Liberty Oilfield Services Inc

NYSE:LBRT

Earnings Call Analysis

Liberty Reports Strong Year-to-Date Performance

Liberty has excelled in a challenging environment, posting a 37% year-to-date cash return on invested capital, a step up from 31% in 2022. In Q3, they achieved $1.2 billion in revenue, a year-over-year and sequential quarterly increase of 2%. Net income after tax for Q3 reached $149 million, marginally lower than Q2's $153 million but still a 1% improvement from the previous year. Their EBITDA for Q3 increased by 15% from last year and 2% sequentially to $319 million. Liberty looks to end 2023 on a high note, aiming for the upper spectrum of their 30% to 40% adjusted EBITDA growth guidance.

Solid Year-to-Date Performance

In the face of a period characterized by weakening industry activity, Liberty has stood out with exceptional year-to-date results. The company has seen a significant increase in its annualized cash return on invested capital, reaching 37% compared to 31% in the preceding year. The third quarter continued this strong performance trend, with a revenue of $1.2 billion, marking a 2% increase from the same quarter last year and from the second quarter of the current year. A noteworthy element of the quarter was achieving record efficiency across all fleets and the highest pump hours of sand pumped in the company's history. Net income after tax was slightly down from the second quarter, at $149 million, but still represented a 1% increase from the previous year, evidencing the benefits of the share buyback program which has augmented the per share value.

Increased Returns to Shareholders

Liberty's board underscored the company's robust capacity to generate strong free cash flow through the approval of a 40% increase in the quarterly cash dividend to $0.07 per share. Additionally, there's an ongoing commitment to shareholder returns as evidenced by the buyback of 1.8 million shares in the third quarter, amounting to around $29 million. Over the past five quarters, the company has returned a cumulative $325 million to its shareholders, continuing to establish itself with an industry-leading return of capital program.

Cautious Outlook for the Near-Term and Strong Projection for 2024

Casting an eye to the future, Liberty anticipates a modest slowdown in North American completions activity in the fourth quarter due to usual seasonality effects impacting efficiency. However, no further idling of fleets is expected in the short term, as the demand in the first quarter of 2024 looks promising. This stability supports the projection of reaching the high end of Liberty's full-year 2023 adjusted EBITDA outlook, which is forecasted to grow by 30% to 40% year-over-year. The outlook for 2024 is even more optimistic, with an expected increment in free cash flow driven by enhanced profitability from current year investments, ongoing margin expansion, and efficiency initiatives, coupled with reduced capital expenditures.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the Liberty Energy Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anjali Voria, Strategic Finance and Investor Relations lead.

[Anjali Voria, executive]

Thank you, Gary. Good morning, and welcome to the Liberty Energy Third Quarter 2023 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer, Ron Gusek, President; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA, adjusted pretax return on capital employed and cash return on invested capital, 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 adjusted pretax return on capital employed and cash return on capital invested as discussed on this call, are available on the Investors section of our website. I will now turn the call over to Chris.

[Christopher Wright, executive]

