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Liberty Oilfield Services Inc
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Good morning, and welcome to the Liberty Energy Fourth Quarter 2022 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. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Anjali Voria, Head of Investor Relations. Please go ahead.
Thank you, Gary. Good morning, and welcome to the Liberty Energy fourth quarter and full year 2022 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 capital invested 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 presented in the company's earnings release, which is available on the Investors Section of its website.
I will turn the call over to Chris.
Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2022 operational and financial results.
Liberty achieved outstanding returns in 2022, with the highest earnings per share in company history. Full year adjusted pretax return on capital employed, ROCE and cash return on capital invested, CROCI, were each at 31% and both accelerated as the year progressed.
These results demonstrate the enhanced earnings power of our diversified platform and technology portfolio as well as our profitability potential over the longer duration cycle ahead. 2022 revenue grew to $4.1 billion, a 68% increase over the prior year. Net income was $400 million or $2.11 fully diluted earnings per share. Adjusted EBITDA increased to $860 million.
Fourth quarter revenue of $1.2 billion increased 3% sequentially, and adjusted EBITDA grew 7% sequentially to $295 million as continued momentum from strong execution in the third quarter and strengthening pricing more than offset weather and holiday seasonality. Michael will review our financial results in greater depth. But suffice it to say, we are pleased with the tremendous improvement we saw in each successive quarter throughout 2022.
Our strong conviction in the outlook and growing free cash flow led us to launch and expand a sector-leading return of capital strategy in 2022. We paid our first quarterly cash dividend since the pandemic during the fourth quarter and earlier this week, we upsized our July 2022 share repurchase program from $250 million to $500 million. In the second half of 2022, we returned a combined $134 million in share repurchases and dividend payments to shareholders.
We retired 4.4% of our outstanding shares since last July, and we now have $375 million remaining in our authorization. We are focused on the opportunistic execution of our buyback strategy and the speed at which we execute on our buyback authorization will be driven by the relative dislocation in our stock price relative to what we believe the intrinsic value of the stock to be.
Our 2022 financial performance illustrated the value created from our actions over the pandemic years, including transformative transactions, technology innovation and investment in the extraordinary talent at Liberty for future success. Together, the Liberty team achieved new records whether measured by revenue, pump hours per fleet, frac stages or tons of sand pumped, all of which were delivered while navigating tight supply and labor markets.
We always strive to raise the bar of elite service quality and performance in the industry. Today, dependability and efficiency are critical to our customers who contend with meeting development plans in a tight frac market and volatile commodity price environment. The frac market is currently tight in all shale basins. In any given year, the near-term fundamental picture can ebb and flow.
And today, natural gas markets are in focus, an increase in natural gas storage levels from a rise in domestic production, moderate winter weather so far and lower LNG export growth are weighing on gas prices. To-date, there has not been any significant reduction in activity in the natural gas regions despite a significant drop in gas prices. We do expect to see some industry pullback in response to gas prices.
And if necessary, Liberty would move any spare capacity to oilier areas where demand for our services significantly outstrips our current supply. This issue is not a significant concern for Liberty. While markets are preparing for the most widely anticipated recession in nearly 50 years, tumult in global oil supply, coupled with today's rather low spare global production capacity implies strong need for North American barrels in the coming years.
Today's low spare production capacity is the inevitable result from years of underinvestment in upstream oil and gas production. The gradual reopening of China and rising global travel are expected to drive incremental demand for oil, even it balanced against slowing economic activity. Oil supply, on the other hand, growth remains very challenged as the release of U.S. strategic petroleum reserves subsides.
The impact of the Russian oil products export embargo hits next month and reduced investment across the Russian industry gradually impacts production. The fundamental outlook for North American hydrocarbons is the healthiest Liberty has seen in our 12-year history. Against this strong backdrop, we expect many possible bumps in the road like softening in natural gas activity and elevated recession risk.
However, the multiyear outlook for North American activity is robust. Currently, our customers and competitors are investing with discipline, keeping capacity flat to only very modest growth. For years, E&P operators, oil and gas alike have invested in expanding metal inventory, understanding the geology and resource quality, optimizing drilling and completion designs and assembling their teams to execute on development plans.
Their hard work is now paying off with high rates of return, particularly in oil, even as breakeven prices have increased from extreme pandemic lows. The majors are redirecting capital spending to the attractive risk reward opportunities in North America. Independents continue their robust shale programs at a minimum to offset natural production declines. As North American oil and gas portion reaches new heights.
There is a rising level of frac activity simply required to keep our customers' production flat. Two factors summarized today's frac market, full utilization of existing frac capacity and strong demand for gas-powered fleets that significantly reduced fuel costs natural gas is much cheaper than diesel, while driving down frac fleet emissions. This transition to natural gas-powered fleets is happening at a measured pace, roughly aligned with the attrition of the industry's older generation diesel frac capacity.
There is also a wide variety of performance specs, quality of these next-generation fleets, and we are investing to be the technical leader. When the shale revolution expanded to include oil basins as well as gas basins, roughly a dozen years ago, there was a building frenzy of new frac fleets, the overhang of these excess fleets took many years to overcome. Today, that overhang is gone, and all the large players in frac are investing with discipline.
Today, frac fleet demand sufficient to keep production roughly flat or drive only very modest growth requires all existing frac capacity. Tighter labor markets and supply chain challenges are making it hard for the smaller players and lower quality players to keep their existing fleets running and deliver an acceptable quality of service. Aging frac pumps and limitations to maintenance supply chains promote the attrition of older equipment across the completion market.
