility, was $259 million. In early March, due to the macroeconomic issues that Chris discussed and after close discussions with our customers about the likelihood of a precipitous decline in frac activity industry-wide, we acted swiftly. As we did in the last downturn, we began with a substantial cut to executive pay, but the incredibly fast deterioration in the industry conditions during March and the view that the conditions would be challenging for most of 2020 led to the announcement we made earlier this month regarding reductions in the number of staffed frac fleets and the necessity to reduce our workforce. To successfully navigate this unprecedented economic challenge, we focused on protecting the business through cash conservation, liquidity management, and maintaining balance sheet strength. We wanted to make sure that Liberty could weather a wide range of possible challenges ahead of us and emerge stronger and well-positioned to take advantage of opportunities in the future. First, we reduced our staffed frac fleet in early April and unfortunately had to reduce our workforce by nearly 50% during the second quarter. We now have 12 staffed frac fleets, and we anticipate this will remain at 12 for the balance of the year with flexible furloughs cutting costs when activity drops below 12 fleets. As a result, we believe that we have structurally adjusted our cost base to align with anticipated 2020 activity outlook. We didn't foresee further cuts to our staffed frac fleet count at the moment, but we will manage the challenging near-term market by utilizing furloughs that will adjust our direct cost of operations very quickly in parallel with customer demand. We expect annualized cost savings of $170 million from reduction in force measures. Second, we suspended variable compensation and our 401(k) match from Q2 going forward and reduced base salaries for the executive team and other salaried employees, plus reduced cash compensation for our directors. We expect annualized cost savings of over $50 million from these measures. Third, we moved our capital expenditures to a maintenance-only mode after delivery of prior capital commitments. Earlier this month, we announced a reduction in our planned 2020 capital expenditures to a range of $70 million to $90 million, which is over 50% below the midpoint of our previous guidance of approximately $165 million. This includes approximately $33 million that was incurred in the first quarter of 2020, the majority of which was for technology and fleet enhancement such as the delivery of tier four dual fuel engines and pumps that were previously expected to be used on our 25th fleet. The second quarter of 2020 will also include some costs associated with this fleet, while the second half of 2020 capital expenditures will primarily consist of maintenance costs. This strategy will enable us to provide best-in-class fleet technologies for our customers who are keenly focused on prioritizing returns on each dollar of capital spending. Customer demand for superior services have increased in the current climate and provides us with an opportunity to further solidify long-term relationships with strategic customers. Fourth, we suspended our dividend. During the quarter ended March 31, 2020, the company paid quarterly cash dividends and distributions to stockholders and unitholders of approximately $5.6 million. On April 2, we announced a suspension of future quarterly dividends for Class A common stockholders and distributions for Liberty LLC unitholders until business conditions warrant reinstatement. We believe this temporary measure to adjust our capital allocation strategy towards cash conservation is prudent to further protect our balance sheet against this uncertain backdrop. Disciplined capital deployment is a core Liberty principle, and we look forward to resuming dividend payments when appropriate. Fifth, we are working with our supplier partners to reduce the costs of running our business. Liberty has always had a partnership mentality with our suppliers, as we do with our customers. This downturn is stressful for the whole supply chain in the oil and gas industry, but this is an industry that has always thrived on working together. Our supply chain partners view Liberty as a company they can rely on to work through tough times with. And as such, in times like these, we come together across the table and work on cost savings. This mentality is the same whether it is our sand partners or our legal and accounting service providers. We expect input cost reductions that will range from 10% to 30% depending on the specific cost line. Sixth, at the beginning in late April, we implemented a temporary measure of employee furlough plans in the field and corporate office. Corporate furloughs will reduce personnel cost portion of G&A by almost 50% from the current reduced levels during what we believe will be the worst of the downturn, the second quarter and the early third quarter timeframe. Operationally, we will have the flexibility to furlough fleets as the work schedule demands, and this will allow us to react quickly to adjust our cost structure down or up as the frac calendar demands. We believe these steps set up Liberty to weather the storms that are in front of us and to be successful in preparing to take advantage of future opportunities. We are managing the business pursuing a free cash flow-positive strategy for the remainder of 2020, and we project to end the year with a greater cash balance than at the end of the first quarter. As Chris discussed, the imbalance in the oil supply and demand has created a challenging market for fracs. We are committed to our strategy of disciplined growth and returning capital to shareholders, but this requires us to protect the business first in an unprecedented downturn. The depth and duration remain uncertain, but we are confident that we have taken the necessary actions to manage through the downturn. Importantly, we are well positioned to react quickly to a rebound in frac demand activity. In these challenging times, we will take this opportunity to work diligently with our customers on providing the best-in-class service and engineering solutions, and expect to emerge in a stronger, more favorable position with higher market share and more entrenched relationships with our operators. We're deeply focused on being the foundation of a strong domestic energy industry. And with that, I will now turn the call back to Chris before we open for Q&A.