Thanks, Anj. Good morning, everyone, and thank you for joining us to discuss our third quarter 2023 operational and financial results. Liberty delivered excellent quarterly financial results, reflecting outstanding operational execution, focused customer engagement and agility across a softer North American frac market. Record pumping efficiencies drove sequential growth in revenue and adjusted EBITDA, while electing to idle the fleet during the quarter in response to softer market conditions. Adjusted EBITDA was $319 million, while fully diluted earnings per share was $0.85. The industry remained disciplined, championing steady pricing for quality services while withdrawing underutilized frac fleets from the market. Our superior execution, combined with expanded vertical integration and technology investments culminated in a trailing 12-month adjusted pretax return on capital employed of 44%. I'm proud that our team delivered a milestone achievement in operational efficiency. We achieved the third consecutive quarter of record average daily pumping efficiencies delivered across our full fleet safely pumping more hours and tons of sand than ever before. This success was driven by the unique culture of innovation and excellence at Liberty. Over the years, our investment decisions have grown our competitive advantage by driving value creation through technology, scale and vertical integration. Today, the latest piece in our Digi Technology suite is demonstrating impressive operating results. The commercial deployment of our proprietary digiPrime units commenced in late September, quickly becoming the crew and customers' favorite technology on that location. We embarked years ago with a blank slate to envision, design and build natural gas-powered frac fleets that would represent a step change improvement in frac technology. We didn't choose the easy route to simply extrapolate from existing pump technology or the partial route where we outsourced the power generation part of a frac fleet, we took on the whole enchilada with a commitment to build the best dam next-gen frac fleet. Well, the effort was worth it. Today, we have a truly differential frac fleet technology that is setting operating performance records while delivering the highest efficiency, lowest emission fleets in the industry. To say that customer interest in digi is high would be an understatement. We are supplying digiFleets with robust, reliable compressed natural gas delivered and managed on-site by our new Liberty Power Innovations division. We are on track to be operating 4 digiFleets by year-end and 6 digiFleets by the end of January 2024. We are excited by the strong customer benefits and pull for our digiFleets. As we continue to transition our fleet towards more natural gas fuel technologies, we are also maximizing diesel displacement with natural gas across our dual-fuel fleets. We have worked in conjunction with our technology providers to develop and deploy control software to significantly increase diesel displacement. Our year's long effort in predictive and preventative maintenance programs have positioned us to optimize equipment performance and availability, enabling us to run our pumps in optimal operating ranges to achieve maximum gas substitution. We are also starting to reap the advantage of vertical integration provided by LPI, improving the reliability of gas supply to our frac fleets. There is much room to run here. Liberty's focus on asset optimization maximizes the uptime of each pump, driving higher equipment reliability and operational efficiency. Our predictive maintenance programs are better than ever before, continually assessing asset health in real time. By applying advanced analytical tools and processes such as machine learning and AI, we are addressing issues before they become critical and using this data to prevent issues in the future. A year ago, we realigned teams to seamlessly work together on the shared goals of maximizing operational efficiency and optimizing equipment maintenance. Today, real-time data is enabling our teams to execute on these priorities and hold themselves accountable in delivering superior results. Wireline was a new business added to Liberty in the OneStim transaction, we knew our customers would greatly benefit from streamlining our frac and wireline crew interactions on site to shave extra minutes off the day. Every minute equals efficiency and translates into a lower cost of producing a barrel of oil for our customers and improved profitability for Liberty. Today, we have more frac and wireline paired red on red crews since we first brought wireline into the fold. We are proud that Liberty Wireline now ranks as the top service provider according to the most recent Kimberlite survey and independent industry research that extensively pulls E&P customers across the industry. We increased our quarterly cash dividend by 40% in response to the significant growth in our per share earnings and cash-generating abilities from our business transformation over the last 3 years. During the third quarter, we repurchased 1% of our shares outstanding or a cumulative 11% since our buyback reinstatement in July 2022. We are focused on the opportunistic execution of our buyback strategy. We will move more aggressively during stock price pullbacks and moderate our pace when the stock runs up. However, we continue to see a large dislocation in our stock price relative to what we believe is the intrinsic value of our stock. The goal remains the same: maximize the value of each Liberty share and drive higher total returns for years to come. Fleets across the industry were idled in response to completions activity softness, supporting a better supply-demand balance of marketed fleets as compared to prior cycles. As the shale revolution matures, the industry has adapted to a new era in frac markets through consolidation, technological process, disciplined investment and serving increasingly complex customer needs. Frac activity has largely stabilized at current levels, representing a base load of frac fleet demand needed to sustain E&P operators flattish production levels. Fourth quarter trends will likely see seasonal softness, winter weather and holiday disruptions. We expect the recent strengthening of commodity prices will drive a modest increase in industry activity beginning in 2024. And Liberty's internal analysis shows several natural gas levered E&P companies are expecting to increase activity into 2024. The sustained strength in crude oil prices is also stimulating demand for frac fleets among smaller private oil producers. The resumption of modest growth in frac is within view. Global oil and gas markets found firmer footing during the third quarter, driving higher oil and gas prices. Volatility in commodity markets has emerged from the possibility of an escalating conflict in the Middle East and renewed recessionary fears. Recognizing the elevated uncertainty, global industry supply and demand trends infer that the delicate balance of oil and gas markets is tilted to the upside given the relatively small spare production capacity today. The long-term demand outlook for secure North American energy anchors a more durable cycle. OPEC+ decisions, including the extension of Saudi Arabia's production cuts further demonstrate a willingness to support commodity prices, underpinning long-term investments in North American shale. We just saw an industry tighten double down on North America's future. The positive outlook for North America is leading to consolidation and investment amongst E&P operators focused on long-term value creation. Liberty is uniquely positioned to support our customers' ambitions to unlock value with our superior services, next-generation technologies, integrated footprint and scale. Today's E&P customer is focused on driving improvement, which can only be achieved with outstanding service partners and differential technologies. The transformative work our team accomplished over the last 3 years through technology investments, vertical integration of wireline, sand and logistics and now LPI natural gas treating and delivery uniquely positions Liberty to address the diversity and complexity of customer needs. I would like to take a moment to celebrate the Liberty team. Record performance was a result of the collective effort of all of our 5,500 teammates across North America. I am proud to be your partner. We outperformed in the third quarter in the face of a softening industry, delivering significant operating efficiencies, outstanding safety record and attractive returns. In the fourth quarter, activity is expected to slow modestly on normal seasonality and the related impact on efficiency. For full year 2023, we expect adjusted EBITDA will be at the high end of our guidance range of 30% to 40% growth over 2022. We continue to deliver superior returns and a differential service for our customers. Our commitment to excellence and focus on company culture, our next-generation Digi Technology suite and LPI positions us well to compete in both near-term cycles and over the long term. The best has yet to come. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results and outlook.

[Michael Stock, executive]

Good morning, everyone. Liberty's year-to-date results have been outstanding during a period marked by softening activity trends, using a slightly different return metric from the ROCE that Chris mentioned earlier that we used to benchmark ourselves versus the industry in the S&P 500. Our annualized cash return on invested capital is 37% year-to-date, an increase from 31% in 2022. Our third quarter financial results were notable, marking a modest increase from the prior quarter in adjusted EBITDA and a modest decrease in net income despite slower industry activity and the idling of one fleet. Our results not only showcase the importance of leading reliability, technology and service quality to our profitability, but also highlight the importance of those features to our customers. Third quarter of 2023 revenue was $1.2 billion, a 2% year-over-year increase and a 2% increase from the second quarter. Relative to the second quarter, record efficiencies across the full fleet, integrated services and a favorable product mix more than offset market headwinds and the idling of one fleet during the quarter. In the third quarter, we had the highest pump hours of sand pump in the history of the company, even with fewer fleet than prior quarters. Third quarter net income after tax of $149 million represented a 1% increase from prior year and a modest decrease from the $153 million in the second quarter. Fully diluted net income per share was $0.85, a 10% increase from prior year, which highlights the per share benefits of our share buyback program and compares to $0.87 in the second quarter. General and administrative expenses totaled $55 million in the third quarter and included noncash stock-based compensation of $9 million. G&A decreased $3 million sequentially as the second quarter of miscellaneous expenses did not repeat. Net interest and associated fees totaled $7 million for the quarter. Tax expense for the quarter was $50 million, approximately 25% of pretax income. We expect the tax expense rate for the full year to be approximately 25% of pretax income. Cash taxes was $7 million in the third quarter, and we expect 2023 cash taxes to be approximately 35% of our effective book tax rate for the year. In 2024, we expect to be approximately 24% effective book tax rate and a similar cash tax rate. Third quarter adjusted EBITDA increased 15% year-over-year and 2% sequentially to $319 million. We ended the quarter with a cash balance of $27 million and net debt of $196 million. Net debt decreased by $60 million from the end of the second quarter. Cash flows were used to fund capital expenditures, $29 million of share buybacks and $8 million of quarterly cash dividends. Total liquidity at the end of the quarter, including availability under the credit facility, was $322 million. Net capital expenditures were $161 million in the third quarter, which included costs related to digiFleet construction, capitalized maintenance spending and other projects. We had approximately $12 million of proceeds from asset sales in the quarter. Net cash from operations was $273 million for the quarter and returns to shareholders with $38 million for the quarter. Our capital expenditures remain on target for 2023 as we expect to deliver certain digiFrac components in the fourth quarter. In July 2022 and January 2023, we installed and then upsized a $500 million share repurchase program, respectively, to take advantage of our dislocated share prices. We also reinstated our quarterly cash dividend 1 year ago. We are pleased to share our Board has approved a 40% increase to our quarterly cash dividend to $0.07 per share beginning this quarter, reflecting our conviction and our ability to generate strong free cash flow through the cycles. We also continue our returns to shareholder’s program with our buyback program, including the repurchase of 1.8 million shares in the third quarter, which represents approximately 1% of the shares outstanding at the beginning of the quarter for a total of $29 million. We have now returned to shareholders a cumulative $325 million in the past 5 quarters. We continue to differentiate ourselves with an industry-leading return of capital program while reinvesting in high-return opportunities and growing our free cash flow. Looking ahead, we see North American completions activity to slow modestly in Q4 on normal seasonality and the related impact on efficiency. We expect activity to increase modestly in 2024. In the third quarter, we reduced our active fleet count by 1 fleet, consolidating our planned activity with our high-efficiency fleets and improving utilization. While we expect normal seasonal softness in the fourth quarter, we do not plan to idle any additional fleets due to the demand in Q1 of 2024. As a result, we will now anticipate reaching the high end of our full year 2023 adjusted EBITDA outlook of approximately 30% to 40% year-over-year growth. In 2024, we see a continued constructive outlook for the oil and gas markets and even more so for Liberty. We anticipate free cash flow will exceed 2023 levels driven by incremental profitability from our current year investments, continued margin expansion and efficiency initiatives and lower capital expenditures. We will continue to deliver on our strategic priorities, including our industry-leading return of capital program, a strong balance sheet and continued investment in differential technologies that position us well in the coming years. I will now turn it back to the operator for Q&A, after which, Chris will have some closing comments at the end of the call.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Stephen Gengaro, with Stifel.

