LBRT - NYSE

Good morning, and welcome to the Liberty Energy Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anjali Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Thank you, Gary. Good morning, and welcome to the Liberty Energy third quarter 2023 earnings conference call. Joining us on the call are Chris Wright, Chief Executive Officer; Ron Gusek, President; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements, reflecting the company's views about future prospects, revenues, expenses, or profit. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures including EBITDA, adjusted EBITDA, adjusted pre-tax return on capital employed and cash return on invested capital are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of adjusted pre-tax return on capital employed and cash return on capital invested as discussed on this call are available on the Investors section of our website. I will now turn the call over to Chris.

Thanks, Anj. Good morning, everyone. And thank you for joining us to discuss our third quarter 2023 operational and financial results. Liberty delivered excellent quarterly financial results reflecting outstanding operational execution, focused customer engagement and agility across a softer North American frac market. Record pumping efficiencies drove sequential growth in revenue and adjusted EBITDA while electing to idle a fleet during the quarter in response to softer market conditions. Adjusted EBITDA was $319 million, while fully diluted earnings per share was $0.85. The industry remained disciplined, championing steady pricing for quality services while withdrawing underutilized frac fleets from the market. Our superior execution, combined with expanded vertical integration and technology investments culminated in a trailing 12-month adjusted pre-tax return on capital employed of 44%. I'm proud that our team delivered a milestone achievement in operational efficiency. We achieved the third consecutive quarter of record average daily pumping efficiencies, delivered across our full fleet, safely pumping more hours and tons of sand than ever before. This success was driven by the unique culture of innovation and excellence at Liberty. Over the years, our investment decisions have grown our competitive advantage by driving value creation through technology, scale and vertical integration. Today, the latest piece in our digiTechnologies suite is demonstrating impressive operating results. The commercial deployment of our proprietary digiPrime units commenced in late September, quickly becoming the crew and customer's favorite technology on that location. We embark years ago with a blank slate to envision design and build natural gas powered frac fleets that would represent a step change improvement in frac technology. We didn't choose the easy route to simply extrapolate from existing pump technology, or the partial route, where we outsourced the power generation part of our frac fleet. We took on the whole enchilada, with a commitment to build the best dam next-gen frac fleet. Well, the effort was worth it. Today, we have a truly differential frac fleet technology that is setting operating performance records while delivering the highest efficiency, lowest emission fleets in the industry. To say that customer interest in digi is high would be an understatement. We are supplying digiFleets with robust, reliable compressed natural gas delivered and managed on site by our new Liberty Power Innovation's Division. We are on track to be operating four digiFleets by year end and six digiFleets by the end of January 2024. We are excited by the strong customer benefits and pull for our digiFleets. As we continue to transition our fleet towards more natural gas fuel technologies, we are also maximizing diesel displacement with natural gas across our dual fuel fleets. We have worked in conjunction with our technology providers to develop and deploy control software to significantly increase diesel displacement. Our year's long effort in predictive and preventative maintenance programs have positioned us to optimize equipment performance and availability, enabling us to run our pumps in optimal operating ranges to achieve maximum gas substitution. We are also starting to reap the advantage of vertical integration provided by LPI improving the reliability of gas supply to our frac fleets. There is much room to run here. Liberty's focus on asset optimization maximizes the uptime of each pump, driving higher equipment reliability and operational efficiency. Our predictive maintenance programs are better than ever before continually assessing asset health in real time. By applying advanced analytical tools and processes such as machine learning and AI, we're addressing issues before they become critical and using this data to prevent issues in the future. A year ago, we realigned teams to seamlessly work together on the shared goals of maximizing operational efficiency and optimizing equipment maintenance. Today, real time data is enabling our teams to execute on these priorities and hold themselves accountable in delivering superior results. Wireline was a new business adding Liberty in the one stem transaction. We knew our customers would greatly benefit from streamlining our frac and wireline crew interactions on-site to shave extra minutes off the day. Every minute equals efficiency and translates into a lower cost of producing a barrel of oil for our customers and improved profitability for Liberty. Today, we have more frac and wireline paired [red-on-red] crews since we first brought wireline into the fold. We are proud that Liberty wireline now ranks as the top service provider according to the most recent Kimberlite survey, an independent industry research that extensively polls E&P customers across the industry. We increased our quarterly cash dividend by 40% in response to the significant growth in our per share earnings and cash generating abilities from our business transformation over the last three years. During the third quarter, we repurchased 1% of our shares outstanding or accumulative 11% since our buyback reinstatement in July 2022. We are focused on the opportunistic execution of our buyback strategy. We will move more aggressively during stock price pullbacks and moderate our pace when the stock runs up. However, we continue to see a large dislocation in our stock price, relative to what we believe is the intrinsic value of our stock. The goal remains the same, maximize the value of each Liberty share and drive higher total returns for years to come. Fleets across the industry were idled in response to completions activity softness, supporting a better supply demand balance of marketed fleets as compared to prior cycles. As the Shale Revolution matures, the industry has adapted to a new era in frac markets through consolidation, technological process, disciplined investment and serving increasingly complex customer needs. Frac activity has largely stabilized at current levels representing a baseload of frac fleet demand needed to sustain E&P operators' flattish production levels. Fourth quarter trends will likely see seasonal softness, winter weather and holiday disruptions. We expect the recent strengthening of commodity prices will drive a modest increase in industry activity beginning in 2024. Liberty's internal analysis shows several natural gas levered E&P companies are expecting to increase activity into 2024. The sustained strength in crude oil prices is also stimulating demand for frac fleets among smaller private oil producers. The resumption of modest growth in frac is within view. Global oil and gas markets found firmer footing during the third quarter, driving higher oil and gas prices. Volatility in commodity markets has emerged from the possibility of an escalating conflict in the Middle East and renewed recessionary fears. Recognizing the elevated uncertainty, global industry supply and demand trends infer that the delicate balance of oil and gas markets is tilted to the upside, given the relatively small spare production capacity today. But long term demand outlook for secure North American energy anchors a more durable cycle. OPEC+ decisions, including the extension of Saudi Arabia's production cuts, further demonstrate a willingness to support commodity prices underpinning long term investments in North American shale. We just saw an industry tightened double down on North America's future. The positive outlook for North America is leading to consolidation and investment amongst E&P operators focused on long term value creation. Liberty is uniquely positioned to support our customers ambitions to unlock value with our superior services, next generation technologies, integrated footprint and scale. Today's E&P customer is focused on driving improvement, which can only be achieved with outstanding service partners and differential technologies. The transformative work our team accomplished over the last three years through technology investments, vertical integration of wireline, sand and logistics and now LPI natural gas, trading and delivery uniquely positions Liberty to address the diversity and complexity of customer needs. I would like to take a moment to celebrate the Liberty team record performance was a result of the collective effort of all of our 5,500 teammates across North America. I am proud to be your partner. We outperformed in the third quarter in the face of a softening industry, delivering significant operating efficiencies, outstanding safety record and attractive returns. In the fourth quarter activity is expected to slow modestly on normal seasonality and the related impact on efficiency. For full year 2023, we expect adjusted EBITDA will be at the high end of our guidance range of 30% to 40% growth over 2022. We continue to deliver superior returns and a differential service for our customers. Our commitment to excellence and focus on company culture, our next generation digiTechnologies suite and LPI positions us well to compete in both near term cycles and over the long term. The best is yet to come. With that, I'd like to turn the call over to Michael Stock our CFO to discuss our financial results and outlook.