Thanks, Michael. My heartfelt thanks to the Liberty family for their actions during these extremely challenging times. It is with heavy hearts that Liberty had its first-ever layoffs. Our hearts go out to these Liberty family members, who are integral parts of building our company. We look forward to the days when we can welcome them back to Liberty. Thanks to all Liberty team members, plus our customers and suppliers who have worked closely together to safeguard the health and safety of everyone during the pandemic. Nothing ever trumps the health and safety of our people. Your efforts have been tremendous, and we are proud of our record so far, but we can't take our eyes off this ball. Thanks also to the healthcare workers and first responders across our country, as they lead from the front in battling the pandemic. I want to end with a few broad thoughts on energy and data points from the recently released EIA report on U.S. energy supply and demand in 2019. First, 2019 was the first year since 1957 that the U.S. produced more total energy than we consumed. This is a huge milestone. The two fastest-growing sources of energy supply in 2019 were oil and gas. In fact, oil and gas supplied just a hair below 70% of U.S. total energy consumption in 2019, an all-time high for market share. Our industry is critical in enabling today's world, particularly our modern healthcare system. We are also central to the world's COVID mitigation efforts, from supplying the raw materials for PPE, personal protection equipment, and other critical hospital supplies to literally fueling hospitals, transportation, and the rest of our economy. Hang tough everyone. We are needed. We'll now open the line for questions.

The first question comes from Blake Gendron with Wolfe Research. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. The first is on working capital. In the prior downturn, you guys were growing fairly substantially, so it wasn't an appreciable source of cash. But embedded in your free cash flow positive outlook for the remaining three quarters of this year, just wondering how we should think about the key components of working capital as contributors to cash flow?

Yeah. Blake thanks very much. Yeah, we will actually have a significant generation of cash from working capital. As you saw, we've built our receivables pretty significantly in Q1 as we fuel growth. And I think you'll see that we'll be able to mine that as we go through the year. And obviously, we are targeting balancing cash flow before working capital as closely as possible to zero as well.

Okay. Makes sense. And sticking with the working capital theme here, I appreciate your comments about aligning yourselves with top-tier customers. Would you say, though pushback from investors is that your position in the Rockies and the Bakken, you have some challenged customers up there in the current commodity tape. So I'm just wondering what you're doing to mitigate bad debt risk. Do you have AR insurance? And if so, what percentage of receivables are covered by insurance at this time? Thank you.

Yeah. No, we take – we have a close relationship with all of our customers. We do not have AR insurance, and we have no coverage on that at this present point in time. But yeah currently, as everybody did, we instituted the new guidance around looking at receivables in the first quarter. And as you saw, we took about a $2.5 million allowance. $1 million of that was related to a small customer that filed over a year ago, finalizing that debt. So really when we took a look at our receivables, we've put about a $1.5 million allowance on them. So we feel pretty comfortable where we are at this present point in time that the market is changing very, very quickly for some of the E&P operators.

Understood. Appreciate the comments. Thanks, guys.

Thanks, Blake.

Our next question will come from Chris Voie with Wells Fargo. Please go ahead.

Hey, good morning. Wondering if you can give a little update on your view for the Lower 48, there's a wide range of investments on how low activity is going to go. I guess, you guys are expecting to be able to maintain 12, but with some flexibility if it gets worse. Can you give any color on what you're expecting for the industry at this point given the visibility that you have?

Yes, Chris. Look, the next few months will be extremely low frac activity in the oil basins. The gas basins clearly will hold up better, but oil basin frac activity, I mean, if you're shutting in wells to figure out where you're going to put oil, you have to have special reasons to be fracking them. And we know they're due, but there'll be very low frac activity in the next three months. And we absolutely will not be keeping 12 frac fleets busy during the next three months. The 12 frac fleets are sized to where we expect will probably be towards the end of this year. We don't know how this rebound unfolds, but I think it's likely that the bottom in frac activity is the next three months.

