Liberty Energy Inc. Q2 FY2025 Earnings Call

Welcome to the Liberty Energy Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Anjali Voria, Vice President of Investor Relations. Please go ahead.

Thank you, Wyatt. Good morning, and welcome to the Liberty Energy Second Quarter 2025 Earnings Call. Joining us on the call are Ron Gusek, Chief Executive Officer; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA, adjusted net income, adjusted net income per diluted share, adjusted pretax return on capital employed and cash return on invested capital 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 a calculation of adjusted pretax return on capital employed and cash return on invested capital as discussed on this call, are available on our Investor Relations website. I will now turn the call over to Ron.

Good morning, everyone, and thank you for joining us to discuss our second quarter 2025 operational and financial results. Liberty delivered an exceptional second quarter amidst increased macroeconomic uncertainty and energy sector volatility. Revenue and adjusted EBITDA increased 7% and 8% sequentially, respectively, against an industry backdrop of softening completions activity. This strong performance is a direct reflection of the outstanding contributions of our team, safely driving record efficiencies and increased utilization that more than offset industry pricing headwinds. Our outstanding performance with lasting customer loyalty reinforces our position as the fleet of choice in a competitive market. Tariff policies, the accelerated unwind of OPEC plus production and geopolitical tension drove renewed uncertainty in the energy sector. During the quarter, we collaborated as partners with our customers to drive greater efficiencies, which is likely to grow our market share as activity pulls back in the second half of 2025. Amidst market pressures and near-term reductions in customer activity, we are planning to modestly reduce our deployed fleet count and reposition this horsepower to support expanded demand from long-term partners for our simul-frac offering. We are leveraging our full suite of completion products and services, including frac, wireline, sand, chemicals, logistics, fueling services and top-tier engineering and diagnostic tools to drive increased engagement with our customers. We have created a unique competitive position that allows us to stay agile in dynamic markets. We are excited to bolster our technology leadership with rapid progress on our cutting-edge digiPrime enhancement with the industry's first variable speed natural gas reciprocating engine. This is truly the next wave of technology in frac fleet design. We now have 2 variable speed digiPrime units pumping in the field that have together completed over 1,700 hours of testing in the high-pressure environment of West Texas. These units provide precision rate control and increased torque, increasing both operational and capital efficiency. This latest technology advancement expands our ability to offer a 100% natural gas solution. Our successful development and field testing during the second quarter reflect our commitment to continued innovation in high-efficiency, low-emission technologies. Three years on from our first digiFleet deployment, the results continue to exceed expectations. The platform is delivering substantial, measurable benefits, most notably in the durability and performance of key components. One of the core advantages of operating on 100% natural gas is the reduced wear and tear on engine components compared to diesel. Natural gas combustion produces fewer particulates, extends oil life, and significantly reduces engine stress, factors that contribute to engine lifespans expected to be 2 to 3 times longer than conventional diesel and dual fuel-powered systems. We are already seeing this play out in the field. Digifleet power ends are lasting twice as long as conventional power ends while managing significantly higher load. Similarly, fluid ends are achieving twice the horsepower hours of their conventional counterparts. These early results are clear evidence of the operational and capital efficiency gains enabled by our digiFleet. They directly support our mission to deliver the lowest total cost of service to our customers while setting a new standard for sustainable performance in the field. We also completed a successful field trial of the industry's first last mile sand slurry system. The system performed as designed, consistently exceeding delivery volumes in conjunction with our proprietary water handling system. By transporting sand slurry via pipe, it is expected to reduce costs, improve delivery reliability and decrease dust, emissions and road maintenance for our customers. Growing demand from data centers and industrial users necessitates a collaborative approach to address power service requirements that increasingly surpass the traditional utility offering. During the second quarter, we announced two strategic alliances for the development of power facilities. In Pennsylvania, we are collaborating with Range Resources and Imperial Land Corporation to provide power services to anchor a strategically located industrial park tailored for scalable development with advantaged access to Marcellus natural gas. In Colorado, our strategic alliance with AltitudeX Aviation Group will support a proposed development at the Colorado Air and Space Port powered by a Liberty Microgrid. These partnerships address the barriers that commercial and industrial developers face, including access to suitable land, integrated power management solutions and reliable fuel supply. Together, we offer a turnkey solution that combines on-site generation, market integration and infrastructure readiness to meet the evolving needs of high-demand users. Our recently announced collaboration with Oklo represents an exciting path towards delivering integrated next-generation power solutions for sophisticated large load customers. This comprehensive approach combines the speed to market of Liberty's Forte distributed natural gas power and high-performance load management solution to meet immediate demand with a path to integrate grid power management and baseload small modular nuclear reactors with Oklo's Aurora powerhouses. This complete solution is designed for data centers, industrial sites and utility scale facilities, providing rapid deployment, enhanced grid optimization and long-term price stability. This ultimately enables a seamless path to reduce carbon intensity without sacrificing reliability and flexibility. Liberty was an early investor in Oklo, committing $10 million in 2023. After evaluating companies and technologies across the advanced nuclear space, we identified Oklo's innovative business model, small and scalable design and differentiated technology as an important strategic solution to meet the growing power demands of large-scale energy users. We are thrilled to be aligned at a pivotal moment where collaboration can drive meaningful impact. Together, we will deliver an unprecedented fully integrated power and grid management solution, offering large-scale energy users a new level of reliability, scalability and flexibility that simply hasn't existed before. While oil markets continue to evolve in response to dynamic global economic and geopolitical developments, North American production has remained relatively stable. As the world's largest supplier of oil and natural gas, U.S. producers continue to play a vital role in delivering reliable energy to global markets, supporting domestic industrial activity and power demand and providing strategic leverage in the geopolitical landscape. Recent events ranging from shifting tariff policies to rising regional hostilities and mixed economic signals affecting global oil demand have not yet driven a meaningful North American production response. Larger, well-capitalized producers with strong balance sheets and highly efficient operations enjoy healthy well economics, enabling them to weather commodity price volatility. Intra-quarter price fluctuations created hedging opportunities, further tempering supply side reactions. Producers are targeting a relatively flat production profile, sustaining a baseline of frac activity to offset the natural decline of producing wells. Completions activity is anticipated to gradually slow during the second half of the year, reflecting disciplined capital deployment and contributing to market pricing pressures on services. This slowdown in activity is expected to accelerate equipment cannibalization and attrition, which fundamentally improves the supply and demand dynamics within the services industry over the cycle. Today's larger producers require a technically superior offering to meet the rising demand for efficiencies and engineering support that few service companies are positioned to deliver. Liberty's unmatched portfolio breadth, integrated services and technical innovation uniquely enable us to deliver greater value to our customers and drive outperformance. As we look ahead, the strategic investments we have made in completions through cycles enhance our ability to support customers in an evolving landscape. We are leveraging our integrated suite of completion services, cutting-edge technologies, industry-leading partnerships and the dedication of our exceptional team to navigate market uncertainties. Within our power business, LPI delivers a robustly engineered end-to-end energy solution, uniquely integrating on-site generation and load management, ISO market participation and advantaged retail supply, creating a comprehensive flexible approach that redefines reliability and cost efficiency in deregulated regions. We are excited by LPI's future growth and its ability to contribute to our track record of delivering superior long-term returns while balancing disciplined investment with a strong balance sheet through cycles. I will now turn the call over to Michael to discuss our financial results and outlook.

