Liberty Energy - Earnings Call - Q1 2021

Transcript

Speaker 0

Good morning and welcome to the Liberty Oilfield Services First Quarter twenty twenty one Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Some of our comments today may include forward looking statements reflecting the company's view about future prospects, revenues, expenses or profits.

These matters involve risks and uncertainties that could cause actual results to differ materially from our forward looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's earnings release and other public filings. Our comments today also include non GAAP financial and operational measures. These non GAAP measures, EBITDA, adjusted EBITDA and pretax return on capital employed, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and a calculation of pretax return on capital employed as discussed on this call are presented in the company's earnings release, which is available on its website.

I would now like to turn the conference over to Alimbra's CEO, Chris Wright. Please go ahead.

Speaker 1

Thanks, Ian. Good morning, everyone, and thank you for joining us to discuss our first quarter twenty twenty one operational and financial results. We're excited to embark on a new era for Liberty, completing our first quarter with an expanded platform as a fully integrated completion services, engineering and diagnostics company. We're pleased to report $552,000,000 in revenue and $32,000,000 in adjusted EBITDA in the first quarter. The Liberty One SIM combination has been extraordinary.

We've doubled the size of our business while only growing G and A by approximately 15% and depreciation and amortization by less than 40% from pre pandemic levels in exchange for a 37% equity interest. In addition, the enormous growth in our technological expertise has been inspiring. We brought together a suite of leading edge technologies and two of the top technological teams in the industry. We are excited to bolster our frac technology leadership in many areas, and I will highlight just a few later in the call. We have come a long way since the founding of our company a decade ago.

Our focus, however, remains the same, delivering superior returns across cycles to build a differential company with long lasting competitive advantages. Accomplishing this requires great people and a culture that aligns them to passionately pursue the Liberty mission. We estimate that we currently have a little over 15% of the deployed fleets in the market and are likely completing a little under 20% of North American shale wells. After a rapid rebound off of the COVID bottom, we are now in a slowly improving market. Liberty's number of deployed fleets in the first quarter was in the low 30s and will be similar in the second quarter.

We will remain disciplined in deploying additional capacity. Fleets are only deployed to customers with strategic value and that will deliver good returns on capital invested. Overall, market conditions today remain challenged, but they are improving as demand for frac services grows and more importantly, supply of quality fleets shrinks. Interest in Liberty fleets and partnership continues to grow. Our dialogues with customers are becoming even more constructive as both parties seek mutually beneficial long term partnerships.

The demand pull for next generation equipment with engineering and diagnostics is quite strong. Pricing dynamics continue to improve across all basins. While current pricing levels remain well below Q1 twenty twenty, customer conversations have continued to gain momentum since we last reported. As WTI oil prices have been relatively stable in the $60 range and customer economics have substantially improved, our customers are becoming more comfortable with the necessity for a phased approach to price increases. This is a testament to the deep customer relationships our team has developed over the years.

The ongoing attrition amongst frac fleets will likely further this discussion as we move through the year. The industry is healing. The market for next gen equipment has tightened, and the market for next gen equipment with industry leading operations and technology innovation is even tighter. Looking forward, we see a pathway to normalized margins for Liberty at some point in 2022. We've already achieved three sequential quarters of margin improvement as activity has built off historic lows in the second quarter of last year.

While the rate of growth is slowing sequentially, the trend still looks modestly upward as private E and P companies are reacting to strong commodity prices. Public E and Ps, however, are remaining steadfast in their commitment to capital discipline regardless of commodity prices. We fully support this discipline in investing across the whole energy sector as it is required to bring our industry back to full health after the giant upheaval brought by the shale revolution. A year on from the onset of the global pandemic and severe crash in oil markets, I'm pleased that the fundamentals for our industry and business are on an upward trajectory. North American and global economies are decidedly stronger, and the world needs more energy.

Where will this energy come from? While there are a lot of new and exciting technologies in the market, at the heart of dependable cost effective energy access is oil, gas and natural gas liquids. Hydrocarbons play the anchor role in fulfilling our global energy needs and will continue to do so in the coming decades. Hydrocarbons supply just over 80% of world energy when we founded Liberty ten years ago, and they still supply just over 80% of global energy today. The biggest shift in hydrocarbon demand has been natural gas displacing coal market share in electric power generation.

In fact, oil and gas are currently at their record market share ever in The United States at just under 70% of total primary energy supply. Yes, I know that we hear lots of talk about an energy transition that is soon to make us all obsolete. That is simply not so. Let me put things in perspective. Wind and solar today supply roughly 2% of global energy concentrated in the electric power sector, which collectively supplies less than 20% of global energy.

In absolute terms, the trillions invested in wind and solar do produce a great deal of energy. But in relative terms, they are still quite modest, even compared simply to the growth in energy demand the world will see in the next decade alone. The only way out of poverty is increased energy consumption. Hydrogen is rightfully full of buzz these days, but it is not an energy source. Hydrogen is an alternate method of energy storage.

It takes more energy to produce hydrogen than is released when it is consumed. It has great potential to create zero carbon liquid fuels. Hydrogen adoption will grow, not shrink, the full need for energy. Climate change concerns are the driver behind the energy transition dialogue. Climate change is a serious, sizable and global challenge.

