Liberty Energy Inc (LBRT) 2022 Q1 法說會逐字稿

Good morning, and welcome to the Liberty Oilfield Services First Quarter 2022 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 pretax return on capital employed, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of pretax return on capital employed, as discussed on this call, are presented in the company's earnings release, which is available on the website.

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

Good morning, everyone, and thank you for joining us today to discuss Liberty's first quarter 2022 operational and financial results. The world is seeing in steering fashion, how critical it is to have a secure, reliable supply of affordable energy. Today's energy crisis did not begin with the Russian invasion of Ukraine, it began last year when global supplies of LNG simply could not keep up with demand. The cost of this shortage go far beyond the soaring prices of global LNG, which has spent extended periods above $200 per barrel on an energy equivalent basis.

The world has seen rolling blackouts, countless factory shut down, millions struggling to pay their heating and utility bills and perhaps worse of all, we are likely at the leading edge of a global food crisis due in significant part to curtailed nitrogen fertilizer production that is critically dependent on natural gas. Without natural gas synthesized nitrogen fertilizer, global food production would drop in half. Today's crisis is not due to any shortage of energy, it is due to a shortage of energy infrastructure, which, in turn, is due to a shortage of reality in mainstream energy dialogue and policy. We desperately need a more thoughtful, sober dialogue on energy or the human toll will continue to mount. Enough on this critical topic.

Turning to my favorite energy company. Liberty entered 2022 with the right people, asset base and strategy to execute in a tightening frac market, and we are pleased to deliver strong first quarter results. This quarter demonstrated the benefits of our vertical integration strategy as we successfully navigated an operationally challenging environment. Last year, we expanded our services to include wireline, and we became a major sand producer, obtaining 2 large mines in the Permian Basin. We enhanced our technological advantages through the acquisition of PropX with wet sand handling and industry-leading last-mile proppant delivery solutions.

Together with our ongoing development of digiFrac electric fleets and many others, these advancements provide our customers with differential frac services. The integration of our acquisitions in 2021 came at a short-term financial cost, but these actions are already paying significant dividends in 2022. Revenue for the quarter of $793 million increased 16% sequentially, and adjusted EBITDA expanded to $92 million as we executed on our strategy and benefited from increased pricing, both the pass-through of inflationary costs and higher net service pricing.

We also saw margin growth from our new strategic efforts that both lowered our cost of operations and increased our efficiency. Liberty also leveraged our vertically integrated portfolio to better mitigate the early quarter impacts of sand and logistics challenges, notably in the Permian Basin. We are encouraged by the progress we've made in the first quarter. The transformative work our team accomplished with the integration of OneStim and PropX in 2021 is now behind us and paying dividends via an advantaged platform with the scale and vertical integration to better our frac services. I want to thank our entire team for going above and beyond.

As the market tightened last fall, our customers recognized that the unfolding recovery would increase the importance of having the highest quality partners to navigate turbulent times and still deliver operational excellence. Today's operational challenges are topped by labor shortages, sand supply tightness and logistics bottlenecks. Liberty customers are seeing differential execution in this challenging environment, in part due to vertical integration from our OneStim and PropX acquisitions. Sand supply tightness in southern oil and gas basins, including the Permian, Eagle Ford and Haynesville impacted industry-wide operations.

While many E&Ps directly source sand, we are seeing a reversal of that trend as no E&P can hope to match the scale and sophistication of Liberty supply chain. The magnitude of our purchasing power and the strength of our relationships with suppliers provides better surety of supply to support continuous operations. Sand supply challenges were exacerbated by truck driver shortages. Liberty's logistics digitization efforts, coupled with a wide network of multiple origins and destinations allowed us to efficiently employ the limited number of truck drivers with dynamic route optimization. We have now deployed PropX's PropConnect software across all our West Texas fleets, giving us increased visibility and data analytics. We were able to act on real-time profit consumption monitoring and inventory tracking, all ultimately supporting the distribution of sand to our fleets and reducing nonproductive time.

Logistics optimization and centralization is critical in today's environment where truck driver shortages are pervasive across the country. We still have significant room for improvement here, but are pleased with our progress so far. The differential Liberty fleet efficiency requires innovation and continuous improvement. We continue to see the intensity of frac work climbing, which is driving up the demands on our equipment, particularly the high-pressure pumps, maximizing uptime and driving down operating costs are top priorities. Our StimCommander or pump control platform is a key component in achieving this goal. The StimCommander platform allows for full automation of the pumping equipment, enabling intelligent rate and pressure control across our entire fleet. With the digital model of every engine transmission pump configuration in the Liberty world, the software will ensure the optimal execution of any job design, on any fleet, including our soon-to-be deployed digiFrac pumps.

