Good morning and welcome to the Liberty Oilfield Services First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode.

[Operator Instructions] Please note this event is being recorded.Some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses, or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements.

These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's earnings release and other public filings.Our comments today also include non GAAP financial and operational measures.

These non-GAAP measures including EBITDA, adjusted EBITDA, and pretax return on capital employed are not a substitute for GAAP measures and may not be comparable to similar measures of other companies.A reconciliation of net income to EBITDA and adjusted EBITDA on the calculation of pretax return on capital employed as discussed in 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..

the health and safety of our people and all those that they touch. Liberty was an early mover in this area.

During February 2020, we formed the COVID-19 response team to design and implement safety procedures and contingency plans at our customers' locations and our offices and facilities that allow continued delivery of safe frac services while protecting the health of both our customers and employees.So far, we have had only one worker on a frac crew test positive for COVID which he appeared to have contracted on his days off.

Arriving for a new shift, he suspected that he may be infected and immediately quarantined himself and notified the crew. Texas authorities commended the actions of this individual and Liberty and a full recovery from COVID soon followed.

Liberty has continued to improve our processes to protect all folks involved.We also have been very proactive in protecting our business during these unprecedented times. Our first step was to immediately reduce executive salaries by 20%.

Subsequent reductions have reduced executive cash compensation by roughly two-thirds which will fall further cut in half during our May through July furlough program as we suspect that period will mark a very low trough in frac activity.Michael will provide more details on our headcount reductions, our first ever and deeply painful, as well as our CapEx cuts; dividend suspension and operating cost reductions throughout our business.We designed Liberty with highly variable compensation structures to allow navigation through cycles and we are confident in navigating through this cycle.The focal point of our actions is our customers.

What does the collapse in oil prices and storage rapidly filling mean for their future frac demand? How can we help all of them successfully navigate these challenging times? How can we help them with frac design changes to become more competitive? How can we work with them to improve throughput?We love all our customers that we worked for in 2019 and 2020 and we stand with them during these challenging times.

In addition all of our largest customers meaning our multi fleet customers our top-tier player we chose to align with because they had strong balance sheets, high quality assets, and most importantly, are managed by great people.All of these customers are active in the Permian Basin.

They will be survivors and likely consolidators as this downturn plays out. We love the profile of our top customers.

We have grown our market share percent of their business with all our top customers this year.Industry conditions had been declining for several quarters even before the COVID pandemic.During these challenging times, operators became even more demanding on service quality, efficiency, safety and technology solutions.

All of this plays to Liberty's favor and those trends are accelerating now as the market stresses have dramatically increased.

Our first quarter results reflect both the flight to quality providers and Liberty's efforts to concentrate more of our capacity with select top-tier players.Liberty's Q1 revenues grew sequentially 19% to $472 million and net income was $2 million or $0.02 per fully diluted share.

Adjusted EBITDA was $54 million, equating to $9 million annualized EBITDA per average active frac fleet, which was all 24 of our frac fleets until mid-March.

This performance was driven by strong customer preference for Liberty and outstanding operational execution.Liberty's first quarter results smashed previous quarterly records for a number of stages pumped and sand volume pumped, both by double-digit percentage increases.

Over the last 12 months, which have been far from boom times in our industry, Liberty delivered a 6% pretax return on capital employed, generated significant free cash flow, and returned approximately $25 million to our stockholders. Obviously, industry conditions have dramatically deteriorated since mid-March.

What had been a slow grind of shrinking E&P CapEx to raise returns combined with an oversupply of frac industry capacity has transitioned into an abrupt plunge in customer activity and demand for frac services.Today's oil price is below $20 and the pending crunch for oil storage capacity have seen demand for frac services drop like a stone.

The rapid drop in frac activity is understandable, as many producers are forced to shut in existing production to better align supply with demand, as oil storage is rapidly approaching capacity.Oil demand normally rises and falls relatively slowly, as it is primarily tied to economic activity.

Never before have we seen a forced abrupt shutdown of such large parts of the global economy. The financial crisis or Great Recession saw a 2% to 3% drop in demand for oil spread over several months. The COVID pandemic led to a 20% to 30% drop in demand over only a few weeks.In the next few months, we expect very low frac activity in the oil basins.

U.S. oil producers are now navigating forced production shut-ins due to storage constraints. U.S. oil production will decline rapidly due to both wells being shut in and extremely low levels of new wells coming on production.

Where things go next, depends greatly on how quickly demand for oil rebounds as world economies reopen and oil begins to be drawn out of storage.The pace of oil storage draws and the pace of oil demand rebound from increased economic activity will strongly influence oil prices and therefore producer appetite for frac services.

These factors may lead to an increase in frac activity later this year. Our highly flexible cost structure and strong Liberty culture, allow us to adapt to whatever unfolds.

We are strongly focused on preserving Liberty culture and our competitive advantages, while always delivering superior service to our customers on-site and during periods of hiatus and frac operations.We innovated our way to success during the last downturn and we are busy doing the same this time with inventive cost saving frac and completion design changes to active parent-child well management efforts, novel equipment innovations and software applications to optimize logistics.

Michael will summarize the specific cost-cutting and liquidity enhancing measures that we have undertaken.Before I turn the call over to Michael, I want to highlight several distinct advantages that position Liberty to weather this downturn and come out the other side with a stronger market position.

One, top-tier customers who will survive and likely own larger asset portfolios on the other side; two, strong relationships and communications with our customers, we are in this downturn together and we will get through it together; three, a tight net Liberty culture of trust and partnership that brings out the best in crisis; four, differential performance that drives outsized demand for Liberty services; five, strong balance sheet built to last; six, loyal and committed suppliers and partners.I will now turn the call over to Michael to discuss our specific actions and financial results..