Good morning, everyone. I'm happy to report that we had strong financial results despite the changing macro environment in the second quarter. Liberty's activity levels increased compared to the previous quarter, even as we saw a decline in industry-wide frac activity. This led to an increase in our market share, a trend we anticipate will continue in the latter half of the year due to our unique service offerings and expected stronger performance. We also made notable strides in our power business, developing long-term partnerships that will foster future success. In the second quarter, revenue reached $1 billion, up from $977 million in the prior quarter. Our results were up 7% sequentially, as higher activity across nearly all our business lines more than offset pricing challenges and weaker conditions in the Permian sand market. Net income for the second quarter was $71 million, compared to $20 million from the previous quarter. Adjusted net income was $20 million, up from $7 million in the previous quarter, excluding $51 million of tax-effected gains on investments. Fully diluted net income per share was $0.43, compared to $0.12 in the prior quarter. Adjusted net income per diluted share was $0.12, up from $0.04 in the previous quarter. Adjusted EBITDA for the second quarter was $181 million, compared to $168 million in the previous quarter, showing an 8% sequential increase. General and administrative expenses were $58 million in the second quarter, down from $66 million in the prior quarter, which included a noncash stock-based compensation of $6 million. G&A decreased primarily due to accelerated stock-based compensation related to Chris' departure in the first quarter. Other income items totaled $58 million for the quarter, including $68 million from investment gains and approximately $10 million in interest expense. The second quarter tax expense was $24 million, about 25% of pretax income, with cash taxes at $20 million. For the second half of 2025, we now expect the tax expense rate to remain around 25% of pretax income, with little to no cash tax payments. We finished the quarter with a cash balance of $20 million and net debt of $140 million, which decreased by $46 million from the previous quarter. Uses of cash in the second quarter included capital expenditures and $13 million in cash dividends. Despite market uncertainties, we decided to pause share buybacks to focus on executing our long-term strategic plans while assessing the situation. We will remain flexible and focused on value in our buyback strategy. Our total liquidity at the end of the quarter, including credit facility availability, was $276 million. In July 2025, Liberty expanded its credit facility by $225 million to support strategic growth in power generation, raising our total commitments to $750 million, subject to borrowing base limitations. Net capital expenditures in the second quarter were $134 million, including investments in digiFleet, maintenance spending, LPI infrastructure, and other products. We realized about $3 million from asset sales during the quarter and $51 million from equity security sales. We now expect total capital expenditures for 2025 to be around $575 million, about $75 million less than originally planned, evenly distributed between reduced completions and delays in power generation. As we approach 2026, we will evaluate market volatility and its impact on completions capital expenditures while continuing to pursue the growth potential of our power business. Following a strong second quarter, we anticipate a sequential decline in third-quarter revenue and EBITDA. Many service providers, having already experienced gaps in the second quarter, reacted negatively, leading to pricing challenges. Consequently, given recent macroeconomic developments, we are retracting our full-year EBITDA target range from January and will share further insights on our fourth-quarter expectations during our next earnings update. Despite the expected softness in the frac market, we remain optimistic about the upcoming opportunities and our capacity to create value. We are confident in our ability to continue outperforming. We are working closely with our customers to deliver top-notch service and engineered solutions that adapt to changing well economics and strengthen our relationships. Our power opportunities continue to grow, and we are excited about the partnerships we are forming that position us to offer integrated long-term solutions. We are committed to generating superior returns for our shareholders over the long term. I will now hand the call back to the operator for Q&A, after which Ron will provide some closing remarks.

