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Liberty Oilfield Services Inc
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Good morning and welcome to the Liberty Oilfield Services 2017 Fourth Quarter and Full Year Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. 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 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 return on capital employed as discussed on this call are presented in the company’s earnings release which is available on its website.
I would now like to turn the conference over to Liberty CEO, Chris Wright. Please go ahead
Good morning, everyone. I want to welcome our new investors to the Liberty family and thank you for joining us on our first earnings call as a public company. We are proud of our fourth quarter and full year 2017 results. Over the course of 2017, we nearly doubled our fleet count, expanded our presence in the Permian, entered the Eagle Ford and added over 1,000 new team members to the Liberty family. We did all this while generating industry-leading returns and earnings per fleet.
Our full year revenue totaled $1.5 billion with net income of $169 million. Full year adjusted EBITDA was $281 million or $18.6 million of adjusted EBITDA per average active frac fleet. In the fourth quarter, our revenue was $449 million generating net income of $58 million. Adjusted EBITDA totaled $92 million or $20.2 million per average active frac fleet on an annualized basis. We are a returns-driven organic growth company focused on compounding shareholder value by reinvesting cash flow at high rates of return. For the full year 2017, we generated pre-tax return on capital employed of 35%. From Liberty’s inception, we’ve had a vision to build a different type of company. One with a foundation rooted in technology committed to long-term partnerships with our customers and suppliers. We have built this company from day 1 with the overriding idea that if you bring together the right people and provide a culture that fosters innovation and efficiency, they will achieve outstanding results.
Technology and innovation are embedded in the DNA of Liberty. Technology has enabled us to build long-term customer partnerships and has been a key driver in generating our differential financial results. We are firm believers that the best ideas are the ones that solves specific problems. From frac design optimization to maximizing operational throughput, minimizing maintenance cost, and reducing environmental impact. We are driven to reduce our customer’s cost to produce a barrel of oil. We have focused significant resources to develop our extensive geologic and engineering database of unconventional wells. We are utilizing this database as the starting point for our in-depth proprietary analysis to recommend improvements in completion design in the Permian Basin as we have done for years in the Rockies. Simply point, we want to help our partners maximize their returns.
We are excited as we move into 2018, the frac market remains very strong, improved commodity prices and increased drilling activity are providing a positive industry backdrop. The demand for frac services continues to outstrip supply. We believe this trend will persist through 2018 supporting modest upward pricing potential. We expect that 2018 will be a year for the industry to focus on quality of execution which is what Liberty does best. More so than iron, we believe that human constraints in the workforce will continue to regulate the pace of industry expansion having retained our people through the last downturn, we believe we have uniquely experienced workforce and the ability to attract new team members more easily than others. Our fleets are longely outlived assets as are the people who joined the Liberty family to operate them. Given the positive market backdrop, our record of performance and excellent customer relationships, Liberty continues to experience significant excess demand for our services. During the first quarter, we deployed our 20th and 21st weeks under dedicated arrangements with existing customers and as previously announced, plan to deploy our 22nd fleet on a dedicated basis at the end of the second quarter.
We take a long-term through cycled approach when we decide to commission a new fleet. We always want to ensure demand for Liberty significantly outstrip supply and deciding when and where to add assets, we evaluate where we believe we are in the cycle, our existing or potential customers and their long-term plans and the ability to staff a fleet with the quality of people we demand. Based on these criteria, we have pleased orders for two additional new build fleets to satisfy commitments we have made to customers. We expect these fleets will be delivered in the third and fourth quarters of 2018.
With this newly committed construction, we expect to exit 2018 with 24 fleets in service. I will now hand over the call to Michael Stock, our CFO to discuss our financial results.
Good morning. We are extremely pleased with our 2017 results and believe we have put in place an excellent platform to support our growth going forward. We grew our fleet count from 10 active fleets to 19 over the course of 2017 while increasing operational throughput and maintaining a strong record of safe operations. For this call, we will discuss our net income and EPS on a pro forma basis. Prior to our IPO, Liberty’s predecessor companies were not subject to U.S. federal income tax at the entity level and as such, our net income does not include income tax expense. Our pro forma adjustment are only to reflect what our income tax expense and subsequent net income would have been have we been a public company for all of 2017.
