Welcome to the Liberty Energy Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Anjali Voria, Strategic Finance and Investor Relations Lead. Please go ahead.
Thank you, Dave. Good morning, and welcome to the Liberty Energy 2nd Quarter 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, revenue, 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, and Pre-tax Return on Capital Employed, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and Adjusted EBITDA and calculation of Pre-tax Return on Capital Employed, as discussed on this call, are presented on our earnings release, which is available on our website. I will turn the call over to Chris.
Thanks Anjali. Good morning, everyone, and thank you for joining us. I'm proud to discuss our second quarter 2022 operational and financial results. The 2nd quarter was a busy and exciting time as the Liberty team continued to deliver differential quality services in today's robust but operationally challenged environment. This translated into a notable milestone of fleet financial performance at levels that were last seen in 2018 as measured in annualized adjusted EBITDA per fleet. The hard work and dedication of our employees, combined with deep relationships with our partners across the value chain, enabled us to achieve strong operational efficiency in an environment still impacted by supply chain challenges. In the 2nd quarter, revenue was $943 million, a 19% sequential and 62% year-over-year increase. Net income for the quarter was $105 million, or $0.55 per fully diluted share.
Adjusted EBITDA for the quarter was $196 million, 114% increase over the prior quarter. Liberty's first half of 2022 is starting to reveal the value creation from our 2021 acquisitions and our insistence upon getting the business integrations done right, consistent with our focus on long-term results. We've positioned the company to deliver top-tier performance through cycles with a focus on free cash flow generation and maximizing returns. We're driving cash flow expansion that allows us to fund compelling organic investments to grow our competitive advantage while also returning cash to shareholders. Our strong financial results and a constructive outlook support the reinstatement of our return of capital program, beginning with a board-approved $250 million share buyback program. Our guiding principle is to maximize the value of a Liberty share.
We believe the flexibility afforded by a share repurchase program gives us the ability to opportunistically act on a dislocated stock price, calibrated by market and business conditions. While the global economic recovery outlook has softened on reverberating impacts from higher inflation, rising interest rates, and the Russian invasion of Ukraine, oil and gas markets remain constrained. Eight years of under-investment in upstream oil and gas production, exacerbated by inept global policy initiatives aimed at incentivizing an energy transition, has created a mismatch of supply and demand. Today, historically low global oil and gas inventories, limited OPEC spare production capacity, and a dearth of refining capacity are colliding with increased energy demand. Oil and natural gas demand growth is coming from the post-pandemic recovery in travel, China's emergence from its enforced COVID lockdowns, plus seasonal demand factors.
These are all further magnified by the Russia-Ukraine conflict and the potential for sanctions imposed on Russian oil exports, coupled with Russia's decision to constrain natural gas pipeline exports to Europe. The greatest risk to our marketplace is a severe recession that leads to a drop in global demand for oil and natural gas. A moderate recession typically leads only to a slowing in the rate of demand growth for oil and natural gas. Which would likely not be overly disruptive to our customers' activity, given today's low inventory levels and tight supply and demand balances. The recovery in oil supply appears to be under greater threat than oil demand. North America is positioned to be the largest provider of incremental oil and gas supply. Today, E&P operators are evaluating the opportunity to deploy incremental capital in North America to modestly grow production while remaining focused on shareholder priorities.
The fundamental demand call in North American oil and gas supply is strong. Supply is restricted by a tight frac market where equipment, supply chain, and labor constraints limit frac fleet availability and service quality available to our customers. Many frac companies are struggling to execute in today's environment. Moreover, operators desire ESG-friendly frac fleet technologies that provide the opportunity for both significant emissions reductions and large fuel savings. Liberty is uniquely positioned with the technology, scale, and vertical integration to meet demand for service quality and best-in-class technology. The frac market is near full utilization, and few service providers have the fleet capacity and supply chain reach to satisfy E&P operators' goals. Liberty was disciplined in restraining fleet reactivations in the post-COVID era of muted returns.
Pricing has now recovered to where Liberty, in support of our customers' long-term development needs, is reactivating several of our recently acquired available fleets from the OneStim transaction. Importantly, these long-term dedicated customers seek additional next-generation fleets that are simply not available today in the market. Liberty is providing an avenue to serve those customers and simultaneously drive free cash flow from these existing fleets to reinvest in our fleet modernization program and free cash flow. Liberty is also partnering with key customers on the deployment of 2 additional digiFrac electric fleets in early 2023. Demand is very strong for the technically superior design Liberty developed throughout the downturn that drives better safety and efficiency, a rare commodity in a tight market. The strong frac market and specific conversations with our customers give us confidence in the demand for Liberty services into the coming year.
In the 3rd quarter, we expect approximately 10% sequential revenue growth, primarily driven by fleet reactivations and modest net pricing increases. Third quarter margins are expected to improve from contribution of incremental fleets and modest price improvements, partially offset by ongoing supply chain, operational, and inflationary pressures. Since the 2020 downturn, we have made the decision to refrain from reactivating fleets without the economics and longevity of business to support the onboarding of a new crew and the capital associated with restoring equipment. Today, we are one of the few players in the market with the equipment available to support a rising demand for frac services. We are also one of the only players with the supply chain capacity to support these services as sand and other materials remain in short supply. Reactivating fleets is a long-term strategic decision.