Equipment are treated in recent years has largely been scrapped or sold for industrial applications in international markets, and we see these trends continuing for the foreseeable future as gas-powered technologies take hold. Hence, we view the risk of surging frac fleet capacity supply crashing service prices as relatively low. Of course, we closely monitor frac market conditions and would adjust our behavior if clouds appear on the horizon.
Today's tight frac market creates a sense of urgency among E&P operators to align with top-tier partners for both differential long-term technology and the outstanding service quality required to deliver on their production goals. Over the past few years, Liberty's team has rapidly innovated to develop the most technically advantaged frac fleet with digiFrac and 2022 marks the first commercial deployment of these game-changing pumps.
digiFrac sets the bar for combining the lowest emission fleets in the market with superior design, of performance, reliability and cost efficiency. We are currently undergoing a phased deployment of our first fleet as the modularity of both our pumps and high thermal efficiency power production allows us to commission the fleet on a pump-by-pump basis while maintaining continuity of operations for our customers.
digiFrac pumps are fully compatible with our existing conventional and dual fuel pumps as they all share our proprietary control software, allowing optimization of pump operations across the fleet. Gas-powered pumps are a focus of our innovation efforts as we look to develop technologies that are beyond the scope of what the industry offers today. Next week, we plan to unveil the world's first natural gas hybrid frac pump, part of our digi platform at the SPE frac Conference in Houston.
This technology will have an even lower emissions profile than any electric frac fleet technology available today. Together with our existing fleet, our suite of pump and power technologies will enable fit-for-purpose customizable solutions. With the breadth of equipment, we will be able to pair digiFrac with dual fuel technologies to optimize gas consumption under a variety of circumstances.
Customers will also be able to leverage a combination of available grid power and Liberty's generators to power fleet and consume any type of gas, including field gas, CNG or LNG. This suite of new technology developments will allow customers to have an optimized solution to match their needs. All will include a fully electric backside, proprietary quiet fleet technology and the lowest possible emissions footprint.
We see a multiyear cycle favoring service companies that offer differential technologies, fortifying strong customer engagement and competitive advantages. We enter 2023 with strong competitive advantages that will enable further profitability expansion, including efficiency gains. [technical difficulty]
Pardon me. This is the conference operator - we appear to have trouble with the speaker signal. We're going to put you on hold and get back to - reconnect to the speaker as soon as possible. Thank you. Please stay on the line. Pardon me, this is the conference operator. We've rejoined the speaker location. Sir, please go ahead.
Apologize for the interruption a technical difficulty is there. I'm going to pick back up where I was - our free cash flow potential and strong balance sheet allows us to not only prioritize accretive share repurchases, but also to invest in our future. The goal is simple maximize the value of a Liberty share. In 2023, we are targeting approximately 40% to 50% growth in adjusted EBITDA with no meaningful change to our fleet count from today's levels.
As we laid out in our Investor Day in mid-2021, we viewed 2022 and 2023 as years of countercyclical investment at the start of a longer strong earnings cycle ahead. Our 2023 outlook includes potential capital expenditures of approximately 50% of EBITDA, a similar percentage of capital expenditures as 2022. We would also expect to reduce - for that to reduce to the neighborhood of 30% of EBITDA in 2024.
Our 2023 discretionary CapEx is driven by strong customer demand for next-generation low-emission frac technology in the coming five years. Our confidence in our long-term strategy and the strength of our operating model has never been higher, and we expect our investments today will lead to strong returns over the coming years. Our 11% - or 11-year annual average cash return on capital invested, CROCI, of 23% since our company founding was achieved during a relatively tough period for our industry.
And before we had developed a suite of differential technologies and services that we are now rolling out. Today, Liberty is creating opportunity through ingenuity and innovation, not just in frac fleet technologies, but also in wet sand handling, logistics software and systems to optimize supply chains, predictive software, generating operational efficiencies and so much more.
We enter 2023 with significant competitive advantages that enable strong relationships with the best producers and that drive demand for Liberty services far beyond our capacity to supply. These factors are likely to deliver rising free cash flow and strong returns to our shareholders in the years ahead.
With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.
Good morning, everybody.
Liberty ended the year with very strong execution. In the fourth quarter, adjusted EBITDA increased by 7% sequentially in a seasonally weaker quarter, and we reduced net debt by $55 million, while we invested $116 million in capital expenditures and returned $64 million to shareholders. Our terrific fourth quarter results rounded out a great year for Liberty.
Our team delivered 68% revenue growth, approximately $400 million of free cash flow generation defined as adjusted EBITDA less capital expenditures and nearly 50% free cash flow to adjusted EBITDA conversion ratio. We're pleased with our results and which we have now seen revenue growth in each of the last 10 quarters and profitability expansion through each quarter in 2022.
At Liberty, our results would not have been possible without the hard work, dedication of our nearly 5,000 employees. Supply chain and logistics challenges offer opportunities for some companies will showcase the vulnerability and others. And the Liberty team came together to deliver industry-leading operational efficiency our customers have come to rely on. We have a unique combination of leading business or financial strength that reinforces sustainable long-term advantages.
Our 2022 adjusted pretax return on capital employed and cash return on cash capital invested at 31% was the highest in three years, and we are on a path to surpass that in 2023. Our balance sheet strength allows us to focus on our priorities of investing and expanding our competitive advantages while returning a significant amount of capital to shareholders. Critically, we do not need fleet growth to significantly expand our margins.
We have the tools, the technology and the people in place to expand our share of completion spend with our customers through a variety of technology investments we are making today. For the full year, revenue increased 68% to $4.1 billion to $2.5 billion in 2021. Net income totaled $400 million or $2.11 per fully diluted share. Adjusted EBITDA was $860 million, highest in the company history, seven times 2021 results.
