Liberty Energy Part 2: Estimates And Relative Valuation

Revenue estimates are higher in the next year but can decelerate afterward
EBITDA can increase sharply in NTM 2023 but will fall sharply after that
The stock is reasonably valued with a positive bias at the current level

In Part 1 of this article, we discussed Liberty Energy’s (LBRT) outlook, performance, and financial condition. In this part, we will discuss more.

Linear Regression Based Revenue Forecast

Based on a regression equation among the crude oil price, and rig count, LBRT’s revenues can increase sharply in the next 12 months (NTM 2023). The growth rate will decelerate in the following two years.

A regression model based on the forecast revenues suggests that the company’s EBITDA can increase sharply in NTM 2023. In NTM 2024, the model means that the EBITDA growth rate will fall steeply.

Relative Valuation And Target Price

Here is an analysis of LBRT’s relative valuation using its forward EV/Revenue multiple. The returns potential (6% upside) using the forward EV/Revenue multiple (0.96x) is lower than sell-side analysts’ expected returns (21% upside) from the stock.

LBRT’s forward EV-to-EBITDA multiple contraction versus the adjusted trailing 12-month EV/EBITDA is steeper than peers because its EBITDA would rise more sharply than its peers in the next four quarters. Its EV/EBITDA is higher than its peers’ average. So, I think the stock is reasonably valued (with an EV/EBITDA of 22x) versus its peers and has a slight positive bias at this price level.

What’s The Take On LBRT?

Liberty, following its revenue base expansion through Schlumberger’s fracking business and PropX, is reaping the benefits of these businesses’ technological prowess. It strengthened the technology side of the business through the PropX acquisition and made significant improvements in route optimization. North America has been resilient because of the local supply of natural gas and increasing leading-edge pricing. Given the falling cost level in the coming months, we expect the EBITDA margin to expand in Q2. So, LBRT’s stock price outperformed the VanEck Vectors Oil Services ETF (OIH) in the past year.

Free cash flow turned negative in Q1, raising investors’ concerns. However, the OneStim fleet’s maintenance systems are different from the legacy set, which led to significant inefficiencies in recent times. It has continued investment in digiFrac pad generation systems and Tier IV DGB upgrades. This can lower free cash flow further in 2022. Nonetheless, its low leverage (debt-to-equity) will protect it from any possible pressure on cash flows.

Relative to its peers, the stock appears reasonably valued at the current level. Investors might want to stay invested for higher returns in the medium-to-long term.