Liberty Energy - Earnings Call - Q2 2021

Transcript

Speaker 0

Good morning, and welcome to the Liberty Oilfield Services Second 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 views about future prospects, revenues, expenses or profits.

These matters involve risks and uncertainties that could cause actual results to differ materially from our forward looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's earnings release and other public filings. Our comments today also include non GAAP financial and operational measures. These non GAAP measures including EBITDA, adjusted EBITDA and pre tax return on capital employed, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the 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 Liberty's CEO, Chris Wright. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us to discuss our second quarter twenty twenty one operational and financial results. We have a little problem with the audio today, so we apologize if the quality is not up to the usual standard. Liberty delivered another quarter of solid improvement as we start to exit the COVID downturn. The second quarter marks the anniversary of the extraordinary events of a year ago, where business activity plunged on the back of a collapse in oil demand. I want to first thank the Liberty family for navigating this downturn with the utmost tenacity, dedication and commitment throughout these trying times.

We are now starting to see the strength of our business one year out from the depths of the cycle with the transformative actions we've taken over the past year, including the OneStim acquisition. Second quarter revenue was $581,000,000 representing a 5% sequential increase or approximately a 9% increase when excluding seasonality in Canada, where basin activity was impacted by spring breakup. With the acquisition of OneSim, this is the first year in our history we've had geographic exposure in Canada, where the spring breakup seasonality will now impact our sequential revenue comparison. Adjusted EBITDA in the second quarter was $37,000,000 compared to $32,000,000 in the first quarter. Results included the restoration of field personnel variable compensation one quarter ahead of our plan, resulting in an $8,000,000 increase to personnel costs.

Excluding this cost, adjusted EBITDA would have been 45,000,000 This equates to a 41% sequential increase in profitability adjusted for the variable compensation restoration on a 5% gain in revenue. While the results improved at higher activity levels with staff leads still in the low 30s, we were also navigating the macroeconomic supply and demand shocks triggered by the pandemic and related reopenings that are creating supply chain constraints and labor shortage. A swift economic recovery is leading to strong demand for workers across many industries with not enough folks to fill open positions. There are several million workers still out of the labor force that were in the labor force pre COVID. The effect of these missing workers is causing disruption in many labor intensive sectors of our economy.

Supply chains in many industries were also disrupted or overwhelmed by a lack of complements or shortages in raw materials. As customers, both legacy and new, ramped during the quarter, effective completion crew scheduling was challenging with producers and service companies dealing with supply chain interruptions, staffing, and transportation shortages. Liberty was not immune from staffing issues and the industry supply chain challenges. For example, trucking shortages. Trucking is strained by the dual impact of high demand for licensed drivers across several industries, coupled with scheduling changes due to completion delays from some customers.

Within our customer base, we are also seeing operators transitioning from completing DUCs or drilled but uncompleted wells to new well construction, leading to its own challenges that gave rise to difficulties in calendar coordination and above normal interbasin fleet movements. All in, we are not yet back to Liberty's usual executional efficiency in the field, but is improving every month. This opportunity motivates and excites us. The transitory impacts of the pandemic driven supply demand shocks on labor and supply chain challenges will pass. The robust demand in global energy demand and supportive commodity price environments is increasing the demand for frac services, and we believe we are in the early innings of an up cycle.

The Liberty team worked hard to welcome a hugely expanded customer portfolio, but we still have work optimizing our calendar and streamlining service delivery. As we look to Q3, we anticipate benefits from continued progress in these areas and as a larger percent of our work migrates to fully dedicated fleets and fewer inter basin fleet movements. Some customer relationships are expanding as we can now work with key customers across North America given our expanded geographic reach and a premier technology service offering. As I mentioned earlier, we restored our variable compensation programs one quarter ahead of pace. The reopening of the economy is happening faster than folks are returning to labor force.