They are not spot fleets, but rather fleets that will go to high quality, dedicated customers that are interested in a road to next-generation solutions over time. Today, next-generation equipment is in short supply and will remain so for the foreseeable future. To maintain a development program, producers seeking a frac crew are willing to take equipment available to support their operations in the near term. For Liberty, reactivated fleets are largely well-maintained Tier 2 diesel equipment that came with the OneStim acquisition. These fleets are coming online at favorable prices that support the hiring and training of a new crew for the long term, our next-generation technology expansion program, and increasing our free cash flow generation. For a minimal capital outlay, the unit economics of these fleets generate free cash flow that provide a source of funding for investment in our fleet modernization program.
Over the long term, next-generation fleets will replace older technologies. While we already have one of the largest dual fuel fleets available, our equipment makeup will evolve to an entirely next-generation fleet over time. The fleet reactivations are not market share driven decisions, but are investments in driving the increase in value of a share of Liberty stock by investing at the right time with the right economics. We are also excited to announce a $10 million investment in Fervo Energy, a next-generation geothermal technology company that develops geothermal assets for dispatchable, reliable baseload grid power with low carbon intensity. With this investment, Liberty expand into supporting geothermal resource development, leveraging our extensive expertise in subsurface engineering and pressure pumping assets to help create dense underground networks to mine the Earth's heat for electricity production.
We chose this investment opportunity because of our belief in the concept viability, the quality of Fervo's team, and the size of the potential resource already captured. Unconventional geothermal applications offer a potential pragmatic solution for a reliable source of low carbon electricity, and we're excited to be part of the journey. Our team is diligently working to support a world where we are seeing the greatest threat to energy security, reliability, and affordability in decades. Yesterday, we released our 2022 Bettering Human Lives report, placing today's global energy security crisis in proper context and showcasing Liberty's leadership in clean energy technology innovation. Our drive is to bring awareness to the importance of energy access, expanding further into the topics of geopolitics, food security, and the four pillars of the modern world, cement, steel, plastics, and fertilizer, all critically enabled by hydrocarbons.
ESG has always been part of our DNA since day 1, and we bring to focus our innovation and investment in digital technology, engine technology, sand, logistics, and supply chains, as well as our robust governance and the people and culture that bind us. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.
Good morning, everyone. We're pleased with our second quarter results. The entire Liberty family pulled together to provide exceptional execution for our customers and deliver record revenue, net income, and adjusted EBITDA. We are now beginning to see the advantages of the transformative work our team accomplished through the integration of OneStim and PropX, and is already generating returns at a faster pace than we projected at our Investor Day a little over one year ago. Successfully achieving scale and vertical integration by doing the integration the right way has been key to our financial performance and positions us well entering into the second half with the right momentum. This quarter, we reached annualized Adjusted EBITDA per fleet levels that were last seen in 2018, and we believe that we are only at the early stages of the oil field services upcycle.
Liberty is a company of a much different scale of integration today than we were in 2018. We are in an even stronger position to lead the industry in technology and service quality and to expand our profitability. Our best-in-class frac fleet technologies have evolved to include Liberty's built-for-purpose digiFrac fleet that raises the industry standard on providing the lowest emission technology in the market with superior durability, reliability, and enhanced automation and controls. Our Tier 4 DGB fleet has grown significantly and marries dual fuel pumps with automated controls that maximize gas substitution for diesel in an environment where the savings from fuel cost arbitrage have increased over the last year. We have an expanded supply chain with 2 of our own sand mines and deeper partnerships with our suppliers that allow us to deliver superior operational execution in severely restricted markets riddled with global supply chain challenges.
We also have the premier technologies in wet sand handling and last mile proppant delivery solutions through PropX. These transformative changes we've made and continue to make at Liberty are critically important drivers of shareholder value at a time where market fundamentals are increasingly constructive for our industry. The second quarter of 2022 revenue was $943 million, $150 million or 19% increase from $793 million in the 1st quarter. Approximately 60% of our top line growth was driven by activity, mix, and a modest contribution from a fleet reactivation, while the reminder came from pricing. Net income after tax was $105 million, increased from a net loss after tax of $5 million in the 1st quarter.
Fully diluted net income per share was $0.55 compared to fully diluted net loss of $0.03 in the 1st quarter. Results included $7 million in fleet reactivation costs incurred for both the fleet deployed in the 2nd quarter and the planned 3rd quarter fleet deployments. General and administrative expenses totaled $42 million, including non-cash stock-based compensation of $4 million. G&A increased $4 million sequentially, primarily driven by performance-based compensation, inflationary and activity increases commensurate with the growth in our business, and investment in platform IT systems and other process improvements to support our continued expected growth. Net interest expense and associated fees totaled $5 million for the quarter. Adjusted EBITDA increased to $196 million, more than doubling from $92 million achieved in the 1st quarter, showcasing solid incremental margin expansion on activity and pricing gains.
We ended the quarter with a cash balance of $41 million and net debt of $213 million. Net debt increased by $34 million in the 1st quarter, primarily due to an increase in working capital. As of June 30th, we had $150 million of borrowings on our ABL credit facility. On July 15th, we exercised the accordion feature on our ABL credit facility, thereby increasing our borrowing capacity from $350 million to $425 million. Total liquidity, including availability under the credit facility, was $263 million pro forma for the accordion. Net capital expenditures totaled $127 million on a GAAP basis in the 2nd quarter of 2022.
The CapEx was driven by Tier 4 DGB upgrades and digiFrac spending of $65 million, sand logistics and other margin-enhancing projects of $29 million, and the remainder relating to ongoing capitalized maintenance spending. In the 3rd quarter, we expect approximately 10% sequential revenue growth. This is primarily driven by fleet reactivation and including one full quarter of contribution from a crew deployed in the latter part of the 2nd quarter and modest price increases. We also expect margin improvement primarily for the contribution of incremental fleets and modest net pricing increases, partially offset by ongoing supply chain, operational and inflationary pressures including in commodities, raw materials, and labor costs. As market fundamentals continue to improve for our industry, we are well-positioned to support global energy needs by continuing to invest in this early part of the cycle to maximize free cash flow over the long term.
