Welcome to the Liberty Energy Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Anjali Voria, Strategic Finance and Investor Relations Lead. Please go ahead.

Thank you, Anthony. Good morning, and welcome to the Liberty Energy Third Quarter 2022 Earnings Conference Call. Joining us on the call are Chris Wright, Chief Executive Officer; Ron Gusek, President; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that 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 our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures including EBITDA, adjusted EBITDA, pre-tax return on capital employed, and cash return on capital invested, are not a substitute for GAAP measures, and may 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 on the company’s earnings release, which is available on the Investors section of this website. The calculation of cash return on capital invested, is set forth in the company’s Investor presentation dated September 6, 2022, which is also available on the Investors section of the website. I will turn the call over to Chris.

Good morning, everyone, and thank you for joining us for our third quarter 2022 operational and financial results. We are extremely proud of our team's strong operational execution that underpinned robust third quarter financial results. Our strategic plans to deploy six fleets to supply incremental demand from our long-term customer partners, was successfully completed ahead of schedule, while navigating challenging labor markets and a volatile supply chain. Our strong customer partnerships, vertically integrated delivery model, and the strength of our crew leadership, was crucial to quickly bringing new fleets to market, while maintaining high levels of performance across our entire fleet. In the third quarter, revenue was $1.2 billion, a 26% sequential, and 82% year-over-year increase. Net income for the quarter was $147 million, or $0.78 per fully diluted share. Adjusted EBITDA for the quarter was $277 million, a 41% increase over the prior quarter. Strong results enabled us to launch our return of capital program, and repurchase 2.5% of our outstanding shares. We also announced the restoration of our pre-COVID quarterly cash dividend of $0.05 per share to be paid in December. We will maintain a flexible approach to returning capital to shareholders, while maintaining a strong balance sheet, and investing in compelling opportunities. Capital allocation is front and center again. I'm proud to say that our operational execution in the quarter was unparalleled, breaking several Liberty records, including profit pumped, pump hours, technology rollouts, and more, all while deploying fleets acquired in the OneStim acquisition. The incredible undertaking of bringing six additional fleets online during the third quarter, required an extraordinary level of collaboration and coordination between our teams. In a 90-day period, we hired and onboarded six crews, which is no small feat in a highly competitive labor market. Our ability to attract and selectively choose from…

Good morning. Liberty had an exceptional quarter, a 26% sequential increase in revenue translated into a 40% increase in net income, and at 41% expansion in adjusted EBITDA. The Liberty team delivered on outstanding results on strong execution across the board. The cadence of our quarterly results is a testament to the hard work of the entire organization. Third quarter revenue was $1.2 billion, a $246 million or 26% increase from $943 million in the second quarter. Our results were driven by strong activity improvement, with nearly half of the sequential growth related to the deployment of OneStim acquired fleets. We also benefitted from modest pricing improvements during the quarter. Net income after tax was $147 million, increase from $105 million in the second quarter. Fully diluted net income per share was $0.78, compared to $0.55 per share in the second quarter. Results included a $9 million fleet startup cost incurred for fleet deployments, a $29 million non-cash charge for the remeasurement of the tax receivable agreements, and a $3 million gain on investments. General and administrative expenses totaled $50 million, including non-cash stock-based compensation of $6 million. G&A increased $8 million sequentially, primary driven by performance-based compensation, inflationary and activity increases commensurate with the growth of our business, including investment in platform IT systems and other process improvements to support a continued expected growth. Net interest expense and associated fees totaled $7 million for the quarter. Adjusted EBITDA increased to $277 million, a 41% increase from the $196 million achieved in the second quarter. In the quarter, the tax receivable agreements related to our (RC) structure at the time of our IPO, were required to be remeasured, and resulted in a $29 million non-cash charge in the third quarter. This resulted in a 17% effective rate on the combined…

Thanks, Michael. Recent Russian drone and missile strikes have damaged or destroyed over a third of Ukraine's power stations and numerous fuel depots. The targeting is obvious, imperil a country's energy system, and you imperil everything else, making life much, much harder for Ukrainians. The world is rightfully outraged at this cruel strategy. Ursula von der Leyen, President of the European Commission, called these attacks war crimes, yet imperiling our own energy system through the political process, remains a front burner priority for many politicians and activists. Surely, this is only possible because most people still don't appreciate that increasing roadblocks to hydrocarbon development and infrastructure, are highly destructive, with no offsetting benefits. For example, restricting hydrocarbons and heavily subsidizing intermittent weather-dependent renewables, have severely compromised our electricity grids, from California to Texas to New England. New England is warning of blackouts this winter due to potential gas shortages, even though the mother of all shale gas reservoirs is next door, but access to this gas is blocked because New York State prevented the expansion of the gas pipelines, harming tens of millions of Americans. New England has generated millions of megawatt hours of electricity this year burning oil, because sufficient natural gas was either unavailable or unaffordable. Copious biofuel subsidies, and a growing regulatory burden, have led to the shutdown or conversion of multiple American refineries, contributing to skyrocketing diesel prices and US distillate inventories now being at their lowest October level in 50 years. I could go on, but you get the point. Let's all check our desires to be fashionable or hip when we talk about energy. Energy is so critical to human well-being that we must speak honestly, candidly, and frequently, to combat the increasingly damaging plague of energy ignorance that has taken over our country and much of the western world. With that, I will now turn it over to the operator for questions.

