Good morning and welcome to the Liberty Oilfield Services First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. Some of our comments today may include forward-looking statements, reflecting the company’s view about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company’s beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company’s earning release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA and pre-tax return on capital employed are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA and the calculation of pre-tax return on capital employed as discussed on this call are presented in the company’s earnings release, which is available on its website. I would now like to turn the conference over to Liberty’s CEO, Chris Wright. Please go ahead.

Good morning, everyone and thank you for joining us. We are pleased to discuss with you today our first quarter 2019 results. Despite facing a challenging market, we are proud to have delivered a sequential 13% increase in revenue to $535 million and adjusted EBITDA increase of 18% to $85 million and a net income before income taxes increase of 27% to $41 million after adjusting for gain loss on disposal of assets. In the quarter, our fully diluted earnings per share, was $0.26. We were able to execute this financial performance due to the excellence of our operations and supply chain teams. Even with some significant winter weather, our fleets performed at summer-like efficiencies and we pumped a record volume of profit in the quarter. These strong financial results enabled us to continue the organic growth of our asset base while returning $24 million of cash to shareholders in the form of quarterly dividends, distributions and the repurchase of 1% of our total outstanding shares. With our focus on long-term success, we continue our commitment to achieve superior returns on invested capital, maintain a strong balance sheet and invest for the future. We delivered a pre-tax return on capital employed for the 12 months ended March 31, 2019, of 33% while generating significant free cash flow and returning cash to shareholders. Our first quarter 2019 results reflect a rebound in our activity from the fleet utilization challenges experienced in the fourth quarter of 2018. We have balanced the demand for Liberty’s differentiated services with market pricing dynamics to produce acceptable returns on our fully utilized frac fleet. Based on visibility with our customer activity pipeline for the year, demand for Liberty fleets remains high. And at the end of the first quarter, we activated our new Tier 4 frac…

Good morning, everyone. We are pleased with the performance of our team during a challenging first quarter. Liberty operations and supply chain teams executed at the level that drives customers to want Liberty as their partner. This is evidenced by the fact we pumped the highest quarterly volume of profit in our history in the midst of a softer patch in the industry. For the first quarter 2019, revenue increased 13% to $535 million from $473 million in the fourth quarter of 2018. Net income after tax totaled $34 million in the first quarter, the same as the fourth quarter. Pre-tax net income increased 27% to $41 million after adjusting for the loss of gain on disposal of assets. First quarter adjusted EBITDA increased to $85 million from $72 million in the fourth quarter. Annualized adjusted EBITDA per fleet increased to $15 million in the first quarter compared to $13 million in the fourth quarter. General and administrative expenses totaled $22 million for the quarter or 4% of revenue and included stock-based compensation expense of $2 million. Interest expense and associated fees totaled $4.2 million for the quarter and compared to $3.5 million in the prior quarter. And first quarter income tax expense totaled $6 million compared to $4 million in the fourth quarter. We ended the quarter with a cash balance of $59 million and net debt of $47 million. At quarter end, we had no borrowings under our ABL credit facility. And total liquidity, including availability under the credit facility, was $292 million. As we’ve discussed previously, in order to seek the best long-term returns for our shareholders, we will follow a proven strategy of maintaining a strong balance sheet, investing in compelling growth opportunities and returning capital to shareholders when appropriate. In the first quarter, we paid…

As Yogi Berra said, predictions are hard, particularly about the future. But our best guess is that we may see a continued gradual decline in available frac capacity actively marketed due to ongoing fleet idling in response to current forecast returns for many players in the space. Capital discipline may drive a modest market improvement over the next several quarters. As we look further into the future, we tend to agree with comments made by others during this earnings season that there is a significant amount of horsepower in the general market that is at the point of needing significant reinvestment to remain competitive. The most likely result is that a portion of this aged equipment will be permanently retired over the next few years. However, we are not making any decisions based on this idea. Our focus is on driving improvements in our technologies and operations that allow us to increase our returns, independent of any price movement. These medium to long-term efforts will only bear fruit very gradually, but they are top of mind for us everyday as we pursue our mission to build a truly differential frac company. Thanks for joining us today. We will open it up for questions.

[Operator Instructions] The first question comes from Sean Meakim of JPMorgan. Please go ahead.

Thanks. Good morning.

Good morning.

