Liberty Energy Inc. Q1 FY2022 Earnings Call

Good morning and welcome to the Liberty Oilfield Services First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 pre-tax return on capital employed, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA, adjusted EBITDA, and the calculation of pre-tax return on capital employed as discussed on this call, are presented in the company's earnings release, which is available on the website. I would now like to turn the conference over to Liberty's CEO, Chris Wright. Please go ahead.

Good morning, everyone. Thank you for joining us today to discuss Liberty's first quarter 2022 operational and financial results. The world is seeing in a searing fashion how critical it is to have a secure, reliable supply of affordable energy. Today's energy crisis did not begin with the Russian invasion of Ukraine. It began last year when global supplies of LNG simply could not keep up with demand. The cost of this shortage goes far beyond the soaring prices of global LNG, which have extended periods above $200 per barrel on an energy equivalent basis. The world has seen rolling blackouts, countless factory shutdowns, and millions struggling to pay their heating and utility bills. Perhaps worse of all, we are likely at the leading edge of a global food crisis, doing significant part to curtailed nitrogen fertilizer production that is critically dependent on natural gas. Without natural gas synthesized nitrogen fertilizer, global food production would drop in half. Today's prices are not due to any shortage of energy. It is due to a shortage of energy infrastructure, which in turn is due to a shortage of reality in mainstream energy dialogue and policy. We desperately need a more thoughtful, sober dialogue on energy, or the human toll will continue to mount. Enough on this critical topic. Turning to my favorite energy company, Liberty, we entered 2022 with the right people, asset base, and strategy to execute in a tightening frac market, and we're pleased to deliver strong first-quarter results. This quarter demonstrated the benefits of our vertical integration strategy as we successfully navigated an operationally challenging environment. Last year, we expanded our services to include wireline and became a major sand producer, obtaining two large mines in the Permian Basin. We enhanced our technological advantages through the acquisition of PropX with wet sand handling and industry-leading last-mile delivery solutions. Together with our ongoing development efforts of digiFrac electric fleet and many others, these advancements provide our customers with differential frac services. The integration of our acquisitions in 2021 came at a short-term financial cost, but these actions are already paying significant dividends in 2022. Revenue for the quarter of $793 million increased 16% sequentially, and adjusted EBITDA expanded to $92 million as we executed on our strategy and benefited from increased pricing. Both a pass-through of inflationary costs and higher net service pricing. We also saw margin growth from our new strategic efforts that have both lowered our cost of operations and increased our efficiency. Liberty also leveraged our vertically integrated portfolio to better mitigate the early quarter impacts of sand and logistics challenges, notably in the Permian Basin. We are encouraged by the progress we've made in the first quarter. The transformative work our team accomplished with the integration of OneStim and prospects in 2021 is now behind us and paying dividends via an advantaged platform with the scale and vertical integration to enhance our frac services. I want to thank our entire team for going above and beyond. As the market tightened last fall, our customers recognized that the unfolding recovery would increase the importance of having the highest quality partners to navigate turbulent times and still deliver operational excellence. Today's operational challenges are topped by labor shortages, sand supply tightness, and logistics bottlenecks. Liberty customers are seeing differential execution in this challenging environment, in part, due to vertical integration from our OneStim and PropX acquisitions. Sand supply tightness in southern oil and gas basins, including the Permian, Eagle Ford, and Haynesville, impacted industry-wide operations. While many E&P companies directly source sand, we are seeing a reversal of that trend as no E&P can hope to match the scale and sophistication of Liberty's supply chain. The magnitude of our purchasing power and the strength of our relationships with suppliers provides better surety of supply to support continuous operations. Sand supply challenges were exacerbated by truck driver shortages. Liberty's logistics digitization efforts, coupled with a wide network of multiple origins and destinations, allowed us to efficiently employ a limited number of truck drivers with dynamic optimization. We have now deployed PropX's PropConnect software across all our West Texas fleets, giving us increased visibility and data analytics. We were able to act on real-time profit consumption monitoring and inventory tracking, all ultimately supporting the distribution of sand to our fleets and reducing non-productive time. Logistics optimization and centralization is critical in today's environment, where truck driver shortages are pervasive across the country. We still have significant room for improvement here, but are pleased with our progress so far. The differential Liberty's fleet efficiency requires innovation and continuous improvement. We continue to see the intensity of frac work climbing, which is driving up the demands on our equipment, particularly the high-pressure pumps. Maximizing uptime and driving down operating costs are top priorities. Our stim commander or pump control platform is a key component in achieving this goal. The stim commander platform allows for full automation of the pumping equipment, enabling intelligent rate and pressure control across our entire fleet. With a digital model of every engine and transmission pump configuration in the Liberty world, the software ensures the optimal execution of any job design on any fleet, including our soon-to-be deployed digiFrac pumps. Improved safety, reduced fuel consumption and emissions, improved component life, and reduced personnel requirements are benefits we are starting to see. As an example, Liberty achieved a 20% to 30% improvement in power and life after deployment in one of our districts where high-pressure work is prominent. The stim commander software has recently been rolled out on over half our fleet so far. The remainder will be completed over the coming quarters. The restrained global investment in oil and gas over the last seven years leaves us with a supply shortage just as worldwide demand for energy is growing and expected to surpass pre-pandemic levels in 2022. Relatively low and declining oil and gas inventories have led to persistent upward pressure on commodity prices even prior to the Russian invasion of Ukraine, although Russian export volumes of oil and gas have been only modestly impacted so far. Uncertainty regarding potential future impacts of sanctions and fire aversion to Russian hydrocarbons presents significant risk to future supply and demand balances. The modest but low stated plan increases in OPEC plus supply and the release of global emergency oil reserves are simply not enough to supply a rebounding world economy. North American oil and gas are critical in the coming years. Tight oil and natural gas markets, coupled with geopolitical tensions in many key oil and gas-producing regions, have all eyes on North American supply. The North American economy is proving more resilient to today's global challenges, in significant part due to a secure local supply of price-advantaged natural gas. North America is well-positioned to be the largest provider of incremental oil and gas supplies to power the global economy and frankly enable the modern world. The frac services market is seeing robust activity improvement and a tightening of the supply-demand balance. Drilled but uncompleted well inventory has stabilized after a steep continuous decline from pandemic elevated levels. Available frac capacity is nearing full utilization and demand has increased, while supply is limited due to continued equipment attrition, labor shortages, supply chain constraints, and very low investment in recent years. Today, profitability of active frac fleets across the industry are still below healthy levels but trending strongly. We need to see and we will work to drive healthy returns in the frac industry to match the already robust returns of our customers. Leading-edge service pricing is recovering to levels that could support fleet reactivations, and we have many long-term partners requesting additional capacity from us. As always, we will be quite disciplined in deploying the additional capacity that we have today from the OneStim acquisition. We mentioned several quarters ago that we expected to reach mid-cycle returns at some point in 2022. We are on track to hit that target. It is not that we are particularly pressured; it is simply that supply and demand works. Seven years of underinvestment in oil and gas production capacity was accompanied by an even more dramatic drought in investment in new frac fleet capacity. The brief 2017 to 2019 upcycle was all about redeploying fleets built earlier in the decade with relatively modest new fleet construction. Much of that older equipment has now been scrapped. The emerging cycle is likely to last longer and be characterized by a much slower and more modest rise in active frac fleets. With that, I'll turn the call over to Michael to discuss our financial results in more detail.

