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Liberty Oilfield Services Inc
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Good morning, and welcome to the Liberty Oilfield Services Fourth Quarter and Full Year 2018 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.
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 the current conditions that are subject to certain risks and uncertainties that are detailed in the company’s 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, 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’re pleased to discuss with you today our fourth quarter and full year 2018 results. In partnership with our customers, the Liberty team continues to focus on driving technology innovations and high efficiency operations, which are a win for Liberty and a win for our customers.
2018 was Liberty’s first year as a public company and we welcome our new investors to the Liberty family. Liberty was built on the idea of bringing great people together, with a singular focus on building the best frac company, to support our customers, and bring technology innovations to the shale revolution. The unique people and culture that we have created at Liberty, drive us forward in this goal every day.
We are pleased to report strong 2018 financial results. We had significant growth in all key metrics including revenue of 45% to $2.16 billion, net income before taxes up 72% to $289 million and adjusted EBITDA of 56% to $438 million.
Our strong cash generation in 2018 enabled us to invest in growth and return $95 million of cash to shareholders in the form of quarterly dividends, distributions and the repurchase of 4% of our total outstanding post IPO shares.
All of this was achieved while reducing our net debt to only $3 million at year-end. Liberty was built for long term success, with a focus on superior returns on invested capital, maintaining a strong balance sheet and investing for the future.
Liberty demonstrated this in 2018, by delivering a pre-tax return on capital employed of 39% in a year of strong growth while generating significant free cash flow and returning cash to shareholders.
In 2019, and into the future, we will continue this relentless focus to provide the best service and technology to our customers, environment and culture for our employees, close partnerships with our suppliers, and superior returns to our shareholders.
Strong cash generation in the fourth quarter enabled us to execute on returning 35 million of cash to shareholders in the form of a quarterly dividend and repurchasing 1.5% of our total outstanding post IPO shares, while reducing our net debt to $3 million.
The fourth quarter of 2018 was challenging from a fleet utilization perspective. A number of customers made last minute decisions to defer completions in the fourth quarter due to a combination of capital budget and cash flow management decisions brought on in part by the rapid drop in the commodity price in November and December. While this was disruptive to our fourth quarter work calendar, we believe the focus on capital discipline by operators is ultimately a positive factor for the services industry as we move towards a sustainable production environment that could ultimately lead to less volatile activity levels and perhaps even a steadier commodity price.
With these challenges, our fourth quarter revenue was $473 million and net income was $34 million or $0.27 per fully diluted share. Adjusted EBITDA for the quarter was $72 million or $13 million per average active frac fleet on an annualized basis.
Premium service quality coupled with basin and customer diversity provides the company the opportunity to continue generating strong returns on capital employed, regardless of how the market unfolds in 2019.
The fourth quarter customer project deferrals provided Liberty a solid backdrop for utilization at the start of 2019. In fact, in January, we pumped the highest monthly volume of sand in the company’s history. We are currently projecting sequential revenue growth in the first quarter in the single digit percentage range and adjusted EBITDA to be approximately flat, as increased utilization is offset by pricing decreases.
Due to the rapid commodity price decline at the end of 2018, our customers are still finalizing budgets for 2019 and we expect to have a much clearer picture of full year 2019 completions demand by the end of the first quarter.
Utilization of our frac fleets is expected to remain strong, due to the partnerships we have forged with our customers. But the potential timing of our price improvement is not clear at this point. We are focused on generating strong returns on capital and free cash flow in 2019 while investing in technology and growing our competitive advantage.
On the technology front, we continue to focus on opportunities to improve safety and drive efficiency. Through a partnership with one of our key suppliers, Liberty will be deploying a new, articulating flow line that allows for quick, safe transitions, between wellheads on a multi-well pad.
The new system eliminates the need for a zipper manifold and significantly reduces the amount of treating iron required, replacing those components with a single flow line and hydraulic quick connect at the wellhead.
[Indiscernible] is simplified and potential exposure for personnel is reduced. When we rolled out our quite frac fleets in 2016, we integrated an innovative fire suppression system into every frac pump. We recently finished the engineering to enhance our traditional pumps with this new safety feature, and expect all Liberty frac pumps to be equipped with onboard fire suppression by the end of 2019.
We expect capital expenditures in 2019 to be approximately 175 million, a decrease of 36% from 2018. The budget includes 65 million for the completion of the deferred fleets 23 and 24, 65 million of maintenance capital, and about 45 million for technology, fleet efficiency improvements and facilities.