So to start, I guess, Chris could you maybe give us a sense of your confidence level in terms of 4Q being a bottom for EBITDA per fleet profitability? And I am just curious if there is any other pieces that we should be considering in the quarter in terms of startup drag from fleet 23, how that can influence the second quarter or even the third quarter, trying to get a sense of the other moving parts? I hear you on the medium to long-term, some of the opportunities that are out there, but in the near-term, what are the levers are there to drive profitability in, let’s say, a flat pricing environment in the next couple of quarters?

Well, look the improvement first of all, fleet start-up costs are relatively modest in all of these quarters. They’re less than 2% of our EBITDA, so I don’t think they’re a driver either way. Q4 was challenging really from a utilization perspective. As we said 3 months ago, the challenge in Q4 was short-term notice from customers on major changes in schedule. That we had higher obviously, higher average prices in Q4 than we did in Q1, but significant utilization challenges, is what drove that result down. And, yes, I think it’s a fair statement we expect that to be the bottom in EBITDA per fleet. Q1, the story, basically, was very high utilization and good efficiency. Always room for improvement on those, but I would say very proud of the team for the utilization and the efficiency that was delivered in Q1.

Okay, understood. So then in the Permian, specifically, how has your customer mix changed over the last couple of quarters or I am not sure if it’s largely the same and folks have gotten back to work. And as you think about a big part of the incremental demand that tightened the market last year and has helped that oversupply situation today has been private E&Ps. I’m just curious how you see their behavior factoring into the setup for the back half of the year.

Yes. So, in the Permian, our customer base is very much the same. Changes in customer makeup at Liberty happen very slowly. We tend to have long-term partnerships, and we’re slow in changing horses in the customer department. So no, none of the changes there would be due to different customers. Your comments about privates, I think, are quite relevant because our expectation is that the publics with announced CapEx budgets, we probably see a meaningful drop-off again in Q4 from them. If you run highly efficient operations, people have a budget. You run efficiently, tend to spend the budget a little bit quicker. So, we do expect to see some of the same challenges in Q4 from that. What we’re doing this year is a better tracking of their expenditures versus budget and just tighter communication to understand that dynamics of that further out. There is excess demand for Liberty, so I believe we will have others to fill gaps that I think will inevitably open in Q4. Privates are likely a meaningful part of that as well. That depends on oil prices. Oil prices right now, I think you see an increase in activity from privates. If oil is $48 going into Q4, I think we won’t. But there certainly will be activity in Q4. As long as we know well in advance, we can make calendar and schedule responses. But I think we’re going to see some of the same noise and movement and struggles in Q4 this year as we did last year and as we probably will next year as well.

Make sense. Great. Thank you.

The next question comes from John Daniel of Simmons Energy. Please go ahead.

Great quarter. I just have two quick questions on just sort of rebuild, etcetera. Can you speak to what your remanufacturing efforts are going to be in 2019 and how that would compare to what you did over the last couple of years?

If you look at our fleet age, I think this is our eighth commercial year in business, so early fleets. They some of them are absolutely in the rebuild cycle. And those efforts are ongoing, and they were ongoing last year, too. Might they be a little bit greater this year? Quite yes, I suspect they will.

John, it’s Michael. I think, as we said, about $65 million of we think of capitalized maintenance, and that’s really that rebuild cycle, moving from about $2.5 million to $3 million on average a fleet. So, a little more going on this year; you have very early fleets getting rebuilt.

Okay. Can you I’m just trying to oversimplify this because I’m not very smart. But how many fleets would you or pumps would you expect to rebuild, because you are spreading that out over all units. Because the narrative is that the lower-performing people can’t reinvest, right, and you guys are not an underperforming player. I’m just curious if you can say, okay, look, of our 23 fleets, we’re going to effectively rebuild 2 or 3 every year going forward.”

Yes. That’s about right, John, I mean, I think we’re probably sort of in that 10% range; it’s going to average. Again, I think it will depend we’ve got a fairly steady sort of aging of fleets between sort of most of what we’ve done is newbuild. And the equipment that we picked up of Sanjel was sort of a relatively 2.5-year average fleet age when we bought it. So, yes, so I think it’s going to be relatively steady. Some years, you’ll see 2 fleets. Some years, you’ll see 3 fleets. You might see 8% to 12%, but I think it will depend on cycle. And also, just a lot of it is just how busy you are and how you can kind of bring that bring those equipment’s out of the field.