Ultimately, wages are rising, and we opted to reinstate our variable compensation plan one quarter ahead of schedule to remain competitive in the labor market. Importantly, we also recognize that our employees made significant sacrifices throughout the last year. Their dedication and commitment to the Liberty family during these trying times was foundational to maintaining our partnerships with customers and suppliers and also helping other folks navigate a challenging time. Looking ahead, the improving macroeconomic backdrop should support these compensation increases. The industry has seen market improvement over the past year since the depths of the downturn.

Global economic growth continues strong. The forward outlook is also strong as countries more fully reopen, partially offset by the impact of global supply chain constraints and virus variant concerns. Commodity markets remain constructive as sustained economic expansion drives rising energy demand, while years of relative underinvestment in the energy sector can train constrain supply outside of OPEC plus In fact, the rapid rebound in oil demand has already passed pre pandemic highs in major major Asian countries. This is evidenced by the recent significant draws in global oil inventories. Looking forward, the recent announcement by OPEC plus for a gradual reinstatement of prior oil supply through the rest of 2021 and into 2022 is expected to be more than offset by projected increases in global oil demand.

This should support a continued increase in demand for North American completion services. Exploration and production capital spending likely increases in 2022 as operators work towards attaining modest oil growth next year. They will need to address both the decline in the inventory of DUCs and the impact of decline curves on their production base. A modest increase in U. S.

Oil and gas production requires an increase in frac activity from today's levels. The combined impact of improved E and P economics with greater potential for free cash flow generation, increased completion service demand and tightness in next generation frac equipment is expected to underpin a more disciplined frac market and continued modest rises in service prices. The economic rebound across North America, coupled with supply constraints in the labor force and some supply chains, have led to a rise in inflation and wage growth. It is important that frac service pricing continues to rebound from extreme pandemic lows. The backdrop for pricing discussions with our customers has strengthened throughout the year.

Chances our team sacrificed over the past year to support our customers, the partnership works both ways, and we are committed to remaining disciplined in the current environment. We continue to have positive dialogues with our customers to both pass through incremental inflationary costs in addition to net frac pricing increases. This process is gradual, and we expect gradual improvements to continue phasing in over the next twelve to eighteen months. It is noteworthy that service prices tend to lag broader inflationary increases across the value chain, but the increases are necessary to facilitate the next phase of growth and technology investment. Technology, backed by a distinguished team of engineers and innovators, has been amongst the key differentiators that has allowed us to grow into the second largest North American frac company from our founding only a decade ago.

During the second quarter, we held our first Investor Day, where we spent a day exploring the technology that makes Liberty special from our in-depth downhole technologies to how we create operational efficiencies and the evolution towards next generation equipment. For those of you who have not seen this, I would encourage you to spend some time viewing the webcast available on our website and get to know our team, our technology and our unique culture that drives innovation and collaboration. We also announced a successful field test of our DC frac electric frac pump during the quarter. The results were incredible. Final field testing was completed on a three well pad with 24 operations in the Delaware Basin.

DG frac represented around 10% of the pumping capacity. The work of building the industry's first purpose built, fully integrated electric frac pump truly shined as the system became the preferred capacity for rate changes and adjustments made in real time. DG frac allows quick, easy, precise adjustments of pumping rate using our micro control system. What does this mean? It means that it allowed for on demand precision rate control that was simply not possible before.

CinDefrac quickly became the go to pump for precise rate control on location. This is the value of owning and developing the technology to have the motors, the gears, the drivetrain fully integrated into the pump. With the electric backside from the OneSim acquisition, we will provide a fully electrified solution for our customers, agnostic of the power source, whether it's the grid or Liberty's gas reciprocating engines or both. Importantly, DISGRAC will also drive ESG objectives for our customers as they continue to look for ways to minimize their footprint, offering at least 20% less emissions relative to the next best technology in

Speaker 2

the

Speaker 1

market. Together, having high power density, precise control and a noteworthy reduction in emissions makes Digifrac the best in the market, and our customers are taking notice. We've already begun the commercialization process for Digifrac in 2022 with deep collaboration and conversations with customers for fleet rollout. In early June, we released our inaugural ESG report entitled Bettering Human Lives. Liberty's leadership in ESG is well known as it has been part of our DNA since day one.

