Liberty Energy Inc (LBRT) 2019 Q4 法說會逐字稿

Good morning, and welcome to Liberty Oilfield Services Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that 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 risk and uncertainty 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 uncertainty 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 and the calculation of pretax return on capital employed as discussed on this call are presented in the company's earnings release, which is available on this website -- on its website.

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

Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2019 operational and financial results. We are pleased to have delivered solid financial results in 2019, given a market backdrop that became more challenging as the year progressed.

For the full year 2019, revenue was $2 billion, an 8% decrease from $2.2 billion in 2018. Net income totaled $75 million in the full year, and full year adjusted EBITDA was $277 million, a 37% decline from $438 million in 2018. Annualized EBITDA per fleet was $12.2 million compared to $20.6 million in the prior year. Results were driven by a challenging price environment that offset an increase in the average number of frac fleets deployed during the year and improved frac efficiency.

Continued strong cash generation in 2019 enabled us to invest for growth, returned $41 million in cash to shareholders in the form of quarterly dividends, distributions and the repurchase of 1.2% of our total shares outstanding at the outset of the year, while investing in growing our market share and organically growing our fleet count from 22 fleets at the end of 2018 to 24 fleets at the beginning of 2020.

Pretax return on capital employed was 10% for the full year 2019. All of this was achieved while improving our balance sheet to a positive net cash position at the year-end. The sequential slowdown of completions in the fourth quarter was more pronounced than that experienced during the same period in 2018, as operators managed completions to fixed capital expenditures and some were constrained by capital markets.

These constraints caused gaps in the completion schedule and negatively affected overall fleet utilization. Despite these challenging conditions during the fourth quarter, Liberty achieved positive cash flow from operations without structural changes to our fleet count or workforce. We had visibility into the strong customer demand for Liberty's differential services at the start of the first quarter, burdening Q4 a bit to best position ourselves moving into 2020. This demand positioned us to commission our 24th fleet in January, a testament to the level of dedicated customer interest for our best-in-class fleets.

For the fourth quarter of 2019, revenue decreased 23% to $398 million from $515 million in the third quarter of 2019. Net loss after tax decreased to $18 million in the fourth quarter compared to net income of $19 million in the third quarter. Fourth quarter adjusted EBITDA decreased 57% to $30 million from $70 million in the third quarter. Annualized adjusted EBITDA per fleet was $5.2 million in the fourth quarter compared to $12.1 million in the third quarter.

The pricing dynamic entering 2020 is challenging. Total industry frac stages in North America were up only marginally year-over-year in 2019. However, efficiency gains across the industry have raised the number of frac stages completed by each fleet by 10% to 20%, which implies a decrease of at least 10% in the active frac fleets needed to meet demand. The slowing pace of frac activity led to progressively lower demand for frac fleets through the second half of 2019, resulting in pricing pressure on services. The substantial oversupply of frac equipment in the second half of 2019 was the pricing backdrop for 2020 dedicated fleet negotiations.

The supply of staffed fracturing fleets across the industry fell meaningfully in late 2019. While this trend is helpful in the long-term, we believe the impact of attrition has not yet supported improvement in pricing for services at the start of 2020. Without improvement in pricing, increased profitability will have to come from technology, increased efficiency and improved processes. Future activity projections for the industry are dependent on multiple factors, including commodity prices, availability of capital and takeaway capacity in each basin.

For Liberty fleets, demand is strong in 2020, and we chose to activate our 24th fleet earlier this year as part of growing our business with larger customers to support their long-term development programs. Liberty has always employed a strategy of investing for the future based on long-term fundamentals. Our competitively advantaged portfolio of highly efficient, environmentally friendly frac fleets, coupled with our financial strength, allows us to navigate periods of challenging markets and to take advantage when the cycle turns favorable.

A significant topic at the forefront of investor and customer conversations within the industry is environmental, social and governance concerns, which Liberty has focused on since day 1. We pride ourselves on advancing ESG solutions that are beneficial to all stakeholders, our customers, our communities and our employees. Governance and compensation practices at Liberty have always been focused on transparency and maximizing alignment.

Liberty is also a first mover in driving an environmental and socially conscious approach to hydraulic fracturing. We began deploying dual fuel frac fleets in 2013, introduced our game-changing Quiet Fleets in 2016, and we're an early test partner with Caterpillar on both Tier 4 diesel and Tier 4 dynamic gas blending engines.

We continue our aggressive efforts in developing next-generation frac fleets to both reduce our environmental impacts and reduce customer costs by displacing diesel fuel with natural gas.

We are in conversations with many customers about Liberty's next-generation fleets and recently came to terms to build fleet 25, a Tier 4 DGB Quiet Fleet for an existing customer under a long-term agreement. It takes special circumstances in today's market to build capacity, but this was just such a case.

