Liberty Energy Inc. Q3 FY2024 Earnings Call

Thanks, Wyatt. Good morning, and welcome to Liberty Energy's third quarter 2024 earnings call. Joining us on the call are Chris Wright, Chief Executive Officer; Ron Gusek, President; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses, or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments for today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA, adjusted net income, adjusted net income per diluted share, and adjusted 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 and adjusted EBITDA, net income to adjusted net income, and adjusted net income per diluted share and the calculation of adjusted pre-tax return on capital employed, as discussed on this call, are available on our Investor Relations website. I will now turn the call over to Chris.

Thank you, Anjali. Good morning, everyone, and thank you for joining us to discuss our third quarter 2024 operational and financial results. Liberty delivered a solid quarter with revenue of $1.1 billion and adjusted EBITDA of $248 million. We again reached new heights in efficiencies, pumping more hours in a quarter than ever before companywide amidst the backdrop of a slowing demand environment. We are excited to celebrate the progress of a Liberty digiPrime fleet that set the company record for the number of hours pumped in a month by any crew in company history, low fuel cost from natural gas, low emissions, and record operational performance. The Liberty culture of striving for improvement and pushing beyond our prior achievements continues regardless of the macro environment we find ourselves in. I'm proud of our team for executing at the highest operating levels, generating strong financial performance and value for our customers. In the third quarter, we generated strong free cash flow, enabling a robust return of capital program. We opportunistically increased our share repurchases to $39 million at a lower stock price relative to the prior quarter. Since the reinstatement of our capital return program in July 2022, we have distributed $509 million to shareholders through the retirement of 14% of shares outstanding and quarterly cash dividends. Earlier this week, we also announced a 14% increase in our quarterly cash dividend to $0.08 per share. The compounding effect of buybacks and dividends is an attractive way to drive higher total shareholder returns over cycles. We balance our return of capital program with disciplined investment in innovative businesses and leading-edge technologies that expand our competitive advantage and increase our market opportunities in the coming years. Our success across multiple business cycles is driven by our well-defined competitive moat, differential technologies, long-term growth potential, and high returns on invested capital. I want to highlight two of the drivers of our leading financial performance. Number one, we've built trust and loyalty with our customers by delivering a superior service focused on their specific needs. And number two, we've strategically expanded in essential areas that grow our technology and service leadership position. Why is this important? When we look at our relative performance in a softening market, our largest customers have grown during this period of industry consolidation, and our percentage of their work has also grown. This demonstrates the importance of dedicated relationships with customers that are also able to withstand and prosper across cycles, and who value quality, safety, and service. Our focus on strategic investment drives the differential experience our customers benefit from today. Focused investments have allowed us to develop new markets and lead technology innovation and operational efficiency in the industry. Let me share a few recent examples. Over the past year, Liberty entered partnerships with entrepreneurs to develop the new gas-rich Beetaloo Basin in Australia. We have taken a significant step forward with the arrival of a Liberty fleet in country. Operations are expected to begin next month. Another example is our Liberty Advanced Equipment Technologies, LAET, manufacturing and assembly division that delivered its first digiPrime pumps in the third quarter. This marks great progress since the launch of LAET just last year. For the last few years, we have supported our frac operations with the design and manufacturing of Liberty pump technology, including power ends, fluid ends, and ancillary equipment. We are now designing and manufacturing digiTechnologies as well as critical components for LPI and PropX. The new LAET organization expands our ability to design, engineer, and package complete proprietary systems. The success of new technology comes through ownership of the engineering design and the ability to rapidly incorporate feedback from field operations. This accelerates the innovation cycle and reduces total cost of ownership. Our manufacturing strategy reflects a balanced approach to in-house versus outsourced production whereby we can leverage selective key learnings through the innovation cycle with our external partners, which remain an important part of the scale of our manufacturing and assembly needs. Our PropX division, acquired three years ago, is a leading provider of last-mile proppants handling and delivery solutions and has delivered nearly 400 billion pounds of sand since inception. As the premier provider of wet sand handling technology, we're excited to share several new developments. PropX has recently deployed its new prop stack delivery system, optimizing the use of damp sand piles for high throughput frac locations. The innovative new prop hopper, together with advanced laser sand metering technology currently in testing, offers additional value to our customers through improved accuracy and simplified on-site operations. We are also in the advanced stages of testing a slurry pipe system for last-mile delivery of sand that could minimize trucking, reduce environmental impact, and provide real sustainable cost reductions across the value chain. Earlier this summer, Liberty Power Innovations, LPI, fuel gas operations commenced in the DJ Basin with first CNG sales in July. LPI's expanded compression and delivery operations in Colorado are off to a strong start, helping bring our frac fleet CNG fueling services to critical mass. We are now supporting most of our gas burning fleets in both the Permian and DJ Basin. Alongside CNG, we are also treating field gas in the Haynesville, Permian, and other basins for certain customers. LPI handled more gas volumes and delivered more CNG in the third quarter than in its operating history, with much more runway to expand. Today, the rising demand for power in commercial and industrial applications offers compelling opportunities for LPI. We are excited to leverage the expertise that we have built constructing and managing power plants for frac fleets to additional opportunities both inside and outside the oilfield. An energy-rich future creates opportunity as much of the ensuing demand will be meaningfully powered by natural gas, which is an area we believe we have significant advantages. The other opportunity in growing long-term supply of firm power is nuclear, which has been much in the news these days. Our ownership stake and partnership with small modular reactor company, Oklo, has been truly exciting. Oil markets reflect significant uncertainty across the global economy, OPEC+ production plans, Chinese economic growth, and Middle East geopolitical dynamics. Global demand for oil will grow by approximately 1 million barrels of oil per day this year, and it's expected to exceed that rate next year. While global oil production may be in surplus in 2025, oil prices are expected to remain relatively range-bound and supportive of North American activity. Natural gas prices rose in recent weeks as storage congestion concerns ease due to producer curtailments and strong domestic power generation demand. However, higher prices may incentivize a reversal of curtailments and, therefore, prove to be transitory. The commissioning of LNG export facilities in the U.S. and Canada is expected to stimulate gas activity in 2025 and support higher sustained natural gas demand. Frac markets are navigating the slowing of E&P operators' 2024 development programs in response to the strong first half 2024 production efficiency gains from factors including producer consolidation, longer lateral wells, and concentration of activity in high-graded acreage. Elevated uncertainty in energy markets has further left operators reluctant to accelerate completions activity in advance of the New Year. We now expect a low-double-digit percentage reduction in Q4 activity, a bit more than the typical Q4 softening. Completions activity likely increases in early 2025 to support flattish E&P oil and gas production targets. Since late 2023, U.S. crude oil production has been relatively flat and would likely decline if current completion activity levels persist. Eventually, activity levels will likely increase to support growing global demand for oil and natural gas. Frac industry dynamics are poised to improve in 2025 from today's levels. E&Ps brought wells to production faster this year, in part due to completion efficiencies and increased frac intensity with higher pump rates. Efficiencies were aided by a mix shift towards larger producers benefiting from consolidation and partnerships with top-tier frac service providers. Industry-wide frac efficiency is at its highest levels, but we expect the rate of improvement will slow going forward. Higher intensity fracs require more horsepower. Softer activity has been a catalyst for equipment attrition, cannibalization, and idling of fleets. Together, these imply that the supply and demand balance of frac fleets is tighter than headline frac fleet counts suggest. Large well-capitalized E&Ps are enjoying attractive economics across a wide range of oil prices. To maintain efficiency gains and further support the increasing complexity of E&P needs, investment is necessary in leading-edge service technologies. Soft year-end frac activity levels are pressuring prices in the near term to levels that are inconsistent with the anticipated market demand and supply of horsepower in 2025. It is important that service prices support investment, especially given aging equipment, industry underinvestment in next-generation technologies, and growing fleet sizes. Few service providers are positioned to manage the growing complexities of completion demands with quality service and next-generation technologies. We are significantly advantaged with our deep customer relationships, leading-edge digiTechnologies offering, and the integrated services that enable strong efficiencies for our customers and returns for our shareholders. We remain disciplined in investing in asset deployment as we seek to drive superior long-term financial results. Over the last two years, we have maintained a roughly flat deployed fleet count. However, amidst near-term reductions in customer activity and market pressures, we are planning to temporarily and modestly reduce our deployed fleet count, while continuing to support our long-term partners. Looking ahead, we expect to deliver healthy free cash flow generation in 2025. Our investment cadence within frac slows following an accelerated technology transition push in the last few years. Our strategic investment is expected to shift in support of our growing opportunities for power generation services. We are well-positioned to deliver on our dual priorities of strategic investment and return of capital to shareholders, creating value over the long term. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results and outlook.