The fully diluted earnings per share calculation reflects the impact of additional tax on net income and shares outstanding, assuming the conversion of all of Liberty’s Class B common stock into Class A common stock. For 2017, we generated pro forma net income of $130 million and fully diluted earnings per share of $0.88. Revenue for the year was $1.5 billion and adjusted EBITDA totaled $281 million. Adjusted EBITDA to our average active fleet and return on capital employed as previously described by Chris are two key matrix we use to evaluate our performance. For 2017, we generated adjusted EBITDA per average active fleet of $18.6 million and return on capital employed of 35%. Revenue for the fourth quarter grew to $449 million, a 2% increase of the third quarter revenue of $442 million. For the fourth quarter, we generated pro forma net income of $45 million and fully diluted earnings per share of $0.30 compared to third quarter pro forma net income of $49 million and fully diluted earnings per share of $0.33. Adjusted EBITDA for the fourth quarter totaled $92 million or $22.2 million of annualized EBITDA per active fleet compared to $22.3 million per fleet in the third quarter. In the fourth quarter, we experienced impact to our operations due to holidays and some customers having exhausted their full year budgets earlier than expected.
While the curtailed activity didn’t make their fourth quarter earnings, we believe disciplined spending across the upstream space will serve to provide greater balance to commodity prices existing in the current cycle. General and administrative expense excluding fleet activation cost totaled $17.6 million for the quarter or 3.9% of revenue. We expect general administration expense excluding non-cash share-based compensation to decline slightly as a percent of revenue in 2018 at higher revenues offset the increased G&A costs associated with being a public company. We ended the year with a cash balance of $16 million and total debt of $196 million. On January 17, we completed our initial public offering. We utilized a portion of the proceeds to completely pay down our ABL facility and a portion of that term debt. Pro forma for the offering at year-end, we had $118 million of cash and $107 million of debt.
In the first quarter of 2018, we experienced some extreme and unusual weather across all five of our operating basin reducing throughput and in some cases temporarily shutting down operations. While these events will impact our first quarter earnings, we expect to see high single-digit growth in revenue and EBITDA of the fourth quarter while our first quarter earnings may be slightly below our expectations, the strong demand for our frac services leads us confidence in our expectations for the full year. As we look to 2018, we will continue to exercise our disciplined organic growth plan. We expect to deploy a total of five fleets in 2018 consisting of four new build Liberty quad [ph] fleets and our final refurbished fleets. We are upgrading five of our fleets to meet customer demand for high pressure work in the Permian and Eagle Ford. We are constantly working to increase throughput.
Towards that end, we are building capacity to include pump down services with all Liberty frac fleets and builds ancillary pumping services business in our three major basins to perform prefrac services including toe preps acidizing and other services previously handled by third parties. Our fleets are designed with the lowest total cost of ownership philosophy combined with our rigorous preventive maintenance program, we believe we have one of the lowest maintenance CapEx expenditures on a per fleet basis. Our maintenance CapEx budget for 2018 is $55 million or $2.5 million per fleet. For 2018, our CapEx budget is approximately $310 million which includes $20 million of carryover from the fourth quarter and the additional horsepower provide ancillary services previously discussed.
We expect our 2018 capital budget to be completely funded by cash flow from operations. We expect to end 2018 with 1.2 million horsepower consisting of 19 standard 40,000 horsepower fleets, five 50,000 horsepower high-pressure fleets, 120,000 of dedicated pump down capacity attached to these fleets and approximately 40,000 of horsepower supporting ancillary pumping service line. With that, I would turn the call back to Chris before we open for Q&A.
Thank you, Michael. We believe that 2018 will be a year defined by execution. We look forward to strengthening our customer partnerships and working together to increase operational efficiency and throughput, lowering the cost to produce a barrel of oil. I want to thank our customers, suppliers and the whole team at Liberty who worked tirelessly to advance the shell revolution that is changing the world’s energy landscape. Thanks for joining us. I’ll turn it back to the operator.
We will now begin the question-and-answer session [Operator Instructions] The first question comes from Sean McGinn of JPMorgan. Please go ahead.
Thank you, hi good morning. Chris, as you increase your mix in the Permian here going forward, just maybe elaborate a bit on how the mix changes there thinking about stages per fleet, revenue per stake, metrics, just the variance across the DJ and Bakken versus the Permian and how that should influence first half per fleet as you move through 2018?