Good morning, everyone. Liberty's year-to-date results have been outstanding during a period marked by softening activity trends using a slightly different return metrics from [indiscernible] Chris mentioned earlier, that we use to benchmark ourselves versus the industry in the S&P 500. Our annualized cash return on invested capital is 37% year-to-date, an increase from 31% from 2022. Our third quarter financial results was notable marking a modest increase from the prior quarter and adjusted EBITDA and a most decrease in net income despite slower industry activity and the idling of fund fleet. Our results not only showcase the importance of leading reliability, technology and service quality to our profitability, but also highlight the importance of those features to our customers. Third quarter 2023 revenue was $1.2 billion, a 2% year-over-year increase and a 2% increase from the second quarter. Relative to the second quarter, record efficiencies across the full fleet, integrated services and a favorable product mix more than offset market headwinds and the idling of one fleet during the quarter. In the third quarter, we had the highest pump hours of sand pumped in the history of the company, even with one fewer fleet than prior quarters. Third quarter net income after tax of $149 million represented a 1% increase from prior year and a modest decrease from $153 million in the second quarter. Fully diluted net income per share was $0.85, a 10% increase from prior year, which highlights the per share benefits of our share buyback program and compares to $0.87 in the second quarter. General and administrative expenses totaled $55 million in the third quarter and included non-cash stock based compensation of $9 million. G&A decreased $3 million sequentially as the second quarter miscellaneous expenses did not repeat. Net interest and associated fees totaled $7 million for the quarter. Tax expense for the quarter was $50 million approximately 25% pre-tax income. We expect the tax expense rate for the full year to be approximately 25% of pre-tax income. Cash taxes was $7 million in the third quarter and we expect 2023 cash taxes to be approximately 35% of our effective book tax rate for the year. In 2024, we expect to be approximately 24% effective book tax rate and a cash - similar cash tax rate. Third quarter adjusted EBITDA increased 15% year-over-year and 2% sequentially to $319 million. We ended the quarter with a cash balance of $27 million and net debt of $196 million. Net debt decreased by $60 million from the end of the second quarter. Cash flows were used to fund capital expenditures $29 million of share buybacks and $8 million of quarterly cash dividends. Total liquidity at the end of the quarter including availability under the credit facility was $322 million. Net capital expenditures were $161 million in the third quarter which included costs related to digiFleet construction, capitalized maintenance spending and other projects. We had approximately $12 million of proceeds from asset sales in the quarter. Net cash from operations was $273 million for the quarter and returns to shareholders were $38 million for the quarter. Our capital expenditures remain on target for 2023 as we expect to deliver certain digiFleet components in the fourth quarter. In July 2022 and January 2023, we installed and then upsized the $500 million share repurchase program, respectively to take advantage of our dislocated share prices. We also reinstated our quarterly cash dividend one-year ago. We are pleased to share our Board has approved a 40% increase to our quarterly cash dividend to $0.07 per share beginning this quarter, reflecting our conviction their ability to generate strong free cash flow through the cycles. We also continue our returns to shareholders program with our buyback program, including the repurchase of 1.8 million shares in the third quarter, which represents approximately 1% of the shares outstanding in the beginning of the quarter for a total of $29 million. We have now returned to shareholders accumulative $325 million in the past five quarters. We continue to differentiate ourselves with an industry leading return of capital program while reinvesting in higher return opportunities and growing our free cash flow. Looking ahead, we see North American completions activity to slow modestly in Q4 on normal seasonality and the related impact on efficiency. We expect activity to increase modestly in 2024. In the third quarter, we reduced our active fleet count by one fleet, consolidating our planned activity with our higher efficiency fleets and improving utilization. While we expect normal seasonal softness in the fourth quarter, we do not plan to idle any additional fleets due to the demand in Q1 of 2024. As a result, we will now anticipate reaching the high end of our full-year 2023 adjusted EBITDA outlook of approximately 30% to 40% year-over-year growth. In 2024, we continued - we see a continued constructive outlook for the oil and gas markets and even more so for Liberty. We anticipate free cash flow will exceed 2023 levels driven by incremental profitability from our current year investments, continued margin expansion and efficiency initiatives and lower capital expenditures. We will continue to deliver on our strategic priorities, including our industry leading return of capital program, a strong balance sheet and continued investment in differential technologies that position us well in the coming years. I will now turn it back to the operator for Q&A. Afterwards Chris will have some closing comments at the end of the call.

