Liberty Energy Inc (LBRT) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Liberty Oilfield Services Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

Some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's earnings release and other public filings.

Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA and pre-tax 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 pre-tax return on capital employed, as discussed on this call, are presented in the company's earnings release, which is available on its website.

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

Good morning, everyone, and thank you for joining us to discuss our third quarter 2021 operational and financial results. Our third quarter results show solid growth momentum with a 12% sequential increase in revenue on both higher activity and service pricing. Our team delivered this growth while navigating acquisition integration activities, cost inflation and the disruptive impact of the pandemic on global supply chains and labor availability.

Third quarter revenue was $654 million compared to $581 million in the second quarter. Adjusted EBITDA in the third quarter was $32 million compared to $37 million in the second quarter. The third quarter benefited from service price increases, but Liberty was not immune to the serious supply chain issues the world faces today as faster cost increases more than offset higher prices during the period. Increased transportation costs and driver shortages, maintenance personnel, supply chain constraints and integration costs hurt margins in the period. We estimate that rapidly increasing logistic costs that were not passed through to customers in the quarter were approximately $12 million and maintenance costs were $8 million higher than normal due to integration and COVID-related disruptions. We are actively addressing the supply chain, logistics and integration challenges that are continuing into the fourth quarter to moderate their impact on margins.

We all know the COVID pandemic has caused meaningful disruptions in the labor market. Liberty has taken significant steps to address the effects, and we are starting to come out of the other side of these challenges. Michael and Ron will expand on these issues and opportunities. There is now widespread recognition amongst operators that not only is the availability of next-generation equipment limited but even more scarce is high-quality service partners with best-in-class efficiency and technical expertise to drive higher performance. We believe this tightness in the market versus quality service providers is important for operators, and they recognize it's critical to have the right partnerships in place today to be successful over the coming years.

There is significant interest in Liberty's digiFrac electric fleet. We have completed 4 very successful deal trials and over 30 technical and factory deep dives with customers, and the response is overwhelmingly positive. We are excited to announce the execution of the first 2 multiyear arrangements to deploy digiFrac fleets in 2022 with 2 of the field trial partners. We are also in active negotiations with the others. The technical innovation and engineering control that these fleets exhibit, combined with the leading emissions profile and Liberty's operational excellence, is a combination that is hard to beat. We are continuing our multiyear deployment strategy centered around choosing the best partners, strategic frac deployments and strong returns on incremental capital deployed.

Operational efficiency came to the forefront during the quarter. In late September, we announced that Liberty frac and wireline teams worked in concert to achieve 24 hours midnight to midnight of continuous plug and perf pumping time. We are excited that just 1 week later, this team did it again, giving the ambitious goal of Liberty's Operation 1440 is an incredible feat delivering a full 1,440 minutes of pumping time with 0 nonproductive and nonpumping time requires a remarkable effort of coordination and efficiency. Our team achieved this due our 10-year focus on real-time data tracking and predictive analytics and due our partnership with Kaiser-Francis and Downing.

Surveying the macro, worldwide economic activity continues to grow, driving higher demand for energy, despite the impact of supply chain disruptions, material shortages, labor scarcity, rising costs and COVID-related uncertainty. Energy demand continued to outpace the gradual return of supply as evidenced by the energy crisis in Europe, China and India. Global oil and gas supply remains constrained by underinvestment in both oil and gas production and the associated infrastructure. The urgent desire of many to see oil and gas transitioned away is running headlong into reality. In the year 2000, hydrocarbon supplied 86.1% of global energy, falling by less than 2% to 84.3% in 2020.

Underinvestment in oil and gas infrastructure, whether it be shrinking the natural gas storage capacity in the United Kingdom or hindering the permitting of U.S. LNG export facilities, will surely lead to thousands of preventable deaths this winter among those unable to afford skyrocketing heating bills or surging food prices due to a global shortage of natural gas, driving up fertilizer prices. Strong oil, gas and natural gas liquids prices are bolstering demand for frac services, particularly among private E&Ps. The positive momentum we've seen is expected to continue in the fourth quarter and into 2022. Our customers demand modern, environmentally friendly solutions with high-performance operations and strong partnerships. We are in a highly advantaged position with top-tier technology innovation, engineering prowess, service quality and ESG friendly solutions.

As we continue to look for ways to improve our efficiency and build value, we are very excited to announce our acquisition of PropX, a leading provider of environmentally friendly last-mile proppant delivery solutions. PropX has also been a long time equipment and service provider to Liberty. The dynamic team at PropX is a great cultural fit with Liberty. The addition of PropX integrates the latest proppant delivery technologies and software into our supply chain, including their new ESG friendly wet sand handling technology and expertise. We will continue to bring PropX technology, equipment and services to the whole industry. Together, we believe these solutions will reduce the environmental impact of last-mile delivery and lower our total delivery cost to our customers.

I'll hand it off to Ron to discuss the significant value PropX will bring to the Liberty organization.

Thank you, Chris. We are excited by the opportunity to both strengthen Liberty's logistics efficiency and technology, while also continuing to offer these leading solutions to the industry as a whole, whether we are performing the frac services or not. PropX is a leading provider of last-mile proppant delivery solutions, including containerized sand equipment, well-site proppant handling equipment and logistics software across North America. In the most recent Kimberlite survey, 60% of the E&Ps surveyed expressed a preference for containerized sand handling on their locations. Today, PropX systems can be found on approximately 25% of all frac locations.

Founded in 2016 as a solution to optimize on-road trucking delivery of sand, their custom designed-for-efficiency, containerized sand handling equipment for both wet and dry material maximizes delivered load capacity and flexibility. The system utilizes the widest cross-section of trucks in the market. This has led to logistics efficiency and environmental benefits from lower delivery rates, faster turnarounds, fewer trucks required and reduced emissions due to lower idle time.

Liberty has been a long-time customer of PropX. In fact, as part of the integration of OneStim, we are in the process of moving legacy OneStim fleets to PropX box systems across North America, as this is the more efficient and cleaner facilitator of sand transportation in the industry. The rapid innovation and ingenuity of PropX continue to date in the nascent wet sand business. Through their ongoing work with early adopter, Ovintiv, PropX has built the equipment and expertise to become the premier provider of this technology. Wet sand handling technology is a key enabler of the next step in cost and emissions reductions in the proppant industry. It is an ESG-friendly solution that allows for the delivery of wet sands to operators.

