Liberty Energy Inc (LBRT) 2022 Q3 法說會逐字稿

Welcome to the Liberty Energy Earnings Conference Call. (Operator Instructions). I'd now like to turn the conference over to Anjali Voria, Strategic Finance and Investor Relations lead. Please go ahead.

Thank you, Anthony. Good morning, and welcome to the Liberty Energy Third Quarter 2022 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer; Ron Gusek, President; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements, reflecting the company's 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 our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures.

These non-GAAP measures, including EBITDA, adjusted EBITDA, pretax return on capital employed and cash return on capital invested are not a substitute for GAAP measures and may 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 the Investors section of its website. The calculation of cash return on capital invested is set forth in the company's investor presentation dated September 6, 2022, which is also available on the Investors section of the website. I will turn the call over to Chris Wright.

Good morning, everyone, and thank you for joining us for our third quarter 2022 operational and financial results. We are extremely proud of our team's strong operational execution that underpins robust third quarter financial results. Our strategic plans to deploy 6 fleets to supply incremental demand from our long-term customer partners was successfully completed ahead of schedule while navigating challenging labor markets and a volatile supply chain. Our strong customer partnerships, vertically integrated delivery model and the strength of our crew leadership was crucial to quickly bringing new fleets to market while maintaining high levels of performance across our entire fleet.

In the third quarter, revenue was $1.2 billion, a 26% sequential and 82% year-over-year increase. Net income for the quarter was $147 million or $0.78 per fully diluted share. Adjusted EBITDA for the quarter was $277 million, a 41% increase over the prior quarter. Strong results enabled us to launch our return of capital program and repurchased 2.5% of our outstanding shares. We also announced the restoration of our pre-COVID quarterly cash dividend of $0.05 per share to be paid in December.

We will maintain a flexible approach to returning capital to shareholders while maintaining a strong balance sheet and investing in compelling opportunities. Capital allocation is front and center again. I'm proud to say that our operational execution in the quarter was unparalleled, breaking several Liberty records, including proppant pump, pump hours, technology rollouts and more, all while deploying fleets acquired in the OneStim acquisition. The incredible undertaking of bringing 6 additional fleets online during the third quarter required an extraordinary level of collaboration and coordination between our teams. In a 90-day period, we hired and onboarded 6 crews, which is no small feat in a highly competitive labor market. Our ability to attract and selectively choose from a higher quality pool of candidates, especially in this tight labor environment is a testament to the Liberty team and culture. It is an energized empowering and engaging workplace designed to allow our employees to passionately pursue their goals. The training and onboarding of new employees to work alongside seasoned crews will drive high service quality for years to come.

Additionally, our operational readiness was helped by the recent realignment of our teams across the company. from frac crew to maintenance to supply chain and procurement, we now have seamless dedicated teams working together to support crews, allowing specific teams to identify goals, execute on clear priorities and hold themselves in each other accountable for the delivery of superior service. We leveraged our extensive supply chain capacity to support the deployment of additional fleets in an environment where sand and other materials are in short supply. While Liberty has grown rapidly over our 11-year history, we've worked hard to preserve and build the culture that has created our industry-leading service quality epitomized by the quality and dedication of our employees.

The recent realignment of our teams has created dynamic units within our organization that foster innovation and collaboration. Our people and the culture that bind them remains our most precious asset. -- deploying the balance of the fleet that we acquired from OneStim was a long-term strategic decision in support of high-quality, dedicated customers and only at the appropriate time. Our customers' well economics remain strong even with the recent pullback in commodity prices. Further, operators remain dedicated to development programs, supporting flat to modest production growth. The frac market is very near full utilization and our ability to deploy fleets for long-term dedicated customers when the time was right, is a testament to the technology, scale, vertical integration and supplier partnerships that we have built.

Our customers chose to partner with Liberty, not only because of our market-leading operational performance, but also because they recognize that technology innovation is an essential component in delivering top-tier services today and far into the future. In the most recent Kimberlite survey, an independent industry research firm that extensively polled E&P customers across the industry.

Liberty was ranked the top service provider across the spectrum. We are quite proud of the results in that survey. Demand for our next-generation in frac fleets is strong and will soon be on customer locations starting in the latter part of this quarter. It will set the standard for the lowest emission technology in the market with superior performance, durability and reliability. We bring our unique solutions-driven technology focus to all parts of our business. This quarter, we are rolling out our next level Sentinel Logistics automation software that fully integrates with our Oracle Cloud and ERP systems to continue to improve on our industry-leading logistics operations. Our technology partnerships further our research into areas complementary to our business.

We recently announced an investment in NatronEnergy, a global pioneer rapidly scaling up an exciting Prussian Blue sodium ion battery technology that could have a role further enhancing our duty frac fleets. We believe this technology will be used to maximize uptime and potentially provide peak-shaving ability to optimize generator utilization and ensure the lowest possible emissions footprint for on-site power generation for digi frac fleets. We're also partnering with Furbo to help advance geothermal resource development for dispatchable, reliable baseload grid power with low carbon intensity. We'll have more to say about this on our next earnings call. We are continuing to execute on our disciplined leadership of the frac industry as we seek to drive superior long-term financial results and support our customers to deliver a secure supply of reliable, affordable and clean energy to the world in a time of global in security.