[Operator Instructions] Our first question is from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, everybody. Two things for me. The first I'll start with, and I have to ask you, is the guidance - I mean you have, you had a really good quarter, a great three quarters start to the year, it feels like it would be hard to not get above the guidance range. I know there's some seasonality but could you just kind of give us some any additional color on how to think about the fourth quarter given you're not laying down anymore fleets. And you're at such a healthy level through the third quarter?

Yes, Stephen. Yes, our guidance has always is our best estimate of where we're going to come in, we want to be close. And if you look at the fourth quarter seasonality, we've been very, very efficient with our customer's plans, as we've been through the first three quarters. So you are going to see a little bit of budget maintenance as they've sort of - they've completed things a little bit quicker than they would have expected. And so as we go through, you're going to see seasonal slowdowns with holidays and winter, a little bit of budget maintenance management as we go through the year and then I think you'll see everything pick up again in Q1.

Okay, thanks Michael. And then as we think about next year and your capital spending needs, how should we think about CapEx. I think it should fall as a percentage of EBITDA. And it feels like that will lead to pretty robust free cash flow next year. And any color you can add on plans for that free cash flow?

We will continue with - as our stated goals, obviously, the first year we managed was a very, very strong balance sheet to make sure that we can weather any situation that could come up in the future. We have an incredibly high demand for our next generation technologies. And as you see, we will have a very, very strong return of cash to shareholders program. We also have some interesting business opportunities with our Liberty Power Innovations business. So, I think we will continue with exactly the way we have invested capital over the last 10-years.

And any ballpark on CapEx for next year at this point?

No, we will give you those details in our January calls as we always do as we like to give it to you once a year.

Okay. Thank you.

A lots of free cash flow as you said, Stephen, we agree very significant free cash flow next year.

Yes, I mean, it feels like CapEx comes down and free cash flow is pretty strong. That's why I ask the question. Thanks, Chris and Michael.

Yes, thanks Stephen.

The next question is from Roger Read with Wells Fargo. Please go ahead.

Yes, thank you. And good morning. Just wanted to follow-up. One of the things I think Chris, you said was, you know, customers are obviously going to want more efficiency, better performance, et cetera. As we talk some of the E&P companies, they also discuss, you know, hey we want the right sort of company rather than the single cheapest service company we can get. Can you give us any insights into how sort of we should think about that with pricing? We typically think of pricing power but what is the right way to think about that relationship here as to what it can mean for margins in '24?

You always have some companies in our industry, and I would say when Liberty started, they maybe when the norm that viewed frac as a commodity. Well, we bid it out, we get a whole bunch of bids, and our supply chain team sees who the two or three cheapest are, and then we go talk to them. That was the norm when we launched Liberty today that exists but it's not the norm anymore. I just think people have taken a broader view of shale. And on this line item, is that Liberty number higher? Well, yes, it is. But if you get wells done faster, safer, more efficiently, lower emissions, and better help on design and execution about how to maximize recovery from those wells. Hey, all in value, I would say Liberty holds up a pretty significant differential versus others. And one of the things we have rolling out now is this different fleet technology, right - that arbitrage between the cost of power fleet with diesel and the cost of power fleet with natural gas. That's a huge cost savings opportunity that benefits both our customers and us. And our fleets not only are burning natural gas versus diesel but these next generation fleets burn a lot less natural gas than a turbine driven fleet for the same amount of work. The higher thermal efficiency, virtually zero methane slip, so they're just cleaner and cheaper, more efficient. So that technology allows it to be a win for our customers and a win for us. But ultimately, there's always a back and forth dialogue with our customers. Hey, market is softening. We're seeing numbers like this. But we don't have customers saying, hey, these guys are 10% cheaper. So we're going to jump over there. I would say most of our customers and our partners, they get the value and the trust in the relationship working together. We didn't do everything we could have last fall when the market was really tight. Could we have jacked up prices a little bit more and missed people, but still held the work? Sure we could have. But we didn't do that. We act as long-term partners with our customers like this business thrives when we win, our customers win and over the long-term, you can generate better efficiency, smarter decision making and come up with new ideas that then should be developed. There's just huge benefits in long-term partnerships with our customers. And I am thrilled like a ton of our achievements, our innovations, they're not just Liberty, that's partnerships with long-term customers that lead to stuff like that.

No, I appreciate that. Follow-up question for you, Michael, as we think about the combination of the ways to return cash to shareholders, dividends versus share repos, is there an overall framework we should think about here, or is kind of getting to Stephen's earlier question. If free cash flow is up, we should just think about that as incremental returns to shareholders?