Improved safety, reduced fuel consumption and emissions, improved component of life and reduced personnel requirements are benefiting -- are benefits we are starting to see from the deployment. As an example, Liberty saw a 20% to 30% improvement in power and life after deployment in one of our districts where high-pressure work is prevalent. The StimCommander software has recently been rolled out on over half our fleet so far. The remainder will be completed over the coming quarters. Restrained global investment in oil and gas over the last 7 years leaves us supply short just as worldwide demand for energy is growing and expected to surpass pre-pandemic levels in 2022. Relatively low and declining oil and gas inventories have led to persistent upward pressure on commodity prices, even prior to the Russian invasion of Ukraine.

Although Russian export volumes of oil and gas have been only modestly impacted so far, uncertainty regarding potential future impacts of sanctions and fire aversion to Russian hydrocarbon presents significant risk to future supply and demand balances and the modest, but low stated plan increases in OPEC+ supply and the release of global emergency oil reserves are simply not enough to supply a rebounding world economy. North America oil and gas are critical in the coming years. Tight oil and natural gas markets, coupled with geopolitical tensions in many key oil and gas producing regions have all eyes on North American supply.

The North American economy is proving more resilient to today's global challenges in significant part due to a secure local supply of price advantage natural gas. North America is well positioned to be the largest provider of incremental oil and gas supply to power the global economy and, frankly, enable the modern world. The frac services market is seeing robust activity improvement and a tightening of the supply-demand balance. Drilled, but uncompleted well inventory has stabilized after a steep continuous decline from pandemic elevated levels. Available frac capacity is nearing full utilization as demand has increased and supply is limited due to continued equipment attrition, labor shortages, supply chain constraints and very low investment in recent years.

Today, profitability of active frac fleets across the industry are still below healthy levels, but trending strongly. We need to see and we will work to drive healthy returns in the frac industry to match the already robust returns of our customers. Leading edge service pricing is recovering to levels that could support fleet reactivations, and we have many long-term partners requesting additional capacity from us. As always, we will be quite disciplined in deploying the additional capacity that we have today from the OneStim acquisition.

We mentioned several quarters ago that we expected to reach mid-cycle returns at some point in 2022. We are on track to hit that target. It is not that we are particularly pressured, it is simply that supply and demand works. 7 years of underinvestment in oil and gas production capacity was accompanied by an even more dramatic drought in investment in new frac fleet capacity. The brief 2017 to 2019 upcycle was all about redeploying fleets built earlier in the decade with relatively modest new fleet construction. Much of that older equipment has now been scrapped. The emerging cycle is likely to last longer and be characterized by a much slower and more modest rise in active frac leads.

With that, I'll turn the call over to Michael to discuss our financial results in more detail.

Good morning, everyone. Wow, we have come a long way, and we're only just getting started. I'm so proud of our team for the quarter we've achieved, but more importantly, of how we were able to do so after the last 2 years of managing through the pandemic, a rebounding economy that pivoted into global supply chain challenges and now an inflationary environment, all while investing in our business for this emerging multiyear upcycle.

The first quarter of 2022 revenue was $793 million, a $109 million or 16% increase from $684 million in the fourth quarter. Liberty teams worked with our customers to deliver solid activity gains, despite the sand and logistics bottlenecks that plagued the industry. We also saw net service price increases as contracts repriced into the new year. Of the top growth in top line, approximately 55% was driven by activity and mix and the balance by net service pricing. We saw good progression through the quarter as sand and logistics bottlenecks ease and the full effect of pricing was realized. Net loss after tax was $5 million in the first quarter compared to $57 million loss in the fourth quarter.

Fully diluted net loss per share was $0.03 in the first quarter compared to a $0.31 loss in the fourth quarter. Results were negatively impacted by $9 million related to the loss of disposal of assets of $5 million and a remeasurement of liability under tax receivable agreements, the TRA, of $4 million. General and administrative expenses totaled $38 million for the quarter, including noncash stock-based compensation of $6 million. G&A was up $3 million sequentially, driven primarily by $2 million of noncash stock compensation expense as fourth quarter reductions in stock compensation expense contrasted with the annual grants in the first quarter. Net interest expense and associated fees totaled $4 million for the quarter.

First quarter adjusted EBITDA increased to $92 million from $21 million in the fourth quarter, reflecting solid incrementals from activity increases and the increase in net service pricing. The integration challenges of 2021 are now mostly behind us, and we are seeing the value of our scale and our vertical integration strategy as we laid out during Investor Day last year. We ended the quarter with a cash balance of $33 million and net debt of $179 million. Net debt was up by $77 million, mainly driven by an increase in working capital.