However, we wanted to broaden the conversation around ESG by going far beyond the narrow focus of our company and asking only how we can reduce negative impacts. Of course, maximizing positive impacts is a critical part of the balance for a value take for a value added process. Our report provides an overview of where the world gets energy and how that has changed over time. We also cover the huge problem of energy poverty and the cost to human well-being of rising energy prices or falling energy reliability. We directly discussed the role of fossil fuels in modern society and how are we, as a company, advancing human liberty.

I'm humbled by the response this report has garnered. The conversations spurred by our report has been enriching and uplifting. We're proud of the efforts of our industry and our company in being a part of the solution towards reaching billions of underserved people with lower cost energy. By looking at the data, we know progress in the human condition has been enabled by the surge in plentiful, affordable energy, saving lives, it is important to recognize the unintended consequences of climate change mitigation with a realistic lens. We welcome the market's focus on ESG as it aligns with the principles we've long held at liberty.

But it is critical to bring the same analysis supported by data to ESG decisions just as we do in other areas. Our team's focus on digital technology has been critical to the immense improvements in shale well productivity and efficiency over the last decade, and we continue to strive to advance our customers' ESG goals as well. We take these responsibilities very seriously and will continue to drive the conversation going forward. We are excited by the opportunity ahead of us. I'm so proud of the Liberty team coming together through a year of incredible change.

We created opportunity in the face of adversity, and we believe we are now going through an inflection point. Our focus is on operational execution through the rippling effects of the pandemic and harvesting gains as we embrace the early innings of the cyclical recovery. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.

Speaker 2

Good morning, everybody. We are pleased with the performance of our team in the second quarter, delivering solid results while continuing to integrate the OneStim business and managing a ramp in customer activity. This marks the first quarter we've operated entirely under the Liberty umbrella after the cutover from Schlumberger to Liberty internal systems at the February. It's incredible to see what a difference a year has made. Just one year ago, the second quarter, we were sitting at only $88,000,000 of revenue on the back of a dramatic drop worldwide oil demand.

Widespread shut ins from shale producers are the near halt in North American fracking. Revenue in the 2021 is over six times what it was a year ago. I'm so proud of the Liberty team that has navigated the roller coaster of the last twelve months with dedication and focus as we have ramped up our frac activity and made such great progress in our OneStim acquisition integration. Now let's take a deeper look at the results for the quarter. In the second quarter of twenty twenty one, revenue increased 5% to 581,000,000 from 552,000,000 in the first quarter, reflecting the combination of increased activity across the all US basins, more than offsetting Canadian spring breakup seasonality impacts.

Excluding Canadian seasonality, revenue saw an approximate 9% sequential increase on relatively flat staffs Lea County. As our team works diligently to bring new base activity online with local operators, the underlying business improvement was encouraging and supports a picture of continued improvement despite utilization challenges arising, supply chain challenges, and the labor shortages, as Chris described. Importantly, our teams are reinvigorated by the activity increase, and we expect utilization to show continually continual improvement in the third quarter as we streamline customer scheduling and actively manage through labor challenges. Our net loss after tax was $52,000,000. Net loss included a valuation allowance adjustment of certain deferred tax assets and related TRA impacts, negatively impacting results by a net of $21,000,000.

These accounting adjustments were necessary in applying gas standards and were primarily driven by COVID nineteen related losses. The results also included transaction and other costs of 3,000,000 and a 700,000.0 increase in bad debt reserve. Fully diluted net loss per share was 29¢ in the second quarter compared to 21¢ in the first quarter. The quarter was negatively affected by approximately 12¢ per share by deferred tax asset valuation allowance adjustments. Second quarter adjusted EBITDA increased to 69,000,000 in the first quarter.