Our full year results began to show the full potential of the earnings' power of our platform that our team has carefully built over the years. In the fourth quarter of 2022, revenue increased 3% sequentially to $1.2 billion. We saw a healthy customer demand, and our execution excelled through winter weather challenges and disruptive supply chains. A full quarter of contribution of third quarter fleet deployment aided our results.
Fourth quarter net income after tax of $153 million increased from $147 million in the third quarter. Fully diluted net income per share was $0.82 compared to $0.78 in the third quarter. General and administrative expenses totaled $49 million in the fourth quarter, including a non-cash stock-based compensation of $5 million. G&A declined $1 million sequentially, primary on variable compensation recorded in the quarter.
Net interest expense and associated fees totaled $7 million in the quarter. Fourth quarter adjusted EBITDA increased 7% sequentially to $295 million from $277 million achieved in the prior quarter despite the usual holiday and weather challenges for Q4. Results included non-cash charges for the re-measurement of the tax receivable agreements of $76 million for the full year of 2022 and $43 million in the fourth quarter.
These non-cash charges are all the noise related to the reversal of the valuation allowances recorded on our deferred tax assets in 2021. In 2023, we no longer expect the TRA to affect our income statement. We expect 2023 effective tax rate to be approximately 23% and our combined cash taxes and TRA payments to be approximately 10% for the year. We ended the year with a cash balance of $44 million and net debt of $175 million.
Net debt decreased by $55 million from the end of the third quarter, even with the execution of $55 million of share buybacks and $9 million towards our recently reinstated quarterly cash dividend. Total liquidity at the end of the year, including availability under the credit facility, was $351 million. Earlier this week, we amended our ABL facility to provide a $100 million increase in net borrowing capacity to $525 million.
In conjunction with our ABL expansion, we retired our $105 million term loan, reducing our effective interest rate. Net capital expenditures were $116 million on a GAAP basis in the fourth quarter, which included costs related to digiFrac fleet construction, capitalized maintenance spending and other projects. In 2022, we demonstrated the capital investment and higher rate of return opportunities and shareholder returns can both be achieved.
We proactively installed a share repurchase program in July of 2022 to take advantage of the dislocated share prices - and we seized the opportunity to do so with $125 million in shares repurchased in the second half of the year. We also reinstated our quarterly cash dividend in the fourth quarter, equating to another $9 million paid during 2022.
Our convictioning and a strengthening outlook and our ability to grow free cash flow positioned us to double the size of our original share repurchase authorization to $500 million this week. In our 12-year history, we have always taken the approach of investing counter cyclically in the early stages of the cycle, generating strong free cash flow, harvesting cash in the late stages. Our cash return on capital invested has been over 2 times our cost of capital during our 12-year history.
Looking forward, we are targeting approximately 40% to 50% growth in adjusted EBITDA year-over-year in 2023, with no meaningful change in our fleet count from today's levels. In 2023, our investments are aimed at fully capturing a uniquely Liberty opportunity for differential returns. We have the premier design, the latest pump technology in the market. We are investing in the development of these pumps.
We plan to own the value chain with our own power generation and the freight pump cannot function without this power. As we improved with sand and logistics controlling the full cycle of service provision maximizes long-term returns. This is a strictly different approach compared to some frac providers who lease technology and contract power generation from other providers. We are targeting capital expenditures of approximately 50% of EBITDA in 2023, similar to 2022.
Comprised of maintenance spending and discretionary growth CapEx and fleet technologies, power generation, ESG-friendly wet sand handling and other high-return opportunities, included in this number some potentially accelerated early cycle investment spending that laid the foundation for earnings growth in 2024 and beyond. As such, we anticipate capital expenditures as a percent of EBITDA will decline to the neighborhood of 30% in 2024, following this infrastructure development.
As we look forward, we are well positioned to maximize free cash flow generation to support our capital allocation priorities of disciplined investment to expand earnings per share, balance sheet strength and the return of capital to our shareholders.
With that, I'll turn it back over to Chris.
I closed our last conference call speaking about Russia's attack on Ukraine's energy system as their calculated way to inflict maximum human misery, regrettably those attacks continue. Unfortunately, the politically driven attacks on our own energy system remain ongoing as well. During the holiday cold snap, New England generated over 20% of its electricity burning oil. Why? Because by far, its largest source of electricity, natural gas plants were unable to secure enough natural gas at peak demand times.
New England and an increasing number of states like California and New York continue to impose both higher energy costs and lower electrical grid reliability on their citizens, simply because the political and energy regulatory arenas no longer engage in honest sober dialogue about energy, the environment, climate and human well-being. The electricity grid is the most important network in the world.
We demonstrated earlier the problems that can arise when a less important network, our telephone network can struggle as well. This, attacks on our energy system must stop or we will drive down American standards of living and de-industrialize our country just like Europe. That path is not looking too rosy right now. As not everyone is inclined to read our 100-page bettering human lives report that covers these issues.
I made two brief videos last week to illustrate these points. One is called Zero Poverty 2050, and the other is called - let's be honest. The latter video garnered over 100,000 impressions on LinkedIn, but it was removed censored by LinkedIn three times in 48 hours, a video that simply lays out big picture facts about our energy system and climate change is banned by a business network platform.
Either the LinkedIn censors are ignorant in this area or they are politically or socially motivated to protect the alarmist climate narrative that increasingly permeates our society likely some combination of the two. I find this alarming that a Microsoft-owned business is actively working to protect a false and destructive mean about energy and climate. The video is up now. Apparently, Torquemada approved it the fourth time.
I'll conclude by saying that complacency is surely not a viable strategy going forward if we are to eventually reverse the damaging plague of energy ignorance in our country. Rent seeking interest groups will only grow in power as long as subsidies are counted in the tens and hundreds of billions of dollars.
