LIBERTY ENERGY INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs, and expected performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in "Cautionary Note Regarding Forward-Looking Statements," the Annual Report under the heading "Item 1A. Risk Factors," and in "Part II - Other Information, Item 1A. Risk Factors" included therein. We assume no obligation to update any of these forward-looking statements.
We are an independent provider of hydraulic fracturing and wireline services, proppant and proppant delivery solutions, and related equipment to onshore oil and natural gas E&P companies in
North America. We have grown from one active hydraulic fracturing fleet in December 2011to over 30 active fleets as of March 31, 2022. We provide our services primarily in the Permian Basin, the Eagle Ford Shale, the DJ Basin, the Williston Basin, the San Juan Basin, the Powder River Basin, the Haynesville Shale, the SCOOP/STACK, the Marcellus Shale, Utica Shale, and the Western Canadian Sedimentary Basin. Additionally, we operate two sand mines in the Permian Basin. On December 31, 2020, the Company acquired certain assets and liabilities of Schlumberger's OneStim business, which provides hydraulic fracturing pressure pumping services in onshore United Statesand Canada, including its pressure pumping, pumpdown perforating and Permian frac sand business, in exchange for consideration resulting in a total of 66,326,134 shares of the Class A Common Stock being issued in connection with the OneStim Acquisition. As of April 20, 2022, Schlumberger owned 26.5% of the issued and outstanding shares of our Common Stock. The combined company delivers best-in-class completion services for the sustainable development of unconventional resource plays in the United Statesand Canadaonshore markets. On October 26, 2021, the Company acquired PropX in exchange for $11.9 millionin cash and 3,405,526 shares of Class A Common Stock and 2,441,010 shares of Class B Common Stock, and 2,441,010 Liberty LLC Units, for total consideration of $103.0 million, based on the Class A Common Stock closing price of $15.58on October 26, 2021, subject to customary post closing adjustments. The Liberty LLCUnits are redeemable for an equivalent number of shares of Class A Common Stock at any time, at the election of the shareholder. Founded in 2016, PropX is a leading provider of last-mile proppant delivery solutions including proppant handling equipment and logistics software across North America. PropX offers innovative environmentally friendly technology with optimized dry and wet sand containers and wellsite proppant handling equipment that drive logistics efficiency and reduce noise and emissions. We believe that PropX wet sand handling technology is a key enabler of the next step of cost and emissions reductions in the proppant industry. PropX also offers customers the latest real-time logistics software, PropConnect, for sale or as hosted software as a service. We believe technical innovation and strong relationships with our customer and supplier bases distinguish us from our competitors and are the foundations of our business. We expect that E&P companies will continue to focus on technological innovation as completion complexity and fracture intensity of horizontal wells increases, particularly as customers are increasingly focused on reducing emissions from their completions operations. We remain proactive in developing innovative solutions to industry challenges, including developing: (i) our databases of U.S.unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; (iii) hydraulic fracturing fluid systems tailored to the specific reservoir properties in the basins in which we operate; (iv) our dual fuel dynamic gas blending fleets that allow our engines to run diesel or a combination of diesel and natural gas, to optimize fuel use, reduce emissions and lower costs; (v) the successful test of digiFrac™, our innovative, purpose-built electric frac pump that has approximately 25% lower CO2e emission profile than the Tier IV DGB; and (vi) our PropX wet sand handling technology which eliminates the need to dry sand, enabling the deployment of mobile mines nearer to wellsites. In addition, our integrated supply chain includes proppant, chemicals, equipment, logistics and integrated software which we believe promotes wellsite efficiency and leads to more pumping hours and higher productivity throughout the year to better service our customers. In order to achieve our technological objectives, we carefully manage our liquidity and debt position to promote operational flexibility and invest in the business throughout the full commodity cycle.
Recent trends and perspectives
Restrained global investment since the last oil and gas downturn has led to supply challenges at a time where worldwide demand for energy is growing and expected to surpass pre-pandemic levels in 2022. Relatively low and declining oil and gas inventories have led to persistent upward pressure on commodity prices, even prior to the Russian invasion of
Ukraine. Although Russian export volumes of oil and gas have been only modestly impacted so far, uncertainty regarding potential future impacts of sanctions and buyer aversion to Russian hydrocarbons presents significant risk to future supply and demand balances. We believe that the modest increases in OPECsupply and release of global emergency oil reserves are not sufficient 22 -------------------------------------------------------------------------------- Table of Contents to supply a rebounding world economy and that North American oil and gas are critical in the coming years. However, given the rising COVID-19 cases, mobility restrictions in Asiaand the Federal Reservesignaling a sharp rise in interest rates, general economic uncertainty persists. The frac services market is seeing robust activity improvement and a tightening of the supply-demand balance. Drilled but uncompleted well inventory has stabilized after a steep, continuous decline from pandemic-elevated levels. Available frac capacity is nearing full utilization as demand has increased and supply is limited due to continued equipment attrition, labor shortages, supply chain constraints and very low investment in recent years. While the first quarter benefited from the increase in activity, we continue to face operational challenges including labor shortages, sand supply tightness and logistics bottlenecks. During the first quarter of 2022, the posted WTI price traded at an average of $95.18per barrel ("Bbl"), as compared to the first quarter of 2021 average of $58.09per Bbl, and fourth quarter of 2021 average of 77.33 per Bbl. In addition, the average domestic onshore rig count for the United Statesand Canadawas 816 rigs reported in the first quarter of 2022, up from the first quarter of 2021 of 522 and the fourth quarter of 2021 of 704, according to a report from Baker Hughes.
