LIBERTY ENERGY INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report. 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 this Annual Report under "Cautionary Note Regarding Forward-Looking Statements" and "Item 1A. Risk Factors." Except as required by law, we assume no obligation to update any of these forward-looking statements. This section of this Annual Report generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. For discussion of year endedDecember 31, 2020 , as well as the year ended 2021 compared to the year endedDecember 31, 2020 , refer to Part II, Item 7- "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Annual Report.
Overview
The Company, together with its subsidiaries, is a leading integrated energy 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 ofDecember 31, 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 . 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.
Recent Trends and Outlook
We believe the fundamental outlook for North American hydrocarbons remains healthy. E&P customers continue to see attractive drilling returns, particularly in oil, even as breakeven prices have increased from the pandemic lows. Major operators are redirecting capital spending toNorth America and domestic E&P operators' pronouncements of returns targets infer a continuation of resource development to at least offset natural production declines. As North American oil and gas production reaches new heights, we expect to experience a rising level of frac demand to simply keep production flat. While some industry pullback in natural gas regions is possible, due to decreasing prices, demand in oilier areas continues to outstrip supply and we do not expect this possible pullback will have an impact on overall frac demand in 2023. While demand currently remains strong, we acknowledge there is an elevated recession risk looming in global markets. However, we believe the impact of a possible recession on the industry in 2023 would be relatively muted due to disruptions in global oil supply, rather low spare global production capacity, and increased demand from the gradual reopening ofChina and rising global travel. We believe oil supply growth remains challenged as the release ofU.S. strategic petroleum reserves subsides, the impact of the Russian oil products export embargo hits in the first quarter of 2023, and reduced investment across the Russian industry gradually impacts production. In addition to the overall strong demand for frac supply, E&P operators are also focused on obtaining top tier equipment and service providers. Demand for natural gas powered fleets, in an effort to reduce fuel costs and emissions is strong and the 32 -------------------------------------------------------------------------------- transition to natural gas-powered fleets is happening at a measured pace, which so far is roughly aligned with the attrition of the industry's older generation diesel frac capacity. During the year 2022, the posted WTI price traded at an average of$94.90 per barrel ("Bbl"), as compared to the 2021 average of$68.13 per Bbl, and the 2020 average of$39.16 per Bbl. In addition, the average domestic onshore rig count forthe United States andCanada was 947 rigs reported in the fourth quarter of 2022, up from the average in the fourth quarter of 2021 of 704, according to a report fromBaker Hughes . Acquisitions 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. 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, 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 were 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.
Increase in Drilling Efficiency and Service Intensity of Completions
Over the past decade, E&P companies have focused on exploiting the vast resource potential available across many ofNorth America's unconventional resource plays through the application of horizontal drilling and completion technologies, including the use of multi-stage hydraulic fracturing, in order to increase recovery of oil and natural gas. As E&P companies have improved drilling and completion techniques to maximize return and efficiency, we believe that their "break-even oil prices" continue to decline. These improvements in well economics have keptU.S. Shale oil and gas production competitive even as oil and gas prices have declined. Liberty has been a significant partner with our customers in driving these continued improvements. Improved drilling economics from horizontal drilling and greater rig efficiencies. Unconventional resources are increasingly being targeted through the use of horizontal drilling. According toBaker Hughes , as reported onJanuary 27, 2023 , horizontal rigs accounted for approximately 91% of all rigs drilling inthe United States andCanada , up from 77% as ofDecember 26, 2014 . Over the past several years, North American E&P companies have benefited from improved drilling economics driven by technologies that reduce the number of days, and the cost, of drilling wells. North American drilling rigs have incorporated newer technologies, which allow them to drill rock more effectively and quickly, meaning each rig can drill more wells in a given period. These include improved drilling technologies and the incorporation of geosteering techniques which allow better placement of the wellbore. Drilling rigs have also incorporated new technology which allows fully assembled rigs to automatically "walk" from one location to the next without disassembling and reassembling the rig, greatly reducing the time it takes to move from one drilling location to the next. Today the majority of E&P drilling is on multi-well pad development, allowing efficient drilling of multiple horizontal wellbores from the same pad or location. The aggregate effect of these