Good morning everyone.

As Chris discussed, entering into 2020, industry conditions were already challenged prior to the emergence of the COVID pandemic, but we were very proud to deliver solid 2019 results and a favorable 2020 outlook on our February earnings call with solid visibility for all 24 of our current fleets and our 25th fleet being fully utilized in 2020.However, the black swan event that crushed oil -- global oil demand and oil price has now crush demand for frac services across the domestic landscape and oil and gas -- all oil and gas basins have been affected.Regrettably, we announced earlier this month that we reduced our staffed frac fleet count by 50% and first -- for the first time in the company's history, we had to lay off Liberty team members.

The toll on separated and present Liberty employees has been dramatic and we are truly humbled by the incredible professionalism and understanding that the Liberty family has shown through the implementation of these tough measures.With that in mind, let me start by celebrating the remarkable achievements of the first quarter, which owed everything to the hard work of the entire Liberty team.

Our first quarter included a fully utilized schedule of 24 fleets that were active through mid-March.Our operations team pushed efficiency to new heights.

We pumped a company record amount of proppant and stages in the first quarter, a double-digit percentage increase from our previous best.For the first quarter of 2020, revenue increased 19% to $472 million from $398 million in the fourth quarter of 2019.

Net income after tax increased to $2 million in the first quarter, compared to a net loss of $18 million in the fourth quarter.

Fully diluted net income per share was $0.02 per share in the first quarter, compared to a fully diluted net loss per share of $0.15 in the fourth quarter of 2019.First quarter adjusted EBITDA increased 77% to $54 million from $30 million in the fourth quarter and annualized adjusted EBITDA per fleet was $9 million in the first quarter compared to $5 million in the fourth quarter.General and administrative expense totaled $29 million for the first quarter or 6% of revenues and included one-time software costs related to the ERP implementation of $1 million, noncash stock-based compensation expense of $3 million and $2.5 million accounts receivable allowances.

Net interest expense and associated fees totaled $3.6 million and income tax expense was $0.3 million for the first quarter.We ended the quarter with a strong liquidity position with a cash balance of $57 million, which was down from the fourth quarter of $113 million due to growth in revenue and therefore accounts receivable.

At quarter end, we had no borrowings drawn on our ABL facility and total liquidity including $202 million available under the credit facility was $259 million.In early March, due to the macroeconomic issues that Chris discussed and after close discussions with our customers about the likelihood of a precipitous decline in frac activity industry-wide we acted swiftly.

As we did in the last downturn, we began with a substantial cut to executive pay, but the incredibly fast deterioration in the industry conditions during March and the view that the conditions will be challenging for the most of 2020 led to the announcement we made earlier this month regarding reductions in a number of staff frac fleets and the necessity to reduce our workforce.To successfully navigate this unprecedented economic challenge, we focused on protecting the business through cash conservation, liquidity management and maintaining balance sheet strength.

We wanted to make sure that Liberty could weather a wide range of possible challenges ahead of us and to emerge on the other side stronger and well-positioned to take advantage of opportunities in the future.First, we reduced our staff frac fleet in early April and unfortunately had to reduce our workforce by nearly 50% during the second quarter.

We now have 12 staff frac fleets and we anticipate this will remain at 12 for the balance of the year with flexible furloughs cutting costs when activity drops below 12 fleets.As a result, we believe that we have structurally adjusted our cost base to align with anticipated 2020 activity outlook.

We didn't foresee further cuts to our staff frac fleet count at the moment, but we will manage the challenging near-term market by utilizing furloughs that will adjust our direct cost of operations very quickly in parallel with customer demand.

We expect annualized cost savings of $170 million from reduction in force measures.Second, we suspended variable compensation and our 401(k) match from Q2 going forward and reduced base salaries with the executive team and other salaried employees plus reduced cash compensation for our directors.

We expect an annualized cost savings of over $50 million from these measures.Third, we moved our capital expenditures to a maintenance-only mode after delivery of prior capital commitments.

Earlier this month, we announced a reduction in our planned 2020 capital expenditures to a range of $70 million to $90 million, which is over 50% below the midpoint of our previous guidance of approximately $165 million.

This includes approximately $33 million that was incurred in the first quarter of 2020, the majority of which was for technology and fleet enhancement such as the delivery of tier four dual fuel engines and pumps that were previously expected to be used on our 25th fleet.The second quarter of 2020 will also include some costs associated with this fleet while the second half capital -- of 2020 capital expenditures will primarily consist of maintenance costs.

This strategy will enable us to provide best-in-class fleet technologies for our customers who are keenly focused on prioritizing returns on each dollar of capital spending.Customer demand for superior services have increased in the current climate and provides us with an opportunity to further solidify long-term relationships with strategic customers.Fourth, we suspended our dividend.

During the quarter of -- ended March 31, 2020, the company paid quarterly cash dividends and distributions to stockholders and unitholders of approximately $5.6 million.

On April 2, we announced a suspension of future quarterly dividends for Class A common stockholders and distributions for Liberty LLC unitholders, until business conditions warrant reinstatement.

We believe this temporary measure to adjust our capital allocation strategy towards cash conservation is prudent to further protect our balance sheet against this uncertain backdrop.

Disciplined capital deployment is a core liberty principle and we look forward to resuming dividend payments when appropriate.Fifth, we are working with our supplier partners to reduce the costs of running our business. Liberty has always had a partnership mentality with our suppliers as we do with our customers.

This downturn is stressful for the whole supply chain in the oil and gas industry, but this is an industry that has always thrived on working together. Our supply chain partners view Liberty as a company they can rely on to work through tough times with.