To date, natural gas displacing coal in the power sector has been the largest factor, bringing U. S. Per capita greenhouse gas emissions to their lowest levels since the 1950s. Continued progress will require significant contributions from many areas across the energy space, including continued contributions from our industry and likely large scale carbon capture and utilization and storage. Liberty will both continue and expand our efforts in lowering greenhouse gas emissions.

The oil and gas industry is not shrinking, but rather it's maturing into a steadier, slower growth and cleaner business. We believe The U. S. And Canada will continue to play leading roles as both major energy producers and drivers of improved technology and practices globally. The world faces a second and frankly more urgent global energy challenge, energy poverty.

Onethree of humanity still lacks access to modern energy that enables the healthier opportunity rich lives that we all treasure. Millions die every year simply from lack of clean cooking fuels and reliable access to electricity. Sadly, this global crisis gets very little political attention because it only affects people in low income countries and the lowest income folks in wealthy nations. Surging U. S.

Exports of propane and other natural gas liquids are helping hundreds of millions gain their first access to clean cooking fuels. U. S. LNG exports are also helping bring electricity access to the 1,000,000,000 people who currently lack any electricity access and another 1,000,000,000 with only unreliable, intermittent, low wattage electricity. Electricity in lower income countries comes predominantly from hydrocarbons or hydropower.

While the shale revolution has helped accelerate the rise for so many at poverty, more than 2,000,000,000 people remain in these dire circumstances. Unfortunately, policy decisions to restrict capital access for hydrocarbon energy development in low income countries is a growing headwind. You could read much more about these two global energy challenges and Liberty's wide ranging efforts in our sustainability report that will be released on June 1. Two weeks after that, on June 17, Liberty will host an Investor Day in Denver to provide deep insight in delivering people, technology development, business processes, frac operations, strategic efforts and new energy avenues. We hope that you can join us in Denver or via videoconference.

In the first quarter, our operations teams executed at the highest level, navigating weather disruptions across the southern regions and in Canada, working quickly to minimize weather impacts on our customers. Our sales teams drove new business above expectations, successfully embracing the strength of both our legacy RED and BLUE sales organizations. It goes without saying that we achieved a record quarter for total proppant pumped, topping our previous mark set in Q1 twenty twenty. What is notable is that our fleet efficiency levels were collectively strong with both red and blue fleets near the top of our efficiency leaderboard. Of course, we have work ahead of us to raise efficiencies of many acquired fleets to Liberty Standards, but it is notable that we had strong results across the combined fleets.

Overall, the integration has been an incredibly positive experience. Our team worked at OverDrive, handling the challenges of integration to deliver a seamless transition for our customers with no disruption to operations. What a testament to the hard work of folks across supply chain, IT, HR, finance and importantly, our crews in the field. Again, our crew efficiency has been commendable given the naturally disruptive nature of a large scale integration, and the hard work continues. We are moving towards the collective best practices, which are coming both from legacy Liberty and our new Liberty Blue fleets.

This effort will drive continuous improvement that is Liberty's DNA. We've combined our maintenance operations for both frac and wireline, but the integration isn't over yet. We continue to work on personnel integration, finalize the transition of our ERP and internal systems and manage the challenges associated with the closed Canadian border. Technology initiatives are an exciting part of the progress. The rich history of both RED and BLUE's legacy businesses is positioning us attractively to push forward opportunities for automation.

In the near term, we've already identified ways to streamline the number of people we have on location. We are deploying a new version of SonicStrap chemical management automation, a Liberty developed electronic system of sensors to track chemicals with high accuracy and precision. Automation of equipment control systems will also allow us to streamline operations and reduce costs. We are launching a new direct frac diagnostic measurement, FracSense. This grows our portfolio of frac design and monitoring technologies that help optimize well spacing, cube development and tailor frac designs and perforating strategy.

This is a highly complementary technology to our well watched diagnostic and our extensive suite of proprietary software tools and engineering expertise that power our efforts to help customers lower the cost to produce hydrocarbons. Our focus on empirical data, real measurements, expands significantly with FracSense. This fiber optic based direct measurement of fracture geometry allows calibration of our frac models and better optimization tools for our customers. FracSense measurements provide information about fracture hazmat, stage spacing coverage, perforation cluster design and its impact on cluster efficiency, fracture length and fracture height calibration through volume to first response. That is a mouthful.

It also produces a direct way to measure frac hits in a complementary fashion with Liberty's WellWatch. Has also gained significant momentum in recent weeks. We've hosted numerous customer tours at our ST-nine facility in Magnolia, and the enthusiasm is electrifying. With Digifrac, we can drive a reduction in greenhouse gas emissions of at least 20% compared to all other existing frac fleet designs, and customers are taking notice. This has been the number one draw for customer engagement as E and P priorities are shifting to minimizing emissions output while maintaining operational efficiency and safety.

To date, we've completed over two fifty hours of high pressure durability testing on our pump and have plans for field testing next month. We also have a team in place for commercialization as customer interest has exceeded our expectations. This is truly the next wave of technology in frac fleet design, and we're excited to lead the industry in this endeavor. The rate of DG frac fleet deployment is highly dependent on economics and the same prudent capital deployment strategy that we have always followed. As we look at the year ahead, our view on oil markets has become more constructive, buoyed by vaccinations, massive fiscal and monetary policy actions and strong fundamental leading economic indicators, global demand for oil is expected to continue to rise through the year.

