Liberty Energy Inc (LBRT) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Liberty Oilfield Services Second 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 views 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 second quarter 2021 operational and financial results. We have a little problem with the IO today, so we apologize if the quality is not up to the usual standard. Liberty delivered another quarter of solid improvement as we start to exit the COVID downturn. The second quarter marks the anniversary of the extraordinary events of a year ago, where business activity plunged on the back of a collapse in oil demand. I want to first thank the Liberty family for navigating this downturn with the utmost tenacity, dedication and commitment throughout these trying times. We are now starting to see the strength of our business 1-year out from the depth of the cycle with the transformative actions we've taken over the past year, including the OneStim acquisition.

Second quarter revenue was $581 million, representing a 5% sequential increase or approximately a 9% increase when excluding seasonality in Canada, where basin activity was impacted by spring breakup. With the acquisition of OneStim, this is the first year in our history, we had geographic exposure in Canada, where the spring breakup seasonality will now impact our sequential revenue comparison.

Adjusted EBITDA in the second quarter was $37 million compared to $32 million in the first quarter. Results included the restoration of field personnel variable compensation one quarter ahead of our plan, resulting an $8 million increase to personnel costs. Excluding this cost, adjusted EBITDA would have been $45 million. This equates to a 41% sequential increase in profitability adjusted for the variable compensation restoration on a 5% gain in revenue.

While the results improved than higher activity levels with staff fleet still in the low 30s, we were also navigating the macroeconomic supply and demand shocks triggered by the pandemic and related reopenings that are creating supply chain constraints and labor shortage. A swift economic recovery is leading to strong demand for workers across many industries with not enough folks to fill open positions. There are several million workers still out of the labor force that were in the labor force pre-COVID.

The effect of these missing workers is causing disruption in many neighboring sensitive sectors of our economy. Supply chains in many industries were also disrupted or overwhelmed by a lack of complements or shortages in raw materials. As customers both legacy and new ramped during the quarter effective completion crew scheduling was challenging with producers and service companies dealing with supply chain interruptions, staffing and transportation shortages.

Liberty was not immune from staffing issues and the industry supply chain challenges. For example, trucking shortages. Trucking is strained by the dual impact of high demand for licensed drivers across several industries coupled with scheduling changes due to completion delays from some customers. Within our customer base, we are also seeing operators transitioning from completing DUCs or drilled but uncompleted wells to new well construction leading to its own challenges that gave rise to difficulties in calendar coordination and above normal inter-basin fleet movements.

All in, we are not yet back to Liberty's usual executional efficiency in the field, but is improving every month. This opportunity motivates and excites us. The transitory impacts of the pandemic driven supply demand shocks on labor and supply chain challenges will pass. The robust demand in global energy demand and supportive commodity price environment is increasing the demand for frac services. And we believe we are in the early innings of an up-cycle. The Liberty team worked hard to welcome a hugely expanded customer portfolio, but we still have work optimizing our calendar and streamlining service delivery.

As we look to Q3, we anticipate benefits from continued progress in these areas. And as a larger percent of our work migrates to fully dedicated fleets and fewer inter-basin fleet movements. Some customer relationships are expanding as we can now work with key customers across North America, given our expanded geographic reach and a premier technology service offering. As I mentioned earlier, we've restored our variable compensation programs one quarter ahead of pace. The reopening of the economy is happening faster and folks are returning to labor force.

Ultimately, wages are rising. And we opted to reinstate our variable compensation plan one quarter ahead of schedule to remain competitive in the labor market. Importantly, we also recognized that our employees made significant sacrifices throughout the last year. Their dedication and commitment to the Liberty family during these trying times was foundational to maintaining our partnerships with customers and suppliers and also helping other folks navigate a challenging time.

Looking ahead, the improving macroeconomic backdrop should support these compensation increases. The industry has seen marked improvement over the past year since the depth of the downturn. Global economic growth continues strong. The forward outlook is also strong as countries more fully reopened, partially offset by the impact of global supply chain constraints and virus variant concerns. Commodity markets remain constructive and sustain the economic expansion, drives rising energy demand, while years of relative underinvestment in the energy sector constraint supply outside of OPEC+.