Good morning, everyone. We have come a long way and we are only just getting started. I'm so proud of the team for the quarter we have achieved, but more importantly, of how we were able to do so. After the last two years of managing through the pandemic, a rebounding economy that pivoted into global supply chain challenges, and now an inflationary environment, all while we are seeing that business for this submerging multi-year upcycle. This quarter, revenue was $793 million, a 16% increase from $694 million in the full quarter. The teams worked with their customers to deliver solid activity gains, despite the same logistics bottlenecks that plagued the industry. We also saw net sales price increases as contracts repriced into the new year. Of the top growth in top line, approximately 55% was driven by activity in mix, and the balance by net sales pricing. We saw good progression through the quarter as sand and logistics bottlenecks eased and the full effect of pricing was realized. Net loss after tax was $5 million in the first quarter compared to a $250 million loss in the fourth quarter. Fully diluted net loss per share was $0.03 in the first quarter compared to a $0.41 loss in the fourth quarter. Results were negatively impacted by $9 million related to the loss of disposal of assets of $5 million and a remeasurement of liability on the tax receivable agreements, the TRA of $4 million. General and administrative expenses totaled $58 million for the quarter, including non-cash stock-based compensation of $6 million. G&A was up $3 million sequentially, driven primarily by $2 million of non-cash stock compensation expense as full quarter reductions in stock compensation expense contrasted for the annual grounds for the first quarter. Net interest expense and associated fees totaled $4 million for the quarter. This quarter, adjusted EBITDA increased to $92 million from $21 million in the fourth quarter, reflecting solid incrementals from activity increases and the increase in net service pricing. The integration challenges of 2021 are now mostly behind us and we have seen the value of our scale and our vertical integration strategy as we laid out during last year's guidance. We ended the quarter with a cash balance of $33 million, up from $8 million at $179 million. This increase was driven by an increase in working capital. As for capital expenditures, we had $90 million on a GAAP basis in the first quarter of 2022. CapEx was driven by basements and TF4 DGB upgrades and digiFrac of $46 million, sand logistics and other margin improvement initiatives totaling $15 million, with the balance related to normal fleet capitalized maintenance. We are expecting approximately a 10% sequential revenue growth in the second quarter, expanding on solid progress made this quarter. We expect to see increased activity levels and modest service price increases as we move through the quarter. These factors are expected to support higher EBITDA margins in the second quarter. The team worked diligently in the first quarter to educate our customers on the realities of the fast-paced inflationary environment we are operating in. There is a greater understanding across the broad customer base that inflation is going to be part of the environment and increased costs will continue to be passed through. We are at the start of the cycle, and soon company margins need to return to levels that encourage reinvestment, so that we can continue to support our customers' future success. Leading-edge pricing has shown signs of recovery that could potentially justify limited fleet reactivation in support of long-term customer service. As the market has changed, the road to what we call heavy value, the most profitable way to bring a barrel of oil or natural gas to the surface has changed. Our sales, engineering, supply chain, and operations teams are proactively working with our customers to find ways to mitigate rising costs through optimized completion design, including innovative solutions around sand chemistry and logistics, integrated planning to improve efficiency, and optimization of the frac calendar, among many other strategies. The release strategy innovation during the early innings of the cycle and focusing on people and partnerships has delivered superior returns on capital and growth over the last ten years and puts us in a great position to thrive in the upcoming cycle. I'll turn the call back to Chris before we answer the finance questions.