And John, I will also add, as you probably heard us say before, when we build a new fleet or design a new fleet, our whole mindset is total cost of ownership over the life of the fleet. You can get fleets cheaper and you can save in the short term, but you pay for that in the long term. And that’s just not our mentality, right? So, when we’re designing these fleets, we’re thinking about what is its 10 year what are the next 10 years on this fleet going to look like? Now we’re never perfect on that, but that’s how we view it. And you’ve also got issues. When I was talking about fleets and some of them aging that are more than 10 years old, right, there were just different fundamental components. 10 years from now, 15 years from now, we’ll probably have better fundamental components than we have today. So then as fleets get very old, even if they are maintained, you get essentially, there’s a slow obsolescence factor in addition to if you didn’t maintain them well and you didn’t make the decisions when you first built them.

Fair enough. Last one for me, just in the age of rising calls for ESG investing. How are you guys looking at dual fuel kits on your fleets? Like what percent of them are dual fuel today? And as stuff comes through and gets rebuilt, are you automatically putting in dual fuel kits what you’re doing there?

Yes. So, we’ve always been intrigued by that. There is a lot of things to like about dual fuel. Number one on that is natural gas is cheaper than diesel, right? So, when you’ve got availability to natural gas, it’s a cheaper way to run a frac operation. Definitely, it’s got lower emissions, and again, not just in CO2 emissions, but SOx and NOx and particulate emissions. So, look, in a perfect world, look at United States electricity grid, right? We don’t use oil to make any electricity, and natural gas is our biggest source. So natural gas is a preferred fuel. Close to half of our fleets or pumps are dual fuel, so we’re not running at that level today because to do that, you’ve got to have gas in the field, right, so probably only half of our dual fuel fleets are actually running with that capability, but certainly, we hope to see, we expect to see and we work with our customers to see an increasing consumption of natural gas to power like to power frac fleets.

And John, pretty much everything we build is dual fuel now and has been for a number of years.

Perfect. Thank you so much.

Thanks John.

The next question comes from George O’Leary of Tudor, Pickering, Holt. Please go ahead. George O’Leary: Good morning guys.

Good morning George. George O’Leary: First question, really, just a clarifying question. When you mentioned that profits could be flatter or slightly down quarter-over-quarter, which is understandable, given where pricing likely exited the quarter versus where it entered the quarter in Q1, was that per-fleet profitability or overall EBITDA? Just trying to make sure I didn’t misunderstand that.

So, I said that’s overall EBITDA, George, so overall EBITDA we’re thinking but very similar to fleet profitability. There’s not a lot of difference. We only had sort of 1/3 of a fleet additional for Q1 ‘22.

It just depends on the dynamics. You mentioned the price, right? Average price is almost, for sure, going to be down in Q2 over Q1, not a lot, but it’s going to be down. And we had, I would say, exceptional utilization and operational performance in Q1, maybe unusual for a winter season, but our guys get more seasoned, and they’re getting better. And so, it’s hard to go too much higher from that in the short run. And so, could there be a little more scheduling challenges in Q2 or whatever that’s another headwind factor? Yes, that’s certainly possible. George O’Leary: Okay, that’s very helpful. My next that was a good segue. My next question was going to be if you think about it in terms of hours or sand pumped per fleet per month, how much better can you actually get or might we be reaching kind of near-term full efficiencies? So, I think you answered that question, but I’ll let you respond if not?

On near-term, on-long term, is there room for significant growth and efficiencies? Absolutely. That’s technology development here. That’s operating procedures. That’s customer relationships. So, no, we still see a fair amount of room for improvement on that, and, look, that’s really been a Liberty mission in our entire history. If you look at number of hours a day, we’re pumping from 7 years ago and 5 years ago, it’s lumpy of course, because we’re in the real-world upward trend and we certainly expect that upward trend to continue. But to clarify your other point, yes, in the short run, are there brand-new things that are going to really drive it up in Q2 over Q1, not in the short run. So, later this year, I think we’ll see some more positive developments there. George O’Leary: Great.

Yes. And, George, that was just a – really a – that was a modeling clarification for you all, as we’ve always said, you get a little uptick winter over summer on average year. I just don’t think it will be as pronounced anywhere near as pronounced this year as is on average. So, we just kind of try to message that. George O’Leary: Okay. That’s very helpful clarification. On – I’ll piggyback on one of John’s questions. On the dual fuel side, half your pumps shows commitment to that. How do you – and I know how you framed it historically. Just curious for your updated thoughts on e-frac versus dual fuel and why one makes sense over the other?