Customarily, sand processing requires sand to be washed and dried prior to transport. And the drying is the highest emitting process at a sand mine. PropX's wet sand handling equipment allows for the transportation and usage of wet sand, eliminating the drying process, reducing costs and emissions. We view wet sand handling and delivery as a disruptive force in the last-mile delivery business in terms of lowering total costs and reducing environmental impact. As we look ahead, we see many opportunities for localizing the supply chain with smaller scale wet sand mines using the PropX system, providing real, sustainable cost savings across the value chain.

We are also thrilled to have PropConnect, the latest real-time logistics software, which raises efficiency for operators and service providers across the space. The PropConnect well site and software automation platform is available to customers for sale or as a hosted software as a service. It drives better visibility and automation from source to dispatch to well site and billing. Internally at Liberty, we plan to integrate PropConnect with our Oracle transportation management system and other existing logistics development efforts to streamline supply chain, delivery and operations. We expect this integration will modernize last-mile delivery, enable our driver quick pay initiative and bring significant improvement in cost efficiency and geo optimization.

An early trial of the next-generation software platform in the Permian enabled a 20% reduction in the number of truckers required to keep a pad supplied with proppant through end-to-end optimization of truck flow. The new platform also enhances Liberty's ability to partner with a broader range of trucking providers from the independent owner-operator to the largest firms. They will benefit from clear line of sight to utilization levels and automated invoice workflow, speeding payment times to inside of a week. Safety is paramount to Liberty and driving is the most dangerous activity we undertake. We believe direct oversight in the last-mile space provides us the strongest opportunity to drive continued improvement in this area.

The transaction positions Liberty as an integrated provider of completion services offerings with proppant, equipment, logistics and integrated software that will improve Liberty's operational efficiency. It is representative of our relentless focus on building value over the long term. By integrating the latest proppant delivery technologies and software into our supply chain, we believe we will reduce the environmental impact of last-mile delivery and lower our total delivered cost to our customers.

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

Thank you, Ron. Good morning, everyone. Our third quarter results showcased the hard work by the Liberty team. We delivered a solid top line result, improving overall service prices, utilization and efficiency, despite ongoing global supply chain disruptions and integration activities. The challenges that hit our profitability still exist, but we are aggressively managing them to moderate the effect on future results. We're excited by the accretive PropX acquisition that will complement these efforts.

Let's look at our results in greater detail. In the third quarter of 2021, revenue increased 12% sequentially to $654 million from $581 million in the second quarter, reflecting the combination of increased activity, high-quality price pass-through and increased service prices. Revenue in the U.S. was approximately a 10% sequential increase on relatively flat start fleet count. Top line growth was achieved despite supply chain and logistic challenges that are impacting our industry as a whole and the integration issues that Liberty is navigating in our first year of the OneStim acquisition.

Our net loss after tax was $39 million. Net loss included a gain on the remeasurement of our TRA liability. The positive fee impacted results by approximately $5 million. Results also included transaction and other costs of $1.6 million. Fully diluted net loss per share was $0.22 in the third quarter compared to $0.29 in the second quarter. Third quarter adjusted EBITDA was $32 million compared to $37 million in the second quarter. The decline in adjusted EBITDA was a result of several factors.

Logistics costs negatively impacted EBITDA by approximately $12 million from driver shortages, higher transportation costs, and we did not pass-through as quickly as they materialized during the quarter. Driver shortages across the country are at an all-time high, and our industry is heavily dependent on transportation of sand and other materials. We are taking measures to streamline our logistics network and pass through fast, rising transportation costs. The purchase of PropX with full integration of the PropConnect software with Oracle transportation management will drive a fast paced system with the long-term solution to streamline logistics. Reducing the quantity of drivers needed reduces cost per mile.

Maintenance costs were approximately $8 million higher than normal due to the integration and COVID-related disruptions, including the impact of fewer maintenance core personnel due to labor supply constraints, higher [filing rates] of maintenance parts as we transition the legacy dual teams to Liberty's predictive maintenance software and industry-wide pandemic-driven supply chain network efficiencies. As we discussed last quarter and Chris mentioned in his prepared remarks, the labor market across the whole country and in all industries is in a challenging place. Successfully providing superior service to our customers has driven by Liberty's commitment to our team members. Liberty historically has been insulated from the turnover issues that have been part of this industry over the last 2 years.

In this quarter, we announced the transition of all of our field crews to the start of the 2 on, 2 off week schedule that we believe promotes crew efficiency, reduces turnover and most importantly supports our goal to be the safest completions company in North America. We're seeing turnover rate move back towards historical Liberty levels, and that will be a financial fruit over the future quarters.

General and administrative expense totaled $32 million and included $3.8 million of stock-based compensation. Excluding stock-based compensation, accounts receivable balance in the second quarter, G&A expense increased by $5 million in the second quarter. This increase was driven by the restoration of sales and profitability bonuses and compensation increases totaling $2.4 million, higher legal and professional service costs of $1.1 million and increased IT and other costs to support our new larger integrated business post the OneStim acquisition of $1.6 million. The current quarterly run rate is a reasonable estimate for the fourth quarter.

Net interest expense and associated fees totaled $4 million for the third quarter, and we also recorded a noncash adjustment of $4.9 million related to tax receivables aggregated gain. Income tax expense totaled $1 million related to Canadian operational third quarter results. We ended the quarter with a cash balance of $35 million, reflecting an increase from second quarter levels. Total term debt was $106 million net of deferred financing costs and original issue discount.

There was a $16 million drawn on the ABL facility at month end and total liquidity available under the credit facility was $268 million at the end of quarter. In October, we amended our secured asset-based revolving credit facility. The amendment extends the maturity date of the facility from September 2022 to October 2026 and revised for $100 million increase in the aggregated commitment to a total of $350 million.