There is much to lament about the state of the world today. There are also things to celebrate. The pendulum has started to swing back towards energy sobriety. It is hard to overstate how important this fact is. Progress will likely be slow, and surely much more human damage will be caused by politicians and regulators' resistance to reality. But many positive developments are unfolding, punctuated by Germany fast-tracking approvals for new LNG import terminals. Economic growth and bettering human lives go hand in hand with increased energy consumption. This has been true throughout human history. It is encouraging to see improving returns moving the last sector that has yet to see them in the oil and gas industry. A healthy, robust North American energy industry is required to meet the world's growing demand for energy. We look forward to your questions. I will now turn the call back to the Operator.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Neil Mehta with Goldman Sachs.

Good morning team and congratulations on a very good quarter. Chris, in your Analyst Day, you put out a mid-cycle fleet profitability target of $14 to $18 million of EBITDA per fleet. We're at $10 million as of this last quarter. How are you thinking about the path to getting there, and do you think there's actually potentially upside risk to this figure? And how much higher does it need to go before you think the industry is incentivized to pursue new build activity?

Yeah, thanks Neil. I think you clearly have to get above mid-cycle economics to incentivize people to build a new frac fleet. We are a long way from that. Building a new frac fleet simply for more capacity. But the road to get there, which gives you've seen a step on that road, but the road to get there is just supply and demand. A tighter market right now is driving up net service pricing. It's also making customers very cooperative around scheduling. Our industry needs high utilization, high throughput, and pricing. It's a combination of those three things that drives profitability. And we're on that road now.

Thanks Chris. And if fleet profitability remains elevated, even for some of the older conventional assets in your portfolio, would you consider delaying fleet upgrade CapEx and deploying equipment as-is, or is the CapEx view over the next few years from your Analyst Day still the base case?