The improvement in adjusted EBITDA primarily reflects an increase in business activity in the second quarter. Second quarter adjusted EBITDA would have been 45,000,000, but we elected to restore variable compensation one quarter a year of projected pace due to the impact of tight labor markets on our industry. Labor supply is very tight, and we're competing for labor with a variety of other sectors as economic activity increases. Head of administration expenses totaled 29,000,000 and included 5,900,000.0 stock based compensation and 700,000.0 from accounts receivable balance. Excluding these items, underlying g and a expense only increased modestly by 1,300,000.0 for the first quarter despite IT and other costs related to the onboarding of legacy OneStim employees.

Net interest expense and associated fees totaled 3,800,000.0 for the second quarter. We also recorded an adjustment of 3,300,000.0 related to the tax receivable that was related to the deferred tax valuation I referred to earlier. Income tax expense totaled 16,000,000, again reflecting the impact of the valuation adjustment resulted in a $24,000,000 tax expense, more than offsetting what would have been a projected $8,000,000 tax benefit related to operational second quarter results. We ended the quarter with a cash balance of $31,000,000, reflecting a decrease from first quarter levels as working capital increased. Total debt was $106,000,000, then it was deferred financing costs.

There were no borrowings drawn on the ABL credit facility, and total liquidity available under the credit facility was $277,000,000 at the end of the quarter. In June, Riverstone successfully monetized the final part of the equity position of Liberty through a secondary stock offering, culminating a ten year partnership with with our firm. This transaction effectively completes Liberty's evolution to a fully publicly traded company with only 1% of shares not traded in public markets. We are grateful for the commitment of our longest tenured shareholder over the years and are excited to reach this next chapter. Capital expenditures were $38,000,000 for the quarter, and we're focused on being disciplined in the timing of investment during the recovery, balancing second quarter EBITDA and capital expenditures at nearly equivalent levels.

We continue our disciplined approach to investing into the upside with capital expenditures targeted for technology investment, maintenance CapEx, and growth CapEx towards next generation. As we discussed at our Investor Day, we have a strong foundation to build upon to successfully execute in the next cycle. Our philosophy remains the same, to grow and support our business and our people with a disciplined approach to investment while maintaining balance sheet strength and drive higher long term returns for shareholders over cycles. As we look forward, we are excited by the core strengths of our business, our geographic diversity and integrated service offerings, supported by our best in class electric pump, DigiGranny, impressive fleet of next generation dual fuel equipment, unmatched subsurface technologies that drive customer engagement, and the unwavering focus on automation and operational efficiency through Project forty forty. This unique combination of assets will drive financial results in the coming cycle.

With that, I will now turn the call back to Chris before we open the Q and A.

Speaker 1

Thanks, Michael. We read many reports surprised by the rapidity of the surging demand for oil and natural gas. This should not be a surprise. Energy enables every other life activity. As people rebound from COVID, they bring with desire to better their lives and visit their families and friends.

Global oil demand last year dropped 8% to 9%. Natural gas demand dropped 2%, and electricity demand only 1%. All three will almost certainly hit record highs next year or in 2023. Energy matters. I thank the Liberty family and the ecosystem that is our customers and suppliers for their efforts that better human lives.

I'll now turn it back to the operator to take your questions.

Speaker 0

Will now begin the question and answer session. The first question is from Ian Macpherson with Piper Sandler. Please go ahead.

Speaker 3

Hey. Good morning, Chris and Michael.

Speaker 2

Good morning, Ian.

Speaker 3

Michael, I wanted to or really, either of you talk about the moving dynamics into q three. You you talked about more dedicated work, fewer move fleet moves, and probably just a more concentrated calendar for q three than you had in q two. And then we'll also have the reversal of the adverse Canadian seasonality. And you've spoken repeatedly about just the methodical price increases. So I would imagine that all of that, combines to a healthy rate of top line improvement that we should expect for q three, and I just wonder if you might bracket that for us.

Speaker 2

You know, so we can talk about that. We're gonna get as we move towards getting rid of the some of the noise out of the calendar, the white space, the utilization improvement, that's gonna be a slow improvement as we go through the year. I think that all of that is gonna get rung out of the system by early next year as we sort of integrate all the new customers and new basins. The Canadian seasonality will reverse. You know, I don't think we're probably expecting it to come back to the sort of the highest of q one exactly in q three, but so that we will get some positivity from that.