Good morning, everyone. Over the past two years, our results demonstrate the hard work and dedication of the Liberty team. We've delivered superior returns during a time when industry activity levels and market conditions have softened from peak levels. We've also strategically used those two years to focus on building our competitive advantages. We embarked on the initiative to transition our fleet to next-generation digiTechnologies that are in high demand. We are pleased to share that we are on track to start the year with approximately 90% of fleets, primarily powered by natural gas with dual fuel and digiFleets. We also launched and have now reached critical mass in LPI infrastructure to power our fleets. As we look ahead, we are well-positioned to drive continued differentiation and solid performance through cycles. In the third quarter of 2024, revenue was $1.1 billion compared to $1.2 billion in the prior quarter, representing a 2% sequential decline on pricing headwinds. Third quarter net income after-tax was $74 million compared to $108 million in the prior quarter. Adjusted net income after-tax was $76 million compared to $103 million in the prior quarter and excludes a pre-tax net unrealized loss of $3 million for mark-to-market loss adjustments. Fully diluted net income per share was $0.44 compared to $0.64 in the prior quarter, and adjusted net income per diluted share was $0.45 compared to $0.61 in the prior quarter. Third quarter adjusted EBITDA was $248 million compared to $273 million in the prior quarter. General and administrative expenses totaled $59 million in the third quarter, largely in line with $58 million in the second quarter, and included non-cash stock-based compensation of $5 million. Other expense items totaled $11 million for the quarter, inclusive of the aforementioned $3 million net unrealized loss on investments. Net interest expense of $9 million was relatively in line with $8 million in the prior quarter. Third quarter tax expense was $22 million, approximately 23% of pre-tax income. We continue to expect the tax expense rate in 2024 to be approximately 23% to 24% of pre-tax income. Cash taxes were $16 million in the quarter, and we now expect 2024 cash taxes to be approximately 50% of our effective book tax rate for the year. We ended the quarter with a cash balance of $23 million and net debt of $100 million. Net debt declined by $17 million from the end of the second quarter. Third quarter uses of cash included capital expenditures, $39 million in share buybacks, and $11 million of quarterly cash dividends. Total liquidity at the end of the quarter, including availability under the credit facility, was $352 million. Net capital expenditures were $163 million in the third quarter, which included investments in digiFleets, dual fuel fleet upgrades, LATC, and Permian facility construction, capitalized maintenance spending, and other projects. We had approximately $4 million of proceeds from asset sales in the quarter. In the fourth quarter, we expect capital expenditures to be approximately $200 million based on expected timing deliveries on digiTechnologies, completion of dual fuel technology upgrades, demand for wet sand handling equipment. Our ability to generate strong cash flows through cycles enables our commitment to capital returns. In the third quarter, we repurchased $39 million of shares, or over 1% of the shares outstanding, and distributed $11 million in cash dividends. We continue to deliver on our return of capital program while reinvesting in high returns opportunities that increase our long-term cash flow generation. Looking ahead, we are now anticipating fourth quarter seasonality to be more pronounced than typical, as early year E&P production outperformance, coupled with emerging macroeconomic uncertainties, keeps E&Ps hesitant to raise activity ahead of the New Year. While unusually softer year-end activity levels are serving as a backdrop in pricing conversations, these pressures are inconsistent with the anticipated industry demand in 2025. We believe fleet activity is now at or below levels required to sustain flattish oil and gas production and are poised to inflect higher in 2025. Horizontal rig counts have also stabilized, a signal of bottoming activity in the market. After two years of largely maintaining a flat fleet count, we are now planning to temporarily reduce our deployed fleets by approximately 5%. We will reactivate those fleets to support our customers' long-term development needs in a disciplined fashion. As we invested early in the cycle to build our competitive advantage transitioning our fleet to next-generation digiTechnologies, we now expect our capital spending program for our completion services to decline in 2025. As such, we expect free cash flow, as defined as EBITDA less CapEx, to the completions business to increase year-over-year. We have significant flexibility to maintain strong free cash flow generation and adjust our capital spending targets to fund potential new power opportunities while continuing to support our robust return of capital program. We expect our investments to shift towards growing opportunities for power generation services in the years ahead. We also increased our quarterly cash dividend by 14% to reflect the confidence we have in our ability to invest and expand our long-term earnings, drive free cash flow generation, and deliver a leading return of capital strategy. We combine a cash dividend with opportunistic share repurchases to generate significant value for our shareholders. I will now turn the call back to Chris for a few remarks.