Most of it will go there, Roger, but look, we've been a believer to have a base dividend that's modest, it's a very small percent of our cash generation ability. And we plan to slowly and steadily grow that with time, that's sort of a base return, that's going to happen. We bumped it a larger chunk this year, because we're basically recalibrating it for the much greater cash generation ability we have now than we had three years ago on a per share basis. And then so that's a small piece. But that's sort of the base piece that's always there. Then there's obviously CapEx and that's always the biggest balancing decision we have. Wow. And then again, today, that's trickier. Because the demand for what we have new coming out is just tremendous. But we're not going to invest all the cash we generate or even more than half of it into CapEx but we're going to balance what are the most compelling investments and how do we structure that. And then that additional cash? No, the biggest use of it, the last year has been buybacks. That's probably the case, I'm not sure next year, that's going to be the case as well. There's - technology based acquisitions are generally not an AMD company. But if there's compelling things, we'll do those. And we always think it's critical to just keep the balance sheet, very strong because you never know what happens. And look, I know, you know the history, but in that top downturn in '15 and '16 and the top COVID downturn, we were positioned and able to make just compelling acquisitions, that massively grew our per share value and ability to generate cash and profitability. So buybacks are still the dominant thing, but we put for us it's not formulaic, it's not a percent of cash and a quarter. I don't think you should look at cash flow or profitability or any of those things on short-term timeframes. There's swings to them. So, we just take a longer term window on that. And I'm sure you've heard before in our buybacks, we have an internal view on intrinsic value versus stock price. And the wider that differential is, the more aggressive our buybacks are going to be. And if the stock price moves quickly, if it moves quickly downward, we're going to pounce on that. If it moves quickly upward, we're going to caution and take a breath and reflect what's happening. Not going to stock buybacks if there's still a large value dislocation but we're going to be more measured in the approach.

Appreciate that. Thank you.

Thanks.

The next question is from Derek Podhaizer with Barclays. Please go ahead.

Hi, I want to ask a few questions on your digiFleets. So you talked about getting the four by year end, six by end of January. How should we think about the digiFleets as far as incremental versus replacement? And then if we look into 2024 and how this [hydrates] your overall fleet? How do we think about that expanding your profitability? And then finally, just the future mix of the digiFrac versus the digiPrime? And who do you think is going to be the winner over time?

Great, great questions, Derek. First of all, in the replacement versus the digiFleets that just market dependent. I think when we talked a year ago, when the market was literally short equipment, we said probably a balance between the two. Look at the marketplace now, there's no shortage of horsepower out there. So all of these fleets were rolling in, are just replacement for our oldest equipment. You know, that's the cost of maintenance and lowest of quality equipment. They're just replacement fleets. The market stays like it is today, no reason to change that strategy. The fleet's themselves and maybe we've communicated less than perfectly here, there's not any different digiFrac fleet or digiPrime fleet. There's a digiFleet. There's two different frac pumps that have different strengths and different weaknesses that together we built to make a system that was just compelling. And that was differential. And I'm going to have Ron expand a little bit more on the difference between those pumps and how you can figure the optimal fleet, depending upon the customer needs.

Yes, Derek. I like to think of them as complementary, not that there's going to be a winner and a loser in these technologies. So as Chris noted in his opening remarks, digiFrac the electric pump for us. And so that consists of two components, first of all, power generation trailers, so the Rolls Royce 20-cylinder, natural gas engine driving an electric generator, and then the electric pump itself that turns that electricity back into mechanical energy. That was a five-year effort for us to build from the ground up, fit-for-purpose electric system, and that included both innovation around the power generation side to make sure we delivered the most efficient low emissions power generation we could, that was modular, that was capitally efficient, that allowed us to deploy the right amount of power generation to match needs on location to be able to adapt to incoming grid power to the extent we had that available to us. And then to pair that with a ground up pump design that we again, think brings a whole host of benefits to the table. But in working through that design and ultimately, as we began to have conversations with our customers around the deployment of digiFrac, there was a recognition that not all of our customers are going to use grid power as part of this. And so that led us to recognize we had further opportunity. We had an opportunity to make this system more efficient yet, which is to say that we were going to remove the conversion of energy from mechanical to electrical and back to mechanical, there are losses associated with that. And so you burn a little more gas and as a result have a modest amount more emissions to accomplish the same thing. And that's what led to digiPrime. So digiPrime just removes that conversion mechanism, we take that same natural gas engine, incredibly efficient, lowest emissions profile you can find in the industry, and attach that directly to a transmission and a pump. Now there's a limitation to digiPrime and that the engine is a constant speed engine, it runs at one speed and one speed only. We have the ability to change gears, so we have some amount of rate control. But if when you really want that fine-tuning in a frac, when you're working up against the high pressure limitations that we might have, you want that ability to have some micro adjustment in rate. We don't get that with digiPrime, we get that with digiFrac, the electric version of the pump. And so you'll see these two - these two different technologies work together as what we'll call a digiFleet. And so, it's ultimately going to be a combination of the two. And the ratio of those two different technologies on location is going to be a function of whether or not the operator - our customer, our partner in this anticipates using grid power. So to the extent we won't have access to grid power, you should expect the digiFleet to consist of the majority digiPrime pumps and then a couple of digiFrac electric pumps on top of that for that fine-tuning. And then to the extent we have an E&P partner who's going to have some grid power on location, we might access - have access to 5 or 10 megawatts of electricity, you're going to see the percentage of that fleet. That is digiFrac our electric pumps creep up a little higher, and we'll have less digiPrime on that. So that's how we'll think about that going forward. It's going to vary fleet-by-fleet, customer-by-customer, depending on the situation we find in the field. But ultimately, at the end of the day we are going to deliver to the customer, an unrivalled technology profile with the lowest emissions and lowest fuel consumption you can find in the industry.

Great, I appreciate that rundown very interesting and very helpful. Second question, I know you talked about the opening costs. But I agree that integration is going to define the winners in a maturing shale cycle. Can you spend some time on LPI? I know is a recent acquisition, but maybe how impactful it was for third quarter? Or how should we think about it for 2024 and it being a profitability lever as you continue to scale that out across your fleets?