In fact, the rapid rebound in oil demand has already passed 3 pandemic highs in major Asian countries. This is evidenced by the recent significant draws in global oil inventories. Looking forward, the recent announcement by OPEC+ for a gradual reinstatement of prior oil supply through the rest of 2021 and into 2022 is expected to be more than offset by projected increases in global oil demand. This should support a continued increase in demand for North American completion services. Expiration of production capital spending likely increases in 2022 as operators work towards attaining modest oil growth next year. They will need to address both the decline in the inventory of DUCs and the impact of decline curves on their production base.

A modest increase in U.S. oil and gas production requires an increase in frac activity from today's levels. That combined impact of improved E&P economics with greater potential for free cash flow generation, increased completion service demand and tightness in next-generation frac equipment is expected to underpin a more disciplined frac market and continued modest rises in service prices. The economic rebound across North America coupled with supply constraints in the labor force and some supply chains have led to a rise in inflation and wage growth.

It is important that frac service pricing continues to rebound from the extreme pandemic lows. The backdrop for pricing discussions with our customers has strengthened throughout the year. Just as our team sacrificed over the past year to support our customers, the partnership works both ways and we are committed to remaining disciplined in the current environment. We continue to have positive dialogues with our customers to both pass-through incremental inflationary costs in addition to net frac pricing increases. This process is gradual, and we expect gradual improvements to continue phasing in over the next 12 to 18 months.

It is noteworthy that service prices tend to lag broader inflationary increases across the value chain, but the increases are necessary to facilitate the next phase of growth and technology investment. Technology backed by the strongest team of engineers and innovators has been amongst the key differentiators and has allowed us to grow into the second largest North American frac company from our founding only a decade ago.

During the second quarter, we held our first Investor Day, where we spent a day exploring the technology that makes Liberty special from our in-depth downhole technologies to how we create operational efficiencies and the evolution towards next-generation equipment. For those of you who have not seen this, I would encourage you to spend some time viewing the webcast available on our website and get to know our team, our technology and our unique culture that drives innovation and collaboration.

We also announced the successful field test of our Digifrac Electric Frac Pump during the quarter, the results were incredible. Final field testing was completed on a 3-well pad with 24 operations in the Delaware Basin. Digifrac represented around 10% of the pumping capacity. The work of building the industry's first purposed built, fully integrated electric frac pump truly shine as the system became the preferred capacity for rate changes and adjusted expansion real time. Digifrac allows quick, easy, precise adjustments of pumping rate using our micro-control system.

What does this mean? It means that it allowed for on-demand precision rate control that was simply not possible before. Digifrac quickly became the go-to-pump for precise rate control on locations. This is the value of owning and developing the technology to have the motors, the gears the drivetrain, fully integrated into the pump. With the electric backside from the OneStim acquisition, we will provide a fully electrified solution for our customers agnostic of the power source, whether it's the grid or Liberty gas reciprocating engines or both.

Importantly, Digifrac will also drive ESG objectives for our customers, as they continue to look for ways to minimize their footprint, offering at least 20% less emissions relative to the next best technology in the market. Together, having high-power density, precise control and a noteworthy reduction in admissions makes Digifrac the best in the market and our customers are taking notice. We've already begun the commercialization process for Digifrac in 2022 with deep collaborations and conversations with customers for fleet rolled out.

In early June, we released our inaugural ESG report entitled Bettering Human Lives. Liberty's leadership in ESG is well-known as it has been part of our since day one. However, we wanted to broaden the conversation around ESG by going far beyond the narrow focus of our company and asking only how we can reduce negative impacts. Of course, maximizing positive impacts is a critical part of the balance for evaluated process. Our report provides an overview of where the world gets energy and how that has changed over time.

We also covered the huge problem of energy poverty and the cost of human well-being of rising energy prices or falling energy reliability. We directly discussed the role of fossil fuels in modern society and how are we as a company advancing human Liberty. I'm humbled by the response this report is garnered. The conversation spurred by our report has been enriching and uplifting. We're proud of the efforts of our industry and our company is being a part of the solution towards reaching billions of underserved people with lower cost energy.