[Operator Instructions] our first question will come from (indiscernible) with Bank of America. You may now go ahead.

Hi, good morning, guys, Chris, Ron, and Mike. I'll just start with a quick one just so that we all know. In terms of your fleet count, you said you reactivated six fleets in the third quarter. Can you remind us where you are right now, and should we include all these four digiFrac fleets as incremental on top of where you are?

Yes, so we don't give the precise numbers, but we were mid-30s before. I'd say we're low 40s fleet count today, and it's not going to move much from there. I think as far as bringing out additional fleets from legacy equipment, that's done. We do have digiFracs being constructed. The first two that come out, if the customer relationship and forward horizon for that equipment is compelling. Those might be additive fleets, but only if it's compelling. And the other big challenges, as you know, of course, is humans and staff. The humans are what dominate the asset of a frac crew, of a fleet. So, our frac fleet count today is low 40s, and probably doesn't move much from there throughout the next year. Michael, you want to elaborate on that or add to?

I guess none.

Okay. Thanks for clarifying. So, it sounds like it just got pulled forward because you were talking about low 40s last quarter as well, so that's not different. Okay, good. And then on the CapEx front, Mike, you were talking about some CapEx potentially moving from the fourth quarter to early next year. That all makes sense, but can you quickly update us on what should we expect for next year CapEx? Because last quarter you were talking about that being at or slightly below 2022 levels.

There's no real change to that at the moment. That's really where we're expecting, That's still the general expectation.

Okay. Perfect.

And from the bottom up as a pure investment and compelling returns, as we've proved over the last 11 years of our history, we will invest in those when they make sense, and I think we've done a very good job providing returns for our shareholders.

Right. Okay, perfect. Okay, guys, I'll turn it back. Thanks.

Our next question will come from Derek Podhaizer with Barclays. You may now go ahead.

Hey, good morning, guys. So, normally, we're talking about budget exhaustion in the fourth quarter, but the guidance doesn't really suggest that, more just the typical seasonality. Can you remind me, what's different this year than years prior? Is there more worry from the E&Ps that if they laid down rigs or frac spreads, they won't get them back? I think we have to remind the investors and ourselves that what seasonality looks like and maybe why we won't see that budget exhaustion that we typically see, just given the tightness of the market. Just some thoughts around that, I think, would be helpful.

So, Derek, I think you said that about right. Operators’ biggest concerns right now are security of supply, particularly security of supply of competent, reliable crews. So, yes, there is a larger evidence to suspend operations for the last few weeks of the year than there typically is. Now, for some people, that is the right thing to do and that does fit their budgets. And for long-term key customers of ours, if we've got other places we can temporarily deploy those crews and bridge that gap, in today's market, that's not hard to do. We'll see some of that, but yes, I think not the usual amount you typically see in December, but there's still the holiday season. One of the things we do at Liberty is we shut down our crews, all of them for 24 hours, and in some cases, twice for holiday parties and celebrations. We’ve got to keep our people working hard in the field, pumped up and excited. Those are important events for us. So, there's always a little bit of holiday, of weather slowdown, even without budget exhaustion

Derek, we’re returning to more of the pre-2018, the more normalized long-term planning of E&Ps, where they've got a steady cadence of spending throughout the year. I think the change to - that happened in 2018 kind of caused a ripple effect for two or three years until it was interrupted by COVID, but I think we're back to more normal sort of like standard good planning from the E&P companies.

Got it. Okay. No, that's helpful, and I appreciate the comments there. For my next question, just wanted to touch on, which I think is an underappreciated part of this market, is the re-pricing effect and then the profitability expansion that certain investors are worried that if we see a peak in rigor frac out, maybe that just marks the peak and North America is done, but maybe walk us through from now through next year, where that might not be bad for your profitability, whereas you have the repricing effect and maybe the vertical integration to continue profitability expansion. Maybe some thoughts around there as where we can see on more a flattish fleet count that you just mentioned, where the earnings power and expansion can come from as far as a repricing effect of the tail end of your fleet count.