While we are taking delivery of the final equipment for fleets in ‘23 and ‘24 in early 2019, they will not be deployed without the correct combination of strategic customer demand and market dynamics. We may end 2019 with one or both fleets awaiting deployment.
Liberty’s strong financial results, favorable long term outlook, and strong balance sheet support a balance balanced strategy of growth and returning capital to our stockholders. Liberty is committed to compounding long term stockholder value by reinvesting cash flow at high rates of return and returning cash to shareholders as appropriate.
We are excited by the opportunities in front of us, and the positive long term outlook for the shale revolution, and the benefits that this brings to our industry, and the country as a whole.
I will now hand the call over to Michael Stock, our CFO to discuss our financial results.
Good morning. We’re exceptionally proud of Liberty’s financial performance in our first year as a publicly traded company. For the full year 2018 revenue increased 45% to $2.16 billion from $1.49 billion in 2017. This was driven by an increase in average frac fleets, 41% an increase of efficiency across active fleets.
Net income totaled $249 million in the full year or $1.81 per fully diluted earnings per share. Full year adjusted EBITDA increased 56% to $438 million from $281 million in 2017. Annualized adjusted EBITDA after the fleet increased to $20.6 million in the full year compared to $18.6 million in 2017.
We are pleased with our operations team year-over-year efficiency increases, which were achieved during a period of significant capacity growth. The high fleet throughput efficiency that we achieve is a win for both customers and Liberty. We can lower their completion costs, speed the product to market and increase allocating capital [Indiscernible] [Technical difficulty] The full year 2018 pre-tax return on capital is 39%. And with [Indiscernible] distinct competitive advantage. If you so choose did the best people and bind them together that a unique culture and a singular focus.
We achieve this by marrying operational excellence with technology and a strong balance sheet. We are focused on what is important to our customers. The cost to deliver a barrel of oil to the surface. We work in partnership with them to improve completions efficiency every day, and believe that our financial results for 2018 underline the effectiveness of this plan.
Our strong cash generation in 2018 enabled us to invest in growth, return $95 million of cash to shareholders in the form of quarterly dividends, distributions and the repurchase of 4% of our total outstanding shares in our first year as a public company.
All of this was achieved, while reducing our net debt drawing [ph] $3 million at year-end and delivering on significant profitable growth. As Chris mentioned, the fourth quarter was challenging from a customer scheduling perspective. Last minute project deferrals, due to companies managing to announce budgets and cash flow balancing, caused a significant increase in whitespace on the calendar.
Typically, we would have far more visibility into these schedule changes, and therefore be better able to fill these gaps. We expect to gain a lot more clarity into our customers full year completion plans as we get through earnings season and the customer top line budgets are flowed through to asset level completion plans.
We are pleased with the performance of our team during a challenging fourth quarter and the Liberty operations team worked tirelessly in the face of very unusual customer scheduling choppiness, to provide exceptional execution for our clients.
The fourth quarter 2018 revenue decreased 15% to $473 million from $559 million in the third quarter. Net income totaled $34 million in the fourth quarter, compared to net income of $66 million in the third quarter.
Fourth quarter adjusted EBITDA decreased to $72 million from $117 million in the third quarter. Annualized adjusted EBITDA per fleet decreased to $13 million in the fourth quarter compared to $21 million in the third quarter.
General and administrative expenses totaled $25 million for the quarter or 5% of revenues included stock based compensation expense of 1.6 million.
Interest expense and associated fees totaled $3.5 million for the quarter and fourth quarter income tax expense totaled $4 million compared to $12 million in the third quarter. We ended the year with a cash balance of $103 million and a roughly equal amount of total debt of $106 million.
At year end, we had no borrowings drawn under our ABL credit facility and total liquidity including availability under the credit facility was $328 million. As we have discussed previously, in order to seek the best long term returns for our shareholders, we will follow a prudent strategy of maintaining a strong balance sheet, investing in compelling growth opportunities and returning capital to shareholders when appropriate.
In the fourth quarter, we paid a quarterly dividend of $0.05 per share, and we also repurchased 1.75 million shares, reducing our total outstanding post IPO share count by 1.5%.
As of December 31, 2018 the total remaining availability under our original $100 million share repurchase authorization was $17 million, all of which was used to repurchase shares in January of 2019.
Additionally, our board of directors approved on January 22nd, 2019 an additional authorization to repurchase shares of Liberty's Class A common stock, an amount not to exceed $100 million through January 31, 2021.