George, this is Ron. I think we’ve always said from the e-frac standpoint, it’s a technology we continue to keep an eye on. And I think when we see a – when we see the right set of circumstances come together that, that makes sense for us, we will be prepared to roll out an electric frac fleet. But at this point in time, just given what we see the trade-offs as, I think we still feel we’re far better served by running dual fuel. We’ve tackled the noise problem. We have the quiet fleets out there already. We don’t really face a footprint challenge or anything like that. And for those customers, who do want to run gas, we have that capability today. So, I think we’ve checked all those boxes at this point in time. And when and if we have demand, rest-assured, we’re – we feel like we’re on top of what e-frac technology will be, and when the time comes, we’ll be prepared to put something in the market. George O’Leary: Thanks very much for the color, Ron. Good music too.

Sorry about that.

The next question comes from Angie Sedita of Goldman Sachs. Please go ahead.

Hi, good morning, guys.

Good morning, Angie.

Good morning.

So, Chris, your comments on potential upside and pricing for later this year, want to dig into that a little bit. Is that solely driven by lower supply? Can you give us a little bit of color about supply and activity, but – fill us in?

So, our guess is that the dominant driver and maybe the sole driver is lower supply. The market today is less oversupplied than it was 2 months ago and much less oversupplied than it was 4 months ago. So, we’re seeing supply removed from the market. With customers with lower budgets and aggressive production targets, it’s critical to them to have high throughput, reliable, efficient operations. So, maybe there’s even a little bit of skew in there in that, the pull on Liberty fleets right now is actually quite strong. We’re – there are plenty of people we like, we know, we’d like to work for – we don’t have the capacity for today. So, yes, we are – we don’t know the future, as I said. So, if oil goes to $70 and privates go crazy, then maybe you’ll see increased activity late in the year, but it’s not obvious that that’s going to happen. Our sort of general macro assumption is relatively flattish activity from here and probably a rockier fourth quarter. Now our macro is no better than anybody else’s, so don’t take that to the bank, but when we say that we expect a little bit firming market, that’s supply exiting the market.

Okay. And then is the thought that we could see additional fleets coming out in Q2 or do you think that’s generally behind us? And if we did see some movement in pricing, wouldn’t you expect so many fleets to come back into the market?

Yes. I think we’ll see a bit of both of those. I suspect we’ll still see fleets exiting the market. I think there’s still a number of players, if you’re not generating meaningfully positive cash flow when you’re aging a capital-intensive asset, that doesn’t make a lot of sense. And I think we’ve seen a lot of the players in the market that have been quite rational and have responded to that in a rational way. So, no, I don’t think the idling of fleets and laying of capacity is over. But if prices moved up meaningfully, would some of those come back? I certainly expect they would. I certainly expect they would. We don’t expect radical price changes either way going forward. But our dialogs with customers and potential customers, if there’s a bias from where price is now, it’s up a little bit. It’s not down a little bit and it’s not flat for the rest of the year, but modest, very modest changes that we might see.

Okay, okay. Fair enough. And then clearly, we’re talking about retiring fleets and just some idling on your fleets. I mean, what are you hearing or any views that you have on just overall attrition as we go into the end of 2019 and 2020?

We’re probably not hearing anything different than you’re hearing, right? I think it’s a fleet age thing and a operating profitability thing. If you have a fleet and it’s not really cutting it today, it’s not operationally performing great, you’re not making any cash with it, are you going to spend large money to rebuild that fleet, I think a number of people would say no. It’s better to have a slightly smaller, but higher average quality fleet than I’ve got today. But we have no quantitative insight in there that you or others don’t have.

Fair enough. Thank you. I will turn it over.

Thanks, Angie.

[Operator Instructions] The next question comes from Vebs Vaishnav of Howard Weil. Please go ahead.

Hey, good morning, guys and congratulations on a very good quarter.

Good morning. Thanks, Vebs.

Thank you.

So just thinking about 24th fleet, how likely does that go to work this year?

So, it’s – that is a granular decision for us, not a macro decision for us. So, I think I mentioned earlier, we’re in a number of dialogs with existing customers, with customers we’ve been talking to for a while maybe aren’t existing customers that are interested in Liberty capacity. And so for us to deploy that fleet, we’d have to feel comfortable, it’s going to a strategic customer that’s going to be a great long-term home for it and that all of our existing fleets we can keep deployed and active with uncertainties that will come in demand. So, there’s a number of boxes that need to be checked for that to happen. That’s certainly very – certainly could happen this year, but very likely – but just as likely, it certainly might not happen this year. But again, for us, it’s not a macro call. Well, it’s a macro call on the whole fleet utilization and a micro call on a particular opportunity.