Three months completed
Three months ended March 31, Description 2022 2021 Change (in thousands) Revenue
Cost of services, excluding depreciation and impairment presented separately
670,019 498,935 171,084 General and administrative 38,318 26,359 11,959 Transaction, severance and other costs 1,334 7,621 (6,287) Depreciation, depletion and amortization 74,588 62,056 12,532 Loss (gain) on disposal of assets 4,672 (720) 5,392 Operating income (loss) 3,839 (42,219) 46,058 Other expense, net 8,489 3,754 4,735 Net loss before income taxes (4,650) (45,973) 41,323 Income tax expense (benefit) 830 (7,357) 8,187 Net loss (5,480) (38,616) 33,136
Less: Net loss attributable to non-controlling interests (104)
Net loss attributable to
$ (34,205) $ 28,829Revenue Our revenue increased $240.7 million, or 43.6%, to $792.8 millionfor the three months ended March 31, 2022compared to $552.0 millionfor the three months ended March 31, 2021. The increase is attributable to higher service prices and increased fleet utilization, commensurate with the demand recovery and tightening of the market for our frac services.
Cost of services
Cost of services (excluding depreciation, depletion, and amortization) increased
$171.1 million, or 34.3%, to $670.0 millionfor the three months ended March 31, 2022compared to $498.9 millionfor the three months ended March 31, 2021. The higher expense was primarily related to the increase in activity from higher fleet utilization, as discussed above, and inflationary pressure on material, personnel, and repairs and maintenance costs.
General and administrative
General and administrative expenses increased
$12.0 million, or 45.4%, to $38.3 millionfor the three months ended March 31, 2022compared to $26.4 millionfor the three months ended March 31, 2021, primarily related to increased personnel costs from reinstated bonus programs which had been temporarily suspended during the first quarter of 2021 as a result of the COVID-19 pandemic, and additional corporate costs attributable to increased levels of activity. 23
Transaction, severance pay and other costs
Transaction, severance and other costs decreased
$6.3 million, or 82.5%, to $1.3 millionfor the three months ended March 31, 2022compared to $7.6 millionfor the three months ended March 31, 2021. The costs incurred in the three months ended March 31, 2021primarily related to investment banking, legal, accounting, other professional services provided and integration costs in connection with the OneStim Acquisition. Such costs were significantly lower during the three months ended March 31, 2022as the integration efforts move towards completion.
Depreciation, depletion and amortization
Depreciation, depletion and amortization expense increased
$12.5 million, or 20.2%, to $74.6 millionfor the three months ended March 31, 2022compared to $62.1 millionfor the three months ended March 31, 2021. The increase in 2022 was due to additional equipment placed in service since the prior year period and additional depreciation from property acquired in the PropX Acquisition.
Loss (gain) on disposal of assets
The Company recorded a loss on disposal of assets of
$4.7 millionfor the three months ended March 31, 2022primarily as a result of plans to sell two non-strategic facilities acquired in the OneStim Acquisition compared to a gain of $0.7 millionfor the three months ended March 31, 2021due to miscellaneous equipment disposals in the normal course of business.
Operating profit (loss)
The Company recorded operating income of
$3.8 millionfor the three months ended March 31, 2022compared to operating loss of $(42.2) millionfor the three months ended March 31, 2021. The decrease in loss is primarily due to the $240.7 million, or 43.6%, increase in total revenue partially offset by a $194.7 millionincrease in total operating expenses, the significant components of which are discussed above.