I will now turn it over to the operator for questions.
[Operator Instructions] Our first question is from Derek Podhaizer with Barclays. Please go ahead.
Hi, good morning, guys. Just wanted to expand on the gas market comments so, what would relocating capacity look like? Would you expect to displace customer fleets in oilier basins or would these be incremental fleets to the market? Just want to know what this could mean for pricing? Is there any threat to the downside or is there ability to price up as you move fleets over?
Derek, first of all, I'd say we view this as pretty unlikely. I think we'll see some modest contraction in industry activity. It doesn't likely impact Liberty fleets in gas, less than 20% of our capacity is working in gas areas. But in an extreme case, if it did displace a fleet, it would be quite easy for us to move that to another area. And that would more likely - we've got a lot of people constantly calling and trying to figure out what it would take to get a fleet.
So - we would have no trouble placing that fleet. Yes, ultimately, that would likely just slide into an existing program where our customer is using a lower quality player that they have no choice but to use. But I think that - the gas market concerns, I think, are real, but I think they're overblown on their potential impact in the frac market. Total industry-wide, this might be a few fleets we have today probably 10 or 20 fleets demanded that are simply not there.
That's not just Liberty but just industry as a whole. There's activity not happening because people don't have a fleet so that - it might be something, but it's - not likely meaningful to the frac market.
Got it, okay. No, that's helpful. I wanted to touch on your EBITDA guide for 2023. You said a 40% to 50% growth over 2022. I'm just curious like - can you maybe unpack that a little bit? What's locked in today? What gives you the confidence that those numbers? Do you have pricing locked in for all 23 - or is it just capacity and pricing is more of a moving target? I'm just curious what would drive upside to that estimate maybe what would drive some downside to that estimate. Just if you could expand on that percentage forecast you put out?
I mean that forecast comes from what we know today. We're never big on seeing wildly different things in a crystal ball. So the market is strong today. That's sort of existing market conditions continuing on. We have relatively low risk of keeping our fleets busy.
We have ongoing internal technology efforts that drive down our cost of operations, and we'll continue to push those forward. So I think it's sort of an extrapolation of where we sit today. Michael, I don't know if you want to add anything to that?
Yes, we had great visibility. We have very low customer turnover and we have kind of strong visibility into our customers' plans for the balance of the year. So barring any exogenous change in the world those plans will continue. So - we have a strong view.
As Chris said, I think there's upside is self-help cost reduction as we move more to, sort of expand the shoulders of earnings of the business. The downside is sort of exactly the same as you say and exogenous events that changed the world market.
Yes great. Appreciate the color, guys. I'll turn it back.
Thanks.
The next question is from Stephen Gengaro with Stifel. Please go ahead.
Thanks. Good morning, everybody. Two things from me, just to start with, when we think about - I mean obviously, you gave some color on 2023. When we think about your positioning in the market and some of the things you've done on the vertical integration side, I mean, obviously, you got some frac sand from the SLB acquisition. Are you seeing - how do you see - because we've been hearing about tightness in the frac sand market recently?
Are you seeing that as sort of a competitive advantage? And how is that kind of increasing or helping the efficiency at the well site. I'm talking of frac sand, but also the other things you've done so anyway to kind of give us a little more color on how those things kind of aid in your execution at the well site?
Yes, the primary benefit we have by owning sand capacity, we've invested to expand it a little bit. The primary benefit of it is just surety of supply to our fleet. We saw the benefit of that in Q1 of last year, where there were troubles across the sand space. And we were able to navigate those with less impact than others.
Vertical integration for us, sure, these are profitable businesses, but we do it predominantly to assure our core business of frac could run reliably and can keep that train on the track and run that train as fast and efficiently as possible.
Great, thank you.
The markets are tight, but it's - I don't think it's slowing down fracking wells. It's - we're not at a disruptive part in the sand market right now.
Great, thank you. And then the other question and you've talked a little bit about this on prior calls and how you sort of approach the use of the buyback, but you - clearly, you've doubled it and you've been utilizing it. How should we think about your - the sort of the pace of buybacks over the next 12 months and your willingness to kind of exhaust this as we go forward here, depending on valuation, et cetera?
Yes, as we said, it's just the - the pace at which we buy back the stock is proportional to the dislocation of the share value. And today, as we sit here, we're still in an extremely dislocated share price. So we see it as an incredibly attractive investment opportunity right now to buy our stock back. You've seen us walk that walk the last five or six months and with share prices in this neighborhood, I think you will continue to see aggressive buybacks.
Okay, thank you, Chris.
Thank you.
The next question is from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Good morning, Scott.
Question here, with this backdrop of an expanding gas diesel spread, I'm curious whether there's any mechanism within recent contracts for digiFrac or on dual fuel fleets where you can capture some of the incremental fuel savings that your customers are benefiting from. Is there any direct way that you guys can benefit from the kit that's providing these savings is it, direct may I know?
I mean, we're bringing the technology and the equipment that enables the realization of this arbitrage. So yes, I think it's fair to assume that the majority of that arbitrage value will be captured by Liberty. And yes right now, that arbitrage value is growing - is growing.
Is it direct, Chris, though or is it just indirect through your ability to keep a healthy rate structure or is there a direct mechanism that wins it somehow to the gas diesel spread?
We're pretty early on in rolling out these technologies, it's a smaller piece. So today, I would say it's mostly indirect, but you'll probably see an evolution of that structure going forward.
Okay, yes it will be good to see. And Michael, just real quick on the CapEx just to make sure I got the numbers right. The 40% to 50% EBITDA growth, it's about $1.25 billion, and we think about half of that is around $600 million for CapEx for the year. Is the right way to think about it?