In The U. S, five states have already recovered from the pandemic recession on a GDP basis, with others soon to follow suit. Surging COVID cases in certain countries such as India, Brazil and some EU nations are raising concerns for oil demand in those areas. But a steady draw of global oil inventory stock suggests the measured increases in OPEC plus oil production output is being absorbed by higher global demand, resulting in a tightening of the oil supply and demand balance. Over the last three quarters, North American frac activity has rapidly increased towards supporting maintenance production levels.

Hence, public E and Ps are now at roughly maintenance run rate frac activity. Private E and Ps, on the other hand, are more responsive to current oil and gas prices, which continue to support modestly increasing demand for frac services, in line with their recent rise in rig activity. Importantly, E and P companies are maintaining capital discipline and moderating long term growth, aiming to increase commodity price stability and enhance sector attractiveness. We believe that this approach is a positive for the industry going forward. North America is a critical energy supplier for the globe, and we need a healthy industry.

With that, I'd like to pass the call over to Michael to discuss our detailed financial performance.

Speaker 2

Good morning. We are pleased with our first quarter results. I'd like to take a moment to thank our entire team for going above and beyond expectations. They came together to deliver solid results while encountering operational challenges arising from unusual winter weather and added responsibilities through the sizable integration of our OneStim acquisition. We're off to a great start.

Executing on our strategy, expect to drive the next phase of financial growth and superior returns. We are already seeing early stage benefits from our teams leveraging a full suite of completion services, including frac, wireline and sand, along with engineering and diagnostic tools unique in the industry to drive increased engagement with new and existing customers. As Chris reviewed, we are also working very hard on integrating our technology development efforts to improve efficiencies throughout the supply chain and drive the next phase of innovation in the frac business. The first quarter of twenty twenty one, revenue increased 114% to $552,000,000 from $258,000,000 in the fourth quarter, reflecting the inclusion of Bunzton and new customer wins that exceeded expectations. Revenue gains were partially offset by weather disruptions during February in The South and in Canada.

We estimate a net reduction in first quarter revenue of approximately $25,000,000 of weather impacts. As onethree of the activity disruption was partially restored in March, the remainder of the revenues are expected to be completed in the second quarter. Net loss after tax decreased to $39,000,000 in the first quarter compared to $48,000,000 in the fourth quarter. Fully diluted net loss this year was $0.21 in the first quarter compared to $0.41 in the fourth quarter. Results for the quarter included $7,600,000 of nonrecurring transaction related costs, and there were no reported fleet startup costs during the quarter.

The first quarter adjusted EBITDA, which excludes noncash stock compensation expense, increased to $32,000,000 from $7,000,000 during the fourth quarter. The improvement in adjusted EBITDA primarily reflects the higher absorption of fixed costs with the inclusion of Bunsen. General and administrative expense totaled $26,400,000 for the quarter and included noncash stock based compensation expense of $4,300,000 G and A was approximately 31% higher relative to the fourth quarter on 114 sequential increase in revenue. G and A costs essentially flat with Q1 twenty twenty levels, the last pre pandemic quarterly benchmark, despite the doubling of our business with the Oneston acquisition and the ambition of new service lines, basins and our entry into the Canadian market. We doubled our available frac equipment, added wireline and the Permian sand mines, and depreciation and amortization was $62,000,000 for the quarter, only 35% higher than the fourth quarter of $46,000,000 Net interest expense and associated fees totaled $3,800,000 in line with prior quarters.

We ended the quarter with a cash balance of $70,000,000 approximately flat with fourth quarter levels and a total debt of $106,000,000 net of deferred financing costs and OID. Dividend borrowings drawn on the ABL credit facility and total liquidity, including availability under the credit facility, was $258,000,000 based on the financial statements as of 03/31/2021. Capital expenditures were $42,000,000 for the quarter. We reiterate that our capital expenditures for the year are expected to be in the $1,455,000,000 dollars range, including maintenance, data synergies, technology investments and the utilization outlined in the last quarter. Importantly, we plan to be free cash flow positive in 2021 while continuing to invest for the future.

Integration is proceeding as planned, and we cut over the OneStim fleet to deliver the internal systems at the February with no disruption of customer operations. Schlumberger provided transition administration services in the first quarter, which made up the bulk of the $7,600,000 transaction services and other costs line. We expect there will be some trailing transition costs of less than $3,000,000 in the second quarter related to the cutover. The integration was a significant logistical challenge that the Liberty team, both legacy and new, planned for and executed incredibly well. Bringing together a team of approximately 3,000 dedicated individuals across 15 locations in two countries during a pandemic with remote working requirements, social distancing was something we did not undertake lightly.

The women and men of Liberty rose to the challenge, and we are now operating one living, breathing organism with a single goal to build and grow the best and service company, period. The management team and I are humbled by

Speaker 3

their hard

Speaker 2

work, innovation and character and strive to live up to the example they have seen. You'll see the fruits of our labor as we exit the challenging market background in the last twelve months. Our increased scale provides significant financial leverage as the market improves. We should see increased absorption of fixed costs for both basin and corporate level. Prior to the COVID downturn, G and A costs were approximately $100,000,000 per year.