Other expenses, net
Other expense, net increased by
$4.7 million, or 126.1%, to $8.5 millionfor the three months ended March 31, 2022compared to $3.8 millionfor the three months ended March 31, 2021. Other expense, net is comprised of loss on remeasurement of liability under the TRAs and interest expense, net. During the first quarter of 2022, the Company remeasured the liability under the TRAs resulting in a loss of $4.2 million. Interest expense, net was consistent between periods, increasing $0.6 millionas a result of increased borrowings under the credit facility. Net Loss before Income Taxes
Lower net loss before income taxes
for the three months ended
Income tax expense (benefits)
We recognized an income tax expense of
$0.8 millionfor the three months ended March 31, 2022, an effective rate of (17.8)%, compared to a benefit of $7.4 millionfor the three months ended March 31, 2021, an effective rate of 16.0%. The income tax expense is primarily attributable due to the Company recording a valuation allowance on its U.S.net deferred tax assets and excluding any U.S.tax benefit on U.S.losses while calculating income tax expense on Canadaoperations that are not subject to a valuation allowance.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income before interest, income taxes, and depreciation, depletion and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as non-cash stock based compensation, new fleet or new basin start-up costs, fleet lay-down costs, costs of asset acquisitions, gain or loss on the disposal of assets, bad debt reserves, transaction, severance, and other costs, the loss or gain on remeasurement of liability under our tax receivable agreements and other non-recurring expenses that management does not consider in assessing ongoing performance. Our board of directors, management, investors, and lenders use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation, depletion and amortization) and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. 24
Note regarding non-GAAP financial measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure for the periods presented: Three months ended
March 31, 2022compared to three months ended March 31, 2021: EBITDA and Adjusted EBITDA Three Months Ended March 31, Description 2022 2021 Change (in thousands) Net loss $ (5,480) $ (38,616) $ 33,136Depreciation, depletion and amortization 74,588 62,056 12,532 Interest expense, net 4,324 3,754 570 Income tax expense (benefit) 830 (7,357) 8,187 EBITDA $ 74,262 $ 19,837 $ 54,425Stock based compensation expense 6,813 4,947 1,866 Fleet start-up costs 585 - 585 Transaction, severance and other 1,334 7,621 (6,287) Loss (gain) on disposal of assets 4,672 (720) 5,392 Loss on remeasurement of liability under tax receivable agreements 4,165 - 4,165 Adjusted EBITDA $ 91,831 $ 31,685 $ 60,146EBITDA was $74.3 millionfor the three months ended March 31, 2022compared to $19.8 millionfor the three months ended March 31, 2021. Adjusted EBITDA was $91.8 millionfor the three months ended March 31, 2022compared to $31.7 millionfor the three months ended March 31, 2021. The increases in EBITDA and Adjusted EBITDA primarily resulted from improved market conditions and activity levels as described above under the captions Revenue, Cost of Services, and General and Administrative Expenses for the Three Months Ended March 31, 2022, Compared to the Three Months Ended March 31, 2021.
Cash and capital resources
Historically, our primary sources of liquidity to date have been cash flows from operations, proceeds from our IPO, and borrowings under our Credit Facilities. We expect to fund operations and organic growth with cash flows from operations and available borrowings under our Credit Facilities. We monitor the availability of capital resources such as equity and debt financings that could be leverage for current or future financial obligations including those related to acquisitions, capital expenditures, working capital and other liquidity requirements. We may incur additional indebtedness or issue equity in order to meet our capital expenditure activities and liquidity requirements, as well as to fund growth opportunities that we pursue, including via acquisition, such as with the OneStim Acquisition and the PropX Acquisition. Our primary uses of capital have been capital expenditures to support organic growth and funding ongoing operations, including maintenance and fleet upgrades. Cash and cash equivalents increased by
$12.9 millionto $32.9 millionas of March 31, 2022compared to $20.0 millionas of December 31, 2021, while working capital excluding cash and current liabilities under debt and lease arrangements increased $64.4 million. We have $350.0 millioncommitted under the ABL Facility (net of any outstanding letters of credit), subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory (with the ability to request an increase in the size of the ABL Facility by $75 million) available to finance working capital needs. As of March 31, 2022, the 25 -------------------------------------------------------------------------------- Table of Contents borrowing base was calculated to be $298.3 million, and the Company had $108.0 millionoutstanding, in addition to a letter of credit in the amount of $1.4 million, with $189.0 millionof remaining availability. Additionally, we have $106.0 millionborrowings remaining on the Term Loan Facility, which was originally $175.0 million. The ABL Facility has a maturity date of the earlier of (a) October 22, 2026and (b) to the extent the debt under the Term Loan Facility remains outstanding 90 days prior to the final maturity of the Term Loan Facility, which matures on September 19, 2024.