By looking at the data, we know progress in the human condition has been enabled by the surge in clinical, affordable energy, saving lives. And it is important to recognize the unintended consequences of climate change mitigation with realistic lens. We welcome the market's focus on ESG as it aligns with the principles we've long-held at liberty. But it is critical to bring the same analysis supported by data to ESG decisions just as we do in other areas.

Our team's focus on digital technology has been critical to the immense improvements in shale well productivity and efficiency over the last decade. And we continue to strive to advance our customers' ESG goals as well. We take these responsibilities very seriously and will continue to drive the conversation going forward. We are excited by the opportunity ahead of us. I am so glad that Liberty's team coming together through a year of incredible change. We created opportunity in the face of adversity. And we believe we are now going through an inflection point.

Our focus is on operational execution through the rippling effects of the pandemic and harvesting gains as we embrace the early innings of the cyclical recovery.

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

Good morning, everybody. We are pleased with the performance of our team in the second quarter, delivering solid results while continuing to integrate the OneStim business and managing a ramp in customer activity. This marks the first quarter we've operated entirely under the Liberty umbrella after the cutover from Schlumberger to Liberty Internal Systems at the end of February. It's incredible to see what a difference a year has made. Just 1 year ago, in the second quarter, we we're sitting at only $88 million of revenue on the back of a dramatic drop worldwide ore demand, wide spread shutters from shale producers in the near holt to North America tracking. Revenue in the second quarter of 2021 is over 6x what it was a year ago. I'm so proud of the Liberty team that has navigated the roller coaster over the last 12 months with dedication and focus as we have ramped up our frac activity and made such a great progress in our OneStim acquisition integration.

Now, let's take a deeper look at results for the quarter. In the second quarter of 2021, revenue increased 5% to $581 million from $552 million in the first quarter, reflecting the combination of increased activity across all U.S. basins, more than offsetting Canadian spring breakup seasonality impacts. Excluding Canadian seasonality, revenue saw an approximate 9% sequential increase on relatively flat start fleet count. As our team works diligently to bring new basin activity online with more work operators, the underlying business improvement was encouraging and supports the picture continue to improve despite utilization challenges arising from supply chain challenges and the labor shortages as Chris described.

Importantly, our teams are reinvigorated by the activity increase. And we expect the utilization to show continually -- continued improvement in the third quarter as we streamline customer scheduling and actively manage it through labor challenges. Our net loss after-tax was $52 million. Net loss included a valuation allowance adjustment on certain deferred tax assets and related TRA impacts, negatively impacting results by a range of $21 million. These accounting adjustments were necessary in applying gas standards and were primarily driven by COVID-19 related losses. The results also included transaction and other costs of $3 million and a $0.7 million increase in bad debt reserve. Fully diluted net loss per share was $0.29 in the second quarter compared to $0.21 in the first quarter. The quarter was negatively affected by approximately $0.12 per share, both deferred tax asset valuation allowance adjustments.

Second quarter adjusted EBITDA increased to $37 million from $32 million in the first quarter. The improvement in adjusted EBITDA primarily reflects an increase in business activity in the second quarter. Second quarter adjusted EBITDA would have been $45 million, but we elected to restore variable compensation one quarter ahead of projected pace due to the impact of tight labor markets in our industry. Labor supply is very tight. And we're competing for labor with a variety of our severs as economic activity increases.

General and administrative expenses totaled $29 million and included $5.9 million in stock-based compensation and $0.7 million from accounts receivable allowance. Excluding these items, underlying G&A expense only increased modestly by $1.3 million for the first quarter despite IT and other costs related to the onboarding of legacy OneStim employees. Net interest expense and associated fees totaled $3.8 million for the second quarter. We also recorded an adjustment of $3.3 million related to the tax receivable gain that was related to the deferred tax valuation, I referred to earlier. The income tax expense totaled $16 million, again, reflecting the impact of the valuation adjustment resulted in a $24 million tax expense, more than offsetting what would have been projected $8 million tax benefit related to operational second quarter results. We ended the quarter with a cash balance of $31 million, reflecting a decrease from first quarter levels as working capital increased. Total debt was $106 million in preferred financing costs. There were no borrowings drawn on the ABL credit facility and total liquidity available under the credit facility was $277 million at the end of the quarter.

