Liberty Energy Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in “Cautionary Note Regarding Forward-Looking Statements,” the Annual Report under the heading “Item 1A. Risk Factors,” and in “Part II – Other Information, Item 1A. Risk Factors” included herein. We assume no obligation to update any of these forward-looking statements.

Overview

The Company, together with its subsidiaries, is a leading integrated energy services and technology company focused on providing innovative hydraulic fracturing services and related technologies to onshore oil and natural gas E&P companies in North America. We offer customers hydraulic fracturing services, together with complementary services including wireline services, proppant delivery solutions, field gas processing and treating, CNG delivery, data analytics, related goods (including our sand mine operations), and technologies to facilitate lower emission completions, thereby helping our customers reduce their emissions profile. We have grown from one active hydraulic fracturing fleet in December 2011 to over 40 active fleets as of March 31, 2024. We provide our services primarily in the Permian Basin, the Williston Basin, the Eagle Ford Shale, the Haynesville Shale, the Appalachian Basin (Marcellus Shale and Utica Shale), the Western Canadian Sedimentary Basin, the DJ Basin, and the Anadarko Basin. Our operations also extend to a few smaller shale basins, including the Uinta Basin, the Powder River Basin, and the San Juan Basin, as well as to two sand mines in the Permian Basin.

In early 2023, the Company launched Liberty Power Innovations LLC (“LPI”), an integrated alternative fuel and power solutions provider for remote applications. LPI provides CNG supply, field gas processing and treating, and well site fueling and logistics. LPI was formed with the initial focus on supporting the Company’s transition towards our next generation digiFleets℠ and dual fuel fleets, as CNG fueling services are limited in the market, yet critical to maintaining highly efficient well site operations. Currently, LPI is primarily focused on supporting an industry transition to natural gas fueled technologies, serving as a key enabler of the next step of cost and emissions reductions in the oilfield.

We believe technical innovation and strong relationships with our customer and supplier bases distinguish us from our competitors and are the foundations of our business. We expect that E&P companies will continue to focus on technological innovation as completion complexity and fracture intensity of horizontal wells increases, particularly as customers are increasingly focused on reducing emissions from their completions operations. We remain proactive in developing innovative solutions to industry challenges, including developing: (i) our databases of U.S. unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; (iii) hydraulic fracturing fluid systems tailored to the specific reservoir properties in the basins in which we operate; (iv) our dual fuel dynamic gas blending (“DGB”) fleets that allow our engines to run diesel or a combination of diesel and natural gas, to optimize fuel use, reduce emissions and lower costs; (v) our digiFleets℠, comprising of digiFrac℠ and digiPrime℠ pumps, our innovative, purpose-built electric and hybrid frac pumps that have approximately 25% lower CO2e emission profile than the Tier IV DGB; (vi) our wet sand handling technology which eliminates the need to dry sand, enabling the deployment of mobile mines nearer to wellsites; and (vii) the launch of LPI to support the transition to our digiFleets as well as the transition to lower costs and emissions in the oilfield. In addition, our integrated supply chain includes proppant, chemicals, equipment, natural gas fueling services, logistics and integrated software which we believe promotes wellsite efficiency and leads to more pumping hours and higher productivity throughout the year to better service our customers. In order to achieve our technological objectives, we carefully manage our liquidity and debt position to promote operational flexibility and invest in the business throughout the full commodity cycle in the regions we operate.

Recent Trends and Outlook

Frac industry dynamics remain constructive, as relatively steady demand in recent months has focused service companies on disciplined pricing and quality of service. Global oil and gas commodity prices have diverged and moved materially in recent months. Yet these changes have not materially impacted demand for North American frac services. Oil prices rallied since early in the year, owing to an improved global economic outlook, ongoing OPEC+ voluntary production cuts, and rising geopolitical tensions. Natural gas prices have conversely declined considerably since last fall, primarily owing to strong production and mild winter weather driving high natural gas inventories. Natural gas price pressures are expected to strengthen int he future with increasing LNG exports and surging domestic power demand in years ahead. Global energy demand continues to march higher, supporting what we believe will be a strong North American oil and gas industry in the coming years.