Our board of directors has also declared a quarterly cash dividend and distribution of $0.05 per share to be paid on March 20, 2019 to holders of record as of March 6, 2019. As we look forward into 2019, we are very positive about how Liberty has positioned to continue its mission to drive best-in-class returns.
A geographically diverse footprint, long term customer partnerships, and highly efficient operations position as well to produce solid returns even in a challenging market. In 2019, we expect general and administrative expense to maintain a run rate similar to the second half of 2018, and tax rates for the year are estimated to be 16% to gap book tax rate, 24% for the fully dilutive [Indiscernible] EPS calculation and 14% for the cash tax effect.
I will turn the call back to Chris, before we open up for Q&A.
I’d like to close with some thoughts on the shale revolution. We understand the investment community’s concerns with the oil and gas industries relatively poor returns on capital in recent years. I think, it’s helpful to understand how we got here.
The first successful tests of shale gas occurred only 20 years ago in the Barnett Shale. Shale gas exploration and production reached critical mass, only a little more than a decade ago, and for shale oil it was far less than a decade ago.
Since then, U.S. oil production has more than doubled, significantly altering world oil markets. Shale gas has also transformed the world natural gas markets, switching the U.S. from one of the world’s largest importers of natural gas to one of the world’s largest exporters. Any change this fast, and this large, in one of the world’s largest and most important industries leads to significant disruption.
We believe that the industry is in the process of exiting the dot com phase of the shale revolution, where the primary focus was on growth and optimism was pervasive. This upending is yielding winners and losers. Like in the dot com boom, there have been more losers than winners. However, the pace of innovation has been impressive. While some companies have been disciplined with their shareholders capital during this period, we expect to see increasing investment discipline and returns across the value chain as we move out of the early stage dot.com phase of the shale revolution.
Thanks for listening in today. I’ll turn it back to the operator for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question will come from James West of Evercore ISI. Please go ahead.
Hey, good morning guys.
Good morning, James.
Chris, I appreciate your perspective on the shale revolution here. I think you’re right, and I hope you’re right on the [Indiscernible] in the dot.com phase of the revolution on oil shale because as you pointed out returns have been atrocious for the industry and not specifically for you guys, you guys -- capital disciplined and returns focus. But for an industry overall, it’s been a pretty bad run here.
So I wanted to ask the question on top of my mind is okay, so we’ve gone through an air pocket here with the pressure pumping business. It’s unclear, how this year is going to ultimately unfold in terms of pricing and returns on assets, but how are you seeing behavior of your competitors? You guys are certainly disciplined, but I don’t know what everybody else says, and so perhaps you could if you comment on kind of what you’re seeing in the marketplace right now.
Yes, we’ll do James. And look, we hear stuff from our customers. We hear stuff in around the in the bars. What I’m going to give you is sort of a sense of what’s going on. But in the broad sweep [ph] last -- from last summer saw the peak of activity level and a very high peak it was, probably 20% say 70, 80, 90 frac fleets that were fracking last summer are not fracking today. Overnight, probably some of that few of them are back, but they were fracking in December. So that’s a pretty significant decline.
And as you have a fleet that’s getting pushed out of work, it doesn’t immediately just lay the guys off and park, the equipment. They try to find new work. They want to keep that fleet going. It takes a few strikes or if they are failing or the pricing so egregious before those people get laid off, and the equipment really gets parked. And now you’ve shrunk supply in the marketplace.
So I think we’re seeing a fair amount of supply come out of the marketplace. So I actually think a lot of the reactions of above our competitors and probably mostly been rational. There is many more fracs, many less frac fleets available to frac today. There is less demand for them, so the market’s soft. But that you know for a market to get better, you either have to have an increase in demand or a decrease in supply.
And what’s really been going on the last six months, and I suspect we’ll see continue the next few months is a reduction in the available supply looking for work.
Right. Okay great. And then, another topic on top of mind is consolidation in the industry. And, I know you guys have a fleet that’s unique and perhaps you may not be interested in mixing your assets with other assets, but could you maybe comment on what you see in the M&A market. And if this is a possible outcome for the industry. I mean, I know you have a lot of new public companies including yourself that maybe don’t want to be consolidated or consolidate, but it seems to me we need some consolidation to get the overall return profile for pressure pumping up?
And of course, predictions are hard especially about the future. But I think you’re going to see some of the least efficient players into maybe the bigger delivered ones struggle a bit, in today’s environment. So we might see some consolidation. We might see -- certainly there’s plenty of rumors and chatter. I think there’s a lot of that dialogue going on. Yes, there was a little bit of consolidation and at one or two last frac players by the end of the year that would certainly improve the market and that’s probably a reasonable chance that happens.