We have doubled the scale of the company and expect G and A to increase by approximately 15% over pre pandemic levels. All through net income will be helped by the fact that depreciation and amortization only increased by approximately 35%. We will leverage our new broad technology platform to bring to market tools that increase efficiency and reduce cost of operations. The enhanced supply chain integration that is underpinned by the North American wide operations and increased scale will drive economies and deepen partnerships with our vendors to lower cost of operations. We're excited to talk more about these opportunities at our Investor Day on June 17 and see the results over the next few years.

In a highly cyclical business, we believe it's imperative that long term returns need to provide shareholders with reward that is commensurate with risk. At Liberty, our approach is simple: strike the right balance between sustainable growth opportunities, balance sheet strength and returns to shareholders. Looking forward, we are now navigating a significantly larger business in a rising market with fundamentally stronger market systems. We have a distinct advantage with our best in class technology and completion services, driving deeper customer partnerships. We are already seeing pricing increases secured with more customers in the coming quarters, driven by the long term value added by our industry leading technical knowledge and services that help customers lower their overall cost per barrel of oil or Mcf gas.

Our leading edge equipment technology, most of all, duty frac has garnered significant interest from customers who want to improve their ESG profiles by achieving greater operational efficiency and lowering emissions output. Fleet economics have not improved to a point where it makes sense to add cruise ship, but our customers have seen meaningful improvement in their economics. Industry attrition and accelerating customer interest in our leading edge services will allow us to reach that level earlier than others in our space. Importantly, we have the balance sheet flexibility to act swiftly should conditions improve meaningfully. Liberty is committed to creating long term stockholder value via our balanced strategy, compounding shareholder value by reinvesting cash flow at high rates of return and returning cash to shareholders as appropriate.

While the market remains challenging, this does not change the fundamental principles upon which we manage the company. With that, I will hand the call over back to Chris for closing comments before

Speaker 1

we open for Q and A. Thanks, Michael. I just want to extend a broad and heartfelt thanks to everyone in the Liberty family that's worked through so hard through these tough times and through this tremendous transformation of our company to all our customers and partners as well. And with that, we'll open it up for questions.

Speaker 0

We will now begin the question and answer session. Our first question comes from Blake Gendron of Wolfe Research. Blake, please proceed.

Speaker 4

Yes, thanks. Good morning, guys and Chris. Always appreciate your perspective on the macro and the energy outlook at the top of the call here. I wanted to circle back on the path to normalized margins. Seems like things are still pretty competitive pricing wise, perhaps an upside bias activity with privates potentially adding in the back half here.

That said, it seems like we really need to see either number one, accelerated attrition or number two, bifurcation of next gen frac equipment in terms of pricing. Curious more so on the latter, how you think this manifests in terms of your relationship with customers? Is there any sort of pricing mechanism by which you can take down some economic rent created by GHG emission reduction?

Speaker 1

Yes. Look, you're right in that the market today is tough. Look, we've come off an incredibly low downturn, but every quarter, things supply and demand are sequentially getting better. And yes, people want next generation frac equipment. They want to lower and of course, it's not just greenhouse gas emissions, but it's NOx and carbon monoxide and other pollutants that are reduced with modern fleets.

So there's a hunger for that. There's also an understanding that our whole industry, the service industry doesn't have the good returns today that E and Ps have recently come back to. So yes, it's a dialogue. Everybody buying wants a low price, everybody selling wants a high price. But absolutely, next generation fleets and higher performance and higher opportunities to bring technology to continue to drive performance better, there's that demands a price premium.

And so it takes time. I think of the last downturn, if things were just brutal at the start of the summer in 2016, and two years later, the market was dramatically different, dramatically. Now that one was driven more by a surging increase in demand. This rebound, we've seen a surge of increase in demand, probably more modest going forward, but the rate of investment in new equipment over the last few years has just been very low. In 2017 and 2018, people were building frac fleets at a feverish pace.

Nothing like that has happened in the last two plus years. So I think it's mostly supply attrition and the desire for better equipment that continue to pull the economics of frac in the right direction.

Speaker 4

Totally fair. I want to switch to wireline bundling. We've seen some companies try to do this in the past with fairly mixed success at various points in the cycle. Wondering what Liberty is seeing in terms of early MPT reductions and the like. I know still very early days.

And also in this current activity environment, the receptivity of value added wireline technology is looking like? Is there anything specifically you'd call out on that front?

Speaker 1

Look, obviously, integration between frac and wireline as a new Liberty, we're early on in that. But yes, there are opportunities to make those two teams and systems work together better to drive efficiency and lower downtime, absolutely. Clearly, Schlumberger has a number of those paired fleets working together. For us, bundling sort of a price like a price discount. For us, it isn't about that.

It's about how do we deliver the safest, fastest, best, most efficient completion service. And that really is a dance on the dance floor between frac and wireline. So we're proud of the teams we have in both sides and very excited about the opportunities about how to make those into one team, not two different teams. Thanks a lot for the time.

Speaker 0

Thank you. Thanks, Mike. Our next question comes from Scott Gruber of Citigroup. Scott, please proceed.

Speaker 5

Yes, good morning.

Speaker 1

Good morning, Scott.

Speaker 5

Great to hear that normalized margins are possible next year. And certainly, we saw the quick snapback last cycle like you commented on, Chris. Where would you peg the normalized margins at given the new combined fleet and the different portfolio composition that you're going to have this next cycle?