And as such, in times like these, we come together across the table and productively work on cost savings. This mentality is the same whether it is our sand partners or our legal and accounting service providers.

We are expecting input cost reductions that will range from 10% to 30% depending on the specific cost line.Sixth, at the beginning in late April, we implemented a temporary measure of employee furlough plans in the field and corporate office.

Corporate furloughs will reduce personnel cost portion of G&A by almost 50% from the current reduced levels during what we believe will be the worst of the downturn, the second quarter and the early third quarter time frame.

Operationally, we will have the flexibility to furlough fleets as the work schedule demands and this will allow us to react quickly to adjust our cost structure down or up as the frac calendar demands.

We believe these steps set up Liberty to weather the storms that are in front of us and to be successful preparing to take advantage of future opportunities.We are managing the business pursuing a free cash flow positive strategy for the remainder of 2020 and we project to end the year with a greater cash balance than at the end of the first quarter.

As Chris discussed, the imbalance in the oil supply and demand has created a challenging market for fracs.

We are committed to our strategy of disciplined growth and returning capital to shareholders, but this requires us to protect the business first in an unprecedented downturn.The depth and duration remain uncertain, but we are confident that we have taken the necessary actions to manage through the downturn.

Importantly, we are well positioned to react quickly to a rebound in frac demand activity.

In these challenging times, we will take this opportunity to work diligently with our customers on providing the best-in-class service and engineering solutions and expect to emerge in a strong more favorable position with higher market share and more entrenched relationships with our operators.

We're deeply focused on being the foundation of a strong domestic energy industry.And with that, I will now turn the call back to Chris before we open for Q&A..

Thanks, Michael. My heartfelt thanks to the Liberty family for their actions during these extremely challenging times. It is with heavy hearts that Liberty had it's first-ever layoffs. Our hearts go out to these Liberty family members who are integral parts of building our company. We look forward to the days, when we can welcome them back to Liberty.

Thanks to all Liberty team members plus our customers and suppliers who have worked closely together to safeguard the health and safety of everyone during the pandemic. Nothing ever trumps the health and safety of our people.

Your efforts have been tremendous and we are proud of our record so far, but we can't take our eyes off this ball.Thanks also to the health care workers and first responders across our country, as they lead from the front in battling the pandemic.

I want to end with a few broad thoughts on energy and data points from the recently released EIA report on U.S. energy supply and demand in 2019. First, 2019 was the first year since 1957 that the U.S. produced more total energy than we consume. This is a huge milestone.

The two fastest-growing sources of energy supply in 2019 were oil and gas.In fact, oil and gas supplied just a hair below 70% of U.S. total energy consumption in 2019, an all-time high for market share. Our industry is critical in enabling today's world particularly our modern health care system.

We are also central to the world's COVID mitigation efforts from supplying the raw materials for PPE, personal protection equipment and other critical hospital supplies to literally fueling hospitals transportation and the rest of our economy. Hang tough everyone. We are needed.We'll now open the line for questions..

[Operator Instructions] The first question comes from Blake Gendron with Wolfe Research. Please go ahead..

Hey, good morning, guys. Thanks for taking my question. The first is on working capital. In the prior downturn you guys were growing fairly substantially. So it wasn't an appreciable source of cash.

But embedded in your free cash flow positive outlook for the remaining three quarters of this year, just wondering how we should think about the key components of working capital as contributors to cash flow?.

Yeah. Blake thanks very much. Yeah, we will actually have a significant generation of cash from working capital. As you saw, we've built our receivables pretty significantly in Q1 as we fuel growth. And I think you'll see that we'll be able to mine that as we go through the year.

And obviously, we are targeting balancing cash flow before working capital as closely as possible to zero as well..

Okay. Makes sense. And sticking with the working capital theme here I appreciate your comments about aligning yourselves with top tier customers. Would say though pushback from investors is that your position in the Rockies and the Bakken you have some challenged customers up there in the current commodity tape.

So, I'm just wondering what you're doing to mitigate bad debt risk. Do you have AR insurance? And if so what percentage of receivables are covered by insurance at this time? Thank you..

Yeah. No we take – we have a close relationship with all of our customers. We do not have AR insurance and we have no coverage on that at this present point in time. But yeah currently as everybody did we instituted the new guidance around looking at receivables in the first quarter. And as you saw, we took about a $2.5 million allowance.

$1 million of that was related to a small customer that filed a year – over a year ago finalizing that debt. So, really when we took a look at our receivables we've put about $1.5 million allowance on them.

So we feel pretty comfortable where we are at this present point in time that the market is changing very, very quickly for some of the E&P operators..

Understood. Appreciate the comments. Thanks guys..

Thanks, Blake..

Our next question will come from Chris Voie with Wells Fargo. Please go ahead..

Hey, good morning. Wondering if you can give a little update on your view for the Lower 48, there's a wide range of investments on how low activity is going to go. I guess, you guys are expecting to be able to maintain 12, but with some flexibility if it gets worse.

Can you give any color on what you're expecting for the industry at this point given the visibility that you have?.

Yes, Chris. Look the next few months will be extremely low frac activity in the oil basins. The gas basins clearly will hold up better, but oil basin frac activity, I mean, if you're shutting in wells to figure out where you're going to put oil you have to have special reasons to be fracking them.

And we know they're due, but there'll be very low frac activity in the next three months. And we absolutely will not be keeping 12 frac fleets busy during the next three months. The 12 frac fleets is sized to where we expect will probably be towards the end of this year.

We don't know how this rebound unfolds, but I think it's likely that the bottom in frac activity is the next three months..

Okay. That's helpful. Thanks. And then on a follow-up historically you guys have had a stance on M&A where you would be open to buying assets, but wanted to preserve the culture of the company and not acquire operating companies.