In conjunction, the term loan maturity date was extended by 2 years with no substantial payment was due up to maturity in September 2024. We are excited to announce the acquisition of PropX for an aggregate purchase price of approximately $90 million, subject to normal closing adjustments. It is consisting of $13.5 million in cash and the equivalent of 5.8 million shares of Liberty's common stock valued at $76.5 million based on a 30-day average share closing price of $13.08. The $90 million purchase price represents approximately 4.7x their estimated standalone 2021 EBITDA.

As Ron described, with this acquisition, Liberty will further integrate our completion services, with proppant, equipment, logistics and integrated software, that will improve our operational and logistics efficiency, directly confront the logistics challenges we face today and is a clear example of our strategy of investing for the future and maintaining a clear focus on technology innovation, highly efficient operations and a strong balance sheet to deliver greater value for our shareholders through cycles.

Capital expenditures were $56 million for the quarter and that including approximately $10 million of OneStim fleet Libertization. As we look ahead, we see the momentum we have created this year will set us up well for executing in 2022. Customer pricing recovery is speeding up. We've addressed the unique personnel challenges of 2021. Logistics and supply chain will continue to be a challenge but the issues are identified and being addressed. The management team continues to be amazed and proud of how the Liberty team has performed in these tough times and are excited to see what they can do with the tailwind at their back.

With that, I will turn the call back to Chris before we open for Q&A.

Thanks, Michael. While the quarter had some challenges, we are very pleased with the trajectory of our business. I want to thank everyone on team Liberty for their tireless efforts. I also thank our customers and our suppliers for their partnership.

Back to the operator now to take your questions.

(Operator Instructions) First question comes from Scott Gruber with Citigroup.

Chris, you and peers have been pushing pricing now for a few quarters. And it appears you're offsetting the inflation across the system, but not getting much net pricing. What's your confidence in securing net pricing in the quarters ahead? And is this something we have to wait for the new year for the MSAs to reset to really see it come through in your financials? And overall, just kind of how you think about the potential magnitude of net pricing gains that are possible as we head into next year?

You bet, Scott. We actually feel pretty good about things. Just remember how low things sunk 5 quarters ago. So we were getting net pricing improvements from a very low, low over the last 4 quarters. Last quarter definitely a bump in the road. We drove pricing up but not as much as we should have, and you see the results of that. Pricing is continuing to move up in the current quarter, but the larger movement in pricing, double-digit, will be starting Q1. And most of those price moves have already been agreed with our existing customers. So we feel pretty good about where things are going. We wish they'd moved faster, but things are going to a good place.

It’s good to hear. And just digging in a little bit more on kind of what's driving the pricing. There's still a lot of legacy Tier 2 equipment on the sidelines. And obviously, there's a preference for low emission, kind of next-gen kit, but we also have a scarcity of quality crews out there today, as Michael discussed. And that alone should raise the value of an active experienced crew today.

Can you just parse out a little bit for us kind of what's driving the net pricing? Is it more scarcity of quality next-gen equipment? Or is it crew scarcity? Any color on that front? And if it's more driven by crew scarcity, which is just kind of less of a phenomenon than we've seen in past cycles, just kind of overall what does that mean for the kind of potential on securing net pricing? And the magnitude. You talked about double digits, but kind of what is the scarcity of quality crews means for pushing pricing?

Yes. Scott, [you made them actually]. We can -- both of those things. And they are -- and you're right. They are separate forces. Mostly among the larger public operators, yes, there's a very strong desire. They have lower emission fleets. Remember, lower emission fleets run on gas versus oil. So they also have a cost saving or an efficiency there in running on natural gas as opposed to diesel. So that is driving inflation. I would say that's driving the differential pricing between next-generation fleets down the line.

And there's really a continuum from Tier 2 to Tier 2 diesel to Tier 4, I mean Tier 2 dual fuel, Tier 4, and Tier 4 dual fuel and now fully gas burning and maybe at the top of that stack digiFrac. So there is a pricing differential driven by that. But then there's also sort of a macro tailwind of just a tighter market of quality crews. Because the labor challenges makes the whole market tight, but there's also sort of a differential between the quality of the crew you're getting. And yes, it does not take too many incremental fleets that are deployed over the last few months to meaningfully tighten that market now today. If you're just standing up 2 rigs and you want to get a quality frac fleet today, that's meaningfully more difficult than that was 6 months ago.

Got it. And the 10% improvement that you foresee, that's kind of across the board on average that you expect for Liberty?

Yes. I think I'd have to be more generic at double digit. But yes, we are getting price rises -- net price rises in Q1 across the board. Look, there's a stronger demand. There's probably a growing bifurcation in the pricing you get for environmentally friendly next-generation fleet versus Tier 2. But all of -- the economics of all of them are floating meaningfully upwards. And then again, it's very gradual so far, but you'll see a more meaningful jump in that in the start of next year.

Our next question comes from Stephen Gengaro with Stifel.

Two things from me. One, just following up on the prior line of questioning. When you think about that level of net pricing improvement, double digits, I mean, that theoretically translates to $6 million, $7 million rise in EBITDA per fleet, right, because you sort of directly fall for the line if it's net. Is that a reasonable starting point as you think about next year versus second half '21?

So it's not going to be -- I think your math is reasonable. But it won't be a rough immediately on January 1 everything changes. Most of these are agreed, a lot phase in January 1. Some are tiers that will phase in over the year. But are we going to see that much of an increase in EBITDA per fleet year-over-year? Absolutely.

Great. Okay. And then my second one is -- it's around PropX and just really 2 questions. One is just how we think about how it folds in, and I assume it's going to be sort of meshed in and accretive just to the efficiency of operations. But given the market share you talked about, just curious how you think about that business working for third parties. And if you're worried at all about cannibalization of the work outside of Liberty.

Honestly, we're not that worried about that. A lot of PropX's other business is with people in the proppant business, a lot of direct sourcing for E&P. Some of it certainly is with competitors of ours, but I suspect that business continues on. And if it doesn't , I don't think it's much of a needle mover. So yes, we're excited about PropX for 2 reasons. One is directly integrating our technology development efforts will make Liberty's efficiencies, smoothness, safety and ultimately cost to deliver better. Also, we have a third-party business that we suspect will continue to grow. And it's a strong business as well.