Got it. Got it. And as I just think about CapEx maybe for next year, so is it fair way of thinking, let’s say, $5 million a fleet on, call it, 23, 24 fleets and some additional CapEx on top of it?

No, I mean, if you think about it – are you talking about capital maintenance, Vebs?

Yes, sir.

No. So, I think $5 million is probably too high, right? I think we still think we’ll probably average around kind of $3 million. It will be somewhere between $2.5 million and $3.5 million. We don’t have the budget yet of what we’re going to rebuild. But I wouldn’t expect it to go to $5 million. You’re going to see some investments in technology improvements. Just like we did this year, we’ll finish out the articulating arm rollout. There’s a number of other technologies that we’re looking at to really reduce the cost of operation. So, you’re going to see some investment in there. Will it be in the order of what we did this year, which was in the order of $40 million? I think it will be around in that zip code I would – it’s possible. So – and then it just comes down to is there any demand for new fleets, if there’s going to be any disruption of new fleets.

Yes. We are not like near the trigger to order new fleets right now. That’s not in the front burner of Liberty right now, but, yes, next year is a ways away. But I would say obviously, relative to cash flow next year, is CapEx likely to be relatively modest, that’s likely.

Got it. And I think it has been asked, but just want to have some more color on pricing. So, you guys think pricing should be improving later in the year. You guys talked about 2Q average pricing lower sequentially. And then you guys also talked about in the fourth quarter, you think public E&Ps could drop activity because of budget discussion. So just like trying to reconcile is basically what you’re saying is pricing is going to be up in 3Q and then like then flattish in 4Q or how are you guys thinking about it?

Okay. So, yes, I guess to clarify what I already said. So, we expect average pricing down sequentially in Q2, not that there’s – not that existing prices are going down. We just have price reductions that happened in Q1, maybe the middle of Q1 that now are going to flow through for a whole quarter. And I don’t want to say that I – kind of a table, like the frac prices are going to be up in Q3 and down or flat in Q4, I don’t know about that. The best guess is probably pretty close to flattish this year. I’m just saying in our dialogs, in our world, the potential dialogs about future pricing, there’s definitely much more likely that there are modest upward bumps as opposed to any downward bumps. So – but I don’t know if that’s true for the whole market, that may not unfold as well. It depends how the market unfolds. But we had a pretty rapid reset of pricing that I think is – absent some big exogenous shock, I think it’s bottomed. And, yes, I suspect if there’s a little movement from here, it’s more likely up than down, but that’s a very qualified, very modest statement. Don’t – I don’t want to imply anything more than that.

That makes sense. Thank you for taking my questions.

You bet. Thanks, Vebs.

The next question comes from Stephen Gengaro from Stifel. Please go ahead.

Thanks, and good morning, gentlemen.

Good morning, Steve.

Two things, if you don’t mind. The first, just a follow-up on Vebs’ question, on the pricing front, is it fair that the bigger degradation in price was sort of 4Q, 1Q as opposed to what we’re seeing flowing into 2Q on sort of the average price declines?

Yes. That’s absolutely fair to say that.

Okay. So more of this was already reflected in the numbers as opposed to – you’re just sort of highlighting that there’s still a slight degradation in 2Q?

Yes. And that’s – look, there was a lot of price resetting in Q4 or at the very beginning of Q1. Think of when the supply and – not just commodity prices falling rapidly, even more importantly, just supply and demand in the frac market. There is just way more fleets looking for frac work than there was demand for frac work in Q4, particularly the end of Q4 and going into Q1, so you get the markets work and so you get pricing response there. So, yes, I would say a large part of the big reset already flowed through Q1, but the later ones and resets that were middle of Q1, there’s a little bit of an impact from there, but a long way to say yes, you said it correctly.

Okay, great. Just making sure. Thank you. And then secondly, when you talked about some of the maintenance requirements, is there anything over the next couple of quarters that’s abnormal that sort of takes a fleet out of the mix for any period of time outside of what we would kind of consider normal as we model this going forward?

No.

No.

Okay, good, perfect. Thanks for the clarification.

Thank you.

Thanks for now.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Wright for closing remarks.

Thanks everyone for joining us today, for your interest in Liberty and for your interest in this industry that literally powers all the other industries and makes the world go round. Have a great day, and we look forward to talking to you 3 months from now.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.