Yes. Derek, yes, obviously, the market is tight and it's been floating up pretty at a rapid pace in the first part of this year. There's still a tailwind of pricing pressure pushing up today, but it's - I think most of the reset of price up has probably happened, still a little bit more. And yes, of course, there's - some fleets reprice often, so they kind of follow the marketplace. Some of them are locked in for longer time periods, so yes, we'll have some positive pricing resets happening around the end of the year. But yes, economics are good today. For us, it's both quality of service, how much efficiency we get done in a day. That's a big driver of profitability, and a lot of it is our internal systems. How can we get more efficient, deliver a higher quality service at a lower cost? And of course, lower means lower than it otherwise would be without technology. There's still that backdrop of inflation of parts and equipment and stuff like that that we're contending with.

And we continue to focus on the expanding the shoulders of our earnings potential. As we say, we take more of the wallet of the - we are a vertically integrated company in a large number of ways, and we get more and more efficient at delivering all of those services, which allows a lower cost per lateral foot to our customers, and a higher profitability per lateral foot or per fleet, if you like, for us. And I think that's the key thing of what we're doing. That continued expansion comes from always being that technology leader. And generally, as you've seen, there's always a general trend of a flight to quality from our customers, to the quality providers who can provide that steady good service that they really need to plan their business. And that allows us to have that surety of demand, which means we can invest in the technology which expands our profitably every year. We did keep with the same fleet count to continue to expand our profitability.

Got it. Thanks, Chris. Thanks, Michael. I’ll turn it back.

Our next question will come from Stephen Gengaro with Stifel. You may now go ahead.

Thanks, and good morning, everybody. When you think about, and I know you don't give us the exact fleet count, but when you think about second quarter to third quarter, and I think your step-up in EBITDA per fleet was about $5 million, give or take, can you kind of talk about that bridge and kind of the driving factors of that? And then - and maybe on top of that, is there - outside of seasonality, is there any reason the pricing you're seeing shouldn't take that number up next year?

Right. So, it's a combination effect. Obviously, you've got a significant amount of fixed costs in a $5 billion company, right, that as you grow your earnings, you absorb those quicker. That's one of the sections. We had a tailwind of pricing as pricing moved up. And we also had an amazingly - so whilst we were adding six fleets, an increase of efficiency and activity from our crews. Our operations team are absolutely and utterly sort of like performing at top level out there. And I think that's a key thing. And I think some of the background services, whether it's water, et cetera, sort of some of the early struggles with sand, water, trucking, et cetera, from the first half of the year, that's getting lined out and getting a little bit better. So, yes, we're getting contribution from all of those. And as it comes to next year, no, I mean, I think you've got some fleets now that are sort of kind of - you've got a number of fleets that are really at sort of where market pricing is now. We've got some that are slightly - that are a little bit below market pricing that will reprice. But obviously, one of the key things about next year is where is the long-term sort of like the market going to be as far as pricing? Where are oil prices going to be? Now, we may have some small headwinds in the short term, but we think there's a very long runway for a strong call on US oil and gas production, which we think bodes well for strong earnings for us for a number of years to come.

Great. Thanks, Michael. And then when you think about, and I know you talked a little bit about CapEx maybe sliding into next year, but even with that, I mean, your free cash generation in ‘23 and probably ‘24, looks very, very strong. What do you do with it? I mean, assuming there's no acquisitions, and obviously, you've reinstated a dividend, but do you more aggressively give capital back to shareholders? Do you have a thought process or a framework in mind on how investors should be thinking about that?

Well, yes, it’s a topic of frequent discussion among the leadership of the company with our board, because yes, I do think in the next few years, one of our biggest decisions will be capital allocation, what to do with a lot of free cash flow coming. And it's - and again, we will never adopt a formulaic, X percent will go here, because share buybacks for us depend upon the price at which we can buy stock back, and the delta between that price and our estimate, conservative estimate of intrinsic value. So, share buybacks are likely going to be a large part of capital allocation in the coming years, obviously to this year. They're the dominant piece of returning cash to shareholders. We have restored the dividend we started years ago, and we intend to pay a regular quarterly dividend going forward, probably modest growth rate in that dividend as well. But our business is always going to be cyclical. So, we're never going to have a huge quarterly dividend because our results are - the results are likely to remain cyclical. And then the other big thing is, keep a very strong balance sheet. We never know what's coming. The next downturn, when it arrives, is probably not going to give us warning way in advance. So, we're always going to have a strong balance sheet. That's done - that’s served us well in making the last two downturns, both pretty severe, making transformative acquisitions. And then we're always going to invest in technology and things that make our company better, that build our competitive advantage versus our competitors, that allow us to provide higher quality services at a lower cost, and then a safer setting. So, technology investments are there and acquisitions, look, we've never been a consolidator per se, but if there are acquisitions that, as Michael says, broaden our shoulders, allow us to increase the profitability per fleet, and the economics of those acquisitions are compelling, we're always looking at that. We're obviously not much of an acquirer, but we're always looking when there's compelling opportunities. And today, if you're going to acquire stock, cash is much more attractive than stock, given the valuations of our stock right now and our cash generation. But again, so it is a bottom-up day-by-day decision on that. There's not a simple formulaic answer to that.