You bet, Sean. In the Permian, since the reservoirs are thicker, the average size pounds of sand in a frac stage, is bigger than it is in the DJ or in the Bakken. I mean, obviously we get paid more for that. In fact we get paid even more on a per pound basis because the efficiency or average throughput in the Permian is still lower than it is in the Rockies. But on a gross profit per fleet basis in the rearview mirror, recent rearview, I would say they are about equal. I would say Permian is definitely moving ahead of the other basins. It will be slightly more gross profit or EBITDA per fleet than the other basins but they are reasonably aligned today.
Right so then your expectation would be that even if the efficiency mix is deteriorating, it doesn’t necessarily have a negative impact on gross profit per fleet?
Right now the pricing offsets that. But we are actually seeing just recently some meaningful improvements in efficiency and throughput in the Permian. We like a lot what we see in the Permian.
Got it. Okay thank you for that. And then just thinking about the supply chain, can you maybe just give us little more detail of how much lost work is a drag on margin in the first quarter, I guess maybe top line and margin and just any other potential bottlenecks that are maybe they are worth pointing out here?
Yes, we mentioned weather and some of the struggles we and really the industry had in Q1 and it did impact throughput and if you get less done, it impacts your margins as well. But I will let Ron speak to that. But I am pretty proud about how our supply chain has handled the struggles in Q1.
Yes Sean, certainly you have heard the challenges that some of the industry’s talk about specifically around the railroad and the ability to move sand there. We’ve been fortunate to avoid any issues as a result of that. Our supply chain team worked pretty hard to make sure that we had not only primary supply in Basin but also secondary and tertiary opportunities there. A big thanks to our partners on the supply side who worked hard with us to make sure that we were able to keep things up and running. So very, very proud to say that to this point in time we have not yet experienced a shutdown as a result of sand issues.
That’s very helpful. Maybe just to place it little differently you think about there’s a number of factors driving your gross profit typically in the fourth quarter and the dating process as well but you about thinking about January versus March, can you maybe give us a sense of the trajectory intra quarter and that could be helpful?
You bet Sean. Yes, January for us was most impacted months, some extremely cold weather, shut down roads where you couldn’t move anything, fuel or chemicals in addition to sand. And just – and problems with water supply which are not handled by us, and wireline from the extreme weather, so January was meaningfully impacted. February maybe a little less slower or similar and March definitely better. Yes. I would say, we are at the highest throughput of the quarter, right now.
Got it. Thank you very much.
The next question comes from Connor Lynagh of Morgan Stanley. Please go ahead.
Yes. Thanks. Just wondering if we could get – dial in a little more on just how much we should expect EBITDA per fleet to decline in the first quarter and if we look back at the third quarter where you’re doing $22 million or so of EBITDA per fleet. Is that a reasonable expectation for midyear this year? Can you do better with pricing higher and efficiency moving higher in the Permian? Just what are your expectations on that front?
Connor, yes certainly we expect to exceed those numbers this year, this summer, whatever in that timeframe but we don’t have other impediments. Pricing has approved. Our team, our efficiency that were able to deliver has improved since then. In Q4, we talked about exhaustion of budgets and holidays and things just less days on location moving sand and fluids through our pipes. Q1 we have had some similar struggles mostly for different reasons. Although weather is an overlapping reason. But I would say, our expectation as we said in our press release for Q1 is not a decline in EBTIDA per frac fleet from Q4. It looks to be roughly flat. Similar growth in fleets to revenue and EBITDA. But yes, both of them are impacted versus the cleaner operating environment we had in Q3. But again the macro backdrop for us today is better than it was in Q3.
Yes absolutely. I was interested, the comment you made on the Permian making steps up in efficiency. Do you think that’s a market wide comment or is that due to things that you guys in particular are doing with your customers there. What do you attribute it to?
We should have more months to see there is some folds. But I would say, it’s probably more a Liberty specific thing in the Permian itself you know which is very busy. Ancillary services are stretched and there is some obvious struggles you are going to have when a basin is growing that fast. If you look to the Bakken in 2013 or 2012, you would see the same stresses on a system before infrastructure and available services catch up with activity level. But it comes down to the right partners and customers and the right partners and supply chain and logistics and just learning how to deal with the different challenges in the different basins.