We are now targeting capital expenditures of $500 million-$550 million for full year 2022. The approximately $200 million increase reflects an additional next-generation technology investments, including incremental spending, the additional digiFrac fleets, and proppant and sand handling of wet sand equipment, as well as capital investment in the frac fleet reactivation and Libertization of approximately $55 million-$60 million, including the one fleet deployed in the 2nd quarter and the balance that will be deployed in the second half of the year. The incremental adjusted EBITDA we are on track to achieve in 2022 relative to the beginning of the year is expected to far more than exceed the additional CapEx spending in our budget. We expect to be free cash flow positive for the full year of 2022 after investing in these long-term competitive advantages.
We expect to enter 2023 with an active frac fleet count of about 40. Investments we are making in 2022 will further expand earnings potential in 2023, and our fleet modernization plans are expected to continue in 2023. We believe capital spending is likely to be at or below 2022 levels in 2023. We anticipate strong 2023 free cash flow conversion of over 50%, driven by both incremental profitability from 2022 investments and a continued margin expansion initiatives. We are planning ahead to have a fleet of the latest technologies as we enter what we expect to be a longer duration oil and gas cycle. As we stated at the beginning of the year, we have significant flexibility in adjusting our capital spending targets depending on economic conditions, customer demand, and returns expectations.
As we look to the future, the increased free cash flow generation capability of our repositioned business, successful OneStim integration, operational execution and fundamental outlook allows us to meet our capital allocation priorities of disciplined investment to expand earnings per share, balance sheet strength, and the return of capital to shareholders. With that, I will now turn it over to Chris before we open for Q&A.
Thanks Michael. The world is gripped today by a serious energy and food crisis that is of our own making. It is not, in fact, due to any shortage of available resources. It is due entirely to investment decisions and a growing myriad of barriers to investment in hydrocarbons. The very hydrocarbons without which the modern world is simply not possible. It is admirable that the public, regulators, and our industry are keen to improve the quality and cleanliness of our activities. It is not admirable that so many emotionally driven, fact-free impediments to investment have come from government regulations, NGO litigation and lobbying, and Wall Street too often equating lower greenhouse gas with better in all cases. The blame for the current energy crisis also falls on our industry for too often compliantly going along with the endless anti-hydrocarbon fashion of today.
If it is not for us to speak candidly, honestly, and loudly about the critical role hydrocarbons play in the modern world, and most critically, for those desiring simply to join the modern world, then who else will play this role? Certainly, it has not been political leaders, activists, academics, or celebrities. It is us that must carry that torch. Otherwise, the immense human damage we see today from the lack of investment in hydrocarbon production and hydrocarbon infrastructure will be only the beginning of a calamitous crisis. Toward that end, I strongly encourage everyone to read Liberty's improved and expanded version of Bettering Human Lives that was released on our website last night. It touches on many critical issues that are either overlooked, misunderstood, or simply ignored.
We welcome all feedback on this report as we strive to be honest brokers for information on how the world is energized today, how it might be energized in the future, and what inevitable trade-offs must be made. Individuals are all entitled to their own opinions. They are not entitled to their own set of facts. That idea from Daniel Patrick Moynihan. I will now turn it over to the operator for questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up, and then re-queue for additional questions at this time. We will pause momentarily to assemble our roster. Our first question comes from Chase Mulvihill with Bank of America. Please go ahead with your question.
Hey, good morning, everybody. I guess first thing I wanted to hit on is just the CapEx, you know, obviously a big bump here. You've got, you know, the new builds, the incremental new builds, the digiFrac fleets in the first half of next year. Could you just kinda split up the CapEx of $500-$550 million between, you know, upgrades and reactivations versus new builds and versus maintenance, just so we can kind of get a context of kinda where the CapEx is going?
Yes, Chase. You know, we'll take you back to sort of what we announced at the beginning part of the year, where the $200 million capex that was announced, if you think about it, there's gonna be 2 new builds, digiFrac fleets about $120 million, probably in the $50 million-$58 million worth of reactivations. The balance is just some additional wet sand handling technologies and some margin improvement projects that we've green-lighted with the improved pricing.
Okay, let me ask you this. The fleets that you're reactivating in the back half of the year, are those upgrade? Are you spending to upgrade those, or are those just gonna be kinda, you know, Tier 2 fleets?
Yeah, they are Tier 2. We're not upgrading them to Tier 4 DGB. You know, at that price, obviously, you couldn't. But they are being, to some degree, Libertized to where they are. They would be a Liberty Tier 2 fleet. So they have longevity with them, which will then support the long generation move of those clients to next generation fleets as kind of planned with each of those clients. They have a different cadence with every one of them, but, you know, during the next 5 years.
Okay, that makes sense. If I can ask on the buyback, you know, if I can kind of poke around this a little bit and try to think about how you think about pacing that $250 million. I know you didn't really kinda commit to it at this point. You know, should we think about it, you know, kind of more matching kinda how free cash flow evolves, or is it kinda more opportunistic buybacks, based on kinda what's your view of intrinsic value versus where the stock's trading?
Yeah, entirely opportunistic, Chase. No, no formulaic money's gonna flow out at X. Buybacks to us are opportunities when you have a balance sheet to support them, and you have a large compelling difference between the intrinsic value of the share and the price at which you can buy shares. The rate at which we'll buy back our stock is strongly dependent on the magnitude of that dislocation between intrinsic value and market price.