[Stephen Gengaro, analyst]

Two things for me. The first, I'll start with, and I have to ask this sort of is the guidance. I mean, you had a really good quarter, a great 3 quarters to start the year. It feels like it would be hard to not get above the guidance range. And I know there's some seasonality, but could you just kind of give us any additional color on how to think about the fourth quarter given you're not laying down any more fleets and you're at such a healthy level through the third quarter?

[Michael Stock, executive]

Yes, Stephen. Our guidance, as always, is our best estimate of where we're going to come in. We want to be close. And if you look at the fourth quarter seasonality, we've been very, very efficient with our customers' plans as we've been through the first 3 quarters. So you are going to see a little bit of budget maintenance as they've completed things a little bit quicker than they would have expected. And so as we go through, you're going to see seasonal slowdowns with holidays and winter, a little bit of budget maintenance management as we go through the year. And then I think you'll see everything pick up again in Q1.

[Stephen Gengaro, analyst]

And then as we think about next year and your capital spending needs, how should we think about CapEx? I think it should fall as a percentage of EBITDA. And it feels like that will lead to pretty robust free cash flow next year? And any color you can add on plans for that free cash flow?

[Michael Stock, executive]

We will continue with our stated goals. Obviously, the first thing is we manage for a very, very strong balance sheet to make sure that we can weather any situation that could come up in the future. We have an incredibly high demand for our next-generation technologies. And as you see, we will have a very, very strong return of cash to shareholders program. We also have some interesting business opportunities with our Liberty Power Innovations business. So I think we will continue with exactly the way we have invested capital over the last 10 years.

[Stephen Gengaro, analyst]

And any ballpark on CapEx for next year at this point?

[Michael Stock, executive]

No. We will give you those details in our January call, as we always do as we like to give it to you once a year.

[Christopher Wright, executive]

Lots of free cash flow. As you said, Stephen, we agree very significant free cash flow next year.

[Stephen Gengaro, analyst]

Yes. I mean it feels like CapEx comes down and free cash flow is pretty strong. That's why I asked the question.

[Operator]

The next question is from Roger Read, with Wells Fargo.

[Roger Read, analyst]

Just want to follow up. One of the things, I think, Chris, you said was customers are obviously going to want more efficiency, better performance, et cetera. As we talk to some of the E&P companies, they also discuss, “Hey, we want the right service company rather than the single cheapest service company we can get.†Can you give us any insights into how sort of we should think about that with pricing? We typically think of pricing power, but what is the right way to think about that relationship here as to what it can mean for margins in '24?

[Christopher Wright, executive]

Look, you always have some companies in our industry. And I would say when Liberty started, they may even have been the norm that views frac as a commodity. Well, we bid it out. We get a whole bunch of bids in our supply chain team sees who the 2 or 3 cheapest are and then we go talk to them. That was the norm when we launched Liberty. Today, that exists, but it's not the norm anymore. I just think people have taken a broader view of shale. And on this line item, is that Liberty number higher? Well, yes, it is. But if you get wells done faster, safer, more efficiently, lower emissions and better help on design and execution about how to maximize recovery from those wells, hey, all in value, I would say Liberty holds a pretty significant differential versus others. And one of the things we have rolling out now is this different fleet technology, right? That arbitrage between the cost of power fleet with diesel and the cost of power fleet with natural gas. That's a huge cost savings opportunity that benefits both our customers and us. And our fleets not only are burning natural gas versus diesel, but these next-generation fleets burn a lot less natural gas than a turbine-driven fleet for the same amount of work, that higher thermal efficiency, virtually 0 methane slip. So they're just cleaner, cheaper, more efficient. So that technology allows it to be a win for our customers and a win for us. But ultimately, there's always a back-and-forth dialogue with our customers. “Hey, market is softening. We're seeing numbers like this.†But we don't have customers saying, "Hey, these guys are 10% cheaper. So we're going to jump over there.†I would say most of our customers and our partners, they get the value and the trust and the relationship working together. We didn't do everything we could have last fall when the market was really tight. Could we have jacked up prices a little bit more and nipped people but still held the work? Sure, we could have. But we didn't do that. We act as long-term partners with our customers. Like this business thrives when we win, our customers win, and over the long term, you can generate better efficiency, smarter decision-making and come up with new ideas that then should be developed. There's just huge benefits in long-term partnerships with our customers. And I am thrilled, look, a ton of our achievements, our innovations, they're not just Liberty. That's partnerships with long-term customers that lead to stuff like that.