In June, Riverstone successfully monetized the final part of its acreage position in Liberty through a secondary stock offering, culminating a [tenured] partnership with our firm. This transaction effectively completes Liberty's evolution to a fully publicly traded company with only 1% of shares not traded in public markets. We are grateful to (inaudible) our longest tenured shareholder over the years and are excited to see the changes.

Capital expenditures were $38 million for the quarter, and we're focused on being disciplined timing of investment during the recovery, balancing the second quarter EBITDA and capital expenditures and nearly -- business. We continued our disciplined approach to investing and to the up cycle with the capital expenditures targeted for technology investments, maintenance CapEx and growth CapEx for next generation. As we discussed at our Investor Day, we have a strong foundation to build upon to successfully execute in the next cycle. Our philosophy remains the same to grow and support our business, adapting with a disciplined approach to investments, while maintaining balance sheet strength and to drive higher long-term returns for shareholders over the time. As we look forward, we are excited by the core strength of our business, our geographic diversity and integrated service offerings, supported by our best-in-class electric pump Digifrac, impressive fleet of next generational dual fuel equipment, unmatched subsurface technologies that drive customer engagement and the unwavering focus on automation and operational efficiency through project affordability. This unique combination of assets will drive financial results in the coming time.

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

Thanks, Michael. We read many reports surprised by the rapidity of the surging demand for oil and natural gas. This should not be a surprise. Energy enables every of their life activity. As people rebound from COVID, they bring with desire to better their lives and visit their families and friends.

Global oil demand last year dropped 8% to 9%. Natural gas demand dropped 2% and electricity demand only 1%. All 3 will almost certainly hit record highs next year or in 2023. Energy matters. I thank the Liberty family and the ecosystem that is our customers and suppliers for their efforts that better human lives. I'll now turn it back to the operator to take your questions.

(Operator Instructions) The first question is from Ian McPherson with Piper Sandler.

Michael I wanted -- or really either of you talk about the moving dynamics in the Q3. You've talked about more dedicated work, fewer fleet moves and probably just a more concentrated calendar for Q3 than you had in Q2. And then, we'll also have the reversal of the adverse Canadian seasonality. And you've spoken repeatedly about just the methodical price increases. So I would imagine that all of that combines to a healthy rate of top-line improvement that we should expect for Q3? And I just wonder if you might bracket that for us.

Ian, so we can talk about that. We've got to get -- as we move towards getting rid of the -- some of the noise out of the calendar, the white space utilization improvements, there's going to be a slow improvement as we go through the year. I think that all of that is going to get run out of the system by early next year as we sort of integrate all the new customers or the new basins. The Canadian seasonality will reverse. I don't think we're probably expecting to come back to the sort of the highs of Q1, exactly in Q3. But we will gain some positivity from there. And it's saying we're getting slow and incremental price increases here. So I think we'll see a slow increase there. I think a slow and steady room rise at the moment which is what we're looking at this year as we put in the -- that's probably the correct platform to really take advantage of where we're going into the cycle in '22 and '23.

Yes. And I'm still not hearing your message or anything particular with regard to incremental fleet additions in the back half at this point, correct?

Ian, yes. Look, our view is we're very loyal to our customers and the partners we have. Economics are still not there for us to want to chase revenue or new business for new business is sake. So there's many that there's pretty strong pull right now for new capacity just because market activity is increasing. And for us, it's always a combination of the pricing, the economics, the strategic relationships.

So yes, just because the industry is growing doesn't necessarily mean that Liberty's fleet count is going to grow. That's just a bottom-up decision for us.

Understood. But it sounds like Digifrac is indeed moving forward. So that's more likely a first half '22 commercialization as you see it today?

End of the first half -- end of the half. We're out in the field commercially operating.

The next question is from Neil Mehta with Goldman Sachs.

This is Ati on for Neil. So on the missing comment, hey, could you provide some color on that? So are you competing with other industries? Or are there just folks trying to look to rejoin the force but -- or have they found jobs? What's really happening there?