This is a pretty extreme situation.Now, I'm curious, if your view has shifted at all in terms of opportunistically acquiring anything or other product lines. Just maybe, if we could get an update on M&A and if there's been any shift in how you see it right now..

I think in the last – certainly in the last call, I don't know before that as the market gets weaker and things get dislocated that's a more likely time for Liberty to do something. Now, it's still a high bar. It's got to work. It's got to be additive on a per-share value. We've got to be comfortable with the cultural risks involved.

So look, yes, we are approached all the time on all sorts of things. It's not impossible, but a deal has really got to be compelling for shareholders of Liberty..

Okay. Thanks. I’ll turn it back..

Our next question will come from Chase Mulvehill with Bank of America. Please go ahead..

Hey, good morning, folks. I guess, I just want to follow up on Chris' question here on the M&A side and obviously it needs to be compelling.

But when you think about the compellingness of a potential acquisition, how do you think about the consolidation versus kind of adding incremental services whether it's kind of completion-related services or other?.

I don't know that, we have any new color there. Frac is by far and away the largest and I would say, central service of onshore unconventional production. That's our focus. Something enables that something – it's got to have synergies and strength in growing and building our frac business making it better. We're still focused guys..

Okay. All right. And then through this downturn, I mean, obviously last downturn, the strategy was to take market share expand the customer base.

Is there any change as we think about this downturn as to your strategy?.

Probably no wild changes, but look this downturn is different. The last downturn sort of ground lower and lower, right? So we had a certain amount of capacity and it was outperforming others. And so, as activity ground lower among our existing customers, we incrementally added customers to keep our capacity full. This has not ground lower.

This drove off a cliff because it was beyond our industry, right? Our economies got forcibly shut down. That creates a massive dislocation.And when frac fleets are getting pushed out of the market super fast price is collapsing so simply impractical for us in any reasonable way.

Could we have kept all our -- maybe but that was not the strategy or goal at all we took here.

Our goal here number one, was to do everything possible we could to help all of our existing customers navigate a massive disruption.So that's technical thing, that's performance, that's all sorts of business partnership things help on COVID plans and pandemic.

So one of the things that has happened already is growing our market share among our existing customers. As things rebound I think we'll see a lot of capacity and probably a number of competitors go out of the marketplace.

So when there's opportunities to add customers that we think will be good Liberty partners and positive for us, I suspect you'll see some of that.But our goal as it always is, is to build the long-term value of every share of Liberty stock. Yes. We said in our comments certainly we expect we will have a larger market share.

That in itself is not the goal. The goal is to build our competitive advantages deliver something differential. And when there's increased pull on that service quality and that differential product that probably will lead to market share gains..

Perfect. Appreciate the color. I am putting back over..

Thanks Chase..

Our next question will come from Waqar Syed with AltaCorp National. Please go ahead..

Good morning..

Good morning Waqar..

Okay. My question is how many crews do you have working as of today..

So we never give specific numbers on what's going on and in fact today might be a different answer than a week ago or a week from now, but I will say activity has dropped dramatically. So it is a small number. It is certainly single digits. And it may drop lower. It's probably going to bounce around.

There are a number of players, strong great players, good balance sheets going to sell oil at the wellhead in low single-digit prices.Why do it? Why do it? So yes, there's low activity now. We're not out trying to twist anyone's arm to convince them to do stuff now. There's lead times.

If you've got a big pad and you got to drill it out when you start fracking that oil is not going to come to market for two to four months.But it's low activity right now Waqar, but we've built the business and arranged our cost structure that. However people decide to play these next three months we're good with that.

We just stay in constant communication figuring out how we can plan and be supportive for whatever comes next..

Okay.

Then in terms of your CapEx budget for $70 million to $90 million what number of active fleets is embedded in that number? Any guidance there?.

Yes. Waqar, I mean I think that number was embedded around the 12 fleets running sort of a slightly slower portion of that to the balance of the year. I think there's definitely opportunity that we will reduce that CapEx number as we execute.

But again we want to make sure that we've got conservative estimates as to what we will execute on through them all..

With -- given what's going on with suppliers and everybody else what's your maintenance CapEx per fleet? And how does that compare now versus what it was a year ago?.

Yes. Really Waqar, look as you say we came in with a budget of around $3 million of fleet.

For this year at the beginning of this year when we were going to be fully active for 24, that changes right? I mean again maintenance CapEx is basically the replacement of engines, transmissions and power-ins.Obviously some of that is, as we're not running all of our fleets is a would be deferred, right? So if an engine blows up we can put that pump on the bench and we can use one of the ones that wasn't being utilized before.

So our order though over the next two years it's going to average around about $3 million per active frac fleet. But can we defer some of that over the next nine months into 2021? Yes. So that's -- the great thing about the service industry, it's a very flexible business..

Okay. And then just a final question there, Chris you have a pretty good handle on the Bakken DJ. You guys have done work in the Permian.

Given what you're seeing in terms of completion activity, how do you see the decline rates in those basins, and any thoughts on where the production could go there in these basins?.

Yes. They're down significantly downward. And Waqar as you know the further away you are and the higher your transportation costs, right everyone's reading about the Bakken. Clearly, the Bakken is Penn first frac activity, declined there first. Shut-ins are happening there first.

As oil prices compress, those extra differentials from basins further away from the Gulf Coast they -- on a percentage-wise those differentials become a bigger deal. So things compress.Certainly in downturns low oil prices. Rockies get hit first and then hit worse. That's no different this time. It's not just a basin thing though.

Within certain basins some customers have refineries and dedicated transportation and offtake agreements at their own refineries. You know, they're in a different position to people with different offtake different ways they market their crude and move their crude.

