There have been growing concerns among investors of hydraulic fracturing or fracking companies citing concerns over water management, emission of greenhouse gases, and disclosure of toxic chemicals among others. Companies such as BP (BP), Shell (SHEL), Chevron ( CVX), Exxon Mobil ( XOM), and TotalEnergies ( TTE) all published green claims in 2021. They are also required to spend at least 10% of their capital expenditures on low-carbon projects this year alone. However, despite the pressurized campaigns from shareholders and even from the U.S. government (that ostensibly offers more subsidies to green projects), oil and gas companies are braving it all.
Liberty Energy (NYSE:LBRT ) expects a 10% increase in sequential growth driven largely by fleet reactivations and a modest increase in sales margins. It is working on the premise that the supply of available frac fleets will remain tight throughout 2022 and into 2023. To help curtail the rising costs, the company has maintained environmental, social, and governance (ESG) friendly fleet technologies that provide for the reduction of carbon emissions thereby helping to save fuel. Management is also considering an increase in its capital expenditures in North America to raise production and conduct fleet upgrades. However, the company is still facing power generation and cost-related headwinds that may slow down the deployment of its two digiFrac fleets later in 2022.
LBRT formerly Liberty Oilfield Services reported an 8.3% gain in revenue (in Q2 2022) at $943 million against analysts' consensus estimates of $870.69 million for the quarter. Diluted EPS stood at $0.55, beating estimates by more than $0.40. Gross profit has also increased 373.13% in the six months leading to June 30, 2022, to stand at $228.9 million.
Liberty hit record fundamentals in Q2 2022 with the first half of 2022 showing how the acquisitions in 2021 were creating value for the company.
Speaking about acquisitions and business integration, LBRT announced its investment in Natron Energy for the production of sodium-ion batteries. As an energy-storage solution, the batteries will help provide uninterrupted backup power for Liberty's digiFrac. LBRT did not disclose the invested capital in Natron but it was optimistic that the batteries will help it meet its ESG goals. Unlike lithium-ion batteries-as used by Tesla (TSLA), cobalt or copper, sodium-ion battery components are in abundance, at a lower cost, and provide for wider distribution. It explains why Nabors Industries (NBR), a leader in drilling for offshore oil and natural gas wells invested $7 million in Natron Energy back in July 2022.
I think LBRT's desire to adopt sodium-ion batteries is part of a wider scheme to lower the costs of operations. Despite racking in record revenues in Q2 2022, Liberty’s costs of revenue were over the roof. Two years ago, in the quarter ending on June 30, 2020, Liberty's quarterly revenue costs hit a historic low of $89.5 million. Of course, this was negatively affected by the Covid-19 pandemic. Revenues were $88.4 million at the time while the company ended up with a loss of $1.2 million. By June 30, 2022, LBRT’s costs of revenue had increased by almost 700% since 2020 to stand at $713.7 million.
Reactivation costs for fleets deployed in Q2 2022 and those planned for Q3 were to the tune of $7 million. The oilfield services market environment has been hit by raging inflation forcing companies to run for fuel-cost savings and lower emissions. Liberty intends to have at least four fleets by early 2023 and the company is already experiencing power management headwinds regarding the digiFrac.
As stated earlier, digiFrac is Liberty’s innovative electric frac pump. The company believes that this pump lowers carbon dioxide emission by 25% as compared to the Tier IV dynamic gas blending (DGB) engine. The latter is a factory-fit solution that not only meets the emission standards for diesel and gas but also has a maximum diesel displacement rate of 85%. Liberty has its own DGB fleet that also allows its engines to run on diesel or a combination of diesel and natural gas. This option allows for the reduction in emissions, costs, and optimal use of fuel.
With Liberty offering next-generation fleets, it will be vital for investors to establish how the reactivated Tier 4 diesel fleets are priced relative to the next-generation fleets. The next 6 to 12 months should give us a clue about the profitability expansion in the pricing of the next-generation fleets as well as re-contracting.