And it's saying we're getting slow and incremental price increases. Yeah. So I think we'll see a slow increase there. I think it slowed the stadium rooms of race at the moment is what we're looking at this year as we put in the that's probably the correct platform to really, you know, take advantage of where we're going into the cycle in '22 and '23.

Speaker 3

Yeah. And and I'm still not hearing you message anything particular with regards to incremental, fleet additions in the back half at this point.

Speaker 1

Correct? Yeah. Ian, yeah. Look, our our view is we're very loyal to our customers and the partners we have. Economics are still not there for us to wanna, you know, chase revenue or new business for new business' sake.

So there's many there's a pretty strong pull right now for new capacity just because market activity is increasing. And for us, it's always a combination of the pricing, the economics, the strategic relationships. So yes, just because the industry is growing doesn't necessarily mean that Liberty's fleet count is going to grow. That's just a bottom up decision for us.

Speaker 3

Understood. But it sounds like DG frac is indeed moving forward, so that's more likely a first half twenty two, commercialization as you see it today?

Speaker 1

Yeah. Let end end of the first half. End end of the first half. By the time we're out in the field commercially operating.

Speaker 3

Got it. Okay. Okay. Thank you both.

Speaker 2

Thank you. Thank you.

Speaker 0

The next question is from Neil Mehta with Goldman Sachs. This

Speaker 4

is Ati on for Neil. On the missing workers' comment, Could you provide some color on that? So are you competing with other industries? Or are there just folks trying to look to rejoin the force but or have they found jobs? What's really happening there?

Speaker 1

Yeah. It it is. Look. This is this is an economy wide problem. Labor intensive industries right now are are stressed.

And and for oil and gas employment, for the field crews, the most important people in our business, you know, two big competing industries is construction and trucking, both local trucking, think Amazon surging demand for local drivers and long haul trucking, and construction. And both of those industries are booming right now. Booming. So, yes, lay labor market, particularly in the area of our field operations, very tight right now. Thanks, Jeff.

Well, yes, thank you. Again, a great question. Liberty has always had, I think, a great place to work and a great culture. We've never been stressed for competition for labor anything like we are today. Now with Liberty, I think we've got great culture and great people, and we'll get through it.

But, yes, it's a challenge we haven't faced at this level before. Great. Thanks. Thanks.

Speaker 0

The next question is from Connor Lynagh with Morgan Stanley. Please go ahead.

Speaker 1

Connor, you might be muted. We can't hear anything.

Speaker 5

Hey. Thanks. Good morning. This is Dan on from Connor's team. How are you guys?

Speaker 1

Hey, Dan. Doing well, Dan.

Speaker 5

Hey. So I just wanted to ask, so as you laid out in the press release that one stands kind of transitioning from the integration phase to the operational phase. I was wondering what, kind of some of the near term opportunities are, and if you could kind of give a little bit more color on on kind of expand a little bit on the, operational and capital efficiency opportunities you were talking about in terms of technology integration and automation?

Speaker 1

You bet. I'll start with the human side, always the most important side. You take two very proud teams with different legacies, different histories, different procedures. So one of the big things we wanted to do when we took over, you know, look, we just took this over January 1, not break what's happening. Customers that are Schlumberger customers hired those crew, those humans and those procedures.

And they do some things differently than us. Some of the way we do things is better. We want to move that improvement over their fleets. Some of the ways they do things are better than the way we do things, and we wanna move those procedures over to our fleets. But that, you know, that's just that's human culture.

That's thousands of people working across the country. So that's a slow, methodical process to lead to improvement and minimize the the friction of transition and changing processes. But it's incredibly important. And, again, thrilled by the humans, thrilled by the new learnings. There's a number of things that and maybe I mostly point you to our Investor Day where we went in detail in probably at least a dozen technologies.