Our first question will come from Stephen Gengaro with Stifel.

So 2 for me that are probably connected, and we get asked this a lot, so I'll ask you. When we think about the power generation side of the business, can you talk about, one, sort of what the current sort of supply chain looks like for incremental capacity? And then the other question is sort of around kind of the potential for some of these assets to be contracted over the next couple of quarters?

Yes, Stephen. Let me address the first part. From a supply chain perspective, there is indeed additional capacity available, especially regarding gas reciprocating engines, beyond what we have already obtained. We've engaged with our suppliers, and specifically, our relationship with Liberty has revealed significant availability for extra capacity. We could substantially increase our order book for 2026 if we choose to and have those assets ready for delivery in late 2026 and early 2027. Realistically, if we wanted, we could probably double our order book for 2026. Regarding the second part of your question, I'll respond, and if Michael has additional insights, he can certainly share. We've announced several larger partnerships, which involve more extensive development efforts. Considering permitting and related timelines, these projects will take longer, potentially extending into 2027 for deployment of those assets. However, we will start deploying power generation assets this fall at three sites: one in Colorado and two in Texas. We expect to initiate generation at these sites sometime in 2026.

Great. In light of the Oklo announcement, it seems like Wall Street is trying to understand the transition to future energy solutions, whether it's grid power or small modular reactors. Your partnership with Oklo appears to focus on developing a long-term power solution while smaller reactors are still in development, which may take 5 to 7 years. How should we view this? Is it meant as a long-term baseload power solution, or could it also serve as backup power when some of the smaller reactors become operational in the future?

