Liberty Energy (LBRT) - 2018 Q4 - Annual Report

PART I Business Liberty Oilfield Services provides hydraulic fracturing services to North American E&P companies, covering its corporate structure, services, assets, customer relations, and regulatory environment Overview and Corporate Structure The company, an independent hydraulic fracturing provider, grew to 22 fleets by 2019, adopted a holding company structure post-2018 IPO, and initiated TRAs, share repurchases, and dividends - The company is an independent provider of hydraulic fracturing services in major North American basins, including the Permian, Eagle Ford, DJ, Williston, and Powder River Basins[18] - Liberty grew organically from one active hydraulic fracturing fleet in December 2011 to 22 active fleets by February 2019[29] - Following its January 2018 IPO, the company adopted a holding company structure, with Liberty Inc.'s primary asset being its equity interest in Liberty LLC[19][178] - The company entered into Tax Receivable Agreements (TRAs) to pay legacy owners 85% of net cash savings from certain tax benefits, potentially leading to substantial future payments[25][26][27] - In 2018 and early 2019, the company authorized two separate $100 million share repurchase programs and initiated a quarterly cash dividend of $0.05 per share[32][33][34] Our Services and Technology The company provides advanced hydraulic fracturing services, differentiating through custom solutions, proprietary data, and innovative technologies like Liberty Quiet Fleet® and custom fluid systems - The core service is hydraulic fracturing, stimulating production by pumping a pressurized fluid mixture into a well to crack underground formations[48][49][50] - The company utilizes proprietary databases and multi-variable data analysis to optimize fracture design and well completions for customers[52] - Key technological innovations include the Liberty Quiet Fleet® for noise reduction and custom fluid systems like Liberty Spirit™ for specific basins[31][39][53] Properties and Equipment The company operates 22 hydraulic fracturing fleets from leased headquarters and owned/leased facilities, with a focus on Quiet Fleet® technology and dual-fuel capability Principal Properties | District Facility Location | Size | Leased or Owned | | :--- | :--- | :--- | | Odessa, TX | 77,500 sq. ft on 47 acres | Owned | | Henderson, CO | 50,000 sq. ft on 13 acres | Leased | | Williston, ND | 30,000 sq. ft on 15 acres | Owned | | Gillette, WY | 32,757 sq. ft on 15 acres | Leased | | Cibolo, TX | 90,000 sq. ft on 34 acres | Owned | | Sedalia, CO | 11,805 sq. ft on 112 acres | Owned | - As of 2019, the company operates 22 hydraulic fracturing fleets, with eight utilizing Liberty Quiet Fleet® technology and approximately 40% having dual-fuel capability[56] Marketing, Customers, Suppliers, and Competition The company manages sales regionally, has concentrated customer revenue (42% from top five in 2018), diversified suppliers, and competes in a fragmented market Top 5 Customer Revenue Concentration | Year | % of Revenues | | :--- | :--- | | 2018 | 42% | | 2017 | 53% | | 2016 | 59% | - Extraction Oil & Gas, Inc. was the only customer accounting for more than 10% of revenues in 2018[60] - The company competes in a highly fragmented market against large integrated companies and specialized hydraulic fracturing providers[63] Environmental and Occupational Safety and Health Matters The company's operations are subject to stringent federal, state, and local environmental and safety regulations, particularly concerning hydraulic fracturing and climate change - Operations are subject to stringent regulations from agencies like the EPA and OSHA, potentially imposing significant compliance costs and penalties[67] - Worker health and safety is regulated under OSHA, including standards for hazardous materials and respirable crystalline silica[70] - The company operates as a motor carrier, subject to DOT regulations governing safety, hours of service, and hazardous materials transport[72] - Hydraulic fracturing faces increased regulatory oversight at federal, state, and local levels, potentially leading to new restrictions or bans that could reduce demand[93][94][95] - Climate change regulations, including those limiting GHG and methane emissions, could increase operating costs for the company and its customers[86][87] Risk Factors The company faces significant business risks from industry cyclicality, competition, and regulations, alongside stock-related risks from its holding company structure and TRA obligations Risks Related to Our Business Business risks include dependence on E&P spending, commodity price volatility, intense competition, customer credit risk, operational hazards, capital requirements, and extensive environmental and safety regulations - The business is directly dependent on the capital spending of oil and natural gas companies, highly sensitive to volatile commodity prices[101][104] - The company has significant customer concentration, with the top five customers representing 42% of revenue in 2018, posing a risk of loss or non-payment[113] - Federal, state, and local initiatives on hydraulic fracturing and induced seismicity could limit oil and gas activities, reducing demand for services[123][124] - The business is subject to numerous environmental and safety laws, such as those concerning silica exposure, water disposal, air emissions, and climate change, imposing significant costs and liabilities[131][134][148] Risks Related to Our Class A Common Stock Stock risks stem from the holding company structure, dependence on Liberty LLC distributions, controlled company status, substantial TRA