LIBERTY ENERGY INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs, and expected performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in "Cautionary Note Regarding Forward-Looking Statements," the Annual Report under the heading "Item 1A. Risk Factors," and in "Part II - Other Information, Item 1A.-Risk Factors" included herein. We assume no obligation to update any of these forward-looking statements.
Overview
The Company, together with its subsidiaries, is a leading integrated oilfield services and technology company focused on providing innovative hydraulic fracturing services and related technologies to onshore oil and natural gas E&P companies inNorth America . We offer customers hydraulic fracturing services, together with complementary services including wireline services, proppant delivery solutions, data analytics, related goods (including our sand mine operations), and technologies that will facilitate lower emission completions, thereby helping our customers reduce their emissions profile. We have grown from one active hydraulic fracturing fleet inDecember 2011 to over 40 active fleets as ofSeptember 30, 2022 . We provide our services primarily in thePermian Basin , theEagle Ford Shale , theDJ Basin , theWilliston Basin , theSan Juan Basin , thePowder River Basin , theHaynesville Shale , the SCOOP/STACK, theMarcellus Shale ,Utica Shale , and theWestern Canadian Sedimentary Basin . Additionally, we operate two sand mines in thePermian Basin . OnDecember 31, 2020 , the Company acquired certain assets and liabilities of Schlumberger's OneStim business, which provides hydraulic fracturing pressure pumping services in onshoreUnited States andCanada , including its pressure pumping, pumpdown perforating and Permian frac sand business, in exchange for consideration resulting in a total of 66,326,134 shares of the Class A Common Stock being issued in connection with the OneStim Acquisition. As ofOctober 18, 2022 , Schlumberger owned 12.6% of the issued and outstanding shares of our Common Stock. The combined company delivers best-in-class completion services for the sustainable development of unconventional resource plays inthe United States andCanada onshore markets. OnOctober 26, 2021 , the Company acquired PropX in exchange for$11.9 million in cash and 3,405,526 shares of Class A Common Stock and 2,441,010 shares of Class B Common Stock, and 2,441,010 Liberty LLC Units, for total consideration of$103.0 million , based on the Class A Common Stock closing price of$15.58 onOctober 26, 2021 , subject to customary post-closing adjustments.The Liberty LLC Units are redeemable for an equivalent number of shares of Class A Common Stock at any time, at the election of the shareholder. Founded in 2016, PropX is a leading provider of last-mile proppant delivery solutions including proppant handling equipment and logistics software acrossNorth America . PropX offers innovative environmentally friendly technology with optimized dry and wet sand containers and wellsite proppant handling equipment that drive logistics efficiency and reduce noise and emissions. We believe that PropX wet sand handling technology is a key enabler of the next step of cost and emissions reductions in the proppant industry. PropX also offers customers the latest real-time logistics software, PropConnect, for sale or as hosted software as a service. We believe technical innovation and strong relationships with our customer and supplier bases distinguish us from our competitors and are the foundations of our business. We expect that E&P companies will continue to focus on technological innovation as completion complexity and fracture intensity of horizontal wells increases, particularly as customers are increasingly focused on reducing emissions from their completions operations. We remain proactive in developing innovative solutions to industry challenges, including developing: (i) our databases ofU.S. unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; (iii) hydraulic fracturing fluid systems tailored to the specific reservoir properties in the basins in which we operate; (iv) our dual fuel dynamic gas blending fleets that allow our engines to run diesel or a combination of diesel and natural gas, to optimize fuel use, reduce emissions and lower costs; (v) the successful test of digiFrac™, our innovative, purpose-built electric frac pump that has approximately 25% lower CO2e emission profile than the Tier IV DGB; and (vi) our PropX wet sand handling technology which eliminates the need to dry sand, enabling the deployment of mobile mines nearer to wellsites. In addition, our integrated supply chain includes proppant, chemicals, equipment, logistics and integrated software which we believe promotes wellsite efficiency and leads to more pumping hours and higher productivity throughout the year to better service our customers. In order to achieve our technological objectives, we carefully manage our liquidity and debt position to promote operational flexibility and invest in the business throughout the full commodity cycle in the regions we operate. 23
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Recent Trends and Outlook