And Steve, I think I will add just a little bit. That is one of the key technology enablers for the future here is the wet sand handling business, right? I mean that's a key differentiator as we move forward. I think we're going to be working with all of our E&P clients on that. And it's another way that we're going to be focusing on driving down the ESG footprint of frac industry for our large and small clients across the board.

It doesn't work everywhere, but the areas where it will work, it will be great. It will be -- again, it's really -- take trucks off the road. It makes the world safer. It takes emissions out of the year. This is -- these things that PropX has been working on, really what we're doing is we're giving them a bigger megaphone, a bigger backbone to take this to market that'll help the whole industry and we'll sell it to everybody, whether it's a frac company, E&P company, sand company, et cetera.

Our next question comes from Taylor Zurcher with Tudor, Pickering and Holt.

My first question is on the supply chain. You talked about kind of 2 buckets, logistics and maintenance, where costs ramped pretty notably, sequentially. The logistics side is pretty straightforward to me. And so my question is really on the maintenance side. But when you're talking about $8 million of extra maintenance cost, is that really raw materials cost inflation on things like fluid ends? Or what's going on there in Q3? And how should we think about that piece of the equation for Q4 and beyond?

Taylor, it's a great question. Actually, there is a lot of general inflation that's rolling through the cost structure of everybody at the moment. Yes, we didn't highlight those. That, to some degree, normal costs. I mean, I'll just throw one as an example, tire prices are up 10%, right? I mean significantly rubber prices. You've got issues around supply chain everywhere. So those are places we didn't call out. But I think one of the things we were trying to focus on there is to see when you look at our business, where -- there's 2 places where integration costs, personnel issues and maintenance practices, they all sort of come together. There's 2 places you can do that is, one is efficiency.

And the key thing is our operations team did an amazing job with the integration, issues around supply chain, keeping efficiency up. But the other place that you see there that rolls through your financial statements is really your cost of operation, but frankly, all maintenance costs, right. Depending on how you run the equipment, it's meant how much it's going to cost. Now that is something that when you get turnover and you get integration, and we change systems, sort of that wear and tear can spike. But it doesn't happen one-to-one right.

It's not how you run the equipment this month, it's going to change your cost this month. So what we're doing is we're seeing sort of the banking of the way from the start of the integration and to the personnel issues over the summer really get in Q3. Some are going to hit in Q4 then roll off in Q1. We're actively like aggressively mitigating those at the moment. But again, I think that's where you see it turn up in the financial statements. And we recall that to try and explain to people how that works.

I think, Michael, that's super helpful. And my follow-up is on digiFrac, encouraging to see you guys ink some multiyear arrangements. I guess my question is, you're talking about arrangements here. Should we translate that sort of terminology as being analogous to a firm contract for these first 2 fleets? And then part 2, any color that you'd be willing to provide on the economics behind these 2 fleets, whether -- I know you talked earlier about double-digit pricing improvement next year. I'm sure digiFrac is a big piece of that and I suspect at the high end of that. But just looking for any sort of color on the economic returns that you're expecting from this incremental digiFrac equipment in 2022.

You bet, Taylor. So yes, look, there are contracts behind these. But as we've always been, we never talk about the details of our commercial arrangements. But -- so for us, it was careful to choose the right partners that have a long runway in front of them that have been partners of us for a while. And of course, the economics are strong, very strong return on the new deployed capital for us.

Yes, those are the 2 things that matter, the right partners, the right windshield in front of how long that equipment will work and very strong returns on an incremental capital. And digiFrac deals we've agreed, and there were many more discussions. Obviously, there's a lot of interested partners. We're excited about it because they are big wins for both sides. There are huge ESG and even operational performance improvements for our customers. There's great efficiencies with them. There's lower fuel costs. But of course, there's very strong economics for Liberty in deploying that incremental new capital.

Our next question comes from Connor Lynagh with Morgan Stanley.

Just a clarifying question to start here. I might have missed, but I was just curious, did you give any sort of earnings contribution expectations for the PropX assets? Or just any sort of high-level framework for how we should think about it affecting your sort of mid-cycle EBITDA per fleet?

Yes, Connor, as you state, when you look at their 2020 -- their pro forma 2021 earnings was about 4.7x EBITDA was the valuation. So you kind of back calculate into that. They're obviously being an equipment -- mostly an equipment rental business, go down probably lower -- they don't go as low during the lows, right? So they're going to rebound a little bit from there, but obviously not as fast as a frac company. So there is incremental improvements from there, but we wanted to give kind of people that sort of a handle as we start from the moment.

Okay. Got it. Maybe just a higher level one here. Obviously, with the acquisition of OneStim and now PropX, you've definitely become more integrated and sort of broader in your completions equipment offering. So I'm curious, are there any other areas you feel are necessary or potentially just value-accretive for you to pursue in the completion of the supply chain? Or do you feel like the footprint as it stands right now is the right way to be for the coming cycle here?

So we're always looking at deals. You rarely hear about them because we don't do many of them, but we're always looking at deals. I think the industry views Liberty as a nice acquirer. I think people like our culture and the way we do business. So we get approached a lot. Are there other technologies, other enabling things might be a good fit for Liberty? Certainly possible. We feel really be necessary. It's not like we need to buy anything else, but we continually evaluate stuff. And if we think it's accretive to our earnings going forward and helps us build a stronger competitive advantage, then we're interested. And then it goes down to be is it a good cultural fit, are we going to be able to pull it off. So there's a lot of factors there. But we're always looking and -- yes, it's certainly not impossible to see more things like this going forward.

Got it. And just to clarify that -- the comment there. It sounds like you would probably be more interested in pursuing more sort of technology-focused acquisitions as opposed to capacity. Or how are you thinking about that as where valuations are right now?

I think your comment is generally right. We look at everything. We look at everything. But yes, technology, things that make us better are the most appealing.

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

I guess a few follow-up questions here. I guess, first, maybe I'll just follow-up on Connor's question, thinking about further integration. Would you think about kind of being further integrated in fluid ends or aftermarket or perf guns or anything like that where you could save costs there?