I believe you're heading in the right direction with your thoughts on this. However, it's worth considering a broader perspective. We have a timeline discrepancy, as customers want to get their facilities operational sooner than what waiting for a small modular reactor (SMR) would allow. In the initial phase, we provide a solution that supports startup and ongoing operations until we can deploy an SMR at the location. Once an SMR is in place, it's important to remember that nuclear energy is best suited for stable baseload power, delivering a consistent supply of kilowatts or megawatts. Data centers, for example, exhibit highly variable load demands that can change significantly in fractions of a second, necessitating a responsive mechanism. Our collaboration with natural gas reciprocating engines and potentially more advanced technologies like supercapacitors helps manage that variability, functioning as a partnership rather than relying solely on one or the other. Additionally, utilizing gas alongside nuclear enables us to leverage nuclear for that baseload capacity while maintaining flexibility. When the grid becomes available, we can adjust our gas operations based on pricing. If wind and solar energy are plentiful and power prices are low, we can reduce gas usage to benefit from the cheaper rates. Conversely, if grid prices are high, we can activate our gas capacity to ensure our core customers are served and also contribute power to the grid. Viewing this as a long-term partnership reveals significant economic opportunities when combining nuclear with gas, not just in the short term but for many years to come.

Our next question will come from Scott Gruber with Citigroup.

I understand that the various aspects of the completions business make it challenging. However, I would like to get more information about the second half of the year. Although activity is decreasing, you are reallocating some capacity and gaining market share, but pricing is becoming a challenge. Could you provide insights on the revenue and EBITDA trends for the third quarter? Additionally, what is the outlook for the fourth quarter? Will the seasonal effects be more significant than usual? Or could the current slowdown in customer activity potentially lessen the decline in the fourth quarter? Any additional details would be appreciated.

Yes, that's a good question, Scott. We're coming off a strong second quarter, but as you've pointed out, we've noticed a decrease in activity. This is due to a decline in rig count, which has continued into the start of the third quarter. Typically, we experience a lag of 3 to 5 months in completions following these changes. Therefore, we expect to see this impact our completions in the latter half of the quarter. While utilization was robust in Q2, we're beginning to see more open time on our schedule. We anticipate a mid-single-digit reduction in asset utilization. We're also repurposing some assets and reducing our fleet size to improve efficiency, as customers are requesting more simul-frac work. This allows us to maintain horsepower utilization while operating fewer, larger fleets to enhance efficiency. With the increase in open time towards the end of the year, we expect some pricing challenges. We predict low single-digit pricing headwinds, with firmer prices for our advanced technology assets, but more competitive pricing for older equipment, especially diesel. Overall, we foresee average pricing changes in the low single digits. Regarding Q4, it's still early to assess. I appreciate your insights, and I hope it unfolds positively. However, given the market's volatility, we prefer to wait and see how Q4 develops before providing a clearer outlook. Michael, do you have anything to add?

No, I think you covered it well there. I think at least normal seasonality for Q4 coming off Q3, but we'll have some more clarity as we get closer.

I appreciate it. And then I wanted to come back to the Oklo alliance. It's certainly an interesting alliance. Now Oklo, I believe, has a bunch of MOUs for the reactors. So with the alliance, will you be targeting customers with MOUs? Are they clamoring for a kind of faster time to first power? Or will the alliance be mainly targeting new customers?

No. When considering the Oklo powerhouses, these are significant customers. They have multiyear development agreements in place, which means we need to think about how they plan to develop power over the next 5 to 10 years. The Liberty-Oklo Alliance will definitely focus on these customer relationships. This collaboration will enable us to deliver power and create a more integrated, interconnected solution for the long term, addressing many challenges associated with achieving a sustainable nuclear energy source as we strive for low-carbon solutions. Additionally, we want to stay competitive in the AI sector. Liberty's Forte generation and load management solution allows us to handle the fluctuating energy demands from AI data centers, including the seasonal variability caused by the significant cooling requirements of these centers. Hence, the Oklo powerhouses will provide reliable baseload power, while Liberty Gas will serve as a long-term generating asset within this integrated solution. We will actively advance the development of data centers that have been discussed over the past year.