Okay. All right. Great, guys. Appreciate it. Thank you.
Thanks, James.
The next question will come from Sean Meakim of JPMorgan. Please go ahead.
Thank you. Good morning.
Good morning, Sean.
So maybe we could just dive in a little bit more into the drivers of your 1Q guide. Just thinking between volumes, efficiencies, pricing whereas, where would you say leading edge pricing is for your fleet today versus what your average fleet is experiencing? How much do you think efficiency can help you month-over-month as budgets get set? Just thinking about this different unpack those pieces in order for us, as you think like your guidance for the first quarter please?
You bet, Sean. So as we said, in late summer we have got a market very strong with such centers division [ph] in Q3 an activity that you talked about in last call. We saw a more significant erosion in Q4 and then whether these [Indiscernible] that are pushed on the market and they are trying to get to work, that pushes pressure on pricing. Since pricing I don’t know from last fall was something, unit pricing declined to more than 10%. Half of that is decreasing commodity prices. Think of the compression for example on share prices. That’s a plus for us, it’s a plus for our customers. But you know maybe 5% of that is coming out of our variable margin.
So that’s of course that, that makes the market tougher. But activity level, we had these schedule changes there. They’re normal for this industry. They happen all the time, but we usually know that with some advance. And as you’ve heard us say before, there’s excess demand for Liberty. We can always move fleets somewhere else if we know a schedule change. What business in the fourth quarter -- fourth quarter was very short notice changes in behavior that didn’t allow us to redeploy those fleets or efficiently redeploy it. That hurts.
Now that goes on in Q4. In Q1 today, every fleet, all 22 fleets we have our fracking as I’m talking to you today. But I’d say we’ve got good reason to believe that will continue. That will continue as far out as we can, as we can see. I think, we feel pretty good about fleet, fleet utilization this year, even though the market is softer. We’ll keep our fleets busy. We’ve been in very close communication with our customers. They’re somewhat apologetic for the vagaries of this changing market exiting the dot.com phase that sometimes makes very rapid decisions required. But pricing is compressed.
And Sean, I guess to maybe your most important question. I would say across our fleets today, they’re all pretty close or roughly in line with leading edge pricing.
I think that compression in pricing as probably mostly happened. I would suspect we’re at a bottom, our dialogues with customers about pricing now is when we might bring them back up. But I don’t see that’s not next week, next month. But, we don’t have wide price disparity in the fleets today.
Got it. Thank you guys. That’s very helpful. And so then just to expand on a little bit. Just how would you characterize your ability to drive improved EBITDA per fleet if we are able to stabilize at roughly current pricing levels? So like in other words, we’ve talked previously about a range of EBITDA per fleet in 2018 that was maybe low to high 20s. We’ve had this downdraft here in the backhalf 2018 into 2019. What does that -- what does that range look like without pricing improvement in 2019 as you’re -- as you drive volumes and improve your efficiency? And how confident are you in 1Q as a bottom for that metric?
Yes. Well, of course we don’t know pricing. I -- I again, I suspect by the time we get to year end we’ve probably got you know there’s probably a drift in the other direction in pricing. From here or there we don’t know the timing of that. You’ve heard sort of our guide of what we think happened this quarter and that’s reflective of this just this top pricing. There’s two things we can do about that.
One is, schedule, is to keep the fleets busy. Our customers if we’re getting customer work faster, faster than they thought, we’ve thought ahead on that. We’ve found ways to either slide up the work that follows that with that customer or insert work from others to keep these fleets busy.
And the second thing, in Q4, our fleets actually had an awesome throughput on every day they fracked. The problem was, it was just way too many days they didn’t frac. So that’s why we gave the hat tip to our operations team for even with these big schedule gaps still running like a well-oiled machine on the days they are fracking.
But as you’ve heard us say before, this huge driver that’s a win for us and win for our customers is driving increased efficiency, throughput every day in the field. And we continue a huge focus on that, and I’m going to let Ron Gusek elaborate a little bit on a few of the highlights of what’s going on with us on increased throughput.
Yes Sean, I might just add a few things in there just around the efficiency thoughts. I mean, obviously we continue to work on training and those sorts of things with our crews. We’ve had crews that have been working together for years and years now, the tenure, the experience together continues to allow for efficiency improvements just amongst the guys out there.