That's correct, reducing downward is your EBITDA as we go into 2024.
Yes, got it. Okay, I appreciate the color. Thank you.
Thanks Scott.
The next question is from Marc Bianchi with Cowen. Please go ahead.
Hi, thank you. I'd like to follow-up on that - that last point there about '24, and I know this could get a little tricky, right, because you probably don't want to give a financial forecast for '24. But I'm just curious, on an absolute dollar level, do you see the CapEx going lower or going meaningfully lower kind of regardless of what the EBITDA does or how should we think about the absolute amount of CapEx as we go from '23 to '24?
Yes, our investment in CapEx, Marc, is never ever dislocated from the amount of money we earn or the EBITDA or cash flow we earn, right? There is - sometimes in time shift where we see the market strengthening, we invest early in the cycle. And then when strengthened prices and EBITDA grow, EBITDA is the highest, we'll do low CapEx because, obviously, if we see sort of a cycle beginning to cap out.
So there's some time shift there, but it's always, always relates to the amount of cash flow that we are earning right? So just to sort of point that out, right? But no, in relative - terms, in the baseline business of the size and who it is an environment, yes - on a normalized - on a per dollar basis, it would be lower in '24 and we estimate to be lower in '24 than it would be in '23.
Do you think that level - so if - let's just hypothetically say EBITDA is exactly the same in '24. Do you think that level of CapEx is a sustaining level where you can continually pursue these digiFrac deployments and sort of handle attrition that occurs every year in the fleet at that level?
Yes.
Okay, okay, super. The other one I had was on just the digiFrac deployment. Maybe you could talk a little bit about expectations for a timeline to have a full digiFrac fleet, because it seems like we've just got a few pumps sort of mingled in with conventional pumps in the fleet right now?
As we said in the transcript, we're continuing operations with that first customer for it at full speed right now frac operations, which gives us the luxury to roll things in slowly and carefully, test everything, figure out how to optimize everything. So it's a gradual roll in. But I think you'll see around the end of the third quarter, maybe early in the second quarter, we should see three digiFrac fleets out there running in full.
End of the [indiscernible] quarter.
Oh, sorry about that - end to the first quarter, beginning of the second quarter. I misspoke, not for the first time today.
Good clarification there. Thanks Chris. I'll turn it back.
Thanks.
The next question is from Ati Modak with Goldman Sachs. Please go ahead.
Hi, good morning team. Just to understand the thought process in case we do see a strong drawdown in the number of active fleets and pricing does come under pressure. At what level would you say it is better to stack a fleet than accept lower pricing? And then what would you think that the industry on the whole would be willing to do in terms of pricing concessions?
Ati, that's a great question hard to give much of an answer to that. The market - we don't see any signs of weakening right now. The market is strong. Of course, someday, the market will weaken. Don't know when that is or how it will fall. Our relationships are one-on-one with particular customers. So look, and you see a softer market, there's also efficiencies.
There's other ways to drive well cost down then lowering our net price if the market as a whole to supply we get other materials and run operations. But you know we've - as I mentioned in our intro, we've gone through sort of eight tough years in frac with the giant track fleet overhang, even when activity bounced back strongly in 2017 and 2018, there was just dozens of surplus equipment parked all around.
So that was just a different dynamic than we are today. And we were a younger company, establishing relationships, proving ourselves very early on in developing and rolling out our new technologies. We're just simply in a much different place today that I can't predict - future swings up or down in pricing. But I don't think you'll see anything dramatic in the foreseeable future there.
Yes, I'll just add Ati - from a general perspective, if you talk to other players. As Chris said, the market has completely changed, right? It's not this access sort of equipment that was made to be reactivated at any given time. So any swing down will be a smaller percentage of the total fleets available. You've got a much more consolidated market across the board for frac. And we are, as an industry, one hell of a lot more disciplined, right?
And so yes, I think you're going to see a lot more disciplined effect with net pricing kind of not moving, nowhere near in anyway the shape that you've seen over the last seven, eight years in these small cycles that were well oversupplied, comparative to what is going to happen in the next five years. That's just my personal view.
Thank you, I appreciate - the answer there. And then Michael, maybe can you talk about the free cash flow and working capital changes this quarter? And how should we think about that in 2023?
Yes, I mean we had a small build in working capital this year. That's mostly driven by sort of year-end prepayments and inventory. Next year, obviously, working capital will be a slight build as it follows revenue, Ati kind of really just you can model it with revenue. I think that's a relatively reasonable number.
I've given you the cash tax number for next year is sort of around 10% of pretax net income. And other than that, really, CapEx is the main sort of next main deduction has got very low debt, obviously very low interest.
Michael, can you repeat some of that with the years by right next year '23 or '24?
Next year I mean '23 sorry.
Yes sorry, '23 so for 2023 cash tax is around 10% of pretax net income obviously we see CapEx around about 50% of EBITDA, interest is relatively diminimis, because we got - it's relatively small amount of debt and those and we're going to have slight build of working capital as revenue is going to increase from Q4 levels through the end of the year, but that will be relatively small.
Thanks guys. I'll turn it over.
Thanks Ati.
The next question is from Arun Jayaram with JPMorgan Chase. Please go ahead.
Hi Chris, I had some questions on kind of the rollout of digiFrac, you're taking kind of a modular approach, which makes sense. But I was just wondering if you could comment on how performance has been in the field and what you're seeing in terms of that technology?
And just perhaps to clarify, so you'll be adding three fleets, did you say at the end of the 1Q, but your overall guide is for relatively flat fleet activities. So are you taking some diesel fleets out of the - out of the working fleet?