As of March 31, we had $108 million of borrowings drawn on our ABL credit facility and total liquidity, including availability under the credit facility, was $222 million. Net capital expenditures totaled $90 million on a GAAP basis in the first quarter of 2022. CapEx was driven by investments in Tier 4 DGB upgrades and digiFrac of $46 million. Sand logistics and other margin improvement investments of $15 million and the balance related to normal fleet capitalized maintenance.

Looking ahead, we are expecting approximately a 10% sequential revenue growth in the second quarter, expanding on the solid progress made in the first quarter. We expect to see increased activity levels and a modest service price increases as we move through the quarter. These factors are expected to support higher EBITDA margins in the second quarter. Our team worked diligently in the first quarter to educate our customers on the realities of the fast-paced inflationary environment we are operating in. There is a greater understanding across the broad customer base that inflation is going to be part of our near-term environment and increased costs will continue to be passed through as they are incurred.

We are at the start of the cycle and service company margins need to return to levels that encourage reinvestment, so that we can continue to support our customers' future success. Leading edge pricing has shown signs of recovery that could potentially justify limited warm-stacked Tier 2 diesel fleet reactivation in support of long-term customer farmers. As the market has changed, the road to what we call Happy Valley, the most profitable way to bring a barrel of oil or MCF of gas to surface has changed.

Our sales, engineering, supply chain and operations teams are proactively working with our customers to find ways to mitigate rising costs through optimized completion design, including innovative solutions around sand, chemistry and logistics; integrated planning to improve efficiency and optimization of the frac calendar and much more. The Liberty strategy of investing during the early innings of the cycle and focusing on people and partnerships has delivered superior returns on capital and growth over the last 10 years and puts us in a great position to thrive at the upcoming cycle.

I'll turn the call back to Chris before we open the phone for questions.

There is much to lament about the state of the world today. There are also things to celebrate. The pendulum has started to swing back towards energy sobriety. It is hard to overstate how important this fact is. Progress will likely be slow and surely much more human damage will be caused by politicians and regulators resistance to reality.

But many positive developments are unfolding, punctuated by Germany fast-tracking approval of 2 new LNG import terminals. Economic growth and bettering human lives go hand in glove with increased energy consumption. This has been true throughout human history. It is encouraging to see improving returns moving the last sector that has yet to see them in the oil and gas industry, energy services, a healthy, robust North American energy industry is required to meet the world's growing demand for energy. We look forward to your questions.

I will now turn the call back to the operator.

(Operator Instructions) The first question comes from Neil Mehta with Goldman Sachs.

Congratulations here on a very good quarter. Chris, in your Analyst Day, you put out a mid-cycle fleet profitability target of $14 million to $18 million of EBITDA per fleet. We're at $10 million as of this last quarter. How are you thinking about the path to getting there? And do you think there's actually potentially upside risk to this figure? And how much higher does it need to go before you think the industry is incentivized to pursue new build activity?

Yes. Thanks, Neil. Yes, I think you clearly have to get above mid-cycle economics to incentivize people to build a new frac fleet. We are long ways away from that to build a new frac fleet simply for more capacity. But the road to get there, which you've seen a step on that road, but the road to get there is just supply and demand. A tighter market right now is driving up net service pricing. It's also making customers very cooperative around scheduling. Our industry needs high utilization, high throughput and pricing. It's the combination of those 3 things that drive profitability. And we're on that road now.

And if fleet profitability remains elevated even for some of the older conventional assets in your portfolio, would you consider delaying fleet upgrade CapEx and deploying equipment as is or is the CapEx view over the next few years from your Analyst Day still the base case?

Yes, I don't think anything in the macro plan has changed at all. Yes you're seeing elevating profitability across fleet types right now, but the high tech -- the next-generation fleets that we're building, those are arrangements with customers. If we make an agreement, we always live by what we agreed to. And we're excited about that. That's bringing out a next generation of technology. There's huge customer interest in that. It's ultimately going to drive down operating costs, drive down emissions and move fleet powering from diesel to natural gas. Those are all positive developments.

The next question comes from Arun Jayaram with JPMorgan.

Chris and team, I wanted to delve a little bit in the 1 quarter beat. $92 million, the Street was in the upper 40s, so significant beat relative to expectations. Ultimately, we're trying to understand is how much of the beat was driven by the pressure pumping business versus some of the benefits from your vertical integration from sand -- sand logistics and kind of wireline? And can you give us a sense of maybe what the EBITDA per fleet was trending in 1Q and then maybe some of the tailwinds you're getting from the vertical integration?