obligations, and potential stock price volatility - Liberty Inc. is a holding company dependent on distributions from Liberty LLC to cover taxes, corporate expenses, and TRA payments[178] - The company is a "controlled company" due to majority voting power by Principal Stockholders, exempting it from certain NYSE corporate governance requirements[187] - The Tax Receivable Agreements (TRAs) require Liberty Inc. to pay 85% of certain tax savings to legacy owners, with payments potentially accelerating upon a change of control[203][206] - Estimated TRA termination payments were approximately $67.3 million as of December 31, 2018, potentially impacting liquidity negatively[207] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[217] Properties Property information is incorporated by reference from the 'Business' section (Item 1) of this report - This section incorporates property information by reference from Item 1. Business[218] Legal Proceedings A patent infringement lawsuit by SandBox Logistics, LLC was dismissed in December 2018, and other legal matters are not expected to be material - A patent infringement and breach of contract lawsuit by SandBox Logistics, LLC was dismissed with prejudice on December 19, 2018[219] - The company does not expect other ordinary course legal matters to materially impact its financial condition[220] Mine Safety Disclosures This section is not applicable to the company - Not applicable[221] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock began trading on NYSE in January 2018, initiated a $0.05 quarterly dividend, and repurchased $29.0 million in shares in Q4 2018 - The company's Class A Common Stock trades on the NYSE under "LBRT" following its January 17, 2018 IPO[224] - A quarterly cash dividend of $0.05 per share of Class A Common Stock was initiated and paid in September and December 2018[226] Q4 2018 Share Repurchases | Period | Total number of shares purchased | Average price paid per share | Total value of shares purchased as part of publicly announced plans or programs | | :--- | :--- | :--- | :--- | | October | — | $ — | $ — | | November | 191,712 | $ 18.83 | $3,610,000 (approx) | | December | 1,558,778 | $ 16.25 | $25,340,000 (approx) | | Total Q4 | 1,750,490 | $ 16.53 | $29,000,000 (approx) | - As of December 31, 2018, $17.1 million remained available for future repurchases under the $100 million share repurchase program authorized in September 2018[228] Selected Financial Data This section presents selected historical financial and operational data for the years ended December 31, 2015 through 2018, including statements of operations, cash flows, balance sheet, non-GAAP measures, and operational metrics Selected Statement of Operations Data (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenue | $ 2,155,136 | $ 1,489,855 | $ 374,773 | | Operating income (loss) | $ 306,563 | $ 181,137 | $ (54,434) | | Net income (loss) | $ 249,033 | $ 168,501 | $ (60,560) | | Net income attributable to Liberty Inc. stockholders | $ 126,349 | $ — | $ — | Selected Other Financial & Operational Data (in thousands, except fleet data) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Capital expenditures | $ 258,835 | $ 311,794 | $ 102,428 | | Adjusted EBITDA | $ 438,234 | $ 280,728 | $ (5,588) | | Total Fleets at end of period | 22 | 19 | 10 | | Average Active Fleets | 21.3 | 15.1 | 7.4 | Selected Balance Sheet Data (at end of period, in thousands) | | 2018 | 2017 | | :--- | :--- | :--- | | Total assets | $ 1,116,501 | $ 852,103 | | Long-term debt (including current) | $ 106,524 | $ 196,357 | | Total equity | $ 740,814 | $ 392,766 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, revenue growth, market trends, non-GAAP measures, liquidity, capital resources, debt, contractual obligations, and critical accounting policies Overview, Recent Trends and Outlook Demand for hydraulic fracturing is tied to E&P activity and commodity prices, with WTI crude oil price declines impacting frac service pricing in late 2018, yet long-term trends like drilling efficiencies and increased completion intensity remain beneficial - WTI crude oil prices averaged $65.23 in 2018 but fell significantly in the second half, reducing frac service pricing in late 2018[241][242] - Long-term industry trends benefiting the company include improved drilling economics and increased complexity and service intensity of well completions[244][246][248] - The average proppant used per well more than doubled from six million pounds in 2014 to over 13 million pounds in 2018, indicating higher service intensity[248] Results of Operations This section details financial results for 2018 vs 2017 and 2017 vs 2016, attributing significant revenue and income growth to fleet expansion and improved market conditions Year Ended December 31, 2018, Compared to Year Ended December 31, 2017 In 2018, revenue increased 44.7% to $2.2 billion, driven by a 41.1% increase in average active fleets and a 2.5% increase in revenue per fleet, leading to significant growth in operating and net income Financial Performance Comparison (2018 vs. 2017) | (in thousands) | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Revenue | $ 2,155,136 | $ 1,489,855 | $ 665,281 | | Operating income | $ 306,563 | $ 181,137 | $ 125,426 | | Net income | $ 249,033 | $ 168,501 | $ 80,532 | - Revenue increased due to a 41.1% increase in average active fleets (from 15.1 to 21.3) and a 2.5% increase in revenue per average active fleet[260] - Cost of services increased by 42.0% to $1.6 billion, primarily due to a 34.8% increase in material volumes and a 39.4% increase in personnel costs[261] Year Ended December 31, 2017, Compared to Year Ended December 