Okay. Could I ask how you define intrinsic value or how you calculate it?
Well, I mean, obviously, I won't share the details, but it's just a commonsensical discounted cash flow incorporating our weighted average cost of capital at a range of possible scenarios going out to the future in our business.
All right. Makes sense. That's how pretty much everybody thinks about it. All right, I'll turn it over. Thanks, Chris.
You bet. Thanks, Chase.
Our next question comes from Stephen Gengaro with Stifel. Please go ahead.
Thanks. Good morning, everybody.
Good morning.
Two things from me, if you don't mind. The first, when we think about the fleet reactivations in the back half of the year, you talked about, I think, exiting next year or starting next year with about 40+. Are we coming off of a base of around 35 in the 2nd quarter? I'm just gonna try to calibrate kind of the percentage increase you're seeing in the third quarter and how I should think about the digiFrac fleets entering in 2023.
Yeah. It's like, you know, yes, Stephen. Yeah, we're probably mid-thirties, mid-thirty-five number-ish. We obviously activated one right at the end of the second quarter. The balance will be activated sort of as you go through the year towards the end through the end of 4th quarter.
Okay.
It's a very straight line if you wanna model it.
Okay. Then when we think about, I guess it's a two-part question, but the steep increase in profitability per fleet in the 2nd quarter up to give or take, I think about $23 million of EBITDA per fleet. Did that bridge from the 1st quarter, and I assume it's price utilization, and there's probably some value from the sand business in there, I would think. How should we think about the sort of the potential of that number without giving us guidance. I mean, is this something that could go to the high 20s as 2023 evolves or is that too aggressive? I mean, any parameters around sort of the bridge and where that could go as we go forward?
Where it could go, Chase, you know, from my point of view, would really more dependent on, the demand side of the oil, supply demand equation, right? Depends on how, you know, kind of how any sort of potential recession may affect demand for next year. You know, generally internal numbers, you know, we have seen from late Q2, you know, the industry is running maybe around 250 fleets, gonna move to 275 by the end of the year, kind of modeling that to stay flat at this present point in time. So yeah, there is definitely upside on pricing, but I think that's still to be seen as to. Obviously you've seen a lot of movement in the market for frac fleets and in general, in the general economy.
I think we need to kind of, you know, take sort of watch it as we go.
Yeah, Stephen, I'll just add, yeah, we don't know the future. Obviously, the trends are pretty positive right now, but it's a combination of how well we perform operationally, what the trends in pricing, and they're still migrating in a positive direction. Also our just quality of operation. As Michael said, some of our capital is these margin enhancement factors. We're trying to figure out how to run our business more efficiently to get more done at a lower cost in a safer fashion. There's a lot of moving factors in that. We're always a little shy about predicting the future, except we did say a year ago that we would return to mid-cycle economics this year, and that wasn't based on anything specific.
It's just based on when margins are awful, supply shrinks, and eventually demand will grow. Just supply shrinkages alone was gonna fix the marketplace given the 2 or 2.5 years of poor frac market conditions.
Great. Very good. Just one quick one. Michael, you mentioned this, but as the market evolves over the next couple of years, do you view the upgrades and the digiFracs as ultimately replacements for these Tier 2s that you're reactivating, and it's sort of a bridge to newer higher-end assets?
Generally what we see, Stephen, is in the market, if you think about sort of what's been announced for new builds, it approximates about what the attrition cycle is for frac fleets. You know, if you think about a 10-year life for some of these older diesel fleets, et cetera, you know, that sort of the announced numbers that are coming out are approximately the same. So we see a pretty balanced market, a pretty disciplined approach by ourselves and, you know, our competitors. We think that's good for the frac market overall.
Very good. Thank you for the color, gentlemen.
Thanks.
Our next question comes from Arun Jayaram. Please go ahead with your question.
Chris, Michael, good morning. Chris, I was wondering if you could give us a little bit more, you know, bigger picture, around the scope or the ambitions of your fleet modernization program. You mentioned $5-$550 million of CapEx this year and at or a little bit below that kinda next year. I was wondering if you give us a little bit more scope on, how long do you expect, you know, the higher CapEx trend relative to maintenance to continue, and, you know, what type of, you know, capacity do you expect over the next couple of years?
You know, we don't have any plans to add capacity, you know, per se. Our plan, and we do have a plan, on fleet modernization is sort of a continued gradual program. Of course, what's actually gonna happen is not gonna be our plan. It might be accelerated if the demand pulls there. It might be slowed down. We never put anything in stone. I would say the migration to next generation fleets, the economics are gonna pull that pretty strongly. Both these next generation fleets have meaningfully lower emissions. The very latest next generation fleets are also gonna have, you know, greater safety, higher reliability, better performance. Just from a straight numbers perspective, the delta in fuel cost today between burning natural gas and burning diesel is large. It's a big deal.
Just the economic driver of fuel cost savings is likely gonna have continued customer pull to get next generation fleet equipment. Again, for us, it's not in expanding, it's not growing our fleet. It's just simply a disciplined, returns-driven upgrade cycle in our fleets that will be and is being pulled by our customers.
Great. I was wondering if you could just, you know, follow up. Just give us a sense for the 2 digiFrac fleets that were to be deployed, you know, starting in the 3rd quarter or later this year. Give us a sense of how those deployments are going in terms of timing and perhaps how the contract terms for the latest two new builds are trending relative to your initial two that you plan to put in the field?