Got it. And just in terms of where you see it going from here, I mean how much more efficient can you be in that market or just broadly across the US? Is it 5%, is it 30% just high-level, how bigger is the opportunity to set there.
I would say, you probably bounded it nicely. Certainly, we’ve got more than a 5% upside and what we can get done with efficiency. I mean, I would say, it’s meaningful. 30% is large that may be several years down the road but I would say, the gains we expect to get are somewhere in that wide range. There is a number of initiatives and you’ve heard of some of them in the press release you know, pump down operations to get the wireline guns down between stages, you know we do that in some of our fleets but not in all of our fleets, and in a stressed market, we are seeing that hold us back. So we decided, we don’t want that to hold us back. So we are taking pump down operations across all of our fleets in-house. That will help drive efficiency and reduce problems. Same thing for toe preps and acidizing and other things that prep pads. So they are on schedule to move it. We are rolling out this year an automated pressure testing system that now it does a better job pressure testing but it’s faster and more efficient. So there is, I could go on and on. We have a number of operations. As you know, that’s the culture of our company just to figure out together with our customers how to get more done at a day.
Absolutely. Thanks a lot for taking the time.
Thanks, Connor.
The next question comes from Waqar Syed of Goldman Sachs. Please go ahead.
Thank you very much. Good morning. Just some housekeeping. What do you think the average fleets – active fleet count would be for Q1 and then Q2?
It looks to be, it’s going to be roughly 20 fleets in this quarter and we will end the quarter with 21 and we will go to 22 but only very late in the quarter. So probably a little over 21 in next quarter.
And then for deliveries in the third and fourth quarter, you expect them to be at quarter end or sometimes in the middle of the quarter, or how should we be modeling those?
Well the Q3 fleet looks like it’s going to be right at quarter end. Hopefully it should be in the quarter and Q4 fleet sort of up in the air, sort of up in the air. That could be more at the middle of the quarter than to the end of the quarter but it’s far enough out, hard to say with any precision.
And for your – the CapEx numbers that you provided for the year, could you provide a little more breakdown. You mentioned $55 million for maintenance and then $20 million from last year. Could you further provide breakdown in terms of between upgrades and new builds CapEx.
I will let Michael speak to that.
Yes, Waqar, when we look forward to this -- on the ancillary service line probably about between $20 million and $25 million is associated with that. We’re also looking at about $50 million or about $13 million for our final refurb fleet. And really the balance of that CapEx being runs in is really new builds which includes pump down equipment and the upgrades to high pressure.
So the returns on these ancillary services investments, are they kind of in line with what your returns are going to be on the pumping side?
They are, Waqar. It’s a double combination in the oil and on these rig billing they have, they will have strong returns on their own right. But they also have the ancillary need to accelerating and making around the fleet more efficient. So we are expecting great returns on those assets.
And that’s the bigger reason Waqar why we are doing them. Yes, we will have good returns on that equipment. But it’s a relatively small business compared to the broader complex. The motivation to do them is simply a hunt for efficiency simply to figure out how to get more done at a day.
Great. And then just one last question, do you expect to generate free cash flow this year?
Absolutely.
And could you quantify within the range you know what do you think that could be?
I mean, I am sure you got a model as we’ve got a model of our financial performance for the year. Certainly, our expectations are to generate cash flow from operations above – well above our plan CapEx. But I am probably not prudent to elaborate any more than that. But as you have heard us from the past or you have seen us in the past. We are return on capital and return of capital, guys. So this year may be mostly building and strengthening the balance sheet but I think next year, you will hear us talk about return of capital.
Okay great. Thank you very much. Appreciate it.
Thanks Waqar.
The next question comes from George O'Leary of TPH and Company. Please go ahead.
Good morning, guys. Just given all the focus on driving efficiencies for your customer and technology maybe as you pushed further into the Texas market, did you tick through some of the areas where your customers are acutely focused on improving their completions operations or various issues in the field, what maybe those issues are and then how you guys are thinking about helping those customers?