improved techniques and technologies have reduced the average days required to drill a well, which according toLium Research , has dropped from 28 days in 2014 to 18 days in 2022. Increased complexity and service intensity of horizontal well completions. In addition to improved rig efficiencies discussed above, E&P companies are also improving the subsurface techniques and technologies used to exploit unconventional resources. These improvements have targeted increasing the exposure of each wellbore to the reservoir by drilling longer horizontal lateral sections of the wellbore. To complete the well, hydraulic fracturing is applied in stages along the wellbore to break-up the resource so that oil and gas can be produced. As wellbores have increased in length, the number of frac stages and/or the number of perforation clusters (frac initiation points) has also increased. Further, E&P companies have improved production from each stage by applying increasing amounts of proppant in each stage, which better connects the well to the resource. The aggregate effect of increased number of stages and the increasing amount of proppant in each stage has greatly increased the total amount of proppant used in each well, according to Liberty's FracTrends database, from six million pounds per well in 2014 to over 20 million pounds per well in 2022. Further efficiency gains are being sought via the "simul-frac" 33 -------------------------------------------------------------------------------- technique. Utilizing a larger frac fleet (1.25x to 2x the normal horsepower), operators are fracturing stages in two separate wells on a pad simultaneously as a single operation. When compared to typical zipper-frac operations, this new method allows for more lateral feet to be completed in a day. This emerging trend will allow operators to complete a pad of wells quicker, thereby shortening the time from spud to first production. These industry trends continue to keep our customers as important suppliers to the global oil and natural gas markets, which directly benefit hydraulic fracturing companies like us that have the expertise and innovative technology to effectively service today's more efficient oilfield drilling activity and the increasing complexity and intensity of well completions. Given the expected returns that E&P companies have reported for new well development activities due to improved rig efficiencies and increasing well completion complexity and intensity, we expect these industry trends to continue.
How We Generate Revenue
We currently generate revenue through the provision of hydraulic fracturing and wireline services and goods, including sand from ourPermian Basin sand mines. These services and goods are provided under a variety of contract structures, primarily master service agreements ("MSAs") as supplemented by statements of work, pricing agreements and specific quotes. A portion of our statements of work, under MSAs, include provisions that establish pricing arrangements for a period of up to approximately one year in length. However, the majority of those agreements provide for pricing adjustments based on market conditions. The majority of our services are priced based on prevailing market conditions and changing input costs at the time the services are provided, giving consideration to the specific requirements of the customer. Our hydraulic fracturing and wireline services are performed in sections, which we refer to as fracturing stages. The estimated number of fracturing stages to be completed for a particular horizontal well is determined by the customer's well completion design. We recognize revenue for each fracturing stage completed, although our revenue per completed fracturing stage varies depending on the actual volumes and types of proppants, chemicals, and fluid utilized for each fracturing stage. The number of fracturing stages that we are able to complete in a period is directly related to the number and utilization of our deployed fleets and size of stages.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are direct cost of personnel, services, and materials used in the provision of services, general and administrative expenses, and depreciation, depletion, and amortization. A large portion of the costs we incur in our business are variable based on the number of hydraulic fracturing jobs and the requirements of services provided to our customers. We manage the level of our fixed costs, except depreciation, depletion, and amortization, based on several factors, including industry conditions and expected demand for our services.
How We Evaluate Our Operations
We use a variety of qualitative, operational and financial metrics to assess our performance. First and foremost, of these is a qualitative assessment of customer satisfaction because ensuring we are a valuable partner to our customers is the key to achieving our quantitative business metrics. Among other measures, management considers each of the following: •Revenue; •Operating Income; •EBITDA; •Adjusted EBITDA;
•Net Income Before Taxes; and
•Earnings per Share.
Revenue
We analyze our revenue by comparing actual monthly revenue to our internal projections for a given period and to prior periods to assess our performance.
Operating Income
We analyze our operating income, which we define as revenues less direct
operating expenses, depreciation and amortization and general and administrative
expenses, to measure our financial performance. We believe operating income is a
meaningful metric because it provides insight on profitability and true
operating performance based on the historical cost basis of our assets. We also
compare operating income to our internal projections for a given period and to
prior periods.