The foundation of technology and long-term partnership commitments drive the superior financial results that has enabled Liberty over the last 10 years to have an average cash return on capital invested that is triple the OSX and is over 40% higher than the S&P 500. Global macroeconomic concerns are mounting with rising interest rates, elevated inflation levels, Chinese COVID lockdowns and slowing industrial activity. Despite these headwinds, oil and gas markets remained tight in the third quarter and remain so today. And as we look ahead, risk to the delicate balance in oil and gas markets comes from both the demand side and the supply side. A mild recession may only modestly impact the global demand for energy and it is likely already reflected in commodity prices, but a deeper global economic downturn would result in further demand contraction. The COVID lock challenge in China may also persist longer than expected, further pressuring near-term commodity prices. On the other hand, constrained global oil supplies are the dominant force behind higher commodity prices and the outlook for needed future supply growth looks highly uncertain.

OPEC Plus is preemptive cuts to production quotas are expected to translate into reduced production from the few countries actually producing at their stated quotas, mainly Saudi Arabia, the United Arab Emirates and Kuwait. So far, Russian oil exports have only been modestly curbed since the Ukraine invasion as some exports that were previously set for Europe have been redirected to Asia. However, the impending sanctions on Russian seaborne crude could meaningfully lower global oil supplies as tanker capacity constraints Russia's ability to redirect all the apparels to Asia where storage capacity is already reaching peak levels. In contrast, distillate storage levels in the U.S. are at 50-year lows. -- marry supply risk abound from countries like Libya, Nigeria, Iraq and others. Historically, low levels of global spare oil production capacity, low worldwide oil and gas commercial inventories and low global strategic petroleum reserves, all a direct result of an 8-year period of global underinvestment in oil production capacity and infrastructure, make today's oil market balance fragile.

Despite the endless happy talk of an energy transition, long-term global oil demand has been growing steadily over the last 30 years in the 1990s, demand rose at a 1.1% compound annual growth rate. In the 2000s, the compound annual growth rate was again 1.1%. In the 2010s, the compound annual growth rate was slightly higher at 1.2%. This trend was briefly interrupted by COVID, but long-term global demand continues to rise. And assuming it continues, even at a reduced 1% compound annual growth rate over the next decade, equates to over 1 million barrels per day per year of incremental demand for oil. -- surveying the global centers of oil production today does not bring high confidence on where these additional barrels will be coming from.

North America is likely to be the leading supplier of these incremental barrels, which is quite bullish for Liberty's business in the coming years. The natural gas outlook remained similarly tight, dominated by rising demand across the world. During the first half of 2022, the U.S. became the largest exporter of LNG in the world, a notable achievement since we were the largest natural gas importer just 15 years ago. Today, U.S. LNG exports are significantly higher than last year despite the Freeport LNG facility outage. LNG export facilities under construction will expand export capacity by nearly 6 Bcf per day, an increase of over 40% over the next 3 years from current export capacity levels. In today's tight gas markets abroad, these molecules are in high demand, as evidenced by the growing energy crisis in Europe, which has led to a rise in competition for LNG gas supplies that typically headed to Asia. In the U.S., natural gas demand for power generation is at all-time highs and likely continues for the foreseeable future.

Additionally, the demand from the reshoring of energy-intensive operations, including within industrial and petrochemical industries, supports a strong demand pull for U.S. natural gas. Together, these factors are likely to strengthen the demand for secure North American energy. -- combination of capital discipline among the public operators and very tight supply chains, particularly in the frac services market are constraining today's activity levels to deliver only modest U.S. oil production growth. Today's frac market is relatively tight with near full utilization of available capacity. Today's limited capital being deployed in the frac market is expected to be primarily directed towards the build-out of next-generation frac fleet capacity at levels roughly sufficient to offset aging legacy equipment. Tight service supply has made service quality and reliability top of mind for customers.

Next-generation fleets are also highly sat after. These 2 factors further strengthen Liberty's competitive position. Liberty's outstanding technology, operational progress and customer focus have delivered acceleration in our financial results throughout the year. We're proud of the Liberty team and our top-notch customers and suppliers. We are well positioned today and have an exciting suite of new technology developments underway as we move into a strong market in 2023.

With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.

Good morning. Liberty had an exceptional quarter, a 26% sequential increase in revenue translated into a 40% increase in net income and a 41% expansion in adjusted EBITDA. I -- the Liberty team delivered on outstanding results on strong execution across the board. The cadence of our quarterly results is a testament to the hard work of the entire organization. Third quarter revenue was $1.2 billion, a $246 million or 26% increase from $943 million in the second quarter. Our results were driven by strong activity improvement, with nearly half of the sequential growth related to the deployment of OneStim acquired fleets. We also benefited from modest pricing improvements during the quarter. Net income after tax was $147 million, increased from $105 million in the second quarter. Fully diluted net income per share was $0.78 compared to $0.55 per share in the second quarter.

Results included a $9 million fleet start-up costs incurred for fleet deployments, a $29 million noncash charge for the remeasurement of the tax receivable resins and a $3 million gain on investments. General and administrative expenses totaled $50 million, including noncash stock-based compensation of $6 million. G&A increased $8 million sequentially, primarily driven by performance-based compensation, inflationary and activity increases commensurate with the growth of our business, including investments in platform IT systems and other process improvements support our continued expected growth. Net interest expense and associated fees totaled $7 million for the quarter. Adjusted EBITDA increased to $277 million, a 41% increase from the $196 million achieved in the second quarter. In the quarter, the tax receivable agreements related to our Up-C structure at the time of our IPO were required to be remeasured and resulted in a $29 million noncash charge in the third quarter.

This resulted in a 17% effective rate on the combined income tax and TRA expense lines. As a reminder, in the second quarter of 2021, prior losses due to the curved downturn resulted in Liberty recording a valuation allowance on a portion of deferred tax assets and a remeasurement of the TRA liability as required by U.S. GAAP.