So it's variable but I think you will see a large contraction in oil production in virtually every base driven simply by economics. I have a strong balance sheet why would I take $4 at my wellhead if I can shut in that production and wait two or three months?So I think you're going to see U.S. production artificially contract rapidly because.

The storage tanks getting year full. We simply have to have today's supply equal to today's demand. Today's demand is artificially compressed although it's started to bounce back the last couple of weeks, but only at a slow pace. So then you'll see that.Then I think the next phase after that is you'll see people bring production back on.

And at the same time you'll probably see people start to frac. They'll be looking ahead two or three months what is -- where do we believe oil prices and oil demand is going to go and it will come back. But -- sorry for the long-winded answer but yes the Rockies are going to be hit earlier and hit a little harder than the other basins.

But these same impacts will be across all the basins and we will see multiple millions of barrels a day come out of U.S. oil production this year..

Thank you, sir. Thank you..

Thanks, Waqar..

Our next question will come from John Daniel with Simmons. Please go ahead..

Hey, guys. No longer Simmons, but that's okay. Chris, a great quarter by the way in light of the market so congratulations there. But let's assume that you get back to the steady state of 12 fleets running call it effectively all 12.

And knowing that you're probably averse in giving financial guidance in this market but what's a reasonable range from an EBITDA per fleet in that scenario?.

Yes. Yes certainly, way too early to say that, John. Look pricing dropped hard. It's probably bottomed, right? Just fleets have to get pushed out of the marketplace. Price and customer preference are the two mechanisms that do that that decide, which fleets get pushed out.

With this very little activity it really comes down to customer preference, but then pricing likely has bottomed. And then as activity increases that's the force that'll drive price back up. But we're going to be in a challenged market this year and for -- it could be several quarters.

I suspect it will be several quarters.So we don't have any crystal bar. So I don't have any particular prognostication on what EBITDA per fleet will unfold over the next few quarters. It will be low and it will probably start to move up.

We worry more about the right relationships, the right balance sheet the right competitive advantages the right customers. The times to reap cash from our assets that's not 2020 that's building in 2020 to set that up..

Fair enough. And then in terms of working with the right customers obviously a lot of them are going to take the holidays in the next couple of months.

But do you feel like you have firm visibility that those crews come back later this year, or is it just that's what they think they're going to do but they don't really know what they're going to do?.

Yes. No one knows exactly what we're going to do what they're going to do because there's so and John as you know as well as I do they're solely just moving pieces, right? The single biggest one is how does the economy rebound how does oil demand come back. And then what happens with oil supply around the world.

With this period of low price what stress does that cause to push oil out? So really activity will come back win oil prices and the ability to hedge future oil prices improves. Well right now take away in short-term prices but no. So people have -- everyone's got plans or ideas.

We're constantly talking but everyone is really going to watch and follow what the data says..

Got it. And then just last one, sort of, theoretical big picture for me is you kind of have a clean slate right now.

Are there any things that you want to do differently with Liberty going forward when the market eventually recovers?.

Well, there's lots of things we talk about. There's lots of technology efforts we have going on and only a few amount of them we talk with. But to us, I would say really it's doubling down or deepening what we've already said. The way to get better in this industry is partnerships long-term partnerships with customers to be able to flex together.

When the price of everything changes the optimal design changes..

Right..

Desire for new technologies hey, if we can cut 20% out and move oil production this way that may make sense in a depressed price but it may not make sense at a high price. So for us it's just to keep getting better, but not just internally in our doors but in our partnership with our customers with our major suppliers.

So, I guess, I get a nothing answer for you..

That’s right. Nice try. All right. Thanks a lot..

Thanks, John..

Our next question will come from Ian McPherson with Simmons. Please go ahead..

Thanks. Good morning. Thanks for the answers today. Chris I mean this is more of a compliment that Liberty has struck me as an experienced cold stacker of equipment and now you're marketing half of your fleet for this year and for some quarters.

What have you picked up with regard to the do’s and don’ts from your competitors across the industry with parking equipment for a long time? And how do you envision your plans for your idle – your old idle equipment through this downturn?.

Ian, it's Ron. Yes. Obviously, that's not something we've had to do in our past but we have an incredible operations team. They knock it out of the park in the field each and every day and these are guys who have been in this industry a long, long time and know how to take great care of an asset.

So we have confidence in the plans they're putting in place to take those assets and cold stack them for the foreseeable future and ensure that those assets are ready to go when we're ready to put them back in the field.So they've laid out a comprehensive plan as to where those assets are going to live in our world, what's going to be done to them to ensure that they're ready to go and we have the utmost confidence that when we need those assets they'll be ready to perform like Liberty assets always have..

Okay. Thanks, Ron.

Is it fair to assume that your marketed fleets now are more concentrated around your clean fleets and quiet fleets?.

Yes. Look I would say in this downturn, right the more assets are going to be in the stronger players, yes. Interest in that stuff absolutely is growing. So yes, that's a higher percent.

Activity in general is going to migrate to Texas through this downturn.Our market share, our percent of our assets in the Permian will grow quite meaningfully during this downturn but we'll stand behind all of our customers. But yes, I think a migration towards next-generation fleets absolutely is in progress and the downturn is not changing that..

Thanks, Chris. And it's been danced around a little bit during the conversation this morning but how much do you think this most recent lag down has impacted – I won't ask you to talk about your price book but just a more industry-wide observation.

How much do you think this latest kick in the shins has impacted industry pricing from January to today?.

Meaningfully, meaningfully. Look, it's – think of our customers that they're getting way less than half per barrel of oil today than they were getting four months ago. Their margins, their activity is compressed. So everything compresses. All input costs compress, margins compress. So yes, it's meaningful..

