Market Outlook

We have already discussed Liberty Energy’s (LBRT) Q2 2023 financial performance in our recent article. Here is an outline of its strategies and outlook. Liberty Energy’s management reckons the demand for hydraulic fracturing will be resilient in 2H 2023. This is because completions activity declines can offset production declines. Some operators are targeting modest production growth, which should keep frac spread utilization high.

Also, even if there is a moderate decline in completion activity, higher frac utilization and insulation from commodity price fluctuations will mark 2023 fracking activity. Lower natural gas prices caused lower activity in gas basins, leading to the redeployment of the fleet from gassy to oilier basins. The US frac spread count year-to-date increased marginally until the second week of August. During this period, the US rig count declined by 16%.

Frac Spread Count And Strategies

LBRT can re-adjust its frac spread count lower to protect the margin. In 2H 2023, a moderate completion activity in North America would prompt a lower frac count and a stable pricing environment. The company estimates a decline of nearly 30 active fleets in the industry in the remainder of 2023. The frac spread count will likely mirror the US rig count with a lag of one quarter. Readers may note that the US rig count dropped by 10% from Q1 to Q2. In response, Liberty can reduce its frac fleet count by “one to three” if activity slows down further. However, the outlook for the energy sectors in more constructive in 2024.

However, such an adjustment should be temporary because the company continues to put faith in its natural gas-powered fleet. Its transition to the digiTechnologies fleet should expand its earnings potential because it can reduce customers’ total well costs due to the journey from diesel to natural gas. It deployed its first digiFleet comprising digiFrac electric pumps in Q1. It may deploy its second digiFleet soon as the supply chain challenges recede. It plans to deploy two more digiFleets by 2023.

The Aftermath of LPI and Siren Integration

The launch of LPI has provided a reliable source of natural gas fuel for the company’s suite of digiTechnologies. Integrating Siren into the LPI platform expanded the customer base for drilling and completion needs. So, it is set to increase its gas compression capacity in the Permian Basin in Q3 and enter the DJ Basin later in 2023. The company is also improving its fleet of CNG trailers and logistics services. It has added field gas processing and treating facilities in the Haynesville and Permian.

Other Drivers Explained

The company is also building digiPrime hybrid pumps. Although these pumps are capital-intensive, when combined with digiFrac electric pumps, they will manage transient load and precision rate control. LBRT will depend more on fleet configuration and digiTechnologies for efficient gas consumption and emissions.

As discussed in our previous article, LBRT would also look to meet increasing demand from micro and mini-grids, data centers, utilities, and emergency power with a combination of CNG and RNG, like hydrogen. Regarding the frac fleet composition transition, the management commented in the Q2 earning call,

“It’s a very slow sort of incremental process – we are bringing on digiFrac pumps as we go. As we said, we’ll have four fleets of that. Generally, if we’re looking at a flat fleet count, that would be replacing Tier 2 diesel. So, we are moving up our natural gas percentage.”

LBRT’s Outlook And Q2 Performance

In FY2023, LBRT expects its adjusted EBITDA to grow by 30%-40% compared to a year earlier. It also expects its operating margin to expand following increased investment profitability, cost reduction measure, and lower capital expenditures. Its free cash flow can also exceed FY2022.

Its topline, however, may continue to face challenges. Its revenues in Q2 2023 decreased by 5% compared to a quarter ago. It incurred unplanned charges in Q2 due to customer completion schedule changes. Despite improved efficiencies, drilling delays in larger pads and fleets shifting from gas to oilier basins caused the market to soften and posed challenges to frac fleet utilization.

Cash Flow & Balance Sheet

In Q2, LBRT returned $69 million to shareholders through cash dividends retirement of outstanding shares. Since July 2022, it has returned $287 million to shareholders. It now has $240 million of the buyback authorization remaining. Given strong free cash flow generation, it upsized the share buyback plan to $500 million in Q1.

In 1H 2023, Liberty’s cash flow from operations increased by 228%, led by higher revenues. Its free cash flow also turned positive in 2H 2023 compared to a negative FCF a year ago. As of June 30, 2023, its total liquidity was $226 million.

Relative Valuation

Liberty is currently trading at an EV-to-adjusted EBITDA multiple of 2.76x. Based on sell-side analysts’ EBITDA estimates, the forward EV/EBITDA multiple is 2.78x. The current multiple is significantly lower than its five-year average EV/EBITDA multiple of 19x.

LBRT’s forward EV/EBITDA multiple expansion versus the adjusted current EV/EBITDA is sharper than its peers because its EBITDA is expected to decrease more steeply than its peers in the next four quarters. This typically results in a lower EV/EBITDA multiple than its peers. The stock’s EV/EBITDA multiple is lower than its peers’ (NINE, PUMP, and ACDC) average. So, the stock is reasonably valued versus its peers.

Final Commentary

LBRT’s management will look to benefit from the tighter balance in frac equipment demand and supply. Although the frac spread count can decline, lower production can balance the supply, improving frac utilization in 2023. Although the topline can take a hit in 2H 2023 due to a lower frac count, its transition to the digiTechnologies fleet should expand its earnings potential. On top of that, the natural gas price movement caused a temporary shift to oil-rich basins, although the situation can reverse once the price recovers.

The introduction of various new technologies and cost measures can turn around the situation for LBRT in 2024. Launching a new Liberty Power Innovations division will increase its gas compression capacity in the Permian and DJ Basin. As the free cash flow strengthens, LBRT focuses on improving its shareholders’ returns. The stock is reasonably valued versus its peers at this level.