Yeah. I don't think anything in the macro plan has changed at all. Yes, you're seeing elevating profitability across fleet types right now. But the high-tech, the new generation fleets that we're building, those are arrangements with customers. If we make an agreement, we always live by what we agreed to. And we're excited about that. That's bringing out a next generation of technology; there's huge customer interest in that. It's ultimately going to drive down operating costs, drive down emissions, and move fleet powering from diesel and natural gas; it's all positive developments.

Thanks, guys.

Thanks, Neil.

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

Yeah. Good morning, Chris and team. I wanted to delve a little bit into the one-quarter beat. $92 million, the street was in the upper forties; significant beat relative to expectations. Ultimately, trying to understand how much of the beat was driven by the pressure pumping business versus some of the benefits from your vertical integration from sand logistics and kind of wireline. Can you give us a sense of maybe what the EBITDA per fleet was trending in Q1? And then maybe some of the tailwinds you're getting from the vertical integration?

I'll take this one to start with. The vast majority of our business is frac. Logistics of sand are really to enable frac. The vast majority of the sand that comes from their sand mines gets delivered through our frac fleets. So that vertical integration and having to control both the pull points and the push points is the key thing we're enabled to be more efficient as we drove through the quarter with all the bottlenecks that existed, especially in the southern basins. So that was the key part. So really, it is driven by frac. The underlying results, there are some pickups as you're looking at the difference in Q4 and Q1, obviously, the integration costs that were part of the Q4 story rolled off. But yes, it's largely driven by frac and everything that we do to enable efficient operations in the field.

That's helpful. Maybe to you, Chris, I was wondering if you could maybe characterize the supply-demand balance today in frac. You guided to 10% sequential revenue growth in 2Q. I was wondering maybe you could talk about the demand situation. Maybe what's unmet as you look at the market today. And for that 2Q guide, how much of that is the mix between activity growth versus net pricing gains?

Yeah, the supply-demand market today is quite tight. This tightening last fall, and I think as we said in our last call, is meaningfully tighter in December than it was in October, and that trend has continued. And there's just not that much spare capacity left. So, you do get to the very end of whatever can easily be deployed, it's already deployed. Yeah, you have a tight market, and we have today a tight market. So our expectation of a 10% revenue gain, something like that from Q over Q, the biggest component of that is just increasing activity. Obviously, in the first quarter, there is always weather, seasonal issues that shave a few percentage points off revenue. This year, maybe that was magnified a little bit by the truck driver sand struggles, particularly very early on in the quarter. So GAAP Q2 is seasonally a better quarter as far as revenue and generally, we will drop the bottom line. So I would say, activity is the biggest piece, but continued migration of pricing upwards across our fleet is a component of that as well, not unless Michael wants to comment more on that.

No, I think it's very clear as to what you will look at this year. The vast majority in Q2 is going to be activity driven. There's a slight headwind that comes out of ex-Canadian operations in Q2; the balance is sort of the opposite that you'll see in the U.S. in Q1. So that mutes a little bit the activity growth. A small amount of the net pricing is going to be going on in Q2 as we get through. And I think we will see more guidance for the second half of the year as we progress.

Great. Thanks a lot.

The next question comes from Chase Mulvehill with Bank of America. Please go ahead.

Hey, good morning, everybody. I guess first thing, a lot of discussion around kind of your profitability and vertical integration. But if we kind of looked at first quarter numbers, it thinks about kind of optimization on vertical integration and think about kind of where leading-edge frac pricing is. I don't know if you could kind of talk to kind of how much of that where you further optimization you have and how much kind of more leading-edge price you have to kind of flow through your results versus kind of 1Q. And then maybe kind of talk about the momentum that you're seeing on the frac pricing side.

Pricing will continue to trend higher given the current situation. It's important to understand that part of this increase is driven by inflation. Acquiring parts is more costly than before, and almost everything has become more expensive. This means there will always be dynamic pricing as the costs associated with components fluctuate. Additionally, net pricing is on the rise, and there is beginning to be some competition for fleet options. Not everyone interested in our fleet, or seeking additional fleet capacity, will be able to secure one. Therefore, our capacity allocation and pricing strategies involve a partnership approach. As we approach the end of the year, we expect to maintain a similar customer profile to what we had at the beginning of the year. However, as the market tightens, prices will continue to increase. We collaborate closely with our customers, and while there may be other competitors in a similar situation, we are not in a position where prices will surge dramatically. That’s not how we operate at Liberty. As a business in a tight market, pricing will gradually continue to rise.