Current global macroeconomic concerns include rising interest rates, elevated inflation levels, and Chinese Covid lockdowns. Despite these headwinds, oil and gas markets remained tight in the third quarter. As we look ahead, risks to the delicate balance in oil and gas markets appear to come from both demand and supply. With regards to demand, while a mild recession may modestly impact the global demand for energy, and may already be reflected in prices, a global economic downturn could result in increased demand destruction, further pressuring commodity prices. At the same time, global supply risks are also present. OPEC+ preemptive cuts to production quotas may result in a decline in production from key producers includingSaudi Arabia and theUnited Arab Emirates . Currently, Russian oil exports have been modestly curbed since theUkraine invasion, however, impending sanctions on Russian seaborne crude could further lower global oil supplies. Low levels of spare production capacity, worldwide oil and gas commercial inventories, and global strategic petroleum reserves further exacerbate supply concerns. Together, these factors may strengthen the demand for secure North American energy. Today's commodity prices continue to offer returns for E&P operators, even after the decline in oil and gas prices in recent months. The combination of capital discipline among many public operators and tight supply chains, particularly in the frac services market, have constrained activity levels to deliver only modestU.S. oil production growth. The limited capital being deployed is expected to be primarily directed towards the buildout of next generation frac fleet capacity at levels roughly sufficient to offset aging equipment with next generation fleets in demand. We believe that the current frac market is relatively tight with near full utilization of available capacity. Tight service supply has made service quality and reliability important for customers. Given that we pride ourselves on both our service quality and fleet modernization program, these two factors may further strengthen Liberty's competitive position. During the third quarter of 2022, the posted WTI price traded at an average of$93.06 per barrel ("Bbl"), as compared to the third quarter of 2021 average of$70.58 per Bbl, and second quarter of 2022 average of$108.83 per Bbl. In addition, the average domestic onshore rig count forthe United States andCanada was 942 rigs reported in the third quarter of 2022, up from the third quarter of 2021 of 634 and an increase from the second quarter of 2022 of 810, according to a report fromBaker Hughes . 24
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Results of Operations
Three months endedSeptember 30, 2022 compared to three months endedSeptember 30, 2021 Three months ended September 30, Description 2022 2021 Change (in thousands) Revenue$ 1,188,247
874,453 593,683 280,770
General and administrative 50,473 32,281 18,192
Transaction, severance and other costs 1,767 1,556 211
Depreciation, depletion, and amortization 82,848 65,852 16,996
Gain on disposal of assets (4,277) (79) (4,198)
Operating income (loss) 182,983 (39,566) 222,549
Other expense (income), net 33,148 (940) 34,088
Net income (loss) before income taxes 149,835 (38,626) 188,461
Income tax expense 2,572 753 1,819
Net income (loss) 147,263 (39,379) 186,642Less: Net income (loss) attributable to non-controlling interests
310 (489) 799
Net income (loss) attributable to Liberty Energy Inc.
stockholders $ 146,953 $ (38,890) $ 185,843
Revenue
Our revenue increased $534.5 million , or 81.8%, to $1.2 billion for the three
months ended September 30, 2022 compared to $653.7 million for the three months
ended September 30, 2021 . The increase in revenue is attributable to higher
service pricing and an activity-driven increase in fleet utilization and
efficiency commensurate with increased demand for hydraulic fracturing services.
Cost of Services
Cost of services (excluding depreciation, depletion, and amortization) increased$280.8 million , or 47.3%, to$874.5 million for the three months endedSeptember 30, 2022 compared to$593.7 million for the three months endedSeptember 30, 2021 . The increase in expense was primarily related to increases in materials and parts consumption and higher labor costs related to higher fleet utilization as well as ongoing inflationary increases impacting costs for materials, labor, and maintenance parts. General and Administrative General and administrative expenses increased$18.2 million , or 56.4%, to$50.5 million for the three months endedSeptember 30, 2022 compared to$32.3 million for the three months endedSeptember 30, 2021 primarily related to increases in performance-based variable compensation, labor cost inflation, and corporate costs related to increased activity.
Transaction, Severance and Other Costs
Transaction, severance and other costs of$1.8 million and$1.6 million for the three months endedSeptember 30, 2022 and 2021, respectively, consist of integration cost, investment banking, legal, accounting, and other professional services provided in connection with the OneStim Acquisition and PropX Acquisition.