Arun Jayaram, this is Ron . Obviously, customers are excited to see that technology out in the field, and we're excited to get it deployed out there. We continue to see strong demand. We are navigating some supply chain challenges, not so much on the pump side. We have pumps being delivered on schedule. We're struggling a little bit more on the power generation side, so that's holding us back a bit. We still expect to deploy our first two fleets this year, in Q4 likely, and the next two fleets probably in Q1 is our expectation today. As you think about how that contracting has evolved, you kind of want to think about how the business, really the market has evolved over time.
If you think about when we announced those first contracts, we were in a little bit different environment then versus where we find ourselves today. Leading edge pricing, even for a Tier 2 diesel fleet, has moved pretty dramatically over the last 3-4 months. As we think about contracting next generation fleets, to the point Chris made earlier, the fuel savings opportunity there is massive, maybe of order $20-$25 million annually. We think about, you know, where leading edge Tier 2 diesel pricing is and then the fuel savings opportunity there that of course we want to capture some meaningful piece of as well. That provides guidance as to where we want to set pricing for our next generation capacity we're deploying.
Great. Thanks a lot.
Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead with your question.
Great. Chris and Michael, congrats on a solid quarter here. I want to build on some of your comments. You mentioned you don't expect to add capacity, but broadly speaking, do you see current profitability levels as incentivizing your competitor set about adding capacity to the market overall? I guess where we're going with it is, do you see discipline fading at all?
We haven't seen any of that. Look, obviously, we're close to all the equipment builders. I don't know of any fleets being built that are not really driven by ESG or specs. I don't know of any straight kind of capacity adds. They probably are, but if there is, it's very small, very little. Certainly among the bigger players who are an increasing share of the marketplace these days, you know, I don't think there's any appetite. Look, A, you couldn't do it. Oh, the market's great today, I want 3 more fleets. Well, you know, sign up for 15 months and you'll get them. Well, what's the market going to be in 15 months? People, I think, are, you know, obviously burned from overbuilding or redeploying too many idle equipment in the past.
No, we have not seen a fading of discipline. We've seen a pretty rational dialogue between us and our customers, in a marketplace today where our customers have just fantastic returns. We're still lagging a raised behind that, but we're moving in that direction as well.
Just to point out, I mean, really, if you think about it, there's about 10% attrition a year. Now, that attrition can be delayed somewhat if it's a very strong market, but eventually it comes, right? So I think that's one of the things you've got to look at when we look at sort of what is being built. It seems to be balancing with attrition, you know, over the long term.
That's a good perspective. The follow-up is just around labor. A year ago on these calls, we were spending a lot of time talking about how tight the labor environment is, and just talk about what you're seeing right now. Are you still facing labor challenges? How are you mitigating some of those risks?
Yeah, labor markets remain tight. I would say you're seeing a few more people coming back into the labor force, so incrementally better than it was 6 months ago, but still a very tight labor market. Nothing like we'd seen in the last 10 or 12 years. Incremental improvement the right direction. What we've focused on is very Liberty specific opportunities about why it's a great place to work at Liberty, why people love their jobs here, why we have low turnover. But it is an on the ground effort, and we're going to trade schools where people are learning to become electricians and welders and standing in those groups, having them do internships at Liberty.
In fact, having NCAA like signing ceremonies as people sign on to join Liberty, whether it's out of Alabama or Mississippi or somewhere that may not be right in the middle of the oil patch. I give huge credit to our recruiting and HR team, who just had to change the game a bit to find and attract people to come in. People come in, and if you treat them well and they have a great job, you know, this is an exciting industry. They're all solvable problems, but yes, it is a challenge and it is a significant constraint. I would say others, yeah, and turnover in our industry as a whole, I would say, is probably still quite high. Most everything in our industry is shorthanded today. I don't want to get too much comfort on the labor problems.
They're real, but I think Liberty's been doing a pretty good job navigating that.
Thank you, sir.
Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead with your question.
Hey, guys. Phenomenal quarter. Congratulations. Quick question on the incremental fleets. How much of that growth is driven by your ability to tie your own sand and access to that sand versus just better overall industry demand?
Look, it's people. This is almost all from existing customers, right? That either want to do a little bit of incremental activity or maybe they've split their work between Liberty and somebody else, and somebody else is struggling, and they're not getting consistent throughput. They're not getting things done the way they'd like them to be done. If, you know, I think that the pull there is we know you guys, we trust you guys, you can deliver, you know, and what are the economics it would take to get a little more of that? It's all of that package, of course, John, but you, we buy a lot of sand from third parties as well.
Look, we're in a bunch of different basins, so it's not just that we have sand mines, but it's that we have relationships and a history that in a tight procurement market. I would say our goal has always been to not just be the preferred frac provider, but to be the preferred partner to our suppliers as well. So.
A little color on that too. I mean, the activations are not in one specific basin, right? They are actually spread across all our basins, which to some degree helps in the ability to source labor, and support those fleets and for supply chain to support those fleets. The key things you're asking at this present point in time when you're activating a fleet is really, can you source the labor? Can supply chain support them? That's a key event because you're putting a fleet to work and it's delayed or it sort of has issues, is not good.
Right.
It's not a good economic choice.
Okay. Got it. The other one for me is just, you know, if you look at the backdrop, I mean, clearly demand is good. You guys are obviously performing well. Do you think there's the opportunity, Chris, Ron, Mike, to transition finally to sort of take or pay arrangements for these fleets? Just what would happen if you went and asked that customer today to lock something up? I mean, and the transition away from dedicated fleets, is that in line of sight?