I mean, look, we acquired ST9 years ago. So we already make fluid ends and power ends and valves and sieves. It's a young business. So we're excited about continued improvements in both performance and cost efficiency in those areas. But yes, we've already done that.

Yes, I would say that's one of the ways we look at things, Chase, is we look at technology add-ons where we can sort of improve returns for our customers and improve their business. We've replaced it in the supply chain, where we see that we really like to have more control or reach further back where we sort of like what speed technology improvements will reduce costs. That's another key place that we always look. And I think sort of the original purchase reasoning behind ST9 was that. Obviously, there's a huge technology advantage with the digiFrac design.

I think you see that when we took the Freedom Proppants business along with the OneStim business, right? That was key, West Texas sand. The same thing, to some degree, you would say, was with Prop, that you'll see the same thing with PropX, right? We've got -- it's a key supplier for us. It's sort of a one-stop shop is what we need. We need to make sure we have access to it, and we can help them make and reduce some of the costs of these key containers and handling equipment. But also it's a huge technology portfolio with a nascent wet sand technology, which is another key driver, right. Also what you'll see is this cost savings, improving EBITDA, immediately accretive, plus room to build technology for the future. That's generally how we like to look at acquisitions.

And moving over to kind of the new build. You obviously -- you announced the 2 digiFrac electric fleets. How do you think about adding capacity today into a market that's oversupplied? Now I know that kind of -- there's a higher demand for next-gen equipment. But how do you think about adding because obviously, competitors are doing the same? And one would argue that the market doesn't need incremental capacity. Are you scrapping capacity on the low end as you add new capacity? Or is this kind of net additions to your overall capacity?

Look, right now, demand for frac fleet is growing and the available number of fleets able to work is actually shrinking. You hear announcements of some electric frac fleets being built. That number is way below the amount of equipment just from attrition on an annual basis that's happening right now. So we have 2 trends in the industry right now, growing slowly, but growing demand for frac fleets and shrinking supply of frac fleets. That's where the macro we're in right now, which is what's driving the continued improvements and actually improvements to a pretty good place sometime next year. So for us, it's -- we never look at that like top down. Next year, we'll run x number of fleets. We're going to add x or subtract y.

That's just not the way we do it. It's always a bottom-up customer-by-customer dialogue. Is that customer strategic? What needs do they have? What are the economics for it? How are we going to staff it or work it? So right now, from our existing partners and some newer partners, yes, there is a strong pull for Liberty right now. I'd say we've been quite disciplined in not just saying yes to everyone and bringing tons of new fleets out. In fact, we've held the line on fleets for a long time right now. But next year, and certainly, with the digiFrac fleets, are they likely to be incremental for Liberty? Yes, they will be. They will be. Supply and demand, it's a different situation right now than it was 3 quarters ago. Now look, we report results. That's all rearview mirror. And when prices change today, it isn't usually for tomorrow. That's further ahead. So our results are always just a lag look into what's going on in the marketplace.

Yes. The real view around the real crew point at the moment is truly trained, effective personnel, right? That's the issue around bringing -- people bringing new fleets for the growth. Logistics and personnel is really the touch point as opposed to sort of the amount of raw steel that just happens to be sitting on side line.

Yes, it makes sense. One quick follow-up. And in the press release, you were pretty candid about the activity levels, and you see increasing activity into kind of 4Q and 2022. So I guess specific to 4Q, do you think that you see any seasonality or budget exhaustion or anything like that? And then when you look out to 2022, do you think the ramp is kind of more first half or second half weighted?

Yes. Well, I'll take Q4 and I'll give Chris next year. He's going to be able looking to go out. Q4, when we look at in Q4, we're obviously going to see seasonality, right? You're going to see Christmas, Thanksgiving, holiday breaks, and no more that's usually sort of a mid-single digits slowdown in activity in a normal year, once we've got past this budget exhaustion over the last 3 years, which was abnormal over time. So I think that's going to happen. I think that's going to get offset for us by sort of increased activity and some increase of scheduling earlier part of Q4. So I'd say, we're going to see a slight uptick probably top line in Q4 is the expectation.

Yes. And going into next year, publics are still very disciplined. And again, we applaud that. We applaud that. Prices are going to be higher next year and their cash flow is going to be higher. But I think CapEx levels will still be quite modest. Production, probably mostly around maintenance production levels for the public, which still means an increase in CapEx but for the private, it's just a response to the strong economics.

So I would say there's a measured but continual increase in that CapEx and that activity level. So look, we're probably going to get -- next year, I think the numbers you read around 20-plus percent total increase in CapEx next year, that's probably a reasonable yes. But again, think of that 27% spend, half of that's price. So there'll be increased activity levels next year. It's not a stair step in January. I think it's probably more gradual and spread out over the year, depending upon commodity, commodity prices.

Our next question will come from Atidrip Modak with Goldman Sachs.

Could you -- maybe at a high level, could you provide any color on what the frac equipment supply/demand picture looks like today? What do you estimate the utilization rate is like? And what does supply look like as you go into next year? Because there are a lot of your peers who are talking about upgrades, not necessarily electric fleets. Just any color around that.

Yes. It's harder with frac fleets than with drilling rigs because what's happened is the intensity of frac work has continued to migrate up. People -- economics are poor. So people when -- they have a frac fleet sitting and an engine goes down or you need major compo, there's a lot of -- we hear, there's a lot of pilfering of parts and competitors. So it's -- you can't just fly over and count how many large frac fleets there are. But I will tell you the excess capacity of steel is definitely shrinking. So the equipment is being worn out. As Michael said, probably the single biggest challenge is if you're going to deploy a new frac fleet or even keep the one you've got going.