During the first quarter of 2024, the posted WTI price traded at an average of $77.50 per barrel (“Bbl”), as compared to the first quarter of 2023 average of $75.93 per Bbl, and the fourth quarter of 2023 average of $78.53 per Bbl. Subsequent to March 31, 2024, the WTI price traded at an average of $86.41 per Bbl through April 15, 2024. In addition, the average domestic onshore rig count for the United States and Canada was 810 rigs reported in the first quarter of 2024, down from the first quarter of 2023 of 965, but up from the fourth quarter of 2023 of 781, according to a report from Baker Hughes.

Results of Operations

Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023

(in thousands)

Revenue

Our revenue decreased $189.0 million, or 15.0%, to $1.1 billion for the three months ended March 31, 2024 compared to $1.3 billion for the three months ended March 31, 2023. The decrease in revenue was primarily attributable to an activity-driven decrease in fleet utilization commensurate with lower demand for hydraulic fracturing services, a decrease in materials pricing, and slightly lower service prices.

Cost of Services

Cost of services (excluding depreciation, depletion, and amortization) decreased $105.7 million, or 11.9%, to $782.7 million for the three months ended March 31, 2024 compared to $888.4 million for the three months ended March 31, 2023. The decrease in expense was primarily related to decreases in materials and lower fleet utilization during the period ended March 31, 2024.

General and Administrative

General and administrative expenses was consistent with the prior year quarter, decreasing 0.1%, to $53.0 million for the three months ended March 31, 2024 compared to $53.0 million for the three months ended March 31, 2023, primarily related to lower performance related compensation expense offset by higher corporate technology and other costs.

Transaction, Severance, and Other Costs

Transaction, severance, and other costs decreased $0.6 million to $0.0 million for the three months ended March 31, 2024 compared to $0.6 million for the three months ended March 31, 2023. The costs incurred in the three months ended March 31, 2023 consisted of due diligence work for the Siren Acquisition. See Note 2—Significant Accounting Policies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for further details.

Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization expense increased $28.8 million, or 30.5%, to $123.2 million for the three months ended March 31, 2024 compared to $94.4 million for the three months ended March 31, 2023. The increase in 2024 was due to additional equipment placed in service since the prior year quarter, including equipment related to the deployment of our digiTechnologiesSM.

(Gain) Loss on Disposal of Assets, net

The Company recorded a gain on disposal of assets of $1.2 million for the three months ended March 31, 2024 compared to a loss on disposal of assets of $0.5 million for the three months ended March 31, 2023. The gain as of March 31, 2024 was primarily related to the scrapping of fully depreciated equipment. The loss as of March 31, 2023 was a result of the Company regularly selling equipment that is no longer in use as part of normal course fleet and equipment management.

Other Expense, Net

Other expense, net decreased by $0.8 million, or 10.5%, to $7.1 million for the three months ended March 31, 2024 compared to $7.9 million for the three months ended March 31, 2023. Other expense, net is comprised of interest income—related party and interest expense, net. Interest income—related party increased $0.1 million related to a note receivable agreement executed in December 2022, amended in August 2023, and fully collected in March 2024. Additionally, interest expense, net decreased $0.7 million as a result of decreased average borrowings partially offset by higher interest rates under the credit facility during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Income Tax Expense

The Company recognized income tax expense of $26.5 million for the three months ended March 31, 2024, an effective rate of 24.4%, compared to $54.5 million for the three months ended March 31, 2023, an effective rate of 25.1%. The decrease in income tax expense is primarily attributable to the decrease in net income before income taxes, as discussed above.

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income before interest, income taxes, and depreciation, depletion, and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as non-cash stock-based compensation, new fleet or new basin start-up costs, fleet lay-down costs, costs of asset acquisitions, gain or loss on the disposal of assets, bad debt reserves, transaction, severance, and other costs, the gain or loss on remeasurement of liability under our tax receivable agreements, the gain or loss on investments, and other non-recurring expenses that management does not consider in assessing ongoing performance.