As a result of our strong financial results in recent quarters, we believe in the fourth quarter of 2022 will no longer require a valuation allowance on deferred tax assets and will again revert -- in Q4 2022, we expect the release of the valuation allowance and the related remeasurement of the TRA along with the provision for tax for the full year 2022 results to equate to approximately a 24% combined effective tax rate for the quarter. We expect 2022 cash taxes to be approximately $7 million for the year. In 2023, we expect approximately a 23% combined effective book tax rate of which we expect to pay about 1/3 of that in the year as cash taxes. We ended the quarter with a cash balance of $24 million and a net debt of $230 million. Net debt increased by $17 million from the second quarter due to an activity driven increase in working capital and $7 million of cash utilized to execute the share buybacks in the quarter. As of September 30, we have $150 million of borrowings drawn on our ABL credit facility.

Total liquidity available under the credit facility was $298 million. Net capital expenditures totaled $95 million on a GAAP basis for the third quarter of 2022, which include costs related to fleet deployment, digiFrac fleet construction and ongoing capitalized maintenance spending. In the fourth quarter, we expect approximately flat sequential revenue growth. This is primarily driven by full quarter contributions from crews deployed in the third quarter, basically offsetting normal holes seasonality.

We also expect relatively flat margins as the contribution of incremental fleets will be offset by ongoing supply chain operational and inflationary pressures, including commodities, raw materials and labor costs. As we look forward, the global energy supply and demand balance supports a constructive backdrop for North American production over a longer duration oil and gas cycle. Liberty continues to invest in the early part of this cycle to build out our competitive advantage and maximize free cash flow over the long term. While our capital expenditures are largely on track for the full year 2022, there is a potential for some amount of Q4 spending to slip into Q1 of 2023, resulting from supply chain delays. As we reiterated through the year, we have significant flexibility in adjusting our capital spending targets depending on economic conditions, customer demand and return expectations. Our increased free cash flow generation capability of our business supports our capital allocation priorities of disciplined investment to expand earnings per share, balance sheet strength and return of capital to our shareholders.

In the third quarter, we announced a $250 million repurchase -- share repurchase authorization. And in the quarter, we repurchased 2.5% or $4.7 million of our outstanding shares for approximately $70 million. We now have $180 million remaining on the authorization. In addition, we announced the reinstatement of our quarterly cash dividend to recovers of $0.05 per share, beginning with a dividend payable in December 2022. We are confident in our ability to deliver a leading return of capital strategy that combines a cash dividend and opportunistic share repurchases to drive significant value for our shareholders.

With that, I will turn it over to Chris before we open for Q&A.

Thanks, Michael. Recent Russian drone and missile strikes have damaged or destroyed over 1/3 of Ukraine's power stations and numerous fuel depots. The targeting is obvious, in parallel country's energy system and you imperil everything else, making life much, much harder for Ukrainians. The world is rightfully outraged at this cruel strategy, Versal Lavender Lie, President of the European Commission called DisataxWarcris, yet in paralleling our own energy system through the political process remains a front burner priority for many politicians and activists. Surely, this is only possible because most people still don't appreciate that increasing road blocks to hydrocarbon development and infrastructure are highly destructive with no offsetting benefits. For example, restricting hydrocarbons and heavily subsidizing intermittent weather-dependent renewables have severely compromised our electricity grid from California to Texas to New England.

New England is warning a blackout this winter due to potential gas shortages, even though the mother of all shale gas reservoirs is next door, but access to this gas is blocked because New York State prevented expansion of the gas pipelines, harming tens of millions of Americans. New England has generated millions of megawatt hours of electricity this year burning oil because sufficient natural gas was either unavailable or unaffordable. Copy is biofuel subsidies and a growing regulatory burden have led to the shutdown or conversion of multiple American refineries, contributing to skyrocketing diesel prices and U.S. distillate inventories now being at their lowest October level in 50 years. I could go on, but you get the point. That's all checked our desires to be fashionable or hit when we talked about energy. Energy is so critical to human well-being that we must speak honestly, candidly and frequently to combat the increasingly damaging play of energy iterate that has taken over our country in much of the Western world.

With that, I will now turn it over to the operator for questions.

We will now begin the question-and-answer session. (Operator Instructions). Our first question will come from Saurabh Pant with Bank of America.

I'll just start with a quick one, just that we all know. In terms of your fleet count, you said you reactivated 6 fleets in the third quarter. Can you remind us where you are right now? And should we include all these more Digitrac fleets as incremental on top of the you are…

Yes. So we don't give that precise numbers, but we were mid-30s before. I'd say we're a low 40s fleet count today. And it's not going to move much from there. I think as far as bringing out additional fleets from legacy equipment, that's done. We do have Digi fracs being constructed. The first 2 that come out, if the customer relationship and forward horizon for that equipment is compelling, those might be additive fleets, but only a bit compelling. And the other big challenge, as you know, of course, is humans and staff, the humans are what dominate the asset of a frac crew of a fleet. So our frac fleet count today in low 40s and probably doesn't move much from there throughout the next year. Michael, do you want to elaborate on that or to…

Okay. No, thanks for clarifying. So it sounds like it just got pulling forward because you were talking about low 40s last quarter as well. So that's not defend Okay, good. And then on the CapEx front, Mike, you were talking about some CapEx potentially moving from the fourth quarter to early next year.

That all makes sense, but can you quickly update us on what should we expect for next year's CapEx? Because last quarter, you were talking about that being at or slightly below 22%. There's no real change to that at the moment. That's really where we're expecting. That's still the general expectation. But obviously...

From the bottom up as a pure investment and compelling returns as we've proved over the last 11 years of our history, we will invest in those when they make sense. And I think we've done a very good job providing returns for our shareholders.

Our next question will come from Derek Podhaizer with Barclays.

