Liberty Energy Inc. — Q2 2023 Form 10-Q
Period: Three and six months ended June 30, 2023; unaudited. Liberty provides hydraulic fracturing and related energy services and technologies in North America. It reported one operating segment.
Financial performance
Amounts below are in millions of dollars except per-share data and margins.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,195.0 | $942.6 | $2,457.1 | $1,735.4 |
| Operating income | $206.5 | $110.6 | $431.6 | $114.4 |
| Net income | $152.7 | $105.3 | $315.4 | $99.9 |
| Diluted EPS | $0.87 | $0.55 | $1.76 | $0.52 |
| Adjusted EBITDA (non-GAAP) | $311.5 | $196.1 | $641.3 | $287.9 |
| Operating margin | 17.3% | 11.7% | 17.6% | 6.6% |
| Net margin | 12.8% | 11.2% | 12.8% | 5.8% |
Q2 revenue grew 26.8%; first-half revenue grew 41.6%. Management attributed the increases to higher service pricing, added and reactivated fleets, and improved fleet efficiency. Cost of services rose 16.8% in Q2 and 24.4% for the first half, reflecting greater materials and labor use as well as inflation. Q2 general and administrative expense increased 37.6%, primarily due to performance-based compensation, labor inflation, and higher activity-related corporate costs.
- Cash flow: First-half operating cash flow was $444.4 million, versus $135.6 million a year earlier. Investing cash outflow was $356.3 million, including $292.3 million of property and equipment purchases and $74.9 million for the Siren acquisition, net of cash acquired. Financing cash outflow was $100.2 million.
- Liquidity and debt: Cash was $31.7 million at June 30, down from $43.7 million at year-end. ABL borrowings were $288.0 million; the borrowing base was $485.7 million, with $194.2 million available after $3.5 million of letters of credit. The company reported covenant compliance. The ABL matures January 2028; its weighted-average borrowing rate was 7.3%.
- Capital allocation: First-half share repurchases were $134.7 million, and cash dividends were $17.4 million. The board approved a further $0.05-per-share quarterly dividend for September 2023.
Material changes and unusual items
- Income tax expense rose to $47.3 million in Q2 and $101.8 million for the first half, from $0.2 million and $1.1 million, respectively, in 2022. The effective tax rate was 23.7% in Q2 and 24.4% for the first half, versus 0.2% and 1.1%; management cited the 2022 U.S. deferred-tax valuation allowance and the company’s tax status. Tax expense materially affects year-over-year net-income comparability.
- On April 6, Liberty acquired Siren Energy, a Permian-focused natural-gas compression and CNG-delivery business, for approximately $76.4 million cash, subject to adjustments. Purchase accounting remains preliminary; goodwill recorded was $43.1 million. The filing does not disclose Siren’s separate revenue or earnings.
- On January 31, Liberty LLC merged into the company and outstanding Class B shares were exchanged for Class A shares. The company also repaid its term loan using ABL borrowings.
- Property and equipment, net, increased to $1,546.2 million from $1,362.4 million at year-end, alongside higher depreciation and capital spending. The company recorded a $2.2 million inventory write-down in the first half.
Outlook, risks, and contingencies
Management described North American frac activity as steady but expects completions activity to moderate in the second half of 2023 versus the first half, with fleet demand expected to follow rig-count trends by about one quarter. It anticipates a balanced market and largely stable pricing, while natural-gas-market activity may not improve until 2024. These are expectations, not quantified company earnings or revenue guidance.
Management cited commodity-price and demand uncertainty, lower natural-gas prices, possible recessionary conditions, inflation in labor and materials, and customer activity changes as relevant factors. Q2 average WTI was $73.54 per barrel, versus $108.83 a year earlier. The filing says no material risk-factor changes were identified. It also notes foreign-currency exposure from Canadian operations and that cash deposits exceeded FDIC insurance limits.
- Purchase and supply commitments totaled $205.4 million: $134.6 million due in the remainder of 2023 and $70.8 million in 2024. If minimum purchases are not met and suppliers do not agree to changes, potential shortfall fees could reach $29.9 million for the remainder of 2023 and $8.7 million for 2024; management does not expect significant fees based on forecast activity.
- Tax receivable agreement liabilities totaled $119.5 million, including $4.7 million current. The filing says the company made no TRA payments in the first half.
- Management did not believe pending legal matters, individually or collectively, would materially adversely affect financial position or results. The filing reports no material off-balance-sheet arrangements other than disclosed purchase commitments.
Most important facts for investors to verify
- Whether second-half activity and pricing follow management’s expected moderation and stable-market outlook, particularly in gas basins.
- Cash conversion and working-capital trends, alongside continued capital expenditures, repurchases, and dividends.
- ABL availability, borrowing costs, and covenant headroom if activity or receivables weaken.
- Final Siren purchase-price allocation and the acquired business’s contribution to results.
- Tax-rate comparability, TRA obligations, and related-party exposures; related-party revenue was $52.2 million in Q2 2023 versus $1.2 million a year earlier, and one customer accounted for 11% of Q2 revenue.