We don't view ESG fleets as special fleets. They are simply the way we do business. ESG concerns are not a box check for Liberty, they are simply embedded in our DNA. As we continue to review future capital outlay decisions, we undertook a comprehensive study on next-generation frac fleets under various operating conditions.

In order to better understand the pros and cons of next-generation options for powering frac fleets, the Liberty team prepared a white paper in partnership with OEM manufacturers that compares Tier 4 diesel, Tier 4 dual fuel and turbine powered electric frac fleets, and it is available for download on our website. The comparison looked at emissions profiles, fuel costs, operational considerations and capital costs for each of the 3 options.

The results of the analysis under field operating scenarios was that with current technologies, Tier 4 dual fuel fleets provide the most effective combination of fuel savings, reduced emissions footprint, operational efficiency and capital cost.

Greenhouse gas emissions are currently lowest for the dual fuel technology as are total overall emissions. We currently expect to deploy both dual fuel fleets in the near-term and potentially next-generation electric fleets in the future.

During the 2015 to 2016 downturn, Liberty played offense. We grew our market share and invested in our technology, systems and culture. We were well positioned to take advantage of an improving market. We are following the same strategy this time.

While the timing of an improvement in market conditions remains uncertain, we expect to make significant progress in 2020 across all fronts, customers, culture, operations, technology and next-generation frac fleets.

I will now hand the call over to Michael Stock, our CFO, to discuss our financial results in more detail.

Good morning, everyone. We are pleased with the performance of our team in the fourth quarter and the full year 2019, amidst a challenging market backdrop.

For the full year 2019, revenue declined 8% to $2 billion from $2.2 billion in 2018. Results were driven by a challenging price environment, more than offsetting a 7% increase in the average number of frac fleets deployed during the year.

Net income totaled $75 million for the full year. Due to a nuance in GAAP accounting related to the relative timing of exchanges from Class B to A shares and the quarterly earnings performance, we reported $0.53 per fully diluted earnings per share, which is lower than would have been calculated without the exchanges between the 2 classes of shares.

Full year adjusted EBITDA was $277 million, a 37% decline from $438 million in 2018. Annualized EBITDA per fleet was $12.2 million compared to $20.6 million in the prior year.

As Chris pointed out, the continuation of strong cash generation in 2019 enabled us to invest in growth, return $41 million in cash to shareholders in the form of quarterly dividends, distributions and the repurchase of 1.2% of our total shares outstanding at the outset of the year.

Pretax return on capital employed was 10% for the full year. All of this was achieved while improving our balance sheet to a positive net cash position at year-end. We are very pleased with the operational efficiencies gained during the year and solid financial results in a period of significant oversupply of frac capacity in the market and the resulting pricing pressures.

The sequential slowdown in completions in the fourth quarter was disruptive, as operators managed completions to fix capital expenditure budgets and some were constrained by capital markets. These capital constraints caused gap in the completion of schedule and negatively affected overall fleet utilization.

Further, the oversupply of frac fleets was a negative drag on spicing -- pricing for spot work available to fill in gaps related to dedicated operators scheduling issues. Despite these challenging conditions, during the fourth quarter, Liberty achieved positive cash flow from operations without structural changes to our fleet count or workforce due to the visibility we had into strong customer demand for Liberty's differential services at the start of the first quarter.

For the fourth quarter of 2019, revenue decreased 23% to $398 million from $515 million in the third quarter of '19. Net loss after tax decreased to $18 million in the fourth quarter compared to net income of $19 million in the third quarter. Fully diluted net loss per share was $0.15 in the fourth quarter compared to fully diluted earnings per share of $0.15 in the third quarter of 2019.

Fourth quarter adjusted EBITDA decreased 57% to $30 million from $70 million in the third quarter, and annualized adjusted EBITDA per fleet was $5.2 million in the fourth quarter compared to $12.1 million in the third quarter. General and administrative expense totaled $98 million for the full year of 2019 or 5% of revenues and included noncash stock-based compensation expense of $9.2 million. G&A expense totaled $26 million for the quarter or 7% of revenues and included noncash stock-based compensation of $2.5 million.

Net interest expense and associated fees totaled $14.7 million for the full year 2019 and $3.2 million for the fourth quarter. Income tax expense totaled $14.1 million for the full year 2019 and was a $3.1 million benefit for the fourth quarter. We ended the year with a cash balance of $113 million and a net cash position of $7 million. At year-end, we had no borrowings drawn on the ABL credit facility, and total liquidity, including $171 million available under the credit facility, was $283 million.