[Roger Read, analyst]

A follow-up question for you, Michael. As we think about the combination of the ways to return cash to shareholders, dividends versus share repos, is there overall framework we should think about here? Or is kind of getting to Stephen's earlier question, if free cash flow is up, we should just think about that as incremental returns to shareholders.

[Christopher Wright, executive]

Most of it will go there, Roger. But look, we've been a believer to have a base dividend that's modest. It's a very small percent of our cash generation ability, and we plan to slowly and steadily grow that with time. That's sort of a base return that's going to happen. We bumped it a larger chunk this year because we're basically recalibrating it for the much greater cash generation ability we have now than we had 3 years ago on a per share basis. And then that's a small piece, but that's sort of the base piece that's always there. Then there's obviously CapEx, and that's always the biggest balancing decision we have. Wow. And then again, today, that's trickier because the demand for what we have new coming out is just tremendous. But we're not going to invest all the cash we generate or even more than half of it into CapEx, but we're going to balance what are the most compelling investments and how do we structure that. And then that additional cash, the biggest use of it, the last year has been buybacks. That's probably the case. I'm sure next year, that's going to be the case as well. There is technology-based acquisitions. We're generally not an A&D company, but if there's compelling things, we'll do those. And we always think it's critical to just keep the balance sheet very strong because you never know what happens. And look, I know you know the history, but in that top downturn in '15 and '16 and the tough COVID downturn, we were positioned and able to make just compelling acquisitions that massively grew our per share value and ability to generate cash and profitability. So buybacks are still the dominant thing. But for us, it's not formulaic. It's not a percent of cash in a quarter. I don't think you should look at cash flow or profitability or any of those things on short-term time frames. There are swings to them. So we just take a longer-term window on that. And I'm sure as you've heard before, our buybacks, we have an internal view on intrinsic value versus stock price and the wider that differential is, the more aggressive our buybacks are going to be. And if the stock price moves quickly. If it moves quickly downward, we're going to pounce on that. If it moves quickly upward, we're going to caution and take a breath and reflect what's happening. Not going to stop buybacks if there's still a large value dislocation, but we're going to be more measured in the approach.

[Operator]

The next question is from Derek Podhaizer, with Barclays.

[Derek Podhaizer, analyst]

I want to ask a few questions on your digiFleet. So you talked about getting to 4 by year-end, 6 by end of January. How should we think about the digiFleets as far as incremental versus replacement? And then if we look into 2024 and how this high-grades your overall fleet, how do we think about that expanding your profitability? And then finally, just the future mix of the digiFrac versus the digiPrime? And what do you think is going to be the winner over time?

[Christopher Wright, executive]

First of all, the replacement versus additional fleet, that's just market dependent. I think when we talked a year ago when the market was literally short equipment, we said it will probably be a balance between the 2. Look at the marketplace now. There's no shortage of horsepower out there. So all of these fleets we're rolling in are just replacement for our oldest equipment, the cost of maintenance and lowest-quality equipment. They're just replacement fleets -- of the market state like it is today, no reason to change that strategy. The fleet themselves and maybe we've communicated less than perfectly here. There's not a different digiFrac fleet or a digiPrime fleet. There's a digiFleet. There's 2 different frac pumps that have different strengths and different weaknesses that together, we've built to make a system that was just compelling and that was differential. And I'm going to have Ron expand a little bit more on the difference between those pumps and how you configure the optimal fleet depending upon the customer needs.

[Ron Gusek, executive]

Yes, Derek, I'd like to think of them as complementary, not that there's going to be a winner and a loser in these technologies. So as Chris noted in his opening remarks, digiFrac, the electric pump for us -- and so that consists of 2 components. First of all, power generation trailers. So the Rolls-Royce 20 cylinder natural gas engine driving an electric generator. And then the electric pump itself that turns out electricity back into mechanical energy. That was a 5-year effort for us to build from the ground up a fit-for-purpose electric system. And that included both innovation around the power generation side to make sure we deliver the most efficient low emissions power generation we could, that was modular that was capitally efficient that allowed us to deploy the right amount of power generation to match needs on location to be able to adapt to incoming grid power to the extent we had that available to us and then to pair that with a ground-up pump design that we, again, think brings a whole host of benefits to the table. But in working through that design and ultimately, as we began to have conversations with our customers around the deployment of digiFrac there was a recognition that not all of our customers are going to use grid power as part of this. And so that led us to recognize we had further opportunity. We had an opportunity to make this system more efficient yet, which is to say that we were going to remove the conversion of energy from mechanical to electrical and back to mechanical. There are losses associated with that. And so you burn a little more gas and as a result, have a modest amount more emissions to accomplish the same thing. And that's what led to digiPrime. So digiPrime just remove that conversion mechanism. We take that same natural gas engine, incredibly efficient, lowest emissions profile you can find in the industry and attach that directly to a transmission and a pump. Now there is a limitation to digiPrime in that the engine is a constant speed engine. It runs at on speed and on speed only. We have the ability to change gears, so we have some amount of rate control, but when you really want that fine-tuning in a frac when you're working up against the high-pressure limitations that we might have, you want that ability to have some micro adjustment in rate. We don't get that with digiPrime. We get that with digiFrac, the electric version of the pump. And so you'll see these 2 different technologies work together as what we'll call a digiFleet. And so it's ultimately going to be a combination of the 2 and the ratio of those 2 different technologies on location is going to be a function of whether or not the operator, our customer, our partner in this anticipates using grid power. So to the extent we won't have access to grid power, you should expect the digiFleet to consist majority digiPrime pumps, and then a couple of digiFrac electric pumps on top of that for that fine-tuning. And then to the extent we have an E&P partner who is going to have some grid power on location, we might have access to 5 or 10 megawatts of electricity. You're going to see the percentage of that fleet that is digiFrac, our electric pump creep up a little higher, and we'll have less digiPrime on that.So that's how we'll think about that going forward. It's going to vary fleet-by-fleet, customer by customer, depending on the situation we find in the field. But ultimately, at the end of the day, we are going to deliver to the customer an unrivaled technology profile with the lowest emissions and lowest fuel consumption you can find in the industry.