Okay. That's helpful. Thanks. And then on a follow-up, historically, you guys have had a stance on M&A where you would be open to buying assets but wanted to preserve the culture of the company and not acquire operating companies. This is a pretty extreme situation. Now, I'm curious, if your view has shifted at all in terms of opportunistically acquiring anything or other product lines. Just maybe, if we could get an update on M&A and if there's been any shift in how you see it right now.

I think in the last – certainly in the last call, I don't know before that, as the market gets weaker and things get dislocated, that's a more likely time for Liberty to do something. Now, it's still a high bar. It's got to work. It's got to be additive on a per-share value. We've got to be comfortable with the cultural risks involved. So look, yes, we are approached all the time on all sorts of things. It's not impossible, but a deal has really got to be compelling for shareholders of Liberty.

Hey, good morning, folks. I guess, I just want to follow up on Chris' question here on the M&A side and obviously it needs to be compelling. But when you think about the compellingness of a potential acquisition, how do you think about the consolidation versus adding incremental services, whether it's kind of completion-related services or other?

I don't know that, we have any new color there. Frac is by far and away the largest and I would say, central service of onshore unconventional production. That's our focus. Something enables that, something – it's got to have synergies and strength in growing and building our frac business, making it better. We're still focused, guys.

Okay. All right. And then through this downturn, I mean, obviously, last downturn, the strategy was to take market share and expand the customer base. Is there any change as we think about this downturn as to your strategy?

There likely won't be any significant changes, but this downturn is notably different. In the last downturn, we experienced a gradual decline, which allowed us to maintain our capacity while outperforming our competitors. As activity decreased among our current customers, we gradually added new customers to keep our capacity utilized. However, this time the decline was abrupt, mainly due to external factors that led to a forced shutdown of the economy, resulting in significant disruption. The rapid exit of frac fleets from the market caused prices to plummet, making it challenging for us to operate effectively. While we could have potentially retained all our fleets, that was never our strategy or goal. Our primary focus has been to support our existing customers through this major disruption by providing technical assistance, enhancing performance, and forming business partnerships, including support related to COVID-19. One positive outcome has been an increase in our market share among current customers. As the market rebounds, we anticipate that many competitors may exit, allowing us to pursue new customer relationships that align with our vision. Ultimately, our goal remains to enhance the long-term value of each Liberty share. While we expect to gain a larger market share, it’s not our sole objective; rather, we aim to strengthen our competitive advantages and deliver distinctive services. An increased demand for quality and differentiation in our offerings will likely contribute to our market share growth.

Perfect. Appreciate the color. I am putting back over.

Thanks, Chase.

Our next question will come from Waqar Syed with AltaCorp National. Please go ahead.

Good morning.

Good morning, Waqar.

Okay. My question is how many crews do you have working as of today?

So we never give specific numbers on what's going on, and in fact today might be a different answer than a week ago or a week from now, but I will say activity has dropped dramatically. So it is a small number. It is certainly single digits. And it may drop lower. It's probably going to bounce around. There are a number of players, strong great players, good balance sheets going to sell oil at the wellhead in low single-digit prices. Why do it? Why do it? So yes, there's low activity now. We're not out trying to twist anyone's arm to convince them to do stuff now. There's lead times. If you've got a big pad and you gotta drill it out, when you start fracking that oil is not going to come to market for two to four months. But it's low activity right now, Waqar, but we've built the business and arranged our cost structure that however people decide to play these next three months, we're good with that. We just stay in constant communication figuring out how we can plan and be supportive for whatever comes next.

Okay. Then in terms of your CapEx budget for $70 million to $90 million, what number of active fleets is embedded in that number? Any guidance there?

Yes, Waqar, I mean I think that number was embedded around the 12 fleets running sort of a slightly slower portion of that to the balance of the year. I think there's definitely opportunity that we will reduce that CapEx number as we execute. But again, we want to make sure that we've got conservative estimates as to what we will execute on through them all.

Given the current situation with suppliers and others, what is your maintenance CapEx per fleet? How does that compare to what it was a year ago?