Liberty's financial results, favorable long-term outlook, strong balance sheet support our balanced strategy of disciplined growth and returning capital to our stockholders. Liberty is committed to compounding stockholder value by reinvesting cash flow at high rates of return and returning cash to stockholders as appropriate. During the year ended December 31, 2019, the company paid quarterly cash dividends and distributions to stockholders and unitholders of approximately $23 million.

Our Board of Directors announced on January 22, 2020, a cash dividend of $0.05 per share for Class A common stock, to be paid on March 20, 2020, to holders of record as of March 6, 2020, and a distribution of $0.05 per unit has also been approved for holders of units at Liberty LLC, which will use the same record and payment date.

As Chris discussed, the pricing dynamics for 2020 are challenging due to the supply-demand imbalance in the frac market in the latter half of 2019. This imbalance is being fixed by a reduction of supply, but this takes time and is not affecting pricing for work in 2020 yet.

We see a frac market that looks more positive over the next few years, and this is the driver for 2020 investment decisions. In the current pricing environment with current efficiencies, we're projecting the EBITDA per active frac fleet will be down slightly in the full year 2020 when compared to the full year 2019 at approximately $10 million per active frac fleet.

In mid-2019, we took delivery of our 24th fleet and held it out of the market until a combination of the right customer with dedicated activity levels and projected returns supported activation. This fleet was placed in service in January with a dedicated customer.

In 2019, we also announced the commitment to purchase next-generation Tier 4 dual fuel engines to upgrade 2 fleets in 2020. Due to strong customer demand, we've adjusted these plans, and one set of these engines will be used to build our 25th fleet. We expect capital expenditures in 2020 to be approximately $165 million, which includes $45 million for the completion of fleet 25, $85 million for maintenance capital and about $35 million for technology, fleet efficiency improvements, facilities and general capital. Fleet 25 will be deployed before the end of the second quarter with a long-term dedicated customer.

We believe redirecting the use of the Tier 4 dual fuel engines for 25th fleet is an example of optimizing our capital outlay for the highest long-term returns. We enter 2020 with a clear commitment to a value proposition, designed to report -- reward shareholders and stakeholders alike through commodity cycles. We believe that investing in the future and a sustained focus on technology innovation combined with highly efficient operations and our strong balance sheet, positions Liberty to deliver greater value for our shareholders through the cycles.

I will now turn it back to Chris before we open for Q&A.

U.S. oil production growth has slowed meaningfully over the last year, and we believe this trend will continue with the anticipated 2020 reduction in E&P CapEx. It is unclear right now whether the coronavirus will meaningfully disrupt oil demand growth this year. In any case, increased investment restraint by U.S. producers and frac companies should lead to an improved supply-demand balance in both the oil market and frac fleet market.

ESG is a far broader subject than often discussed. Our industry, like any industry, has a broad range of ESG benefits and costs that should be considered. For example, over 2 billion people still suffer energy poverty, lacking reliable access to electricity and clean cooking fuels. Lack of access to clean cooking fuels alone kills more people every year than AIDS and malaria combined. Energy poverty is also a major contributor to the other global scourges: hunger, malnutrition and lack of access to clean water.

The folks at Liberty are strongly motivated to play our part in combating energy property in the U.S. and around the globe, which would dramatically improve the lives of millions together with major environmental progress via reduced deforestation pressure and cleaner air as wood and crop residue burning is replaced with far cleaner fuels like liquid petroleum gas. Poverty remains both the greatest threat to humans and to the environment. In addition to contributing to the industry's role in combating energy poverty, Liberty continues our mission to reduce the impacts of energy production on nearby communities and the broader environment. Since our founding, Liberty has been a leader in ESG conscious frac practices and are committed to continue to push the industry forward.

We'll now open the line for questions.

(Operator Instructions) Our first question is from Chase Mulvehill from Bank of America.

I guess, first, if we can kind of talk about the 25th fleet, I just want to make sure that I heard you right. This was a newbuild fleet? Or are you actually upgrading some of the pumps to be able to squeeze another fleet out? So I just want to make sure I'm getting this right.

It is a newbuild fleet. We'd ordered pumps that we're going to upgrade across our fleet, but the demand from existing customers and the significant interest with -- across our customer base in new generation ESG fleets led us to make the decision. This is an additional fleet, a newbuild fleet.

Okay. And on the pumps that you had planned to replace with the new Cat pumps, are you still upgrading those as well?

Chase, we'll be upgrading 1 new set of -- 1 set of the pumps rather than 2, 1 fleet rather than 2. And that other fleet will just continue in its rotation as a Tier 2 diesel.

Got it. Okay. And the 24th and 25th fleet, it sounds like the 24th fleet started in 1Q. So can you confirm that? And then what's the timing for the 25th fleet and then what basins?