Look, this is an economy-wide problem. Labor-intensive industries right now are stressed. And for oil and gas employment for the field crews, the most important people in our business, 2 big competing industries is construction and trucking. Both local trucking, think Amazon surging demand for local drivers and long-haul trucking and construction, and both of those industries are booming right now, booming.

So yes, labor market, particularly in the area of our field operations very tight right now. Again, a great question. Liberty's always had, I think a great place to work and a great culture. We've never been stressed for competition for labor, anything like we are today. Now, at liberty, I think we've got great culture and great people and we'll get through it. But yes, it's a challenge, we haven't faced to this level before.

The next question is from Connor Lynagh with Morgan Stanley.

Connor, you might be muted. We can't hear anything.

This is Dan on for Connor's team. So, I just wanted to ask, so, as you laid out in the press release that OneStim is kind of transitioning from the integration phase to the operational phase. I was wondering what kind of some of the near-term opportunities are? And if you could kind of give a little bit more color on kind of expand a little bit on the operational and capital efficiency opportunities, you were talking about in terms of technology, integration and automation.

You bet. Look, I'll start with the human side, always the most important side. You take 2 very proud teams with different legacies, different histories, different procedures. So one of the big things we wanted to do when we took over, look, we did took this over January 1, not great what's happening. The customers, Schlumberger our customers hired those crews, those humans and those procedures. And they do some things differently than us. Some of the way we do things is better. We want to move that improvement over their fleets. Some of the ways they do things are better than the way we do things, and we want to move those procedures over to our fleets. But that's human culture that thousands of people working across the country. So that's a slow, methodical process to lead to improvement and minimize the friction of transition and changing processes. But it's incredibly important. And again, thrilled by the humans, thrilled by the new learnings. There's

a number of things and maybe I mostly point you to our Investor Day, when we went in detail and probably at least a dozen technologies. And a key thing there is you can also meet the people that are leading those teams and are doing that work. But I mean, there are simple straightforward things by engine idle reduction. It's just a fuel saving technology. But diesel engines, you can't just shut off and turn them on. So you have to have a smart algorithm about waiting to shut them off, when to turn them on and under what environmental conditions. In the cold winter, it's a different algorithm, a different answer than it is in heat or dusty or windy or all the different conditions. We've got the continued progress in major buyer or moderated technology different ways to do that. Flexible hoses, we have a project, we talked extensively at Investor Day. We call Project 1,440. There's 1,440 minutes a day and every minute, why aren't we pumping and what shall we do about that? So look, it's -- again, it's technologies and ideas from both sides, both legacy sides of the company, now, there's just one Liberty. But -- so a number of exciting efforts there and I take us the rest of the time if I went down that road.

I'll add one point to Dan as well. The increasing amount of integrated between wireline and frac on-site, increased number of red-on rigs wireline units with customers, which I think is actually also great for productize on the learning. As we say, one of the key things we're focusing on this year is really the sort of integration between the frac and the wireline systems to reduce downtime and increase some completion throughput as we go through the year. So it's a very specific project that Rob and his team working on there with I think is going to be quite good as well. So that's just one other item, I had to say.

That's great color. And then, quickly on kind of Digifrac and next-gen equipment. So you guys have laid out 2 scenarios, kind of a slower and faster transition scenario in the Investor Day presentation. I was just wondering if you could go over what the puts and takes are in terms of what might merit a faster or slower transition? Is it more customers specific or contract terms specific? Or is the macro backdrop kind of a bigger factor? And maybe that answer is different for a new build Digifrac fleet versus kind of just some upgrades to traditional capacity. But yes, any color on the puts and takes in those 2 scenarios you laid out would be great.

But I think we avoid giving details. But I think you laid out the 3 factors. Who is the customer? What is the future of that customer? What is the depth of the relationship between levering that customer, what are the economics, both short-term profitability of it and commitment and visibility to long-term efficient employment, where we want to frac as many days as possible and get as much done every day as possible? And those are the 2 dominant drivers. And then, as you mentioned, the macro is a big part of that too. We're cautious investors when we get late cycle. And we're more aggressive investors when it's the beginning of the cycle, just there's stronger economics to invest early on in the cycle than there is mid or late cycle. But it's -- again, I can't give any other specific color. It's not a simple quantitative formula. It's relationship, partnership and returns on capital deployed.