[Derek Podhaizer, analyst]

Second question, I know you talked about the opening call, so I agree that integration is going to define the winners in a maturing shale cycle. Can you spend some time on LPI, I know it's a recent acquisition, but maybe how impactful it was for third quarter? Or how should we think about it for 2024 and it being a profitability lever as you continue to scale that out across your fleet?

[Christopher Wright, executive]

Yes. Look, it's in line with other Liberty historical vertical integration. If there's something that's holding us back, slowing down the delivery of our quality of service, we look at how to solve that problem. And to get on-site delivered natural gas, there's not a lot of options today, and the quality of that service is very spotty. Sometimes it's fine. Sometimes it's not enough gas. Sometimes there's manifolds that can hook up to some of the pumps, but not all the pumps. All of these things just hold back the substitution of natural gas into diesel. So we just decided we're taking that problem into our own hands, and we're going to make sure all of our fleets have reliable, robust gas delivery. And if CNG is the right option, that's done via CNG. If there's gas to process out of a pipeline or field gas, we have technologies to process that gas on site and use that. We can blend the 2 together. So we just decided natural gas is so critical. It's look stepping back, it's the fastest-growing energy source on the planet and has been for the last 10 years and likely will be for the next 10 years. So we are talking here about that specific application of using natural gas to power frac fleets. Which absolutely is the future for many reasons, cost, emissions, efficient abundance of natural gas. Now we're also -- we want that expertise to build a call them virtual pipelines, delivery and moving of natural gas to where we need. We're starting with our natural gas-powered frac fleets, digiFleets that without gas, they don't run, dual fuel fleets, if you don't get gas, they still run, you just burn more diesel, more expensive, higher emissions than you should have been. So we're building LPI first to power our frac fleets. But it's also, of course, going to supply other people's rigs, other operations in the field. There's other oilfield applications to that. And ultimately, as you look ahead, what is Liberty generating expertise in. We're generating expertise and having the highest thermal efficiency on wheels mobile power generation, there is and we're generating expertise in how to move natural gas at a remotely or on-site process natural gas to deliver natural gas wherever it's needed and however it's needed. So natural gas is 40% of U.S. electricity generation. And sadly, but unfortunately, we are driving our electricity grid prices up and our grid stability down. So expertise in moving, deploying natural gas and remote power generation is only going to grow in value.

[Operator]

The next question is from Luke Lemoine, with Piper Sandler.

[Luke Lemoine, analyst]

The whole digi initiative seems like it's going extremely well. And I guess, specifically on digiPrime, this was just a latest in a few months ago has now been in the field since the end of September. You guys talked about this being the customer's favorite technology on site. But could you maybe just talk a little further about the feedback and maybe what you've learned as well about having it live on a well location?

[Ron Gusek, executive]

Yes. Sure, can, Luke. Feedback has been extremely positive since day 1. So you have to imagine what really is a pretty big step forward for not only our operations team but also our customers in terms of what they're seeing here. We're basically talking about power density that's 2 for 1 relative to Tier 4 DGB. So we’re to optimize substitution on a Tier 4 DGB engine, obviously, this is pressure-dependent, but you might see that pump delivering maybe 6 barrels a minute or so. We've got digiPrime out there, a single pump effectively replacing 2 of those, delivering steady as she goes day in and day out, 24 hours a day at 12 barrels a minute. And it's doing so, burning less gas than those 2 pumps would have combined. So remove the diesel and reduce the gas consumption, and we're delivering twice the rate. So it truly is an incredible step forward. It's fully integrated with our pump control platform. And so to our operations team out there, it is seamless in its operation. But you could think of it just like a nuclear power plant on our grid, once it is up and running, it is steady as she goes, and it has been delivering day in and day out since we put it out there. The first customer for that is extremely excited and cannot wait to see some more of them out on location.

[Luke Lemoine, analyst]

And then, Chris, I know you don't want to disclose customers, but the remaining digi deployments later this year and early next in the Permian or these in a couple of different basins.

[Christopher Wright, executive]

Starting in a couple of different basins. Permian is the biggest basin. So of course, the majority of DG deployment is in the Permian. We've got requests and pull into several basins, but at year-end, we'll be running digi in just 2 basins and much room to grow in those 2 basins. But by the end of next year, that will certainly be more than 2 basins. That's one of our big questions we've got to decide, the right partners, the right timing to continue to deploy it.

[Operator]

The next question is from Waqar Syed, with ATB Capital Markets.

[Waqar Syed, analyst]

And first of all, congrats on a great quarter. My question is like in the Q3 results, how many digiFleets were active during the quarter on average?

[Christopher Wright, executive]

Probably 2 in the weeds to the close. 2 is probably a reasonable estimate. But originally, we feather in these pumps into existing fleets. That's one of the key things. The fleet keeps running just like a data we feather in this technology. It's only more -- in across multiple fleets. It's only more recently that we have fleets running that are entirely digi.

[Waqar Syed, analyst]

And so when you start running these entirely digiFleets, would the margin on those be accretive to the margins that you get on the other fleet?

[Christopher Wright, executive]

They are. There's a digital diesel displacement, there's lower cost to our customers and a higher technology solution. So yes, that benefits Liberty as well as benefiting our customer.

[Waqar Syed, analyst]

year, nothing else changes. This record high margin that we saw in Q3, 25.5% or so EBITDA margin. You could be higher running higher margin than that in Q2 or Q3 next year?

[Christopher Wright, executive]

It's absolutely possible Waqar. And that's the internal job we call it self-improvement in Liberty. We have to always be in a position where if the market is flat, our profitability is growing. We're growing by doing things better, by doing things more efficiently by delivering premium technologies. So yes, if the market stayed flat for the next 3 years, with Liberty's profitability continue to grow through those 3 years, absolutely.