Yeah, when you think about the tightness in the pricing moving higher. I don't know if you'd be able to characterize the tightness. Is it more of a function of equipment type tightness or labor tightness?

It’s both. The single biggest challenge right now is labor, and everyone knows this countrywide, but certainly in our industry, after a big downturn that pushed a lot of people out of our industry. There are high-paying jobs in more pleasant conditions. So we've unfortunately lost some people out of our industry. We are actively today recruiting people back into our industry. But that's harder today. So labor, particularly confident, qualified, trained labor, is in tight supply, but it's not just labor. There's just not that many frac fleets or frac pumps sitting around with extra capacity today. Again, most of the very old stuff has now been scrapped and some of which is still parked or is going through auction houses. If tightened in both areas, and as you know, logistics are tight. If you theoretically wanted to stand up ten more fleets in the Permian basin, well, where are you going to get the sand from? Where are you going to get the truck drivers? I get to staff those fleets, and what are those fleets going to be? The challenges are pretty broad based.

Absolutely, that makes sense. I just want to follow up on Neil's question regarding mid-cycle margins. Clearly, you provided that range a few years back, which Neil mentioned was $14 to $18 million in annual EBITDA per fleet. Additionally, there are other factors like frac services and wireline prospects that will contribute to that EBITDA per fleet. I understand that you’ve stopped providing fleet numbers, which is acceptable. However, how should we evaluate mid-cycle margins? Should we focus solely on EBITDA per fleet or consider percentage margins? Should we view this as a business with around a 20% margin in mid-cycle, or could you help us better understand what mid-cycle looks like for the new Liberty?

I'll defer to Michael. I'll just say, look, wireline is critical to derive efficiency of operations and make things move. You can't frac without sand and logistics. So all those are critical. They're not huge pieces of the puzzle, they're more important as enablers than margin deliverers in themselves, although they do deliver margin. A lot to give any more color, but the dominant margin we make or the large majority of the margin we make is from frac operations.

That's correct, Chris. When we had the Investor Day, all those parts of the business were part of our business plan. I see it as assessing the developments that we were already implementing. The key point is that as we progress towards mid-cycle, the reality of service company pricing needs to rise significantly above mid-cycle to facilitate reinvestment. Mid-cycle is just a step towards our ultimate goal of through-cycle. Mid-cycle margins and through-cycle margins should increase from that point. That's our direction.

Maybe where I think I'd add to that is we don't foresee plans to build 10 more frac fleets because we need more frac fleets; the market is growing. We're just not doing that. What we are going to do is when we have digiFrac, it is truly differential in operating costs, in emissions, in quality working to build the digiFrac fleet. When it makes sense in a bottom-up negotiation with customers, that's what we will do. We're going to continue to upgrade the existing fleet we have. But we don't have any we are going to grow our fleet capacity by 50% or 10% or 20%. We don't have any such plans. It's for us, it's just about higher technology and better equipment we're bringing to the location. It's not about capacity growth in building new equipment. We have additional equipment from the OneStim deal, some of them running not that long ago, and those have been parked and not far from ready to go for months since we closed the deal a year-and-a-half ago. Our industry had a rough last two or three years, but it hasn't been great for this industry for a while, and the dominant driver of that is just overbuilding in the early 2010s. But that's working its way off, and we're heading towards a better-balanced market.

That all makes sense. Appreciate the color, Chris and Michael, we'll talk to you guys.

Thanks.

Thanks.

Next question comes from Steven Gandara with Stifel. Please go ahead.

Thanks. Good morning, everybody. From I guess two things for me. If we could start and sort of back to sort of EBITDA per fleet question. Is there as you look ahead and you look at net pricing improvements, if sand prices were to normalize a bit? I know they've been elevated. Is that a headwind or is that neutral for your profitability per fleet from here?

Neutral, Stephen. I mean, long-term sand prices. You'll be hearing the stories of these spot market prices, etc. But you've got to be in, but we think about things like clearly. The majority just pass all of that customer, our long-term customers, the vast majority of that partnership from ethane supplies a long-term partnership. So that greatly so spot market prices really are not a significant factor in our business as much as what you're seeing on the margins.