Yes. So Chase, the 24th fleet did start in Q1, sort of in the middle of January it was started up. Q2, I think the 25th fleet will be starting in Q2, I'd say, probably middle towards the end is probably where it is scheduled at the moment. That'll become a little clearer as we get through the build cycle. We don't really comment on the basin, but...

Yes, look, we have a general migration at Liberty to grow our capacity in the Permian. We're not necessarily shrinking elsewhere, but our net adds are in the Permian.

Got it. All right. One quick one. You talked about the $10 million of annualized EBITDA per fleet for this year. Could you talk about the trajectory of kind of how we get there? Do you get to $10 million in the first quarter? Or is this a gradual progression and you end up getting above that by the time you get to 3Q of this year?

Yes, Chase, generally, you always have a little bit of kind of seasonal challenges and a week or so of slow startup at the beginning of the year. So I'd say January will be under that run rate. Q2 and Q3 will be slightly over that run rate. I think Q4 likely will have a few challenges around the capital constraints, as we have seen for the last 2 years. I don't think that sort of works its way out of the system this year. So I think that'll be sort of the run rate, it will be like a slight -- a small bell curve as far as they go. A little bit higher in the middle of the year in the summer quarters. A little bit lower in Q1 and Q4.

And a little bit of a change, Chase, in customer profile that should mitigate somewhat the drop in Q4, although that's -- we don't think that's going away. We expect Q4 to be down again this year. But I think we -- it should be a little different for us this year, not quite as large of a drop as we had this year and last year.

Our next question is from Waqar Syed from AltaCorp Capital.

A couple of questions here. Number one, this 25th fleet that you're adding, is this a net add for the customer? Are they cannibalizing one of your fleets or one of your competitors' fleets?

Waqar, it is a net add. It is a net add. One of the things we're doing right now with some of our larger customers is growing our market share, our percent of the work.

But this is a net add for that specific customer and it will actually increase in their completion count.

Correct.

Okay. And then the $45 million investment, that is hard to justify with the $10 million EBITDA. Is the return metrics or the EBITDA contribution from that fleet going to be very different from the average for the fleet? In the past, it's normally $15 million to $20 million EBITDA per crew is what generally is required to justify a new fleet. Are we still in the same kind of economics range?

Yes. The EBITDA per fleet of that new fleet will definitely be higher than our average. We won't disclose specifics. But yes, the return on that fleet over the next few years, I think, will be, yes, no different, no lower than we've deployed fleets in the past for.

And Waqar, just a little color, commentary on that one. I just -- we really don't think that the return profile for this year was really was affected by the oversupply last year. It's really where we are as far as where the balance market is at the moment. So yes, just we would say that those returns are going to improve without any other changes, in the next 2 years after that. And that's where we look out. We look out in that sort of 3-year window when we look at the return profile or a little bit longer.

And then the same question kind of applies to the 24th fleet that you're just picking up. This fleet was available to you last year as well, but the pricing was just not there. Is the return metrics for the 24th fleet also similar to the 25th fleet?

Look, Waqar, we won't go into those details. But as we said all along, it's a combination of the pricing and the strategic value of the customer, the relationship or what it is. And so yes, fleet 24, the combination of pricing, which will be above our average pricing and the customer and relationship that's going forward compelled us to do it. We're quite excited about it.

Yes, Waqar, just a little bit of color on that one. As we see it in Q2 of last year, we had a view. We knew that there was going to be this drop off in the back end of last year, 2019. So that was going to -- we knew that was going to be a challenge. So again, with the change in customer mix, we see that as being a little more steady this year.

Okay. And then the study -- and thank you, first of all for the very detailed good study on the comparison between Tier 4 dual fuel and electric fleets and traditional diesel engines. Now the economics or the fuel economics change dramatically, whether you use LNG, CNG or field gas. Do you know for the 25th fleet, what the customer prepares to use in terms of field gas -- for fuel?

It will be a combination. That's being worked out. We will -- in all the cases, we can migrate to using as much field gas as possible. But you can't necessarily come out of the gate across a field where you're going to operate and always have field gas.

Our next question is from Stephen Gengaro from Stifel.

I think 2 things, if you don't mind. Just the first follow-up on some of the prior questions. When you think about the Tier 4 DGB fleets particularly, let's talk about the 25th, if you don't mind. Is there a willingness yet from the customer on the longer-term arrangement to share in some of the fuel cost savings you're bringing to the table? Or is it or is it still -- are the economics still just driven by efficiency?

No, absolutely. That's one of the drivers. There's two drivers for a customer and us to deploy one of these fleets. One is, it is going to be lower cost of operations and absolutely a sharing of that is -- is part of the economics of why it makes sense for them and why it makes sense for us. And the other is a lower, cleaner emission profile that's almost independent of cost, is also a driver for some customers. But for us -- to achieve that, requires new capital deployment. You've got to have the economics that justify it.