[Waqar Syed, analyst]

So you're saying right now that 2024 could be modestly higher activity. So when we translate that into Liberty's profitability on EBITDA, given that LPI could be contributing or EBITDA, given that you'll have more of these digiFleets running with higher margins. How do you see 2024 EBITDA versus 2023?

[Christopher Wright, executive]

Look, again, in a flat market conditions, it will certainly rise. But that bigger factor is swings in what's going on in the marketplace. But I think as you've seen over the last 3 quarters, in a gradually softening market can our self-improvement offset that it can. But the question is how much is the market soften? Or how much does the market strengthen, or does it stay flat? But I think their point is well taken Waqar that in a flat market, we have drivers of increased profitability, absolutely. And we will always strive to have that. But the second factor is what does the market actually do, and we don't control that. You get the feeling that the volatility in that in market conditions is likely to be lower in the next few years than it's been in the last few years.

[Operator]

Next question is from Arun Jayaram, with JPMorgan.

[Arun Jayaram, analyst]

Chris, I wanted to start with maybe a bigger picture kind of question. We've seen some recent consolidation in the Permian Basin with Exxon and Pioneer. And Exxon's key thesis is to significantly raise resource factors, and they cited, 2/3 of the expected synergies to come from higher recovery factors. So a lot of that is driven by frac. So I wanted to get your thoughts on the ability of the industry to raise recovery factors we have heard of some producers more recently touting a new kind of completion design. And I wanted to get your thoughts on that and ability to maybe if you can increase recovery factors, the ability to improve economics in Tier 2 and Tier 3, the wells, which I think would have positive implications for your business?

[Christopher Wright, executive]

Yes. So look, that has certainly been the story of the shale revolution is this continual innovation, we say, design of the plumbing underground to increase recovery. Liberty was certainly an early mover and maybe first publisher of this extreme limited entry. We got to get more fracs within each frac stage more contact area. So there we've seen a continual march up in innovation, really ultimately recovery factors in shale well productivity. Now what's been masked over the last 5 years is probably a slightly declining average quality of location being drilled. And then this improvement, incremental improvement of recovery have offset that. Towards the beginning, have slowly increasing recoveries per foot. Now those increases generally are not happening anymore overall because the average decrease in rock quality is slightly outrunning this incremental improvement in technology. Now look, Exxon is a tremendous technological powerhouse. So if Exxon have their efforts, maybe more than incremental views on how to change recovery. I wouldn't bet against Exxon. We work with a lot of partners on -- some are incremental, some are more testing or investigating game-changing ideas for recovery. So yes, a lot of that going on. Yes, you're going to see continued technological improvement in recovery from wells and some will be incremental and some will be bigger changes. But obviously, your bigger picture question is really a question for Exxon. But yes, our industry is moving forward will continue to. And there could be some exciting things in the next few years.

[Arun Jayaram, analyst]

And shifting gears a little bit. Chris, we are in RFP season, talking to my E&P coverage around having discussions with frac operators around 2024 needs. I was wondering if you could maybe characterize the tone of those discussions, obviously, and maybe give us a sense of how you think pricing will play out this year versus last year when the supply/demand balance was quite a bit tighter?

[Christopher Wright, executive]

So again, as I said, look, our dialogues are generally one-on-one with our customers. We don't submit a whole bunch of bids and then wake up in December and find out who we're going to be working for next year. That's never been the way our business works. Almost all of our business is continuing to work with existing customers. Do the bigger ones of those RFP? Absolutely. Did they get market checks? Absolutely. Might they ship their fleet composition? Absolutely. Generally, less with Liberty fleets. We tend to continue to work with our existing partners, and we have dialogues about what's going on in the marketplace and what are reasonable responses to that. Yes, where market conditions much stronger 12 months ago than today, absolutely. But our market condition is bad today? Absolutely not. As you see with our results and where we're pumping, people want the right partners. Most of our dialogue with customers isn't so much about line item Liberty pricing. It's what can we do together to drive down well costs. How can we move faster? How can we change the design? How can we swap out a chemical that we thought we needed with a cheaper example. How can we deliver sand more efficiently? Hey, the price of sand is going down. Does that change our frac design? That's driving well cost down. The price of steel and tubers are going down. The price of plugs is going down. There's some technology innovations. So look, always a dialogue around this kind of stuff, but it's not as black and white like they win, we lose. They're on price, there is a little bit of that, but the broader dialogue is how do we get more efficient and improve both of our economics. And look, so in the spot market, is it soft right now is our idle equipment? Yes. But for quality dedicated fleets, is there a huge surplus of that? No. So I think pricing will probably continue to be relatively boring. It hasn't moved a lot over the last 12 months and probably not going to move a lot over the next 12 months. That's my guess.

[Operator]

The next question is from Neil Mehta, with Goldman Sachs.

[Neil Mehta, analyst]

And Chris, I want to stay on the topic of the macro. I think you've said that you expect demand for frac fleets to parallel recent rig counts at approximately a 1-quarter lag. Is that still your thinking? And if so, how are you thinking about the rig count, which is showing some signs of stabilization, but your views around that as that will feed into the demand view as well.

[Christopher Wright, executive]

Yes. For what do we hear from our customers, and it's obviously no secret. I think rig count is probably bottoming now. I think you're going to see rig count grow over the next 6 to 12 months. But in our new boring shale industry, it's probably going to grow much slower, much more modestly. People are disciplined in investments. Public are low deflate change their plans too much. Privates are the more reactive ones. Drilling economics are quite good today for oil. So are we going to see an increase in private activity, Absolutely. Natural gas, we're going to see growth in activity there. But people I think are wisely more waiting for the right market signals. Gas prices have firmed a little bit. Let's see what the winter does. Huge new demand starting late next year through the couple of years after that from LNG export capacity. So definitely going to see rising gas activity. But in frac, maybe that starts in Q2, could be some a little bit sooner than that. If the winter is warm and probably low, it could be Q3. But yes, a little bit of upward momentum in gas, a little bit of upward momentum in oil for private and public are pretty slow and steady.

[Neil Mehta, analyst]

And staying on the macro, we've talked about consolidation to the length of your customer. We've also seen consolidation in the U.S. frac industry. What has that meant for discipline and your ability to sort of hold pricing in a softening market?