I'll take this one to start with. When you look at it, the vast majority of our business is frac and everything we've invested in the logistics sand is really to enable frac. The vast majority of the sand that comes from our sand mines gets delivered through our frac fleets. So that vertical integration and having the control of both the pool points and the push points is the key thing we're enabled to sort of like to be able to be more efficient as we drove through the quarter with all the bottlenecks that existed, especially in the southern basins. So that was the key part.

So really, it is driven by fracs as you see the underlying results. There was some pickup as you're looking at the difference between Q4 and Q1. Obviously, as the integration costs that were part of the Q4 story rolled off, but yes, it's predominantly driven by frac and everything that we do to enable the efficient operations in the field.

Great. That's helpful. Maybe to you, Chris, I was wondering if you could maybe characterize the supply-demand balance today in frac. You guided to 10% sequential revenue growth in 2Q. I was wondering maybe you could talk about the demand situation, maybe what's unmet as you look at the market today and for that 2Q guide, how much of that is the mix between activity growth versus net pricing gains?

Yes. Look, the supply-demand market today is quite tight. It was tightening last fall. And I think as we said in our last call, it was meaningfully tighter in December than it was in October, and that trend has continued, and there's just not that much fair capacity left, right? So you get to the very, very near the end of whatever can easily be deployed is already deployed, you have a tight market, and we have today a tight market.

And so, our expectation of a 10% revenue gain, something like that Q-over-Q, the biggest component of that is just increased activity. Obviously, in the first quarter, there's always weather or seasonal issues that shave a few percentage points of revenue. This year, maybe that was magnified a little bit by the trucker, sand struggles, particularly very early on in the quarter. So Q2 is seasonally a better quarter as far as revenue and generally what drops the bottom line. So I would say activity is the biggest piece, but continued migration of pricing upwards across our fleet is a component of that as well. I don't know if Michael wants to comment any more on that.

No, I think that's very, very clear as to what you -- what Chris did there. I think the vast majority in Q2 is going to be activity driven. There's a slight headwind that comes out of our Canadian operation in Q2 that balances sort of the uptick that you'll see in the U.S.A. in Q1. So that sort of mutes a little bit the activity growth. A small amount of net pricing is going to be going on in Q2 as we go through. And I think we'll see -- we'll do some more guidance for the second half of the year as we get to the next call.

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

I guess first thing, a lot of discussion around kind of profitability and vertical integration. But if we kind of look at first quarter numbers and think about kind of optimization on vertical integration and think about kind of where leading edge frac pricing is, I don't know if you could kind of talk to kind of how much of that where -- further optimization you have and how much kind of more leading-edge price you have to kind of flow through your results versus kind of 1Q? And then maybe kind of talk about the momentum that you're seeing on the frac pricing side?

Look pricing will continue to migrate higher right now with where we stand. Now you got to realize part of that is just inflationary. I mean to buy parts is more expensive today, to do most everything is more expensive. So that means there's always going to be -- and that's historically been true as well. There's always dynamic pricing as our costs or pass-through components change in price. Today the additional thing is net pricing is going up. And there is starting to be a little bit of a competition for fleets, not everyone that wants a fleet or wants an extra fleet today, frankly, is going to get one.

And so, for us, where we allocate capacity and how we work pricing, it's just very much a partnership dialogue. At the end of the year, we're going to have pretty much the same customer profile we have today and we had at the start of the year. But as market tightens, price will continue to drift upwards. We act as partners to our customers. So we're not -- and we may have a competitor or 2 in this boat, but we're not in the -- it's going up 25% in the next pad or we're out a year. That's just not the way Liberty works. But we're a business and the market is tight, and so, pricing will continue sort of gradually to migrate upwards.

When you think about the tightness and the pricing moving higher, I don't know if you'd be able to characterize the tightness, is it more of a function of equipment tightness or labor tightness?

It's both. It's both. The single biggest challenge right now is labor. And everyone knows this, right? This is countrywide, but certainly, in our industry, after a big downturn that pushed a lot of people out of our industry. There's high-paying jobs in more pleasant conditions. So we've unfortunately lost some people out of our industry. We are actively today recruiting people back into our industry, but that's harder today. So labor, particularly competent, qualified, trained labor is in tight supply, but it's not just labor. There's just not that many frac fleets or frac pumps sitting around.