Yes, we started with a budget of about $3 million per fleet. At the beginning of the year, when we were planning to be fully operational for 24 fleets, that situation changes. Maintenance CapEx essentially refers to replacing engines, transmissions, and pumps. Since we are not operating all of our fleets, some of that expense can be deferred. For instance, if an engine fails, we can set that pump aside and use one that was previously unused. Over the next two years, our average order will be around $3 million per active frac fleet. However, we can defer some of that over the next nine months into 2021. The advantage of the service industry is its flexibility.

Okay. And then just a final question there, Chris you have a pretty good handle on the Bakken DJ. You guys have done work in the Permian. Given what you're seeing in terms of completion activity, how do you see the decline rates in those basins and any thoughts on where the production could go there in these basins?

Yes. They're down significantly downward. And Waqar, as you know, the further away you are and the higher your transportation costs, right everyone's reading about the Bakken. Clearly, the Bakken is penn first frac activity, declined there first. Shut-ins are happening there first. As oil prices compress, those extra differentials from basins further away from the Gulf Coast, on a percentage-wise, those differentials become a bigger deal. So things compress. Certainly in downturns, low oil prices. Rockies get hit first and then hit worse. That's no different this time. It's not just a basin thing though. Within certain basins, some customers have refineries and dedicated transportation and off-take agreements at their own refineries. You know, they're in a different position to people with different off-take different ways they market their crude and move their crude. So it's variable but I think you will see a large contraction in oil production in virtually every base driven simply by economics. I have a strong balance sheet; why would I take $4 at my wellhead if I can shut in that production and wait two or three months? So I think you're going to see U.S. production artificially contract rapidly because the storage tanks are getting full. We simply have to have today's supply equal to today's demand. Today's demand is artificially compressed, although it's started to bounce back in the last couple of weeks, but only at a slow pace. So then you'll see that. Then I think the next phase after that is you'll see people bring production back on, and at the same time, you'll probably see people start to frac. They'll be looking ahead two or three months: where do we believe oil prices and oil demand are going to go? and it will come back.

Thank you, sir. Thank you.

Thanks, Waqar.

Our next question will come from John Daniel with Simmons. Please go ahead.

Hey, guys. No longer Simmons, but that's okay. Chris, a great quarter by the way in light of the market, so congratulations there. But let's assume that you get back to the steady state of 12 fleets running, call it effectively all 12. And knowing that you're probably averse to giving financial guidance in this market, but what's a reasonable range from an EBITDA per fleet in that scenario?

It's certainly too early to say that, John. Pricing has dropped significantly; it may have bottomed out. Fleets need to be pushed out of the marketplace. Price and customer preference are the two factors that determine which fleets are removed. With minimal activity, it really comes down to customer preference, and pricing likely has indeed bottomed. As activity picks up, that will drive prices back up. We expect to face a challenging market this year, possibly for several quarters. I don't have a specific prediction on what EBITDA per fleet will look like in the coming quarters; it will likely be low but may start to increase. We're more focused on having the right relationships, a solid balance sheet, competitive advantages, and the right customers. The time to generate cash from our assets isn't now; we need to build in this year to prepare for that.

Fair enough. And then in terms of working with the right customers, obviously a lot of them are going to take the holidays in the next couple of months. But do you feel like you have firm visibility that those crews come back later this year, or is it just that that's what they think they're going to do but they don't really know what they're going to do?

Yes, no one knows exactly what we're going to do or what they will do because there are many moving parts. The most significant factor is how the economy recovers and how oil demand increases. We also need to consider what happens with global oil supply. During this period of low prices, we have to look at the stress that might push oil out. Activity will resume once oil prices and the ability to hedge future prices improve. Currently, prices are affected in the short term, but everyone has plans or ideas. We are constantly communicating, but ultimately, everyone will be observing and responding to the data.

Got it. And then just last one, sort of, theoretical big picture for me is you kind of have a clean slate right now. Are there any things that you want to do differently with Liberty going forward when the market eventually recovers?

Well, there's lots of things we talk about. There's lots of technology efforts we have going on and only a few amount of them we talk about. But to us, I would say really it's doubling down or deepening what we've already said. The way to get better in this industry is partnerships, long-term partnerships with customers to be able to flex together. When the price of everything changes, the optimal design changes.

Right.

Desire for new technologies, hey, if we can cut 20% out and move oil production this way that may make sense in a depressed price, but it may not make sense at a high price. So for us, it's just to keep getting better, but not just internally in our doors, but in our partnership with our customers, with our major suppliers. So, I guess, I get a nothing answer for you.