Stephen, just to clarify, you said efficiencies, the new fleets are actually just the same -- just as efficient as our old fleets. They're not more efficient, right? So there is no inherent sort of increase in efficiency just because it's a Tier 4 DGB.

Okay. And then 2 others. One is, when you look at the progression, you've provided some color. I think to Chase on the EBITDA progression. Just so I'm clear, is the progression driven by utilization, not any expected changes in price in 2020?

Yes. That was driven by really a utilization in Q1 because we have a significant amount of fleets in the northwest. The north have a little more weather challenges. Also, you have always had a slightly slower start to the year. So historically, Q1 is always a little lower than your summer quarters. So yes, that was without pricing. So pricing goes up, that would increase the general projections.

Great. And just one final and it's back to the white paper you put out, and I've been through it a few times and as you guys know. But when you think about conversations with customers and understanding the emissions profiles that you laid out, do you get any customers yet saying, yes, but for ESG reasons, it just sounds better if it's electric or how have those conversations gone?

Yes. And they're -- look, it is a complicated equation. It is not just a mathematical equation. So yes, there's feel, there's perception, I would say, we don't have any customer that's not concerned about numbers, they're very concerned about numbers. And there hadn't been a good supply of actually -- of those numbers out there. So it's a combination of those. What is it, what's their -- there is more than just numbers in the decisions. And everybody's got a little bit of a different take or different view. But I wouldn't say wildly different.

Our next question is from Chris Voie from Wells Fargo.

So first, just to get a little more detail on the pricing, if possible. Your revenues were down 23% quarter-over-quarter in the fourth quarter. Just curious if you can give a little color on how much of that was a pricing impact. And then in terms of average pricing in 1Q, if you expect that to be a little bit lower? I think the range among competitors is probably 0% to 5%, but just curious if you can give a little color on pricing in the first quarter as well.

Generally, Chris, when we talk about pricing, we like to talk year-over-year because then you can talk about dedicated pricing. And as we've said sort of like a dedicated pricing 2019 down to 2020, we have order 10% plus or minus down, rough numbers. Obviously, Q4, what you have is you have the roll-off of dedicated fleets as people were finishing up capital budgets and some capital constraints, debt market issues. And so that utilization, a good amount of that, the sales team did a great job of refilling with other people on spot work. Now the spot pricing was very, very low in Q4 because of the large oversupply of equipment and people sort of like wanted to keep things working and sort of, people were working out where the demand was going to be in 2020. So it's really hard to compare pricing Q-over-Q. Generally, I would say, spot pricing will be up Q1 over Q4, but we don't do very much spot work, other than when we need to fill gaps because of these artificial constraints that happened in Q4. So that's sort of where we are on pricing.

Okay. That's very helpful. And then in terms of the first quarter, I'd say, on average, most of your competitors are probably tracking, maybe up mid-single digits in the first quarter. But in general, they have fewer active fleets and kind of consolidated work to those fleets in the fourth quarter. You're going to have higher average fleets and likely a strong rebound in efficiency and activity per fleet in the first quarter. Can you give a sense of how much you expect first quarter revenue to be up, is that going to be like 10%, 15%? Or maybe just a little color there?

Yes, I think that's -- yes, I think it's a fairly reasonable number, Chris. I think you -- it's right in the right ballpark.

Our next question is from James West from Evercore ISI.

Chris, curious about as you guys are evaluating new technologies and I know you and I have talked about some of the more interesting things out there like frac lock in the past. Do you see anything on the horizon here that could be a big game changer to efficiencies?

I don't know about game changer. There are some of the things you and I have talked about. There are some other things we're working on. But I would say there, they are incremental improvements. What we're looking for is incremental improvement in efficiency, cost and safety. Some may only hit 1 of those, some will hit 2 or 3 of those, but that's the goal. And to develop systems and then roll them out and perfect them, it takes some time. But we -- frankly, that's one of the things we like about where we are. We're not going to flip a switch and make the frac market great in 3 months from now. But we have some things going on that make us feel pretty good about our competitive position and supply and demand with time will work itself out. Given tough Q4 and all that, I'd say, we actually feel pretty good about our business right now. That may sound weird.

Good to hear. And then how do you balance the strategic nature of the business, with the current pricing environment and really the high focus you guys have on returns in the business. Obviously, with pricing where it is, returns are under pressure. You did a great job with your returns in 2019, but 2020 seems like it's more challenging, yet you're putting equipment into the market. And so I'm just curious how you think about that? Are you willing to sacrifice a bit on the return side for strategic reasons, because you see a better future out there? Or will you still be earning above your cost of capital?