Speaker 1

Well, PEG sounds way too specific for us, and particularly talking about the future. But look, clearly, our cost basis across our fleet, our average fleet is lower now. What we ultimately focus, what we ultimately care about is return on capital employed or measured in other way, cash return on cash invested. In our ten year history, exactly in stellar years in the industry, we've been above the S and P 500 in that metric and that's our goal is to continue to deploy cash in a disciplined fashion and generate a solid return on that. And so that's the ultimate yardstick for us.

From an EBITDA per fleet thing, I mean, yes, that's sort of a wide band. It really depends on a number of factors. But something in the mid teens there is probably a broad brush estimate of that. But again, it's about developing strong returns on capital and a strong balance sheet, so we're resolute for whatever comes.

Speaker 5

Got you. Got you. And just thinking through the pathway to get to something in the mid teens ballpark, is it primarily operationally driven through your fixed cost absorption and efficiency improvement initiatives? How much pricing is required to get there? If you can kind of split apart the pricing driver from the other drivers, that would be great.

Speaker 1

It's a mix of the two. It is a mix of the two. And I don't think we'll go any more specific than that. But you need both. Clearly, we have greater efficiencies now.

Clearly, we have efforts underway to continue to drive down our cost to deliver the service. But we just saw a significant and large pricing compression to work with customers as oil prices compressed. I mean, it was across the whole sector. But yes, we'll need to see some pricing come back. It is.

I think our customers are aware of that. Good news for customers and for the industry is pricing doesn't need to come back even near where it was to bring returns back. That's just a continual progress of efficiency across our industry. The cost to drill a well and deliver a barrel of oil just continued to go down on a secular basis. Cyclically, is that going to bounce up a little bit in the next twelve to twenty four months?

Sure. But relatively modest amount, relatively modest amount.

Speaker 5

Got you. Would you be willing to offer if it's more operationally driven or more pricing driven to get there?

Speaker 1

Michael is swinging a baseball bat at me. So look, it's hard to make predictions about the future. It's those two things working in concert. Yes, time will tell.

Speaker 5

Understood. Understood. Appreciate the color.

Speaker 1

Thanks, Scott.

Speaker 0

Our next question comes from George O'Leary of TPH and Company. George, please proceed.

Speaker 6

Good morning, Chris. Good morning, guys.

Speaker 7

Good morning, George. You all talked a good

Speaker 6

bit about attrition kind of marketed supply not being what it may seem on the surface. Curious if you could peel back the onion a little bit there and frame what you guys view as the actual marketed supply versus what our perception of that marketed supply might be.

Speaker 1

Yes. Look, again, it's hard to put specific numbers on that because, look, our guess, and I think it's in consensus. We've probably got a board of 200 frac fleets running today. Is there a lot of parts equipment? Absolutely.

I think very little, maybe almost none of that parts equipment is actually staffed. A lot of it look, customers get choice when the market loosens, and people want to keep getting better. So there's just a stronger demand for the next generation fleets. There's a fair amount of legacy equipment around, but it's not being reinvested in. It's starting to perform more poorly.

So you see a fleet that used to have X number of pumps and now they're bringing out 1.25 of that number of pumps just because of maintenance problems and pumps going down and repairs. So it's not like there's an aircraft carrier full of shiny fleets just ready to drive off somebody's yard to go to work. And but I think it's too sticky and don't have good enough data to quantify that. But the rate of equipment being retired and worn out is dramatically larger than the rate of new equipment being built.

Speaker 6

That's very helpful, Chris. And then on the just with respect to the e frac offering, it does seem like there's strong demand for more ESG ish type offerings that truly add efficiencies in the field out there in the market. You can just see that in utilization numbers of the different technology types. Just at a high level, what do you think differentiates or will differentiate your CFRAC offering from the competitors? Is it largely that ST-nine pump?

Or are there other kind of bells and whistles? I'm not looking for specific color. I know you don't want to give away any kind of competitive edge, but just any high level color on what you think makes your offering unique versus the competition?

Speaker 8

Yes, George, this is Ron. I'll maybe give you just a couple of points that we would maybe highlight in that regard. You certainly hit on one of them. We think from the SE9 pump standpoint, we have taken a very, very novel approach to the design there and ultimately believe that that asset is going to be a better performing asset out in the field relative to other approaches that have been taken around sweeping more horsepower through the same side of pumps. So we're pretty excited about the innovations there.

But I

Speaker 1

think the other side that

Speaker 8

we looked at very, very carefully was the power generation side. There had been, we'll call it one very typical approach to powering electric frac fleet out in the field and our look at that suggested that that was not the optimal way to be running a frac fleet and electric frac fleet specifically that there was a better solution to deliver not only improved fuel savings and better economics on location, but very specifically a reduced emissions footprint. And so we'll be taking a very different approach to powering our frac fleet. We've talked quite publicly about that already that we'll be using natural gas recip engines rather than gas turbine on location. And I think we're convinced that delivers better capital efficiency, better redundancy on location, better efficiency as a result of that.

And maybe most importantly for some of our customers, a significantly improved footprint relative to the existing solutions.

Speaker 6

Awesome. Thanks for the color, Ron.