Yes, our plans for digiFrac rollout this year will dominantly been replacement fleets [so come] and get. Market conditions are pending, but that's the plan right now, dominantly replacement capacity, basically an upgrade, which is an upgrade both in the performance of the fleet. It's an upgrade of reducing our cost of operating that fleet.
And of course, it's an upgrade in that the pricing port is better. We bring something better for our customers with a lower all-in cost to us. I'll turn it over to Ron to make any more technical comments about that.
Look, as far as performance going well, we always expect when we put new technology in the field. We got a bit of a learning curve with that, but things are going well. We're actually in between pads right now with the operator. We had wrapped up pumping consistently on the last 45 or 50 stages on that with all the pumps that were on location at that point in time.
We'll begin with a slightly bigger fleet on the next pad and excited about getting the rest of that fleet out likely by the middle of February. And then we'll have the other ones follow on quickly after that.
Great, thanks a lot Ron. And another question for Chris is, given the retrenchment in natural gas prices, including Waha, are you seeing - do you expect this perhaps to accelerate the attrition of diesel fleets just given the cost competitive benefits of running dual fuel plus the emissions benefits?
So yes, that - very low Waha prices and outlook, they may stay there for a year or two. Certainly, that grows the arbitrage between the two, but the arbitrage was large already. And it's a lot of capital and investment to bring out a new fleet and swap them over. So it makes it incrementally more positive, but I don't think it's a big enough move to speed investment contracting decisions any meaningful amount.
Great, thank you.
Yes, thanks to Chris and Arun.
The next question is from Waqar Syed with ATB Capital Markets. Please go ahead.
Thank you, a great quarter. So my question is - with respect to Canada versus U.S. margins. In Q4, what were the margins like between Canada and U.S. were they par or one was higher than the other?
Generally, as you know, we don't discuss it from basins really. Most all of our basins are not Canada as a country - my favorite sport in the world hockey, but it's the same size as some of our U.S. basins. But in reality, I'll tell you the only real difference between the two markets is the Canadian market is probably not quite as tight yet as the U.S. market on frac supply.
So that's the only real change. If you have a difference between the two different markets, right? So the other than that - other than that everything else sort of remains, it's fairly similar across the North American onshore [indiscernible].
Yes, and have you added any new capacity into the Canadian market? And then how many maybe Tier 4 fleets do you have in Canada?
Waqar, we don't want to give the details on that. But certainly, there's optimism in Canada, new pipelines, at least on the horizon of coming in of activity levels there. But -- so we're always in dialogue with customers. We never do it on a - we're going to add to this basin or take away from that basin. It's always just a customer specific decision we make. Thanks Waqar.
And another question, if I may, what was the impact of weather on the quarter? Could you maybe quantify that a little bit in terms of revenues or number of jobs or anything?
Yes, pretty normal. And so - I think you guys all heard me say that kind of Q4 and Q1 are generally somewhere between 4% and 8%, depending on the year lower than the summer quarters. So Q4 was a pretty normal year as far as that in the midrange there. And we're expecting Q1 to be about the same so probably activity-wise the two winter quarters will be relatively flat with a bit of a pickup in some.
Yes, thank you, thank you very much.
Thanks.
The next question is from Keith MacKey with RBC Capital Markets. Please go ahead.
Hi, good morning, and thanks for taking my questions. Maybe if we could just start out on pricing. It looks like the guide implies EBITDA per quarter, roughly what you saw in Q4 and if fleet count remains flat, it sort of implies that you're not building in much more pricing, but maybe if you could just talk a little bit about how you're seeing the pricing environment unfold, both on the leading edge and in moving your average fleet up to that level, that would be helpful?
I mean - as we said, pricing is strong right now. The market is good. So yes, there's still some - most all of our pricing is already adjusted. There's, a little more adjustments we're getting in Q4 from older. I mean, in Q1. My guess, I got to get my calendar straight. So again, there's still a little bit of positive action happening there.
But market is strong. Markets are tight, and we're just not making much of a guess on where things go from here. But it looks like things will stay strong. Are there forces that can push them up further sure.
Perfect, thanks for that. And not to try to steal too much of your thunder from the event next week, but can you maybe just give us a little bit more comment on the hybrid frac pump? What -- will it be involved in these next digiFrac fleets that you're putting out or what's the timing on that? And what's really the, I guess, the business case for the hybrid pumps now?
Keith, this is Ron. Yes, I can give you a little bit of color on that. Really, the third leg in the stool in our digiFrac platform. And probably the quickest and easiest analogy I could give you would be something like the power grid. Chris talked a little bit about that earlier today. But think of this new pump as baseload power force, sort of like a nuclear power plant on the grid. So this is basically a little brother to the same power plant we're using on the generator.
So 100% natural gas engine, extremely efficient, 44.5% thermally efficient so very, very good at the use of gas. [indiscernible] thank you for the same reason we chose that engine for generating power much, much better than a turbine on location, either in a direct drive application or in a power generation application. In this case, we're connecting it to a transmission and a pump, but we're also taking some of that power to run a smaller generator on location.
So we're using the primary power to drive the pump and provide horsepower. We're using a small amount of that power to generate power electricity, enabling a fully electric backside. The unique thing about this engine is it's a single speed engine. So it doesn't have throttle control to it. It's made to run it one speed and one speed only. And so, it's not made the deal with Transient, which is how it pairs so nicely with our digiFrac electric pump.
Together, the combination of those things works just like a nuclear power plant with a gas peaker plants on top of that. So we have this combination that delivers flat baseload capacity, strong and steady, incredibly efficient. And then on top of that, to deal with regular transient load we have in the frac space, we've got digiFrac. So you'll see those two going out into the field in partnership with one another.
