Liberty Oilfield Services Inc. (LBRT) Q2 2022 Earnings Call Transcript

Liberty Oilfield Services Inc. (LBRT 1.10%)
Q2 2022 Earnings Call
Jul 26, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Liberty Energy earnings conference call. [Operator instructions]. I would now like to turn the conference over to Anjali Voria, strategic finance and investor relations lead. Please go ahead.

Anjali Voria -- Strategic Finance and Investor Relations Lead

Thank you, Dave. Good morning and welcome to the Liberty Energy second quarter 2022 earnings conference call. Joining us on the call are Chris Wright, chief executive officer; Ron Gusek, president; and Michael Stock, chief financial officer. Before we begin, I would like to remind all participants that some of our comments today may include forward looking statements reflecting the company's view about future prospects, revenue, expenses, and profits.

These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions and are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA and pre-tax return on capital employed, are not a substitute for gap measures and may not be comparable to similar measures of other companies.

A reconciliation of net income to EBITDA and adjusted EBITDA and calculation of pre-tax return on capital employed as discussed on this call are presented on our earnings release, which is available on our website. I will turn the call over to Chris.

Chris Wright -- Chief Executive Officer

Thanks, Anjali. Good morning, everyone, and thank you for joining us. I'm proud to discuss our second quarter 2022 operational and financial results. The second quarter was a busy and exciting time as the Liberty team continues to deliver differential quality services in today's robust but operationally challenged environment is translated into a notable milestone of fleet financial performance at levels that were last seen in 2018 as measured in annualized adjusted EBITDA for fleet.

The hard work and dedication of our employees, combined with deep relationships with our partners across the value chain, enabled us to achieve strong operational efficiency in an environment still impacted by supply chain challenges. In the second quarter, revenue was $943 million, a 19% sequential and 62% year-over-year increase. Net income for the quarter was $105 million or $0.55 per fully diluted share. Adjusted EBITDA for the quarter was $196 million, a 114% increase over the prior quarter.

Liberty's first half of 2022 is starting to reveal the value creation from our 2021 acquisitions and our insistence upon getting the business integrations done right, consistent with our focus on long term results. We've positioned the company to deliver top-tier performance through cycles with a focus on free cash flow generation and maximizing returns. We're driving cash loads expansion that allows us to fund compelling organic investments to grow our competitive advantage while also returning cash to shareholders. Our strong financial results and a constructive outlook support the reinstatement of our return on capital program, beginning with the board approved $250 million share buyback program.

Our guiding principle is to maximize the value of the Liberty share. We believe the flexibility afforded by a share repurchase program gives us the ability to opportunistically act on a dislocated stock price calibrated by market and business conditions. While the global economic recovery  outlook has softened on reverberating impacts from higher inflation, rising interest rates, and the Russian invasion of Ukraine, oil and gas markets remain constructive. Eight years of underinvestment in upstream oil and gas production, exacerbated by inept global policy initiatives aimed at incentivizing an energy transition, has created a mismatch of supply and demand.

Today, historically low global oil and gas inventories, limited opex, spare production capacity, and a dearth of refining capacity are colliding with increased energy demand. Oil and natural gas demand growth is coming from the post-pandemic recovery in travel, China's emergence from its enforced COVID lockdowns plus seasonal demand factors. These are all further magnified by the Russia-Ukraine conflict and the potential for sanctions imposed on Russian oil exports, coupled with Russia's decision to constrain natural gas pipeline exports to Europe. The greatest risk to our marketplace is a severe recession that leads to a drop in global demand for oil and natural gas.

A moderate recession typically means only to a slowing in the rate of demand growth for oil and natural gas, which would likely not be overly disruptive to our customers activity. Given today's low inventory levels and tight supply and demand balances, the recovery in oil supply appears to be under greater threat than oil demand. North America is positioned to be the largest provider of incremental oil and gas supply. Today, E&P operators are evaluating the opportunity to deploy incremental capital in North America to modestly grow production while remaining focused on shareholder priorities.

The fundamental [Inaudible] at North American oil and gas supply is strong. Supply is restricted by a tight frac market where equipment, supply chain, and labor constraints limit frac fleet availability and service quality available to our customers. Many frac companies are struggling to execute in today's environment. Moreover, operators desire ESG-friendly frac fleet technologies that provide the opportunity for both significant emissions reductions and large fuel savings.