Fair enough. Good. Thanks for all the answers. Appreciate it..

Thanks, Ian. Appreciate it..

Our next question will come from Sean Meakim with JPMorgan. Please go ahead..

Thank you, good morning..

Good morning, Sean..

So Chris I was hoping maybe to come back to I don't want to say the M&A question but the M&A topic from a different perspective. So for a long time now multiple cycles, pressure pumping has been the fastest-growing product line in all of oilfield services.

It's also been the most fragmented with the weakest market structure.If you were to fast forward a couple of years ahead, let's say even beyond the next 12 to 18 months that could be quite difficult.

Do you see this as a time frame in which it's realistic to suggest that frac could consolidate to a point where it has a healthier market structure?So I recognize to the extent that Liberty may or may not be a participant in that consolidation over time that you still have a willingness if the parameters and returns meet your thresholds.

But I'm thinking more at an industry level, is it realistic to think that in a world in which large cap diversified services or formerly large cap are not necessarily interested in being consolidators in this product line, can the relatively smaller midsized players in this space consolidate to what's a healthy market structure? I love just trying to hear your thoughts on what's realistic and what are kind of the probability distribution of outcomes for this market over the next now 18 to 36 months?.

So Sean my short answer is yes. I think we believe that that's exactly what will happen. No insight in how that will come about but I believe that happens. I think you characterized our industry to pass very well, incredible growth. Shale revolution has transformed the world.

Frac has been the engine behind it grown massively.But as I use the analogy, like the dot-com revolution, awesome for the world, not awesome for the participants in the business in the last decade but we had some positive trends already and one is higher specs for equipment.

Next-generation fleets, there's a huge interest in that, just a higher bar around performance and safety. That was bleeding capacity out. That was causing the lower-tier players to shrink and become under stress.Obviously, stresses are very significant right now. So I very much subscribe to your premise.

I think we will have dramatically fewer players in the space two years from now, dramatically increase concentration and fundamentally a better business.That will take time. That will be an ugly process. There'll be bankruptcies. There'll be mergers. There'll be just shutdowns of business lines.

We've already seen that twice at least two companies already, just got out of the business in partly trucks.So, yes, I think as painful as these downturns are and this one is a unique one, it will lead to some very positive structural changes in our industry.

And I think the industry as a whole, while overall might be smaller two years from now, I think the competitive marketplace and structure of the business will be meaningfully better..

I appreciate that. So then the other thing, I would posit to you is that historically this business has never been able to fix itself from a supply perspective, right? The supply tends to be pretty sticky. So meaning that, where we've seen step changes in utilization it's the demand.

Either demand under-whelms the supply for a reason or in some cases there's been a step change in demand as well as stripping supply.

It's been many years since that was the case, but we have seen it.As you think about that consolidation scenario, is there a threshold of demand that we need to see eventually, or again, taking nothing about the near term, but on an intermediate to long-term basis what types of thresholds of crew demand or something along those lines would you need to see in order to get the industry back to where it's functioning at a healthier level? Again, just more of a hypothetical, but I'd like to hear how you see that piece on an intermediate long-term basis..

Yes. We have talked about that a fair amount. And of course, the honest answer is, we don't know. We simply don't know.

But if you look at world oil production, the way it's going right now, there's not much growth, and there's a lot of countries that are meaningful oil producers that are in trouble.So I think if you look forward, looking past the next two years, I don't know how fast oil demand is going to bounce back from COVID, no one knows.

And we certainly do not. But I think the call on U.S. oil is likely to be meaningful in the next three to 10 years. I think our industry overall will be smaller fewer players maybe even gross CapEx dollars. I doubt we'll ever get back to 2014 levels. I doubt that.Total industry frac fleets, it might only be 200 or 250 fleets three or four years from now.

Remember, fleets are getting higher efficiency and bigger throughput. So that can still do a lot of work.

But the new technology and the higher level of performance, there's just a lot of incumbent players that I don't think there will be a spot for on the other side.And you're right, our industry, historically, has been very bad at managing supply on this end.

That's absolutely true, which is why the weaker conditions we had last year and the weaker conditions we expected to have this year, as you would have talked we do that productive.

The lower quality players literally -- we're going cash flow negative and capacity actually was leaving our industry.I thought this might have been our first year where demand might have been flattish without the -- well we would still would have a fourth quarter falloff.

Demand might have been flattish, but the market was going to incrementally get better, because the lower quality players and older tier equipment was just getting pushed out.But yes, to have meaningful discipline, we probably got to have a smaller number of players in a more consolidated sector.

And I do believe -- we do believe in a couple of years we should have something like that..

That's very helpful, a lot of queue on there. Thank you, Chris..

Thanks, Sean..

Our next question will come from Connor Lynagh with Morgan Stanley. Please go ahead..

Yes. Thanks. I was wondering if you guys could sort of help us put together all the moving pieces on your margin. It sounds like you've got a lot of flexibility built into your structure now. You're also expecting some input cost savings.

If we were to look at second quarter and say activity is six fleets or activity is 12 fleets, how different would your gross profit margin -- and maybe I will just focus there to keep it simpler or put a different way what would you expect your incremental margins way relative to it?.

I think, yes, Connor a little bit too much detail, but the reality is I think the way we've set up our flexibility other than fixed district overhead gross margins, just gross profit margins will stay relatively flat.

So if you take the fixed cost and the fixed district cost out, they will be relatively flat whether we're running three fleets or nine fleets. So, no, we're not going to be running 12 fleets in Q2.So I think that's the case.

Obviously, then you've got a significant difference in your G&A absorption and your fixed district opening is the key thing there. I think that's generally hard. So again, the policy is going to be -- when we're working we'll have crews working.