Yes, it's in line with other Liberty historical vertical integration. If there's something that's holding us back, slowing down the delivery of our quality of service, we look at how to solve that problem and to get on time delivered natural gas. There's not a lot of options today and the quality of that service is very spotty. Sometimes it's fine. Sometimes it's not enough gas. Sometimes these manifolds can hook up to some of the pumps, but not all the pumps. All of these things just hold back the substitution of natural gas into diesel. So, we just decided we're taking that problem into our own hands. And we're going to make sure all of our fleets have reliable robust gas delivery. As CNG is the right option that's done via CNG. If there's gas to process out of a pipeline or field gas, we have technologies to process that gas on-site and use that, we can blend the two together. So, we just decided natural gas is so critical. It's look, stepping back. It's the fastest growing energy source on the planet and has been for the last 10-years and likely will be for the next 10-years. So we are talking here about that specific application of using natural gas to power frac fleets, which absolutely is the future for many reasons, costs, emission, efficient abundance of natural gas. Now we're also - we want that expertise to build - you can call virtual pipelines, delivery and moving of natural gas to where we need or starting with our natural gas our frac fleets, digiFleets that without gas they don't run. Dual fuel fleets, if you don't get gas, they still run, you just burn more diesel, more expensive, higher emissions, and you should have been. So, we're building - LPI. First to power our frac fleets. But it's also of course going to supply other people's rigs, other operations in the field. There's other oilfield applications for that. And ultimately as you look ahead, what is Liberty generating expertise in. We're generating expertise, and having the highest thermal efficiency on wheels, mobile power generation there is. And we're generating expertise in how to move natural gas, how to remotely or on-site process natural gas to deliver natural gas, wherever it's needed and however it's needed. So, natural gas is 40% of U.S. electricity generation. And sadly, but unfortunately, we are driving our electricity grid prices up and our grid stability down. So expertise and moving, deploying natural gas and remote power generation is only going to grow in value.

Great, appreciate all the color. I'll turn it back.

The next question is from Luke Lemoine with Piper Sandler. Please go ahead.

Hi, good morning.

Good morning, Luke.

Good morning. The whole digi initiative seems like it's going extremely well. And I guess specifically on digiPrime, this was just over testing a few months ago. It has now been in the field since September. You guys talked about this being the customer's favorite technology on-site. But can you maybe just talk a little further about the feedback and maybe what you've learned as well of having it live - on our well location?

Yes, sure can Luke. Feedback has been extremely positive since day one. So you have to imagine what really is a pretty big step forward for not only our operations team, but also our customers in terms of what they're seeing here. We're basically talking about power density, that's two for one relative to Tier 4 DGB. So you know where to optimize substitution on a Tier 4 DGB engine. Obviously, this is pressure dependent, but you might see that pump delivering maybe six barrels a minute or so. We've got digiPrime out there a single pump, effectively replacing two of those, delivering steady as she goes day-in and day-out 24 hours a day, at 12 barrels a minute. And it's doing so burning less gas than those two pumps would have combined. So remove the diesel and reduce the gas consumption. And we're delivering twice the rate So it truly is an incredible step forward. It's fully integrated with our pump control platform. And so to our operations team out there, it is seamless in its operation. But you could - think of it just like a nuclear power plant on our grid. Once it is up and running it is steady as she goes in. It has been delivering day-in and day-out since we put it out there. The first customer for that is extremely excited and cannot wait to see some more of them out on location.

Okay. Great. Thanks, Ron. And then Chris, I know you don't want to disclose customer's for their remaining digi deployments later this year and early next in the Permian? Are these in a couple of different basins?

Starting in a couple of different basins, for me is the biggest basin. So of course, the majority of digi deployment is in the Permian. We've got requests in pulling to several basins, but - at year end we'll be running digi in just two basins and much room to grow in those two basins. But by the end of next year, that will certainly be more than two basins. That's one of our big questions we've got inside the right partners, the right timing to continue the deployment.

Okay, perfect. Thanks so much.

Thank you.

The next question is from Waqar Syed with ATB Capital Markets. Please go ahead.

Thank you. And first of all congrats on a great quarter. My question is like in the Q3 results, how many digiFleets were active during the quarter on average?

Probably [two in the weeds to quote] - two is probably a reasonable estimate but originally we feathering these pumps into existing fleet, that's one of the key things. The fleet keeps running just like it did and we feather in this technology. It's only more - and across multiple fleets. It's only more recently that we have fleets running that are entirely digi.

Okay. And so, when you started running these entirely digiFleets, what the margin on those be accretive to the margins that you get on other fleets?

They are. They are. There's additional diesel displacement, there's lower cost to our customers and a higher technology solution. So yes, that benefits Liberty as well as benefiting our customer.

So then taking that thought forward. So once you have, let's say, six of those fleets running in Q2 of next year, if nothing else changes, this record high margin that we saw in Q3, 25.5% or so EBITDA margins, you could be higher - running higher margin than that in Q2 or Q3 next year?

It's absolutely possible Waqar and that is a - right, that's the internal job. We call it self-improvement in Liberty. We have to always be in a position where if the market is flat, our profitability is growing. We're growing by doing things better, by doing things more efficiently, by delivering premium technologies. So yes, if the market stayed flat for the next three years, would Liberty's profitability continue to grow through those three years? Absolutely.

So you're saying right now that 2024 could be modestly higher activity. So, when we translate that into Liberty's profitability or EBITDA, given that LPI could be contributing or EBITDA given that you'll have more of these digiFleets running with higher margins? How do you see 2024 EBITDA versus 2023?

Look, again, in a flat market conditions, it will certainly rise. But you know, that bigger factor swings in what's going on in the marketplace. But I think as you've seen over the last three quarters in a gradually softening market. Can our self-improvement offset that? It can, but the question is, how much is the market softened? Or how much is the market strengthened? Or does it stay flat? But I think the point is well taken Waqar that in a flat market, we have drivers of increased profitability. Absolutely, and we will always strive to have that. But you know that second factor is what is the market actually do? And we don't control that. But we are - you get the feeling that the volatility in that in market conditions, is likely to be lower in the next few years than it's been in the last few years. Thanks Waqar.

Thank you.