Depreciation, Depletion, and Amortization
Depreciation, depletion, and amortization expense increased$17.0 million , or 25.8%, to$82.8 million for the three months endedSeptember 30, 2022 compared to$65.9 million for the three months endedSeptember 30, 2021 . The increase in 2022 was due to additional equipment placed in service since the prior year period and additional depreciation from property acquired in the PropX Acquisition. 25
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Gain on Disposal of Assets
The Company recognized a gain on disposal of assets of$4.3 million for the three months endedSeptember 30, 2022 primarily as a result of the sale of used field equipment and light duty trucks in a strong used vehicle and equipment market compared to a gain of$0.1 million for the three months endedSeptember 30, 2021 due to miscellaneous equipment disposals. All disposals recorded during the three months endedSeptember 30, 2022 and 2021 were in the normal course of business. Operating Income (Loss) The Company recorded operating income of$183.0 million for the three months endedSeptember 30, 2022 compared to operating loss of$39.6 million for the three months endedSeptember 30, 2021 , an increase in operating results of$222.5 million , or 562.5%. The increase in operating income is primarily due to the$534.5 million , or 81.8%, increase in total revenue only partially offset by a$312.0 million increase in total operating expenses, the significant components of which are discussed above.
Other Expense (Income), net
The Company recognized other expense of$33.1 million for the three months endedSeptember 30, 2022 compared to other income of$0.9 million for the three months endedSeptember 30, 2021 . Other expense (income), net is comprised of loss (gain) on remeasurement of liability under the TRAs, gain on investments, and interest expense, net. The Company remeasured the liability under the TRAs resulting in a loss of$28.9 million for the three months endedSeptember 30, 2022 , compared to a gain of$4.9 million for the three months endedSeptember 30, 2021 . A$2.5 million gain on investments was recorded during the three months endedSeptember 30, 2022 , compared to no gain for the three months endedSeptember 30, 2021 . Additionally, interest expense, net increased$2.8 million as a result of increased borrowings under the credit facility along with higher interest rates.
Net Income (loss) before Income Taxes
The Company realized net income before income taxes of$149.8 million for the three months endedSeptember 30, 2022 compared to net loss before income taxes of$38.6 million for the three months endedSeptember 30, 2021 . The increase in income is primarily attributable to an increase in revenue, as discussed above, related to the increase in activity and service pricing.
Income Tax Expense
Income tax expense increased$1.8 million to$2.6 million for the three months endedSeptember 30, 2022 , at an effective rate of 1.7%, compared to a tax expense of$0.8 million , at an effective rate of (1.9)%, recognized during the three months endedSeptember 30, 2021 . The increase in income tax expense is primarily attributable to the increase in Company's foreign operations as a valuation allowance was recorded on the Company'sU.S. net deferred tax assets, beginning in the second quarter of 2021. 26
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Nine months endedSeptember 30, 2022 compared to nine months endedSeptember 30, 2021 Nine months ended September 30, Description 2022 2021 Change (in thousands) Revenue$ 2,923,636
2,258,190 1,614,574 643,616
General and administrative 130,953 88,043 42,910
Transaction, severance and other costs 5,293 12,173 (6,880)
Depreciation, depletion, and amortization 234,815 191,122 43,693
Gain on disposal of assets (3,041) (1,076) (1,965)
Operating income (loss) 297,426 (117,789) 415,215
Other expense, net 46,667 3,276 43,391
Net income (loss) before income taxes 250,759 (121,065) 371,824
Income tax expense 3,637 9,402 (5,765)
Net income (loss) 247,122 (130,467) 377,589Less: Net income (loss) attributable to non-controlling interests
389 (6,812) 7,201
Net income (loss) attributable to Liberty Energy Inc.
stockholders $ 246,733 $ (123,655) $ 370,388
Revenue
Our revenue increased
Cost of Services
Cost of services (excluding depreciation, depletion, and amortization) increased$643.6 million , or 39.9%, to$2.3 billion for the nine months endedSeptember 30, 2022 compared to$1.6 billion for the nine months endedSeptember 30, 2021 . The higher expense was primarily related to increases in materials and parts consumption and higher labor costs related to higher fleet utilization as well as inflationary increases impacting costs for materials, labor, and maintenance parts. General and Administrative General and administrative expenses increased$42.9 million , or 48.7%, to$131.0 million for the nine months endedSeptember 30, 2022 compared to$88.0 million for the nine months endedSeptember 30, 2021 primarily related to increases from reinstated bonus programs which had been temporarily suspended during the first quarter of 2020 as a result of the COVID-19 pandemic, labor cost inflation, and corporate costs related to increased levels of activity.