Good to say, look, it's a cyclical business. So if you looked at how we played 2016, for example. No one earned positive returns. But we didn't play 2016 for 2016, we played 2016 for the coming few years. And so we took a different strategy because look, we want the highest returns we can at all times, but we won't make decisions to maximize return in this quarter or last quarter that will hurt the returns over the next few years.

When we build a fleet, when we hire the people, that is a many year commitment. Our goal is to maximize the return on that capital deployed, and that does not line up very well with max -- we can lay a bunch of heads off and lay down the 6 least profitable fleets or whatever and boost numbers in the short term. But that's just not the way we play the game. We want to maximize the returns on our capital invested over time. And that's the same game or same story -- this downturn is nowhere approaching what we saw in '15 or '16.

But I think the opportunities to get better to align with the right customers to make the right strategic decisions, they're the same. I mean we had a lot of -- we ended up saying no to several customers for fleets at the end of the year. It wasn't just scrounging around to find enough, so we can employ the fleets we have. We only brought fleet 24 out because we had lots of interest. And we had, again, fruitful dialogues about where strategically and economically the right place to place this fleet, not just for today's pricing, but that matters. But what -- where is our best pathway to raise returns and profitability on those fleets through efficiency gains, through an understanding of the way pricing will unfold with time. So it's multiyear returns on capital is what we look at and have always looked at.

Our next question is from Blake Gendron from Wolfe Research.

Wanted to follow-up on James's last question. You talked about playing offense in '16, playing offense again here. I would say the big difference between now and then, though, is in '17 and '18, we saw a snapback in activity, took a lot slack out of the market and pumpers got pricing fairly easily in that regime. Now you're starting to see E&Ps decouple, spending in activity from the oil price, and we might have a more moderated kind of flattish trajectory from here on out. So I guess, kind of longer term, what gives you confidence that the share that you're gaining now is defensible, just given that investors will push back and say somebody else will go pump sand for a lower price? I guess, said in a different way, are you putting more stock in the dedicated customer arrangements, the technology and your alignment with customers on that front? Or are you putting more stock in the supply side attrition at some point getting better in 2020?

More in the former than the latter. And I agree with your comments. This is -- this downturn is in no way like the last downturn. We do not expect to snap back in huge growth in demand at all. In fact, we wouldn't be surprised to not see the number of fleets demanded not grow, not grow, but yet still have a market improved.

So for us, we do believe with time, there'll be -- we've seen the attrition happening. Now we believe that will continue in the current economic conditions, but the bigger thing for us is to align with the right partners that are going to be strong going forward that are not just commodity buyers, hey, we can -- this guy's price list shows the pound of sand is cheaper than yours, see you later and maybe we'll come back in the future. There's all different kinds of customers out there.

So for us, it's through time finding the customers that are strong and that want a mutually beneficial partnership. I think being the short-term buyer of cheapest pound of sand is not actually a long-term cost minimization strategy for operators.

Look, everyone plays a different strategy and different game. And it's not our role to question how people make their decisions. But -- so I'd say the biggest thing for us is to strategically align with the right customers where going forward, we can have growing and better economics, and we can work with them to deliver the same thing to them.

Okay. Understood. And then as a follow-up here on the ESG side. First, I really appreciate the ESG commentary and sort of the global reach for oil and gas. And I hope this is a message that is spread across all the peers, across the group, specifically with what you guys can do in the field with ESG, and as it relates to the white paper, the way that we read it is that there is one scenario in which electric frac is potentially as competitive, if not more than dual fuel from an ESG standpoint, and that's on field gas. So we know that from an emission standpoint and from an overall return standpoint, dual fuel is more competitive, thermal efficiency is better across a wider range of operating conditions. But what is your conversation with customers around specifically investing in field gas infrastructure, what's the viability you think in the Permian? Is it something where every operator across all the entire basin can operate on field gas? And then any conversation around customers buying the turbine and power generation portion of this because that would greatly improve the economics of the e-fleet versus Tier 4 dual fuel as well.

Yes. So the field gas versus LNG and CNG is a dynamic moving thing. No, I don't think will soon be a case where everyone will have field gas. But there's been precious little of that done over the last -- we've been in the dual fuel business for 7 years now. We've done -- I would say we've probably done a fair amount of the field gas use that's been done in the industry. It will grow. It is growing, but it's not as easy as it sounds. The -- Blake, I disagree a little bit with the comment on the electric supply, who owns a turbine, for example. I mean, it's still capital. It's capital in our book or capital on their book, but it's capital that's deployed. So I don't know if there's an easy fix to that. We are not -- and I want to be clear, we're not saying one technology is forever the winner or whatever. We just evaluated what's happening today and what are the profiles of that. We have efforts in a few different areas to change the way things work today. So that report was a state of the play as it stands today. But yes, that will move forward and that will change.