Speaker 0

Our next question comes from Stephen Gengaro of Stifel. Please proceed.

Speaker 9

Thanks. Good morning, everybody. Things. First, you mentioned your fleet count in the low 30s deployed. Are you willing to give us a sense for how many fleets you have, which are sort of readily available to go back to work?

And how many would require material CapEx to reenter the active fleet?

Speaker 2

Yes. As we pointed out, I think when we called out the London deal, part of the deal was we had 20 retagged, as described by Slobhaj, blue fleets ready to go. So there is no capital required for those. Plus, we were running more order 23, 24 fleets of legacy REIT. So yes, those two years basically outlined, it doesn't need really any particular CapEx.

Speaker 9

Okay, great. And then second, as you've sort of gone through the process and integrated some of the Schlumberger assets, the OneStim assets, has anything surprised you about sort of the relative profitability or the relative efficiencies? And have you seen anything which has sort of increased your confidence level or changed your views integration savings and how they unfold over the next year or two? And how should you liberatize their assets?

Speaker 2

No. I think we've been very, very nicely surprised by the efficiency. I think that's one of the things we get under the hood, sort of just incredible amount of pride out there in those teams, and they're incredibly good. And so yes, I think they love the fact that sort of working with our team and sort of being let free and being given sort of that responsibility to invest as they can be. So I'd say we are more optimistic about that potential.

I mean I think and when we get to the Investor Day on June 17, we'll add some sort of more looks at the integration. But I really think Ron and the technology team have done a great job of really looking at what's going to be the next generation of integrated frac. As you know, we make investments for the long term. So I think it's going to be really a coming together of best practices, and I think it's going to be exciting.

Speaker 0

Our next question comes from Chris Voie of Wells Fargo. I

Speaker 10

was hoping to touch a little bit more on pricing. I know you don't want to get too detailed, but just compared to, I guess, in February when you described the fact that you had some pricing increases baked into contracts already that would be showing up in the second and third quarter. Just curious if leading edge has improved at all compared to that? And then whether you expect any pricing uplift from including DigiFrac or FracSense, if they're going to be additive? Or how to think about what that might bring as you get into the second half of this year or 2022?

Speaker 2

Chris, I think Chris' point as Chris Wright pointed out, we continue those customers those discussions with customers that have probably had more price increases baked in as we go through the year and into next year. Of course, the defragment won't affect margins until we come into next year. And we will have an increasing amount of Tier four DGB fleets, which are also sort of in great demand by customers as we get through the back end of this year. So that will help.

Speaker 10

Okay. That's helpful. And then maybe on the CapEx front, so maintenance sorry, not maintenance, but CapEx guidance, dollars 145 to $175,000,000 much how do we evaluate the upside risk to that in the case of, let's say, E and Ps get even more hungry for ESG quality fleets and you have to potentially upgrade to Tier four DGV or, I guess, fracs sorry, digit frac is not in the near future. But how much upside risk would there be if that becomes even more important to your customers?

Speaker 2

There'll be upside risk and upside return, it's obviously we won't be making those investments without a very, very strong path to those sorts of returns. If that when that comes about, we'll let you all know. But I think that's the key. They will be matched. So I mean that will be a better pricing environment, better returns, and that's what drives our investments.

So they're looking towards that path of long term returns.

Speaker 10

Okay. Thank you. Our

Speaker 0

next question comes from Ian MacPherson with Simmons. Please proceed.

Speaker 11

Thanks. Good morning, Chris, Michael. Thank you for all the color. When we look out, make the walk from where you are in Q1 towards normalized margins by next year, Starting in Q2, you will have the abatement of the weather impact. I assume that the $25,000,000 of revenue impact that you called out in Q1 would have extremely high EBITDA decrementals associated with it.

So there would be a substantial building block there in addition to the reduced transaction costs and presumably the iterative pricing increases coming in. So are all of those factors correct as we start the march from Q1 towards normalized margins next year?

Speaker 2

Just one clarification. I think the additional revenue that will roll into Q2, we just had normal increased decrementals. So there's nothing specific about that revenue that will drive you're still going to have personnel that delivers it, you're to have stains, you've got to have chemicals, and it's going to drive repair and maintenance costs. So there's nothing particularly different other than sort of revenue growth and activity growth curve for those decrementals. But other than that, yes, you're right.

I think, as Chris said, this is a move towards normalized margins at some point in 2020, right, so making sure that you're not expecting it to come out of the gate on the January 1.

Speaker 11

Understood. And we're certainly not there and we're looking and hoping for some upside to substantially below your prior cycle margins next year in our model. Okay.

Speaker 1

I wanted to get your

Speaker 11

thoughts, Chris, with regard to competitive structure going forward. We've you've obviously been a leading protagonist on consolidation and there is more that could be done. We think there might be, but do you expect more transformational consolidation of some of your smaller than you, but some of the larger independent pressure pumpers to help improve the market structure over the next several quarters?

Speaker 1

Yes. I don't any particular insight into that. There's certainly always dialogue. It certainly makes sense. So I think there's certainly a real possibility that, that stuff happens.

But ultimately, it comes down to human beings that make decisions. And so yes, we also but not hard to predict.

Speaker 11

Okay. Understood. Well, looking forward to the event in mid June. Thanks.

Speaker 1

Thank you. We look forward to seeing you then.