[Christopher Wright, executive]

It's absolutely helpful. The big companies just by nature, have a longer-term time horizon. So if they retire a small frac fleet company that they acquired that may be struggling. And my gosh, park in the fleet, they make nothing. They already bought those equipment, if they get them out there and they generate just some gross margin, it's a positive for them. But if those assets get acquired by a bigger company, they just spent money to buy those assets. They're playing the long game. So they're just going to be managed more intelligently, more disciplined and with a longer-term time horizon. So absolutely, technology consolidation has led to more disciplined investment, more disciplined commercial arrangements, and it's allowed those few bigger companies to invest in the future and try to drive the improvement, I think the whole industry wants to see.

[Operator]

The next question is from Marc Bianchi, with TD Cowen.

[Marc Bianchi, analyst]

I guess another one on kind of the guidance and pricing commentary. I mean pricing is boring, as you say, it sounds like the decline implied by your fourth quarter, your guidance for the year for fourth quarter is all customer budget exhaustion. It would seem like first quarter EBITDA should be able to get back to third quarter levels. Would you agree with that?

[Michael Stock, executive]

Obviously, we don't guide in detail for the quarter upcoming. But I mean, in general, if you had a flat market, your first quarter does have some weather effect compared to your summer quarters. So if you had a dead flat market, your first quarter would be slightly lower than your summer quarters, but that's where we are. But again, I think next year is going to be slightly better than this year in total.

[Marc Bianchi, analyst]

The other one was on Liberty Power innovation. What is the spending that you're anticipating over maybe in 2024 and beyond? And how should we think about kind of the efforts to supply your own fleet versus perhaps supplying to third parties?

[Michael Stock, executive]

So we have a third party -- they do some third-party deliveries here, but the bulk of the, probably the first year to 1.5 years’ worth of growth of LPI will be to support this digi rollout and our expansion and our improvements in our natural gas usage across the rest of our fleets. It's an exciting business, and we'll talk more about it in our January call, and we'll talk about spending as we sort of look at that market going forward. But again, the vast majority will be supporting our fleets in the initial point.

[Marc Bianchi, analyst]

Any bookends around the spending just to maybe set some early expectations for people?

[Michael Stock, executive]

No, we'll put chat about that in January. I think that's the best way to look at that one, Marc.

[Operator]

The next question is from Keith MacKey, with RBC Capital Markets.

[Keith MacKey, analyst]

Just wanted to follow up a little bit on the digi or electric fleet contracts. Some in the market have talked about those as being sort of multiyear type take-or-pay contracts. As you fold in more of the digiFleet, what have you learned about the contract structure for those? Would you agree with the multiyear type of contract? And if so, if not, how is the contract structure generally evolving?

[Christopher Wright, executive]

Look, if you're going to build a new fleet, deploy new capital, that's different than deploy existing equipment. So yes, those are multiyear agreements.

[Keith MacKey, analyst]

And maybe if we could just talk a little bit about the sand market. Things have come off of peak levels. But is what you're seeing for sand demand in the Permian, roughly commensurate with well completion count? Or are you seeing other trends like higher intensity, for example, maybe acting as a buffer on sand demand overall?

[Michael Stock, executive]

Yes. I think overall, certainly, it's relatively well aligned with completion count. That's certainly a good way to think about things. We continue to see movement in the amount of sand pumped in a well. We continue to have operators who are experimenting with alternatives to current design. And so that will have some modest implication. But at the high level, you're absolutely right thinking about it just well count to volume consumed.

[Operator]

The next question is from Dan Kutz, with Morgan Stanley.

[Daniel Kutz, analyst]

Maybe to just piggyback on that last line of questioning, but broaden it out a little bit. So outside of frac and also outside of LPI, could you just comment on what some of the other businesses like sand and PropX, ST9 wireline, just directionally, whether those have been kind of moving consistent with the frac and LPI earnings or maybe moving a little bit lower and appreciating that the benefits of vertical integration, in earnings driver for the overall business. But just if you were to isolate those other businesses, anything that you could comment on in terms of trends that you've seen there?

[Christopher Wright, executive]

Look, you made a key comment. You could isolate, like we never isolate those businesses because we're in them because they make our core business better. They are actually good businesses in their own right, Michael, I'll see if he wants to comment any more on that. But yes, we are in those businesses because they make the whole system work more efficiently. When we have a Liberty wireline crew on a Liberty frac fleet, we have meaningfully lower downtime than when we have a Liberty frac crew and a third-party wireline. So look, our wireline is -- and I think we mentioned in the release, it's now ranked number 1 by customer service and quality. So that makes that a good business in its own right, but even better. It makes the whole Liberty and wireline and frac operate more efficiently, deliver faster results to our customers and better profitability to us. Michael, anything you want to add on that?

[Michael Stock, executive]

The business leaders of those teams are focusing on those businesses and do an incredible job. And I would say there's a decent amount of competition between all our business leaders. And at the moment, I'd say they're all racing across the line, neck and neck, right? They're all kind of traveling about the same pace and doing very, very well.

[Daniel Kutz, analyst]

And then maybe just a question on how debt pay down ranks in the capital priority list. I know you guys knocked out the term loan earlier this year and then you guys paid off a decent sized chunk of the revolver in the third -- of the ABL in the third quarter. But just wondering if there's anything that you could share in terms of whether you think that you'll maybe just kind of continue to chip away at the ABL balance or if there's potential for knocking out a big slug. Just kind of how does that stack in the capital priority this relative to CapEx and buybacks?

[Michael Stock, executive]

We have very small net leverage, so we're very, very comfortable with debt levels where they are at this present point in time. So really -- our ABL level floats with our other uses of capital in that given quarter.

[Operator]

The next question is from Saurabh Pant, with Bank of America.

[Saurabh Pant, analyst]

I guess I'll start with a little bit of more color on the digi side. Because clearly, there's strong demand over there. You'd be at 4 fleet by the end of the year, fixed by the end of January. I'm sure there is more demand. But when you look at the demand that's out there, right, I'm sure you're not trying to meet every demand point, right? Do you need to keep your CapEx in mind, you need to keep your returns and mind the right contract structure customers, all of that. How do you think about how much potential demand might be out there if you were to not be disciplined just a theory, right? I'm just trying to see the demand sent out there. How would you characterize that?