Got it. Understood. Yes, I was talking more from the perspective of the service company buying the e-fleet if the customer were to take on that cost. But that makes a lot of sense, Chris. I appreciate the commentary and the time, and I'll turn it back.

Our next question is from Ian Macpherson from Simmons.

I think if we accepted this principle that Liberty continues to grow share in a market that is shrinking because of efficiencies and pricing is still weak, it begs the question to me, when fleets 26 and 27 are announced. If you have the ability to deploy 24 and 25 in today's conditions, it seems that conditions aren't getting worse from here, at least based on your playbook. So what are your thoughts on the next leg of growth? And whether that might come into view this year?

Again, devil is in the details. No current plans, very possibly no more fleets this year, but if the conditions are compelling. Combination of strategy, I mean, strategic relationship, the economics of it, not just in the short run, but in the longer term, it will make sense. But there's a growing desire for the next-generation fleets. So I think, for us, growth -- if there is growth beyond what we've announced and nothing to say there will be, but for compelling economic and partnership opportunities, we're in dialogues. We're in dialogues to do that. But we're well aware that the market is oversupplied, current economics are not great, and that is a large check on our willingness to invest, quite a large check.

Our next question is from Scott Gruber from Citi.

We've covered a lot of ground. So I just really have 1 question to ask given the previous line of questioning, but it just strikes me that when I think about your offensive strategy now, is it more reflective of your belief that your competitive advantage actually improves over time and maybe more so in a tough market than a good market that you can actually make money in a tough market and reinvesting your business and your people and in technology, while others can't? And that's effectively a partner that your customers want. So to me, it just seems like the customer alignment is important, but it's more of an output than an input in terms of the underpinnings of your strategies? Is that fair?

I think that's a reasonably fair statement of things. Yes, look, the ultimate goal for us, the ultimate way to assure a high return on capital is to build a competitive advantage. We're all going to be playing in the same market right now and a year from now and 10 years from now, so what we need to be able to do is to be able to deliver a higher quality service that's more desirable to our customers at a lower price, right. I mean, a lower cost for us to deliver it. So yes, efficiency, scale, the right customers, the right investments in technologies, that's what will help us build an ability to do a better job than our competitors and cost us less to deliver it than our competitors.

So yes, I think you said it, I think you said it well.

Our next question is from George O'Leary from TPH.

As you think about the first quarter of 2020, the commentary you guys have given on revenue and kind of annualized EBITDA targets has been helpful and also the trajectory in response to Chase's question was helpful. But just thinking about the first quarter is using Q1 of '19 a decent analog to think about the profitability improvement? Or is the fact that maybe we had a little bit more benign of a winter season, possibly at a faster start to activity than we've had the last 2 years. Should we think about the incremental margins as potentially being higher in Q1 '20 than they were in Q1 '19? Or is there something that mitigates that, is the pricing pressure more pronounced than it was last year?

Yes, I think pricing pressure is a little more pronounced. Yes, Q1 last year was a really efficient quarter. It was actually pretty benign from that point of view. I think we came out of the gate very sort of quicker than you would -- than average for the last 5 years. So in general, I would say, I wouldn't bank on that every year. So yes, I think that was -- I'd say, maybe Q1 rebound is going to be a little less good than the Q1 '19 one. But there may be a little more difference between Q2 and Q3 and Q1 in '20 than there was in '19, but it all averages across the board for the year.

Great. That's helpful. And then the DGB Tier 4 fleets, I know you guys were an early mover in testing that technology there, which speaks to the push from your end on looking at these investments that are positive from an ESG standpoint, but also benefit your customers from a cost standpoint and potentially benefit you all as well. I was just curious how much demand pull is there from the customers for pressure pumpers for you to implement these new technologies, whether it's e-fleets or the DGB Tier 4 offering, how much of it's Liberty? How much of it's the customers?

There is a lot from the customers, so it's a dialogue. But I think as you've heard from others, the problem is everybody wants to get better and cleaner and do all that stuff. But the economics, for their economics and their business is so challenged that most want a better fleet, and they don't want to pay any more. I mean, that's where a lot of people are, and that simply doesn't work. So the question is, you've got to have that -- so customer interest is -- and it's not for everybody.

I would say a good majority of the customers out there, they are rural areas, and this is not an issue for them, right? It's bigger players in the public eye or in areas near where there's a growing interest in it, but then the question, the balance, while we have way more dialogues and agreement to do something is to get better in that front is a good chunk of capital upfront. And we're a business just like they're a business. So together, there will be some deals done to move this way but in a tough market that we're in today, that migration to next-generation frac fleets, probably goes relatively slowly, probably goes relatively slowly.

Our next question is from Emily Boltryk from Scotia Howard Weil.