Speaker 0

Next question comes from Mike Staballa of Bank of America. Please proceed.

Speaker 12

Hey, good morning, everyone.

Speaker 5

Good morning.

Speaker 12

So you all gave some color on 2Q activity. If we sort of think look out a little bit in the back half of the year, think about where just broadly you think the industry goes from here through year end, is there upside? And then is anybody having conversations around kind of 4Q budget exhaustion? Is it something we need to start thinking about yet or still too early to tell?

Speaker 1

I would say too early to tell. Certainly for the publics, they lay out a budget plan, and they're going to stick to them. And so as has typically happened, if efficiency of operations runs faster and better than you budgeted for, the possibility of budget exhaustion in fourth quarter is still there, absolutely. Now some of them are still ramping up, so it's not different to another year. I don't think the Q1 expenditures were ahead of 25%, maybe a little below.

But that's a very real possibility. Publics are not going to overspend their budgets. So that work gets done before December 31. And in a number of cases, that's certainly going to be the case. I think there's some roll down there.

And then given the potential offset is what are oil prices then or what are oil prices in the fall when privates are making decisions about their magnitude of continuing or picking up activity. So but yes, I wish I had a better answer.

Speaker 12

Got it. Yes, that's fine. I mean if we could just kind of step back and think higher level about Liberty strategy. I think you mentioned you all had completed 20% of the shale wells in The U. S, and we're kind of around this 200 frac fleet number that is kind of commonly thrown out there as what's maintenance for the industry.

When you're thinking about planning for market share with an industry fleet level kind of on either side of what you think is normal, like what is normal for the industry? And then how do you approach market share when the industry is running either hotter or colder than you think it's going to be?

Speaker 1

Market share for us is always an output, not an input. The decision to work a fleet is always bottom up. It's always we don't say we're going put five more fleets to work here or whatever. We don't even talk like that. So for us, it's always about who are our existing partners, how is that relationship.

We have pretty low customer turnover. So we tend to keep working with our existing partners and try to deepen those relationships. So they win from both sides. Then we have dialogues with lots of other partners that we could add a new partner or we could grow market share with existing partners if they're bigger players want to have a larger percent of their work done by Liberty. So it's really more bottom up dialogues than top down dialogues.

We've said in the past, certainly at the bottom of when the market is really hot, right, returns are awesome and all that, that's certainly the worst possible time to chase after, oh, we can put three more fleets out because EBITDAs are awesome today when the market is really hot. The one thing that's telling you is it's not going to be hot before too long. So in that sort of thinking longer term, we've got to yes, so but again, it's all bottom up. I mean, our history, our ten year history has been sort of a slow growth in market share as the right customers and partnerships have pulled us through, but it's all bottom up.

Speaker 0

Our next question comes from Waqar Saeed of AltaCorp Capital. Please proceed.

Speaker 13

Thank you for taking my question and congrats on a great quarter. And thank you, Chris, for your comments on the macro. Always appreciate it. May have missed some of your earlier comments. I was a little late in joining.

But on Canada, how many active feeds did you have in the first quarter? And how would seasonality impact second quarter results, the seasonality in Canada?

Speaker 2

No, Tom. Yes, we didn't give details about where our fleets are running. And generally, we're running low 30s fleets across the whole complex in North America. Obviously, this breakup in Canada that will reduce Canada down, we said that we had relatively flat fleet count in Q2, so we've got a little bit of other work elsewhere. So it's going to be relatively flat across the complex.

Canada itself will have a normal seasonality. There'll be breakup, and it will pick up again in the summer, and then it will drop generally Canada has continued to drop off again in the fourth quarter, so we have the general rotation there.

Speaker 1

We're thrilled to be in Canada, Waqar. So thanks for asking that. Yes, you would have a tremendous American partner in energy and broader picture. So we're very happy to be in Canada and look forward to building and bettering that business going forward.

Speaker 13

Absolutely. Yes, Canada is an attractive market now. Now in terms of profitability in Canada in the first quarter, how would that compare to the average for what you reported in the first quarter?

Speaker 2

Yes. Obviously, we don't break out geographies. But again, one can think, we have a very, very disciplined approach to how we run our business. And again, across all of our basins, as we've seen many times before, really, we look at them as a whole and sort of really every sort of every decision of putting a fleet to work and having people working, it's a decision that's very unique. And so therefore, they have to be effective.

It's got to be that look at long term returns, and we think Canada is a very appealing long term market for us.

Speaker 13

Absolutely. And then just a final question. What's your current public versus private mix in terms of number of fleets allocated?

Speaker 2

As we've said before, generally, with the OneStim acquisitions we talked about last quarter, really our public private mix is really it's fairly close to about where the industry is, right? I think what you've seen is you've seen a bit of a pickup in the privates. So the beginning part of this year, so we may be a little heavier to the public very slightly because that's where we were going in the beginning of this year. But generally, we are now on the side where we really mirror the markets. If you look at the general market data, that is actually very analogous to us.

Speaker 0

Next question comes from John Daniel with Daniel Energy. Congrats

Speaker 7

on the good interest on Digifrac. Just have a question on that. Really wanting to understand the rollout process because I would assume you guys would seek some contractual support before any type of large scale build out. But I'd also assume an E and P company needs to test the system before they would want to sign a contract. So kind of creates a little bit of a chicken and the egg, if you will.