We've got -- we've got nine fleets working and we're going to have of order 800 people out there in the field work. And if we've got four fleets working, we're going to have 350. So I think that's going to be a key thing..

Yeah. That makes sense.

And could I ask, when you combine the impact of the price degradation for yourselves but also the input cost degradation, how much would that have affected gross profit margin absent these overhead absorption effects?.

Sure. Just to -- there's far too many variables in the -- to talk about to comment on..

Okay. Fair enough. Worth to try. Last one for me.

Could you quantify -- and I apologize if I missed this, but just how significant the drop in G&A we should expect in the second quarter is from the actions you've taken there?.

Yeah. I mean, it's fairly significant, right? We will be of order one-time cost in the first one but of order 30%..

All right, perfect. Thanks guys..

Thanks, Connor..

Our next question will come from Marc Banichi with Cowen. Please go ahead..

Thanks..

Hi, Marc..

Hey, guys. Recognize we don't know where things are going to go from here, but I was curious if you could just talk about April and maybe what the fleet count and profitability looked like? And then maybe we can make our own assumptions about what happens in the next couple of months..

Yeah, Marc. I mean again we won't give any details, but you can imagine things -- I said go off a cliff but it's not a completely vertical cliff right? It's a very -- more like a five, seven climb than a five, 10. And so there's some time period as it runs down that cliff. So if we went into the start of April, we had a much higher fleet count.

So certainly the fleet count is going to be meaningfully higher in April than it's going to be in May and June..

Right, okay.

And reasonable to think that the profitability per fleet would also be following that trend?.

Oh, yeah. You've got fixed cost absorption that obviously changes massively when you get down to very low fleets running..

Yeah, okay. In terms of the geographic distribution of the fleets, I mean, you guys have been focused on the oily basins and been pushing towards Permian over the past couple of years. But there is a bright spot right now, it seems like in the gas basins where you historically haven't had exposure.

How do you think about the opportunity there, or interest in repositioning some fleets as a result of some of those dynamics?.

We've been approached by gas players for the last few years and maybe even more recently. We've watched those basins. Obviously they're awesome changed the world natural gas supply. But they've been -- the reason we didn't go into the gas basins to begin with was it's just simply easier to produce gas and oil. So the U.S.

was just so gas-rich and we still are. And that -- and the ramp-up in productivity of wells was just simply awesome.But it meant really a falling market for five -- at least five years that's been shrinking frac market in the gas basins, but still sizable but shrinking.

But, yeah, have those markets maybe bottomed as demand for frac in them? There's a good chance they have. So, yeah, the macro there is definitely more attractive to us now than it's been in the past.The caveat to that is we tend to move slowly right? We're about customers and relationships and partnerships and so it's possible. It's not imminent.

It's very possible. If nothing happens we don't move into a new basin for another year or two. Probably we eventually will.But our focus right now for sure top focus by far is our existing customers, how do we get -- grow our market share with them and help them, not just survive but thrive on the other side of this downturn.

And we're getting a lot of inbound calls from customers that have providers that have sketchier futures. And so we are starting dialogues with different players. That's a plus.

But, yeah, that's about all I can say.But I agree very much Marc with your comment that the relative performance of the gas basins through this downturn is definitely going to be better. And, yeah, those basins don't look the way they did years ago..

Okay, great. Thanks, Chris. That’s helpful perspective. I’ll turn it back..

Thanks. Thanks, Marc..

Our next question comes from George O'Leary with Tudor, Pickering, Holt & Co. Please go ahead..

Yeah, just going to try to get it at something, I think some others are trying to get at earlier but from a higher level perspective, it sounded like the lion's share of the free cash flow for this year is going to come from a working capital unwind as revenue is expected to decline.And then I thought I heard a comment earlier in the prepared remarks that was along the line to trying to run the rest of the business at/or above cash flow breakeven.

So, one, did I hear that correctly? And should I think of that cash flow breakeven at which you're trying to keep the business at/or above as an adjusted EBITDA less maintenance CapEx level, or how should we think about that?.

Yeah. George, I mean, that's exactly right. I mean, the target obviously is to make sure that you're earning enough of your fleets, you're absorbing your G&A and you're covering your maintenance capital. There is no guarantee that that is going to be possible this year.

I mean, again, we don't know where the market is going for the next few months and then, how quickly the rebound is going to happen.When the restrictions get lifted, when does oil demand get back? But obviously, that's the way you want to in these sorts of days and ages, that's the way you want to manage your business for this what I would consider almost like a stance to where you're building the foundations for where -- for what you're going to take a margin to 2021 into rebound..

Got it, got it. That's super helpful.

And then sticking with the geographic line of questioning, in the last few questioners, how do you think your geographic distribution of fleets will look versus what it's kind of historically more or less look like over the next six to 12 months?And then to the point on, fixed district overhead, is there any opportunity to reduce that whether it's via eliminating consolidating facilities lowering your lease rates or real estate fees? Is there a way you can reduce costs structurally on that front?.

George, I'll let Mark -- I'll let Michael take the cost side of that. But on the geographic basin, yeah, there's no doubt our -- the geographic distribution of us was changing already, right?We weren't shrinking in the Rockies. But we were growing in the Permian.

Permian is the biggest -- in Q1, Permian is the biggest basin we have as well as -- and certainly it will become not just our biggest basin, but by far our biggest basin through this downturn.Yeah, just add more assets in Texas a larger percent of our activity will be in Texas than the Rockies, this year and next year than before.

But I could have said that in 2019 and 2018 as well. But an accelerated geographic transformation is happening.Not leaving any of the Rockies basins. They are huge and important long-term partnerships. We're here for the count. We've got great relationships there.

And fantastic operations, but a greater percent of activity is going to be in Texas and so are we..