The next question is from Arun Jayaram with JPMorgan. Please go ahead.

Hi, Chris. I wanted to start with maybe a bigger picture kind of question. We've seen some recent consolidation in the Permian Basin with Exxon and Pioneer. And Exxon's key thesis is to significantly raise resource factors. And they cited called two-thirds of the expected synergies to come from higher recovery factors. So and a lot of that is driven by frac. So I wanted to get your thoughts on the ability of the industry to raise recovery factors. We have heard of some producers more recently touting a new kind of completion design and want to get your thoughts on that. And ability that maybe if you can increase recovery factors, the ability to improve economics in Tier 2 and Tier 3 wells, which I think would have a positive implications for your business?

Yes. So look, that is certainly been the story of the shale revolution is that continual innovation, we say design of the plumbing underground to increase recovery. Liberty was certainly an early mover, maybe first publisher of this extreme limited entry we got to get more fracs within each fracs stage more contact area. So, there we've seen a continual march-up in innovation, really ultimately recovery factors in shale oil productivity. That what's the mast over the last five years is probably a slightly declining average quality of location being drilled. And then this improvement, incremental improvements of recovery have offset that to at the beginning, have slowly increasing recoveries per foot. Now those increases generally are not happening anymore overall because the average decrease in rock quality is slightly out running this incremental improvements in technology. Now look, Exxon is a tremendous technological powerhouse. So if Exxon have their efforts, maybe more than incremental views of how to change recovery, I wouldn't bet against Exxon. We work with a lot of partners on some are incremental, some are more testing or investigating game-changing ideas for recovery. So yes, a lot of that going on. Yes, you're going to see continued technological improvement in recovery from wells. And some will be incremental and some will be bigger changes. But obviously, your bigger picture question is, is really a question for Exxon. But yes, our industry is moving forward. We'll continue to and there could be some exciting things in the next few years.

Great, thanks for that. And shifting gears a little bit. Chris, we are in RFP season, talking to my E&P coverage around, having discussions with frac operators around 2024 needs. I was wondering if you could maybe characterize the tone of those discussions, obviously. And maybe give us a sense of how you think pricing will play out this year versus last year when the supply demand balances was quite a bit tighter?

Yes, so again, as I said, look all dialogues are generally one-on-one with our customers. We don't submit a whole bunch of bids, and then wake up in December and find out who we're going to be working for next year. That's never been the way our business works. Almost all of our business is continuing to work with existing customers. Do the bigger ones of those RFP? Yes absolutely. Did they get market checks? Absolutely. Might they ship their fleet composition? Absolutely. Generally less with Liberty fleets, we tend to continue to work with our existing partners and we have dialogues about what's going on in the marketplace. And what are reasonable responses to that. Yes, where market conditions much stronger 12 months ago than today? Absolutely. But are market conditions bad today? Absolutely not. As you've seen with our results, and where we're pumping, people want the right partners. We also - most of our dialogue with customers isn't so much about line item Liberty, pricing, it's what can we do together to drive down well costs? How can we move faster? How can we change the design? How can we swap out a chemical that we thought we needed with a cheaper example? How can we deliver sand more efficiently? Here price of sand is going down? Does that change our frac design that's driving well cost down, the price of steel and tubers are going down. The price of plugs is going down. There's some technology innovations. So look, always this dialogue around this kind of stuff but it's not as black and white, you know, like they win we lose, there's a price. There is a little bit of that. But the broader dialogue is how do we get more efficient and improve both of our economics? And so, in the spot market, is it soft right now? Is there idle equipment? Yes. You know, but for quality dedicated fleets is there a huge surplus of that? No. So no, I think pricing will probably continue to be relatively boring. It hasn't moved a lot over the last 12 months and probably not going to move a lot over the next 12 months. That's my guess.

Great. Thanks a lot, Chris.

Thanks. Good questions.

The next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Yes. Thanks so much. And Chris, want to stay on the topic of the macro. I think you've said that you expect demand for frac fleets to parallel recent rig counts at approximately a one quarter lag. Is that still your thinking? And if so, how are you thinking about the rig count, which is showing some signs of stabilization, but your views around that, as that'll feed into the demand view as well?

Yes, but what we hear from our customers and it's obviously no secret. I think rig count is probably bottoming now. I think you're going to see rig count grow over the next 6 to 12 months. But in our new boring shale industry it's probably going to grow much slower, much more modestly. People are disciplined in investments, publics are low - change their plans too much. Privates are the more reactive ones, drilling economics are quite good today for oil. So, are we going to see an increase in private activity? Absolutely. Natural gas, we're going to see - growth in activity there but people, I think are wisely more waiting for the right market signals, gas prices affirmed a little bit, let's see what the winner does, huge new demand starting late next year through the couple of years after that from LNG export capacity. So definitely going to see rising gas activity. But in frac, maybe that starts in Q2. Could be some a little bit sooner than that. The winter is warm and if the frac can stay low, it could be Q3. But yes, a little bit of upward momentum and gas, a little bit of upward momentum in oil for private and publics are pretty slow and steady.

That's helpful. And staying on the macro, we've talked about consolidation through the lens of your customer, we've also seen consolidation in the U.S. frac industry, what has that meant for discipline and your ability to sort of hold pricing in a softening market?

So it's absolutely helpful. The big companies just by nature have a longer term time horizon. So they retire a small frac fleet company, they acquire that may be struggling and my gosh, parking the fleet, they make nothing, they already bought those equipment, if they get them out there and they generate just some gross margin, it's a positive for them. But those assets get acquired by a bigger company. They've got - they just spent money to buy those assets, they're playing the long game. So they're just going to be managed, more intelligently, more disciplined then with a longer term time horizon. So absolutely, technology consolidation has led to more disciplined investment, more disciplined commercial arrangement and it's allowed those few bigger companies to invest in the future and try to drive the improvements. I think the whole industry wants to see.