You bet. I mean, look as customers are moving, you see a significant increase in the number of pad drilling in operations in Texas. That means the ability to move faster is there. But water supply, wireline, maintenance of the wellheads and other ancillary services flow back manifold for a perfect frac designs. You are often pushing the edge of what you can take. So you got to be able to deal with screen outs. Hopefully, flow them back and not have to clean out the wellheads. But the operators down there are savvy, very savvy. They have just been geologically and land acquisition focused and then they have been delineating their acreage focused and now the focus for us and our customers is you know increasingly shifting to just smoother and more efficient operations. I don’t know if my colleague, Ron wants to elaborate on anything there as well or if I have hit the major points.
I think maybe the only other thing we are going to be highly focused on there, of course is this transition to regional sand. We anticipate that’s going to play a significant role in completions in the Permian going forward. So have been laser focused on making sure that’s something we can execute well on in partnership with our customers, so to that end, we have been making sure that we have the appropriate supply chain in place there. Geographical distribution of sand supply so we want – we’ve worked hard to make sure we have access to regional sand in the north and the south and the east and in the west with access to a wide number of highways. Of course you know we have Propex out there with the Golar giving us access to the widest possible trucking fleet, any flatbed trailer of course can move sand for us. So we have been working hard on that to make sure that we are able to deliver that additional component as a partner with our customers as well.
And of course it’s always a balance sheet. You want throughput and efficiency that’s just straight up. But the other thing is to find the best way. The ultimate goal of our operations and throughput and efficiency are large contributors on that goal is to lower our customer’s cost of producing a barrel of oil. So our engineering team has built a very large database now over 50,000 wells and very rigorous analysis to try to figure out how to do best do that. That’s frac design, profit volumes, mez sizes, completion types, fluid systems, rates, I could go on and on. But one of the targets of us right now is regional sand. We have been pumping regional sands since just past the middle of last year and we are now doing an analysis of the impacts of that clearly has its significantly positive cost impact. We just got to confirm that productivity impacts are either not observable or they’re so modest they are well more than offset on the – more than offset by this decrease in well costs. But that’s an ongoing effort. And of course that will be different in different parts of the basin in different horizons and all that. But we are pretty bullish on the outlook for general sand playing a large role there.
That’s very helpful color and then kind of in the same vein you guys have been uber successful in kind of your legacy markets you know most notably the DJ Basin from an efficiency standpoint and have put down some big frac stage per day numbers as you progress into Texas and I realize it’s just relatively early days at this point but continue to grow in that market. Maybe could you bifurcate the – and I realize some of it has to do with the geology and the per stage volumes of sand that you talked about earlier. But could you bifurcate between how many stages per day you are able to get done in say the DJ for example versus the Permian and then can you close that gap and push the Permian closer to the DJ over time, maybe just some color there would be helpful?
Yes, I think in pump hours or number of frac done in – frac activity done in the day in the Permian even sand volumes, will they get to the DJ volumes? They will. On stages will they get there and there again there is not really a DJ number. We have customers in the DJ with probably a factor of 10 difference in sand volumes on stage A versus stage F. So we don’t really – I mean we monitor stages but stages aren’t really the right unit to look at when you are talking about, can you have the same efficiency. I think pump hours in a day or pounds of sand placed in a day or better overall metrics for the efficiency or throughput in a day. Customers in the DJ or Bakken whatever we change stage sizes. Sometimes we are doubling them. Sometimes we are shrinking them. All those impact stages but they don’t really impact efficiency and throughput in a day.
Okay that’s helpful. And maybe if I could just sneak one more and I guess then would you say, the rate of change we can expect in hours pumped or efficiencies kind of however you want to think about it in Texas is maybe the rate of change be higher there versus the legacy markets you guys have been more active in historically.
Yes, I think that’s a reasonable assumption earlier on. So yes, steeper rate of rise and improvement in efficiency, our revenue statement, George.
All right, great. Thanks very much for the color, guy.
Thank you, have a good one.
The next question comes from John Daniel of Simmons & Co. Please go ahead.
Hi guys. Thanks for putting me in. Chris, in your prepared remarks, you talked about seeing excess demand right now. Do you see customers expanding their frac fleet counts or they simply upgrading their frac providers?