The credit facilities contain covenants that restrict our ability to take certain actions. To
See Note 8 – Debt to the consolidated financial statements included in “Item 1. Financial statements (unaudited)” for further details.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31, Description 2022 2021 Change (in thousands) Net cash provided by operating activities
$ 14,552 $ 27,528 $ (12,976)Net cash used in investing activities (90,857) (23,787) (67,070) Net cash provided by (used in) financing activities 88,958 (3,266) 92,224
Analysis of variations in cash flows between the three months ended
Operating Activities. Net cash provided by operating activities was
$14.6 millionfor the three months ended March 31, 2022, compared to $27.5 millionfor the three months ended March 31, 2021. The $13.0 milliondecrease in cash from operating activities is primarily attributable to a $240.7 millionincrease in revenues, offset by a $182.1 millionincrease in cash operating expenses and a $71.1 milliondecrease in cash from changes in working capital for the three months ended March 31, 2022, compared to a $8.0 millionincrease in cash from changes in working capital for the three months ended March 31, 2021. Investing Activities. Net cash used in investing activities was $90.9 millionfor the three months ended March 31, 2022, compared to $23.8 millionfor the three months ended March 31, 2021. Cash used in investing activities was higher during the three months ended March 31, 2022as the Company continues to invest in equipment, including digiFrac, compared to more limited capital spending during the three months ended March 31, 2021. Financing Activities. Net cash provided by financing activities was $89.0 millionfor the three months ended March 31, 2022, compared to net cash used in financing activities of $3.3 millionfor the three months ended March 31, 2021. The $92.2 millionchange in financing activities was primarily due to net borrowings of $90.0 millionon the ABL Facility during the three months ended March 31, 2022, compared to no borrowings on the ABL Facility for the three months ended March 31, 2021. Additionally, there was a $1.1 milliondecrease in payments on finance lease liabilities as the number of finance leases has decreased since March 31, 2021.
Our material cash commitments consists primarily of obligations under long-term debt, TRAs, finance and operating leases for property and equipment, and purchase obligations as part of normal operations. We have no material off balance sheet arrangements as of
March 31, 2022, except for obligations of $20.0 millionpayable within 2022 and $1.4 millionpayable thereafter. See Note 15-Commitments & Contingencies to the unaudited condensed consolidated financial statements included in "Item 1. Financial Statements (Unaudited)" for information regarding scheduled contractual obligations. There have been no material changes to cash requirements since the year ended December 31, 2021.
The Company is a corporation and is subject to
U.S.federal, state, and local income tax on its share of Liberty LLC'staxable income. The Company is also subject to Canadafederal and provincial income tax on its foreign operations. 26
The combined effective tax rate applicable to the Company for the three months ended
March 31, 2022and 2021 was (17.8)% and 16.0%, respectively. The Company's effective tax rate is significantly less than the federal statutory income tax rate of 21.0% due to the Company recording a valuation allowance on its U.S.net deferred tax assets as of March 31, 2022, due to entering into a three year cumulative pre-tax book loss position, primarily as a result of COVID-19 related losses in 2021. The Company's effective tax rate is also less than the statutory rate because of foreign operations for 2021, and the non-controlling interest's share of Liberty LLC'spass-through results for federal, state and local income tax reporting, upon which no taxes are payable by the Company for the three months ended March 31, 2022and 2021. The Company recognized income tax expense of $0.8 millionfor the three months ended March 31, 2022and an income tax benefit of $7.4 millionfor the three months ended March 31, 2021. Per the Coronavirus Aid, Relief and Economic Security ("CARES") Act enacted on March 27, 2020, net operating losses ("NOL") incurred in 2019, and 2020 may be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has previously applied for and expects to receive a NOL carryback refund to recover $5.5 millionof cash taxes paid by the Company in 2018. This amount has been reflected as a receivable in the prepaids and other current assets line item in the accompanying audited consolidated balance sheets.
Refer to Note 12 – Income taxes to the consolidated financial statements for additional information regarding income tax expense.
Agreements on tax claims
Refer to Note 12 – Income taxes to the consolidated financial statements for additional information relating to tax receivable agreements.
Significant Accounting Policies and Estimates
The unaudited condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions (see Note 2-Significant Accounting Policies to the unaudited condensed consolidated financial statements included in the Annual Report). We believe that some of our accounting policies involve a higher degree of judgment and complexity than others. As of
December 31, 2021, our critical accounting policies included business combinations, revenue recognition, estimating the recoverability of accounts receivable, inventory valuation, accounting for income taxes, property and equipment, leases, tax receivable agreements, share repurchases, accounting for long-lived assets, and foreign currency translation. These critical accounting policies are discussed more fully in the Annual Report.
There have been no changes in our assessment of our critical accounting policies since
Off-balance sheet arrangements
We have no material off balance sheet arrangements as of
March 31, 2022, except for purchase commitments under supply agreements as disclosed above under "Item 1. Financial Statements-Note 15-Commitments & Contingencies." As such, we are not materially exposed to any other financing, liquidity, market, or credit risk that could arise if we had engaged in such financing arrangements. 27
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