Okay, great. No, thank you for the color, Chris.

Our next question will come from Atidrip Modak with Goldman Sachs. You may now go ahead.

Hi, team. Thanks for taking the question. Chris, and Mike, there's been a few new builds that we've been hearing about, and there's more fleets being activated now. Help us understand the shape of the supply in terms of the capacity supply curve between these additions and the attrition where you think you will end your 2023?

Yes, I think, again, it's hard to predict the future, but the market is tight, and we certainly don't see anything that meaningfully change that going forward. With good profitability today, are people trying to hang on to that last legacy equipment and get the last bit of juice out of that? Sure, but ultimately, I think you're seeing today some degradation among older or lower quality frac companies and their ability to deliver efficient services. That's both a human, maybe mostly a human challenge and stress in today's marketplace, but also legacy equipment, if not properly invested in, it has a finite lifetime. So, we think the market stays tight. I don't see a meaning - unless we have some large drop in commodity prices and a drop in demand for frac fleets, I think the market stays quite tight really as far as we can see, certainly through next year. There'll be some new fleets coming out. We do keep a count on that. Could that fleet count be a few more than the amount of capacity that's going to age out? And it isn't like a whole fleet will be laid down, but one by one as pumps go down and they exit permanently. I don't think we have much higher active frac fleet count a year from now than we have today. And in our bottom-up survey of customers, the demand for fleets next year is slightly higher than the active fleets today, but not a lot.

Got it. And then talk to us about the Natron investment and what that potentially means for your fleet mix over time. Would you want to eventually entire these kind of tech - own these kind of technologies? And are there other such investments that you are looking at? What are the size of investments or acquisitions do you have in mind?

Well, as you can see with the nature on investment, that's - it's a modest investment, but it's a unique situation, with really a different battery technology. Lithium-ion dominates, or variants of that, dominate today, because it has the highest energy density. For this 100-pound box, you can store the most energy in that configuration, but it's got serious problems with it. It can't discharge super-fast. It wears out. Those batteries don't last very long because those ions don't fit fabulously well in that material matrix. And as you see all the time, it's got a fire risk and a hazard. So, look, if you want the highest energy density, that's the best we’ve got today. But with this Prussian blue and sodium-ion, you've got a different battery configuration that allows very rapid discharge. So, we’ve got to shave a peak off during fracking. We can draw power out of those batteries very fast. The sodium-ions are just a perfect fit size-wise in that Prussian blue crystal matrix. So, you've got much - you should have much longer lives of batteries. You don't have the thermal instability risks and fires. So, we think it's a neat technology for us, for what we need. We're going to run large generators at high thermal efficiencies with minimum emissions to deliver a low-cost sources of energy, and at lowest possible emissions. And that's aided by shaving off spikes in demand that happen episodically through our fracs. So, yes, we're quite interested in - yes, we'll see where that goes. But again, look at - it’s a modest investment to be a partner with this neat upstart company, and probably an anchor - and potentially an anchor customer going forward.

Got it. Thank you. I'll turn it over.

Yes, let's say on the size of investments, as we look - we look at all different sizes, but again, generally, they're focused on technology and places where we can get a real technology advantage in what we can bring to the market.

Got it. Thanks.

Our next question will come from Arun Jayaram with JPMorgan. You may now go ahead.

Yes, good morning. I was wondering if you could give us a sense of the vertical integration and what it's meaning to your earnings power. And maybe more specifically, today, how much of your EBITDA would you estimate is generating outside of pure frac between PropX, wire line, sand mines, et cetera?

Look, it’s dominantly frac. Frac is the big piece of that business. Of course, there's additional earnings from those vertical integration companies. But we did those deals, not just for that additional earnings, which is not trivial, but it's dominantly frac. But they're also to make sure that frac runs at high speed. Having access to sand is not only profitability on sand, but it's to lower your risk of being ever waiting on sand, or having quality problems with your sand supply. So, we look at these vertical integrations as businesses in their own right, but at least equally important, as enablers of the core business of frac.

Yes. As Chris said, you, we really have one segment to our business, and that's one segment for reporting and everything else, and that is frac because it’s all very, very interrelated to that final efficiency of delivering that sort of - that stimulated last lateral foot.