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EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss) before interest, income taxes, 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. See "Comparison of Non-GAAP Financial Measures" for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP. Results of Operations
Year Ended
Years Ended December 31,
Description 2022 2021 Change
(in thousands)
Revenue $ 4,149,228
3,149,036 2,249,926 899,110
General and administrative 180,040 123,406 56,634
Transaction, severance and other costs 5,837 15,138 (9,301)
Depreciation, depletion, and amortization 323,028 262,757 60,271
(Gain) loss on disposal of assets (4,603) 779 (5,382)
Operating income (loss) 495,890 (181,224) 677,114
Other expense (income), net 96,381 (3,436) 99,817
Net income (loss) before income taxes 399,509 (177,788) 577,297
Income tax (benefit) expense (793) 9,216 (10,009)
Net income (loss) 400,302 (187,004) 587,306
Less: Net income (loss) attributable to non-controlling interests
700 (7,760) 8,460
Net income (loss) attributable to Liberty Energy Inc.
stockholders $ 399,602 $ (179,244) $ 578,846
Revenue
Our revenue increased $1.7 billion , or 68%, to $4.1 billion for the year ended
December 31, 2022 compared to $2.5 billion for the year ended December 31, 2021 .
The increase in revenue is attributable to higher service pricing, the
reactivation of several fleets during the year, 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$0.9 billion , or 40%, to$3.1 billion for the year endedDecember 31, 2022 compared to$2.2 billion for the year endedDecember 31, 2021 . The increase in expense was primarily related to increases in materials and parts consumption and higher labor costs related to additional fleets and 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$56.6 million , or 46%, to$180.0 million for the year endedDecember 31, 2022 compared to$123.4 million for the year endedDecember 31, 2021 primarily related to an increase in performance-based variable compensation, labor cost inflation, and corporate costs related to increased levels of activity. 35 --------------------------------------------------------------------------------
Transaction, Severance and Other Costs
Transaction, severance and other costs of$5.8 million and$15.1 million for the years endedDecember 31, 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. Such costs were lower during the year endedDecember 31, 2022 as the integration efforts were completed during the year.
Depreciation, Depletion, and Amortization
Depreciation, depletion, and amortization expense increased$60.3 million , or 23%, to$323.0 million for the year endedDecember 31, 2022 compared to$262.8 million for the year endedDecember 31, 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.
(Gain) Loss on Disposal of Assets
The Company recorded a gain on disposal of assets of$4.6 million for the year endedDecember 31, 2022 due to miscellaneous equipment disposals and sales of facilities in the normal course of business, compared to a loss of$0.8 million for the year endedDecember 31, 2021 . The gain as ofDecember 31, 2022 was a result of the sale of used field equipment and light duty trucks in a strong used vehicle and equipment market offset by a loss on sale of two non-strategic facilities acquired in the OneStim Acquisition and a loss on plan of sale for two other non-strategic facilities. The loss as ofDecember 31, 2021 related to the sale of three non-strategic facilities acquired in the OneStim Acquisition, which collectively resulted in a small loss on sale, along with regular sales of equipment that was no longer being used.
Operating Income (Loss)
The Company recorded operating income of
Other Expense (Income), net
The Company recorded other expense, net of$96.4 million for the year endedDecember 31, 2022 compared to other income, net of$3.4 million during the year endedDecember 31, 2021 . Other expense (income), net is comprised of loss on remeasurement of liability under the TRAs, gain on investments, and interest expense, net. As a result of the valuation allowance on theU.S. net deferred tax assets, discussed below, the Company remeasured the liability under the TRAs resulting in a loss of$76.2 million during the year endedDecember 31, 2022 , compared to a gain of$19.0 million for the year endedDecember 31, 2021 . A$2.5 million gain on investments was recorded during the year endedDecember 31, 2022 , compared to no gain for the year endedDecember 31, 2021 . Additionally, interest expense, net increased between periods, increasing$7.1 million as a result of increased borrowings and higher interest rates under the credit facility during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 .
Net Income (Loss) Before Income Taxes
The Company realized net income before income taxes of$399.5 million for the year endedDecember 31, 2022 compared to a net loss before income taxes of$177.8 million for the year endedDecember 31, 2021 . The increase in results is primarily attributable to an increase in revenue, as discussed above, related to the fleet deployments and an increase in activity and service pricing.