You see both. I think there is still a significant amount of expanding frac fleet count on customers. Even that have been in a flat rig count for a while, their drilling efficiencies are coming up. Their frac intensity might be migrating up. So in general across the basin there is an increase in the demand for frac fleets today right now. For sure that number is going up. But certainly for us again, we are not really betting just on the macro or is to your other point. Now it’s to find the right partners that will benefit the most and partner the best in efficiency and throughput. So yes, certainly our fleets going to work are not always just because there is new capacity needed. They are upgrading operations.
Right and I mean, you guys have done a great job from service quality and you alluded to your – the foundation the company build on technology but let’s assume that the top tier player such as yourself continue to successfully execute and take market share. This would seemingly suggest that your lower quality competitors will be forced to find a home for their fleets and may have to do so at lower pricing. And should that play out, you talked about having dedicated fleets. Can you just elaborate on what you’re doing to lock-in utilization and pricing and how you will approach that day when your competition, the lower quality folks if you will are forced to cut price to try to win back work, just sort of a big picture question for you.
Yes, you bet. So that’s happening today. Even in great markets that’s always happening. You know there are different qualities of players and they deliver a different service and they get paid differently for that. It’s more valuable to get the same frac stages done in the day if you get seven done then if you get four done. Your ancillary services for our customers, all their daily fees on the thing, they shrink. So do premium providers get paid a little bit of a premium price? Yes. Because we deliver premium value. I think our customers win by that too. Ultimately, it lowers their cost even though we may get paid a slightly higher first stage value than a lower quality player. So that dynamics of lower quality fleets getting displays from customers they are in and having to find another home, you know, that’s been going on for I am going to say the last 12 months but that’s been going on for the last 20 years. So there is always that in the backdrop. Now if you get to a situation where there is – the frac – demand for frac work is declined or new capacity rolls on exceeds current demand for frac fleets and you have a different market dynamics. You still have a pricing differential between the operators. You still have a preference to have a preferred higher-quality player on location but you know now you start to see pricing pressure going the other way than it is going today.
Okay, right. Final one and more of a housekeeping for Michael. In your prepared remarks, you talked about an expectation for high single-digit growth and EBITDA for Q1 which again based on my done math would suggest EBITDA just shy of $100 million. Is that fair?
That’s how the net, works, yes John.
Okay but with that math is that including an estimate for equity-based comp and if not can you give us sort of a range for what equity-based comp might be for the year?
We will probably could take that offline. We are still working on the model of the equity-based comp with at the moment.
Okay, cool. Thanks guys.
Thanks appreciate your interest, John.
The next question comes from Scott Gruber of Citigroup. Please go ahead.
Hi guys, this is Barter Kaki just stepping in for Scott. Can you guys just discuss your longer-term growth plans? You previously discussed entering MidCon or Appalachia. Is that still in the pictures? Has that changed at all?
No, I would say, no change in our broader plans. And again, this just like with fleet deployment, it’s a little bit more focused on customers than basins per se. But there will come a time where we decide to enter an additional basin. It will for sure be driven by a customer or two customers that we like and we love the opportunity and we want to help them out. But that’s a bigger decision. We got to build a base. We want to quickly get scaled there and all that. So surely Bart, we will do that. It’s not in the near future. It’s not right through the windshield right now. Our market share in the Permian and Eagle Ford is still small. The Permian is a huge basin. We are new entrants in the Eagle Ford. So for the – for a while we will be focused on the basins we are in. But we are constantly building request and dialoguing with customers and that day for when we add the next basin, it will come. I can’t say when. But it’s not in the next 12 months.
Got you. And for the fleets that are going to come in 3Q and 4Q. Can you just talk a little bit about visibility on you guys have like a handshake agreement with customers for please go to work or is it just more in the discussion at this point. And do you think there’d be for existing customers or new customers?
We are in discussions. I think we know where the fleets are going. But there are other people we are talking to. So we haven’t formerly clarified that. But I would say we have a pretty high probability of where those last two fleets will go. I think both of them will likely go to existing customers.
Got it. Thanks. That’s just for me.
The next question comes from Vaibhav Vaishnav of Cowen. Please go ahead.
Hi good morning. And thanks for taking my question. Chris, I believe you mentioned return of capital. I was hoping if you can provide some color around how you think about that?