So normally, we're talking about budget exhaustion in the fourth quarter. The guidance doesn't really suggest that more just the typical seasonality. Can you remind us what's different this year than years prior? Is there more worry from the E&Ps that if they laid down rigs or frac spreads, they won't get them back. I think we have to remind the investors and ourselves that what seasonality looks like and maybe why we won't see that budget exhaustion that we typically see, just given the tightness in the market? Just some thoughts around that, I think, would be helpful.

So Derek, I think you said that about right. Look, operators' biggest concern right now are security of supply, particularly security of supply of competent reliable crews. So yes, there is a larger hesitance to suspend operations for the last few weeks of the year than there typically is. Now for some people, that is the right thing to do, and that does fit their budget and for long-term key customers of ours. If we've got other places, we can temporarily deploy those crews and bridge that gap in today's market, that's not hard to do. We'll see some of that. But yes, I think not the usual amount you typically see in December. But there's still the holiday season. One of the things we do at Liberty, and we shut down our crews, all of them for 24 hours and in some cases, twice for holiday parties and celebrations. We got to keep our people working hard to be them pumped up and excited. Those are important events for us. So there's always a little bit of holiday and weather slowdown even without budget exhaustion.

And we... Derek, we're returning to more of the pre-2018, the more normalized long-term planning of E&Ps, where they've got a steady cadence of spending throughout the year. I think the change to -- that happened in 2018 caused a ripple effect for 2 or 3 years until it was interrupted by COVID. But I think we're back to more normal like standard good planning from the E&P companies.

Got it. Okay. No, that's helpful. And I appreciate the comments there. For my next question, I just wanted to touch on, which I think is an underappreciated part of this market is the repricing effect and then the profitability expansion that certain investors are worried that if we see a peaking rig or frac out, maybe that just marks the peak and North America is done. But maybe walk us through from now through next year where that might not be bad for your profitability whereas you have the repricing effect and maybe the vertical integration to continue profitability expansion. Just maybe some thoughts around there is where we can see on more of a flattish fleet count that you just mentioned, where the earnings power and expansion can come from as far as the repricing effect of the tail end of your fleet count?

Yes, Derek, obviously, the market is tight and it's been floating up pretty at a rapid pace in the first part of this year. There's still a tailwind to pricing pressure pushing up today, but it's -- I think most of the reset of price up has probably happened. Still a little bit more. And yes, of course, there's some fleets reprice often, so they followed the marketplace -- some of them are locked in for a longer time period. So yes, we'll have some positive pricing reset happening in around the end of the year. But yes, economics are good today. For us, it's both quality of service, how much efficiency we get done today. That's a big driver of profitability. And a lot of it's our internal systems. How could we get more efficient, deliver a higher-quality service in order to lower cost. And of course, lower means lower than it otherwise would be without technology. There's still that backdrop of inflation of parts and equipment and stuff like that, that we're contending with. And we continue to focus on expanding the shareholders of our earnings potential. As we say, we take more of the wallet of the -- we are a vertically integrated company in a large number of ways, and we get more and more efficient in delivering all of those services, which still lowers a lower cost per lateral foot to our customers and a higher profitability for letter fleet, if you like, for us. And I think that's the key thing of what we're doing.

That continued expansion comes from always being the technology leader. And generally, as you've seen, there's always a general trend of a flight to quality from our customers to the quality providers who can provide their steady, good service that they really need to plan their business. And that allows us to have that surety of demand, which means we can invest in the technology, which expand our profitability every year. We did keep with the same fleet count and continue to expand our profitability.

Our next question will come from Stephen Gengaro with Stifel.

When you think about -- and I know you don't give us the exact fleet count. But when you think about second quarter to third quarter, and I think your step-up in EBITDA per fleet was about $5 million, give or take. Can you talk about that bridge and the driving factors of that? And then -- and maybe on top of that, is there outside seasonality, is there any reason the pricing you're seeing shouldn't take that number up next year?

Right. So it's a combination of a thing. Obviously, you've got a significant amount of fixed costs in a $5 billion company, right, that as you grow your earnings, you absorb those quicker. That's one of the sections. We had a tailwind of pricing as pricing moved up. And we also had an amazingly so, whilst we were adding 6 fleets, an increase of efficiency and activity from our crews. Our operations team are absolutely and Italy performing at top level out there. And I think that's a key thing. And I think some of the background services, whether it's water, et cetera, some of the early struggles with sand, water, trucking, et cetera, from the first half of the year. That's getting line down and getting a little bit better. So we're getting contribution from all of those.

And as it comes to next year, no, I mean I think you've got some fleets now that are -- you've got a number of fleets that are really at where market pricing is now. We've got some that are slightly a little below market pricing that will reprice. But obviously, one of the key things about next year is where is the long-term like the market is going to be as far as pricing, where oil price is going to be. Now we may have some small headwinds in the short term, but we think there's a very long runway for a strong call on U.S. oil and gas production, which we think moves well for strong earnings for us for a number of years to come.

Great. And then when you think about -- and I know you talked a little bit about CapEx, maybe sliding into next year. But even with that, I mean, your free cash generation in '23 and probably 24 looks very, very strong. What do you do with it? I mean assuming there's no acquisitions, and obviously, you've reinstated a dividend. But do you more aggressively give capital back to shareholders? Do you have a thought process or a framework in mind on how investors should be thinking about that?

Yes, it's a topic of frequent discussion among the leadership of the company with our Board because yes, I do think in the next few years, one of our biggest decisions will be capital allocation, what to do with a lot of free cash flow coming. And it's -- and again, we will never adopt a formulaic. -- x percent will go here because share buybacks for us depend upon the price at which we can buy stock back. And the delta between that price and our estimate, conservative estimate of intrinsic value. So share buybacks are likely going to be a large part of capital allocation in the coming years. Obviously, to this year, they are the dominant piece of returning cash to shareholders. We have restored the dividend we started years ago.