Income Tax (Benefit) Expense
The Company recognized an income tax benefit of$0.8 million for the year endedDecember 31, 2022 , at an effective rate of (0.2)%, compared to income tax expense of$9.2 million , at an effective rate of (5.2)%, recognized for the year endedDecember 31, 2021 . The decrease in income tax expense is primarily attributable to the Company releasing the valuation allowance on itsU.S. net deferred tax assets in the current year, compared to the prior year recording of a valuation allowance on itsU.S. net deferred tax assets. 36 --------------------------------------------------------------------------------
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss) 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.
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 income (loss), which is the most directly comparable GAAP measure for the periods presented: Year EndedDecember 31, 2022 Compared to Year EndedDecember 31, 2021 : EBITDA and Adjusted EBITDA Years Ended December 31, Description 2022 2021 Change (in thousands) Net income (loss)$ 400,302 $ (187,004) $ 587,306 Depreciation, depletion, and amortization 323,028 262,757 60,271 Interest expense, net 22,715 15,603 7,112 Income tax (benefit) expense (793) 9,216 (10,009) EBITDA$ 745,252 $ 100,572 $ 644,680 Stock-based compensation expense 23,108 19,946 3,162 Fleet start-up and lay-down costs 17,007 2,751 14,256 Transaction, severance and other costs 5,837 15,138 (9,301) (Gain) loss on disposal of assets (4,603) 779 (5,382) Provision for credit losses - 745 (745)
Loss (gain) on remeasurement of liability under tax receivable agreements
76,191 (19,039) 95,230
Gain on investments $ (2,525) $ - $ (2,525)
Adjusted EBITDA $ 860,267 $ 120,892 $ 739,375
EBITDA was $745.3 million for the year ended December 31, 2022 compared to
$100.6 million for the year ended December 31, 2021 . Adjusted EBITDA was $860.3
million for the year ended December 31, 2022 compared to $120.9 million for the
year ended December 31, 2021 . The increases in EBITDA and Adjusted EBITDA
primarily resulted from improved market conditions and increased activity levels
as described above under the captions Revenue, Cost of Services, and General and
Administrative Expenses for the Year Ended December 31, 2022 , Compared to Year
Ended December 31, 2021 .
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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 ABL Facility and Term Loan Facility (collectively, the "Credit Facilities"). We expect to fund operations and organic growth with cash flows from operations and available borrowings under our ABL Facility. 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
As ofDecember 31, 2022 , we had$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 ofDecember 31, 2022 , the borrowing base was calculated to be$425.0 million , and the Company had$115.0 million outstanding, in addition to a letter of credit in the amount of$2.6 million , with$307.4 million of remaining availability.
Additionally, as of
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. OnNovember 4, 2022 , the Company entered into an amendment to the Term Loan Facility (the "Seventh Term Loan Amendment"). The Seventh Term Loan Amendment amended the restricted payments negative covenant of the Term Loan Facility so that the fixed charge coverage ratio requirements for dividend payments are waived, so long as the total of dividends paid and payments made in connection with the Company's 2022 stock repurchase program does not exceed$100.0 million . During the fourth quarter of 2022 the restricted payments negative covenant pertaining to the fixed charge coverage ratio requirements were satisfied and the$100.0 million limit no longer applied. Subsequent to the fiscal year end, onJanuary 23, 2023 , the Company entered into an Eighth Amendment to the ABL Facility (the "Eighth ABL Amendment"). The Eighth ABL Amendment amends certain terms, provisions and covenants of the ABL Facility, including, among other things: (i) increasing the maximum revolver amount from$425.0 million to$525.0 million (the "Upsized Revolver"); (ii) increasing the amount of the accordion feature from$75.0 million to$100.0 million ; (iii) extending the maturity date fromOctober 22, 2026 toJanuary 23, 2028 ; (iv) modifying the dollar amounts of various credit facility triggers and tests proportionally to the Upsized Revolver; (v) permitting repayment under the Term Loan Facility prior toFebruary 10, 2023 ; and (vi) increasing certain indebtedness, intercompany advance, and investment baskets. The Eighth ABL Amendment also includes an agreement from theWells Fargo Bank, National Association , as administrative agent, to release its second priority liens and security interests on all collateral that served as first priority collateral under the Term Loan Facility, with such release to occur within 120 days afterJanuary 23, 2023 . Additionally, onJanuary 23, 2023 the Company withdrew$106.7 million on the ABL Facility and used the proceeds to pay off the Term Loan Facility. The balance of the Term Loan Facility upon pay off was$104.7 million and included$0.9 38 -------------------------------------------------------------------------------- million of accrued interest and a$1.1 million prepayment premium or 1% of the principal. Additionally, there were$0.2 million in bank and legal fees included in the pay off. As such, the only outstanding debt facility afterJanuary 23, 3023 is the ABL Facility. Refer to "Our current and future indebtedness could adversely affect our financial condition" included in "Item 1A. Risk Factors" above for further details on the outstanding balance of the ABL Facility as of the filing date.