Got it. And just my follow up. Chris, you guys acted pretty aggressively on the buyback. You bought back $70 million of stock in the third quarter. You have $180 million remaining. One of the questions from the buy side this morning we've been getting is just on the Schlumberger stake. Schlumberger highlighted how its ownership of Liberty is non-core holding. I think they own around $400 million of stock today. Thoughts on maybe using the buyback to mitigate the impact of this overhang?

Yes. I mean, what they decide to do with the share is certainly up to them. I don't know, and certainly can't speak for them. But from the Liberty side, our goal with buybacks is to increase the value of each share that's out there. So, it's really price-dependent, and without stressing the balance sheet. But yes, are we interested in acquiring more shares, buying back more shares of Liberty stock at an attractive valuation? Absolutely. But again, the aggressiveness at which we'll do that, just quite price-dependent.

Great. Thanks a lot, Chris.

Our next question will come from Waqar Syed with ATB Capital Markets. You may now go ahead.

Thank you, and first of all, congrats on a great quarter. Chris, you've got about 8 million tons of frac sand capacity. Could you maybe tell us like what's the utilization level right now? Are you running 100% or what is that level?

Yes, and again, we don't break down the details of that, but yes, absolutely 100%. We've done some modest investments to optimize throughput, to optimize the cost of mining. But yes, the sand resources we operate are running full out.

And just broadly, don't need a specific number, and how much of that is running through Liberty, and how much is running through third parties?

So, the vast majority of that sand runs through Liberty fleets. There was a big move years ago that all the E&Ps were going to be self-sourcers of sand and look, we were skeptical of that idea then, and remain that way. And the reason is, think of our business. We’ve got over 4,000 employees. Logistics is central to our business. If every aspect of logistics isn't running, the frac fleets are not running. So, I think it's just - it's much more core to our business than to our customers’ business. So, yes, the vast majority of the sand Liberty pumps, and that not just in the Permian but elsewhere, is sand that’s purchased, delivered, and handled by Liberty. Not all of it, but the vast majority of it is.

Okay. And then in terms of how you charge your customers on that sand that's running through your system, is that all on what the spot rate is today? Or do you have some contracts that's keeping those sand prices, the current - that a portion of that sand is not realizing spot prices.

Look, in almost all of our business, we’re not a spot player. We’re a long-term partnership player with our customers on frac. And usually, sand is together with frac. So, yes, that is not riding or playing the spot market. That's long-term committed partnerships with our customers. Price, of course, adjusts with time.

And Waqar, I’d sort of point out that the vast majority of all sand that's pumped in the oil field, is pumped on long-term contracts, right? You hear about swap pricing in West Texas and other places, et cetera, but the reality of the fact, that is the minority of - that's sort of the leading edge of the minority of sand that's pumped. The majority of stuff that the big sand companies sell, not to us or not to service companies or to the self-sourcers, is all sold on long-term contracts that’s a very different price, the spot price that you hear about. So, I think that's something that the - I think is probably a little misunderstood in the industry.

Sure. So, just on that topic, if you could generally just describe what portion or what is the gap between where the spot prices are today versus what your realized prices are today?

Well, not for us. I'll talk generally as far as the market goes, right? I mean, just if you think about West Texas, I mean, people will hear spot prices probably average in the mid-40s-ish, maybe a little - sort of maybe mid to high 40s, and I will say, if you polled the whole of West Texas, I think you'll find that the majority of the sand average is probably being pumped at the mid-20s. That's tons - that's a price per ton at the mine hit, right? So, and generally, that's about where the general sand market is. I think if you ask any of the big sand providers, and I'd say, ask Silica or a few others, I mean, you think you'll find - you'll get roughly those numbers.

That’s okay. Thank you.

Our next question will come from Scott Gruber with Citigroup. You may now go ahead.

Yes, good morning. Just had a question how you think about the kind of multi-year investment in digiFrac. If demand is kind of flattish next year, and the outlook is kind of flattish in ‘24, but rates are holding at these healthy levels, does the pace of the digiFrac investment continue at, call it, four fleets a year? Does it moderate? How should we think about that kind of multi-year investment in digiFrac in a flattish environment?

Yes, again, all those decisions are just one at a time, bottom-up. But yes, three or four fleets a year is - again, it could be much less than that. It could be more than that, but that's probably - that's not out of the realm of reasonable. We're doing individual decisions with customers, with partners one at a time. But yes, I think that the long-term economics of these fleets, and the long-term performance of these fleets are likely to prove quite compelling to customers, and therefore compelling to Liberty. But we’ve got to balance that because it's just one possible use of capital.

Yes, got it. And can you discuss what you're seeing from an inflation perspective with respect to maintenance? Recently heard from a land driller disclosed a pretty sizeable step-up in maintenance for next year. What are you guys seeing, and how should we think about it?