New technology, Chris alluded to the -- to the quick connect system that we’re working on. So with this idea of tracking all of the time that we’re spending out on location and where we have opportunity for improvement. We continue to work on technology initiatives that that allow us to get rid of those and those extra minutes there and find more time to pump. So the quick connect initiative being one of those. I’d love to say we’ve solved all the equipment problems that that exist out there, but we still continue to see meaningful opportunity there. We think we’ve talked about our work on the blenders, that we’ve been doing to improve uptime on what is a single point of failure inside of our frac fleet. We continue to do a large amount of work on pumps and pump design with the goal of ensuring increased uptime there and reduced maintenance time.
And then of course, we continue to do a lot of work with our customers, as our customer partnerships continue to get more and more mature, we grow together and find opportunities for improved efficiency there. So all of those things together, still plenty of room for efficiency improvement there.
The Permian, for example looking fantastic right now. We’ve had many fleets that have been running through Q4, pumping more than twelve hundred minutes a day, but that still leaves us 200 plus minutes a day that we can find there. So lots of opportunity I think on the efficiency side, yes.
Great. Thank you guys for that feedback.
You bet, you bet Sean.
And the next question will come from Jud Bailey of Wells Fargo. Please go ahead.
Thanks. Good morning guys.
Good morning Jud.
Just wanted a follow up on kind of Sean’s line of questioning, that the guidance for revenue I think you said up single digits. Could you give us a sense of kind of what your expectation would be how to think about activity against that. I mean, you cited in January pumping hours were a record. Do you think about your pumping hours being up or sand pump [ph] rather would we think about that that being up 5% to 10% to get to that kind of revenue number, or how are you thinking about the volume growth relative to the revenue expectations?
Yes. I think you're about right there, Sean. I think we're sort of you're probably talking during Q over Q overall a 10% volume metrically to get to that single-digit revenue growth.
Okay. And I guess my next question is to get that -- how do you feel about your visibility for the first quarter? And I guess how for 2019 as you sit here today, how would you characterize visibility on the calendar both near-term and then over the rest of 2019?
In spite of the rapid collapse or the shrinkage in activity collapse is actually the wrong word. We feel pretty good. I mean, we are completely booked as far as we look out in the later this spring, and certainly in the dialogues with our customers. I would say polar [ph] interest from our customers right now is larger than the fleets we have running. So, we are in decisions about what are we going to say yes to. What are we not going to say yes to? So I would say we feel pretty confident that the utilization of our fleets will be very good. There is demand for well more than the 20 Liberty fleets that are fracking today.
Okay. Thank you for that. Chris, I could slip one more based on that last comment. If you got that much demand is it fair to think that fleets 23 and 24 could find work in the back half of the year. Is it a price discussion? Or is it just no one willing to commit that far down the road at this point?
Oh no. I mean, we could put both fleets to work next month. No problem at all. And we are in dialogues about that. But we probably -- but I think it’s unlikely that we do. So yes, it is – it’s a combination of price which means what do we’re going to make right now, and customer partnership. Is it a strategic customer? Does it matter for our long term position? What’s the right balance there to do that? So it's not a question of could we find work to put the fleets out. We have we have a pull on that today. But I think we'll be slow, cautious, disciplined, I don't know the right word in deploying those. It has been said in our press release. It’s a very real possibility that one or both of those fleets is still idle at the end of the year. More likely one of them will be up by then, but I don't know.
It's not a year ago we had such a very good current economics. We had good customer relationships. There was no reason to hold back on that. Today, we’re more on a bubble. Profitability at current levels is meaningfully lower than it was and that we think is representative of mid cycle. So we’re not anxious to deploy every horsepower we can into today’s market. But we respect the customer relationships we have and where they might go in the future. So it’s always a balance. We deploy a fleet. Again it's a – that’s a 10 year asset and the humans in it. We’re going to have 10 years longer than that. So we're looking longer term at it, but of course it reflects. It reflects current pricing as well.
Little color on that, Jud, I mean, I think we’ll be very judicious when we look at that. We believe in discussions with our customers and with people, E&P operators that aren't currently our customers, that there is going to be a very strong focus on customer -- on capital discipline, on staying within budgets, looking at cash flow. So, we want to be very careful and as when we look through their asset -- how they roll down their completions of their assets. What the back end of the year is going to look like? We want to make sure that we'll able to get a very clear view of where they are in the sort of spin cycle for the year. Otherwise we -- you could end up with sort of another choppy Q4.
So we're being very sort of judicious as we look at that. And whether or not we can look at some clients who want to expand and can we do that with a little flex capacity especially if we're looking at whether or not we've got some other clients who may slowdown sort of in the Q4 period. So if we've got flex capacity we can sort of use over the summer. We may stretch a little bit and then sort of still only have the 22 fleet through Q4 and it will be a very solid utilization. So we're looking at that in very a great amount of detail this year.