I mean, there are deals like that today where you know, the buyer needs something, and so we'll have guarantees of our economics. If they struggle on operations and aren't able to you know, have a frac pace move as fast as we'd like, we have some contract protections in there that protect our economics. Those absolutely exist today. Again, for us, the winning in the long run in this industry is always about how can we win together, not "Hey, if things change, you're screwed, and we win." That's just that. With that, they did exist in our industry. Even then, we generally did not engage in them. We've always had a partnership mentality. We always will have a partnership mentality.
Now, I know you're rolling your eyes right now and saying, "Well, Chris, that partnership was harsh for you guys the last 2 or 3 years." There's some truth to that. Are the benefits disproportionately gonna swing a bit more our way going forward? Yes. Yes, of course they are.
Okay.
We've got to always be prepared to deal with, you know, what comes.
Scared you've got a camera in my truck. Okay. Last one for me, and hopefully you guys can answer this one. You noted you'll start the year in 2023 with a fleet count in the low 40s. Is that assuming 2 digiFrac fleets, and can you say how many in Canada? Just remind me.
We don't give fleet breakdowns by basin and all that, John. We've always been careful about that. Low 40s is sort of vague, but yeah, I would say that's taken in a couple digiFrac fleets that are gonna be rolling, and they will be rolling in the fourth quarter.
Okay. Got it. Thank you, guys. Great quarter then.
Thank you, John. I appreciate you driving everywhere in that truck.
Our next question comes from Roger Read with Wells Fargo. Please go ahead with your question.
Yeah, thank you. Good morning. Guess some of these questions have been asked, maybe digging just a little bit deeper on what you're seeing in terms of who's coming to you to bid for potential new fleets or any future reactivations. You know, have we seen that as a difference between sort of oil and gas basins? Understanding you don't like to disclose exactly where the fleets are, but as you think about what's going on in the bidding side, what you're seeing from your customers?
You know, I would say it's pretty balanced right now. It's strong across the sector. Well, strong, meaning that, you know, the economics are good. There's pull for incremental demand, but the pull is for very small incremental demand. You know, the fleet count from the start of the year to today, you know, maybe has moved 10%, growing a little bit fast at the start of the year, probably moves a few percent from here to the end of the year. We sort of model next year as sort of flattish at the end of this year, because there simply isn't. You know, if people wanted 20 more fleets next year, I simply don't think they're there.
We expect to see the continued sort of flattish with a slow creep upwards in active fleet counts and I would say reasonably balanced between oil and gas. You know, the end markets in both are pretty strong right now. But in both markets, everyone across our customers and just friends who aren't current customers, you know, the mindset across everyone is, it's hard to add incremental supply, and it wouldn't be good if we all added a lot of incremental supply. That's oil and gas production and frac fleets. I think it's a pretty disciplined, sober state of affairs in the industry today.
Yeah, thanks for that. Then maybe as a way to tie that into, you know, sort of production expectations as we look to the end of this year and next year. You mentioned earlier in the call, you know, challenges for operating efficiency for the industry. This would tie in a little bit with the labor issues, but if you think about a relatively stable capacity in 2023, I mean, does that imply that if we don't get significant operating efficiency improvements, you know, trained labor, et cetera, that it'll be hard to deliver more wells and more production in 2023?
Well, Roger, the current activity level and sort of like the biggest proxy for what's gonna happen to U.S. oil and gas production is the rate at which pounds of sand are going underground. Way more important than rig count. Practically, it's better than rig count, but really it's pounds of sand going underground. That's the metric we base production predictions and drive. Now, it's not straight simple. It's where's the sand going underground? How is it going? I mean, there's some details around that. The current level of activity is driving today modest growth in both U.S. oil and natural gas production. I think we've said at the beginning of this year, we expected 700,000-800,000 exit-over-exit oil production growth this year. I think that's a reasonable estimate.
We might be a bit above that, but we might be a bit below that. I think that's a reasonable pace at which we're running right now. If you keep going at the current rate, we would see a similar growth rate next year. I think you'll see, again, probably a little less than 1 million barrels a day of U.S. exit over exit rate oil production growth this year, probably on track to see a similar level next year. Now, wide bands on that, but you know, 500 to 1 million barrels a day of exit over exit growth rate next year, probably. Continued, you know, should be more cautious here.
Natural gas is growing and will production rate will grow, but again, also at modest rate. And current activities and next year's plan that they could continue to grow next year at a modest rate.
Great. Thank you.
Thanks Roger.
Thanks Roger.
Our next question comes from Scott Gruber with Citigroup. Please go ahead with your question.
Morning.
What's up?
So as we've talked investors on the last couple quarters, we've sense a general kind of disconnect between market expectations for frac fleet utilization and the trajectory of per fleet profitability. You know many initially looked at the 2017, 2018 upcycle as a comp not using, just how weak that upcycle was. If you look back at 2011, 2012 per fleet profitability got closer to 30 million. Is that a level profitability possible for the underlying fact business alone, most likely, separate from the other businesses or does the partnership model or cost inflation may prevent appears to pushing the track profitability alone towards that at 30 million level that we saw about a decade ago?
It is a certainly possible. It's certainly to fall. Look, it's just supply and demand. It's whatever fleet profitability is a low 20s now this that likely drift higher. I suspect it probably does. But, it's hard to predict where it goes. I would say we would hope it doesn't go to 40 million. If it goes to outrageously high levels that, of course, will be the start of some unwinding and discipline. But that, but there's still a lag there. There's still a risk in there. The economics look awesome, I can't get equipment for over a year. I still think some restraint on that. But when we see people that really need activity and are willing to pay for it, we've deployed these incremental fleets, maybe partially to offset people doing wacky things to get wells online and where they are. And we don't know where the fleet profitability is going to go. Likely to continue to drift higher in the next, in the coming quarters. How much or how far we'll see.