The extra capacity today, again, is the very old stuff or mostly very old stuff that some -- a lot of which got scrapped and some of which is still parked or is going through auction houses. So it's tight in both areas. And as you know, the logistics are tight. If you, theoretically, you wanted to stand up 10 more fleets in the Permian Basin, well, where are you going to get the sand from? Where you're going to get the truck drivers? How are you going to staff those fleets and what are those fleets going to be? So it's -- the challenges are pretty broad-based.

Yes, yes, makes sense. Just one quick follow-up on Neil's question on mid-cycle margins. I mean, obviously, you kind of gave us that range at the Analyst Day a few years ago, I think it was $14 million to $18 million of annualized EBITDA per fleet. But since then, you've obviously -- you've got frac sand, PropX, wireline, so that's going to be additive to that EBITDA per fleet and you stopped kind of giving us fleets, which is fine. But how should we think about mid-cycle margins? Should we -- I don't know if you want to talk to EBITDA per fleet or percentage margins. I mean should we think about this as a 20% margin business as mid-cycle or just kind of help us frame the new Liberty and what mid-cycle looks like?

Before I turn to Michael, I'll just say, look, the wireline is critical to drive efficiency of operations and make things moving. You can't frac without sand and logistics. So all those are critical but they're not huge pieces of the puzzle. They're more important as enablers than margin deliverers in themselves, although they do deliver margin. But it's -- I don't know if Michael wants to give any more color, but the dominant margin we make, the large majority of the margin we make is frac operations.

That's correct, Chris. And when you look at it, Chase, when we had the Investor Day, all those parts of the business were part of our business plan other than the fact that we didn't own profits. And really, we did use containers, and we did the logistics already for the majority of their customers. So that was just additive in the game, what I think of it as like turbocharging the developments that we were already doing in the business. So I think that's the key thing. And I think as Chris said earlier, as we move towards mid-cycle, but the reality of service company pricing is it needs to get on the way definitely above that cycle to move towards reinvestment, right? Mid-cycle is just another step on the way to where we need to go to through cycle -- mid-cycle margins -- our through-cycle margins should increase above that. So that's where we're going.

And may be one other thing I'd add to that, we don't foresee -- we don't have plans to build 10 more frac fleets because we need 10 more frac fleets because the market is growing. We're just not going to do that. What we are going to do is when we have -- digiFrac is truly differential in operating costs, in emissions, in quality, we're going to build digiFrac fleets when it makes sense in a bottom-up negotiation and partnership with customers. But that's -- and we're going to continue to upgrade the existing fleets we have -- but we don't have any OGs, we're going to grow our fleet capacity by 50% or 10% or 20%.

We don't have any such plans. For us, it's just about higher technology and better equipment we're bringing to location. It's not about capacity growth in building new equipment. We (inaudible) that from the OneStim deal, we have additional equipment, some of them that were running not that long ago, -- but we -- those have been parked and not far from ready to go for -- well, since we closed the deal 1.5 year ago. Our industry had a rough -- a really rough last 2 or 3 years, but it hasn't been great in this industry for a while. And the dominant driver of that was just overbuilding in the early 2010, massive overbuilding. But that's working its way off and get we're heading towards a better balanced market.

The next question comes from Stephen Gengaro with Stifel.

I guess 2 things for me. If we could start and sort of back to the sort of EBITDA per fleet question. Is there -- as you look ahead and you look at net pricing improvements, if sand prices were to normalize a bit, I know they've been elevated. Is that a headwind or is that neutral for your profitability per fleet from here?

Neutral, Stephen. I mean, sand prices -- long-term sand prices, you're hearing the stories of the spot market prices, et cetera. But you've got to remember that when you're thinking about things like the Permian, the majority just see all of our customers are long-term customers, the vast majority of our partnerships from our sand suppliers are long-term partnerships. So those crazy sort of spot market prices really aren't necessarily affecting our business as much as what you see the stuff that you're seeing on the margins.

Okay. Great. And then my second question, it may be hard in this market because the market is obviously very tight, but we've clearly seen industry dynamics change. We've seen consolidation you guys have been involved in. Are you seeing any change just, in general, in the behavior and how it's impacting sort of the competitive landscape in pressure pumping?

Yes, there is. Yes I would say that the integration and the failure of a number of companies has definitely driven our industry to a better structure. You've got 4 companies probably with more than 2/3 of frac capacity. That's just -- that has just made better industrial decision-making, I would say, across the board. It's not perfect. There's always going to be incremental fleets. There's always lower cost, lower quality players. So we have a -- there's a pallet of companies out there, but the decision-making has definitely gotten better in our industry.

The next question comes from Scott Gruber with Citigroup.