That's right. Nice try. All right. Thanks a lot.

Thanks, John.

Our next question will come from Ian McPherson with Simmons. Please go ahead.

Thanks. Good morning. Thanks for the answers today. Chris, I mean this is more of a compliment that Liberty has struck me as an experienced cold stacker of equipment and now you're marketing half of your fleet for this year and for some quarters. What have you picked up with regard to the do’s and don'ts from your competitors across the industry with parking equipment for a long time? And how do you envision your plans for your idle – your old idle equipment through this downturn?

Ian, it's Ron. Yes. Obviously, that's not something we've had to do in our past, but we have an incredible operations team. They knock it out of the park in the field each and every day and these are guys who have been in this industry a long, long time and know how to take great care of an asset. So we have confidence in the plans they're putting in place to take those assets and cold stack them for the foreseeable future and ensure that those assets are ready to go when we're ready to put them back in the field. So they've laid out a comprehensive plan as to where those assets are going to live in our world, what's going to be done to them to ensure that they're ready to go and we have the utmost confidence that when we need those assets they'll be ready to perform like Liberty assets always have.

Okay. Thanks, Ron. Is it fair to assume that your marketed fleets now are more concentrated around your clean fleets and quiet fleets?

Yes. Look, I would say in this downturn, right the more assets are going to be in the stronger players, yes. Interest in that stuff absolutely is growing. So yes, that's a higher percent. Activity in general is going to migrate to Texas through this downturn. Our market share, our percent of our assets in the Permian will grow quite meaningfully during this downturn, but we'll stand behind all of our customers. But yes, I think a migration towards next-generation fleets absolutely is in progress, and the downturn is not changing that.

Thanks, Chris. And it's been danced around a little bit during the conversation this morning but how much do you think this most recent lag down has impacted – I won't ask you to talk about your price book but just a more industry-wide observation. How much do you think this latest kick in the shins has impacted industry pricing from January to today?

Meaningfully, meaningfully. Look, it's – think of our customers that they're getting way less than half per barrel of oil today than they were getting four months ago. Their margins, their activity is compressed. So everything compresses. All input costs compress, margins compress. So yes, it's meaningful.

Fair enough. Good. Thanks for all the answers. Appreciate it.

Thanks, Ian. Appreciate it.

Our next question will come from Sean Meakim with JPMorgan. Please go ahead.

Thank you, good morning.

Good morning, Sean.

So, Chris I was hoping maybe to come back to I don't want to say the M&A question but the M&A topic from a different perspective. So for a long time now multiple cycles, pressure pumping has been the fastest-growing product line in all of oilfield services. It's also been the most fragmented with the weakest market structure. If you were to fast forward a couple of years ahead, let's say even beyond the next 12 to 18 months that could be quite difficult. Do you see this as a timeframe in which it's realistic to suggest that frac could consolidate to a point where it has a healthier market structure? So I recognize to the extent that Liberty may or may not be a participant in that consolidation over time that you still have a willingness if the parameters and returns meet your thresholds. But I'm thinking more at an industry level, is it realistic to think that in a world in which large cap diversified services or formerly large cap are not necessarily interested in being consolidators in this product line, can the relatively smaller midsized players in this space consolidate to what's a healthy market structure? I love just trying to hear your thoughts on what's realistic and what are kind of the probability distribution of outcomes for this market over the next now 18 to 36 months?

So Sean, my short answer is yes. I think we believe that that's exactly what will happen. No insight in how that will come about, but I believe that happens. I think you characterized our industry in the past very well; incredible growth. The shale revolution has transformed the world. Frac has been the engine behind it and grown massively. But as I use the analogy, like the dot-com revolution, awesome for the world, not awesome for the participants in the business in the last decade, but we had some positive trends already and one is higher specs for equipment. Next-generation fleets, there's a huge interest in that, just a higher bar around performance and safety. That was bleeding capacity out. That was causing the lower-tier players to shrink and become under stress. Obviously, stresses are very significant right now. So I very much subscribe to your premise. I think we will have dramatically fewer players in the space two years from now, dramatically increased concentration, and fundamentally a better business. That will take time. That will be an ugly process. There will be bankruptcies. There will be mergers. There will be just shutdowns of business lines. We've already seen that with at least two companies already; they just got out of the business, some smaller players. So, yes, I think as painful as these downturns are, and this one is a unique one, it will lead to some very positive structural changes in our industry. And I think the industry as a whole, while overall might be smaller two years from now, I think the competitive marketplace and structure of the business will be meaningfully better.