31, 2016 In 2017, revenue surged 297.5% to $1.5 billion, driven by a 104.0% increase in average active fleets and a 94.8% increase in revenue per fleet, leading to a significant swing to operating and net income Financial Performance Comparison (2017 vs. 2016) | (in thousands) | 2017 | 2016 | Change | | :--- | :--- | :--- | :--- | | Revenue | $ 1,489,855 | $ 374,773 | $ 1,115,082 | | Operating income (loss) | $ 181,137 | $ (54,434) | $ 235,571 | | Net income (loss) | $ 168,501 | $ (60,560) | $ 229,061 | - The revenue surge resulted from a 104.0% increase in average active fleets and a 94.8% increase in revenue per average active fleet, reflecting industry recovery[270] Comparison of Non-GAAP Financial Measures Management uses EBITDA and Adjusted EBITDA to assess financial performance, with Adjusted EBITDA increasing to $438.2 million in 2018, reflecting strong operational growth - EBITDA and Adjusted EBITDA are used by management to assess financial performance by removing capital structure, asset base, and non-recurring item effects[278][279] Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net income (loss) | $ 249,033 | $ 168,501 | $ (60,560) | | EBITDA | $ 431,673 | $ 262,610 | $ (13,072) | | Adjusted EBITDA | $ 438,234 | $ 280,728 | $ (5,588) | Liquidity and Capital Resources The company's liquidity stems from operations, IPO proceeds, and credit facilities, with $103.3 million cash and $224.3 million available under its ABL Facility as of December 31, 2018 Summary of Cash Flows (in thousands) | | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $ 351,258 | $ 195,109 | | Net cash used in investing activities | $ (255,492) | $ (310,043) | | Net cash (used in) provided by financing activities | $ (8,775) | $ 119,771 | - As of December 31, 2018, the company had $103.3 million in cash and cash equivalents[286] - The company has a $250 million ABL Facility with $224.3 million available and a Term Loan Facility with $111.7 million outstanding as of year-end 2018[296][297] Contractual Obligations As of December 31, 2018, total contractual obligations were approximately $1.01 billion, primarily comprising purchase commitments, operating leases, and the Term Loan Facility Contractual Obligations as of December 31, 2018 (in thousands) | | Total | Less than 1 year | 1 – 3 years | 4 – 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Term Loan Facility | $ 111,715 | $ 1,750 | $ 3,500 | $ 106,465 | $ — | | Estimated interest payments | $ 41,533 | $ 11,407 | $ 22,307 | $ 7,819 | $ — | | Operating lease obligations | $ 153,930 | $ 42,717 | $ 81,075 | $ 10,396 | $ 19,742 | | Purchase commitments | $ 690,862 | $ 341,970 | $ 344,947 | $ 3,945 | $ — | | Obligations under the TRAs | $ 16,818 | $ — | $ 3,994 | $ 1,947 | $ 10,877 | | Total | $ 1,014,858 | $ 397,844 | $ 455,823 | $ 130,572 | $ 30,619 | Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including revenue recognition, allowance for doubtful accounts, inventory valuation, property and equipment depreciation/impairment, and Tax Receivable Agreements - Key areas requiring significant management judgment and estimates include Revenue Recognition, Allowance for doubtful accounts, Inventory valuation, Depreciation and impairment of property and equipment, and Accounting for Tax Receivable Agreements[309][310][311][312][315][317] Quantitative and Qualitative Disclosure about Market Risk The company faces market risks primarily from volatile oil and gas drilling activity, interest rate risk on variable-rate debt, and commodity price risk for materials and fuel - The company's primary market risk is its dependence on volatile U.S. oil and natural gas drilling and completion activity, driven by commodity prices[321] - The company is exposed to interest rate risk on its $111.7 million of variable-rate debt; a 1% change would impact annual interest expense by about $1.1 million[323] - The company faces commodity price risk for materials and diesel fuel, managed through customer pass-throughs and fixed-price supply agreements[324] Financial Statements and Supplementary Data This section incorporates the company's audited consolidated and combined financial statements and supplementary data by reference, located at page F-1 - The company's financial statements and supplementary data are included beginning on page F-1 of the report[326] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[327] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, having remediated a prior material weakness - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[328] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[333] - During the quarter ended December 31, 2018, the company remediated a previously identified material weakness related to segregation of duties[334] Other Information The company reports no other information in this section - None[336] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the 2019 proxy statement[339] Executive Compensation Information on executive compensation is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the 2019 proxy statement[340] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the 2019 proxy statement[341] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the 2019 proxy statement[342] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the 2019 proxy statement[343] PART IV Exhibits, Financial Statement Schedules This section provides an index to financial statements and lists all exhibits filed, noting that schedules are omitted as information is presented elsewhere - This item provides an index to the financial statements and a list of exhibits filed with the report[346][347] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[350]