Okay. Well listen I appreciate the color on that. I’ll turn it back.
Thanks, Jud.
The next question will come from George O'Leary with Tudor Pickering and Holt & Company. Please go ahead.
Good morning guys.
Good morning, George.
Trying to come at the utilization question and kind of frac activity question from a slightly different angle; if you guys could frame maybe the average days work or average days pumping per fleet in the fourth quarter of 2018? Or utilization percentage maybe ball parking that? And then, what you would need to achieve to keep EBITDA flat quarter-over-quarter in light of the pricing decreases? I think that would be super helpful.
Yes. George, if you look at that Q over Q, Q3 to Q4, we were down probably 10% to 15% from a utilization standpoint.
And then for the first more or less how many basis points or how many incremental days per spread do you think you might need to pump to keep that EBITDA flat? January is good, but just trying to think through the progression of the whole quarter?
We’ll probably up of order 10% maybe high single digits to 10 points going into Q1.
Okay, great. That's super helpful. And then I just kind of had a -- giving else focus on efficiency and adding bells and whistles to the frac fleet. I can add a nerdy to your question burned more out of curiosity than anything else. But replacing the zipper manifold is interesting. Zipper manifolds typically rented on the well side. I'm just curious if this new, I believe you refer to it as an articulating arm. Is that a new rental product or is that something you'll be purchasing from a CapEx perspective to bolt on to your fleet?
We'll be purchasing it. So it will be CapEx bolted on to our fleet.
Okay. Thanks very much. Rest of my questions has been answered. I'll turn it back over.
Thanks, George.
The next question will come from Scott Gruber of Citigroup. Please go ahead.
Yes. Good morning.
Good morning, Scott.
Coming back to the activity outlook, I know there’s been several questions on this front. I wanted to ask another one. Chris, you mentioned a full calendar as we go through 1Q and it sounds like into 2Q. Does that mean there's a line of sight to getting back to the mid 2018 rate of stages per fleet per month in 2Q or 3Q?
Absolutely, I'd say we're there today or close to it. I mean, we running 22 fleets and pumped record amounts of sand in January. So, I think stage throughput and activity levels right now are good. Winter, so we're going to have disturbances, but boy, so far winter has been -- winter has been very smooth, winter has been very smooth.
Got it. And then just help me square a couple of other numbers. You had mentioned roughly a 5% net pricing hit I believe. Previously, you guys had talked about a mid 20s EBITDA per fleet when you were running at, call it, full utilization. But the EBITDA guide for 1Q was essentially flat. So, at first take out, I would assume that you’d apply that 5% net pricing hit to the mid 20s on EBITDA, but there seems to be a gap in 1Q if we’re already at that level of utilization. So, you just -- how many think about that calculus?
Yes. We had some pricing erosion in Q3. We had some more pricing erosion in Q4 so that total price erosion I going to talk about from which start to which end, but in round numbers, if we went from mid 20s EBITDA to mid-teens or below mid-teens that's probably a 12% net price reduction to us. The price reduction to customers over that time year is even larger because material costs are going down. Revenues, to get that flat revenues through the last six or eight months you got to grow your activity level. Again, even without margin compression just because of the largest cost of a frac is sand and that price is compressed a lot. But to your point pricing from the peak and now yes, is net to us is maybe decline closer to 10% and 5%. And yes, in Q3, Q2 we had almost a dreamy alignment of schedules, so that the days fracked per month for every fleet was incredibly high.
We've got a couple more fleets running now, I think than we did at the end of Q2. We didn't have quite that dreamy other schedule alignment in January, but boy, throughput on an average day I would say is good or better.
Got it. And one last one and answer to this maybe nothing because you guys do a number of things won't have a great strategy. But as we move out of the dot.com phase as you called it, do you think about changing anything with regard to your strategy?
We always think about changing our strategy. Look, the marketplace changes. What's most -- which -- in which customers are -- peak customers chain, customers plans or views of the world or the right way to do things changes. We're always in dialogue with our customers. We’re always challenging ourselves internally. So, yes, and again probably more of our change technology or culture is kind of behind in the doors that we don't talk about all of it. But absolutely, look, they can have much as a how much the oil and gas world changed in the last 10 years. Is Liberty going to a bit like different five years from now. Yes. Is the principles that guide us different? No.