Thanks team.

Thanks.

The next question is from Marc Bianchi with TD Cowen. Please go ahead.

Hi, thanks. I guess another one on kind of the guidance and pricing commentary. I mean if pricing is boring as you say. It sounds like the decline implied by your fourth quarter, your guidance for the year for fourth quarter is all customer budget exhaustion. It would seem like first quarter EBITDA should be able to get back to third quarter levels. Would you agree with that?

Yes, obviously we don't guide in detail for the quarter upcoming. But I mean, in general, if you had a flat market, your first quarter does have some weather effect compared to your summer quarter. So yes, if you had a dense flat market, your first quarter will be slightly lower than your summer quarters. But that's where we are. But again, I think next year is going to be slightly better than this year in total.

Okay. The other one was on Liberty, power innovation, what is the spending that you're anticipating over maybe in 2024 and beyond? And how should we think about kind of the efforts to supply your own fleet versus perhaps supplying to third-parties?

So we have a third-party - they do some third-party deliveries here. But the bulk of the, probably the first year, a year and a half worth of growth of LPI will be to support this digi rollout and our expansion and our improvements in our natural gas usage across the rest of our fleets. It's an exciting business. And yes, we'll talk more about it in our January call. And we'll talk about spending as we sort of look at that market going forward. But again, the vast majority will be supporting our fleets in the initial point.

Okay. Any bookends around the spending just to maybe set some early expectations for people?

We'll chat about that in January, I think that's the best way to look at that one Marc.

Okay. Okay. Thanks, Michael. I'll turn it back.

The next question is from Keith MacKey with RBC Capital Markets. Please go ahead.

Hi, good morning. Just wanted to follow-up a little bit on the digi or electric fleet contracts. Some in the market have talked about those as being sort of multiyear type take-or-pay contracts. As you fold in more of the digiFleets, what have you learned about the contract structure for those, would you agree with the multiyear type of contract and if so, if not, how is the contract structure generally evolving?

Yes, look, if you're going to build the new fleet, deploy new capital that's different than deploying existing equipment. So yes, those are multiyear agreements.

Okay, perfect. And maybe if we could just talk a little bit about the sand market, things have come off of peak levels. But is what you're seeing for sand demand in the Permian roughly commensurate with well completion count, or are you seeing other things, other trends like higher intensity, for example, maybe acting as a buffer on sand demand overall?

Yes, I think overall, certainly, it's relatively well aligned with completion count. That's certainly a good way to think about things. We continue to see movement in amount of sand pumped in a well, we continue to have operators who are experimenting with alternatives to current design. And so that will have some modest implication, but at the high level, you're absolutely right, thinking about it just well count to volume consumed.

Okay. Thanks so much.

The next question is from Dan Kutz with Morgan Stanley. Please go ahead.

Hi, thanks. Good morning. Maybe to just piggyback on that last line of questioning, but broaden it out a little bit. So outside of frac and also outside of LPI, could you just comment on what some of the other businesses like sand and PropX ST9 wireline just directionally, whether those have been, kind of moving consistent with the frac and LPI earnings or maybe moving a little bit lower and appreciating that the benefits of vertical integration will be an earnings driver for the overall business. But just if you were to isolate those other businesses, anything you could comment on in terms of trends that you've seen there?

Yes, look you made a key comment, you could isolate - like we never isolate those businesses, because we're in them because they make our core business better. They are actually good businesses in their own right - Michael if he wants to comment any more on that. But yes, we are in those businesses because they make the whole system work more efficiently. We have a Liberty wireline crew and a Liberty frac fleet. We have meaningfully lower downtime than when we have a Liberty frac crew and a third-party wireline. So look, our wireline is - and I think we mentioned in the release, it's now ranked number one by customer services in quality. So that makes that a good business in its own right. But even better, it makes the whole Liberty wireline and frac operate more efficiently, deliver faster results to our customers and better profitability to us. Michael, anything you want to comment on.

The business leaders of those teams that focus - are focusing on those businesses and do an incredible job, you know, and I would say, you have a decent amount of competition between all our business leaders. And at the moment, I'd say they all racing across the line, neck-and-neck, right. They're all kind of travelling about the same pace and doing very, very well.

Right, that all makes a lot of sense. Thank you. And then maybe just a question on how debt pay down ranks in the capital priority list. I know, you guys knocked out the term loan earlier this year and then you guys paid off a decent sized chunk in revolver and a third - of the ABL in the third quarter. But just wondering if there's anything that you could share in terms of whether you think that you'll maybe just kind of continue to chip away at the ABL balance or if there's potential for knocking out a big slug, and just kind of how does that back in the capital priority list relative to CapEx and buybacks?

Yes, we have very small net leverage. So we're very, very comfortable with debt levels of where they are at this present point in time. It also really - our ABL level floats with our other uses of capital in that given quarter.

Fair enough. Makes sense. Thank you both. I'll turn it back.

Thanks.

The next question is from Saurabh Pant with Bank of America. Please go ahead.

Hi, good morning, Chris and Mike.

Good morning.

Good morning, Saurabh.

Thanks. I guess I'll start with a little bit of more color on the digi side because clearly, there's strong demand over there. You will be at full fleet by the end of the year. Six by the end of January. I'm sure there's more demand. But when you look at the demand that's out there, right. I'm sure you're not trying to meet every demand point, right? You need to keep your CapEx in mind. You need to keep your returns in mind the right contract structure, customers all of that. How do you think about how much potential demand might be out there if you were to not be disciplined just a theory, right. I'm just trying to see the demand sent out there. How would you characterize that?