Liberty is uniquely positioned with the technology, scale, and vertical integration to meet demand for service quality and best in class technology. The frac market is near full utilization and few service providers have the fleet capacity and supply chain reach to satisfy E&P operators goals. Liberty with discipline in restraining fleet reactivation in the post COVID era of muted returns, pricing has now recovered to where Liberty, in support of our customer's long term development needs, is reactivating several of our recently acquired available fleets from the OneStim transaction. Importantly, these long term dedicated customers seek additional next generation fleets that are simply not available today in the market, and Liberty is providing an avenue to serve those customers and simultaneously drive free cash flow from these existing fleets to reinvest in our fleet modernization program and free cash flow.

Liberty is also partnering with key customers on the deployment of two additional digiFrac electric fleet in early 2023. Demand is very strong for the technically superior design Liberty developed throughout the downturn that drives better safety and efficiency, a rare commodity in a tight market. A strong frac market and specific conversations with our customers give us confidence in the demand for Liberty services in the coming year. In the third quarter, we expect approximately 10% sequential revenue growth, primarily driven by fleet reactivation and modest net pricing increases.

Third quarter margins are expected to improve from contribution of incremental fleets and modest price improvements, partially offset by ongoing supply chain, operational, and inflationary pressures. Since the 2020 downturn, we have made the decision to refrain from reactivating fleets without the economics and longevity of business, to support the onboarding of a new crew and the capital associated with restoring equipment. Today, we are one of the few players in the market with the equipment available to support a rising demand for frac services. We are also one of the only players with this supply chain capacity to support these services as sand and other materials remain in short supply.

Reactivating fleets is a long-term strategic decision, [Inaudible] fleets, but rather fleets that will go to high quality, dedicated customers that are interested in a road to next generation solutions over time. Today, next generation equipment is in short supply and will remain so for the foreseeable future. To maintain the development program, producers seeking a frac crew are willing to take equipment available to support their operations in the near term. Our liberty reactivated fleets are largely well-maintained, tier two diesel equipment that came with the OneStim acquisition.

These fleets are coming online at favorable prices that support the hiring and training of a new crew for the long term, our next generation technology expansion program, and increasing our free cash flow generation. For minimal capital outlay, the unit  economics of these fleets generate free cash flow and provide a source of funding for investment in our fleet modernization program. Over the long term, next generation fleets will replace older technologies. While we already have one of the largest dual fuel fleets available, our equipment makeup will evolve to an entirely next generation fleet over time.

The fleet reactivation are not market share-driven decisions, but our investments in driving the increase in value of a share of Liberty start by investing at the right time with the right economics. We are also excited to announce a $10 million investment in Fervo Energy, a next-generation geothermal technology company that develops geothermal assets for dispatchable, reliable, baseload green power with low carbon intensity. With this investment, maybe expand into supporting geothermal, geothermal resource development, leveraging our extensive expertise in subsurface engineering and pressure pumping assets that help create dense underground networks to mine the Earth's heat for electricity production. We chose this investment opportunity.

Because of our belief in the concept viability, the quality of Fervo teams, and the size of the potential resource already captured. Unconventional geothermal applications offer a potential pragmatic solution for a reliable source of low carbon electricity, and we're excited to be part of the journey. Our team is diligently working to support a world where we are seeing the greatest threat to energy security, reliability, and affordability in decades. Yesterday, we released our 2022 Veteran Human Lives report, placing today's global energy security crisis in proper context and showcasing Liberty's leadership in clean energy technology innovation.

Our drive to bring awareness to the importance of energy access. Expanding further into the topics of geopolitics, food security, and the four pillars of the modern world; cement, steel, plastics, and fertilizer, all critically enabled by hydrocarbons. ESG has always been part of our DNA since day one, and we bring to focus our innovation and investments in digital technology, engine technology, sands, logistics and supply chains, as well as our robots governance, and the people and culture that bind us. With that, I'd like to turn the call over to Michael Stock, our CFO, to discuss our financial results.

Michael Stock -- Chief Financial Officer

Good morning, everyone. We're pleased with our second quarter results. The entire Liberty family pulled together to provide exceptional execution for our customers and deliver record revenue, net income, and adjusted EBITDA. We are now beginning to see the advantages, the transformative work our team accomplished through the integration of OneStim and PropX and is already generating returns at a faster pace than we projected at or at least today a little over one year ago.

Successfully achieving scale of vertical integration by doing the integration the right way has been key to our financial performance and position is us well entering into the second half with the right momentum. This quarter we reached annualized adjusted EBITDA to fleet levels last seen in 2018. We believe that we are only at the early stages of the oilfield services upcycle. Liberty is a company of a much different scale of integration today than we were in 2018.