And a key thing there is you can also meet the people that are leading those teams and are doing that work. But, I mean, look, there's there's simple straightforward things like engine idle reduction, which is a fuel saving technology. But these lenses, you can't just shut off and turn them on. So you have to have a smart algorithm about when to shut them off, when to turn them on, and under what environmental conditions. In the cold winter, it's a different algorithm, a different answer than it is in, you know, in heat or dusty or windy or all different conditions.

We've got continued progress in major iron or monobore technology, different ways to do that, flexible hoses. We have a project we talked extensively at Investor Day. We call project fourteen forty. There's fourteen hundred and forty minutes in a day. And every minute, why aren't we pumping, and what can we do about that?

So, look, it's it's again, it's technologies and ideas from both sides, both legacy sides of the company. Now now there's just one Liberty. But so a number of exciting efforts there, and I I take up the rest of the time if I went down that road. I'll add one

Speaker 2

one point again as well. You know, the increasing amount of integrated between wireline frac on-site, increased number of red on red wireline units with customers, which I think is actually also great for both sides As we say, one of the key things we're focusing on this year is really the sort of integration between the frac and the wireline systems to reduce downtime and increase sort of some completion throughput as we go through the year. So it's a very specific project that Ron and his team are working on that, which I think is gonna be quite good as well. So there's just one other one other item that I add to Chris's list.

Speaker 5

Yeah. Thank you both. That's great color. And then quickly on kind of DigiFrac and NextGen equipment. So you guys had laid out two scenarios, kind of a slower and faster transition scenario in the Investor Day presentation.

I was just wondering if you could go over what the puts and takes are in terms of what might merit a faster or slower transition. Is it more customers specific or contract terms specific? Or is the macro backdrop kind of a bigger factor? And maybe that answer is different for a new build Digiprack fleet versus kind of just some upgrades to traditional capacity. But, yeah, any color on the puts and takes in those two scenarios you laid out would be great.

Speaker 1

Yeah. But I I think we always, avoid giving details. But think you laid out the three factors. You know, who is the customer? What is the future of that customer?

What is the depth of the relationship between delivering that customer? What are the economics, both short term profitability of it and commitment and visibility to long term efficient employment, where we want to practice many days as possible and get as much done every day as possible. And those are the two dominant drivers. And then, yeah, as you mentioned, the the the macro is a big part of that too. We're we're cautious investors when we get late cycle, and we're more aggressive investors when it's the beginning of the cycle.

Just there's just stronger economics to invest early on in the cycle than there is mid or late cycle. But it's again, I can't give any other specific color. It's it's not a simple quantitative formula. It's relationship, partnership and returns on capital deployed.

Speaker 2

And I'll just give a little color on that. It's a combination of what we're doing at the moment. You know, we're continuing with our upgrade, progression to tier four DGB this year. There's been plans with our customers, and we are sort of discussing the next generation of, you know, with particular customers moving them to a fully electric sort of natural gas power fleet. Where you've got you're really the key thing there is where you've got great access to fuel gas, the central fuel gas, which drives some of the best sort of cost savings on that side of their business.

So, again, it's a combination. As Chris said, every company has a little different driver. But, yeah, it's it's very really exciting times at the moment as far as having the what we think is actually by far and away the best technologies in both the flexible dual fuel and the very much pure new generation designed for electricity pump. So I think that combination goes well together. Yeah.

Speaker 1

The the right answer is very different for different customers, different circumstances, different geographic settings. Liberty was, I would say, the first mover in dual fuel frac technology from really the start of our company. Early on, we we our big effort was to convince customers of the benefit of it, and we had a lot of dual fuel technology that wasn't fully utilized as dual fuel. Now the acceptance of that is very strong and now the pendulum has swung the other way. But that's what makes the marketplace fun.

Speaker 0

The next question is from George O'Leary with TPH and Company. Just

Speaker 6

first question, kind of an extension of the prior question. How would you describe customer appetite for contracts associated with e frac equipment or your DigiFrac offering? It seems like some of your peers have gotten some contracts signed up at at least optically good economics. But just what's customer appetite for contracting for even tier four DGB or a new build Digifrack fleet?