And I'll just give a little color on that. It's a combination of what we're doing at the moment. We're continuing with our upgrade operations Tier 4 DGB this year, the plans with our customers that we are sort of discussing the next-generation of particular customers moving them to a fully electric sort of natural gas power fleet. Where you've got -- really, the key thing there is where we've got great access to field gas, the dual fuel gas, which drives some of the best sort of cost savings on that side of their business. So again, it's a combination is -- and that's a little different driver. But yes, it's very -- really exciting times at the moment as far as having the -- what we think is actually by far and away the best technologies in both the flexible dual fuel and the very much pure new generation designed for electricity pump. So I think that combination goes well together.

The right answer is very different for different customers, different circumstances, different geographic settings. Liberty was, I would say, the first mover in dual fuel frac technology from really the start of our company. Early on, we -- our big effort was to convince customers of the benefit of it. And we had a lot of dual fuel technology that wasn't fully utilized as dual fuel. Now, the acceptance of that is very strong and now depends on the one or the other way. But that's what makes the marketplace fund.

The next question is from George O'Leary with TPH & Company.

First question kind of an extension of the prior question. How much you describe customer appetite for contracts that you're seeing with the frac equipment or your Digifrac offering? It seems like some of your peers have gotten some contracts signed up at, at least optically good economics. But just what's customer appetite for contracting for even Tier 4 DGB or a new build Digifrac fleets.

The customer interest in cutting-edge frac technology in fleets is very strong, very strong.

And I think the willingness to sign-up for contracts and is also there. And I think that depends on the length of time we have with the customer and where we see the runway, the best of that relationship.

Okay. That's helpful. And then, how would you describe what drives the customer decision to pursue a frac solution for a Tier 4 DGB solution? What are kind of the puts and takes, the benefits of one versus the other and maybe some of the headwinds of one technology offering versus the other?

It's ultimately -- I mean, the interest is driven by 2 things. One is lower emissions, smaller environmental footprint. Certainly, our industry has been moving forward in that direction for a decade. This is that continued evolution. I can say 3 things. A second one is lower long-term operating costs. And yet the difference, the cost difference between gas and diesel is pretty large right now. So the more natural gas you're using for energy for your fleets versus diesel, the lower your fuel costs are. And the third is a properly designed next-generation fleet that's more automated and can do more with software behind it, can deliver better operational performance as well. So those are the 3 factors in varying degrees that drive the interest in the technology. And then, the trade-off. Of course, everything in life times to trade-off. The trade-off piece, the costs are a little bit higher. They're not wildly higher, but they're a little bit higher and time commitment and surety of work needs to be higher as well.

The next question is from Chase Mulvehill with Bank of America.

This is Chase on for Chase. I hope everybody is doing well. I've got a couple of questions. The first one around pricing. In the press release and obviously, in the prepared remarks, you've talked about conversations with customers on going about pushing price. I guess, number one, are the conversations around net pricing increases or just enough pricing to offset inflation? And then number 2 is, when should we expect these pricing increases to show up in Liberty's results? Do you think it's kind of more of a second half of this year catalyst or more so kind of first half of next year?

It's continual, it's continual. And it's both inflation pass-throughs and net pricing. Look, the quarter we just finished, and we talked about struggles mostly with utilization and calendar. That didn't never like to see that happen, but that's just life. We had 5% increase in sequential revenue and a 40% increase in sequential EBITDA if we use the same labor cost payments.

So pricing is coming through, not hugely in Q2, but we had net pricing improvements in Q2. We'll have more in Q3 and more beyond that in Q4 and probably meaningfully more next year. So it's a continual gradual process, continual gradual process. We worked abruptly in adjusting prices with our customers with oil prices just collapsed. And we worked in that partnership mode and then a partnership mode coming out the other side. But in the shape of this downturn, that down pricing was abrupt and the rebound is slow and gradual.