We are in an even stronger position to lead the industry in technology and service quality and to expand profitability, as best in class frac fleet technologies have evolved to include Liberty [Inaudible] digiFrac fleet that raises the industry standard on providing the lowest emission technology in the market with superior durability, reliability, enhanced automation and controls. The tier four DGB fleet has grown significantly and marries dual fuel pumps with automated controls that maximize gas substitution for diesel in an environment with the savings from fuel cost arbitrage have increased over the last year. We have an expanded supply chain with two of our own sand mines and deeper partnerships with our suppliers that allow us to deliver superior operational execution. In severely restricted markets riddled with global supply chain challenges.

We also have the premiere technology, some wind farms handling and last mile delivery solutions through problems. These transformative changes we've made and continue to make at liberty are critically important drivers of shareholder value at a time when market fundamentals are increasingly constructed for our industry. The second quarter of 2022 revenue was $943 million, a $850 million or 19% increase from $793 million in the first quarter. Approximately 60% of our top line growth was driven by activity, mix, and a modest contribution from reactivation, while the remainder comprising.

Net income after tax, was $105 million increase from a net loss after tax of $5 million in the first quarter. Fully diluted net income per share was $0.55, compared to fully diluted net loss of $0.03 in the first quarter. Results included $7 million and fleet reactivation costs incurred by both the fleet deployed in the second quarter and the planned third quarter fleet deployments. General and administrative expenses totaled $42 million, including non-cash stock based compensation of $4 million.

G&A increased $4 million sequentially, primarily driven by performance based compensation, inflationary and activity increases commensurate with the growth in our business, and investment in platform IT systems and other process improvements to support a continued expected growth. In interest expense and associated fees of $5 million. Adjusted EBITDA increased to $196 million, more than doubling from $92 million achieved in the first quarter, showcasing solid incremental margin expansion activity and pricing gains. We ended the quarter with a cash balance of $41 million and net debt of $213 million.

Net debt increased by $34 million, the first quarter, primarily due to an increase in working capital. As of June 30th, we had $150 million of borrowings on our ABL credit facility. On July 15th, we exercised the accordion feature on ABL credit facility, thereby increasing our borrowing capacity from $350 million to $425 million. Total liquidity, including availability under the credit facility, was $263 million pro forma for the [Inaudible].

Capital expenditures total $127 million basis for second quarter '22. The capex was driven by tier four DGB upgrade to digiFrac expanding of $65 million, sand logistics and other margin [Inaudible] projects of $29 million, and the remainder relating to ongoing cash flow statement spending. In the third quarter, we expect approximately 18% sequential revenue growth. This is primarily driven by fleet reactivation and one including one order contribution from accrued employment in the latter part of the second quarter and modest price increases.

We also expect margin improvement, primarily the contribution of incoming fleets and modest net pricing increases, partially offset by ongoing supply chain, operational, and inflationary pressures included including in commodities of raw materials and labor costs. As market fundamentals continue to improve for our industry, we are well positioned to support global [Inaudible] by continuing to invest in the early part of the cycle. To maximize free cash flow, over the long term, we are now targeting capital expenditures of $500 million to $550 million for full year 2022. The approximately $200 million increase reflects an additional next-generation technologies based on including incremental spending, the additional digiFrac fleets, and property exchange handling of sand and equipment, as well as capital investment in the freight fleet reactivation and liberalization of approximately $55 million to $60 million, including the one fleet deployed to the seas and the balance that will be deployed in the second half of the year.

The incremental adjusted EBITDA we are on track to achieve in 2022 relative to the beginning of the year, is expected to far more than exceed the additional capex spending in our budget. As a result, we expect to be free cash flow positive for the full year '22 after investing in the long term competitive advantages. We expect to enter 2023 with an effort to frankly account [Inaudible]. Investments we are making in 2022 will further expand earnings potential in 2023.

And our fleet modernization plan is expected to continue in 2023. We believe capital spending is likely to be available by 2022 to 2023. We anticipate strong 2023 free cash flow conversion with over 50%, driven by both incremental profitability from 2022 investments and a continued margin expansion initiatives. We are planning to use the fleet of the latest technologies as we enter what we expect to be a longer duration or [Inaudible].