It's the skilled labor that can work efficiently and safely. The human side is probably the biggest pinch point in frac fleets. But the seal and quality seal is also getting tighter. There's visibility into that as well. We keep an internal, and I think in just the last few months, a pretty high-quality account of active frac fleets by basins and across North America. And we have probably a 3-month projection ahead of what's going to happen with that due to basically dialogues with everyone running frac fleets. We have the --we don't publish that. We probably never will. But that gives us kind of an insight of where things are going. And obviously, a dialogue with customers, which is every day across many people, Liberty, kind of reinforces our feel that ability to get quality crews today. It's harder than it was 3 months ago, much harder than it was 6 or 9 months ago. And I think probably a widespread belief it will be harder still 3 to 6 months from now.

Yes. And Atidrip, I'll comment on the upgrade cycle a little bit there, the second part of your question there again. It is interesting. What we're seeing now is you are seeing people when -- Liberty as well. As engines come into the, say, 5-year, there is a 10-year retrograde, the upgrade, they are getting upgraded. They are maybe getting upgraded to a Tier 4. There's decent differences there, do some things with cooling systems, et cetera. Some of the Tier 4 engines are getting upgraded into dual fuel DGB. So they are tapping slowly, right? There is a supply chain that's relatively small. So that count happen very quickly.

But I do think over the next 5 to 7 years what you're going to see, is going to see that the bottoming, the ramping of that diesel fleet, the sort of a lot of attrition on the back end of the older Tier 2s, the stuff that was built more than 10 years ago. And then the better versions of those Tier 2, the stuff was built in there sort of 10 to 5 years ago, they'll probably migrate up into the Tier 4 DGB. So say, Ron, you might agree, let's say, 5, 10 from now, it will be mostly in their sort of Tier 4 DGB electric fleet round 10 years from now. Would you agree, Ron?

I think that's fair statement, Mike.

Got it. That's very helpful. And then the next question around digiFrac. So great to see the developments, obviously, but could you provide any updates around CapEx plans around those fleets that you have on agreement now?

Yes, I can. So as you can see, we're starting to spend some money on these arrangements at digiFrac fleet. You'll probably see approximately about $25 million of spending in Q4 rolling into the Q4 numbers, depending on [everything] on deliveries. So our CapEx numbers will be sort of towards the high end of our range, plus about that $25 million of digiFrac. So that's going to be a rise in the high end of that range. For the full year, excellent investments those.

So I think the rest of that, you'll see roll into the majority of it in Q1 and then a little bit into Q2 as they start getting ready for deployment. So that's sort of the range there. Long term, I think what you'll see is probably at your Goldman conference in January, I think, will probably be the best place to talk about the kind of the long-term plans once we get through the end of this year, talking about our long-term deployment plans. We'll probably give a view into -- the full view of next year's CapEx, et cetera, around the beginning of the year time frame, I would expect.

Our next question comes from Ian MacPherson with Piper Sandler.

Chris, you mentioned that your -- you've held the line on fleet deployments through the year, which I know we saw in prior quarters. From that, would we deduce that your 12% revenue increase in the third quarter was basically pricing and utilization improvement on basically a constant deployed fleet count?

Yes.

Yes. Okay. So Michael, when you get from -- you've talked about not an immediate, a gradual probably 2 or 3-part recovery of the margin headwinds that you encountered in the third quarter. What would you hazard you could recover of that $20 million from Q3 into Q4? Or is that not guidable at this point?

I think obviously tough to guide at this present point in time, but I think a number of the logistics costs will get passed through to clients. We're managing through the sort of maintenance noise that's driven by the personnel. They could well be similar in Q4 and then sort of drop-off in Q1, but that will give a little more clarity on the next month.

Okay. And then since I've been so quick, I'll squeeze in a third one, if I may. On PropX, wet sand is still fairly embryonic in the industry, yes. And so I would imagine that the further penetration of that would be an angle of incremental accretion above and beyond the sort of the trailing accretion for that business. Would you confirm that? And then what do you think the runway is for maximum or realistic penetration of wet sand across your fleet over the next couple of years?

Ian, I think you've got that exactly right. I think it's early days in that technology. It's been a little while coming to fruition. But now I think we're in a position where it's fully commercial and lots of upside opportunity there. I think as you look at -- and it won't apply every place, of course. There are environments where it's probably not going to make sense, but there are certainly a number of environments. And I'm guessing you could think of a few where when you think about longer last-mile hauling distances, for example, and ready availability of material nearby well sites that we could process with a mobile line.

It will allow us an opportunity to dramatically reduce trucking distances, dramatically reduce the number of trucks. I heard a story just yesterday or the day before about 1 of these early mobile line operations, what used to be 22 trucks servicing a well site is now down to 5. So just a dramatic step forward in terms of that reduction in costs and emissions. And we see that as an opportunity, not every place, but in a number of places, and certainly in some of the core basins where a lot of the fleet is deployed.

Our next question comes from Roger Read with Wells Fargo.

Maybe to just follow-up the last question Ian had there. Your answer to it is we're trying to think about not just the recovery of the inflationary issues here, but also the net pricing commentary about '22. Given that we're wringing so many costs out, the addition of the wet sand handling another factor in that, how should we think about sort of top line and bottom line performance as we look at '22 versus, say, back -- looking at '18 or '19? And I know that's a little tough because the company has changed quite a bit. But I'm just trying to understand some of the productivity and efficiency issues relative to what, let's say, the baseline business is capable of generating here. So it's a broad question probably for you, Chris, but I just want to sort of understand what the company can generate.

Yes. I'll take this one, Roger, a little bit. I mean, I think one of the things you'll look at, when you look at the difference between top line and bottom line, right, it will depend on how much the reduction in the cost of operations, reduction of sand, reduction sort of in-basin sand, wet sand, et cetera, we were providing that for our clients. That really becomes a bit of a pass-through, right. So you'll probably see bottom lines won't get back to that average per lateral foot stage out of what they were. That's why we've always thought about this thing as returns basically on EBITDA for economic generating unit or capital expenditure, which we call a fleet.

So I think what we do is we get back to that. It takes a while to get back to that 2018 levels, right? I mean, sort of we're a structurally smaller industry that has been a little structurally oversupplied a bit. What you're seeing, though, is you're seeing some really good start of the season discipline in the industry, right? We started seeing wringing out costs. We're starting to see some acquisitions that are actually reducing the amount of players. So I think what we're doing is we are getting into a structurally better industry that -- where we get back to those mid-cycle margins, and we could do well. But then you'll probably see that happen on a relatively lower cost per well, so therefore, a lower top line.