Yes, well, we didn't cannibalize. So, generally, there was significant amount of inflation over the last year or two, and really we are trying to hold that steady at historical levels due to technology and sort of design changes, et cetera, scope. But yes, I mean, obviously, you know about sort of the inflation rates that are going out there related to steel and everything else. So, we're still sort of tracking sort of the general same sort of historical range that we have. And again, I think we really did invest during the downturn. Yes, we didn't cannibalize some of our older equipment. So, we don't have any sort of like early spike like they were talking about.

Got it. Thank you.

Our next question will come from Marc Bianchi with Cowen. You may now go ahead.

Hey, thanks. I wanted to ask on the digiFrac deliveries that you have upcoming. It seems like that's slipped a little bit from the original plan, sounds like partially due to supply chain, but maybe you could talk to the confidence that you have in those now being delivered in the later part of this quarter. And then when they're delivered, if we just assume they're incremental, should we be seeing an immediate uplift in profit from those fleets, or is there sort of a shakedown period? What gives you confidence in kind of getting cash flow out of those on day one?

Right. Yes, no, you're very confident in the delivery. It was an electronics supply chain issue that sort of really sort of put those back a little bit. Everybody was fighting. No, and then, even though they're going to the incremental, right, those teams, there's going to be a transfer as that equipment transfers into that team. And so, when you're thinking about modeling incremental, I would do anything from that, which is taking that older equipment and then moving it to another customer in or extension with that customer in the next year, because you've got - in the next quarter, because you've got to hire the people. That's the way to look at it from a modeling perspective.

Okay. And just from an industrial perspective, is there a period of making sure that these things are working as expected, or what gives you confidence around kind of the ability for the first of a kind fleet to be fully operational as you expect?

We've got pilot pumps out there right now pumping. The performance has been outstanding. It is a new system where things coming together. Are there going to be issues that we're going to have to iron out kinks on? Absolutely, but and of course we're going to phase them in. They're going into a fleet that's already running by the same humans that'll run the new fleet. So, a new digiFrac pump and generator will come in and work together with the existing fleet. So, they'll be sort of phased in as a fleet is converted over. But you're right, it's a new technology and a new system that we've spent years developing. So, are there going to be wrinkles and challenges? And I mean, that's happening right now. Absolutely. Our goal has always been, get to the best fleet at the end of the day. Don't cut corners to be a little bit faster or meet some timeline. We want to - the idea is to build something truly differential here. Thanks.

Makes sense, Chris. Michael, if I could just squeeze one more in real quick on the tax - the cash taxes for next year, I hear you on the - a third of the book tax. How long would your cash taxes be below the book tax if sort of ‘23 continued forever? Just trying to understand the runway there.

I would generally say, you'll probably be just that - I mean, really 2024 is about where they'll balance. They'll be slightly below because of the TRA savings, et cetera, but that only be a couple of percentage points. So, I would model them being even from ‘24.

Super. Thanks so much. I'll turn it back.

Our next question will come from Roger Read with Wells Fargo. You may now go ahead.

Thank you. Good morning, Chris, maybe a question for you, kind of follows up a little bit on the last one that you talked about integrating some of the e-frac, digiFrac stuff in there. I was just curious, as you look at the pricing you're putting through, the net pricing you're achieving in the new equipment, do you think you're at this point close to pricing what digiFrac brings to the market, or is there an uplift there relative to conventional approach?

I mean, look, the obvious thing is the huge - the difference between diesel and natural gas pricing is the power source today is just huge. I mean, that's a - so number one, to the customer, there's just your dramatic cost savings. And remember, again, this is a high thermal efficiency. It's actually going to burn much less gas than these small turbines that are out there powering fleets. So, there's a meaningful cost saving advantage in digiFrac. A huge interest in that. There's a lower emissions component. And ultimately, we think there's going to be also a meaningful performance uplift. But probably to fully realize value of all those pieces, that's going to take some time. We’ve got to get them out there, prove them, show them, see them. I mean, people are paying a premium for them today, but will that premium likely grow in the next 12 months? I think highly likely.

So, definitely some things to think about on the longer term there. Changing gears just a little bit, Michael, for you, as we think about the big build in working capital this quarter, following up on sort of the cash tax question, how should we think about a seasonal slowdown potentially affecting that? Or are we just in - with business ramping up, in for a period of general consumption of cash on the balance sheet?

Yep. Generally, working capital amount follows our revenue, right? So, Q4 is going to be relatively flat. Working capital will be relatively flat. We will have growth next year. Working capital will grow in line with that topline growth. And really, it comes down to our DSOs don't change. Our DPOs don't change. Those are the two major drivers. And so, really as you think about it, you can just mold those in line.

That's it for me. Thank you.

Our next question will go from Luke Lemoine with Capital One Securities. You may now go ahead.