I appreciate that. So then the other thing, I would posit to you is that historically this business has never been able to fix itself from a supply perspective, right? The supply tends to be pretty sticky. So meaning that, where we've seen step changes in utilization, it's the demand. Either demand underwhelms the supply for a reason or in some cases there's been a step change in demand as well as stripping supply. It's been many years since that was the case, but we have seen it. As you think about that consolidation scenario, is there a threshold of demand that we need to see eventually, or again, taking nothing about the near term, but on an intermediate to long-term basis what types of thresholds of crew demand or something along those lines would you need to see in order to get the industry back to where it's functioning at a healthier level? Again, just more of a hypothetical, but I'd like to hear how you see that piece on an intermediate long-term basis.

We have discussed this quite a bit, and the honest truth is that we don't have a clear answer. When you examine global oil production trends, there's not much growth, and several key oil-producing countries are facing difficulties. Looking ahead, especially beyond the next two years, it's unclear how quickly oil demand will recover from COVID; nobody knows this, including us. However, I believe that the situation regarding U.S. oil will be significant in the next three to ten years. Overall, our industry is likely to shrink, with fewer players and possibly less capital expenditure. I don't foresee us returning to the levels seen in 2014. In a few years, we might only have 200 or 250 frac fleets. It's important to note that these fleets are becoming more efficient and capable of handling larger volumes, which means they can still accomplish a lot of work. Nevertheless, with new technologies and improved performance, many existing companies may not find a place moving forward. Historically, our industry has struggled with supply management, which is certainly true. This is why the weaker conditions we faced last year and those we anticipate this year are concerning. Lower-quality players are going cash flow negative, and some capacity is leaving the industry entirely. I initially thought that this could be the first year where demand might stabilize, although we would still see a drop in the fourth quarter. Demand may have remained flat, but the market could gradually improve as lower-quality players and outdated equipment are phased out. To achieve meaningful discipline, we likely need fewer players in a more consolidated market. I believe we will see something like this develop in a couple of years.

That's very helpful; a lot of queue on there. Thank you, Chris.

Thanks, Sean.

Our next question will come from Connor Lynagh with Morgan Stanley. Please go ahead.

I was wondering if you could help clarify the various factors affecting your margin. It seems you have considerable flexibility in your structure, and you're anticipating some savings on input costs. If we consider the second quarter with either six fleets or twelve fleets, how would that impact your gross profit margin? More specifically, what do you expect your incremental margins to be in this scenario?

I think we have set up our flexibility in a way that our gross profit margins will remain relatively flat, excluding fixed district overhead. So whether we operate three fleets or nine fleets, the fixed costs will not significantly change. We will not be operating twelve fleets in Q2. The key aspect here is the distinction in general and administrative absorption along with fixed district operations, which is generally challenging. Our approach will be to ensure that when we have crews available, they will be active. Currently, we have nine fleets operating with about 800 people in the field, and if we have four fleets working, we will have around 350 people. This will be an important factor.

Yeah. That makes sense. And could I ask, when you combine the impact of the price degradation for yourselves but also the input cost degradation, how much would that have affected gross profit margin absent these overhead absorption effects?

Sure. There are too many variables to comment on.

Okay. Fair enough. Worth trying. Last question from me. Could you quantify how significant the drop in General and Administrative expenses we should expect in the second quarter is due to the actions you've taken?

Yeah. I mean, it's fairly significant, right? We will be of order one-time cost in the first one but of order 30%.

Thanks.

Hi, Marc.

Hey, guys. Recognize we don't know where things are going to go from here, but I was curious if you could just talk about April and maybe what the fleet count and profitability looked like? And then maybe we can make our own assumptions about what happens in the next couple of months.

Yeah, Marc. We won't provide any specifics, but you can imagine the situation isn't as drastic as it might seem. It's more of a gradual decline rather than a sharp drop. So there will be some time as we transition downwards. At the beginning of April, our fleet count was significantly higher, so we can expect the fleet count in April to be much greater than in May and June.