And Roger, just to follow-up. From a customer perspective, yes, look, well costs are going to drift up next year from what they were, but nowhere near to where they were just 2 or 3 years ago. The shale revolution has continued to be lean and mean and continue to develop more efficiencies. So I mean, look, its drilling economics for our customers right now have never been better in the shale revolution. And I think next year, they will still be outstanding. There may be single-digit probably all in increase of well costs and strong commodity prices. So I think that -- and we love to see the industry continue to get more efficient. But again, it's in different cycles. Our customers are already there in the great return world, and we're still not quite there yet.

Okay. I appreciate it. And just one follow-up on the maintenance part of the cost issues in the third quarter. As we think about what that was, is that -- you couldn't get equipment or replacement pieces, spare parts, et cetera? Was it that the cost of that is up combination? And how do you -- are we seeing any improvements in that overall supply chain at this point or just continues to be a headwind.

Supply chain continues to be a headwind, right. There's obviously -- the costs have moved up on maintenance, past, et cetera. I think our team did a good job of like maintaining that at sort of like a reasonably effective level. The key thing we were highlighting there really is what failure rate issue. The failure rate really comes down to how you run the equipment, right? They comes with turmoil. They comes with sort of integration. They comes with employee turnover, et cetera.

That has gone up. I think that goes away over the next sort of 2 quarters. But generally, yes, I mean, inflation is going to be an issue and those underlying partners highlighted one with the tires gets going up by 10%, et cetera. But I think you're going to see some real supply chain constraints. As you've seen, the issues we've got off the Port of Long Beach is really affecting everybody. And just-in-time sort of delivery system that we all got used to it, it was incredibly efficient, is definitely there are going to be times where there are key parts for equipment that are just going to be suddenly become unavailable, and people are going to be stranded. Ron, you maybe need to expand on that.

Yes. Maybe a few things on that. Just to add a little more color to what Michael said about cost of operations. As we work through this transition, we moved from 2 different maintenance platforms, ultimately working to consolidate on one. As much as we need to make that as seamless as possible, there were a few hiccups in the road and those things ultimately impacted maintenance. And so we'll get back to those things. We will get to a place where that is back to the way it has always been in Liberty's history. And I think we'll see those improvements coming modestly through the remainder of the year, but really into next year. From a supply chain standpoint, as Michael said, we are really starting to see some potential issues with components availability. Things like air filters and bearings are starting to show up as potential supply chain issues. And so we have our supply chain team working hard on that to make sure we mitigate any operational impact, but those things sometimes come with a pricing impact.

Next question comes from Keith MacKey.

Just wanted to start out with net pricing and your outlook for 2022. Can you maybe just break that down a little bit in terms of how that would compare in the U.S. versus Canada?

The U.S. -- it's some lower than in Canada. There's more players in the U.S. There's more violent swings in the level of activity. But look, there's pricing improvement going on in the U.S. There's pricing improvement going on in Canada. Is the movement a little more dramatic in the U.S.? Probably so.

Okay. Got it. And just finally, on, say, the OneStim integration, just in terms of people, equipment, processes, there were some additional maintenance sort of this quarter. Can you just maybe comment on how far along that integration process is and either percent of completion or inning of the game, if you will? And just when we should start to expect to see some of that stuff drop off?

Yes. I mean I'd say it didn't vary, right? I think it depends on where you are. Sort of if you're thinking about the IT intellectual property transfer, we are probably in the fourth inning and kind of rounding third base. We're doing well, but we have a long way to go. There is a lot of data, a lot of sort of transitions going on there. I think, operationally, I think we're further along. I think Ron would probably say we're in the [theater setting days]. Things are going well. We're integrating crews. I think we move to 2 and 2 as we come through the end of the year, is a key part of that. As we exit Q1, I think we are on to more on the operational on the maintenance side.

Yes. I think to Michael's point, certainly from the operations side, we're moving along well there and getting to the latter innings in the game and it's a bit of an analogy. I think we've got the integration from a maintenance standpoint. We've got the teams working closely together there. We're getting over a lot of those early hurdles with understanding the differences between the assets. As a simple example, we use greases on a fluid and they use oil. And so we're running those differences and coming to the right spot together as a team on those things. So that -- a lot of that stuff is behind us. We've got a lot of new initiatives from the tech development team that are ultimately going to take us to a better place going forward. Artificial intelligence, predictive analytics, things like that, that are going to bring -- they're going to bring us to another level even yet from a maintenance standpoint, I think.

I'd say on the sale side of this, I think we're at the bottom of the ninth.

Yes, I think we've got a lead going into the world series, and we're doing well on that one. I think it's going well. I think that will be sort of really complete this year. I think that's going well. I think engineering is probably very much the same way, right. I think on the -- same thing on chemicals, sort of some of the things that we're doing on the design side with it. Chris?

Just to follow-up Ron's point. In the tech development, which was one of the exciting things for us, Schlumberger, like us, invest long-term in technologies to disrupt things. That's not a 3 month, or even a 12-month turnaround. That's a multiyear turnaround. And we saw some opportunities with the efforts they were doing plus the efforts we were doing and what we could do together, that would be a big deal. So those teams are feverishly working together as one team on that. But those technologies and that technology hitting our business, that's still 1, 2, 3 years out, but we're excited about that stuff. But you won't see it on the ground in our business for another 1 to 3 years.

Our next question comes from John Daniel with Daniel Energy Partners.

I got on a little bit late so if you touched on this earlier, I apologize. But on the 24 hours of continuous pumping time achieved, as we've gone back and looked at that, the success of that, how much of that was driven by you and your operations versus how much was customer planning, third-party services performing well? Just what's your analysis tell you of what may allow that to happen.

Yes. I mean, a key thing is it's advance of all of those things together. So everyone's got to be able to do that. This is high rate pumping in the Permian, water supply. I call it the wellhead. You've got to not have a hiccup. The switching of the -- from well to well, perforating operations, frac operations. So John, I would say, look, you only can get something like that when every piece works. One of those -- I think the second one we did, the 24 hour midnight to midnight, it actually continued for like 35 hours. So that's a lot of things going together well.