Speaker 1

Yeah. Let's say the customer interest in in cutting edge frac technology and fleets is is very strong. Very strong.

Speaker 2

I think the willingness of them to sign up for contracts and is also there. And I think it depends on the, you know, the length of time we've had with the customer and where we see their runway to get to that relationship.

Speaker 6

Okay. That's helpful. And then how would you describe what drives the customer decision to pursue an e frac solution or a tier four DGB solution? What are kind of the puts and takes, the benefits of one versus the other, and, you know, maybe some of the headwinds of of one technology offering versus the other?

Speaker 1

Yeah. I mean, it's it's ultimately I mean, the the the interest is driven by two things. You know, one is is lower emissions, you know, smaller environmental footprint. Certainly, our industry has been moving forward in that direction for decades. This is that continued evolution.

I should say three things. A second one is lower long term operating costs. The difference the cost difference between gas and diesel is pretty large right now. So the more natural gas you're using for energy for your fleets versus diesel, the lower your fuel costs are. And the third is a properly designed next generation fleet that's more automated and can do more with software behind it can deliver better operational performance as well.

So those are the three factors in varying degrees that drive the interest in the technology. And then the trade off, of course, everything in life has a trade off. The trade off is the costs are a little bit higher. They're not wildly higher, but they're a little bit higher. And time commitment and surety of work, it needs to be higher as well.

Speaker 6

Thanks very much, Chris and Michael.

Speaker 1

Thanks, George.

Speaker 0

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

Speaker 7

Hey. This is Chase on for Chase. Good morning, everybody.

Speaker 1

Hey, Chase. Are Chase.

Speaker 7

Hey. Hey. Hope everyone everybody's doing well. I've got a couple of questions. The first one around pricing.

You know, in the press release and obviously in the prepared remarks, talked about, you know, conversations with customers ongoing about, you know, pushing price. You know, I guess, number one, are the conversations around net pricing increases or just enough pricing to offset inflation? And then number two is when should we expect, you know, these pricing increases to show up, you know, in in Liberty's results? Do you think it's kind of more of a a second half of this year catalyst or more so kinda first half of next year?

Speaker 1

It's it's continual. It's continual, and it and it's both inflation pass throughs and net pricing. Look. The the quarter we just finished, and we talked about struggles mostly with utilization and calendar. That's you didn't never like to see that happen, but that's just life.

We had 5% increase in sequential revenue and a 40% increase in sequential EBITDA if you use the same labor cost payments. So pricing is coming through, not hugely in q two, but we had net pricing improvements in q two. We'll have more in q three and more beyond that in q four and probably meaningfully more next year. So it's it's a continual gradual process. Continual gradual process.

We worked abruptly in adjusting prices with our customers when oil prices just collapsed. And we worked in that partnership mode and then partnership mode coming out the other side. From the shape of this downturn, the down pricing was abrupt and the rebound is slow and gradual.

Speaker 7

Yep. And and that 8,000,000 of personnel cost increase that you noted here, was that a full quarter impact or February in February? You know? And so as we think of March, should that step up from 8,000,000, or, you know, is that fully in margins in in February? And so don't really step that up into March.

Speaker 2

And, Jay, that was fully in q two. So, yeah, on that variable compensation, that really isn't gonna step up. That'll continue through all the quarters going forward. I think you're going to see, in general, some low single digit increase in labor costs, you know, going through the second half of the year, as well, I think, in general across the board. I think that's sort you know, part of the the wider economy.

Speaker 7

Got it. And then, you know, last one here. When we think about, you know, fleet reactivations, I mean, obviously, it doesn't sound like you've got any in the back half of this year. But as we step into 2022, I would assume that, you know, modest increase in activity that you pointed to would mean you have to reactivate some fleets. So, you know, when we think about this, can you maybe talk about how much capital or CapEx will be required to reactivate some fleets in 2022?