Got it. How should we think about the contribution from the non-frac businesses? You know, it looked like you had a nice step up in that contribution in 2Q. As we think about 3Q, 4Q and into 2023, will the non-frac businesses, you know, profitability contribution expand at a faster pace than the underlying frac business or more in line? How should we think about the cadence of that contribution?
No, you know, I think, you know, the frac, the underlying frac business is probably the one that expanded at the quicker rate. You know, the non-frac businesses are a little steadier. The majority of our sand, you know, sand mines we picked up from OneStim, you know, really come to go through our frac fleets, you know. That's really a small portion of sort of additional, sort of, I guess, let's say third-party sales that go there. You know, I would say, you know, kind of the first half, the underlying frac is the one that's expanded at a faster rate.
Got you. That would be expected to continue to lead in the second half?
I think that's a fair assumption. I think so.
Okay. In a relative sense. Appreciate the color.
Our next question comes from Conor Lynagh with Morgan Stanley. Please go ahead with your question.
Yeah, thanks. Just a question around capital allocation, and I frankly ask this a little bit facetiously, but given where your stock is, and just how cheap the valuation is relative to these, you know, leading edge numbers that you're putting up here, why spend anything but the bare level of maintenance CapEx and divert the rest into buybacks? What's your thinking around that?
That is very much a dialogue we have internally, very much. I think you can make an argument for that. The question is, we're always playing for the long term, right? Our success are way above average, not just our industry, but the S&P 500 Return on Capital Employed since we've launched this business, cash return on cash invested, I think is closely tied to the great partnerships we've had with our customers that wanna work with us for the long run, that wanna make long-term decisions together with us. It's very important that we run this business in a way that keeps us the best partner for E&Ps available. That competitive advantage in our business definitely helps keep us to deliver elevated returns over the long run.
We'll always continue to invest to keep that competitive advantage. You're right. Today, the attractiveness. Fortunately, we're coming into a place where we're gonna have the free cash flow to pursue a bit of an all of the above approach. Yes, the at today's valuations, some buybacks look pretty compelling.
Just to clarify about how you're thinking about the balance sheet and executing those buybacks, obviously, you've got a fair bit of CapEx for the duration of the year here, and it sounds like, you know, probably a decent amount of the market remains strong in 2023. Would you feel comfortable, you know, levering up a little bit in order to execute buybacks based on where the share price is trading? Or is that something you think of as more of excess free cash flow is what you're gonna use for that program?
No, because the opportunity today is compelling. The window of free cash flow in the very near future, we're quite confident in. Buybacks timing matters. I could say the same thing about CapEx and investment. People tend to invest hugely in their businesses, CapEx and buybacks, when their business is just killing it and minting cash. That's not the best time to invest in CapEx in your business and in buybacks. You have to be willing to do those with a lag. We've talked about this since our IPO. At the beginning of cycles is the best time to invest CapEx in your business. When the share price is most dislocated is the best time to do buybacks, as long as you're not taking balance sheet risk, right?
At the very start of a downturn, you don't know how ugly it's gonna be. You gotta be careful or cautious there. No, the timing of these things is not tied. It's not specifically tied to the timing of cash flow.
Appreciate the context. I'll turn it back.
Thanks Connor.
Our next question comes from Derek Podhaizer with Barclays. Please go ahead with your question.
Hey, good morning, guys. I wanted to hit on pricing a little bit more. Could you talk about where the reactivated Tier 2 diesel fleets were priced relative to the next-gen fleets priced at the end of last year and earlier this year? How much does this raise the bar for next-gen pricing recontracting, and what runway do you have now for profitability expansions as these are repriced in the next 6-12 months?
I gotta be cautious. We always wanna be careful about not giving specific projections because we don't know the future. You make a good point, Derek, that, you know, right now, these reactivation fleets are obviously contracted at very strong economics. If you said, "Hey, let's take the exact same market environment and add a next generation fleet with huge fuel cost savings and lower emissions," yeah, the value of that is enormous. Will that impact repricing of fleets? Sure. Yeah, of course it will.
Got it. That's helpful. Switching over to the digiFrac, so you'll have four fleets by early next year. You talked about the pressure on the power side. Would you supplement with third-party turbine providers or grid power or battery power to help get you to where you need to be with those MTU natural gas reciprocating engines?
Look, I think we certainly contemplate most of the above you listed. Never a turbine. We don't view that as an appropriate solution to put out in the field, so I don't think that's the right answer for us. You know, in terms of an opportunity to use some amount of grid power, I think that's certainly on the table and a conversation we're having with some of the potential digiFrac customers, call it a bit of a hybrid approach in terms of how the power is ultimately provided on location. As you know, there are some folks in the third-party business that have natural gas recip now, have come to the same conclusion we have around the emissions profile from that technology.
Those would also represent a potential option for us as we think about pace of deployment for digiFrac going forward.
Got it. That's helpful color. Last one, if I could squeeze it in, just on the unconventional geothermal investment. Can you talk about how big of an opportunity this could be for you over the next few years, 3-5? Could you frame that and maybe put some numbers around it for us?
I think too early to do that. Obviously we did the investment because we foresaw there was a reasonable chance that this would be meaningful business. We're excited about that opportunity. Too early to really give numbers around that. Yeah, we're obviously not doing it for show or for window dressing. We believe in that business. We believe it can grow to some scale.
Got it. That's helpful. Thanks, guys. I'll turn it over.
Thanks.
Our next question comes from Keith Mackey with RBC Capital Markets. Please go ahead with your question.