And we intend to pay a regular quarterly dividend going forward, probably modest growth rate in that dividend as well, but our business is always going to be cyclical. So we're never going to have a huge quarterly dividend because our results are -- the results are likely to remain cyclical. And then the other big thing is keep a very strong balance sheet. We never know what's coming, the next downturn when it arrives, probably not going to give us warning a ways in advance. So we're always going to have a strong balance sheet. That served us well in making the last 2 downturns, both pretty severe, making transformative acquisitions.

And then we're always going to invest in technology and things that make our company better, that build our competitive advantage versus our competitors that allow us to provide higher quality services at a lower cost and in a safer setting. So technology investments are there. And acquisitions, yes, look, we've never been a consolidator per se. But if there are acquisitions that, as Michael said, broaden our shoulders, allow us to increase the profitability per fleet and the economics of those acquisitions are compelling. We're always looking at that. We're obviously not much of an acquirer, but we're always looking. When there's compelling opportunities. And today, if you're going to acquire stuff, as cash is much more attractive than stock, given the valuations of our stock right now and our cash generation. But again, -- so it is a bottom-up day-by-day decision on that. There's not a simple formula answer to that.

Our next question will come from Neil Mehta with Goldman Sachs.

There's been a few new builds that we've been hearing about, and there's more fleets being activated now. Help us understand the shape of the supply in terms of the capacity supply curve between these additions and the attrition where you think we will end year 2023.

Yes. I think, again, it's hard to predict the future, but the market is tight, and we certainly don't see anything that meaningfully change that going forward. With good profitability today of people trying to hang on to that last legacy equipment and get the last bit of juice out of that, sure. But ultimately, I think you're seeing today some degradation among older or lower quality frac companies and their ability to deliver efficient services. That's both a human, maybe mostly a human challenge and stress in today's marketplace, but also legacy equipment, if not properly invested in, it has a finite lifetime -- so the -- we think the market stays tight. I don't see a meaning -- unless we have some large drop in commodity prices and a drop in demand for frac fleets. I think the market stays quite tight, really as far as we can see, certainly through next year.

There'll be some new fleets coming out. We do keep a count on that. Could that fleet count be a few more than the amount of capacity that's going to age out. And it isn't like a whole fleet will be laid down. But one by one as pumps go down and they exit permanently. I don't think we have much higher active frac fleet count a year from now than we have today. And in our bottom-up survey of customers, the demand for fleets next year is slightly higher than the active fleets today, but not a lot.

Got it. And then talk to us about the nature on investment and what the what that potentially means for your fleet mix over time? Would you want to eventually entire these own these technologies? And are there other such investments that you're looking at? What are the size of investments or acquisitions do you have in mind?

Well, as you can see with the nature of investment, that's -- it's a modest investment, but it's a unique situation with really a different battery technology. Mitano dominate or variance of that dominate today because it has the highest energy density. For this 100-pound box, you can store the most energy in that configuration. But it's got serious problems with it. It can't discharge super fast. If where is out. Those batteries don't last very long because those ins don't fit fabulously well in that material matrix. And as you see all the time, it's got to fire risk in a hazard. So look, if you want energy density, that's the best we got today. But with this crush in blue and sodium ion, you've got a different battery configuration that allows very rapid discharge. So we had to shave a peak off during fracking. We can draw power out of those batteries very fast. The sodium ions are just a perfect fit size-wise in that Prussian blue Crystal matrix. So you've got -- you should have much longer lives of batteries.

You don't have the thermal instability risk and fires. So we think it's a neat technology for us for what we need. We're going to run large generators at high thermal efficiencies with minimum emissions to deliver a low-cost sources of energy and the lowest possible emissions. And that's aided by shaving off the spikes in demand that happen episodically drug fracs. So yes, we're quite interested in, yes, we'll see where that goes. But again, look, it's a modest investment to be a partner with this neat upstart company and probably an anchor and potentially an actor customer going forward. Yes. Let's say, on the size of investments as we look at all different sizes. But again, generally, they're focused on technology and places where we can get a real technology advantage in what we can bring to the market.

Our next question will come from Arun Jayaram with JPMorgan.

I was wondering if you could give us a sense of the vertical integration and what it's meaning to your earnings power. And maybe more specifically, today, how much of your EBITDA would you estimate is generating outside of pure frac between PropX, wireline, sand mines, et cetera?

Look, it's dominantly frac. Frac is the big piece of that business. Of course, there's additional earnings from those vertical integration companies, but we did those deals not just for that additional earnings, which is not trivial, but it's dominantly frac, but they're also to make sure that frac runs at high speed. -- having access to sand is not only profitability on sand, but it's to lower your risk of being ever waiting on sand or having quality problems with your sand supply. So we look at these vertical integrations as businesses in their own right, but at least equally important as enablers of the core business of frac.

Yes, it's Chris, either. We really have one segment to our business, and that's one segment for reporting and everything else, and that is frac because it is all very, very interrelated to their final efficiency of delivering that -- that stimulated last lateral foot. Got it. And just my follow-up. Chris, you guys acted pretty aggressively on the buyback. You bought back $70 million of stock in the third quarter. You have $180 million remaining. One of the questions from the buy side this morning we've been getting is just on the Schlumberger stake Sumber highlighted how it's in ownership of Liberty and noncore holding, I think they own around $400 million of stock today.

Thoughts on maybe using the buyback to mitigate the impact of this overhang?