I mean - look at that, the demand is gigantic, right? Think about that - seven years running, we've been the top ranked from customer's frac company in the quality of the services we deliver and now we have the lowest emission, highest efficiency, all natural gas burning fleets with actually longer lifetimes, likely higher uptime higher performance. So yes, look, there's no cap on the interest in that. Right? So the question for us is, it's always a partnership decision. It's not a top, we had 50 a month a lot. Yes, we could put them to work tomorrow, we wouldn't do that. And we never do that. Like they're going to be built individually for specific customers under specific conditions that have been partners and will remain partners for.

Right, right. No, that makes sense, because we do hear that there is a lot of demand, right. And again, you don't want to satisfy all demand points. That's not the right way to work. So I get that. Just a quick follow-up. I think Arun asked the question on the RFP season. How is that going? Yes a follow-up question on that. In terms of how you think about contracting the duration of the contract, how quickly pricing resets within that contract? Are you are you thinking about that differently when you think about 2024 versus what you have in your portfolio right now for 2023?

No, again new-builds they have long-terms and they have different sort of structures a little bit. But no, in general. No, no different this year than last year, and we just continued in that sort of partnership mindset, existing customer base. Not a lot of change in the Liberty customer makeup.

Okay, okay. Awesome. And then just one last quick one. Just a clarification. I think Marc asked that question. I think Mike, you said that you expect next year to be slightly better than this year. So 2023 was that an EBITDA comment, I just want to be sure of that?

That will be a general expectation.

Okay. Okay. Okay, perfect. Okay. Thank you. I'll turn it back.

Thanks, Saurabh.

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

Hi guys, thanks for keeping - let me get on the call. I guess the first one is just any supply chain or labor concerns as we head into '24?

No, the challenge is that we're being a year ago, 18 months ago, don't look to be challenges today.

Got it. And then Chris, how does the borings mature market influence your acquisition strategy? Because you should have a lot of free cash flow next year?

I mean, yes, our outlook is for a lot of free cash flow and it's just competing usage. So yes - acquisitions are certainly a possibility. You're seeing we're not highly acquisitive. But if something's compelling, sure, sure.

Okay. And I guess the last one from me, I'm assuming the initial rollouts of all the digi technology you're going to larger and higher quality customers, if you will. At this point, are any of the smaller E&P operators inquiring about the technology? Or when do you see those folks wishing to learn more and possibly moving forward?

Oh, absolutely. No, they're fired up about it, you know, they're fired up about it. It really just gets down to that long runway right to do a deal for something like that. You've got to have a pretty clear plan of what your next two or three years are going to unfold? And for some of the bigger privates, they've got that. So it's, yes, that's not years away. But yes, the interest is, is quite large there as well. But you're right, the original deployment is not going to be in that sector.

Okay, that's all I had. Thank you for including me.

Tremendous. Barbecue John.

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

Thanks, everyone for joining today. Sadly, another global conflict has burst on the scene with heartbreaking scenes of death and destruction. War is as old as time, but that does nothing to lessen the horror of its ravages. War is a destroyer of security, personal security, food security, property security, economic security and our vision for a secure future that we all crave. I often speak of energy as the enabler of all human progress. It is, but it is also essential to satisfy our base needs, like security in all forms. Now that the spotlight is again on the United States, the most promising source of security for the world, how are we doing? We properly sprung to action on the military, diplomatic and humanitarian fronts. But what about the energy front? It's underpinned everything. I would pause it, that we are not shining in this area, the area critical to our long-term future. Two quarters ago, I spoke about government policies that are raising up our electricity prices, whilst also destabilizing our electricity grids. Hence, we are not doing well in the power grid area. While electricity grids are arguably the most important networks in the world, in total they deliver only 20% of global energy. What about the total energy pie? Oil and gas today represent a record high of just below 70% of total U.S. primary energy consumption. Fortunately, we are today the world's largest producer of oil and natural gas. Are we maximizing these resources to uplift Americans and provide security to our citizens and our allies. We have blocked the completion of large pipelines already under construction. We have dramatically reduced the granting of leases and permits on federal lands. We drained half our strategic petroleum reserves, not in a crisis but simply to short-term lower gasoline prices. We have used a myriad of regulatory bodies to impede the funding and development of our oil and gas resources, having the obvious and presumably intended impact of reducing U.S. oil and gas production at the margin, and therefore raising prices to consumers and businesses. But there is no stopping the rise and demand for oil and natural gas as everyone, not just Americans wants to raise their standard of living and expand the opportunities available to their children. So what is filling the gap created by suppressing American oil and gas production? Iran, predominantly, we have effectively stopped enforcing the oil export sanctions on Iran, resulting in a roughly 700,000 barrels of oil per day increase in Iranian oil exports over the last 12 months, nearly all flowing to China. The same is coming true for Venezuela. Is having more oil coming from Iran as opposed to the United States beneficial to the security of the United States and our allies? Is it economically better for our citizens and allies that this incremental oil production and related economic activity and tax revenues flow to Iran instead of the United States? Is it better for air quality and greenhouse gas emissions that these incremental barrels are producing Iran versus the world's cleanest production practices in the United States? The answer to all is obvious. Liberty's mission is to better human lives by improving the energy system in North America and the world. We do this primarily by driving improvement and innovation in hydraulic fracturing of oil and gas wells, the dominant source of energy in the U.S. and Canada. We took an ownership stake in Fervo Energy last year to partner in bringing next generation geothermal into our energy system. Things are going quite well there. We took a smaller stake in nature on energy to help bring sodium ion-batteries to market, as they offer distinct advantages to our energy system. After years of watching and investigating we have recently invested $10 million in Oklo, which we view as the most promising of the small modular reactor companies. Why invest in Nuclear? Because it has the energy density, reliability and scalability required to economically meet the world's growing demands for energy. The world needs more energy, better energy. Thanks for joining us today.