Right, okay. And reasonable to think that the profitability per fleet would also be following that trend?

Oh, yeah. You've got fixed cost absorption that obviously changes massively when you get down to very low fleets running.

Yeah, okay. In terms of the geographic distribution of the fleets, I mean, you guys have been focused on the oily basins and been pushing towards Permian over the past couple of years. But there is a bright spot right now, it seems like in the gas basins where you historically haven't had exposure. How do you think about the opportunity there, or interest in repositioning some fleets as a result of some of those dynamics?

We have been approached by gas companies over the past few years, and even more recently. We have monitored those basins, which have significantly impacted the natural gas supply. However, the reason we initially didn’t enter the gas basins was because it’s simply easier to produce gas and oil. The U.S. has abundant gas resources, and we still do. The increase in productivity of wells has been impressive, but it has led to a declining market for at least five years in the gas basins, which is still significant but contracting. There’s a chance that those markets might have bottomed out regarding demand for frac services. The macro environment there is now more appealing to us than it has been in the past. However, we typically take a cautious approach; our priority is on customers, relationships, and partnerships. While it’s possible for us to enter a new basin, it’s not something that is urgent. If nothing changes, we might not move into a new basin for another year or two, but eventually, we probably will. Currently, our top focus is on our existing customers and how to increase our market share with them, helping them not just to survive but to thrive through this downturn. We have received numerous queries from customers whose providers have uncertain futures, allowing us to start conversations with different players, which is a positive development. I agree with your comment that the relative performance of the gas basins during this downturn will likely be better, and the current state of those basins is very different from how they appeared years ago.

Okay, great. Thanks, Chris. That’s helpful perspective. I’ll turn it back.

Thanks. Thanks, Marc.

Our next question will come from George O'Leary with Tudor, Pickering, Holt & Co. Please go ahead.

Yeah, just going to try to get at something I think some others are trying to get at earlier but from a higher level perspective, it sounded like the lion's share of the free cash flow for this year is going to come from a working capital unwind as revenue is expected to decline. And then I thought I heard a comment earlier in the prepared remarks that was along the line to trying to run the rest of the business at/or above cash flow breakeven. So, one, did I hear that correctly? And should I think of that cash flow breakeven at which you're trying to keep the business at/or above as an adjusted EBITDA less maintenance CapEx level, or how should we think about that?

Yes, George, that's exactly correct. The goal is to ensure that your fleets are generating sufficient earnings, managing your general and administrative expenses, and covering your maintenance capital. However, it's important to note that there is no guarantee this will be achievable this year. We are uncertain about market trends in the coming months and the speed of the recovery. Questions remain regarding when restrictions will be lifted and when oil demand will return. Nonetheless, managing your business in this way is crucial as you prepare for what I believe is a foundational phase for achieving margins as we move into the rebound in 2021.

Got it, got it. That's super helpful. And then sticking with the geographic line of questioning, in the last few questioners, how do you think your geographic distribution of fleets will look versus what it's kind of historically more or less look like over the next six to 12 months? And then to the point on fixed district overhead, is there any opportunity to reduce that whether it's via eliminating consolidating facilities lowering your lease rates or real estate fees? Is there a way you can reduce costs structurally on that front?

George, I'll let Mark and Michael address the cost aspect. Regarding our geographic distribution, it's clear that it has been changing. We are not decreasing our presence in the Rockies, but we are expanding in the Permian. The Permian has become our largest basin, and it will increasingly dominate our operations during this downturn. We are adding more assets in Texas, and a larger percentage of our activities will take place there compared to the Rockies this year and next, which has been a trend we mentioned in 2018 and 2019 as well. There is an accelerated transformation happening geographically. We are not abandoning any of the Rockies basins, which are significant and vital for our long-term partnerships. We are committed to those relationships and confident in our operations there, but a greater percentage of our activities will indeed shift to Texas.

When discussing costs, we don't have a significant number of legacy, inactive basins like many historical players do. We have been very focused on our specific areas of operation, which we can continue to work in. We are currently working on reducing our fixed costs for the remainder of the year by collaborating with real estate providers and various other fixed cost suppliers, including insurance providers, to lower those fixed general and administrative costs. We don’t have clear visibility on this yet, and these costs are generally less flexible. However, due to the global pandemic and economic challenges, it has become easier to have discussions with those providers, and there seems to be potential for positive outcomes, though we lack specific details.