Our board of directors, management, investors, and lenders use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation, depletion, and amortization) and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP financial measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net income, which is the most directly comparable GAAP financial measure for the periods presented:

Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023: EBITDA and Adjusted EBITDA

(in thousands)

EBITDA was $238.6 million for the three months ended March 31, 2024 compared to $319.5 million for the three months ended March 31, 2023. Adjusted EBITDA was $244.8 million for the three months ended March 31, 2024 compared to $329.9 million for the three months ended March 31, 2023. The decreases in EBITDA and Adjusted EBITDA primarily resulted from modestly lower pricing and decreased activity levels as described above under the captions Revenue, Cost of Services, and General and Administrative for the Three Months Ended March 31, 2024, Compared to the Three Months Ended March 31, 2023.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity consist of cash flows from operations and borrowings under our ABL Facility. We expect to fund operations and organic growth with these sources. We monitor the availability and cost of capital resources such as equity, debt, and lease financings that could be leveraged for current or future financial obligations including those related to acquisitions, capital expenditures, working capital, and other liquidity requirements. We may incur additional indebtedness or issue equity in order to meet our capital expenditure activities and liquidity requirements, as well as to fund growth opportunities that we pursue, including via acquisition. Our primary uses of capital have been capital expenditures to support organic growth and funding ongoing operations, including maintenance and fleet upgrades, as well as the repurchases of, and dividends on, shares of our Class A Common Stock.

Cash and cash equivalents decreased by $13.0 million to $23.8 million as of March 31, 2024 compared to $36.8 million as of December 31, 2023, while working capital excluding cash and current liabilities under debt and lease arrangements increased $20.4 million.

As of March 31, 2024, the Company had one credit agreement outstanding, a revolving line of credit up to $525.0 million (the “ABL Facility”). The ABL Facility is subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory available to finance working capital needs. As of March 31, 2024, the borrowing base was calculated to be $465.1 million, and the Company had $166.0 million outstanding, in addition to a letter of credit in the amount of $7.4 million, with $291.7 million of remaining availability.

The ABL Facility contains covenants that restrict our ability to take certain actions. As of March 31, 2024, we were in compliance with all debt covenants.

See Note 7— Debt to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for further details.

We have no material off balance sheet arrangements as of March 31, 2024, except for purchase commitments under supply agreements as disclosed above under Note 14—Commitments & Contingencies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report. As such, we are not materially exposed to any other financing, liquidity, market, or credit risk that could arise if we had engaged in such financing arrangements.

Share Repurchase Program

Under our share repurchase program, the Company is authorized to repurchase up to $750.0 million of outstanding Class A Common Stock through July 31, 2026. Shares may be repurchased from time to time for cash in the open market transactions, through block trades, in privately negotiated transactions, through derivative transactions or by other means in accordance with applicable federal securities laws. The timing and the amount of repurchases will be determined by the Company at its discretion based on an evaluation of market conditions, capital allocation alternatives and other factors. The share repurchase program does not require us to purchase any dollar amount or number of shares of our Class A Common Stock and may be modified, suspended, extended or terminated at any time without prior notice. The Company expects to fund any repurchases by using cash on hand, borrowings under its revolving credit facility, and expected free cash flow to be generated through the duration of the share repurchase program. During the three months ended March 31, 2024, the Company repurchased and retired shares of Class A Common Stock for $30.2 million, under the share repurchase program.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

(in thousands)

Analysis of Cash Flow Changes Between the Three Months Ended March 31, 2024 and March 31, 2023

Operating Activities. Net cash provided by operating activities was $159.4 million for the three months ended March 31, 2024, compared to $203.9 million for the three months ended March 31, 2023. The $44.5 million decrease in cash from operating activities is primarily attributable to a $189.0 million decrease in revenues, offset by a $133.7 million decrease in cash operating expenses, interest expense, net, and income tax, and a $52.0 million decrease in cash from changes in working capital for the three months ended March 31, 2024, compared to a $62.7 million decrease in cash from changes in working capital for the three months ended March 31, 2023.

Investing Activities. Net cash used in investing activities was $142.0 million for the three months ended March 31, 2024, compared to $129.7 million for the three months ended March 31, 2023. Cash used in investing activities was higher during the three months ended March 31, 2024, compared to the three months ended March 31, 2023 as the Company continued to invest in equipment, including the new digiTechnologies™ suite, to support increased customer demand in next generation equipment and technology.