Transaction, Severance and Other Costs
Transaction, severance and other costs decreased$6.9 million , or 56.5%, to$5.3 million for the nine months endedSeptember 30, 2022 compared to$12.2 million for the nine months endedSeptember 30, 2021 . The costs incurred in the nine months endedSeptember 30, 2021 primarily related to integration costs, investment banking, legal, accounting, and other professional services provided in connection with the OneStim Acquisition and PropX Acquisition. Such costs were lower during the nine months endedSeptember 30, 2022 as the integration efforts move towards completion.
Depreciation, Depletion, and Amortization
Depreciation, depletion, and amortization expense increased$43.7 million , or 22.9%, to$234.8 million for the nine months endedSeptember 30, 2022 compared to$191.1 million for the nine months endedSeptember 30, 2021 . The increase in 2022 was due to additional equipment placed in service since the prior year period and additional depreciation from property acquired in the PropX Acquisition. 27
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Gain on disposal of assets
Gain on disposal of assets increased$2.0 million , or 182.6%, to$3.0 million for the nine months endedSeptember 30, 2022 , compared to$1.1 million for the nine months endedSeptember 30, 2021 due to miscellaneous equipment disposals in the normal course of business. The increase was a result of the sale of used field equipment and light duty trucks in a strong used vehicle and equipment market offset by the loss on sale of one and plan of sale for two other non-strategic facilities acquired in the OneStim Acquisition
Operating Income (Loss)
The Company recorded operating income of$297.4 million for the nine months endedSeptember 30, 2022 compared to operating loss of$117.8 million for the nine months endedSeptember 30, 2021 , the operating income is primarily due to the$1.1 billion , or 63.6%, increase in total revenue partially offset by a$721.4 million increase in total operating expenses, the significant components of which are discussed above. Other Expense, net Other expense, net increased$43.4 million to$46.7 million for the nine months endedSeptember 30, 2022 compared to$3.3 million for the nine months endedSeptember 30, 2021 . Other expense, net is comprised of loss on remeasurement of liability under the TRAs, gain on investments, and interest expense, net. The Company remeasured the liability under the TRAs resulting in a loss of$33.2 million for the nine months endedSeptember 30, 2022 , compared to a gain of$8.3 million for the nine months endedSeptember 30, 2021 . A$2.5 million gain on investments was recorded during the nine months endedSeptember 30, 2022 , compared to no gain for the nine months endedSeptember 30, 2021 . Additionally, interest expense increased$4.4 million as a result of increased borrowings under the credit facility along with higher interest rates.
Net Income (Loss) before Income Taxes
The Company realized net income before income taxes of$250.8 million for the nine months endedSeptember 30, 2022 compared to net loss before income taxes of$121.1 million for the nine months endedSeptember 30, 2021 . The increase in results is primarily attributable to an increase in revenue, as discussed above, related to the increase in activity and service pricing.
Income Tax Expense
Income tax expense decreased$5.8 million to$3.6 million for the nine months endedSeptember 30, 2022 , at an effective rate of 1.5%, compared to$9.4 million , at an effective rate of (7.8)%, recognized during the nine months endedSeptember 30, 2021 . This decrease in income tax expense is primarily attributable to the Company recording a valuation allowance on itsU.S. net deferred tax assets, beginning in the second quarter of 2021, resulting in income tax expense for that period, while in subsequent periods no tax expense or benefit is recognized onU.S. state and federal income or loss.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We
define EBITDA as net income before interest, income taxes, and depreciation,
depletion, and amortization. We define Adjusted EBITDA as EBITDA adjusted to
eliminate the effects of items such as non-cash stock-based compensation, new
fleet or new basin start-up costs, fleet lay-down costs, costs of asset
acquisitions, gain or loss on the disposal of assets, bad debt reserves,
transaction, severance, and other costs, the loss or gain on remeasurement of
liability under our tax receivable agreements, the gain or loss on investments
and other non-recurring expenses that management does not consider in assessing
ongoing performance.