Hey, good morning, and thanks. Just curious if you can talk a little bit more about what portion of that low-40s fleet count would be non-next generation fleets under your definition, which I think is Tier 2 dual plus.
Yeah, yeah, instead of giving the specific numbers, it's definitely less than half, maybe meaningfully less than half. It's a, you know, it's still a meaningful slice.
Okay, got it. Thanks for that. Under next year's initial look at CapEx of close to 2022 levels, can you talk a bit more about how many digiFrac fleets that might contemplate?
When we look at that, the majority of that CapEx above and beyond maintenance CapEx is, you know, kind of at the moment soft circled to digiFrac. I gave you those numbers to give you kind of a general idea of where things could go. Obviously, those plans will actually be made one customer at a time. Maybe then we'll announce them as we go. Yeah, outside of maintenance Cap, the majority of that will be spent on the digiFrac complex.
Okay, thanks very much. I'll turn it back.
Thanks, Keith.
Our next question comes from Waqar Syed with AltaCorp Capital. Please go ahead with your question.
Thank you. Congrats, gentlemen, great quarter, first of all. Mike, some just quick housekeeping questions. Number one, do you envision some fleet startup costs in Q3, and if so, what will be the size? H2, second half, would that be a source of cash from working capital or still use of cash?
Sorry, Waqar, you broke up while you were asking. I didn't hear. Could you specify the question?
In Q3, do you expect any fleet startup costs? If so, what size?
Yes, we do. I think of all the, you know, it'll be probably similar to Q2, which is between Q3 and Q4, I'd say.
Okay.
At that level.
Working capital, do you expect that to be a source of cash in H2, second half?
It'll be a slight use of cash.
Slight use of cash.
It probably balances in Q4. You know, as we'll have the seasonal, you know, the normal seasonal rollover, seasonal weather rollover. You know, it might be a small use of cash in Q3, and possibly a small balance into Q4.
Okay. Thank you. Just Chris, just one last question from me. With this recent pullback in oil prices, have you seen any change in discussions with your customers, in terms of the direction of leading-edge pricing, or in any way other concerns about, you know, reducing activity or anything like that? Anything negative to on pricing and activity?
No, nothing there. I don't think the pullback's been significant enough. In the out years, it's not meaningful. No changes. No changes yet.
Okay. Thank you very much. That's all for me.
Thank you, Waqar.
Again, if you have a question, please press star then one. Our next question comes from Marc Bianchi with Cowen. Please go ahead with your question.
Hey, thanks. I wanted to go back to the 2023 CapEx if it is flat, or slightly down. Michael, could you just give us the buckets? I'm assuming that the maintenance number is going up because of just the active fleet counts going up, but maybe just level set us on the three buckets or however you want to describe it for 2023.
Yeah. It's really a soft circle, Mark. You know, I think you use sort of our rough rule of thumb of $3.5 million of fleet, you know, kind of in the low 40s. Obviously we've got, you know, you've got inflationary pressures on the maintenance CapEx, etc . You know, that's getting, you know, as we improve equipment, it's, you know, we're doing our best to offset that. I think if you take those maintenance, then I think the balance is really a soft circle on, you know, for decisions that we made customer by customer, the majority will be spent on digiFrac.
Gotcha. Okay, great. One other.
It could change.
Pardon? Go ahead.
It could easily change. I mean, the market changes. We have a lot of flexibility in kind of moving CapEx, or adjusting CapEx, you know, as markets change.
Yeah, we saw that this quarter, right? I guess the other one for you, Michael, is the 2022 and 2023 cash taxes. Can you give us any sense of what we should be assuming there? Because I'm assuming that's quite a bit different from the book tax we'll see.
No, cash tax is relatively minimal. Second half of the year, probably on the order of $10 million-$15 million. You know, it's probably not too dissimilar from book taxes. Obviously, we've got a
Fairly large valuation allowance related to the TRA that protects that. 2023, we'll probably talk about that at the next, you know, as I haven't modeled it out, I'm gonna spend a little time with my tax director on some of the interplay there.
Okay. Not a meaningfully different number, perhaps in the second half, as we're just trying to triangulate on cash flow.
Yeah, I would say in general, I think, yeah, we will be in cash tax payment situation next year. Again, I think next year will be a drag on cash flow to the extent we haven't modeled yet.
Yep. Okay, super. The last one for me is just kinda higher level on, you know, customer budgets here. I mean, the E&Ps have absorbed a lot of inflation over the course of the year and, you know, there's at least for the publics, there's a commitment to, you know, not increase CapEx too much. Are you seeing any customers, you know, adjust plans and activity because of the amount of inflation that they've seen? How are you thinking about that interplay into 2023?
I would say people's goals are based on what they wanna do with their production. You know, do they wanna keep production flat? Do they wanna have very modest production growth? I think that's generally the target is activity levels, and then they wanna work as efficiently as they can to get those activity levels done. Obviously, frac pricing is a piece of that, but it's just a piece, right? You could pay a higher frac pricing, book pricing to, you know, Liberty versus someone else. But if the wells come on sooner and the efficiency of operations is greater, there's some offsetting cost savings from that. No, I think what producers are keeping relatively anchored is their activity and production plans.
Gotcha. Okay, thanks. I'll turn it back.
Thanks, Marc. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Chris Wright for any closing remarks.
Yeah, I just wanna say thanks for everyone's time today, for following Liberty's business and for being involved in the energy business. Huge shout out to everyone on Team Liberty that 24/7 is working hard to make our business successful and to make the world go round. Thanks also to our customers and suppliers and everyone. We'll talk to you next quarter.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.