Okay. Great. Thank you. And then my second question. It may be hard in this market because the market is obviously very tight. But we've clearly seen the industry dynamics changed, we've seen consolidation you've guys have been involved in. Are you seeing any change just in general in the behavior and how it's impacting the competitive landscape and pressure pumping?

Yes, there is. Yes. I would say that integration and the failure of a number of companies has definitely driven our industry to a better structure. You got four companies, probably with an order of two-thirds of the frac capacity. That's just making it a week that has made better industrial decision-making across the board. It's not perfect. There's always going to be incremental fleets. There are always lower-cost, lower-quality players, so we have a pallet of companies out there, but the decision-making has definitely gotten better in our industry.

Very good. Thank you.

Thank you.

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

Good morning. I was contemplating how quickly can incremental pricing roll through your book of business. And so if we just assume that in March you could secure something on the order of like 10% incremental net pricing, how much would you realize in 2Q, how much in 3Q, 4Q, and how much will you have to wait to get through budget season and realize in 1Q of next year? How would that impact your average pricing in the quarters ahead?

Once you've got to look at that, the vast majority of our fleet is re-priced early in the year, like every turn of the year and the new pilot budget year, and increase incrementally from there. And then steep changes generally happen on an annual basis. So, you're not going to get steep changes every quarter across the whole fleet. Then you are going to get changes incrementally in different fleets at different times. And so it sticks in as you go through in the year. That's really how pricing works.

Got you, got you. And just thinking about the macro backdrop here, obviously, it's been good on the oil side and got better recently, but natural gas prices obviously have spiked here in the U.S. recently. Do you think we're going to see an incremental pull in demand for frac services from the gas basins given the price action here?

There is definitely some activity happening right now. While it's not extreme, it feels significant due to the tight market. A slight increase in demand can have a big impact. Specifically, we are seeing more activity in the Haynesville area because of the better access to takeaways and ports, and this uptick is a response to higher prices.

That was it for me. Thanks.

Thanks, Scott.

The next question comes from Ian Macpherson with Piper Sandler, please go ahead.

Thanks. Good morning; congratulations team.

Thanks, Ian.

Another gas question. It seems to me that given the takeaway constraints, I mean, the Northeast can't grow because of various reasons, and we've obviously got infrastructure constraints in the Permian which puts all of the growth burden on the Haynesville. Within the Permian, I would expect that you're going to have a widening fuel spread for dual fuel fleet between Waha versus Henry Hub. Then I guess that's probably a key point of contract negotiation, sharing that saving with customers. Can you speak to that dynamic and how that might be a benefit or maybe more pocket upside as that dynamic probably expands in the future?

Yes, that could be a positive aspect. However, the various agreements we have are structured in different ways. Sometimes, they might consider a hypothetical view of fuel savings, and the pricing is set based on that, meaning the actual fuel savings may not impact us directly. Additionally, as takeaway capacity tightens in the Permian, we might face a situation similar to the Waha blowout. There are many opinions on when and how that might occur. You probably noticed in the Kinder announcement that there’s a good chance they will add extra compression to one or two pipelines. We hope the situation regarding takeaway capacity in the Permian evolves gradually rather than leading to a blowout in basis and a collapse in local gas prices; while it's not impossible, if it does occur in a small number of fleets, it wouldn't benefit us. It wouldn't be significant enough for us to discuss on a conference call.

Got it. Thanks, Chris. Michael, going into today when we had a different view of EBITDA for Liberty this year, at least my outlook was for limited free cash flow for the company this year; you had negative free cash flow in Q1 with some working capital investment. But now that we're reframing EBITDA higher than we thought, would you refresh us on how we should think about free cash flow? We know that you pledged to be going back to Liberty's standard of returning cash through the cycle, but we were previously thinking that was probably more of a '23 event than a '22 event. So just wanted to check in with you on that.

Our view hasn't changed, Ian. As we said in our Investor Day basically a year ago, we're seeing the early part of a long cycle. We're investing in new technologies to support our customers' ESG efforts and efficiency. This really isn't a different year. Again, obviously, EBITDA is rolling higher. Obviously, demand for that next-generation fleets is also being pushed by some of our clients. So we'll give an update on CapEx and free cash flow at the next call.