Our board of directors, management, investors, and lenders use EBITDA and
Adjusted EBITDA to assess our financial performance because it allows them to
compare our operating performance on a consistent basis across periods by
removing the effects of our capital structure (such as varying levels of
interest expense), asset base (such as depreciation, depletion, and
amortization) and other items that impact the comparability of financial results
from period to period. We present EBITDA and Adjusted EBITDA because we believe
they provide useful information regarding the factors and trends affecting our
business in addition to measures calculated under GAAP.
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Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure for the periods presented:
Three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
Description 2022 2021 Change 2022 2021 Change
(in thousands)
Net income (loss) $ 147,263 $ (39,379) $ 186,642 $ 247,122 $ (130,467) $ 377,589
Depreciation, depletion, and
amortization 82,848 65,852 16,996 234,815 191,122 43,693
Interest expense, net 6,773 4,007 2,766 15,959 11,528 4,431
Income tax expense 2,572 753 1,819 3,637 9,402 (5,765)
EBITDA $ 239,456 $ 31,233 $ 208,223 $ 501,533 $ 81,585 $ 419,948
Stock-based compensation expense 6,112 4,245 1,867 17,126 15,091 2,035
Fleet start-up and lay-down costs 7,420 - 7,420 13,174 -
13,174
Transaction, severance and other costs 1,767 1,556 211 5,293 12,173
(6,880)
Gain on disposal of assets (4,277) (79) (4,198) (3,041) (1,076)
(1,965)
Provision for credit losses - - - - 745
(745)
Loss (gain) on remeasurement of liability under tax receivable agreements 28,900 (4,947) 33,847 33,233 (8,252) 41,485 Gain on investments$ (2,525) $ -$ (2,525) $ (2,525) $ -$ (2,525) Adjusted EBITDA$ 276,853 $ 32,008 $ 244,845 $ 564,793 $ 100,266 $ 464,527 EBITDA was$239.5 million for the three months endedSeptember 30, 2022 compared to$31.2 million for the three months endedSeptember 30, 2021 . Adjusted EBITDA was$276.9 million for the three months endedSeptember 30, 2022 compared to$32.0 million for the three months endedSeptember 30, 2021 . The increases in EBITDA and Adjusted EBITDA primarily resulted from improved market conditions and activity levels as described above under the captions Revenue, Cost of Services, and General and Administrative Expenses for the Three Months EndedSeptember 30, 2022 compared to the Three Months EndedSeptember 30, 2021 . EBITDA was$501.5 million for the nine months endedSeptember 30, 2022 compared to$81.6 million for the nine months endedSeptember 30, 2021 . Adjusted EBITDA was$564.8 million for the nine months endedSeptember 30, 2022 compared to$100.3 million for the nine months endedSeptember 30, 2021 . The increases in EBITDA and Adjusted EBITDA primarily resulted from improved market conditions and activity levels as described above under the captions Revenue, Cost of Services, and General and Administrative Expenses for the Nine months endedSeptember 30, 2022 compared to the Nine months endedSeptember 30, 2021 . 29
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Liquidity and Capital Resources
Overview
Historically, our primary sources of liquidity to date have been cash flows from operations, proceeds from our IPO, and borrowings under our Credit Facilities. We expect to fund operations and organic growth with cash flows from operations and available borrowings under our Credit Facilities. We monitor the availability of capital resources such as equity and debt financings that could be leverage for current or future financial obligations including those related to acquisitions, capital expenditures, working capital and other liquidity requirements. We may incur additional indebtedness or issue equity in order to meet our capital expenditure activities and liquidity requirements, as well as to fund growth opportunities that we pursue, including via acquisition, such as with the OneStim Acquisition and the PropX Acquisition. Our primary uses of capital have been capital expenditures to support organic growth and funding ongoing operations, including maintenance and fleet upgrades.