So I was contemplating kind of how quickly kind of incremental pricing could roll through your book of business. And so, if we just assume that in March, you were able to secure something on the order of like 10% incremental net pricing, how much would you realize in 2Q? How much in 3Q, 4Q and how much would we have to wait to get through kind of budget season and realize in 1Q of next year? How would that kind of impact your average pricing in the quarters ahead?

Stephen -- what you're going to look at it, the vast majority of our fleet is kind of repriced early sort of like at the turn of the year as the new part of the budget year and they increased incrementally from there and in step changes generally happen sort of on an annual basis, right? So you're not going to give sort of step changes every quarter across the whole fleet. Then you were going to get changes incrementally in different fleets at different times. And so it sort of steps in as you go through the year, that's really how pricing works.

Got you. Got you. And just thinking about the macro backdrop, obviously it's been good on the oil side and got better recently, but natural gas prices obviously have spiked here in the U.S. recently. Do you think we're going to see an incremental pull in demand for frac services from the gas basins given the price action here?

There is a little bit of that happening for sure right now. So the increasing activity, which, again, is not crazy, but the increasing -- it just feels crazy because in a tight market, a little bit of extra pull is more impactful, but there is increasing activity in the -- particularly in the Haynesville, right, where the takeaway is there and you're closer to ports, activity is increasing there in response to higher prices.

The next question comes from Ian MacPherson with Piper Sandler.

Congratulations team. Another gas question. It seems to me that we're given the takeaway constraints, I mean, the Northeast can't grow because of various reasons, and we've obviously got infrastructure constraints in the Permian, which puts all of the growth burden on the Haynesville. But within the Permian, I would expect that you're going to have a widening fuel arb for dual fuel fleets with Waha versus Henry Hub. And I guess that's probably a key point of contract negotiation sharing that savings with customers. Can you speak to that dynamic and how that might be a benefit or maybe more pocket upside as that dynamic probably expands in the future?

Yes I mean that could be an incremental positive. But in the various agreements we have, they are structured different ways. Sometimes they could be a hypothetical look at the fuel savings and then the pricing is just set based on that. So the changes in the actual fuel savings may or may not flow through to us. And I think what -- when does take away capacity, gets very tight in the Permian and therefore, we have the Waha blow out. A lot of opinions on that, when that may happen and how that might happen.

You probably saw in the Kinder announcement that there's good possibility they're going to take a pipeline or 2 when you add extra compression. So let's hope that the Permian takeaway capacity situation evolves more gradually, and we don't have just a blowout in basis and it collapse at local gas prices. Not impossible. And in a small number of fleets, if that did happen, would it benefit us a bit? Sure. Would it be material? Would you know it? Would we talk about in a conference? No. It wouldn't be meaningful.

Got it. Michael, going into today, when we had a different view of EBITDA for Liberty this year, at least my outlook was for limited free cash flow for the company this year. You had negative free cash flow in Q1 with some working capital investment. But now that we're reframing EBITDA higher than we thought, would you refresh us on how we should think about free cash flow? And really, we know that your -- you've sort of pledged to be going back to Liberty's standard of returning cash through the cycle, but we were previously thinking that would probably be more of a '23 event than a '22 event. So just wanted to check in with you on that.

So our view hasn't changed, Ian, as we said at our Investor Day basically a year ago, right? We're seeing the early part of a long cycle. We're investing in new technologies to support our customers' ESG efforts and efficiency, right? And this really is an investment year. Again, yes, obviously, sort of EBITDA is rolling higher. Obviously, demand for sort of our next-generation fleets is also sort of being pushed by some of our clients. So we'll give an update on CapEx and free cash flow at the next earnings call.

The next question comes from Taylor Zurcher with Tudor, Pickering & Holt.

First one on pricing. You're talking about mid-cycle margins, pricing levels at some point in 2022. It sounds like we're well on our way there. And so, I guess my question is why or why not do we reach peak cycle pricing by 2023? It sounds to me like the industry is super tight today. No one is adding capacity. So this tightness dynamic is going to continue to persist moving forward. So just curious your thoughts on potential peak cycle pricing by 2023?

It's certainly a real possibility. I always want to be -- you hear us when we talk about the future, we're just thinking about supply and demand and sort of broader trends. And yes, those -- that continues to look pretty positive right now. But how that actual pricing dynamic will unfold, I certainly will hesitate to predict, but I think your logic and idea is not unreasonable.

All right. Good to hear. A follow-up just on digiFrac, I know you've got 2 fleets hitting the market here, I think, over the next couple of quarters. So just curious on the outlook for incremental fleet orders above and beyond those 2? How are discussions with customers progressing? How is the economics of a potential third or fourth fleet addition sort of evolving as pricing for the base business is just skyrocketing higher? All sorts of questions on those 2 fronts, I'd love to hear.