Sounds good. Thank you, guys.

The next question comes from Taylor Zurcher with Tudor Pickering and Holt. Please go ahead.

Hey, Chris and team, thanks for taking my question. First one on pricing. You're talking about mid-cycle margins, pricing levels at some point in 2022. It sounds like we're well on our way there, and so I guess my question is, why or why not do we reach peak cycle pricing by 2023? It sounds to me like the industry's super tight today; knowing that in capacity. So, this tightness dynamic is going to continue to persist moving forward. So, just curious your thoughts on potential peak cycle pricing by 2023. Thanks.

It's certainly a real possibility. We'll always want to discuss the future while considering supply and demand and broader trends. Those trends continue to appear quite positive at this time. However, I hesitate to predict how the actual pricing dynamics will unfold. Nevertheless, I believe your reasoning and idea are valid.

All right, good to hear. Follow-up is on digiFrac. I know you've got two fleets hitting the market here, I think over the next couple of quarters. So, just curious about the outlook for incremental fleet orders above and beyond those two. How are discussions with customers progressing? How are the economics of a potential third or fourth fleet addition evolving as pricing for the base business is just skyrocketing higher? I'd love to hear on those two fronts.

You bet. Just looking at the interest in digiFrac, as you said before, it's been huge. So we're in dialogue with multiple partners about that. Certainly, we're going to build more than two. The timing of those builds I'll leave more to Michael, but for us it's never a case of we’re going to build X this year and Y next year. It’s just engaging with our partners, engaging with them, and if we can find the right partner that wants the fleet, we can get the right length of commitment, structure of commitment, profitability, and balance sheet-wise and investment-wise it makes sense, then we'll do it. But the interest there is huge, and we're particularly excited about the next few months to get some pumps out there and not just the prototype ones, but commercial pumps and fleets in operation. I think when people see that and what we learn from that, the interest will grow even more. So it's really more a capital deployment pace of capital deployment decision more than anything else. The interest is very large.

Thanks.

Thank you.

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

Thank you for including me. Firstly, good to hear this frac interest is strong. If I was a customer of yours and I signed a contract today for a fleet, when would I get it? What's the lead time look like?

Yeah. That depends on the Canadian schedules.

I mean, certainly if you were to sign a contract for a fleet right now, you'd be looking at delivery into 2023.

You mentioned that you don't want to grow fleets simply for the sake of growth. How are you handling the situation? Assuming we will be successful with parts, which we expect, will you be retiring older fleets? What is the process regarding your fleet count? Do you transfer crews from legacy fleets to digiFrac crews? Could you explain that dynamic?

Yeah, John, I think with strong pull across the board today, look at the market was moderate. Our plan was to park that equipment that was running, and yes, the same humans that are on that crew that have those relationships, they will run the digiFrac fleet. In today's market, the pull is quite strong so yes, we will first rely on the digiFrac fleet. I would say very likely that legacy equipment that's being phased out, that will be recruited and that fleet will be deployed elsewhere.

Okay, understood, and one more thing, I'm having a bit of a mental block right now; I'll reach out to you all when I remember my question. I'm sorry about that.

Thanks, John.

Thanks, John.

The next question comes from Waqar Syed with ATB Capital Markets, please go ahead.

Thank you, congratulations on a great quarter. So this follows just on some modeling questions. What was the cash consumption from working capital? We estimated around $60 million; is that in the ballpark?

We're selling more than that, closer to whatever increasing need that was in the works.

Okay. All right, makes sense. And then could you talk about what was an active fleet count in Q1 and where it's likely to be in Q2?

Basically, it's likely to be flat as you notice it sort of moves up and down in the Canadian market, etc., versus we will get, as we say, the algorithm entitles that’s about the general guidance we get as it relates to all these sorts of major factors.

Okay, so in Canada, it is likely to go down by maybe a couple of crews. So are you picking up some crews in the U.S. to offset that if you're staying flat?

I was really talking about being a utilized fleet; they move faster. I think generally using the same denominator for whatever your calculations are is probably right. But thanks.