Other prominent innovations (into 2022) that stand out for Liberty include the Quick Fleet design which provides lower noise levels as compared to conventional hydraulic fracturing fleets. The company's own hydraulic fracturing fluid system is tailored to the specific reservoir properties in its basins. Mobile miners handling wet sand can also use Liberty's PropX technology which removes the need to dry sand in well sites. Overall, the company needs to revamp its supply chain to integrate the software with proppants, chemicals, and other logistics to promote well-drilling efficiency. I believe the company should work to increase its pumping hours amid higher productivity contracts to improve service to customers.
Russia's invasion of Ukraine is helping to cement North America's dominance in the supply of oil and gas. Many E&P operators are evaluating their chances of augmenting capital expenses in the region while growing production levels in line with OPEC guidelines. Early in September 2022, OPEC officials agreed to cut oil production by 100,000 barrels per day barely a month after it had approved an increase of the same margin. It seems there is a deliberate push to defend a price level of around $100 a barrel of crude oil. However, Brent Crude is currently trading at $91 per barrel while WTI Crude is at $84 a barrel, indicating a possible decrease. Natural gas prices are also at $7.791. In the long term, the reduction in energy prices will eventually warrant an increase in production possibly to pre-pandemic levels.
The North American hydraulic market is forecast to grow to $34.8 billion by 2030, surging at a CAGR of 14.2% from 2022 to 2030. The increase is supported by the potential of untapped reserves, including tight and shale gas, and the growing need for oil/gas post-pandemic.
Liberty Energy seems to be increasing its fleet size every year. As of June 30, 2022, it had more than 30 hydraulic fracturing fleets. It has expanded its services across the Permian Basin, the Eagle Ford Shale, and The Marcellus Shale and up to the Western Canada Sedimentary Basin. With the exclusion of proceeds from the sale of assets, Liberty Energy increased its capital expenses by more than 250% in the six months to June 30, 2022 (as compared to the same period in 2021).
Other notable entity integration in the quarter included OneStim and PropX, which was acquired on October 26, 2021, for $11.5 million in cash and 3,405,526 shares of Liberty's Class A common shares.
Liberty’s cash balance is lower than its capital expenditures (as far as investing activities are concerned). As of June 30, 2022, Liberty’s cash balance stood at $41.5 million. This represented a modest improvement of 26.13% from $32.9 million recorded in Q1 2022. The net cash used in investing activities increased by $166 million, almost 4 times the cash balance (in the six months leading to June 30, 2022, as compared to the same period in 2021). However, there was a reprieve after operating activities generated net cash of $135.63 million in the half-year period, up from $35.57 million recorded in 2021. There was also an increase of⁓$110 million in cash provided by financing activities in the six months leading to June 30, 2022, that helped to offset the growing expenses. I believe that investors will need to wait a bit longer before a share buyback program is announced in order to raise the share price.
However, the planned increase in capital expenditures may see the company use more cash over the next 12 months, further calling for share dilution to raise liquidity. Investors also need to consider that Liberty is yet to complete the initial price allocation of PropX after closing the deal in October 2021.
Liberty's Tier 2 diesel equipment that came with the OneStim acquisition is yet to come online, posing pricing challenges for the company's reactivated fleets in this section. These Tier 2 fleets have to be upgraded to ensure they comply with the company’s ESG requirements for next-generation fleets. We expect additional costs to support this upgrade. For example, Trican Well Service Ltd. (OTCPK:TOLWF) will be spending at least $32 million to upgrade its fourth low emissions fleet later in 2022. The company intends to upgrade 42,000 hydraulic horsepower (HHP) from conventional diesel engines to Tier IV DGB engines.
LBRT’s share price has surged ~27.26% over the past year as the company grew its investment in energy-friendly power management solutions. Despite the modest increase, I do believe that the company’s turnaround story as far as hydraulic fracking is concerned is yet to be completed.
Liberty Energy, a leading oilfield and technology company, has grown its hydraulic fracturing fleet structure since 2011 to more than 30 as of Q2 2022. The company will escalate its capital expenditures in the North American region with key acquisitions indicating the strength of delivery into 2023. Liberty’s management hopes that its capital expenditures will pay off in the long term as it seeks global growth. Still, the company needs to manage its costs and speed up the upgrade of its remaining Tier 2 diesel engines to confirm its ESG requirements. For these reasons, we propose a hold rating for the stock.
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Disclosure: I/we have a beneficial long position in the shares of LBRT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.