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 8. Financial Statements and Supplementary Data" for further details.
We have no material off balance sheet arrangements as ofDecember 31, 2022 , except for purchase commitments under supply agreements as disclosed below under Note 15-Commitments & Contingencies in "Item 8. Financial Statements and Supplementary Data." 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 . Additionally, onJanuary 24, 2023 the Board authorized and the Company announced an increase to the share repurchase program that increased the Company's cumulative repurchase authorization to$500.0 million . 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Years Ended December 31,
Description 2022 2021 Change
(in thousands)
Net cash provided by operating activities $ 530,364 $ 135,467 $ 394,897
Net cash used in investing activities (450,656) (186,494) (264,162) Net cash (used in) provided by financing activities (55,770) 2,056 (57,826)
Analysis of Cash Flow Changes Between the Years Ended
Operating Activities. Net cash provided by operating activities was$530.4 million for the year endedDecember 31, 2022 , compared to$135.5 million for the year endedDecember 31, 2021 . The$394.9 million increase in cash from operating activities is primarily attributable to a$1.7 billion increase in revenues, offset by a$0.9 billion increase in cash operating expenses and a$277.9 million decrease in cash from changes in working capital for the year endedDecember 31, 2022 , compared to a$46.9 million increase in cash from changes in working capital for the year endedDecember 31, 2021 . Investing Activities. Net cash used in investing activities was$450.7 million for the year endedDecember 31, 2022 , compared to$186.5 million for the year endedDecember 31, 2021 . Cash used in investing activities was higher during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 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 used in financing activities was$55.8 million for the year endedDecember 31, 2022 , compared to net cash provided by financing activities of$2.1 million for the year endedDecember 31, 2021 . The$57.8 million change in cash used in financing activities was primarily due to$125.3 million of cash payments made in connection with share repurchases for the year endedDecember 31, 2022 , compared to none in the year endedDecember 31, 2021 as the Company reinstated the share buyback program. Additionally, the Company reinstated quarterly dividends during the fourth quarter of 2022 resulting in a$9.0 million increase in dividends and per unit distributions to non-controlling interest unitholders. The increases in cash outflows as a result of reinstated shareholder return programs were offset by net borrowings of$97.0 million 39 -------------------------------------------------------------------------------- on the ABL Facility during the year endedDecember 31, 2022 , compared to$18.0 million net borrowings on the ABL Facility for the year endedDecember 31, 2021 . Other changes in financing activity included a$6.1 million increase in payments made for tax withholding on restricted stock unit vesting as a larger number of units vested at a higher stock price in 2022 compared to 2021, and a slight decrease in other distributions and advance payments received from non-controlling interest holders.
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. Certain amounts included in our contractual obligations as ofDecember 31, 2022 are based on our estimates and assumptions about these obligations, including pricing, volumes and duration. We have no material off balance sheet arrangements as ofDecember 31, 2022 , except for purchase commitments under supply agreements disclosed below. See Note 8-Debt to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding scheduled maturities of our long-term debt. See Note 6-Leases to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding scheduled maturities of finance and operating leases. As ofDecember 31, 2022 , we had expected cash payments for estimated interest on our finance lease obligations of$2.3 million payable within the next twelve months and$3.4 million payable thereafter. EffectiveJanuary 23, 2023 the Company withdrew$106.7 million on the ABL Facility and used the proceeds to pay off the Term Loan Facility. The balance of the Term Loan Facility upon pay off was$104.7 million and included$0.9 million of accrued interest and a$1.1 million prepayment premium. As such, the only outstanding debt facility afterJanuary 23, 3023 is the ABL Facility. As ofDecember 31, 2022 , we had purchase obligations of$158.7 million payable within the next twelve months and$44.8 million payable thereafter. See Note 15-Commitments & Contingencies to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding scheduled contractual obligations. As ofDecember 31, 2022 , we do not expect to make any payments under the TRAs within the next twelve months, future amounts payable under the TRAs are dependent upon future events. See Note 12-Income Taxes to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information regarding the TRAs.