The exact ratio of those two pumps is really going to be a function of what the customer situation is like, what - the frac needs are like, what our access to maybe some grid power looks like, all of those things will play into the exact ratio of how we deploy those.
Perfect, good deal, thanks very much.
The next question is from Tom Curran with Seaport Research Partners. Please go ahead.
Good morning.
Good morning, Tom.
I was hoping you could assist us with just some market capacity framing. What percentage of the industry's active fleet, is diesel models regardless of the tier? And when it comes to that pure diesel horsepower, what are your expectations for upgrades to DGB vis-à-vis new-build replacement?
In other words, to the extent we see a portion of that industry diesel horsepower convert over the course of 2023, would you expect the mix to be between new-build replacement versus upgrade and maybe an idea of just how much you are expecting?
But there's still a large amount of diesel capacity out there. It's still - the dominant source of powering frac fleets today. There's, older Tier 2 fleets that people are putting sort of these aftermarket kits to make natural gas burning. That's not a huge cost, although the supply chain struggles there. So there's a good amount of that going on. But longer-term thing, I think as you were hitting at, is going to be what happens to those Tier 2 diesel engines, basically, which are all five to six years old, and the average age of them is probably a decade old.
So those are falling out. And as you said you can either, take that same pump and buy a new Tier 4 - more likely Tier 4 DGB dual fuel engine and put that on the deck or you can build a brand-new natural gas-powered fleet technology. So most of what's going to happen, I suspect in the industry- for those that are investing for the next thing is going to be taking those Tier 2 engines and making a Tier 4 engines.
The bigger players have electric options for us, it's - we're trying to develop, and I believe we have developed technologies that for us will be both cheaper and better. And that's why we spent years doing it. The history of electric frac fleet has actually been more expensive and worse. Now there's, more fleets that are maybe a little better, but they're more expensive. We're trying to solve for both of those cheaper and better with our next-generation technologies, a lot of investment in getting here, but we like what we said.
Understood. Let me give Ron some more airtime, two-part question for you, Ron. First, for the three digiFrac spread you expect to have deployed by 2Q? Which should we expect those to be powered by - will they be on the Rolls Royce MTU gas gen-sets? And then maybe I'll push for a bit more of a sneak preview on your upcoming event. But under operation 1440, could you give us updates on two technology initiatives, preemptive maintenance and then automation?
Yes, so to your first question, absolutely, you're 100% right. Those fleets are all going to be powered by the 20V 4000, the Rolls-Royce natural gas recip engine. We've - we like that power plant. It's the most efficient power plant in the space. And so it will be paired with every one of the digiFrac pumps that we put out in the field for Fleet 1, 2 and 3. And then that same power plant, just a slightly smaller version, the 16 cylinder going on digiprime.
And then as you - you think about the other piece of that puzzle, we made tremendous strides last year in both of those areas. As you think about the preventative maintenance side of things, we launched the team in January last year with a strong focus on moving forward in that preventative maintenance side of the world.
I would say we made huge strides, and we saw that in our cost of maintenance last year, our ability to - run our equipment at, well - really flat maintenance costs in the face of very, very strong inflationary pressure. So that's a credit to that team and the work they've done from a predictive maintenance standpoint.
The amount of intelligence we have or insight we have on our equipment today, probably orders of magnitude beyond where we had been in maybe three or four years ago so huge stride there. Artificial intelligence, of course, we're moving rapidly towards full deployment of our next-generation fleet operating software.
Really a piece of software that effectively enabled us to tell the fleet what rate we want to achieve and the maximum pressure that we can pump at and the software is making all the decisions about how to run those pumps optimized for gas substitution or whatever we might ask of it. But those decisions are all driven by a computer going forward.
Great, I appreciate all the detail. Thanks guys.
The next question is from Saurabh Pant with Bank of America. Please go ahead.
Hi, good morning guys. I want to just quickly go back on the 2023 guide, adjusted EBITDA up 40%, 50%. I think you said you're pretty much extrapolating current market conditions, but I think I heard you say pricing is stepping up a little bit in the first quarter, which is again expected rate?
But again, if you can quickly walk through 2023, how should we expect activity and even more so pricing moving from the first quarter to the fourth quarter? Because it sounds like you're assuming things pretty flat, but I want to make sure we understand the assumptions, especially on pricing through 2023 in that guide?
Right so yes, so pricing relatively - in those numbers, pricing is relatively flat through 2023 activity. Obviously, you know winter quarters are in that 4% to 8% lower activity wise than your summer quarters, which is the standard. You should all be modeling just for winter weather and holidays. And yes, it's really not a huge amount of kind of fleet number changes. That's what's baked into those numbers.
Okay, okay. So like flattish fleet count and flattish pricing after first quarter, right, that's what you're baking in?
That's what it gives you, yes.
Yes, okay, okay perfect. And then a little bit of a clarification on CapEx. Obviously, the implied number is in that $600 million to $650 million range. It's stepping down in 2024 that makes sense. But can you quickly walk through the different components in that 2023 CapEx number between maintenance new digiFrac actually any upgrades that you're doing to the traditional fleets and then anything on the vertical integration front, just so that we can look at the individual components and better understand what part is falling off in 2024?
Yes, I mean I'd say - kind of maintenance is in that realm of probably $170 million to $190 you know standard, right so, between three and a half from the fleet plus $25-ish million for the other ancillary business lines et cetera. And then really, we haven't given the breakdown on the other side of it Sara and the majority of that obviously goes to margin expansion projects.
Obviously, the big dog in that one is the electric fleet for digi equipment that we're rolling out. As I sort of alluded to, some of that with supply chain is, in a little bit of an accelerated build the things that will come online early in 2024 as margin expansion for 2024, where the CapEx will appear in 2023.