But if you got 1 weak link in that chain, it doesn't happen. It doesn't happen. So look, that's an aspiration we want to get to more and more, but that's a long ways from being standard operating procedure, but it's great. It pushes every aspect of the things on location. Where is the weak link in logistics or the weak link in keeping the pumps online or the weak link in maintaining the blenders and the designs and the controls. We're seeing different things from different stages and we want to respond to those. So I can't really allocate percentage. It's just a team effort in concert. I wish I had a better answer, John.

John, I think the neat thing about that story is it's truly built on 9, 10 years of a Liberty foundation now. We've been measuring every minute of every day. Since the day we started, we talked about that over and over and over again. But it is that, that has provided us a level of understanding around the things we needed to be focused on to get there. If you don't measure it, you can't go out and address it. And so I think we put ourselves in a position to understand where those opportunities were, where we needed to be focused on and ultimately the partners we needed to bring to the table to achieve that success.

I got several e-mail from customers, "Hey, congrats. We wanted to be the first." So there's a competitive dynamic, among our frac crews among our customer partners. So that's what animates the progress here.

Well, it's remarkable. Just -- you guys -- because of some of the attributes we're having you on wireline, having you on sand, I didn't know if there is fleets. It was because it was all you or if it was a case where it was just you fracking and another person with the wireline and maybe a third-party, sand. That's what I was trying to drive at, like how much is but I don't know if you've got that in hand...

It helps for sure that we're a large part of that supply chain. We have control over a wider number of the relevant partners on that location. So yes, that's probably not precedent but that happened now and not 12 months ago.

All right. I want to come back to just the activity. Lots of different views on what a U.S. active fleet count is and what the working count is. But if you kind of take that 20% E&P capital spending up year-over-year, and I agree with Chase it's probably higher. I mean my dumb guy math says that would suggest 20 to 30 incremental fleets. Is that from where we are today? Does that pass your smell test? Or do you think just your thoughts there?

It does. It does.

Okay. And then the last one and housekeeping, so I apologize, but the 2 multi-year agreements with digiFrac, it's 2 agreements, but is it 1 fleet in each agreement? Or is it multiple fleets?

One fleet in each of those agreements.

Our next question comes from Arun Jayaram with JPMorgan.

Chris, I was wondering if you could maybe elaborate on the bidding process to secure the new contracts for the 2 digiFrac fleets? Could you talk about the competitive nature of those? What sealed the deal you think for Liberty and maybe just the overall broad investment criteria you're utilizing? In an undersupplied market, how are you thinking about adding additional digiFrac fleets into this environment?

I don't know if I told -- there -- all of our markets are competitive, for sure. But the deals we make and most of everything we're going to do next year is just an ongoing dialogue with existing partners. It isn't like we throw in 80 bids and hope we win 25 of something. That’s Liberty's way. Almost everything is we've got an existing partner or we've got a partner we want to add. Or they would want to add. So it's mostly back and forth discussions among 2 parties. For sure, they're getting competing numbers and other solicited or unsolicited throwing in. But you don't need the dialogue of all these things.

The technology of what digiFrac is versus the others, the quality of the people at Liberty, the way we stand by our agreements come hell or high water, what happens? We just saw with COVID, oh my God, the best of laid plans can get disrupted by something happening. So I think it's mostly a 2-way back and forth negotiation to find the right balance of what's a big win for our partner, what makes compelling sense for Liberty to do. And to deploy meaningful amount of new capital in today's marketplace, yes, the economics better be strong, the comfort in the long-lasting nature of that better be strong.

So all of those pieces are there. But I think with DG and with Liberty's history, there's lots of opportunities for that. So our biggest decision is going to be how many of them to deploy. And again, that's a customer-by-customer partnership by partnership, constrained, obviously, by balance sheet and investments and returns. But it's -- yes, it's not a -- it's not a field, it's closed bid, fingers crossed and then one answer. It's a process.

That’s helpful. And just for my follow-up, Chris, how are you thinking about more inflationary pressure, supply chain challenges is for the industry broadly, raw material inflations, et cetera. How should we think about your sustaining or maintenance CapEx per fleet as we go into 2022, if we wanted to take a conservative approach. Historically, we've been kind of modeling around $3 million of fleet. But what -- how is that evolving as you see things for next year?

Yes. I'll take it a little bit and maybe Ron can chime in on this one. Yes, it definitely got inflation in the system there, right. I mean I think if you look at it, I mean, steel prices, we think, probably have peaked. But really that probably haven't is the cost of the parts yet, right. It is probably [6 months or more]. And I'd say I mean steel prices are up, about 60-plus percent, Ron?

Yes. To Michael's point, I think we've seen -- here we've seen the plateau of that, but that hasn't run all the way through to us yet. Our supply chain is probably 5 to 6 months longer than like a power end we're in. I think we're also going to feel inflation as companies work to deal with these supply chain challenges off the coast. We continue to hear significant inflation in shipping rates in trucking rates, and that's all ultimately got to flow through to the end customer. And so I think we'll continue to feel some of that as part of our CapEx costs headed into next year.

Given where the amount of steel, it's probably in the low double digits. We do think that's probably rolling through in sort of yes, but it's sort of heavy equipment parts across all industries. I haven't seen -- I am waiting to see some of the earnings calls come out in K since I read from the transcripts. But I would assume that's probably where we are with policy. We're going to offset some of that with efficiency. We are going to offset some of that with longer life, with better design.

I mean that is the goal of Ron and Leen's team with teams and the engineering that's going on at the moment. That's one of the reasons we invested in ST9, so we can control that supply chain all the way back to the forge. It's sort of our heaviest steel part. So those are the moves that we are making to make sure that we can kind of integrate [gift through the base]. But we do again a lot of these with inflation.

Ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Chris Wright for any closing remarks.

Thanks, everyone, for your time today and thoughtful questions in these very interesting times. But these interesting times have presented challenges for us, but certainly, opportunities as well. Look forward to talking to you again in 3 months.

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