Financing Activities. Net cash used in financing activities was $30.2 million for the three months ended March 31, 2024, compared to net cash used in financing activities of $97.1 million for the three months ended March 31, 2023. The $66.9 million decrease in cash used in financing activities was primarily due to a $35.7 million increase in net proceeds from borrowings and $44.5 million less cash used for share repurchases for the three months ended March 31, 2024, partially offset by a $7.1 million increase in cash paid for finance leases and a $5.2 million increase in cash used for payments pursuant to tax receivable agreements.

Cash Requirements

Our material cash commitments consist primarily of obligations under long-term debt on the ABL Facility, TRAs, finance and operating leases for property and equipment, cash used to pay for repurchases of, and dividends on, shares of our Class A Common Stock, and purchase obligations as part of normal operations. Certain amounts included in our contractual obligations as of March 31, 2024 are based on our estimates and assumptions about these obligations, including pricing, volumes, and duration. We have no material off balance sheet arrangements as of March 31, 2024, except for purchase commitments of $84.5 million payable within 2024 and $13.0 million payable thereafter. See Note 14—Commitments & Contingencies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for information regarding scheduled contractual obligations. During the three months ended March 31, 2024, the Company expanded its equipment lease facility with two lessors resulting in an increase in finance lease obligations of $30.1 million. The term on these new leases range from three to five years.

There have been no material changes to cash requirements since the year ended December 31, 2023.

Income Taxes

The Company is a corporation and is subject to U.S. federal, state, and local income tax. The Company is also subject to Canada and Australia federal and provincial income tax on its foreign operations.

The effective global income tax rate applicable to the Company for the three months ended March 31, 2024 was 24.4%, compared to 25.1% for the period ended March 31, 2023. The Company’s effective tax rate is greater than the statutory federal income tax rate of 21.0% due to the Company’s Canadian operations, state income taxes in the states the Company operates, as well as nondeductible executive compensation. The Company recognized an income tax expense of $26.5 million and $54.5 million during the three months ended March 31, 2024 and 2023, respectively.

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. As of March 31, 2024, the Company’s net deferred tax liabilities were $102.3 million. The Company has not recorded a valuation allowance against the deferred tax assets for the three months ended March 31, 2024

Refer to Note 11—Income Taxes to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information related to income tax expense.

Tax Receivable Agreements

Refer to Note 11—Income Taxes to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information related to tax receivable agreements.

Critical Accounting Estimates

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions (see Note 2—Significant Accounting Policies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report and Note 2—Significant Accounting Policies and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report). A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

There have been no material changes in our evaluation of our critical accounting policies and estimates since our Annual Report.

Our consolidated financial statements are expressed in U.S. dollars, but, effective January 1, 2021, a portion of our operations is conducted in a currency other than U.S. dollars. The Canadian dollar is the functional currency of the Company’s foreign subsidiary as it is the primary currency within the economic environment in which the subsidiary operates. Changes in the exchange rate can affect our revenues, earnings, and the carrying value of our assets and liabilities in our consolidated balance sheet, either positively or negatively. Adjustments resulting from the translation of the subsidiary’s financial statements are reported in other comprehensive income (loss). For the three months ended March 31, 2024 and 2023, the Company recorded foreign currency translation loss of $3.7 million and $0.5 million, to comprehensive income (loss), respectively.

During the three months ended March 31, 2024, the Company formed an entity in Australia, and will use the Australian dollar as the functional currency for the new entity’s operations. The Australian entity does not have any assets or material liabilities as of March 31, 2024, did not generate any revenue, and incurred only de minimis expenses during the three months ended March 31, 2024, as such there in no impact of changes in the Australian dollar to U.S. dollar exchange rate in the financial statements of Company as of and for the three months ended March 31, 2024.

Other exposures to market risk have not changed materially since December 31, 2023. For quantitative and qualitative disclosures about market risk, in addition to foreign currency translation, see Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in the Annual Report.

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2024 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in the Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results.

No other risk factors were identified in addition to the risk factors set forth in the Annual Report. There have been no material changes to the risk factors in the Annual Report.