Okay. And then in the last, sometimes back, if a crew worked like 25 days a month that used to be a good number. What's the good number these days for you guys, is it 27, 28 days a month?

Generally, I would consider anywhere from 80% to 85% of days we can fully utilize, including rig up and rig down, depending on the type of crew.

Yes.

The next question comes from Dan Cutts with Morgan Stanley. Please go ahead.

Hey, thanks. Good morning, guys and congrats on the quarter.

Hey, Dan.

I just wanted to confirm and apologize if I missed this in the prepared remarks, but you mentioned the $20 million integration cost headwind in the fourth quarter and that it would roll off in 2022. Can you help us understand if that fully rolled off in the first quarter or if there were still some integration costs, and if there are any expected moving forward?

I'd say we were ahead of schedule and the majority of just basically all rolled off as of now.

Perfect. Thanks. And maybe, so appreciating that, you guys probably aren't comfortable sharing specifics, but can you just help us think through how the profitability delta between some of your highest quality assets in the field and some of the lower quality assets in the field is trending? Is that gap widening or shrinking? Maybe kind of help us think through some of the different factors that are impacting profitability there.

These things move through the year. It's interesting because obviously, your high-quality fleets are in the most demand during last year's, our preseason probably contracted it earlier than a lot of your fleets. So you've probably got a little bit of a flattening event cycle at this point in time. Ultimately, as you've seen with ways that we are investing for the launching, ultimately sort of get will re-normalize as we go into next year, right? But I think it comes down to the changes in the contracting cycle when you think about anything that has converted from October pricing that finally contracted in February. So yeah, we were in a very dynamic pricing market.

Got it; that's really helpful. Thanks a lot. I will turn it back.

Thanks, Dan.

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

Yes. Thanks. Good morning and well done on the quarter, guys. What kind of come back, not miss some of the call, so if I ask a question that's already been hit, I apologize. But I wanted to understand a little bit better kind of the margin performance in Q1, if I sort of normalized. Just for what I think an incremental margin ought to be quarter to quarter if things are going well, call it roughly 35% to 45%, which would imply kind of 50% to 60 million of EBITDA would've been about right, which would say there was 20 to 30 million that kind of came from something else. I was just wondering if we think about it that way. What's the right way to think about the 20 to 30? I know integration costs come out, but was there anything else? And as we think about sort of the sustainability and the starting point for future quarters, kind of that starting point would be good for what the basis and then my follow-up question is going to be in terms of the pricing dynamics and the cost that you're dealing with, the inflationary pressure. I know it's different things this time in prior cycles, but is the ability to push pricing and the ability to deal with underlying cost inflation effectively the same as prior cycles or is there anything you would call out?

I'll take the first question. You experienced the reduction of integration costs, and due to the significant change in pricing, which was relatively weak last year, you likely saw higher incremental costs in Q1 than you will in the future. That is a crucial point. Regarding the second question, I do believe this cycle is somewhat different. It's important to remember that we have been navigating an inflationary environment. Customers are now recognizing that we are dealing with widespread inflation and that these costs are going to be fluid and change rapidly. We did not experience that in the past decade of the shale revolution cycle, but that was a significant challenge. Unlike last year, there wasn't a clear understanding between the service industry and the exploration and production industry about the direction of costs. Now, however, we have a better grasp of inflation trends and the speed at which they are changing, and it is indeed very dynamic.

So that means that customers are becoming more, I guess I'll, let's call it accepting of higher price environment for services.

Absolutely. They are operating a business just like we are, and I believe we have a solid partnership. They fully understand the situation now, but as Michael mentioned, that was a process. During the brief period of the shale revolution, inflation in the U.S. was quite low, averaging just below 2%, while our industry was experiencing significant deflation. The shale revolution has contributed to increased sales, as the efficiency and technology we implemented cut well costs nearly in half and doubled well productivity, which has been the trend over the last 12 years. However, the situation is different now as much of the initial opportunity to reduce input costs has been exhausted. We're now facing a macro inflationary environment and relatively tight markets for essential supplies like engine parts, sand, and chemicals. So, it's a different world today, but I believe customers comprehend this change.

All right. Good luck, guys. Thanks.

Thanks, Roger.

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

Thanks, everyone for joining us today, and we wish you all a great, highly energized day. Take care.

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