Thanks, Michael. Slowing activity is pressuring pricing levels, inconsistent with expected future demand. Let me try to put this in perspective. Our per fleet frac profitability remains above the cyclical high in 2018. This cycle is markedly different than previous cycles, reflecting a far healthier frac market, with perhaps wider differential in profitabilities across the quality of frac providers. Already, we are seeing smaller frac companies fall into insolvency, and most of our competitors' investments in frac equipment are below their attrition levels. Available frac capacity is shrinking. This will lead to tightening in the frac market even without increasing frac demand. Our competitive advantage is bigger than it has ever been. CapEx in our core business will trend downward next year and in the foreseeable future, boosting our free cash flow. Liberty Power Innovations is in its infancy, and we have the technology, business infrastructure, and cash flow to develop a high return, sizable diversification to the frac business. However, we love the frac business and have never been more excited about our competitive position and future prospects in frac. I will now turn it back to the operator for Q&A, after which I will have some closing comments at the end of the call.

I will now open the line for your questions. The first question comes from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning.

Good morning, Scott.

Good morning, Scott.

I wanted to start on your comments around investment next year, so EBITDA less CapEx for completions, that will rise with lower completions CapEx next year. What does it mean for how many e-frac fleet additions you could target for next year? And it sounds like LPI investment could go higher next year. So, putting those two pieces together, what are your early thoughts on '25 CapEx? And a wide range is fine. I know we're early, but just curious what that range could be.

Thanks, Scott. The level of capital expenditures we discussed will likely allow us to introduce four or five digiFleets to the market, which is just over 10% replacement. By the end of next year, we are expected to reach around 14% to 15% or close to 40% with digiTechnologies, depending on the fleet configuration. Regarding LPI investments, we are still in the early stages of exploring power opportunities, and we have many interesting discussions underway that are progressing well. We should have clearer insights by our January call about those numbers. We believe it's important for investors to know that we will generate significantly more cash next year from our completions business, which is our current focus. The capital expenditures figure I mentioned also accounts for base molecule management and any necessary expansions to supply natural gas for those frac fleets. This is included in the completions business, and we will address any power generation outside of frac in January.

Got it. I appreciate that color. And then just a follow-up on the near-term dynamics. I guess, one, how should we think about the decrementals in 4Q on that low-teens revenue decline? And two, can you offer any early thoughts on the 1Q recovery from a revenue and incremental standpoint? A couple of moving pieces there in terms of the positive seasonal trend, but I would assume those two fleets you're laying down probably stay on the sidelines for a bit, and then there could be some additional pricing headwinds. Just trying to level set how we should think about where Liberty starts 2025 from a revenue and EBITDA standpoint?