Our next question will come from Keith MacKey with RBC Capital Markets.

Just maybe first start out on the sand slurry pipe system you talked about in the release. Can you just give us a sense of the operational advantages or cost differential that, that type of sand transportation provides versus the traditional methods?

Yes, that's a great question, Keith. Without getting too detailed into the numbers, let me give you a straightforward example to illustrate the differences. Picture a situation where there is an existing proximity mine, which essentially is a wet sand mine situated within someone else's land. With our sand slurry system, we can transport sand without ever needing to load it onto a truck. We can move the sand through a pipeline over distances of about 10 miles directly to the site. Once it arrives, we remove the water and stack it in a wet pile, ready for use, without any truck involvement. In a different scenario, one of the notable challenges we face in sand logistics is the final delivery stage. For instance, in West Texas' Permian region, we might source sand from a mine in the Kermit or Monahans area, load it onto a truck, and travel a significant distance along highways. However, that truck eventually has to navigate slower ranch roads with a speed limit of 10 miles per hour. These roads may be well maintained but still hinder delivery efficiency and consume a lot of time—sometimes accounting for half the travel duration despite covering only a short distance. Additionally, the road maintenance costs for delivering hundreds of truckloads of sand daily can be considerable. By using our slurry system, we can completely eliminate that truck traffic on those roads. This means our trucks can operate solely on paved roads, increasing their efficiency and maximizing the number of trips they can make in a day, while also lowering the transportation costs. Furthermore, this approach reduces the dust and noise from truck traffic and alleviates the burden of road maintenance. We see this as a significant economic advantage for our customers. While it may not be feasible everywhere, there are numerous opportunities in certain regions where this system could be highly beneficial.

Got it. I appreciate that color. I appreciate the comments on the utilization softening and the pricing as well across the asset base. Can you just give us a sense of how the act of consolidating some of your horsepower into fewer fleets might change the earnings power of the business on a like-for-like basis? So would you expect that the simul-frac operations to have higher earnings power or lower earnings power relative to your prior asset footprint without any of these additional changes?

Yes, there's a small change there, Keith. In relative terms, our services are priced based on the return on the assets themselves. As a result, while we will have fewer fleets, each fleet will be slightly more profitable on a fleet basis. However, on a per horsepower basis, you'll notice some similarities, along with a reduced average cost per lateral foot for the client. This approach creates a win-win situation for everyone involved.

Our next question will come from Marc Bianchi with TD Cowen.

I wanted to ask a couple of clarifications around sort of the outlook for the second half here. Ron, you were talking about the drawdown in activity, maybe something on the order of mid-single digits and then add a few percentage points of price to that. So it would appear maybe we're talking about something like 7% or 8%. Is that what you expect for third quarter? Or is that kind of a mix of third quarter and fourth quarter? And then I don't know, Michael, if you want to try to help us with how to think about the operating leverage, the decrementals that we would see on that type of a revenue decline?

Michael is doing some quick calculations for you, Marc. However, I wouldn't suggest simply adding those two figures to arrive at 7% or 8%. It's better to consider those aspects separately, which will likely lead to slightly different outcomes than just combining the two. Michael, would you like to elaborate on that?

I think you're right. I mean I think if you look at those numbers and you get sort of mid-single-digit activity where you've got decrementals that are a little elevated to your usual sort of 35% because of as we are changing out our fleet count. And then you've got, as Ron said, some single-digit pricing decline on average across the whole fleet. I think you can get to the math on getting to the numbers with that, Marc.

Got it. And that's all happening in third quarter. Like this is essentially what you think for the calendar third quarter?

The general assumption is pricing stays relatively flat through sort of we're seeing those drops now as best we know, it stays relatively flat through the fourth quarter, and you'll see some seasonality. But again, we'll have a lot more clarity on that when we get to the next earnings release.

Yes. Okay. Makes sense. And then the other one I had was on the CapEx reduction, you mentioned some of it was frac and some of it was some sort of slower delivery for the power equipment. I guess, could you help us understand how much is each? And then with the power piece, was that your decision or the vendor's decision? And what's the chance of seeing further delays there?