And that $8 million personnel cost increase that you noted here, was that a full quarter impact in 2Q? And so, as we think of 3Q, should that step-up from $8 million? Or is that fully in margins in 2Q? And so don't really step that up into 3Q?

And Chase, that was fully in Q2. So yes, on that variable compensation, that really isn't going to step up. That will continue through all the quarters going forward. I think you're going to see in general, some low single-digit increase in labor costs going through the second half of the year as well I thin in general, across the board. I think that's certainly a part of because it is a wider economy.

And then, last one here. When we think about fleet reactivations, I mean, obviously, it doesn't sound like you've got any in the back half of this year. But as we step into 2022, I would assume that modest increase in activity that you pointed to would mean you have to reactivate some fleets. So when we think about this, can you maybe talk about how much capital or CapEx will be required to reactivate some fleets in 2022? And maybe I don't know if you just want to kind of characterize like what it would cost to reactivate your next-gen fleets?

I mean, look, the fleet reactivation is not a -- yes, in January 1 and no before then. It's just, for us, everything is always bottom up. There's customer dialogue. There's a lot of pull right now. I think the most important thing about a lot of pull right now is it accelerates the movement in pricing. Still not huge, still going to be phased in, not abrupt. But that's -- that's a pull for increase in pricing. As the pricing is meaningful enough and the customer is the right customer, we'll reactivate. We have capacity. But it's just about the full picture economics for us. And I'll turn it over to Michael to comment a little bit on reactivation costs.

Really, Chase, the reactivation cost in the next few fleets is going to be minimal. I think that really one because there won't be any real cost, they came over from (inaudible) fully fit ready-to-go position. We might into probably a couple of million dollars as we move them to longbow and some of the next-generation high end equipment that would be available.

(Operator Instructions) The next question is from John Daniel with Daniel Energy Partners.

Just 2 for me. And the first one is a housekeeping. But when you referred to the staff fleets in the low 30s, for both Q1, Q2. When -- during the Q2, with the Canadian breakup, did those -- were those still considered staff fleets? Or do you led to -- how did you treat the crews in that for definitional proposes?

That roll-down is a sort of an annual roll-down. So again, we consider them staff fleet. We do actually start Canadian fleet slightly different on that, where you have an underlying base of full-time employees, and you do have a number of contractors that come in and out, I mean often from the East Coast. Certainly, the comprise of no Scotia area is sort of a combination of folks that help run those crews during the busy periods. Starting those ramp up a little bit up and down with those fleets as they come on, but you've got underlying sort of a long-term 10-year-plus experience based that continually.

But did your staff Canadian fleets dropped in Q2 just given breakup? Or did you -- really create the same flat?

We had a smooth drop in personnel cost on, but John, what we consider, we still consider them an available fleet at and our staff fleet.

And then, the next one is just on Digifrac. As you did the successful pad, does that customer then keep that unit? You send it back to Magnolia for touch-up work or does another customer take it to test it out? Just, how does that play out over the next couple of quarters with testing?

So that particular cost, yes, it will go to another customer. It will be doing some demo runs. Of course, we're taking a ton of data on it for how we can tweak a further improvement. But yes.

And then ultimately, it will get rebuilt into a final commercial pump where the majority of it gets reduced. So it will be broken down. So you think about rebuilding. If you're taking your sort of race car, and you're taking your identified and rebuilding that you're reusing the majority of it.

But if you look at the multiple customers that tested and the success that you had on the first pad, were your envision, Chris, maybe I might be too optimistic, but a bidding wharf for that first fleet from some of the customers to trial it?

Well, I think, bidding might be the wrong way to look at it. But yes, the pull is significant. And for us, and customers, for us, it's a big decision about who's going to get the first few fleets, what are the terms and conditions and who's the right partners. But yes, the interest for Digifrac, number of hands in the air will certainly be well above the number of fleets will build in the near term. It's just like that we find the right partners. John, thanks so much. Appreciate it.

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

Thanks for everyone's time today, interest in Liberty. We look forward to talking to you in 3 months and a key power in the world. Take care, everyone.

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