Cash and cash equivalents increased by
We have$425.0 million committed under the ABL Facility subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory available to finance working capital needs. As ofSeptember 30, 2022 , the borrowing base was calculated to be$425.0 million , and the Company had$150.0 million outstanding, in addition to a letter of credit in the amount of$1.4 million , with$273.6 million of remaining availability. Additionally, we have$105.2 million borrowings remaining on the Term Loan Facility, which was originally$175.0 million . The ABL Facility has a maturity date of the earlier of (a)October 22, 2026 and (b) to the extent the debt under the Term Loan Facility remains outstanding 90 days prior to the final maturity of the Term Loan Facility, which matures onSeptember 19, 2024 . OnJuly 18, 2022 , the Company entered into an amendment to the ABL Facility (the "Seventh ABL Amendment"). The Seventh ABL Amendment amended certain terms, provisions, and covenants of the ABL Facility, including among other things: (i) increasing the maximum borrowing amount by$75.0 million to$425.0 million , subject to certain borrowing base limitations based on percentage of eligible accounts receivable and inventory, (ii) modifying certain covenant and reporting-related baskets, and (iii) replacing LIBOR with the secured overnight financing rate ("SOFR") as the interest rate benchmark. OnAugust 12, 2022 , the Company entered into an amendment to the Term Loan Facility (the "Sixth Term Loan Amendment"). The Sixth Term Loan Amendment amended certain terms, provisions and covenants of the Term Loan Facility, including among other things: (i) a waiver of the fixed charge coverage ratio requirements for up to$100.0 million of restricted payments made in connection with the Company's 2022 stock repurchase program for its common stock; (ii) the addition of a minimum liquidity requirement of$150.0 million in order to make selected restricted payments, including those made under the 2022 stock repurchase program; (iii) the modification of certain covenant and reporting-related terms, including an increase in the allowance for permitted purchase money indebtedness from$50.0 million to$70.0 million ; (iv) the addition of a prepayment premium of 1.0% through the first anniversary of the Sixth Term Loan Amendment effective date; and (v) the addition and modification of several provisions to replace LIBOR with SOFR as the interest rate benchmark.
The Credit Facilities contain covenants that restrict our ability to take
certain actions. At
See Note 8-Debt to the consolidated financial statements included in "Item 1. Financial Statements (unaudited)" for further details.
We have no material off balance sheet arrangements as ofSeptember 30, 2022 , except for purchase commitments under supply agreements as disclosed above under "Item 1. Financial Statements-Note 15-Commitments & Contingencies." As such, we are not materially exposed to any other financing, liquidity, market, or credit risk that could arise if we had engaged in such financing arrangements.
Share Repurchase Program
Under our share repurchase program, the Company is authorized to repurchase up to$250.0 million of outstanding Class A Common Stock through and includingJuly 31, 2024 . Shares may be repurchased from time to time for cash in the open market transactions, through block trades, in privately negotiated transactions, through derivative transactions or by other means in accordance with applicable federal securities laws. The timing and the amount of repurchases will be determined by the Company at its discretion based on an evaluation of market conditions, capital allocation alternatives and other factors. The share repurchase program does not require us to purchase any dollar amount or number of shares of our Class A Common Stock and may be modified, suspended, extended or terminated at any time without prior notice. The Company expects to fund the repurchases by using cash on hand, borrowings under its revolving credit facility and expected free cash flow to be generated over the next two years. 30
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30,
Description 2022 2021 Change
(in thousands)
Net cash provided by operating activities $ 292,610 $ 80,142 $ 212,468
Net cash used in investing activities (333,875) (119,319) (214,556)
Net cash provided by financing activities 45,642 5,149 40,493
Analysis of Cash Flow Changes Between the Nine Months Ended
Operating Activities. Net cash provided by operating activities was$292.6 million for the nine months endedSeptember 30, 2022 , compared to$80.1 million for the nine months endedSeptember 30, 2021 . The$212.5 million increase in cash from operating activities is primarily attributable to a$1.1 billion increase in revenues, offset by a$679.6 million increase in cash operating expenses and a$238.5 million decrease in cash from changes in working capital for the nine months endedSeptember 30, 2022 , compared to a$2.8 million increase in cash from changes in working capital for the nine months endedSeptember 30, 2021 . Investing Activities. Net cash used in investing activities was$333.9 million for the nine months endedSeptember 30, 2022 , compared to$119.3 million for the nine months endedSeptember 30, 2021 . Cash used in investing activities was higher during the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 as the Company continued to invest in equipment, including building new digiFrac™ fleets and deploying additional fleets, to support increased customer demand in next generation equipment and technology. Financing Activities. Net cash provided by financing activities was$45.6 million for the nine months endedSeptember 30, 2022 , compared to net cash provided by financing activities of$5.1 million for the nine months endedSeptember 30, 2021 . The$40.5 million increase in cash provided by financing activities was primarily due to net borrowings of$132.0 million on the ABL Facility during the nine months endedSeptember 30, 2022 , compared to$16.0 million net borrowings on the ABL Facility for the nine months endedSeptember 30, 2021 . Additionally, there was a$1.4 million decrease in payments on finance lease liabilities as the asset value of finance leases active for the full period has decreased sinceSeptember 30, 2021 . These changes were offset by a$70.1 million increase in cash payments made in connection with share repurchases for the nine months endedSeptember 30, 2022 , compared to cash payments of$0.0 million for the nine months endedSeptember 30, 2021 .