Yes. I mean what they decide to do with the share is certainly up to them. I don't know, and certainly can't speak for that. But from the Liberty side, our goal with buybacks is to increase the value of each share that's out there. So it's really price dependent and without stressing the balance sheet. But yes, are we interested in acquiring more shares, buying back more shares of Liberty stock at an attractive valuation, Absolutely. But again, the aggressiveness of which we'll do that just quite price dependent.

Our next question will come from Waqar Syed with ATB Capital Markets.

And first of all, congrats on a great quarter. Chris, you've got about 8 million tons of frac sand capacity. Could you maybe tell us like what's the utilization level right now, you're running 100%? Or what is that level?

Yes. Again, we don't break down the details of that. But yes, absolutely, 100%. We've done some modest investments to optimize throughput to optimize the cost of mining. But yes, the sand resources we operate are running full out.

And just broadly or don't need a specific number? And how much of that is running through Liberty and how much is running through third parties?

So the vast majority of that sand runs through Liberty fleets. -- as just being moved years ago that all the E&Ps were going to be self sourcers of sand and we were skeptical of that idea then and remain that way. And the reason is, think of our business, we've got over 4,000 employees. Logistics is central to our business. if every aspect of logistics isn't running, the frac fleet is not running. So I think it's just -- it's much more core to our business and to our customers' business. So yes, the vast majority of the Sam Liberty pumps events, not just in the Permian, but elsewhere. It's sand that's purchased delivered and handled by Liberty. Not all of it, but the vast majority of it is.

Okay. And then in terms of how you charge your customers on that sand us running through your system, is that all on what the spot rate is today? Or do you have some contracts that's keeping those sand prices, the current -- the portion of that sand is not realizing spot prices?

Look, in all with all of our business, we're not a spot player. We're a long-term partnership player with our customers on frac and usually sanded together with frac. So yes, that is not riding or playing the spot market. That's long-term committed partnerships with our customers. And our price, of course, adjust with time. And we pointed out that the vast majority of all sand that's pumped in the oilfield is pumped on long-term contracts... You're about swap pricing in West Texas and other places, et cetera. But the reality of the fact that is the minority of the vast of the leading edge of the minority of sand that's pumped. The majority of stuff that the big sand companies sell, not to us or not service companies or to the self-sources, it's all sold on long-term contracts that's a very different price, the spot price that you hear about. So I think that's something that the guys I think is probably a little misunderstood in the industry.

Sure. So just on that topic, if you could generally just describe what portion -- or what is the gap between where the spot prices are today versus what your realized prices are today?

Well, not for us. I'll talk generally as far as the market goes. I mean just if you think about West Texas, I mean, people were here spot prices probably average in the mid-40s-ish maybe a little -- maybe mid- to high wards. And I will say, if you pull the whole of West Texas, I think you'll find that the majority of the sand average is probably being pumped at the mid-20s. -- less tonnes -- that's a price per ton at the mine head, right? So in general, that's about where the general sand market. I think if you ask anything as big sand providers and I'd say, you'll ask silico a few others, I mean I think you'll find you get roughly those numbers.

Our next question will come from Scott Gruber with Citigroup.

Yes. Just had a question on how you think about the multiyear investment in digiFrac, if demand is flattish next year, and the outlook is flattish in '24, but rates are holding at these healthy levels. Does the pace of the digiFrac investment continue at, call it, 4 fleets a year? Does it moderate? How should we think about that multiyear investment in digiFrac in a flattish environment?

Yes. [Danny], all those decisions are just one at a time bottom up. But yes, 3 or 4 fleets a year is, again, it could be much less than that. It could be more than that, but that's probably -- that's not out of the realm of reasonable. We're doing individual decisions with customers, with partners, one at a time. But yes, I think the long-term economics of these fleets and the long-term performance of these fleets are likely to prove quite compelling to customers and therefore, compelling delivery. But we've got to balance that because it's just one possible use of capital.

Yes. Got it. And can you discuss what you're seeing from an inflation perspective with respect to maintenance. -- reason heard from a land driller disclosed a pretty sizable step-up in maintenance for next year. What are you guys seeing? And how should we think about it?

Yes. Well, we didn't cannibalize. So generally, there's a significant amount of inflation over the last year or 2. Really, we're trying to hold that steady out at historical levels due to technology and design changes, et cetera, Scott. But yes, I mean, obviously, you know about the inflation rates that are going out via related to steel and everything else. So we're still tracking the general same historical range that we have. And again, I think we really did invest during the downturn. We didn't cannibalize some of our older equipment. So we don't have any like early spike like they were talking about...

Our next question will come from Marc Banichi with Cowen.

I wanted to ask on the digiFrac deliveries that you have upcoming. It seems like that's slipped a little bit from the original plan. It sounds like partially due to supply chain. But maybe you could talk to the confidence that you have in those now being delivered in the later part of this quarter. And then when they're delivered, if we just assume they're incremental, should we be seeing an immediate uplift in profit from those fleets? Or is there a shakedown period, what gives you confidence in getting cash flow out of those on day 1?

Yes. No, you're very confident in the delivery electronics supply chain issue that really put those back a little bit. Everybody was fighting. No. And even though they're going to the incremental rights those teams, there's going to be a transfer as that equipment transfers into that team. And so when you're thinking about modeling incremental, I would do anything from that, which is taking that older equipment and then moving out to another customer in -- or extension with that customer in the next year because you've got it in the next quarter because you've got to hire the people. That's the way to look at it from a modeling perspective.

Okay. And just from an industrial perspective, is there a period of making sure that these things are working as expected? Or what gives you confidence around the ability for the first-of-a-kind fleet to be fully operational as you expect? We've got private pumps out there right now, pumping. The performance has been outstanding. It is a new system where things coming together? Are there going to be issues that we're going to have to iron out kinks on.