And George, when I talk about the cost side of it, we've -- obviously we don't have like huge numbers of legacy, sort of inactive basin that lot of the historical players have. Again, we've been very, very focused.

And so, the areas that we have set up shop in and we kind of work in we can continue to work in.That said, we are working on bringing down our fixed costs for the balance of the year, pretty working with basically real estate providers and a number of other fixed cost providers, whether it's insurance and other providers to try and bring down those fixed G&A costs.We have no sort of clarity on that.

And again these are costs that are generally not as flexible. But the part of it being a worldwide pandemic worldwide economic collapse, it is actually much more -- much easier to have those conversations with those providers. And I think they look at this present point in time like they could be fruitful. But we have no details..

Thanks very much guys. Thanks, Chris..

Our next question will come from [Indiscernible]. Please go ahead..

Chris, Michael, Ron, just a quick thank you to you and the entire leadership team for really walking the walk. We all know that furlough is the last resort.

And just respect you guys for cutting your own comp and really leaning on culture.And then, Chris just if you wouldn't mind commenting I mean there's obviously been a rapid push for ESG and conversion to renewable energy over the last couple of years.

How do you see this pandemic impacting the pace of that or fundamentally changing any of those variables?.

Yeah. Frank I'm not sure that it fundamentally changes anything. Certainly in the short term when unemployment is low when things are good people focuses tend to grow on issues not as immediate.And so certainly right now what are people worried about most? A job their income is shrinking low cost energy reliability.

So maybe, there's a little bit of slowing of that. There's shrinkage in total capital to be invested but I don't know that it fundamentally changes the outlook there.As I said, the past trends are just different. I made that point. Oil and gas as a percent of total energy supply to the U.S.

was the higher percent last year ever not in the last five years or so ever.So the energy transitions are very slow. In fact the world -- another way to look at it the worlds never had an energy transition.

The amount of energy we get from just biomass it has not gone down.The world consumption trees and sticks and wood that power the world that has not shrunk actually, and we added another layer on top of it. All the additional energy sources to date have always been additive with actually no displacement at all.That is changing a little bit right now.

Coal looks like -- its total usage right now is sort of plateaued. It may actually shrink a bit. It looks like it will shrink. So, we'll see a little bit of displacement from -- it's still the dominant source of worldwide electricity coal dominant. Gas is taking market share in the largest percent of any other source there.

Wind is also taking electricity market share.But again as when I say coal dominant for electricity, electricity is 19% of world energy. 81% of the energy humans consume has nothing to do with the electricity grid or electricity. So, in any case, again, I think it changes people's focus in the short run.

But is it a long-term trend changer? I would guess not..

Thank you. I'll turn it back..

Last question will come from Tom Curran with B. Riley FBR. Please go ahead..

Good morning guys. Thanks for squeezing me in so late..

Hey Tom..

So, I'm curious when we get to the other side of this CASM and oil consumption and customer behavior and spending starts to normalize what is the one technology, if possible, that you would have wanted to either add or that you already have but would ideally have significantly augmented?.

Look, I would say there are two sides of that. One and you've heard us talk about it and these efforts progress is how to fundamentally change wear and tear on pumps. That's something we've worked on for years.

That work is moving forward.And so, yes, by the other side of this might we have a fundamentally different way or at least fundamentally change the cost structure of maintaining and operating pumps, that's very possible. That's the single biggest operating cost.

And so, yes, might we have a fundamental change in that by the other side? I think there's a very reasonable chance of that.And the other -- there's lots but the other has been the massive stuff we've done in big data and analysis. As the industry has thinned out and leaned up, a lot of the technology and research and effort on frac has disappeared.

People love to say, hey we're a manufacturing company now. And there's a lot of manufacturing like things about what we do in the oil and gas business, but the rocks underground were not built in a factory. There's enormous heterogeneity and variability in the rocks, the fluids, the stresses, the faults, the cracks.

These are very complex systems that are two miles through the earth.So, the smart engineering big data analysis optimization is huge. And that's -- I think Liberty has made big strides in that in the last nine years and I think we'll make huge strides in the next nine years.

But again it's fundamentally a harder problem than big data for Amazon customer behaviors. They get a certain number of SKUs and a certain number of transactions.We don't know everything about the rock. The rock changes as you take fluids out of it and you put sand into it.

So, it's a very complicated problem that requires empirical data and empirical data that has to be normalized through these heterogeneities.So, in any case, that's a big problem, but I do think you will see a few years from now on the other side of this meaningful advancements there as well. Those are probably the two I would highlight..

And then just as a quick follow-up there. And Ron if you have thoughts of your own on it I'd be interested in hearing them.

But when it comes to M&A would you be open to a bolt-on mainly or purely driven by technology? And if we were to see that would it most likely be in that second category Chris big data maybe industrial Internet of Things-related?.

Yes. Ron will take that one..

Yes absolutely. I think both of those areas would be of interest to us.

I think we've always said that where opportunity arises that fits with our core -- the ability to make our core business better which is frac without detracting too much attention from being focused on frac we would be interested in that.And so whether that was a technology provider that did something to improve the asset we put out in the field or the ability of those assets to operate at a lower cost base we would be interested in that.

And absolutely on the data side of things, we continue to find ways to innovate there. And if we could find a unique partner that was a great fit for Liberty, we would absolutely consider that..

Good to hear. Good luck. Thanks for taking my questions..

Yes, great questions Tom. It sounds like you've been few of our internal meetings. Take care..

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

Great. Thank you. We went long today but obviously these are very different times. We appreciate everyone's interest and the dialogue in that. We wish everyone's family to be safe and get through this and get our lives back moving forward again. Thank you all for your time today..

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