It's about split 50-50. You've got to remember on the power side, really, that's just a firming up of delivery times. Remember, we gave you some numbers at the beginning of the year in January, right? So things sort of as far as those delivery times firming up between sort of November, December, January and February of next year. So that's just a firming up of the actual delivery times out of the factory. So not a big number, but you've got an artificial 12-month period we're talking about here. And then on the frac side, yes, about 50% of that reduction comes out of the frac side as we start to tamper down CapEx on the completion side of the business as we move towards where we see the market changing as we continue to drive strong free cash flow out of that business as we go forward.

Our next question will come from Saurabh Pant with Bank of America.

Ron, maybe I'll start with the big picture question. Like you said in your prepared remarks, it seems like E&Ps are solving for flat production, right? So if we think about that, new frac, I think, close to 20% of the wells in North America. As you look forward and have your discussions with your customers, Mike, how do you think customers might budget for 2026, right? Just broad strokes, any high-level thoughts on that?

Yes, I'm happy to share my thoughts on that. I would certainly be interested in being in the boardroom when those decisions are made. However, I believe that the exploration and production companies in onshore North America will generally aim to maintain production levels close to their current status. I think it will be challenging to regain market share in the near future, so unless there is a significant economic disruption, we can expect them to have budgets that support holding production steady. We might see a slight decline, potentially around 100,000 to 200,000 barrels a day, but I believe they will plan their budgets to sustain those production levels. We'll have to see how it plays out, but that's my expectation.

Right. No, I know it's too early to speculate, but I appreciate the thoughts, Ron. And then one question I had a follow-up on Marc's question on the power deliveries, right? I understand you're firming up the schedule. But I'm just trying to extrapolate what we heard on the Baker call earlier this week, they're booking a lot of orders. It seems like they're booking more orders than they have capacity right now, right? So I'm just trying to wonder, as you at some point think about, okay, should we at least get a slot, if not a firm order for deliveries beyond 400 megawatts? Any thoughts on what lead times might look like for that?

I think we're pretty comfortable saying that today with our partners on the power generation side, we can still expect deliveries in a 12-month time frame without any concern. In fact, we had a conversation literally the first part of this week to confirm what our additional opportunities would be for 2026. And so I'm quite confident telling you that if we were looking to add meaningful capacity to our order for next year, we could do that and expect deliveries in the same time frame that we are getting them today.

Okay. Okay. I got it. And very quickly, Michael, of that $575 million in CapEx that you gave us, how much of that is maintenance?

So it's slightly less than $200 million.

Our next question will come from Grant Hynes with JPMorgan.

So despite some of the sort of pricing pressure that you kind of mentioned in the release in the lower part of the market, it seems like still kind of getting strong economics on the digiFleet rolling out. Maybe how should we just think of sort of go-forward cadence on digiFleets as we think about power CapEx largely spoken for next year? And I guess, any flexibility kind of on that side?

Based on what we know today, we're set to complete our digital program for 2025, with those fleets already allocated to customers under favorable contractual terms. However, when we look ahead to 2026, our current outlook suggests that we may scale back to just maintenance capital expenditures in the completion segment of the business, which means we might not expand our digital capacity next year. This could change if market conditions improve and we find a compelling reason to adjust our plans, but for now, that's our most probable outlook.

Got it. And then also, we've heard from some peers just on some nat gas activity being relatively stable. Obviously, I think some mix, but maybe with LNG facilities coming online, maybe seeing some early demand signals. I guess, can you just speak to this and maybe provide color if any of the equipment you were speaking about is kind of levered to gas stations?

That's a great point. Certainly not something we had mentioned, but we are in the fortunate position of being underweight Permian relative to rig count there and overweight Haynesville relative to rig count there today. So we are doing a good amount of work in the Haynesville. We're seeing strong support there and expect to see that continue through the latter part of the year, at least as best as we can tell today. So it has been a tailwind relative to the other parts of our operating platform.

Our next question will come from Derek Podhaizer with Piper Sandler.