Other Factors Affecting Liquidity
Customer receivables: In line with industry practice, we typically bill our customers for services provided in arrears dependent upon contractual terms. In weak economic environments, we may experience delays in collection from our customers. In the past, including as a result of the COVID-19 pandemic on the industry, we have experienced delays in customer payments and agreed to extended payment terms, however, we have not experienced any material non-payment events.
Tax Receivable Agreements
In connection with the IPO, onJanuary 17, 2018 , the Company entered into two TRAs with the TRA Holders. The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, inU.S. federal, state, and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that the Company actually recognizes (or is deemed to recognize in certain circumstances) in periods after the IPO as a result, as applicable to each of the TRA Holders, of (i) certain increases in tax basis that occur as a result of the Company's acquisition (or deemed acquisition forU.S. federal income tax purposes) of all or a portion of such TRA Holders' Liberty LLC Units in connection with the IPO or pursuant to the exercise of the right of each Liberty Unit Holder (the "Redemption Right"), subject to certain limitations, to causeLiberty LLC to acquire all or a portion of its Liberty LLC Units for, atLiberty LLC's election, (A) shares of our Class A Common Stock at the specific redemption ratio or (B) an equivalent amount of cash, or, upon the exercise of the Redemption Right, the right of the Company (instead ofLiberty LLC ) to, for administrative convenience, acquire each tendered Liberty LLC Unit directly from the redeeming Liberty Unit Holder (the "Call Right") for, at its election, (1) one share of Class A Common Stock or (2) an equivalent amount of cash, (ii) any net operating losses available to the Company as a result of the Corporate Reorganization, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRAs. OnJanuary 31, 2023 , the last redemption of the Liberty LLC Units occurred. 40 -------------------------------------------------------------------------------- With respect to obligations the Company expects to incur under the TRAs (except in cases where the Company elects to terminate the TRAs early, the TRAs are terminated early due to certain mergers, asset sales, or other changes of control or the Company has available cash but fails to make payments when due), generally the Company may elect to defer payments due under the TRAs if the Company does not have available cash to satisfy its payment obligations under the TRAs or if its contractual obligations limit its ability to make such payments. Any such deferred payments under the TRAs generally will accrue interest. In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits, if any, the Company realizes in respect of the tax attributes subject to the TRAs. The Company accounts for amounts payable under the TRAs in accordance with Accounting Standard Codification ("ASC") Topic 450, Contingencies ("ASC Topic 450"). If the Company experiences a change of control (as defined under the TRAs) or the TRAs otherwise terminate early, the Company's obligations under the TRAs could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. There can be no assurance that we will be able to finance our obligations under the TRAs.
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 year endedDecember 31, 2022 and 2021 was (0.2)% and (5.2)%, respectively. The Company's effective tax rate is significantly less than the federal statutory income tax rate of 21.0% due to the Company releasing the valuation allowance on itsU.S. net deferred tax assets as ofDecember 31, 2022 , primarily due to entering into a three-year cumulative pre-tax book income position and improved operating results. For 2021, the Company's effective tax rate is less than the statutory rate due to the Company recording a valuation allowance on itsU.S. net deferred tax assets as well as tax on foreign operations, 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. The Company recognized an income tax benefit of$(0.8) million and income tax expense of$9.2 million for the years endedDecember 31, 2022 and 2021, respectively. The Company's effective tax rate can be volatile and may change with, among other things, the amount of jurisdiction pre-tax income or loss, ability to utilize foreign tax credits, excess tax benefits or deficiencies from share-based compensation and changes in tax laws in the jurisdictions that we operate. 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 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. In the year endedDecember 31, 2022 , we released a valuation allowance on ourU.S. net deferred tax assets. As ofDecember 31, 2021 , the Company's net deferred tax assets were primarily comprised ofU.S. NOL, investment inLiberty LLC , and TRA tax attributes of$91.3 million . For the year endedDecember 31, 2022 , the Company recorded a tax benefit of$91.3 million related to the release of the valuation allowance onU.S. net deferred tax assets that are more like than not to be recognized. In addition, the release of the valuation allowance resulted in an increase in the tax receivable agreement liability and a loss on remeasurement of liability under tax receivable agreements of$76.2 million for the year endedDecember 31, 2022 .