Sure, Scott. I believe the revenue decline in the fourth quarter will be similar to what we experienced last year. However, the decrementals might be slightly higher. This is based on our observations of the gradual decrease in pricing and the overall dynamics we are seeing at the end of this year compared to last year. If we analyze the revenue and decrementals, we anticipate a recovery in activity heading into Q1. It won't reach the same levels as Q3, but it will fall between Q4 and Q3, along with the usual incrementals from that point. We will have to refine our predictions as we approach the time, especially since we are still in the early stage of the RFP season, but we have a fair understanding of the current situation.

Great color, Michael. Appreciate it. Thank you.

Thanks, Scott.

Next question comes from Ati Modak with Goldman Sachs. Please go ahead.

Hi, good morning, team. Can you talk about the pricing pressure dynamic in the market? Do you think industry pricing discipline is breaking down? Is there a profitability level or return level on your fleet that we should think of in trying to understand where pricing can go?

I wouldn’t say that discipline breaking down is too strong of a statement, but approaching year-end, we have several fleets going down and programs nearing their end. While they may not have gone down yet, there’s an awareness that this will happen after the current or next pad. We are seeing efforts to address that gap and keep fleets operational. For additional pickup work, pricing is quite challenging, even more so than usual. Normally, pricing isn't favorable, but currently, it's particularly difficult. We are not going to engage in a situation where we operate fleets at unviable pricing. Two years ago, market conditions were at their peak, and we have seen a gradual decline since then. We have leveraged technology to enhance our efficiency and services to counteract this trend, and we will continue to do so. However, the rig count has plateaued, and operators likely sense we are close to a pricing bottom. We will remain aligned with our partners to maintain profitability, and if that’s not feasible, we will take measures such as idling some capacity, which we are prepared to do. Current conditions are challenging, but this isn’t a typical downturn suggesting a significant drop. I believe we are likely at or close to the pricing bottom.

Got it. That's very helpful. And then, you mentioned efficiency. You also mentioned that it's at the highest levels, but there is room for some incremental changes, which will be slower from here. Maybe can you help us understand those changes that would take that efficiency even higher and what that means for the competitive advantage?

We are passionate innovators in our industry, particularly at Liberty, always striving to do things differently and better. This drive won't change. Over the past 12 to 18 months, there have been significant changes, including the consolidation of major companies. As a result, many rigs that were previously operated have been reduced, but the remaining rigs are now working on the best land in the combined portfolio, which boosts productivity per well. This counters a long-term decline in average well productivity that has persisted for several years. When there is excess capacity and softer pricing, companies often turn to simultaneous fracturing, which essentially uses more than one fleet at a time, though it's counted as single fleet activity. These trends have led to notable improvements in efficiency and productivity, particularly in the past nine months. This is beneficial for our industry and the overall economics, but it has put short-term pressure on pricing for fracturing equipment as more is achieved with the same horsepower. The decrease in fleet count is somewhat balanced by an increase in the size of the average fleet. Consequently, the horsepower in operation hasn't declined as significantly as the fleet count. We feel optimistic about the marketplace because of the profitability gap between Liberty and smaller private companies that are struggling and may be going out of business or selling their assets. This contraction in capacity is necessary to correct the supply-demand imbalance. Regarding technology, there are ongoing efforts to optimize the supply chain, use AI for truck routing, maximize engine lifespan, and enhance gas substitution, which could lead to greater fuel savings for us and our customers. I may be speaking for too long, so Ron, do you want to add anything, or should we move on?

I think you hit all the high points, Chris.

Thank you, guys.

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

Thanks. Good morning, everybody. Two for me. I'd start just back on the pricing question. When you talk about dedicated fleets with customers, do these prices roll at this time of year or they roll throughout the year? And just as an add-on to that, do you expect any material deterioration in pricing for that part of the business?

Those are all different. Some of them are fixed for a year, while others have adjustments twice a year or even quarterly based on various factors. These adjustments can be significant, but there are usually limits on how much they can increase or decrease. Therefore, there can be changes, but they're not substantial. Currently, there is some rebidding for a new contract starting in January. Not everyone follows the calendar year, but many do. This involves the negotiations and discussions we are having with our customers. We have long-term partners who value the efficiency and quality of our collaboration. These relationships will continue. However, there are other bids coming in that somewhat lessen the pressure on those discussions. This has been happening for two years now.

Great. Thanks. And the other one is, when we hear all about energy demand for AI data centers, et cetera, and I know about the investment in partnership with Oklo and then you sort of think about the LPI business, is the LPI sort of end market similar to sort of where SMRs will be playing or is there any way that you can help us sort of start thinking about what kind of end market you'd be after on the LPI side?