Hey, good morning. Piper Sandler. Chris, just a question on your next-gen fleet investments, kind of on a go-forward basis. Can we assume that these are almost all digiFrac, or is there still a component of customers asking for tier four DGB upgrades?

It will be a mix of the two. We're still doing fleet upgrades, tier two to tier two dual fuel, tier four to tier four DGB. So, look, it’s probably going to be dominantly skewed to digiFrac, but not necessarily exclusively.

Think of it like this. When you completely blow up an engine, you're going to replace it with like a tier four engine. You're going to replace it with a tier four dual fuel, right? So, it’s more of an incremental move. It's on a pump-by-pump basis.

Okay, Got it. Thanks a bunch.

Our next question will come from Keith Mackey with RBC Capital Markets. You may now go ahead.

Hey, good morning and thanks. I just wanted to maybe start off on your customer makeup. Any commentary you can give on the publics versus privates in your, say, current fleet count? And how does that marry up with the results of your customer survey calling for slightly higher fleet demand next year versus this year?

We don’t, obviously, publish our - the Liberty frac fleet count region by region. But look, I think you're seeing our - where our fleets are deployed is reasonably reflective of who are running drilling rigs. Privates today are like 55% of the drill rigs. They're 55% of the activity. Majors were a very small slice. They grew a little bit. They shrunk a fair amount during COVID. They're probably coming back slower than the others. So, yes, maybe they're going to be a little bigger contributor to growth going forward than privates are. Privates came running hard out of the gate. So, there'll be a little change of the mix next year for sure, but not huge, not hugely.

Got it. Thanks for that. And maybe just to follow-up, stepping back a little further. Would you say the last six months has altered your view on what you see as a mid-cycle profitability per fleet in kind of that 14 million to 18 million, whether it's core pumping profitability, or opportunity to increase vertical integration through time?

Yes, I mean, there's – well, there's - one is sort of the supply and demand of the market conditions that drive the cycle and where mid-cycle is. And yes, right now, things are strong and the outlook still is pretty good. So, yes, this could be a more positive macro cycle than the last one or two. We don't know - I mean, there's a good chance of that. Looks like it so far. And then there's also this sort of self-help things that we can continue to improve internally to just have a better differential model than our competitors. And that's also an inflator in our profitability. But I probably shouldn't comment anymore beyond that. Michael, did you want to add?

No, the other thing is obviously our investment in next-generation fleets, which drives down cost of operation, and drives down fuel costs. I mean, that's - all the investment and the technology is being driven by us and the investment of the capital is by us. So, obviously, that will accrue to us, and therefore increase that mid-cycle number.

Perfect. Thanks very much.

Our next question will come from Dan Kutz with Morgan Stanley. You may now go ahead.

Hey, thanks. Good morning. I just want to ask, I guess, about the labor portion of the supply chain. Impressive that you guys were able to staff those six incremental fleets, I think you said in a 90-day period. Should we read that as that kind of some of the labor challenges are abating somewhat, or were you guys able to accomplish that in spite of not really seeing relief on that front?

The labor challenges definitely are abating a little bit. I mean, nine months ago, 12 months ago, just crazy hard. I would say labor market today is still very tight still. If you got rid of the last two years, I'd say it's probably the toughest hiring market we've been in since we started the company. But that's the caveat was it was worse. It was worse 12 months ago. It was worse six months ago. So, labor problem is slightly - it is improving. And so, that's true. But also, I think our dedicated recruiting team and maybe just the character of the crew leaders, all the people leading these new crews, they've all been with Liberty for a while. And so, between recruiting and those crew leaders, that's just - we think a little bit of a different atmosphere to welcome people into. So, my hat is off to our team, did a great job in a challenging market.

Great. Got it. That's helpful. And then maybe just kind of thinking about the other components of the supply chain, and you guys have made some comments on some of those components already, but just wondering if you could kind of roll up any trends that you're seeing in some of the other parts of the supply chain, whether things are improving, moving sideways, getting worse. Just any general thoughts outside of labor would be great.

There's still meaningful challenges. Large equipment, I mean, engines and engine rebuilds, which are a big part of our industry, they're still on allocation. They're happening, but there's still challenges there. There's still challenges there.

Yes. Slight improvement in the sand logistics market. Over the road trucking rates have come down, so you've got some more truckers that have come back to the - are coming back to the oil pads. So, we're seeing some relief there. I'd say, chemical markets reasonably flat, probably a hair better than they were earlier in the year, and that's sort of the main issue. I'd say, probably the biggest struggle is still those sort of heavy equipment style electronics parts that we share with a large amount of the other economies, the other parts of the economy.

Great. Thanks a lot, guys. Thanks for squeezing me in. I'll turn it back.

Our next question will come from John Daniel with Daniel Energy Partners. You may now go ahead.