Cash Requirements
Our material cash commitments consist primarily of obligations under long-term debt, TRAs, finance and operating leases for property and equipment, cash used to pay for repurchases of shares of our Class A Common Stock, and purchase obligations as part of normal operations. We have no material off balance sheet arrangements as ofSeptember 30, 2022 , except for obligations of$44.5 million payable within 2022,$47.3 million in 2023, and$4.2 million payable thereafter. See Note 15-Commitments & Contingencies to the unaudited condensed consolidated financial statements included in "Item 1. Financial Statements (Unaudited)" for information regarding scheduled contractual obligations. There have been no other material changes to cash requirements since the year endedDecember 31, 2021 . Income Taxes The Company is a corporation and is subject toU.S. federal, state, and local income tax on its share ofLiberty LLC's taxable income. The Company is also subject toCanada federal and provincial income tax on its foreign operations. The combined effective tax rate applicable to the Company for the nine months endedSeptember 30, 2022 and 2021 was 1.5% and (7.8)%, respectively. The Company's effective tax rate is significantly less than the federal statutory income tax rate of 21.0% due to the Company recording a valuation allowance on itsU.S. net deferred tax assets as ofSeptember 30, 2022 , due to entering into a three year cumulative pre-tax book loss position, primarily as a result of COVID-19 related losses in 2021. The Company's effective tax rate is also less than the statutory rate because of foreign operations for 2021, and the non-controlling interest's share ofLiberty LLC's pass-through results for federal, state and local income tax reporting, upon which no taxes are payable by the Company for the nine months endedSeptember 30, 2022 and 2021. The Company recognized income tax expense of$2.6 million and$3.6 million for the three and nine months endedSeptember 30, 2022 , respectively, and$0.8 million and$9.4 million for the three and nine months endedSeptember 30, 2021 , respectively, which included the impact of recording a valuation allowance on a portion of the Company's net deferred tax assets. Per the Coronavirus Aid, Relief and Economic Security ("CARES") Act enacted onMarch 27, 2020 , net operating losses ("NOL") incurred in 2019, and 2020 may be carried back to each of the five preceding taxable years to generate a refund of 31
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previously paid income taxes. The Company has previously applied for and expects to receive a NOL carryback refund to recover$5.5 million of cash taxes paid by the Company in 2018. This amount has been reflected as a receivable in the prepaids and other current assets line item in the accompanying audited consolidated balance sheets. Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We recorded a valuation allowance in the second quarter of 2021, against all of our deferred tax assets as ofDecember 31, 2020 and continue to record a valuation allowance for the quarter endedSeptember 30, 2022 . We intend to continue to maintain a full valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next few quarters, including as soon as the fourth quarter of 2022, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion or all of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to the income tax expense for the period the release is recorded. In addition, release of the valuation allowance would result in an increase in the tax receivable agreement liability and an increase in the tax receivable agreement loss for the period the release is recorded. For the quarter endedSeptember 30, 2022 , the unrecognized TRA liability is approximately$50 million . The valuation allowance as ofDecember 31, 2021 was$91.3 million and no additional income tax benefit or expense has been recorded as a result of the valuation allowance through the quarter endedSeptember 30, 2022 .
Refer to Note 12- Income Taxes to the consolidated financial statements for additional information related to income tax expense.
Tax Receivable Agreements
Refer to Note 12- Income Taxes to the consolidated financial statements for additional information related to tax receivable agreements.
Critical Accounting Estimates
The Company's unaudited condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions (see Note 2-Significant Accounting Policies to the unaudited consolidated financial statements in this Form 10-Q and Note 2-Significant Accounting Policies and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report). A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
There have been no material changes in our critical accounting estimates since our Annual Report.
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