[Christopher Wright, executive]

I mean, look, the demand is gigantic, right? Think about. We’ve been 7 years running, we've been the top rank from customers' frac company and the quality of the services we deliver. And now we have the lowest emission, highest efficiency, all natural gas burning fleets with actually longer lifetimes, likely higher uptime, higher performance. So yes, look, there's no cap on the interest in that, right? So the question for us is it's always a partnership decision. We have 50 of them on a lot. We could put them to work tomorrow. We wouldn't do that, and we never do that. Like they're going to be built individually for specific customers under specific conditions that have been partners and will remain partners for.

[Saurabh Pant, analyst]

Right. Now that makes sense because we do know that there is a lot of demand, right? And again, you don't want to satisfy all the bad points that's not the right way to work. So I get that. Just a quick follow-up. I think Arun asked a question on the RFP season, how is that going? Just a follow-up question on that. In terms of how you think about contracting the duration of the contract, how quickly pricing resets within that contract. Are you thinking about that differently when you think about 2024 versus what you have in your portfolio right now for 2023?

[Christopher Wright, executive]

No. Again, new builds, they have long term and they have different sort of structures a little bit. But no, in general, no, no different this year than last year, and we just continue that sort of partnership mindset existing customer base. Not a lot of change in the Liberty customer makeup.

[Saurabh Pant, analyst]

Okay. Awesome. And then just one last quick one, just a clarification. I think Marc asked that question. I think, Michael, you said that you expect next year to be slightly better than this year to 2023. Was that an EBITDA comment? I just want to be sure of that.

[Michael Stock, executive]

That would be a general expectation.

[Operator]

The next question is from John Daniel, with Daniel Energy.

[John Daniel, analyst]

I guess the first one is just any supply chain or labor concerns as we head into '24?

[Christopher Wright, executive]

No. Those challenges that were big a year ago and 18 months ago, don't look to be challenges today.

[John Daniel, analyst]

Got it. And then Chris, how does the boring mature market influence your acquisition strategy because you should have a lot of free cash flow next year?

[Christopher Wright, executive]

I mean, yes, our outlook is for a lot of free cash flow, and it's just competing uses. So yes, acquisitions are certainly a possibility. You've seen we're not highly acquisitive, but if something is compelling. Sure.

[John Daniel, analyst]

And I guess the last one for me. I'm assuming the initial rollouts of all the Digi Technology you're going to larger and higher quality customers, if you will. At this point, are any of the smaller E&P operators inquiring about the technology? Or when do you see those folks wishing to learn more and possibly moving forward?

[Christopher Wright, executive]

Absolutely. They're fired up about it. It really just gets down to that long runway, right? To do a deal for something like that, you've got to have a pretty clear plan of what your next 2 or 3 years are going to unfold. And for some of the bigger privates, they've got that. So yes, that's not years away. But yes, the interest is quite large there as well. But you're right, the original deployment is not going to be in that sector.

[Operator]

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

[Christopher Wright, executive]

Thanks, everyone, for joining today. Sadly, another global conflict has burst on the scene with heartbreaking scenes of death and destruction. War is as old this time, but that does nothing to less in the horror of its ravages. War is a destroyer of security, personal security, food security, property security, economic security and our vision for a secure future that we all crave. I often speak of energy as the enabler of all human progress. It is, but it is also essential to satisfy our base needs like security in all forms. Now that the spotlight is again on the United States, the most promising source of security for the world, how are we doing? We promptly sprung to action on the military, diplomatic and humanitarian fronts. But what about the energy front that underpins everything. I would posit that we are not shining in this area, the area critical to our long-term future. 2 quarters ago, I spoke about government policies that are raising up our electricity prices whilst also destabilizing our electricity grids. Hence, we are not doing well in the power grid area. While electricity grids are arguably the most important networks in the world, in total, they deliver only 20% of global energy. What about the total energy pie? Oil and gas today represent a record high of just below 70% of total U.S. primary energy consumption. Fortunately, we are today the world's largest producer of oil and natural gas. Are we maximizing these resources to uplift Americans and provide security to our citizens and our allies? We have blocked the completion of large pipelines already under construction. We have dramatically reduced the granting of leases and permits on federal lands. We drained half our strategic petroleum reserves, not in a crisis, but simply to short-term lower gasoline prices. We have used a myriad of regulatory bodies to impede the funding and development of our oil and gas resources, having the obvious and presumably intended impact of reducing U.S. oil and gas production at the margin and, therefore, raising prices to consumers and businesses. But there is no stopping the rise in demand for oil and natural gas as everyone, not just Americans, wants to raise their standard of living and expand the opportunities available to their children. So what is billing the gap created by suppressing American oil and gas production? I ramp predominantly, we have effectively stopped enforcing the oil export sanctions on Iran, resulting in a roughly 700,000 barrels of oil per day increase in Iranian oil exports over the last 12 months, nearly all flowing to China. The same is coming true for Venezuela. Is having more oil coming from Iran as opposed to the United States, beneficial to the security of the United States and our allies? Is it economically better for our citizens and allies that fits incremental oil production and related economic activity and tax revenues flow to Iran instead of the United States? Is it better for air quality and greenhouse gas emissions that these incremental barrels are produced in Iran versus the world's cleanest production practices in the United States? The answer to all is obvious. Liberty's mission is to better human lives by improving the energy system in North America and the world. We do this primarily by driving improvement and innovation in hydraulic fracturing of oil and gas wells, the dominant source of energy in the U.S. and Canada. We took an ownership stake in Fervo Energy last year to partner in bringing next-generation geothermal into our energy system. Things are going quite well there. We took a smaller stake in Natron Energy to help bring sodium ion batteries to market as they offer distinct advantages to our energy system. After years of watching and investigating, we have recently invested $10 million in Oklo, which we view as the most promising of the small modular reactor companies. Why invest in nuclear? Because it has the energy density, reliability and scalability required to economically meet the world's growing demand for energy. The world needs more energy, better energy. Thanks for joining us today.

[Operator]

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