Absolutely. Both initiatives are focused on addressing over a decade of poor electricity policies that have resulted in higher electricity prices and reduced grid stability. For instance, California's electricity prices have doubled without any increase in demand. This situation has driven the industry out of the state, even as prices continue to rise. Nationally, we're on the verge of experiencing significant growth in electricity demand for the first time in 25 years. Both projects target this growth, but with Oklo, the facilities will have fixed locations. They can either be connected to the grid or situated behind it, but they will be permanent. Data centers represent a major potential market for this, along with other industrial sites. On the other hand, our LPI and natural gas generating assets are mobile, allowing them to serve a data center that may take 18 to 24 months to connect to the grid. However, they won't remain stationed in one place for two decades like a nuclear power plant would. They can operate in similar markets while also having the ability to move to areas that experience power shortages. We're currently evaluating this vast interest and have to determine the optimal use of our limited assets and capacity. While there may be some overlap between the two, they possess distinct capabilities. Thus, I believe any overlap will be more of an exception rather than the norm, but I'm excited about the potential for both.

Great. Thank you for the color.

I believe Fervo's electric generating capacity from next-generation geothermal is entering the same market, focusing on long-term contracts with utilities. Liberty is a partner in this business, which I believe has promising prospects for addressing the same issue in a somewhat different manner.

Next question comes from Saurabh Pant with BoA. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

Chris, maybe I want to dig in a little bit on your comment on, I think you said the pricing pressure is inconsistent with anticipated supply/demand balance next year, right? So, I'm just thinking forward from there and thinking if that's the case, that's your view, then how do we think you approach your contracting strategy for 2025? Basically saying, do you want shorter-term contracts with more reopeners just to get the upside potential in the back half of '25? Or do you look to sign up contracts with relatively fixed stable pricing, again relative is the word right, for most of 2025? How do you approach that?

That's a great question. If we're tasked with creating a new fleet for a client, we ensure that the pricing is locked in to justify the capital investment. There may be terms that allow for price increases, but the structure will prevent the price from falling to the point where it results in a poor investment for us. Currently, there is significant interest from producers. For new fleets, they are not being deployed at unfavorable pricing. However, there is some challenging pricing in the legacy equipment market, and we do have some assets in that space. We might consider adjusting prices with partners for a dedicated fleet, with a structure that allows prices to increase gradually as the market strengthens, following the collaborative approach we've maintained since our inception. Each situation is different, depending on asset type, customer, and contract duration, leading to a variety of circumstances. This aligns with our approach at Liberty, as different customers have unique needs and priorities. Our strategy involves open communication with them to find a mutually agreeable structure. If that can't be achieved, we may have to utilize available capacity, but very few are keen to end their partnership with Liberty.

Right. No, that makes a lot of sense. Chris, thanks for that. And Mike, maybe one for you. In the press release, you mentioned healthy free cash flow for 2025. If you can help us think through the pieces as we think about 2025 from a free cash flow perspective, what things should we be mindful of as we try to build that up?

We will be reducing capital expenditures in our completions business. We're planning to replace four to five digiFleets, which aligns with the typical attrition cycle and necessary maintenance capital for that segment. Most of our investments in dual fuel will be finalized in the fourth quarter, along with several other new blended technologies, including those made with PropX and wet pile handling to assist our clients. As a result, we will see a decrease in capital expenditures, which is significant as it helps offset a decline in EBITDA. I anticipate a slight increase in cash taxes, as we're currently operating at about 50% of our tax rate and expect to reach around 100% of our book tax rate next year. Interest expenses should remain stable. Given that we will have a quieter fourth quarter, I expect some fluctuations in working capital throughout the year, but overall, working capital should remain relatively stable. Our free cash flow is currently strong and will continue to support robust returns of capital to shareholders moving forward.

Okay, perfect. No, that's all very useful color, Mike. Thank you. I'll turn it back.

Thank you.

Next question comes from Marc Bianchi with TD Cowen. Please go ahead.

Hi, thank you. Maybe Michael, just a follow-up on the capital spending for next year. It wasn't clear to me, do you expect the CapEx dollars to be higher or lower for the total company?

Lower for the completions business. Obviously, the power generation opportunity is still to be clarified. That we'll talk about. I mean, I would expect that within the realm, I think it probably would be slightly low unless there's really exciting and very large power generation opportunity. But generally, I'd say it will be down slightly, it will be down significantly in the completions business. But a good portion of that may, I would say, until we get made up in the outside of frac power generation business, that's still to be thought about and going to be decided upon, and you'll see announcements around that as we go through the quarter into the January call.

Yeah. Okay. That was going to be my next question. The other one that I had was just on the revenue progression here. So, the activity is down low-double-digits, but it sounds like your revenue is down also low-double-digits, but there's some pricing weakness. So, I would have thought that the revenue decline is more than the activity decline. So, maybe you could talk about that and how that progresses into 1Q? I know you said activities up in 1Q, but not quite to 3Q levels. There's pricing component we probably need to be considering too, right?

There are various intertwined issues when comparing the decline in activity to the revenue decline. The situation heavily depends on specific areas within the business mix. For Q4, these declines will align closely. There is a pricing factor involved, and there are some offsets as the decrementals are expected to be slightly higher this Q4 than last year despite a similar revenue drop. This indicates a pricing element that is contributing to the increases in those decrementals. I anticipate that we'll see some improvement going from Q4 into Q1, with activity levels rising between Q4 and Q3. We will gain more clarity on this as we navigate through the pricing season and assess how it impacts earnings. Overall, we expect total activity for the industry next year to be about the same as this year. Pricing pressures currently do not align well with future demand. The level of demand for this year and next will likely remain similar. Given the limited supply of frac fleets and rising attrition along with more complex fracking operations, we're witnessing a tightening market, which should lead to improved pricing as the year progresses. This is reminiscent of conditions at the end of 2021 and throughout 2022. You may recall from our September call that we had six fleets idled because market bids were weaker than they should have been. When we reintroduced those fleets in April, profitability increased significantly in a short time as market sentiments aligned with the actual supply and demand conditions. While we don't expect the same extreme changes next year, there will be some similarities. Thus, the market dynamics will evolve as the year continues. Fortunately, we expect to manage the situation better and achieve stronger free cash flow next year compared to this year.