Yes. You know in the past, we have done it through private companies and there it’s simply special dividends when we generate excess cash during good times, we mail up per share dividend on all the holders. In a public marketplace, we have an additional option which is share buybacks. And so ultimately it will depend when we’re prepared to do that. What’s the valuation of the stock? If we think this stock is significantly undervalued, we may deem that the greatest way to create value to our shareholders is through a buyback. If it’s close to reasonably valued, it’s more likely we would do special dividends but our goal, I mean what motivates all of us and help throughout our careers is to increase the value of a share of stock. We been large owners in every business we have been in and we are here and to me that’s the purpose of a business, grow the value of the share.
So it sounds like you guys based on your internal model think you have free cash flow, significant free cash flow or at least see much more than CapEx as you stated in your comments. Going forward, is the – more the best use still going to be more new builds or is it going to be more of a function of buybacks?
It absolutely depends on the circumstances. There will be circumstances where we may have no new builds in a year and all of the free cash flow, if it’s going to be distributed, I mean, maybe distributed to shareholders. There will be years like this year where we are establishing a presence in trying to change the game a bit in the Permian where the majority of our free cash flow is going to CapEx and expansion of our business. So that’s again ongoing dialogue with our customers, so it’s granular. It’s macro where we think we are in the cycle, how do we feel about our robustness for the inevitable downturn, it’s not in the windshield right now but they always come, and it will come again. So for us, the proportion between those things will never be fixed. It will swing significantly between growth capital and returning cash to shareholders.
That’s helpful. If I think abut March, you said like March is, sounds like it’s more normal weather, normal operations. Can we think of March exit rate around that $22 million that we saw back in third quarter ‘17 per fleet EBITDA?
I prefer not to do that. Of course we are not even halfway through March in all that. But things are going well. We feel good about where our business is right now and the outlook. But you know we will have to provide more specific guidance on that. Appreciate your sentiment. I know what you are looking for but I am going to hold back.
I completely understand. And thinking about the fleet number at 23, 24. It sounds like pricing is still improving. I am not sure if the pricing is already locked for those two fleets but sounds like that should be at least at this level or higher. Is that fair way of thinking about it?
If the market is strong and yes, if there is a pricing change going on, it’s still a slow drift upwards not the rapid changes we saw last year but there is still more demand than supply and yes, pricing is slowly – continue to drift upwards.
And last one for me. I am sorry, I apologize if I missed this. Did you guys mentioned like for the two new builds, what’s the dollar per horsepower cost?
It’s – it was always said dollar per horsepower for new builds is approximately about $1000 dollar a horsepower, probably slightly above that with the new. Ron, can maybe talk to a little bit to the new design of the fleets that coming out at the moment.
Yes, I think, we’ve said that we have never been a company that’s focused on lower the upfront cost of purchasing a piece of equipment. We have always been about total cost of ownership, so in this particular case, we are looking at a next-generation horsepower that’s coming out. We will call it Quiet Thunder. So it will be a next generation of our quiet fleet but with a new generation pump on the end of it. So we have seen pretty significant progression in the maintenance or rebuild cycle for pumps and for engines and transmissions. We got that number pushed up to 10,000 pump hours kind of thing and really the piece that wasn’t aligned with that was the power end on the pump. This next-generation pump will get us to a point where all of those major components are now aligned so engine transmission and power end will have a rebuild cycle all in and around 10,000 pump hours call it 15,000-16,000 engine hours or something like that. So we’re extremely excited about that and look forward to getting these next couple of fleets out there to see how they perform.
Yes, just to follow-up. One last thing on Ron’s comment. To obviously it’s always which is why we added this metric, it’s always about return on capital employed. If I can buy something for half the price, but I am only going to make a third as much money with it, that’s not cheap. That’s expensive. So we are always looking at how to – to accrete value in an organic growth company, you got to reinvest capital at a high rate of return. And so that’s again total cost of ownership, total return on an investment. That’s how we look at every dollar we spent.
That’s very helpful and thanks for taking my questions
Thanks so much. Great questions from everybody. And I believe our QA is ending. Yes, so I thank everyone very much for joining us today for your interest in Liberty and for the thoughtful questions and dialogue. We are excited about where we stand in 2018. We are very excited about the partnerships we have with our customers. Very proud about the success of their operations and frankly the three of us here are very proud to be on the team Liberty that loves what we do and we look forward to talking to you again in the future. Everyone have a great day.
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