Liberty Energy Inc. — Q1 2023 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Liberty provides hydraulic fracturing and related services and goods to North American oil and gas producers, operating in one reportable segment. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $1,262.1 million | $792.8 million; up 59.2% |
| Operating income | $225.1 million | $3.8 million |
| Operating margin | 17.8% | 0.5% |
| Net income (loss) | $162.7 million; $0.90 diluted EPS | $(5.5) million; $(0.03) diluted EPS |
| Adjusted EBITDA | $329.9 million | $91.8 million |
| Net cash from operations | $203.9 million | $14.6 million |
| Capital expenditures | $133.1 million | $91.0 million |
| Cash and cash equivalents, March 31 | $20.9 million | $43.7 million at December 31, 2022 |
| Debt, March 31 | $210.0 million | $218.4 million at December 31, 2022 |
Cost of services, excluding depreciation, was $888.4 million, or 70.4% of revenue, versus $670.0 million, or 84.5%, in Q1 2022. The filing does not present a separately labeled gross margin. Net cash used in investing activities was $129.7 million; net cash used in financing was $97.1 million, including $74.6 million of share repurchases and $8.8 million of dividends. Cash declined $22.8 million during the quarter.
Material changes and drivers
- Revenue growth reflected higher service pricing, fleet additions and reactivations, and greater utilization and efficiency amid increased demand. Management said operating performance also benefited from stronger activity and pricing.
- Operating costs rose, including labor, materials, parts, and maintenance costs; management cited inflation and higher fleet utilization. General and administrative expense increased, mainly due to performance-based compensation, inflation, and higher activity.
- Depreciation increased as additional equipment entered service. The Q1 2022 comparison was also affected by a $4.2 million tax receivable agreement remeasurement loss and a $4.4 million loss on two facilities held for sale; corresponding Q1 2023 losses were not recorded.
- Effective tax rate was 25.1%, compared with (17.8)% in Q1 2022; the filing attributes the higher 2023 tax expense primarily to taxes on U.S. activity, versus a valuation allowance on U.S. deferred tax assets in the prior-year quarter.
- Cash generation improved substantially, but receivables and unbilled revenue increased and working-capital changes reduced operating cash generation. Capital spending increased to support equipment and digiTechnologies investment.
Liquidity, debt, and capital allocation
The amended ABL revolver has a $525 million maximum, subject to borrowing-base limits, and matures January 23, 2028. At March 31, the borrowing base was $499.9 million; $210.0 million was drawn, $2.6 million was committed to letters of credit, and remaining availability was $287.3 million. The weighted-average borrowing rate was 6.7%. Liberty repaid and terminated its term loan in January, refinancing through the ABL. The company reported compliance with debt covenants. Its $119.5 million tax receivable agreement liability included $4.7 million current and $114.8 million long-term.
The board increased the share repurchase authorization to $500 million in January. Liberty repurchased 5.17 million shares for $74.6 million during Q1; approximately $300 million remained authorized at quarter-end. It paid a $0.05-per-share dividend in March and approved another $0.05-per-share dividend after quarter-end.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management expected the frac market to remain strong at least into Q2, with stable pricing and normal seasonality; it expected high utilization and demand in oilier basins to offset softer gas-basin conditions.
- Management described North American hydrocarbon fundamentals as strong, while noting early-spring oil-price declines amid financial-sector stress and recession concerns, and a possible transitory slowdown in domestic natural gas markets. Q1 average WTI was $75.93 per barrel versus $95.18 a year earlier.
- Results remain exposed to commodity prices and customer activity, service pricing, inflation and operating costs, working-capital needs, interest rates, and foreign currency translation. The filing cautions that sustained lower commodity prices could adversely affect results and cash flows.
- Supply agreements carried approximately $253.0 million of future proppant, transload, and equipment commitments, including $192.2 million for the remainder of 2023. Potential shortfall fees could reach $51.0 million for the remainder of 2023 and $7.8 million in 2024 if minimum purchases are missed and suppliers do not agree to changes; management did not expect significant fees based on forecast activity.
- On April 10, 2023, Liberty acquired Permian-focused natural gas compression and CNG delivery business Siren Energy for $78.0 million in cash, subject to closing adjustments. Purchase accounting was incomplete at filing. Management said pending litigation was not expected, in aggregate, to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether pricing, fleet utilization, and oil-basin demand sustain the Q1 revenue and margin improvement, particularly given softer gas-market conditions.
- Whether operating cash flow converts into durable free cash flow after elevated capital spending and working-capital needs.
- ABL availability, borrowing costs, covenant headroom, and planned funding for repurchases, dividends, commitments, and the Siren acquisition.
- Integration and returns from Siren, including final purchase accounting and the business’s contribution to Liberty’s services and lower-emission offerings.
- Exposure to customer concentration, contractual purchase minimums and possible shortfall fees, and the $119.5 million tax receivable agreement liability.