As we stated at the beginning of the year, we have significant flexibility in adjusting our capital spending targets depending on economic conditions, customer demand, and returns expectations. As we look to the future, the increased free cash flow generation capability of our repositioned business successful once the integration, operational execution, and fundamental outlook allows us to meet our capital allocation priorities of disciplined investments to expand earnings per share balance sheet strength, and return capital to shareholders. With that, I will now turn it over to Chris before we go to Q&A.

Chris Wright -- Chief Executive Officer

Thanks, Michael. The world is gripped today by a serious energy and food crisis that is of our own making. It is not, in fact, due to any shortage of available resources. It is due entirely to investment decisions and a growing myriad of barriers to investment in hydrocarbons, the very hydrocarbons without which the modern world is simply not possible.

It is admirable that the public regulators in our industry are keen to improve the quality and cleanliness of our activities. It is not admirable that so many emotionally driven, fact free impediments to investment have come from government regulations, NGO litigation and lobbying, and Wall Street too often equating lower greenhouse gas with better in all cases. The blame for the current energy crisis also falls on our industry for too often compliantly going along with the endless anti hydrocarbon fashion of today. If it is not for us to speak candidly, honestly, and loudly about the critical role hydrocarbons play in the modern world.

And most critically, for those desiring simply to join the modern world, then who else will play this role? Certainly, it has not been political leaders, activists, academics, or celebrities. It is us that must carry that torch. Otherwise, the immense human damage we see today from the lack of investment in hydrocarbon production and hydrocarbon infrastructure will be only the beginning of a calamitous crisis. Towards that end, I strongly encourage everyone to read Liberty's improved and expanded version of Bettering Human Lives that was released on our website last night.

It touches on many critical issues that are either overlooked, misunderstood, or simply ignored. We welcome all feedback on this report as we strive to be honest brokers for information on how the world is energized today, how it might be energized in the future, and what inevitable trade offs must be made. Individuals are all entitled to their own opinions. They are not entitled to their own set of facts.

That idea from Daniel Patrick Moynihan. I will now turn it over to the operator for questions.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions]. Our first question comes from Chase Mulvehill with Bank of America. Please go ahead with your question.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, everybody. I guess first thing I wanted to hit on is just the capex, obviously a big bump here. You've got the newbuilds, the capital, new newbuilds, the digiFrac fleets in the first half of next year.

So could you just kind of split up the capex of the 500 to 550 between upgrades and reactivation versus newbuilds versus maintenance? Just so we can kind of get a context of kind of where the capex is going.

Michael Stock -- Chief Financial Officer

Yes. Chase, really -- so take it back to sort of what we announced at the beginning part of the year, the 200 change that was announced. If you think about it, that'd be two new bills, digiFrac fleets about 120 million, probably in the $50 million to $58 million with the reactivation of the balances. Just to make some additional with the entangling technologies and to margin projects that we've greenlighted with the repricing.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK. Let me ask you this. The the fleets that you're reactivating in the back half of the year, are those upgrades -- are you spending to upgrade those or are those just going to be kind of, you know, tier two fleets?

Michael Stock -- Chief Financial Officer

Yes. They are tier two. We're not upgrading to tier four DGB. Their price obviously you could.

But they are being, to some degree, libertized to where they are. They would be a Liberty tier two fleet. So they have longevity with them, which will then support the the long generation move of those clients to next generation fleets is kind of playing with each of those lines but has a different cadence with every one of them but -- during the next five years.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK. That make sense. And if I can ask on the buyback. If I can kind of poke around this a little bit and try to think about how you're you're you think about pace in that $250 million. I know you didn't really kind of commit to it at this point, but do we -- should we think about it kind of more matching about kind of how free cash flow evolves? Or is it kind of more opportunistic buybacks based on kind of how what's your view of intrinsic value versus where the stock's trading?

Chris Wright -- Chief Executive Officer

Yes. Entirely, entirely opportunistic, Chase. No formulaic money's going to flow out in X. Buybacks to us are our opportunities.

When you have a balance sheet to support them and you have a large, compelling difference between the intrinsic value of the share and the price at which you can buy shares. So the rate at which will buyback our stock is strongly dependent on the magnitude of that dislocation between intrinsic value and market price.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK. Could I ask how you define intrinsic value or how you calculate it?

Chris Wright -- Chief Executive Officer

Yes. But I mean, obviously I won't share the details, but it's just that commonsensical discounted cash flow incorporating our weighted average cost of capital and a range of possible scenarios going out to the future in our business.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Right. Makes sense. That's how pretty much everybody thinks about it. All right.

I'll turn it over. Thanks, Chris.