Refer to Note 12- Income Taxes to the consolidated financial statements for additional information related to income tax expense.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the use of judgments and
estimates. Our critical accounting policies are described below to provide a
better understanding of how we develop our assumptions and judgments about
future events and related estimates and how they can impact our financial
statements. 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. We believe the following are the critical accounting policies used in
the preparation of our consolidated financial statements, as well as the
significant estimates and judgments affecting the application of these policies.
This discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes included in "Item 8. Financial Statements
and Supplementary Data."
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Revenue Recognition: Revenue from hydraulic fracturing services is recognized as
specific services are provided in accordance with contractual arrangements. If
our assessment of performance under a particular contract change, our revenue
and / or costs under that contract may change. In connection with ASC Topic 842
- Leases ("Topic 842"), the Company determined that certain of its service
revenue contracts contain a lease component. The Company elected to adopt a
practical expedient available to lessors, which allows the Company to combine
the lease and service component for certain of the Company's service contracts
when the service component is the predominant component and continues to account
for the combined component under ASC Topic 606 - Revenue from Contracts with
Customers.
Inventory: Inventory consists of raw materials used in the hydraulic fracturing
process, such as proppants, chemicals and field service equipment maintenance
parts, and is stated at the lower of cost or net realizable value, determined
using the weighted average cost method. Net realizable value is determined based
on our estimates of selling prices in the ordinary course of business, less
reasonably predictable cost of completion, disposal, and transportation, each of
which require us to apply judgment.
Property and Equipment: We calculate depreciation and amortization on our assets
based on the estimated useful lives and estimated salvage values that we believe
are reasonable. The estimated useful lives and salvage values are subject to key
assumptions such as maintenance, utilization and job variation. These estimates
may change due to a number of factors such as changes in operating conditions or
advances in technology.
We incur maintenance costs on our major equipment. The determination of whether
an expenditure should be capitalized or expensed requires management judgment in
the application of how the costs benefit future periods, relative to our
capitalization policy. Costs that either establish or increase the efficiency,
productivity, functionality or life of a fixed asset are capitalized and
depreciated over the remaining useful life of the asset.
Impairment of long-lived and other intangible assets: Long-lived assets, such as
property and equipment, right-of-use lease assets and intangible assets, are
evaluated for impairment whenever events or changes in circumstances indicate
that their carrying value may not be recoverable. Recoverability is assessed
using undiscounted future net cash flows of assets grouped at the lowest level
for which there are identifiable cash flows independent of the cash flows of
other groups of assets. When alternative courses of action to recover the
carrying amount of the asset group are under consideration, estimates of future
undiscounted cash flows take into account possible outcomes and probabilities of
their occurrence, which require us to apply judgment. If the carrying amount of
the asset is not recoverable based on its estimated undiscounted cash flows
expected to result from the use and eventual disposition, an impairment loss is
recognized in an amount by which its carrying amount exceeds its estimated fair
value. The inputs used to determine such fair value are primarily based upon
internally developed cash flow models. Our cash flow models are based on a
number of estimates regarding future operations that may be subject to
significant variability, are sensitive to changes in market conditions, and are
reasonably likely to change in the future.
No impairment was recognized during the years ended
Leases: In accordance with ASC Topic 842, Leases, the Company determines if an arrangement is a lease at inception and evaluates identified leases for operating or finance lease treatment. Operating or finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Lease terms may include options to renew; however, we typically cannot determine our intent to renew a lease with reasonable certainty at inception. Tax Receivable Agreements: In connection with the IPO, onJanuary 17, 2018 , the Company entered into two TRAs with the TRA Holders. The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, inU.S. federal, state, and local income tax and franchise tax that the Company actually realizes in periods after the IPO as a result of certain tax attributes applicable to each TRA Holder. The Company accounts for amounts payable under the TRAs in accordance with ASC Topic 450, Contingencies. Share Repurchases: The Company accounts for the purchase price of repurchased Class A Common Stock in excess of par value ($0.01 per share of Class A Common Stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction to retained earnings. All Class A Common Stock shares repurchased are retired upon repurchase. 42
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