Yeah, strategy makes sense. If I could just squeeze one more in, how indicative do you think your experience here into year-end is for the broader industry? And I'm wondering if there's Liberty-specific things. You've got your sand business. You've got some wireline. Are there things happening in those parts of the businesses that might cause you to be different than sort of the broader frac industry as we think about the implications for other companies into 4Q?

I think the short answer is we don't know. It's hard to say. There's just a lot of moving pieces. But I think what we're seeing is reasonably indicative of the whole marketplace, but definitely, our business is dictated by our relationships with our customers and other people's businesses. So, yeah, I don't think it's quite far off from the overall macro, but I guess we'll see in the coming weeks.

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

Hi, good morning. So, it looks like CapEx for this year ends up at around $650 million. Could you maybe just talk a little bit about what the frac portion of that would be and what portion of that would be maintenance CapEx?

This year, maintenance CapEx is likely to be under $200 million, estimated at around $175 million. Maintenance CapEx includes a significant portion for frac operations. We have invested considerably in LPI and the wet sand handling sector. Additionally, there have been notable upgrades in dual fuel technology, digiFrac, and other related enhancements for blenders and other equipment this year. This represents the majority of our spending in this area.

Okay. Got it. And just to follow-up, would it be fair to assume then that next year, your maintenance CapEx in the frac business is roughly similar to that and then you had four to five digiFleets at maybe $50 million each and your total frac CapEx ends up $400 million to $450 million? Is that how we should be thinking about it at this point?

Yeah, you're in the general realm of sensibility there, yeah.

Yeah. Okay. And just one more, if I can. Just to maybe put some of the commentary into numbers for Q4, it looks like with the revenue decline being similar year-over-year and the higher decremental, like we should be getting somewhere between $170 million and $180 million of EBITDA. Is that also in the right ballpark there, Michael?

Reasonable estimation.

And the next question comes from Jeff LeBlanc with TPH. Please go ahead.

Good morning, Chris and team. Thank you for taking my question. I just wanted to follow up on the comment on CapEx of Q4 of $200 million. I'm just curious if you're pulling forward CapEx from 2025 or what's causing the increase, because I believe on the prior call, the estimate was $550 million for the full year. Thank you.

Deliveries have been improving due to a lot of debottlenecking with our delivery partners. They faced some significant challenges with their assembly lines, particularly towards the end of summer and the beginning of fall, but it seems they have resolved those issues. As a result, the delivery cycle and overall expectations appear to be reasonable. Additionally, we have made some adjustments and added elements that have impacted Q4.

Thank you very much. I'll turn the call back over to the operator.

Thanks.

Thanks, Jeff.

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

Hey, good morning, guys. Just wanted to kind of follow up on some of your comments about this, call it, seasonality or CapEx exhaustion issues next month and into December. One of the things we hear from the E&P companies is that they like to pursue this productivity and efficiency, and it requires pretty consistent operations. Does the opening in, call it, activity levels or jobs reflect kind of a mix? Is this mostly smaller private E&Ps? Is it guys exposed more to gas or maybe it makes sense to take a little time off here? Or are you seeing this across kind of the entire area of operations, meaning large E&Ps all the way down to the small privates?

I think you've given a reasonable summary, Roger. It's mostly smaller. It could be small publics. The very biggest players, I would say for sure are the most steadfast in keeping things going, keeping efficiency on track and not ceasing operations. But even those, occasionally they'll be, geez, we're too efficient, so there's a frac holiday, a brief break. But I would say, yeah, it's mostly smaller players. Definitely, it's gas players. Gas has been a hard thing to predict, and plans have evolved a lot over the last 12 to 24 months with the gas players. So, yeah, I think your summary at the beginning was reasonable.

So, are you implying that it's going to become easier to forecast gas after 12 months?

Yeah, good humor, but again, as you've seen, we're probably at a level of gas activity right now that's below even keeping production flat. So no, it's not going to be easy to predict it, but instead of a bouncing trend down, it might be more of a bouncing trend up.

Yeah, I'm just checking you there. I was trying to get you to make sure you were still standing on two feet. The other question I know we understand completion CapEx will likely trend lower, but if we were to see, let's call it, a solid move up or a solid move down in commodity prices. What is your flexibility to either defer spending or to pull spending forward as you look at the supply chains out there?

We have a strong capacity to either delay or accelerate our spending. However, there's generally a three- to five-month timeframe regarding deliveries. We can defer deliveries, and we've done so in the past, delaying them by nine to twelve months in collaboration with our team during extreme situations. Under normal circumstances, the three- to five-month window for changes remains consistent, yet we can significantly adjust capital expenditures within a twelve-month period.