You bet. Look the interest in digiFrac, as you said before, has been huge. So we're in dialogue with multiple partners about that. Certainly, we're going to build more than 2. The timing of those builds. I'll leave more of that to Michael. But for us, it's never -- well, this year, we're going to build X and next year we're going to build Y. It's just engage with our partners, engage with them and if we can find the right partner that wants the fleet, we can get the right length of commitment, structure of commitment, profitability and balance sheet-wise and investment-wise, it makes sense, then we'll do it.

And so -- but the interest there is huge. We're excited about that, and we're particularly excited in the next few months to get some pumps out there and not just the prototype ones, but commercial pumps and fleets in operation. I think when people see that and what we learn from that, the interest still will grow even more. So it's really more a capital deployment -- pace of capital deployment decision more than anything else. The interest is very large.

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

Chris, good to hear digiFrac interest is strong. If I was a customer of yours and I signed a contract today for a fleet, when will I get it? What's the lead time look like?

Yes, I'll let that soothing Canadian voice.

Yes, I mean, certainly, if you were to sign a contract for a fleet right now, you'd be looking at delivery into 2023.

'23, okay. And then you guys have mentioned you don't want to just grow fleets for growing fleet's sake. But Ron, how are you approaching -- let's say you've got -- let's just assume it's only 2 digiFrac fleets, it will be more we know that. Are you retiring your legacy fleets? What's the process or in terms of your fleet count? Do you take those crews on legacy fleet, put them on a digiFrac crew? If you could just walk us through that dynamic.

Yes. John, I think with the strong pull across the board today, look at the market was moderate. Our plan was park that equipment that was running and yet the same humans that are on that crew that have that relationship, they will run the digiFrac fleet. In today's market, the pull is quite strong. So yes, those first 2 digiFrac fleets, I would say, it's very likely that, that legacy equipment that's being phased out, that will be recrewed and that fleet will be deployed elsewhere.

The next question comes from Waqar Syed with ATB Capital Markets.

Congratulations on a great quarter. So first of all, just on -- it's a modeling question. What was the cash consumption from working capital? We estimate around $60 million. Is that in the ballpark?

No we're sort of in the -- closer to actually what our increase in net debt was in the 70s, Waqar.

Okay. All right, makes sense. And then could you talk about like what was the active fleet count in Q1 and where it's likely to be in Q2?

Basically, it's going to be flat. As you know, sort of that moves up and down with the Canadian market, et cetera. But as we said, yes, we're in the mid-30s, and that's about the general guidance we give sort of moves around that margin. No sort of major adds.

Okay. So in Canada, it's likely to go down by maybe a couple of crews, so are you picking up some crews in the U.S. to offset that if you're staying flat?

It's really talking about net sort of like utilized fleet there, Waqar. I think it's generally using the same denominator for whatever your calculations are is probably right, but thanks.

Okay. And then, yes, in the last like sometimes back, if the crew worked like 25 days a month, that used to be a good number. What's the good number these days for you guys? Is it 27, 28 days a month?

Generally, I would consider sort of anywhere from -- depending on the type of crew, 80% to 85% of days we can sort of fully utilize, including rig up and rig down.

And Waqar that's (inaudible) pad size.

The next question comes from Dan Kutz with Morgan Stanley.

Congrats on the quarter. So I just wanted to confirm -- and sorry if I missed this in the prepared remarks, but you guys have kind of called out the $20 million integration cost headwind in the fourth quarter and that, that would kind of roll off in 2022. Can you help us think about whether that did kind of effectively fully roll off in the first quarter or if there were still some integration costs there and if there's any expected moving forward?

Yes I'd say we're ahead of schedule for Q1, and the majority is just basically all of them have rolled off as of now.

Perfect. And maybe -- so appreciating that you guys probably aren't comfortable sharing specifics, but can you just help us think through how kind of the profitability delta between some of your highest quality assets in the field and kind of some of the lower quality assets in the field is trending? Is that gap widening or shrinking? Maybe kind of help us think through some of the different factors that are impacting profitability there?

Dan, as these things move through the year, you've got to remember the -- it's interesting because obviously, your high-quality fleets were the -- in the most demand during last year's RFP season, probably contracted earlier than some of your lower fleets. So yes, you've probably got a little bit of a flattening of that cycle at this present point in time. Ultimately, as you've seen with ways that we're investing for the long term, ultimately, that sort of gap will renormalize as we go into next year, right? But I think it comes down to -- there was a big change in the contracting cycle when you think about, it was contracted from October to anything that we say finally contracted in February. So that -- we're in a very dynamic pricing market. So that's the background of that.

