Liberty Energy Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; amounts below are in millions of dollars unless stated otherwise.
Business context
Liberty provides hydraulic fracturing and related services and technologies to North American onshore oil and gas producers, including wireline, proppant logistics, data analytics, and sand operations. It reported more than 30 active fleets at quarter-end. The PropX acquisition, completed in October 2021, expanded proppant logistics capabilities; the 2021 comparison periods do not include PropX operations.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $942.6 | $581.3 | $1,735.4 | $1,133.3 |
| Operating income (loss) | $110.6 | $(36.0) | $114.4 | $(78.2) |
| Net income (loss) | $105.3 | $(52.5) | $99.9 | $(91.1) |
| Net income (loss) attributable to Liberty stockholders | $105.2 | $(50.6) | $99.8 | $(84.8) |
| Diluted EPS | $0.55 | $(0.29) | $0.52 | $(0.50) |
| Adjusted EBITDA (non-GAAP) | $196.1 | $36.6 | $287.9 | $68.3 |
Revenue grew 62.2% in Q2 and 53.1% for the first half, driven by higher service pricing and increased fleet utilization and efficiency. Operating margin was approximately 11.7% in Q2 versus negative 6.2% a year earlier; for the first half it was 6.6% versus negative 6.9%. Cost of services rose 36.7% in Q2, and management cited higher activity, labor and materials costs, and inflation. General and administrative expense also increased, partly due to compensation and activity-related costs.
- Cash flow: First-half operating cash flow was $135.6, compared with $35.6 in 2021. Investing cash outflow was $232.8 (versus $65.9), including $224.7 of property and equipment purchases. Financing provided $118.8, principally reflecting net revolving-credit borrowings.
- Liquidity: Cash was $41.5 at June 30, up from $20.0 at year-end 2021. The ABL had $150.0 outstanding, a $1.4 letter of credit, and $198.6 of remaining availability at quarter-end. The company reported compliance with debt covenants.
- Debt: Debt carrying value, net of financing costs and discount, was $254.0, versus $122.5 at December 31, 2021; principal outstanding was approximately $255.6. This included $150.0 under the revolving line and $105.6 under the term loan. The term loan matures in September 2024.
- Balance sheet: Total assets were $2,335.1 and total equity was $1,330.0 at June 30, 2022. Accounts receivable and unbilled revenue were substantial at $399.8 and $164.2, respectively.
Changes, outlook, risks and unusual items
- Management described the frac market as near full utilization and expected fleet availability to remain tight through the rest of 2022. It was reactivating selected available fleets and investing in fleet modernization and next-generation equipment. The filing does not provide specific full-year financial guidance.
- Management cited constructive oil and gas market conditions, but also risks from inflation, rising interest rates, supply-chain and labor constraints, and the Russia-Ukraine conflict. It noted that sustained lower commodity prices could materially harm results, financial condition, and cash flows.
- Q2 included a $3.4 gain on asset disposals, primarily used equipment and trucks; first-half results included a $1.2 net disposal loss, including a $2.3 impairment/write-down related to property held for sale. First-half results also included a $4.3 loss from remeasurement of the tax receivable agreement liability.
- The company had $49.8 of future proppant, transload, equipment, and mancamp commitments. Potential shortfall fees could reach $6.8 for the remainder of 2022, $5.8 in 2023, and $0.7 in 2024 if minimum purchases are not met and terms are not amended; management did not expect significant fees based on forecast activity. Litigation was not expected by management to have a material adverse effect.
- Subsequent to quarter-end, the ABL commitment was increased from $350.0 to $425.0 and its benchmark changed from LIBOR to SOFR. The board also authorized a share repurchase program of up to $250.0 through July 31, 2024; repurchases are discretionary and may be funded with cash, revolver borrowings, and expected free cash flow.
- The company had not reinstated its quarterly dividend. Its U.S. net deferred tax assets remained subject to a valuation allowance, reflecting the company’s cumulative pretax book-loss position.
Important facts for investors to verify
- Whether pricing gains and higher utilization persist, and whether cost inflation, labor, and supply constraints limit margins.
- Whether operating cash flow and collections can support the elevated capital spending, fleet modernization, debt service, and planned repurchases; first-half cash flow was affected by growth in receivables and unbilled revenue.
- Debt maturity and covenant terms, borrowing availability under the expanded ABL, and the potential effect of using revolver capacity to fund buybacks.
- PropX integration and the performance of new or reactivated fleets; evaluate non-GAAP Adjusted EBITDA alongside GAAP results and its stated adjustments.
- Purchase commitments and possible shortfall fees, the held-for-sale asset valuation, tax receivable agreement liability, and the uncertain timing and amount of any share repurchases.