I think one of the things, Scott obviously, we have almost quadrupled in the last two and a half years, right. So a jury in that sort of growth phase. We are now focusing as we are going to a slight slow growth period in the next year focus on efficiency, focus on effectiveness, allows us time to spend a lot of time focusing on getting a lot better internally. And there is a huge amount -- number of things that we can do with that.
Great I appreciate all the color. Thank you.
Thanks Scott.
The next question will come from Connor Lynagh of Morgan Stanley. Please go ahead.
Yes. Thanks. Good morning.
Good morning, Conner.
I was wondering if you can give us a little more color on the technology investment you guys are referring to, obviously, pretty significant portion of the capital budget this year. So I think you already sort of alluded to some of the things we're talking about, but could give us a sense of how much capital is going to what, the relative for -- how you think about the returns on that investment?
I think probably, 40% of that that investment is going towards the new articulating arm, the fire suppression systems, that we’ve discussed in detail. Other items we're doing there is sort of improvement in blend of technology rolling out new dry guar [ph] dry fast kits, facility upgrades and ERP upgrade, it just a number of different sort of -- as we move forward, one of the things we're focusing on this year. I mean, you have to invest in this because we’re going to be doing this call in five years time and we want these things to pay dividends. Is your efficiency upgrades inside the building, right. Hey, how do we get better. And that's one of the things that we focus on every day.
So, yes, and we look at every investment as – and look at the return on that investment whether it's straight the sort of cost reduction to the bottom line, improve efficiency, improve throughput and a number of other ways. And a lot of it's investing in people. So I think we look at all those different basins that way.
Yes. Got it. Maybe just shifting more to the to the capital return side of things. So it seems -- if things hold where they are potentially improve seasonally you will be generating a decent amount of free cash flow this year. How do you think about -- are you planning to execute the entire $100 million dollar buyback. Are you planning on any changes to the dividend policy and just walks through how you think about that?
No. I mean, we look at these decisions sort of as we march through the year, because this is an interesting year. This is this could be challenging. We'll see where the commodity market goes. At the moment, we're not seeing a dislocation on asset pricing. But if that happens we want to make sure that we have the balance sheet available to take advantage of that, just like we did in the last downturn. Our dividend policy as we said, when we announced it and we intend for that to be a regular event. We will associate -- we look at that every quarter. But we have no plans at the moment of changes it. And we'll look at the buyback policy as it makes sense as far as the share price in the balance sheet.
Got it. Thanks for the color.
You bet. Thanks Connor.
The next question will come from Stephen Gengaro of Stifel. Please go ahead.
Thanks. Good morning gentlemen.
Good morning, Stephen
Just -- I want to just follow up on two things quickly. The first being the potential sort of EBITDA per fleet numbers at current pricing kind of current frac pricing and current frac sand pricing. Any ballpark you'd be willing to throw out there?
Well, the guidance we’ve given for Q1 is obviously, was a flat EBITDA per fleet from Q4 around just over 30 million a fleet. And again I think what we'll do is we haven't given any further guidance on that side of the world. But we would hope to see efficiency increases. And we'll look to see how the supply demand market comes together and where we can move prices up in the future.
Okay. Thank you. And then just the other quick question, the geographically any material shift to where your assets are versus prior quarter. I don't think so. We just want to be sure?
No, there isn't. There isn’t. We have opportunities in every base and we're in. So they've all got challenges, but not huge differences between the base and as we sit here today, and no movement of assets on our end.
Very good. Thank you.
Thanks, Stephen.
The next question will come from Blake Gendron of Wolfe Research. Please go ahead.
Hey, good morning. Thanks for taking my question. My first is on -- it’s pretty compelling what you talked about a vision for a steady or state U.S. land completions market. And in that paradigm you're going to get to returns -- you're going to get to a certain return level where growth is the answer. But what would it take for you guys after you deploy the 24th spread to just take a step back and say we're going stop growing and just take cash off the table?
It depends on the outlook for the market. And I should say, we don't believe that oil and gas industry ever becomes steady. But we do believe that there are some forces that might make it steady or I think you build an asset that last a long time like a well you get a cyclical industry, but if spending is more curtailed in high cash flow, high prices times. And U.S., look we’ve driven oil price down because U.S. production over the last five years has grown more than total demand in world oil.
Obviously that's not going to continue. I think U.S. oil production will grow meaningfully in the years ahead, but not likely at the crazy breakneck speed it's been the last five years. So – and as people move towards not outspend is for growth as was common at the start of the shale revolution. I think we'll get a little bit slower growth in U.S. oil production therefore a little bit probably steady year level of activity, not steady but stead year. And so I think we will continue that this strategy to saying that as we generate cash every year it's what to do with those dollars. What's the best return?
