North American completions expert Liberty Energy Inc. is looking for ways to expand its electric fleets and services as customers vie for environmentally friendly equipment, according to CEO Chris Wright.

Liberty

The management team of the Denver-based company, formerly Liberty Oilfield Services Inc., held a conference call Tuesday to share 2Q2022 results. Business is good, but Wright noted that there are warning signs too.

The oil and gas industry, he said, is “still impacted by supply chain challenges…” Continued inflation also is sparking worries for the global economy. It’s not one thing, but rather a list of global upheaval that has rocked the energy world.

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“While the global economic recovery outlook has softened on reverberating impacts from higher inflation, rising interest rates and the Russian invasion of Ukraine, oil and gas markets remain constructive,” Wright said. 

‘Severe Recession’ Risk?

“Eight years of underinvestment in upstream oil and gas production, exacerbated by inept global policy initiatives aimed at incentivizing an energy transition, has created a mismatch of supply and demand,” Wright said.

He pointed to the “historically low global oil and gas inventories, limited OPEC spare production capacity and a dearth of refining capacity,” which he said are now “colliding with increased energy demand.”

Demand escalated in the “post-pandemic recovery in travel, China’s emergence from its enforced Covid lockdowns, plus seasonal demand. These are all further magnified by the Russia/Ukraine conflict and the potential for sanctions imposed on Russian oil exports, coupled with Russia’s decision to constrain natural gas pipeline exports to Europe.”

Still, the “greatest risk to our marketplace is a severe recession that leads to a drop in global demand for oil and natural gas,” the CEO said. “A moderate recession typically leads only to a slowing in the rate of demand growth for oil and natural gas, which would likely not be overly disruptive to our customers’ activity given today’s low inventory levels and tight supply and demand balances. The recovery in oil supply appears to be under greater threat than oil demand.”

Still, though, Wright sees upside for pressure pumping services, otherwise lumped into the hydraulic fracturing (fracking) bucket. To that end, the oilfield services giant went on a tear in 2021 to expand its offerings. The plum was capturing Schlumberger Ltd.’s OneStim, the massive U.S. and Canada onshore completions business, in exchange for 37% equity. Liberty also bolted on Proppant Express Investments LLC to enhance last-mile delivery solutions for drilling sites.

Geothermal Too

The latest addition to the portfolio is a $10 million investment in Fervo Energy, a geothermal energy technology company that develops assets for dispatchable baseload grid power with low-carbon intensity. 

“The investment in Fervo is a natural fit for Liberty in the rapidly evolving geothermal market,” Wright said. “Our technical expertise in underground reservoir fluid flow and network fractures should help improve project economics and the scalability of geothermal as an energy source. Unconventional geothermal applications offer a potential pragmatic solution for a reliable source of low-carbon electricity, and we’re excited to be a part of the journey.”

All of the recent transactions polish Liberty’s long-held brand as an environmentally friendly equipment provider. The completions business is centered around the proprietary digiFrac electric fleet used in completions. 

Exploration and production (E&P) customers are pushing for more services like the digiFrac to align with their environmental, social and governance goals. With higher demand, Liberty has expanded capital spending this year to invest in two more digiFrac fleets.

North America is set to be the “largest provider of incremental oil and gas supply,” Wright said. E&P operators “are evaluating the opportunity to deploy incremental capital in North America to modestly grow production, while remaining focused on shareholder priorities.” 

“The fundamental demand call on North American oil and gas supply is strong.” However, a “tight frack market” is constrained by a lack of equipment, supply chain woes and labor constraints.

Struggling Competitors

Wright noted that some smaller competitors are struggling. 

“The frack market is near full utilization, and few service providers have the fleet capacity and supply chain reach to satisfy E&P operators’ goals,” he said.

As the E&Ps began to ramp up post-Covid lockdowns, Liberty didn’t lose its cool, and remained disciplined and restrained in fleet reactivations. That has helped alleviate some of today’s economic concerns.

“Pricing has now recovered to where Liberty, in support of our customers’ long-term development needs, is reactivating several of our recently acquired, available fleets,” said the CEO. 

As important, though, Liberty’s long-time customers are clamoring for the next-generation fleets, which are scarce. 

To resolve some of the shortages, “Liberty is providing an avenue” by using free cash flow from existing fleets to “reinvest in our fleet modernization program,” Wright said. “Liberty is also partnering with key customers on the deployment of two additional digiFrac electric fleets in 2023.”

Recent conversations with the E&P customers have given the management team “confidence in the demand for Liberty services into the coming year. In the third quarter, we expect approximately 10% sequential revenue growth, primarily driven by fleet reactivations and modest net pricing increases. Third quarter margins are expected to improve from the contribution of incremental fleets and modest price improvements, partially offset by ongoing supply chain, operational and inflationary pressures.”

Liberty’s net income was $105 million (55 cents/share) in 2Q2022, compared with a year-ago net loss of $51 million (minus 29 cents) and a loss of $5 million (minus 3 cents) in 1Q2022. Revenue climbed by 62% year/year and 19% sequentially to $943 million. 

In other news, the board authorized up to $250 million in share repurchases through July 2024, which is around 10% of Liberty’s market capitalization based on the current share price.