Okay. Great. Appreciate it. Thanks, guys.

Thanks, Roger.

Our next question comes from Waqar Syed with ATB Capital Markets. Please go ahead.

Thank you very much. Good morning. Chris, I just wanted to get a sense on by when do you think LPI could have a material impact on the revenue line that would be maybe something that 10% of revenues could be LPI. Is that like two to three years out, or is it you're looking at five, six years out? Any guidance on that would be helpful.

Yeah, well, it's not five to six years. It's certainly faster than that. But for us, as with our core frac business, it's always more about doing it right than doing it big or doing it fast. So, but two to three years is probably not an unreasonable expectation.

Okay. And then, from an activity perspective, pumping activity perspective for next year, you're mentioning that you see activity needs to go up to maintain crude oil production. Where do you expect activity to pick up? Do you think it's going to be mostly Permian, or do you think Bakken and Eagle Ford also sees some activity increases? And then, when do you expect Haynesville activity to kind of pick up?

Those are all the tough questions, Waqar. I believe it will encompass various basins. Some of the northern areas naturally slow down in the winter, so Q1 tends to be a bit slower in those regions due to the weather, while Q2 and Q3 are usually busier. The Permian basin doesn't really have a weather cycle, but it is certainly influenced by commodity prices. If oil prices change, it doesn’t significantly alter things, but it does have an impact. We'll start a bit earlier in some areas. Overall, as we look six months ahead from Q4, I believe the average level of activity in the oil basin will increase from where it is today. The extent of that increase is uncertain, but it will likely be higher. The same assumption applies to the gas basins, although activity is quite low right now. We have a strong competitive edge there; our market share and current gas activity are considerable, though not massive. If gas activity rises a bit in six months or significantly in twelve months, that’s just a speculation on my part.

Okay. And then, the pricing pressures that you're seeing, is that now across entire fleet or is it still more on the Tier 2s and maybe Tier 2 dual fuel as well, or now it's permeated to e-fleets and Tier 4 DGBs as well?

It's certainly strongest in legacy equipment, the least desirable equipment. That's where attrition is being driven, equipment being retired there as well. The high-end natural gas burning fleets are much more desirous. But yeah, when you've got a softest market, there's a little bit of pressure everywhere. A newbuild fleet, we wouldn't do a newbuild fleet without great economics. So, yeah, not so much change at the top, but not zero.

Okay. Great. Well, thank you very much. Appreciate the color.

Thanks, Waqar.

Our next question comes from Tom Curran with Seaport Research Partners. Please go ahead.

Good morning, guys. Thanks for squeezing me in. Chris and Michael, in addition to everything you've accomplished via ever better execution in technology out in the field as Chris gave a comprehensive overview earlier in the call. You've also been pulling different levers internally to protect and sustain your record profitability amidst this long grinding downtrend in frac pricing. At this point, which ongoing initiatives do you expect to provide the most support to margins? Have you identified any new efficiency or cost-out opportunities that have yet to be meaningfully realized?

I'm going to pass it over to Ron, who can address medium and long-term projects. You're correct, and I appreciate you highlighting that this is always a focus for us. While we don't control the marketplace, we do strive for our own improvement. This effort is always twofold: how can we provide better service to our customers, and how can we achieve that more efficiently and at a lower cost?

We have several key areas of focus, particularly with digiFleet, where the maintenance outlook has changed significantly. We are developing longer-lasting assets, which applies to both digiPrime and digiFrac. In the electric sector, the maintenance profile is quite different for both pumps and power generation, and the same applies to our digiPrime operations. These assets have distinct maintenance profiles compared to our historical diesel assets. There has been considerable effort in this area, and we are applying what we learn across our fleet as we enhance our machine learning capabilities to better assess asset performance and act accordingly in the field. Additionally, we are heavily invested in automation, enhancing operations from sand handling to chemistry and pump processes. As we automate these functions, we see improvements in both operational efficiency and the maintenance profiles of the assets. On the logistics front, we have implemented Sentinel, which has significantly improved our sand handling and trucking efficiencies, reducing the number of trucks needed by about 30% compared to before we deployed Sentinel. We are also applying this technology to manage gas deliveries more effectively. Over the coming year, we expect to increase the percentage of our fleets operating in the simul frac space, which has historically been lower for us due to our customer base. This shift will result in enhanced efficiencies regarding completed lateral feet per hour, providing benefits as we move into next year.

Got it. A lot to chew on there. Thanks, Ron. And then just with LPI, you guys have once again skated to where the puck is headed in terms of the need for technology solution, in this case, for next-gen power support and logistics out in the field. Looking to 2025, could you share any quantified targets or expectations you have for LPI, be they operational or financial?

No, I mean, that's coming clarification over the Q4 bound. I mean, that is as we've said, this is something that we'll discuss in the January call. So, we'll kind of look at that and I think kind of a more of a holistic view of what that business will look like.

Okay. But it sounds like there is more coming that we can look forward to there, Michael?

There certainly is a lot to be excited about. However, we prefer to discuss things when they are ready. We may not be the first to market, but we consistently come out on top.

I appreciate that. Thanks for taking my questions.

Thanks.

The next question comes from Eddie Kim with Barclays. Please go ahead.

