Liberty Energy Services: LBRT In The USA
Oilfield activity is on the increase and spells profits for LBRT
It may not be today. It may not be tomorrow. But, pretty soon oil and gas are going to be back in style. People are going to get tired of the rolling blackouts that are being predicted for this summer, and are finally going to start asking woke climate-alarmist politicians-"Dude, where's my power?"
It's already started to happen, and I think it will continue to gather momentum. You can see it in the stock price of Liberty Energy Services, (LBRT) which has recently come close to attaining a 4-year high in its stock price, before pulling back 30% in the current sell-off. LBRT does one thing primarily-frack oil and gas wells, and business is getting good again.
I last wrote them up at $12ish in Feb with the admonition that you should add them to your portfolio. That's been a pretty good call as they've topped $18 with the general OFS industry over the past few months. A nice 50% gain in the past 4-months.Before imploding last week that is. (Too bad you can’t do smiley faces in Substack.)
Now with the sharp focus being paid by nearly everybody on American production these companies could be getting ready to see continued gains. Chris Wright, CEO of LBRT makes some comments along these lines-
To power the global economy and frankly enable the modern world, the frac services market is seeing robust activity improvement and a tightening of the supply demand balance. Leading edge service pricing is recovering to levels that could support fleet reactivations. And we have many long-term partners requesting additional capacity from us. Seven years of underinvestment in oil and gas production capacity was accompanied by an even more dramatic drought in investment in new frac fleet capacity. The emerging cycle is likely to last longer and be characterized by a much slower and more modest rise in active frac fleets.
LBRT filings
You all know I think Chris Wright is one of most innovative and prescient leaders in our industry. A couple of months ago I posted an oped he'd written-Inconvenient Truths, about energy realities. I encourage you to give it a read if you missed. What he said, needs to be said and amplified.
If you parse Chris' quote from the CC, you come away with-
Equipment's tight and will remain so
Demand is high and increasing
Pricing is moving higher
We are still in early days of this cycle
That sounds like a solid thesis for investment to me. When you add in the fact that the land rig count is approaching 750, and the frac spread count is nearing 300, its clear that the worm is turning on energy.
The thesis for LBRT
At its core LBRT is a pumping company. I have written them up a number of times as to why they are my number-1 pick in the independent fracker space. In recent times at client request and to gain strategic advantage LBRT has added wireline services and in particular, sand mines to their portfolio though the OneStim acquisition, and that of PropX in 2021. Chris Wright comments on how they are a differentiator for Liberty-
Liberty customers are seeing differential execution in this challenging environment, in part, due to vertical integration from our OneStim and PropX acquisitions. While many E&Ps directly source sand, we're seeing a reversal of that trend as no E&P can hope to match the scale and sophistication of Liberty supply chain. Sand supply challenges were exacerbated by truck driver shortages. Liberty logistics, digitization efforts, coupled with a wide network of multiple origins and destinations allowed us to efficiently employ a limited number of truck drivers with dynamic optimization.
LBRT filings
Liberty is also a technology company, a fact I've stressed in prior articles in some detail. So there's a reason for you to delve back into those earlier articles on the company.
Of course the core thesis for Liberty is eloquently stated by Chris in the call, and I won't try and out do it with my verbiage.
Restrained global investment in oil and gas over the last 7 years leaves the supply short just as worldwide demand for energy is growing and expected to surpass pre -pandemic levels in 2022. Relatively low and declining oil and gas inventories have led to persistent upward pressure on commodity prices even prior to the Russian invasion of Ukraine although Russian export volumes have oil and gas has been only modestly impacted so far. Uncertainty regarding potential future impacts of sanctions and fire aversion to Russian hydrocarbon presents significant risk to future supply and demand balances.
And the modest but low stated plan increases in opec plus supply and the release of global emergency oil reserves, are simply not enough to supplier rebounding world economy. North American oil and gas are critical in the coming years. Tight oil and natural gas markets, coupled with geopolitical tensions in many key oil and gas producing regions, have all eyes on North American supply. The North American economy is proving more resilient to today's global challenges in significant part, due to a secure local supply of price advantaged natural gas. North America is well positioned to be the largest provider of incremental oil and gas supplies.
LBRT filings
I hope you read every word of that. It's all true.
Q-1, 2022 for LBRT
For the first quarter of 2022, revenue increased 16% to $793 million from $684 million in the fourth quarter of 2021. Adjusted EBITDA increased 345% to $92 million from $21 million in the fourth quarter.
As of March 31, 2022, Liberty had cash on hand of $33 million, and total debt of $212 million including $108 million drawn on the ABL credit facility, net of deferred financing costs and original issue discount. The term loan requires only a 1% annual amortization of principal, paid quarterly. Total liquidity, including availability under the credit facility, was $222 million as of March 31, 2022.
Catalysts for LBRT
I think there a couple of drivers that will push business and profits for LBRT. The first is the PropX wetsand technology. This saves energy cost in drying sand. This a huge potential logistics advantage and cost saver. There is also the health aspect of blowing sand and crushed debris. It's a bad idea to breathe in silica-sand. Doing so can lead to silicosis. Which is not good. If you care about people's health, not handling dry sand is a step-change improvement that will gain traction rapidly.
The second is Digifrac. LBRT is ahead of the pack-although all fracking companies are pursuing clean power (gas, electric) to shift away from diesel. There are a couple of drivers here. Emmissions are being tracked by the operators as a result of government initiatives. Lower emmissions are the wave of the future. Cost and efficiency go hand in hand with this technology as will profits. Having this tech developed to this stage of deployment is a step-change advantage for LBRT.
Risks
Obviously the growth we are forecasting for LBRT is dependent on the current price regime for oil-over $100 per barrel. As secure as this seems right now, (a little less secure than when I originally posted this) investors should be advised that the energy sector is subject to a lot of volatility. Any adverse moves in the oil price would impact LBRT shares.
I should probably briefly opine on the crude collapse this week. This what I call a sympathetic move in response to the general market waking up to the “Fed put.” It doesn’t change the fact that the market is still in Backwardation on the NYMEX Strip or does it add to our depleted inventories. This sell-off is a buying opportunity in my book. As an example, I bought Marathon Oil, (NYSE: MRO) on Friday, at 35% discount to recent highs. Buying quality is always in style. I will have a complete work up on MRO for you soon. I’ll give you a hint. You’re going to like it.
Your takeaway
LBRT is trading for 7X forward EV/EBITDA. This might seem a little high and normally it is, but consider the improvement from Q-4, 2021. Using SA's numbers the multiple then was ~37.2X. So things are getting better.
One clue as to where the stock might go from here lies in a metric that tabulates EBITDA per fleet. Currently its about $10 mm per year. Guidance is for it to attain $14-18 mm per fleet. That should move EBITDA toward $650-700 mm for 2022. To keep the multiple at 8X, the shares need to rerate toward $30 per share, a nearly 110% increase from current levels.
I think LBRT is a buy at current prices and investors looking for growth should consider if their risk profile allows entry by a company like LBRT.
Disclosure. The author is long LBRT.
Disclaimer. Nothing I say in this article should be construed as investment advice. It may look or sound like it, but it is not. I am not a CPA/CFA and have no formal training/certifications/licences in either discipline. In these articles I present analysis and relevant information that an interested investors may find instructive. I may be bullish, bearish, or neutral and will discuss why, but I am definitely not recommending you buy or sell any security I discuss. Investors should always do their own due diligence before plunking down their hard-earned cash. They alone are responsible for their investing decisions