Hey guys, thank you for including me and for going over the hour. I just want to go back to the vertical integration questions that were sort of raised earlier. Just sounds like you guys would call that a competitive advantage, which would seem reasonable to me. And I'm just wondering, if it is a competitive advantage on say like the sand, should Liberty look at bolstering a sand presence outside of the Permian to support the other geographic basin you're in, or should it extend into other products such as chemicals? Just your thoughts.

Again, it's a bottom-up thing, not a top-down philosophical thing. So, look, if we've got reliable sand at reasonable economics, we don't have to be owning part of the supply chain, but if it looks like it's going to add to this security of supply of our business and the economics are compelling, it's not impossible we would do something like that. But we haven't made some decision that we're going to own X percent of all the sand we pump. We just always – philosophically, we want to make sure our fleets can keep running and we can deliver a differential performance versus what others in our industry are going to provide to customers. And for us it's what is necessary to deliver that.

Okay. Well, going back to sand, Chris, can you guys - are there any efforts to expand your capacity just with the existing operations in the Permian?

We are doing that. We have done that and we continue.

Okay. Fair enough. And then the six fleets that were deployed in Q3, I think you said all of your fleets that operate today are dedicated or I don't know if I misheard that, and if you could talk about that. And then the second - the follow-up is, are any of these fleets that are being reactivated, are they being viewed as, for lack of a better term, a bridge for that next - for the digiFrac, such that those would go back to the yard at some point? And that's it for me.

Yes look, we don't - I said we don't play in the spot market, which is true. So, but with the efficiency of our fleet today, there are certainly good, solid, sizeable customers out there that are less than a full frac fleet of work. We'll do all of their frac work. We'll balance it, but maybe if we call it a multi-customer fleet, we'll balance it from work from others, or we may have a key customer, then their workload is one and a half fleets. And we'll do all of that, and then we'll balance that other half with another customer or customers to fill that. So, we're not like bidding on 22 things to see what we can get the best pricing on to go in. We don't really play that game, but we do have fleets that are moving between multiple customers, and then things happen. Gaps open up. Somebody's got logistical problem or a supply chain problem or drilling problem or an offset pad problem. So, we try to always keep a suite of people that would like to have Liberty on location, that we can call up on shorter notice and move those fleets to different pads if hiccups happen. And of course, hiccups happen, and they're happening a little more than normal, I would say, these days and because of all the stuff we've been talking about with supply chain. And on the reactivations, yes, there are customers that really want a digiFrac fleet before they get a frac program going now. So, of course, there are some where that - we've got a different fleet working for them now, and as the digiFrac becomes available and those things go in, those fleets will be phased out. Yes, I don't think you're going to see growth in the Liberty fleet count going forward.

Fair enough. And in this case, one more for Michael. This is - I don’t know if you would have this data in front of you, but the addition of the six fleets and all those people is pretty impressive. And I'm curious, as the new hires have been hired, how many of the folks are coming that are not part of the industry already? They're truly new to oil and gas, versus guys that might be, or girls, switching from one service company to another? Any color you might have handy?

Yes. So, I'd say generally, the majority of our hires are from outside. I haven't – don’t know the numbers for these six fleets, whether or not the kind of that was a larger version of experience. We picked up a lot of experienced people. I mean, Liberty is actually seen as probably the best place to work, I believe in the industry for that, for a number of different reasons, the culture, the schedule, et cetera. So, it's always a balance between the two. But we have a lot of veterans. We have a lot of people coming off farms, a lot of people coming out of other industries, coming and joining us.

Fair enough. All right, thank you all very much.

Our next question will be a follow up from Stephen Gengaro with Stifel. You may now go ahead.

Oh, thanks for taking the follow-up, gentlemen. Just a quick one. Can you give us a sense, where is spot pricing now versus the prior peak? Any sense?

We’re not the right guy to ask because we're not that plugged into the spot market. But if you are buying - let me answer a different way. The frac pricing today, think of longer term or dedicator or bigger piece of fracking. It's still well below what it was four years ago if you're an E&P operator. There's still efficiency gains in our industry that are meaningful in driving down the breakeven cost of a barrel of oil. Prices dropped crazy low in the COVID downturn, as they do in all downturns, but - and they bounced back. So, our profitability is back as good as it ever was. But the all-in pricing to a customer on the other end, is still well below where it was.

Yes, no, that's why I was asking, because the profitability has gotten to such a strong level. I was just curious how that relieves the price. So, that's helpful. Thank you.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Chris for any closing remarks.

I thank everyone for their time and thoughtful questions today, and most importantly, thank everyone in the Liberty family and our customers and suppliers and everyone out there working 24/7 every day to make the world a better place to live. Appreciate all of you. We'll talk to you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.