Absolutely. But -- and of course, we're going to phase demand. They're going into a fleet that's already running a lot of same humans that will run the new fleet. So a new digiFrac pump and generator will come in and work together with the existing fleet. So they'll be phased in as a fleet is converted over. But you're right, it's a new technology and a new system that we've spent years developing.

So are there going to be wrinkles and challenges?

And I mean that's happening right now. Absolutely. Our goal has always been get to the best fleet at the end of the day. Don't cut quarters to be a little bit faster or meet some time line. We want to -- the idea is to build something truly differential here.

Makes sense, Chris. Michael, if I could just squeeze one more in real quick on the tax -- the cash taxes for next year. I hear you on the 1/3 of the book tax. How long would your cash taxes be below the book tax if 23 continued forever? Just trying to understand the runway there?

I generally say you'll probably be just -- I mean, really 2024 is about with the balance. They'll be slightly below because of the TRA savings, et cetera, but that only a couple of percentage points. So I would model them being even from '24.

Our next question will come from Roger Read with Wells Fargo.

Chris, maybe a question for you follows up a little bit on the last one you talked about integrating some of the e-frac digiFrac stuff in there. I was just curious, as you look at the pricing you're putting through the net pricing you're achieving and the new equipment, do you think you're, at this point, close to pricing, what digiFrac brings to the market? Or is there an uplift there relative to conventional approach?

I mean, look, the obvious thing is the difference between diesel and natural gas pricing is the power sourcing is just huge. I mean that's -- so number one, to the customer, there's just a dramatic cost savings -- and remember, again, this is a high thermal efficiency. It's actually going to burn much less gas than these small turbines that are out there powering fleets. So there's a meaningful cost saving advantage in digiFrac, -- it's a huge interest in that. There's a lower emissions component. And ultimately, we think there's going to be also a meaningful performance uplift. But probably to fully realize value of all those pieces, that's going to take some time. We got to get them out there, prove them, show them, see them. I mean, people are paying a premium for them today, but will that premium likely grow in the next 12 months? I think highly likely... So definitely some things to think about on the longer term there.

Changing gears a little bit, Michael, for you. As we think about the big build in working capital this quarter following up on the cash tax question. How should we think about a seasonal slowdown potentially affecting that? Or are we just in -- with business ramping up then for a period of general consumption of cash on the balance sheet?

Generally, our working capital amount follows our revenue. So Q4 is going to be relatively flat. Working capital will be relatively flat. We will have growth next year. Working capital will grow in line with our top line growth. And really, it comes down to our DSOs don't change, our DPOs don't change. Those are the 2 major drivers. -- has really, as you think about it, you can just mold those in line.

Our next question will come from Luke Lemoine with Capital One Securities.

Chris, just a question on your next-gen fleet investments come on a go-forward basis. Can we assume that these are almost all digi frac? Or is there still a component of customers asking for Tier 4 DGB upgrades?

It will be a mix of the 2. We're still doing fleet upgrades, Tier 2 to Tier 2 dual fuel, Tier 4 to Tier 4 DGB. So look, it's probably going to be dominantly skewed to dizzy frac, but not necessarily exclusively. Think of it like you completely blow up in engines. You're going to replace it with like a Tier 4 engine, you've got to replace it with the T4 dual fuel, right? So it's more of an incremental move. It's on a by fund basis.

Our next question will come from Keith MacKey with RBC Capital Markets.

I just wanted to maybe start off on your customer makeup. Any commentary you can give on the public versus private in your, say, current fleet count? And how does that marry up with the results of your customer survey calling for slightly higher fleet demand next year versus this year?

Yes. We don't obviously publish our Liberty frac fleet count region by region. But look, I think you're seeing where our fleets are deployed is reasonably reflective of who are running drilling rigs. Private today are like 55% of the roll rates are 55% of the activity. Major -- we're a very small slice. They grew a little bit. They shrunk a fair amount during Codan they're probably coming back slower than the others. So yes, maybe they're going to be a little bigger contributor to growth going forward than private so projects came running hard out of the gate. So there'll be a little change of the mix next year for sure, but not huge, not hugely.

Got it. And maybe just a follow-up, stepping back a little further. Would you say the last 6 months has altered your view on what you see as a mid-cycle profitability per fleet in that $14 million to $18 million, whether it's core pumping profitability or opportunity to increase vertical integration through time.

Yes. I mean well, there's one is the supply and demand and the market conditions that drive that cycle and where mid-cycle is. And yes, right now, things are strong and the outlook still is pretty good. So yes, this could be a more positive macro cycle than the last 1 or 2. We don't -- I mean, there's a good chance of that. It looks like it so far. And then there's also the self-help things that we can continue to improve internally to just have a better differential model than our competitors, and that's also an inflator in our profitability. But I probably shouldn't comment anymore beyond that. Michael, do you want to add...

Yes. The other thing is obviously our investment in next-generation fleets, which drives down cost of operation and drive down fuel cost. I mean that's all the investment and the technology is being driven by us and the investment on the capitals by us. So obviously, that will accrete to us and therefore, increase their mid-cycle number.

Our next question will come from Dan Kutz with Morgan Stanley.

I just want to ask, I guess, about the labor portion of the supply chain. -- impressive that you guys were able to staff those 6 incremental fleets. I think you said in a 90-day period. Should we read that as that some of the labor challenges are abating somewhat? Or were you guys able to accomplish that in spite of not really seeing relief on that front?

