Liberty Energy Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Liberty Energy Inc. is an oilfield services company specializing in hydraulic fracturing and other technologies to enhance production from shale oil and gas wells in North America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Liberty Energy (LBRT) is a North American oilfield services company primarily focused on hydraulic fracturing, also known as “fracking.” This process involves injecting water, sand, and chemicals under high pressure into shale formations to extract oil and natural gas. Beyond fracking, the company also provides well support technologies and well-completion services, including proppant and water management.

Revenue Distribution

LBRT’s revenue is primarily derived from its hydraulic fracturing services, which directly correlate with oil and gas exploration and production (E&P) activity. They sell their services to E&P customers. The company’s revenue is entirely concentrated within the US and Canada.

The oil and gas industry is highly cyclical and heavily dependent on oil and gas prices. E&P companies will increase production and, consequently, demand for services like LBRT’s, when oil and gas prices are high. Conversely, when prices are low, activity drops, leading to lower demand and potential oversupply of oilfield services.

The industry has seen a strong recovery following the slump of 2020 as a result of COVID-19, and the Russian war in Ukraine, which sent global oil prices soaring, made North American oil and gas production very important. This has led to increasing demand for pressure pumping and other well completion services, and many E&P companies have shifted their focus to increasing production. This in turn has had a beneficial effect on pricing power for companies like LBRT.

The industry is also seeing technological innovation, particularly around hydraulic fracturing itself, making the operations more complex and specific to the client’s needs.

Competitive Landscape

The oilfield services sector is highly competitive, and LBRT faces competition from companies ranging from large multinationals to smaller service providers. Many such companies compete on pricing, technical expertise, operational efficiency and reliability. Since 2015 when oil prices began to plummet, companies are intensely focused on lowering costs in order to keep market share.

Some of LBRT’s direct competitors include Halliburton, SLB and Baker Hughes. These large companies are leaders in all oilfield services, and have better market share overall as well as access to better technologies. They tend to use acquisitions as a growth strategy to gain scale advantages. Some of LBRT’s smaller competitors are geographically local and may have advantages in price competitiveness. Overall, barriers to entry in this industry are low, therefore, new companies come in often.

A crucial part of competition in this industry is the scale of services a company can perform. The ability to handle large-scale projects with efficiency is key to winning big contracts, and large companies generally benefit from economies of scale that can lower costs.

In a volatile sector that is very dependent on demand, a key source of competitive advantage has become cost leadership. Companies which offer the lowest costs, and hence, the lowest pricing to customers, are able to keep and maintain market share.

What Makes LBRT Different

LBRT differentiates itself through innovative technologies, such as its digiFrac technology, which allows for remote control and automation of fracking operations. It also highlights its focus on customer service, particularly by using a localized team to provide a close connection to each client. In addition, LBRT’s focus on environmentally sound extraction techniques positions it favorably as governments place more emphasis on ESG (environmental, social and governance) principles.

Financials Overview

LBRT’s latest 10-Q filing is for the quarter ending September 30, 2023:

  • Revenue: Total revenue was $1.29 billion for the quarter, 2.7 billion for the nine months ended September 30, 2023 vs $618 million for the same quarter last year and 1.9 billion for the first nine months of 2022. This is largely due to the increase in demand and increase in oil/gas pricing.

  • Net Income: Net income attributable to LBRT for the quarter was $173 million or $1.05 per diluted share, as compared to $3.6 million or $0.02 per diluted share last year. For the nine months ended September 30, 2023, net income was $399 million vs a loss of $151 million for the same period of 2022. This improvement in net income is in part due to increased revenues and profitability.

  • Operating Cash Flow: LBRT generated $239 million from operations in the last quarter, down slightly from $253 million in the second quarter. This fluctuation reflects changes in working capital.

  • Liquidity and Capital Resources: LBRT holds $563 million in cash. Cash generated from operations provides the main source of liquidity.

  • Debt: LBRT has a substantial amount of long-term debt with maturity ranging to 2029. However, most of their debt was obtained in a time where interest rates were at a low, meaning they are able to have lower costs for their debt.

  • Profitability: Operating profit margin for the most recent quarter was 26.9%, down from 31.5% in the second quarter.