Sometimes it's going to be buying back our stock. Sometimes it can be building more frac fleets, sometimes it's going to be burnishing a balance sheet because there's other investment opportunities. And huge throughout all those is going to be returning cash to shareholders. So, it's not like a 24 fleets we stock, nothing about there's -- there's no reason to do that. But returning I'm probably rambling because it's so depends on the particular circumstances and the opportunities in front of us. But will Liberty return a lot of cash to shareholders in the coming five years? Yes. But we not grow at all. Unlikely that we will -- that we will not grow as all. We'll likely continue to grow. But in today's climate that balance of where to deploy capital is much less towards growth.
Like with single digit market share in the frac market we have deep relationships with our customers and we really value the fact of the service and that partnership with them. And as those customers, as we build with those customers that poll is what we get. It will take us take us through our growth obviously it's 24 and through 24. So yes, there’s an organic growth strategy that has been in place since the beginning and we'll continue.
But we're not a growth for growth sake. We've grown very fast. We just finished our seventh commercial year in business. So we’ll say, we grew quite fast, but it was not we set out to grow at a breakneck pace. We set out to do things differently and provide differential level of service and a differential return on capital, and by executing on that the polar demand for liberty is great. The cash generation was large and so it makes sense and we funded relatively rapid growth. But we're not -- for us the goal is just isn’t to be bigger. It's to be better.
Got it. That makes sense. And I think the more encouraging aspect to the steady or state is just better visibility and it'll allow you to meet those capital allocation decisions a bit easier. My second question and this is more of a back on sort of nuanced completion design question. I’m going to single out specifically as a relatively new adopter of Plug-and-perf as opposed to sliding sleeves. It's been a factor that's helped throughput story in the Bakken specifically, but any sort of meaningful shift in completion design up there that could potentially pressure the throughput side of the story up there?
No. I think like all the other basins it’s seen seeing the benefits of higher throughput just in lower well costs. And when you're zippering you get this stress interaction among the fractures and offset wells that also help steer fractures to the right place and the reservoir where you want them because they used to joke as a frac model or fracs don't like fracs just like frac modellers didn't like frac modellers. But no obviously with sliding sleeves you can get faster easier throughput. When we arrived in the Bakken 70% of the wells were completed with sliding sleeves.
One of the reasons for that, when you get well done much faster you can frac a well in a day and a half instead of a week, instead of week anymore, but with single wells it was. So we were pushing against the tide there that by going to plug-and-perf on single HBP wells you slowed the completion of a well. You had to invest several more days and more money to produce those wells. But you increase well cost 10% or 12% and you increase productivity and you are like 40 plus percent.
So we think the tradeoffs were strongly in favor of doing it and it's why almost everyone. There's probably two companies in the Bakken they still be sliding sleeves and we know that has guys and a partner with them on multiple things. You can see them moving -- they're probably going to be one remaining after them. And in the long run you want to get the maximum recovery and greatest economic returns. Plug-and-perf is almost always the right way to go. And plug-and-perf today is quite different than it was five or seven years ago. I mean originally we were trying to get three to five individual fracs in each stage. That's why it was better than sliding sleeves.
Today and we run diagnostics and this will be called stream limited entry proofreading that we've published papers on. We're getting a dozen or more individual fractures in each frac stage, so the density of plumbing and contact to the rock is just compelling.
All right. Got it. Thanks.
Sorry for the long winded answer.
The next question will come from Marc Bianchi of Cowen. Please go ahead.
Hey, thanks. Most of my questions have been answered. I just wanted to ask a little bit more on first quarter. January, you mentioned was the highest monthly volume in sand for the company. As you put together the guidance here for first quarter, what's the expectation of the progression from January through the remainder of the quarter?
I would say flattish. We've got all of our fleets running at a high pace today and see no reason to believe that won't be the case in February and March.
Got it, got it.
And flattish is a nice change from Q4.
Sure. Is the -- I suspect that would imply the kind of exit rate profitability that you would have would be pretty consistent with what you're guiding to here in the first quarter. Is that fair assumption?
I think it is.
Okay great. Thanks, Chris. I'll turn it back.
Thanks so much, Marc. Appreciate the question.
And this concludes our question and answer session. I would now like to turn the conference back over to Chris Wright for any closing remarks.
Thanks for everyone for investing the time to dialogue with liberty today and your interest in following the company, interesting times in the marketplace. So a longer Q&A section, but a great dialogue and we look forward to the rest of the year in 2019. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.