I guess I just wanted to ask on the attrition comments you guys had in your opening statement. Maybe could you help us understand what you guys expect as far as moving diesel from the market? And you just answered the last question, not replacing much more digi as we look into next year. But maybe just help us understand the supply-demand dynamics of the industry and what you expect as far as diesel being removed and how that can help the supply and demand picture moving forward?

Yes, there's a strong demand for next-generation capacity and the latest dual fuel technology, especially Tier 4. However, demand starts to decline further down the scale. As we look at the capacity that will likely remain unused in the latter half of this year and possibly into next year, it will mostly be Tier 2 diesel capacity, along with some older dual fuel systems. As these units are sidelined, particularly in a tough economic climate, companies may choose to dismantle them for parts to support the core fleet. They might utilize components like transmissions and power ends, which can ultimately render the asset unworthy of returning to service. While we estimate an average annual attrition rate of 10%, in strong economic years, this could drop to the mid-single digits. Conversely, in challenging years like this one, we expect the attrition rate to increase into the mid-teens, leading to a faster rate of attrition in the second half of this year and into 2026. This sets the stage for a stronger market recovery sooner than might be expected once conditions begin to improve.

That's helpful and encouraging. Maybe just going back to the slurry pipe, pretty interesting technology. Can you help us understand maybe the total addressable market there? Is that just a Midland solution in the Permian given where the mobile mini mines are, the wet sand? Or could you move over to the Delaware? Or could there be anything outside of the Permian that we should be thinking about?

I think all of the above are certainly true. There's no reason we couldn't deploy it in the Delaware as well. There's definitely proximity mines over there. I think there are opportunities across the Permian Basin. I wouldn't rule out a place like the Haynesville as a potential opportunity. We use wet sand there, and there may be a case where it makes sense in that environment as well. Certainly not something you're going to run in the dead of winter, of course. So that probably removes some amount of the geography. But outside of that, it's got real application over the right sort of distances.

Our next question will come from Eddie Kim with Barclays.

Just wanted to ask about the decision to reduce your fleet count and redeploy some of those fleets to larger customers with simul-frac operations. Is that because customers right now or certain customers are just kind of stopping completions activity altogether, maybe in response to the decline in the oil-directed rig count we've seen over the past 2 months? Or is it more because they're asking for pricing concessions at levels that are maybe unsustainable for your return threshold? Just any color there would be great.

There's probably a little bit of both of those. I think you could definitely find some smaller operators who are choosing to just stand down completions activity at this point in time. And there has been some reductions in activity. But there's also a real pricing challenge. I think we had some folks in the space who were facing already a calendar with a bit of white space on it into Q2, and they responded, we would argue, unconstructively in that regard with respect to price. And so we've seen some real degradation from a pricing standpoint in the market. And in some cases, that has us choosing not to participate in that. And so we would rather reallocate those resources in support of our strong long-term partners and help them drive efficiencies through things like simul-frac that are ultimately a win for both of us in this time.

Our next question will come from the operator for Q&A, after which Ron will have some closing comments.

Thank you. Global oil demand grew by 0.7% last year, supplying 34% of global energy needs. Global natural gas demand grew by 2.5% last year, supplying 25% of global energy needs. Electricity demand grew by 4%, outpacing total energy system demand growth. We have a similar power story unfolding here in the United States, driven by growth in AI and a reshoring of manufacturing. Recognizing that we had a bigger role to play in delivering on our mission to better human lives, we changed our name from Liberty Oilfield Services to Liberty Energy in April of 2022. We subsequently made investments in small modular nuclear through Oklo, in enhanced geothermal through Fervo and in batteries through Natron. We have worked hard to ensure that the critical role oil and natural gas play in the global energy stack is recognized and that their continued development is supported by the regulators, the public and the financial community. And we are committed to continuing that important work. Unfortunately, our electricity grid has suffered due to similar challenges, misguided policy, market distorting financial incentives and pushback against major infrastructure builds. But with that comes opportunity. We're energized by this next chapter of the Liberty Energy story and as a champion of abundant, reliable power to meet the growing needs for electricity in the U.S. and as a key provider to consumers of the advanced distributed power services necessary to support their business. We look forward to the years ahead. Thank you for joining us on the call today.

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