Thanks very much guys. Thanks, Chris.

Our next question will come from an unidentified speaker. Please go ahead.

Chris, Michael, Ron, just a quick thank you to you and the entire leadership team for really walking the walk. We all know that furlough is the last resort. And just respect you guys for cutting your own comp and really leaning on culture. And then, Chris just if you wouldn't mind commenting, I mean there's obviously been a rapid push for ESG and conversion to renewable energy over the last couple of years. How do you see this pandemic impacting the pace of that or fundamentally changing any of those variables?

I don’t think it fundamentally changes anything. In the short term, when unemployment is low and conditions are good, people's concerns tend to shift towards less immediate issues. Currently, the main worries for people are job security, declining incomes, and the reliability of low-cost energy. There may be a slight slowdown and a reduction in total capital to invest, but I don't believe it significantly alters the long-term outlook. As I've mentioned, the trends in the past have been different; last year, oil and gas represented the highest percentage of total energy supply in the U.S. ever. Energy transitions are progressing very slowly. In fact, historically, the world hasn't experienced an energy transition; the amount of energy sourced from biomass hasn't decreased. The consumption of wood and similar materials has not shrunk, and we have simply added other energy sources on top of it. All the new energy sources have been additive without replacing the old ones. However, this is changing slightly; coal usage appears to be plateauing and may actually decrease. We might see some displacement from coal, although it still remains the main source of global electricity. Gas is gaining market share faster than any other source, and wind is also increasing its share in electricity. It's important to note that while coal is dominant for electricity, electricity only makes up 19% of global energy consumption; 81% of the energy we use is unrelated to the electricity grid. So, while this situation may shift people's focus in the short term, I don't think it will lead to a long-term change.

Thank you. I'll turn it back.

Last question will come from Tom Curran with B. Riley FBR. Please go ahead.

Good morning, guys. Thanks for squeezing me in so late.

Hey Tom.

So, I'm curious when we get to the other side of this CASM and oil consumption and customer behavior and spending starts to normalize what is the one technology, if possible, that you would have wanted to either add or that you already have but would ideally have significantly augmented?

I would say there are two aspects to consider. Firstly, we've been working for years on how to fundamentally change the wear and tear on pumps, and that progress is ongoing. It's possible that we could fundamentally alter the cost structure of maintaining and operating pumps, which is currently the biggest operating cost. So, there's a reasonable chance for a significant change in that area. Secondly, we've made significant advancements in big data and analysis. As the industry has become leaner, much of the technology and research related to fracturing has diminished. While it's often said that we're a manufacturing company now, it's important to remember that the geological formations we work with are not uniform. They consist of diverse rocks, fluids, stresses, faults, and cracks, creating complex subsurface systems. Over the past nine years, Liberty has made considerable progress in smart engineering and big data analysis, and I believe we will continue to see significant developments in the coming years. However, this challenge is inherently more complicated than analyzing consumer behavior for a company like Amazon, which deals with a defined number of products and transactions. In our case, we can't fully understand the rocks, as they change when we extract fluids and inject sand. This complexity requires extensive empirical data that needs to be normalized across various factors. While this is a significant challenge, I believe we will witness meaningful advancements in this field in the next few years. Those are the two key areas I would highlight.

And then just as a quick follow-up there. And Ron if you have thoughts of your own on it I'd be interested in hearing them. But when it comes to M&A would you be open to a bolt-on mainly or purely driven by technology? And if we were to see that would it most likely be in that second category Chris, big data, maybe industrial Internet of Things-related?

Yes. Ron will take that one.

Yes, definitely. Both of those areas are of interest to us. We've always stated that we are open to opportunities that align with our core goal of enhancing our primary business in fracking, as long as it doesn't detract from that focus. Whether it's a technology provider that improves the assets we deploy or enhances their operational cost efficiency, we would consider it. We are also continually seeking innovative solutions on the data front. If we can identify a unique partner that aligns well with Liberty, we would certainly explore that possibility.

Good to hear. Good luck. Thanks for taking my questions.

Yes, great questions Tom. It sounds like you've been in a few of our internal meetings. Take care.

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

Great. Thank you. We went long today but obviously these are very different times. We appreciate everyone's interest and the dialogue in that. We wish everyone's family to be safe and get through this and get our lives back moving forward again. Thank you all for your time today.

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