The next question comes from Roger Read with Wells Fargo.

Well done in the quarter guys. I want to kind of come back and I've missed some of the call, so if I ask a question that's already been hit, I apologize, but I wanted to understand a little bit better kind of the margin performance in Q1. If I sort of normalize for what I think an incremental margin ought to be quarter-to-quarter, if things are going well, call it, roughly 35% to 45%, which would imply kind of $50 million to $60 million of EBITDA would have been about right, which would say there was $20 million to $30 million that kind of came from something else. And I was just wondering if you think about it that way, what's the right way to think about the $20 million to $30 million -- I know integration costs come out, but was there anything else? And as we think about sort of the sustainability and the starting point for future quarters, kind of that starting point would be good for what the base is?

And then my follow-up question is going to be in terms of the pricing dynamics and the costs that you're dealing with, the inflationary pressure. I know it's different things this time in prior cycles, but is the ability to push pricing and the ability to deal with underlying cost inflation effectively the same as prior cycles or is there anything you would call out?

I'll take the first question there. Really, yes, you had the roll-off of integration costs and you had -- because of the step change in pricing because pricing was relatively weak last year and they stepped change in pricing, so you probably had higher incrementals in Q1 than you would expect on your incrementals going forward. That was the key thing there. On the second one, yes, I do think that the cycle is a little different this time, right? You've got to remember, we are in -- you've got to be as old as me or Chris sometimes to sort of like live through an inflationary environment, right?

So a lot of -- but now, I think the broad base of customers are understanding the fact that we live in a broad-based sort of inflationary environment and that these costs are going to be dynamic and relatively to move in quickly. We haven't done that through the last 10 years of the sort of like a shale revolution cycle, right? But I think that's what was challenging, I think for the service industry versus the E&P industry. Last year, there wasn't that broad based understanding of where things will go. And I think now we've got it, we've got the [fees has come out]. I think everybody understands where inflation is and what's happening, and it is moving quickly and it's being very dynamic.

So that means the customers are becoming more I guess, let's call it, accepting of a higher price environment for services?

Absolutely. Look they're running a business just like we are -- I think we're lucky to be a pretty good partnership. But yes, they fully get it now. But to Michael's point, that was a process because think of the short period of the shale revolution. During that short period of the shale revolution, not only was inflation in the U.S. very low, I think, averaged just below 2%, but in our industry, we were in a meaningfully deflationary environment, the entire shale revolution, makes one of the things be celebrated.

Now a lot of that efficiency and technology. We cut the cost of a well almost in half and doubled well productivity. That's the story of the last years. But it's different right now. That's low-hanging fruit to drive down the cost of all the inputs. That's mostly been blocked. And now we have a macro inflationary environment, and we have relatively tight markets for the supply of the various things we need, like engine parts or sand or chemicals. So yes, different rule today, but I think customers get it.

The next question comes from Keith MacKey with RBC Capital Markets.

I just have a question around your fleet distribution. I realize the market is tight pretty much everywhere, but just curious how content you are with where your equipment is situated basin-by-basin and -- or do you see material opportunities to move equipment around either between basins or between customers?

We tend to move more slowly, maybe than everybody because again, it's all around a customer partnership. So none of our customers yet have said they're moving their Permian oil all into the Bakken. So our fleet moves are relatively slow. During the softer time to keep a fleet booked, we might have moved it from a basin that has a seasonal slowdown or not. So we do a little bit of that, but mostly, we're sticking with the customers we've got. We're slowly either growing with them or maybe adding another customer. But I don't think a big shift there.

As we discussed in the fourth quarter, last year, part of the headline was basically taking the combination of the Liberty customers and the old Schlumberger OneStim customers and actually repositioning sort of at least to where we thought they were going to be the right place for the right customers going into this year. And we sort of discussed that relatively and we were very happy about where they are. I think you'll find that our fleet distribution other than the Northeast, is really sort of -- sort of very much like the market, the market averages, right? I think it's very sustainable.

And maybe just a quick follow-up. I'm assuming that still holds true if you're thinking about moving potential underutilized fleets or older fleets from the U.S. and into Canada as well?

We don't really use sort of like underutilized, our fleets are very completely utilized at this present point in time. We do not have a plan to move older fleets to Canada. I think Canada, we will treat like any other great basin and support them with sort of the fleet and the type of technology that we support all of our basins.

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

Thanks, everyone, for joining us today, and we wish you all a great highly energized day. Take care.

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