I'm just curious how you think you're going to handle that?

Speaker 1

John, it's a balance between those two things. In our dialogue with customers, one of the things certainly is we don't want our customers to take technology risk. They've done that. And in many cases, it's not worked out well. It's up to Liberty to deliver DigiFrac to work to the performance specs we believe it will.

If we will get contractual commitments, but if our fleet doesn't work, that's not on them, that's on us.

Speaker 7

Okay. So I assume it'd be performance based contracts then, so they don't have an out that would give you the ability to build?

Speaker 1

Always. Always. All frac contracts are that way. Well, almost There's been some that were done not that way, and I think that's a mistake from both parties.

Speaker 7

Okay. And then one comment I think you made, Chris, was the 20% lower emissions on DigiFrac. Is that relative to the like a legacy turbine solution? Or is that relative to even like the Tier four DGB solution? Any color would be helpful.

Speaker 1

That's relative to the data we have for all existing frac fleets.

Speaker 7

Got it. Okay. Fair enough. And then I guess a last one for me. You mentioned low-30s fleet count in Q1 and Q2.

Just knowing there is some lead time to reactivate fleets, are you making any plans now to sort of reactivate fleets to take you into the mid-30s in the back half of the year? I understand if you don't want to say, but just curious.

Speaker 1

Yes, John. I mean, of course, we're in all sorts of dialogues with existing partners, potential new partners. So no, there's no macro plan of what our fleet level is going to be. But again, relationships drive it all, drive it all. For sure, as you well know, for sure, we will be disciplined.

If there's strong demand pull from customers and partners, that could creep up. It's not going to scream up. It could stay flat. So yes, truly, don't know, but we continue the same partnership mentality we've always had.

Speaker 7

Fair enough. Thank you for putting in Q and

Speaker 1

Thanks, John. We look forward to seeing you out in the road. Appreciate all your questions. Our

Speaker 0

next question comes from Chris Voie of Wells Fargo. Chris, please proceed.

Speaker 10

More follow-up here. Curious if you could maybe just give some color around the contribution from the sand mines. Obviously, a different setup now compared to previously. Just curious if you can break out if that was a meaningful contribution or profitability or a percentage of revenues.

Any color around that so you can think about the contribution going forward?

Speaker 2

Chris, we think of that as one integrated delivery to our customers. So we really aren't breaking those out at the moment. I think that is probably the key thing. It's not sizable enough to be broken out as a segment. So I think it's you got to look at the complex as a whole.

Speaker 10

And

Speaker 0

our last question comes from Frank Rappenhagen with Concentric Equity Partners. Great

Speaker 3

job improving the business in a very tough market. I as we remember the Sangel acquisition transforming the company in 2016. I know that we're going to look back on OneStim as just a transformational event for both this business as well as for the entire market. And as demand comes back, we're going to capture more than our fair share of quality customers. Question for Chris or Ron.

On that, as fleet deployment increases, can you guys comment a little bit on the labor market? I know a lot of CEOs that we talked to are reporting a hard time recruiting and retaining field workers and enhanced unemployment benefits creating a lot of friction, bringing people back into the workforce. How does Liberty see scaling up the workforce over the course of 2021?

Speaker 1

Yes. Great comment, Frank. And that is indeed the case. It's the case for Liberty, it's the case for the industry and in fact, as you've seen, it's the case for the broader economy. I've been in a lot of dialogues with business leaders outside of oil and gas on this issue.

But look, we have these two we have right now about 6,000,000 people out of the labor force that were in the labor force, but they don't currently intend to return to the labor force right now. So and then you have fiscal and monetary stimulus that of course, particularly the fiscal part, that's going to drive growth in economic activity. So we have sort of an accelerator on supply and an incentive and self reporting of a reduction. I mean, in demand for labor, we have an acceleration and we have some constraints on the supply of labor that hopefully end in September, but we'll see what Washington does on these unemployment benefits. So yes, that's for hotels or restaurants or whatever that problem is dramatically worse.

But yes, it is an issue. It's an issue we are facing as well. Fortunately, we have a good sale and a good culture, but hiring today is much harder than you would think from the outside,

Speaker 8

and you're well aware of that.

Speaker 2

I just want to put a little color on there, Frank. I mean I think that's one of the things that's underappreciated as a limiter on supply of frac services in general. That's one thing that will help a little bit on the pricing side. It is actually very, very difficult to get people into the marketplace, right? So really a key amount of the people that we the labor force we pull from can really also work in two industries that are booming at the moment.

One is construction and the other one is trucking with Amazon, etcetera, right? So when people if you always think about our industry and think only in fact, there's sort of like the five heavy equipment. The real, real limiter in supply of frac services is the ability to get good qualified people. So that will help us sort of like sitting back to some of our other questions of earlier, that is actually one of the things that's driving the pricing dynamic with customers.

Speaker 0

This concludes the question and answer session. At this time, I would like to turn the call back to Chris Wright for any closing remarks.

Speaker 1

We thank everyone for their time and interest at Liberty, and we'll get back to work, the whole Liberty family. Thanks for joining us today.

Speaker 0

The conference has now concluded. Thank you

Speaker 10

for attending

Speaker 0

today's presentation. You may now disconnect.