Okay, okay perfect. And just a quick clarification before I turn it over, should we assume digiFrac build cadence to remain the same in 2024 as in 2023 or should we assume it can change depending on the market conditions?
It will change depending on market conditions. Obviously as it - it depends on market conditions, whether it's the earnings that we're going to end up with EBITDA, the amount we will spend on CapEx and the speed at which we rolled out to digiFrac.
Okay, perfect Mike, thanks for the answer. I'll turn it back.
The next question is from Dan Kutz with Morgan Stanley. Please go ahead.
Hi, thanks good morning.
Good morning, Dan.
So I just wanted to ask, any appetite for dividend increases or is the idea to use the buybacks as the flywheel for shareholder returns? What would you kind of contemplate a dividend increase or what would you need to see to do that or again, is the buyback the kind of the flywheel?
Well, buyback is definitely the flywheel. Just look at the different investment opportunities we have today and some of these technologies we've talked about, the outlook for them is simply tremendous and buybacks are just simply tremendous opportunity today. So that's the big dog of where capital will go. We are believers in dividend. We paid a dividend before the COVID downturn as well.
But we're a cyclical business it's always going to be cyclical. We want to have a base dividend that barring a global pandemic that stays and gradually grows with time. So I do think you'll see growth in our dividend, but it's not a major swing based on market conditions or better this than that. It's steady as she goes, but certainly the outlook we have today is likely continues to grow.
Great, thanks Chris. And then maybe just kind of a high level one, some fundamentals for the industry definitely still appear very strong. And I guess I just wanted to ask, what would you view as kind of the biggest near-term risk to your outlook? You mentioned that you think nat gas, activity declines is a relatively minor risk?
But like would a deeper than anticipated recession be it demand concern or a faster supply side response, what kind of metrics would you suggest investors pay attention to and assuming they play out as expected, that would mean that your outlook remains intact?
Yes, we hear a lot about the faster supply side response, but as we hit, we view that is a relatively low risk. It's hard to grow frac fleet capacity. It's going to grow a little bit, but it isn't going to grow a lot. The thing that can change the market faster, as we've seen in the last downturns is a collapse in commodity prices. The risk - to our business is a collapse in oil prices. And so you think about financial crisis, right?
We had a very large scale, very rapidly unfolding collapse with the financial crisis. And it took a tight oil market with oil prices over $100, and it crashed than to $30. And it actually made two or three not great quarters for the industry and things came right back because going into that recession, supply and demand was tight.
And supply and demand is probably at least as tight probably a little bit tighter today than it was then. So I think a huge rapid economic contraction would certainly soften the industry, but even then probably not for too long. So it's really oil demand. So watch oil prices. If oil prices go to $40, activity is going to drop.
Great, thanks a lot of Chris and team. I'll turn it back.
Thank you.
The next question is from Sean Mitchell with Daniel Energy Partners. Please go ahead.
Hi guys, thanks for working me in here. I know we're getting long in the morning. But just really quick, one of the questions earlier was around diesel versus electric frac. Maybe I'm going to frame the question a little different. What's the optimal mix of digiFrac in the Liberty portfolio, I guess, number one? And then number two, remind us what the average expected life of the digiFrac unit is versus a traditional unit?
Look, I think the general working life of these diesel pumps is 10 years that's rebuild. There's a lot of maintenance goes on after that, but pumps that are more than 10 years old. The technology is obsolete. The cost of maintaining and run there so they're generally falling away. You may see a 12-year-old pump out there. There's some - there are some stuff really hanging on. With digiFrac, we definitely expect meaningfully longer life than for a diesel engine. It's just simply - the engine life on our banks, Ron maybe 2x.
Or time between rebuild is probably 3x, Sean. So we're going from maybe somewhere in the 20,000, 25,000 hour range to a time between overhauls of maybe 84,000 hours is the nameplate number for that Rolls-Royce engine.
Okay.
And the thing you should think that they - that's more reduction in capitalized maintenance along the engine of the life of the equipment. The life of the equipment might be longer, that's great, but really what it does. It affects the annualized capital maintenance and brings it down.
Absolutely.
That's for keeping it yes we want to deliver a better quality pump, a better quality fleet at lower long-term costs.
Got it. And then [option mix] of digiFrac in the Liberty portfolio?
That's going to evolve with time. I believe we're there or we'll certainly be there at having a solution that's ultimately cheaper and better. So if you're going to build, you're probably going to build what's cheaper and better. But our build pace is going to be, as Michael said, dictated by the marketplace, but it's going to be slow and gradual.
It's got to make sense - and you got to have compelling economics, you've got to have a willing to allocate ex amount of capital there. So our fleet probably slowly migrates to all whatever is cheapest and best.
Thank you. And then maybe one more, just I think earlier in the call, this was mentioned, but I don't know that we got a clarification, just sand facilities and any efforts to expand capacity there or - of your existing facilities and/or your desire to build new ones in the current market?
Look, the key - sand is a key ingredient for frac. That's our focus on sand. We've got to keep our fleets and our customers' wells on time and without interruptions to operations. So yes, we've invested a little bit in debottlenecking, increasing our throughput in there. We'll make investments to what it takes to secure that Liberty's operational performance and deliver to our customers is the best in the industry. That's what drives our decision-making there.
Okay, thanks guys, appreciate it.
Thanks appreciate that.
This concludes our question-and-answer session. I would like to turn the conference back over to Chris Wright for any closing remarks.
Thanks, everyone, for your time today and interest in this business. Liberty and our industry as we demonstrated networks, matter and sorry about the problem with the phone network, we'll prevent that from happening in the future. Everyone, have a good day. We look forward to talking to you at the next call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.