And and maybe I don't know if you just wanna kinda characterize, like, what it would cost to reactivate your next 10 fleets.

Speaker 1

Yeah. I mean, look, the the fleet reactivation, it's not a, you know, yes in January 1 and no before then. It's just for us, everything's always bottom up. There's customer dialogue. There's a lot of pull right now.

The the most important thing about a lot of pull right now is it accelerates the movement of pricing. Still not huge, still gonna be phased in, not not abrupt, But there is that's a pull for increase in pricing. And if the pricing is meaningful enough and the customer is the right customer, we will reactivate. We have capacity. But it's just about the full picture economics for us.

And I'll I'll turn it over to Michael to comment a little bit on reactivation costs.

Speaker 2

Really, Chase, the reactivation costs for the next few fleets is gonna be minimal. You know, I think they really won't there won't be any real cost. They came over from Saint Bajay in a green tag, fully fully fit, ready to go position. You know, we might incur probably a couple of million dollars as we move them to monobore and some of the next generation iron equipment that that would be valid.

Speaker 7

Yep. Perfect. I'll turn it over. Appreciate the color.

Speaker 2

Thanks, guys.

Speaker 0

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

Speaker 8

Hey. Thank you, guys. Just two for me, and the first one's a housekeeping. But when you refer to the staff fleets in the low thirties for both q one, q two, when during q two with the Canadian breakup, did those were they still considered staff fleets, or do you let the how did you treat the crews in that? That's for definitional purposes?

Speaker 1

Yes. They they rolled down

Speaker 2

is is a sort of an annual roll down. So, yeah, we consider them staff fleets. You do actually staff Canadian fleets slightly different on that when you have an underlying base of full time employees, and you do have a number of contractors that come in and out. I mean, often from the East Coast, sort of, you know, the who runs with Nova Scotia areas, sort of a combination of folks that that that help run those crews, you know, during the busy periods. And then the staffing does ramp up a little bit, up and down with those fleets as they come on, but you've got an underlying sort of, you know, long term, you know, ten year plus experience base that that that that are be continually.

Speaker 8

But does did your staff Canadian fleets drop in q two just given breakup, or did you would you feed it the same flat? Do you follow

Speaker 2

my question? Small drop in personnel cost on, but, John, what we consider, we still consider them an available fleet. Okay. Perfect. Perfect.

Speaker 8

And then the next one is just on Digifrac. As you, you know, you did the successful pad. Does that customer then keep that unit? Do you send it back to Magnolia for touch up work, or does another customer take it to test it out? Just how does that play out over the next couple quarters with testing?

Speaker 1

So, you know, that that particular pump, yeah, it will go to another customer. You know, it'll be doing some some demo runs. Of course, we're taking a ton of data on it for, you know, how we can tweak and further improvement. But yeah.

Speaker 2

Right. It's

Speaker 1

But when you And then all look

Speaker 2

And then, ultimately, it gets re it'll get rebuilt into a final commercial pump where the majority of it gets reused, but it will get broken down. So you can think about rebuilding you know, if you're taking your sort of race car or if you're taking your engine apart and rebuilding it, you're reusing the majority of it. That's how works.

Speaker 8

But if you look at the multiple customers that tested and the success that you had on the first pad, would you envision, Chris, maybe it might be too optimistic, but a bidding warped for that first fleet from some of the customers that trial it?

Speaker 1

Well, you know, I I think I think, yeah, bidding won't be the wrong, way to look at it. But, yes, the pull is significant. And for us and for customers, you know, for us, it's big it's decision about who's going to get the first few fleets, what are the terms and conditions and who's the right partners. But yes, look, the interest for DigiFrac, number of hands in the air, will certainly be well above the number of fleets we'll build in the near term. It's just like as long as we find the right partners.

Speaker 0

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

Speaker 1

Thanks for everyone's time today, interest in Liberty. We look forward to talking to you in three months, and let's keep powering the world. Take care, everyone.

Speaker 0

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