Just a quick question. I may have missed it in the commentary earlier. If you could just go again with the CapEx breakdown for 2020. If there's any incremental CapEx needed to put 25 to work or 24 for that matter?

The 24 is working, there's no extra CapEx for that. I think $165 million for the full year, of which $45 million is slated to finish up fleet 25. The balance is in maintenance CapEx, technology improvements and fleet improvements. So as you can see, year-on-year, CapEx will be just down slightly, and obviously, EBITDA will be down slightly, but cash flow generation well it should be -- not too dissimilar year-over-year on the free cash flow generation.

Our next question is from Thomas Curran from B. Riley FBR.

On Liberty's YouTube channel, I noticed that you posted a series of primer videos to introduce and explain various completion technologies that you can or expect to offer. The set included a video in which Ron took a turn as the star, providing an overview of Energy Recovery's VorTeq system. Would you update us on your latest thinking on and expectations for VorTeq? What's the earliest we might see you commercially introduce the first system? And then how many VorTeq units do you ultimately plan to deploy?

Oh, that's a good question. We're always a little careful about what we say there. Of course, Energy Recovery is a public company as well, and they have not reported yet this quarter, so I have not provided any updated commentary. I will go so far as to say that, that testing is ongoing. We continue to pump sand through the VorTeq assembly in their test facility in Katy. And we continue to be happy with the progress that they are making there. So at this point in time, I'm not going to comment on a potential time for commercialization, but certainly I would go so far as to say that when and if we get to a point where we're happy with that technology commercially, we'll deploy it rapidly across our fleets, starting with those areas where we feel that benefit is going to be realized as quickly as possible.

That's helpful. Thanks, Ron. And then shifting gears from horsepower construction to contrition and what most of your rivals are doing. Chris, how much horsepower do you estimate has been permanently withdrawn from the industry's marketed fleet? And from here, how much more do you expect to be retired? How much incremental horsepower do you think will be put out to pasture over the next 6 to 9 months?

Well, I could say, I don't know and I don't know. I don't know that I have any incremental insight to what you have. Clearly, a lot has been retired. Some has been sent overseas, a lot has been scrapped. Some are shrinking fleet counts and using those extra horsepower to bolster their fleets, so that they can keep efficiency up. So a lot of fleets have grown but I think in the economic conditions we're in today unless you have something special, it's a tough return time and particularly if you're a bottom half player. So I think the tough economic times right now, I think, are actually necessary. This is what will reduce supply and bring discipline in investing. These cyclical businesses are cyclical for a reason. And this is a necessary part of the cycle just as when times are pretty good. Whatever -- the marketplace is -- I don't have any particular insight. Everyone makes sort of game time decisions of what they're doing. But there's very, very little building going on. And there's a lot of fleets being aged and work had shrunk. So supply is shrinking. There's just no way around that and that's what we need.

Our next question is from Chris Voie from Wells Fargo.

Just one more. On your calendar, some of your competitors have commented on this. So I just wanted to get your take in terms of visibility, but should we think that your calendar for first quarter is pretty much full? And to what extent do you have visibility into the second quarter at this point?

We have an even larger percent now that are dedicated fleets than we've had. That's always been our model, and it's even a larger total percent and more single customer dedicated fleet. So yes, the first quarter calendar is full. The second quarter calendar is full. The third quarter calendar is full. Now stuff happens, right? People have the issues with wells or gathering systems. I mean, there'll be -- it doesn't mean our sales guys are taking a nap. Things happen. And we tend, particularly with new customers, like we'll move faster than they're used to moving, we catch up to rigs. So then, sometimes we have to supplement it. We are in talk with other customers to step in and fill gaps. Some of the spot work we did in Q4 is to meet new customers. So it was a pretty -- quite a poor financial quarter for us in Q4, but some positive things happened in Q4. But yes, calendar is full. As far as we can see, we still have some concerns for sure later in the year, and we're working now to try to get some of the privates or whatever to schedule their work as much as they can at the end of the year.

Okay. That's helpful. And then just one more on pricing. And I think I understood this correctly, but I think it might be good for everyone to appreciate it, if I've got it right. So the fact that you're getting rid of the terrible mix from spot pricing in the fourth quarter? That actually suggests that your average realized pricing in the first quarter will be higher than the fourth quarter?

I haven't totally done those numbers that way. But I would say, yes.

Okay. All right. I just want to make sure I understood.

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

Thanks, everyone, for listening in today and your interest and intriguing dialogue about Liberty. I want to sincerely thank the passionate wonderful folks on team liberty that make it happen every hour of every day. I'm proud to be your partner. Safety is the top of the list for us, all of us, every single day. I also wish to thank our customers, suppliers and investors who make it all possible. Have a nice day.

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