Liberty Energy Will Realize Steady Efficiency Gains With Roll-Out of Dual Fuel-Capable Frac Fleets

Analyst

Katherine Olexa

Liberty Energy has provided hydraulic fracturing services since 2011, expanding from one active fleet to over 40 over the past decade. Most of its management team has been involved in technological innovation for fracking since the 1990s. Current tech solutions include statistical analysis to optimize frac design and dual-fuel fleets. The 2020 acquisition of OneStim from Schlumberger, previously the leader in North American pressure pumping, doubled Liberty's capacity while adding a slew of previously unpenetrated customers and shale basins. 

Following the OneStim deal, Liberty is now one of the four largest pressure pumpers in North America, which together control more than two thirds of the market. High utilization rates will support a favorable operating environment for Liberty in the near term. We nevertheless remain skeptical of Liberty’s long-term growth prospects. Unlike competitors such as Halliburton, Liberty’s business relies solely on pressure pumping in the United States and, to a lesser extent, Canada. Its position near the top of the oil and gas supply chain leaves its revenue dependent on exploration and production companies' capital budgeting decisions. We currently expect E&Ps' North American capital expenditures will remain below prepandemic levels at least through 2026. 

High demand for next-generation fleets, such as electric frac spreads and dual-fuel frac spreads supports pricing premiums over and above those afforded by the tight equipment supply. Industrywide fleet conversion continues at a measured pace, and we expect Liberty will be able to command pricing premiums for its next-generation fleets even if the industry's general supply/demand imbalance evens out. In the long run, however, high competition makes it difficult for firms to establish a competitive advantage, and constant innovation in operational efficiency continues to erode potential cost advantages. Pricing pressure will contribute to margin squeezes, as well.

Business Strategy & Outlook

We do not believe Liberty has a moat, as it has not consistently outearned its cost of capital and we do not expect significant performance improvements over the next five years. Opportunities for a moat would likely arise from a cost advantage, and we see little opportunity for Liberty to maintainably reduce its operating costs relative to peers. The industry in general has seen significant efficiency improvements as pressure pumpers race to operate more efficiently than their myriad competitors. Their success has resulted in fewer required frac spreads to meet production requirements, so even though the number of available frac spreads is steadily declining, competition remains heightened. We see even less opportunity for Liberty to command a price premium, given the competitive nature of the fragmented North American pressure pumping market. 

In early 2021, Liberty acquired OneStim, Schlumberger’s pressure pumping business. It nearly doubled Liberty’s frac spread count, launching it to the number-two spot in U.S. pressure pumping behind narrow-moat-rated Halliburton (though Liberty has since been overtaken by ProFrac, which has increased its available fleet through several acquisitions in recent years). In our view, the combination’s main benefit was the addition of Schlumberger’s customer base. For the most part, Schlumberger and Liberty worked with completely different E&P firms, so the combination brought Liberty a slew of new clients, including BP and ExxonMobil. It also secured access to new basins, including the Haynesville. We remain skeptical of the new Liberty’s ability to establish a cost advantage, since it will remain constrained by a tight U.S. shale market despite its increase in fleet capacity. Large, public E&P firms are reducing their capital budgets in response to shareholder pressure for more responsible spending. Furthermore, E&Ps cannot maintainably increase their capital spending without triggering production oversupply. We don’t currently expect E&P capital expenditures in North America to surpass prepandemic levels, limiting the total amount of revenue available to oilfield service firms including Liberty. We therefore believe that Liberty’s added capacity through the OneStim deal will offer little benefit while demand remains constrained. 

The deal also gives Liberty primary access to advancements in pressure pumping technology developed by Schlumberger. Tech advances may benefit Liberty for a short time, but they typically disseminate quickly throughout the industry, limiting opportunities for any one firm to carve out a maintainable competitive advantage. Frac spreads also feature relatively short useful lives, from three to five years. Some frac spread components even require replacement every few months. This exacerbates the difficulty of maintaining a technological advantage since, cost permitting, firms need not wait long before upgrading certain rig components to the leading-edge model at the time. For example, electric frac spreads are currently experiencing increased demand as E&P firms seek to reduce their carbon footprint in well production. Liberty continues its efforts in commercializing digiFrac, its electric frac system, but several major players already offer electric options, and industry estimates indicate electric rigs could constitute about 8% of the total market supply by 2024. While we believe Liberty’s investment in newer, in-demand tech will maintain its relevance with customers (who increasingly prefer ESG-friendly fracking options), we do not anticipate it will convey a competitive advantage due to the firm’s relatively tardy entrance compared with its larger competitors. 

Again, despite the firm’s capacity growth, the North American market—especially the U.S.—remains constrained. We expect public E&Ps, which currently make up about half of the U.S. production, will continue to exercise capital discipline, and Liberty’s revenue growth typically tracks closely with North American development capital expenditures. The OneStim acquisition ensures the level of revenue generated each year will increase, but we forecast growth rates will still follow capital expenditure trends, since the businesses operate in the same market. 

Hydraulic fracturing itself remains controversial. Nearly all of Liberty’s revenue relies on the hydraulic fracturing market, leaving the firm exposed to potential regulatory action aiming to curb the potentially negative outcomes typically associated with the practice. If public opinion becomes insurmountably negative, a fracking ban is possible but unlikely, in our view. Presently, fracking regulations occur on a state level. We have seen states like New York ban the practice outright, but we do not anticipate states with significant fracking operations in place (Texas, Pennsylvania, and so on) will enact a ban in the near term.

None

Economic Moat

Liberty Oilfield Services

Liberty Energy, Inc. engages in the provision of hydraulic fracturing services to onshore oil and natural gas exploration and production companies in North America. Its hydraulic fracturing fleets consist of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. The company was founded on December 21, 2016 and is headquartered in Denver, CO.

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Liberty Energy, Inc. engages in the provision of hydraulic fracturing services to onshore oil and natural gas exploration and production companies in North America. The company was founded on December 21, 2016 and is headquartered in Denver, CO.

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