Hey, good morning. Just thanks for squeezing me in here. I'll just keep it to one question. But just wanted to dig into the softness you're seeing in 4Q a bit more. It just feels like the market has softened pretty substantially over the past three months. So, could you talk about what's really surprised you or what got much worse than you initially expected back in July? Is it mainly kind of the volatility in oil prices that's causing operator uncertainty as you mentioned, or operators reaching their production targets for the year earlier than expected? Just any color on what the main negative surprise was for you guys over the past three months?

I'd say a bit of both. When you consider consolidation, we are combining acreages, which now mostly involves drilling two-mile sections. More recently, we've started drilling many three- and four-mile laterals, and those have performed well. They were completed efficiently, and production has been strong. So, some of this can be attributed to productivity gains from larger operators focusing on the best areas. However, the decrease in oil prices affects our margins; we may be in a temporary slowdown. Overall, the productivity improvements in wells involve significant one-time enhancements. Generally, next year, the average quality of drilling locations is expected to decline compared to this year, and it will likely decrease even more over the next few years. This doesn't mean the shale revolution is over; it indicates we will see a trend towards increased frac intensity. In other words, more sand will need to be pumped underground annually to extract the same amount of oil. We are facing a long-term positive trend overall, but in the short term, we've been somewhat affected by our own success, with increased well productivity and the impact of pricing. It's a combination of both factors.

Got it. Understood. Thanks for all that color, Chris. I'll turn it back.

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

Hey, good morning. Thanks for including me. Chris, as you probably know, there are a number of E&P management teams that now have private equity backing and should probably start up in '25. I'm just curious if that is factored into your '25 outlook and presumably that would drive upside to your spot market views?

Yeah. Definitely not driven into our views right now. We certainly are in dialogues with lots of them. There are people we know. And it's a smaller number of teams, but there's a fair amount of dry capital powder looking for divestitures and opportunities to get assets. So, yeah, look, as a lifelong entrepreneur, that's exciting. But John, no, we're not baking in any of that happening, but yeah, some of that's eventually going to happen, absolutely.

Right. And then, Michael, you touched on the possibility of pricing improvements next year, and I think the attrition story is real, bankruptcies, liquidations are happening, perhaps some consolidation and then a rise in spot market activity as new players emerge. It would seem to me that when that all happens, all else being equal, it's the pricing recovery is probably not low single digit, but something perhaps more substantial at least in the spot market. Is that a fair assessment?

There's certainly one way to interpret this. Looking at the examples from '21 and '22, we do have some recent historical evidence to consider. We'll know more when it arrives. As we've mentioned, the market is currently softer than usual. However, the underlying dynamics will eventually come into play, and I believe we might see an improvement next year.

Okay. And this is probably a leading question, so I apologize, I guess, maybe not, but if I were modeling 2026, which I'm not, doesn't this flow through coupled with lower R&M, the rise in LPI and eventually a higher call in OFS activity given lower-quality rock, it would seem that you could have a material improvement in '26 versus '25?

That certainly would be a very reasonable assumption.

Okay. And for my last question, I apologize for asking so many, but I believe there was an earlier question about the power generation capital expenditures. From my conversations with people in that sector, it seems that those expenditures may be supported by contracts for a longer duration than typically seen in the frac market. Would you consider that to be a fair assessment?

Yeah, that is a fair assessment.

Okay. That's all I got. Thanks for including me.

Thanks, John.

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

Thank you. Thanks for joining us today. Since the first edition of our Bettering Human Lives report, we have raised awareness of energy security. In January this year, we took important, deliberate steps to address global energy poverty by launching the Bettering Human Lives Foundation to address a major fixable problem. The over 2 billion people who lack access to clean cooking fuels and therefore cook every meal using wood, charcoal, or dung. This problem results in over 3 million annual preventable deaths from indoor air pollution, more than malaria, AIDS, and tuberculosis combined. I view this as the largest fixable problem with so far very little concerted efforts to address it. The Bettering Human Lives Foundation has created active partnerships and provided loans to entrepreneurial businesses in both Ghana and Kenya to increase access to clean cooking fuels. In Ghana, our partner has built propane cylinder exchange cages to get propane into communities. In both countries, our partners will convert large boarding school kitchens from burning copious amounts of wood to clean burning propane for student meals. Thousands of student lives will be improved with each conversion made. Further, our partnership with an innovative American company will soon early in 2025 dramatically lower the barrier to entry to switching to propane stoves. It will allow the piecewise selling of propane contained in large cylinders, allowing consumers to pay a small amount each time they cook as opposed to having to upfront purchase for nearly a month's supply. This is a major barrier to entry for families who otherwise would make the switch to clean cooking fuels by reducing the upfront payment by a factor of 10. This could be transformative in speeding adoption of clean cooking fuels. We are also partnering with the same American stove manufacturer to open a facility in Ghana to produce these stoves locally, lowering costs and growing supply. You can find out more about all of this at betteringhumanlives.org. The American shale revolution has dramatically increased waterborne global propane supplies. Our aim is to bring the benefits of this surge in new supply to those desperately in need of clean cooking fuels. My heartfelt thank you to all of existing and future partners in this life-changing endeavor. And if you're in Colorado this weekend, please join us for our inaugural 5K run supporting the Bettering Human Lives Foundation this weekend. Have a great day, everyone.

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