Well, the labor challenges definitely are abating a little bit. I mean, 9 months ago and 12 months ago, just crazy hard. I would say labor market today is still very tight. Still if you've got rid the last 2 years, I'd say it's probably the toughest hiring market we've been in since we started the company. But that the caveat was it was worse. It was worth 12 months ago, it was worth 6 months ago. So labor problem is slightly -- it is improving. And so that's true. But also, I think our dedicated recruiting team and maybe just the character of the crew leaders, all the people leading these crews, new crews, they've all been with Liberty for a while. And so between recruiting and those crew leaders, that's just -- we think a little bit of a different atmosphere to welcome people into. So I my hats off to our team that did a great job in a challenging market.

Great. Got it. That's helpful. And then maybe just thinking about the other components of the supply chain and you guys made some comments on some of those components already. But just wondering if you could roll up any trends that you're seeing in some of the other parts of the supply chain, whether things are improving, moving sideways, getting more? Just any general thoughts outside of labor would be great.

There's still meaningful challenges, large equipment -- I mean, engines and engine rebuilds, which are a big part of our industry, they're still on allocation. They're happening, but there's still challenges there. There are still challenges there. A slight improvement in the sand logistics market over the road trucking rates have come down, so you've got some more truckers that have come back to the -- coming back to the ore pass. So we're seeing some relief there. I'd say chemical markets reasonably flat, probably a hair better than they were earlier in the year. And that's the main issue. I'd say probably the biggest struggle is still those heavy equipment style electronics parts that we share with a large amount of the other economies. We have the other parts of the economy.

Our next question will come from John Daniel with Daniel Energy Partners.

Including for going over the hour I just want to go back to the vertical integration questions that were raised earlier. It just sounds like you guys would call that a competitive advantage, which would seem reasonable to me. And I'm just wondering if it is a competitive advantage on, say, like the sand, should Liberty look at bolstering a sand presence outside of the Permian to support the other geographic basins you're in? Or should it extend into other products such as chemicals, just your thoughts.

Again, it's a bottom-up thing not a top-down philosophical thing. So look, if we've got reliable sand at reasonable economics, it's -- we don't have to be owning part of the supply chain, but if it looks like it's going to add to the security of supply of our business and the economics are compelling. It's not impossible we would do something like that. But we haven't made some decision that we're going to own x percent of all the sand we pump. We did always philosophically, we want to make sure our fleet can keep running and we can deliver a differential performance versus what others in our industry are going to provide to customers. And for us, what is necessary to deliver that.

Okay. Well, going back to Chris, can you guys -- are there any efforts to expand your capacity just with the existing operations in the Permian...

We are doing that. We have done that, and we continue…

Okay. Fair enough. And then the 6 fleets that were deployed in Q3, I think you said that all of your fleets that operate today are dedicated or I don't know if I misheard that. And if you could talk about that. And then the second -- the follow-up is, are any of these fleets that are being reactivated -- are they being viewed as, for lack of a term a bridge for that next for the Digi frac such that those would go back to the yard at some point? That's it for me.

Yes. Look... We don't -- I said we don't play in the spot market, which is true. So -- but with the efficiency of a fleet today, there are certainly good sizable customers out there that are less than a full frac fleet to work. We'll do all of their frac work, we'll balance it maybe we call it a multi-customer fleet, we'll balance it from others or we may have a key customer. Their workload is 1.5 fleets, and we'll do all of that, and then we'll balance that other half with another customer or customers to fill that. So we're not like bidding on 22 things to see what we can get the best pricing on to go in, we don't really play that game. But we do have fleets that are moving between multiple customers and then things happen, gaps open up. Somebody's got logistical from or ply chain from or drilling from or an offset pad problem. So we try to always keep a suite of people that would like to have Liberty on location that we can call up on shorter notice and move those fleets to different pads if hiccups happen.

And of course, hiccups happen, and they're happening a little more than normal, I would say, these days. And because of all the stuff we've been talking about with supply chain. And on the reactivations, there are customers that really want a digiFrac fleet before they get a frac program going now. So of course, there are some where that -- we've got a different fleet working for them now and has the digiFrac becomes available and those things go in, those fleets will be phased out. Yes, think you're going to see growth in the Liberty fleet count going forward.

Fair enough. And we squeeze one more on for Michael. This is -- I don't know if you would have this data in front of you, but the addition of the 6 fleets and all those people is pretty impressive. And I'm curious, as the new hires have been hired, how many of the folks are coming that are not part of the industry already. They're truly new to oil and gas versus guys that might be switching from one service company to another. Any color you might have handy?

So I'd say generally, the majority of our hires are from outside. I haven't done at the numbers for these 6 fleets, whether or not the that was a larger version of the experience. We picked up a lot of experienced people. I mean, Liberty has actually seen is probably the best place to work, I believe, in the industry for that for a number of different reasons, the culture, the schedule, et cetera. So there's always a balance between the 2. But we have a lot of -- we have a lot of veterans. We have a lot of people coming off farms, the people coming out of other industries coming and joining us.

Our next question will be a follow-up from Stephen Gengaro with Stifel.

Just a quick one. Can you give us a sense where is spot pricing now versus the prior peak? Any sense...

We're not the right guy back because we're not that plugged into the spot market. But if you're buying -- answer a different way, their frac pricing today, think of longer-term dedicated or a bigger piece of fracking, it's still well below what it was 4 years ago to -- if you're an E&P operator. There's still efficiency gains in our industry that are meaningful in driving down the breakeven cost of barrel of oil. Prices dropped crazy low in the COVID downturn, I think you all downturns. But and they bounce back, so our profitability is back as good as it ever was. But the all-in pricing to a customer on the other end is still well below where it was. Yes. That's why I was asking because the profitability has gotten to such a strong level. I was just curious how that related to price. \\

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

I thank everyone for their time and thoughtful questions today. And most importantly, thank everyone in the Liberty family and our customers and suppliers and everyone out there working 24/7 every day to make the world a better place to live. I appreciate all of you. We'll talk to you next quarter.

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