    Revenue growth was 108% for the quarter, compared to the same period a year ago, while the increase in net income was more than tenfold. All of these show how strong demand for the company’s services is, and how quickly it can make profits when conditions are favorable.

Risks to the Moat and Business Resilience

Despite its positive financial position, several risks still threaten LBRT’s business:

  • Cyclicality: Oil prices, and thus the E&P industry is very cyclical. A decrease in oil prices will negatively affect the company’s revenue and margins as E&P companies reduce their drilling activity. This is the primary risk for LBRT.
  • Dependence on North American Market: Because LBRT’s revenue is entirely concentrated within the US and Canada, the company is highly reliant on their respective economies and political conditions. If any kind of regulations is established that impacts the industry (or the oil/gas export market), LBRT will be highly affected.
  • Competition: It is a competitive field. If smaller companies or large integrated services companies come up with better cost structures or technologies, LBRT may lose market share.
  • Technological Disruption: There is always the risk that new technologies could disrupt the existing methods for oil and gas extraction, making companies’ existing services unneeded or obsolete.
  • Customer Concentration: A large portion of the industry is based upon the relationships of the company with oil and gas producers. Losing out on key partnerships with E&P clients would negatively impact revenue.
  • Customer Creditworthiness: Because LBRT is exposed to oil and gas companies, any creditworthiness issues from said companies may cause them to have bad financial conditions due to not having received payments for past projects.
  • Inflation: Inflation will greatly impact LBRT’s costs, which may eat into its margins unless they are able to increase prices for their services.
  • Political and Regulatory Risks: Changes to existing environmental regulations, tax laws, and trade policies can all potentially harm LBRT’s business.

Moat Rating and Justification

Rating: 2 / 5 LBRT does have some limited moat due to its focus on technologies like its digiFrac technology and its relationship with customers. However, the cyclical nature of the market and the high competition prevent the company from having a sustainable competitive advantage or a wide-moat business.

  • Intangible Assets: There is some amount of brand power as a leader in the pressure pumping sector, and LBRT has patents on its technology. However, brand isn’t the primary driver of competitive advantage.
  • Switching Costs: Switching costs in this industry are not high. Even though they have strong relations with clients, it is still easy to switch to different providers if the prices or operational efficiencies are better elsewhere.
  • Network Effect: While data and information are traded with the clients, there is no network effect as a form of competitive advantage.
  • Cost Advantages: LBRT has had some success at having cost leadership through the use of its digiFrac technology. However, those cost advantages may not be permanent as companies develop similar and better cost structures.
  • Size Advantages: The company is an industry leader, but is still not one of the largest companies in the entire market. Companies that are larger like Halliburton, SLB and Baker Hughes have access to advantages in scale that are hard for LBRT to match, though size has helped LBRT win contracts.

LBRT could have had a higher rating, if it hadn’t been in such a cyclical and price dependent industry.

Understandability Rating and Justification

Rating: 3 / 5 The business model of LBRT is complex, but it isn’t hard to understand. The primary focus on hydraulic fracturing means that the company is exposed to the vagaries of the oil and gas industries, but the basic function of fracking is understandable. For anyone familiar with economics and supply/demand, it is clear how the company’s financials and their volatility are affected by the larger oil market. LBRT’s technological developments, while a source of competitive advantage, don’t make it any more difficult to understand. However, an investor will need to do a lot of research into financial statements and oil industry dynamics to fully grasp the business.

Balance Sheet Health Rating and Justification

Rating: 4 / 5 LBRT has a generally solid balance sheet with a few caveats. It has a large cash balance and low debt, at least in relation to its profits. They also have substantial tangible assets. Given the highly cyclical nature of its business, and the history of LBRT (it nearly went bankrupt in the 2015-2016 downturn), it is impressive that it has a healthy balance sheet.

However, the company has large and growing liabilities, and continues to make acquisitions in growth markets, which, while potentially profitable, do add significant amounts of debt. A large amount of its assets are intangible, and could therefore, be affected by market dynamics (such as tech development). Debt is also a concern, albeit, the risk of long-term debt is somewhat reduced as their debt is mostly on fixed interest rates. Overall, the company’s finances remain robust.