Business context and reporting period
Liberty Energy Inc. (NYSE: LBRT) filed this unaudited Form 10-Q for the quarter ended September 30, 2022. The company provides hydraulic fracturing and related services, including wireline, proppant delivery, sand, and lower-emissions completion technologies, primarily to North American onshore oil and gas producers. It reports one operating segment. PropX, acquired in October 2021, expanded its proppant logistics business and was not included in the 2021 comparative results.
Financial performance and position
Dollar amounts are in millions unless otherwise noted.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,188.2 | $653.7 | $2,923.6 | $1,787.0 |
| Operating income (loss) | $183.0 | $(39.6) | $297.4 | $(117.8) |
| Net income (loss) | $147.3 | $(39.4) | $247.1 | $(130.5) |
| Net income (loss) attributable to Liberty shareholders | $147.0 | $(38.9) | $246.7 | $(123.7) |
| Diluted EPS | $0.78 | $(0.22) | $1.30 | $(0.72) |
| Adjusted EBITDA (non-GAAP) | $276.9 | $32.0 | $564.8 | $100.3 |
- Q3 revenue grew 81.8% year over year; management attributed the increase to higher service pricing and activity-driven improvements in fleet utilization and efficiency. Nine-month revenue increased 63.6%.
- Q3 operating margin was approximately 15.4%, versus a 6.1% operating loss margin a year earlier. Q3 net margin was approximately 12.4%, versus a 6.0% net loss margin.
- Cost of services, excluding depreciation, increased 47.3% in Q3, slower than revenue growth, but rose in absolute terms due to higher utilization, materials consumption, labor, and inflation. G&A increased 56.4%.
- For the nine months, operating cash flow was $292.6 million, versus $80.1 million in 2021. Investing cash outflow was $333.9 million, including $327.0 million of property and equipment purchases; operating cash flow less those purchases was approximately negative $34.4 million. Financing provided $45.6 million. Cash increased $4.0 million to $24.0 million.
- At September 30, current assets were $996.1 million and current liabilities $704.9 million (current ratio approximately 1.41). Trade receivables and unbilled revenue were substantial at $480.7 million and $200.1 million, respectively.
- Debt carrying value was $253.7 million, compared with $122.5 million at December 31, 2021; cash was $24.0 million. The ABL had $150.0 million drawn and $273.6 million remaining availability, after a $1.4 million letter of credit. The term loan balance was $105.2 million. Weighted-average interest on borrowings was 7.0%; the term loan rate was 10.18%.
- Shareholders’ equity was $1,404.7 million. The company repurchased 4.7 million shares for $70.1 million during the nine months, with $180.0 million remaining under the $250 million authorization.
Material changes, outlook, and risks
- The improvement from losses to profits primarily reflected stronger pricing, demand, utilization, and activity. Q3 2022 also included PropX, unlike the 2021 comparative quarter.
- Other expense included a $28.9 million Q3 and $33.2 million nine-month loss from remeasurement of the tax receivable agreement (TRA) liability. This non-operating item materially reduced reported pretax income. The TRA liability was $70.8 million at quarter-end.
- Management described the frac-services market as tight, with near-full utilization of available capacity and demand for next-generation fleets. It expected limited E&P capital deployment to be directed substantially toward next-generation capacity, but provided no company-specific numeric revenue or earnings guidance.
- Management cited macroeconomic uncertainty, elevated inflation and interest rates, possible recession-driven demand destruction, tight supply chains, and risks to energy supply and prices from the Russia-Ukraine conflict and OPEC+ actions. WTI averaged $93.06 per barrel in Q3, down from $108.83 in Q2 but up from $70.58 in Q3 2021.
- Capital expenditures supported additional and next-generation fleets, including digiFrac development. Management said its tested digiFrac design has an approximately 25% lower CO2e emissions profile than its Tier IV dual-fuel dynamic gas blending fleet.
- The July 2022 ABL amendment increased the facility maximum to $425 million. The August term-loan amendment added a $150 million minimum-liquidity requirement for selected restricted payments, including repurchases; the company reported covenant compliance at quarter-end. The term loan matures in September 2024.
- Purchase commitments totaled $96.0 million, primarily for proppant, transport, equipment, and related services. Management did not expect significant shortfall fees based on forecast activity; potential fees could arise if minimum purchase requirements are unmet and suppliers do not agree to amendments. Litigation was not expected by management to have a material adverse effect.
- The company reinstated a quarterly dividend after quarter-end: $0.05 per Class A share, payable December 20, 2022. The U.S. deferred-tax-asset valuation allowance remained in place; management said sufficient positive evidence to release some or all of it might emerge within the next few quarters, potentially as soon as Q4 2022. Any release could also increase the TRA liability and related expense.
Important facts for investors to verify
- Whether pricing and utilization remain strong enough to offset labor, materials, maintenance, and other inflationary cost pressures.
- Working-capital conversion and collectability, particularly given the high receivables and unbilled revenue balances and the nine-month cash use from working capital.
- Capital spending, ABL borrowing, and liquidity headroom relative to debt maturities, covenant terms, and the $150 million minimum-liquidity condition for selected restricted payments.
- The cash and earnings effects of TRA remeasurement and any future U.S. valuation-allowance release.
- The pace and economics of share repurchases and the reinstated dividend relative to investment needs and cash generation.
- Commodity-market, customer-activity, supply-chain, and geopolitical developments; the filing cautions that actual results may differ materially from forward-looking statements.