Chris Wright -- Chief Executive Officer

You bet. Thanks, Chase.

Operator

Our next question comes from Steven Gandara with Stifel. Please go ahead.

Steven Gandara -- Stifel Financial Corp. -- Analyst

Thanks. Good morning, everybody. So two things for me, if you don't mind. The first, when we think about the fleet reactive issues in the back half of the year, you talk about, I think, exiting next year.

Starting next year is about with 40 plus. Are you -- are we coming off of a base of around 35 in the second quarter? I'm sort of trying to calibrate kind of the percentage increase you're seeing in the third quarter and how I should think about the digiFrac fleet entering in 2023.

Michael Stock -- Chief Financial Officer

Yes. Yes. Very, very five number-ish. We obviously activated one right at the end of the second quarter and then the balance will be activated so that as you go through the year will be through the end of the fourth quarter.

It's OK [Inaudible].

Steven Gandara -- Stifel Financial Corp. -- Analyst

OK. OK. And then when we think about -- I guess it's a two-part question, but the steep increase in profitability per fleet in the second quarter up to give or take, I think about 23 million of every type of fleet. So did that bridge from the first quarter and I assume it's price utilization and has probably some value from the sand business in there, I think.

How should we think about the sort of the potential of that number without giving us guidance? I mean, is this something that could go to the high twenties as 2023 evolves or is that too aggressive? I mean, any parameters around sort of the bridge and where this thing could -- where that could go as we go forward? 

Michael Stock -- Chief Financial Officer

It's -- where it could go, from my point of view, would really be more dependent on the demand side of the oil supply demand equation. I think on how -- kind of how any sort of any particular recession may affect demand for next year. Generally in general numbers, you know, we just see it from like you to the industry is running maybe around 250 fleets going to move to 75 by the end of the year. Kind of wobbly the interstates fleet at this present point in time.

So yes, there's definitely upside on pricing, but I think there's that's still to be seen as to that. Obviously, you've see a lot of movement in the market for freight fleets and in general with the general economy. But I think we need to kind of take -- sort of what it is we get. 

Chris Wright -- Chief Executive Officer

Steven, understand, if we don't know the future, obviously, the trends are pretty positive right now, but it's a combination of how well we perform operationally, what the trends in pricing, and they're still migrating positive direction and also or just quality of operations. As Michael said, some of our capital is these these margin enhancement factors. We're trying to figure out how to run our business more efficiently to get more done at a lower cost in a safer fashion. So there's a lot of moving factors in that.

So we're always a little shy about predicting the future, except we did say a year ago that we would return to mid-cycle economics this year, and that wasn't based on anything specific. It's just based on where the margins are awful. Supply shrinks, and and eventually demand will grow. But just supply shrinkage alone, we've got to fix the marketplace given that two or two and a half years of four frac market conditions.

Steven Gandara -- Stifel Financial Corp. -- Analyst

Great. Very good. Just one quick one. Michael, you mention this, but as the market evolves over the next couple of years, do you view the upgrades and the digiFrac as ultimately replacement for these tier two that you're reactivating and it's sort of a bridge to new -- to newer higher end assets?

Michael Stock -- Chief Financial Officer

Generally what we see among -- even if -- [Inaudible] announced for the bill, it approximates that what the attrition cycle for frac fleets. If you think about a ten year life of some of these all of these diesel fleets, etc., the announced numbers that are coming out are approximately the same. So we see a pretty balanced market, a very disciplined approach by ourselves and our competitors, and we think that's good for the frac market overall.

Steven Gandara -- Stifel Financial Corp. -- Analyst

Very good. Thank you for the color, gentlemen.

Michael Stock -- Chief Financial Officer

Thanks.

Operator

Our next question comes from Arun Jayaram. Please go ahead with your question.

Arun Jayaram -- J.P. Morgan -- Analyst

Chris, Michael, good morning. Chris, I was wondering if you could give us a little bit more bigger picture around the scope or the ambitions of your fleet modernization program. You mentioned 5 to 550 million a capex this year and -- at or a little bit below that kind of next year. But I wonder if you give us a little bit more scope on how long do you expect the higher capex trend relative to maintenance to continue and what type of capacity as do you expect over the next couple of years?

Chris Wright -- Chief Executive Officer

Well, we don't have any plans to add capacity, you know, per se. Our plans -- and we do have a plan on fleet modernization is sort of a continued gradual program. Of course, what's actually going to happen is not going to be our plan. It might be accelerated if the demand pull there might be slowed down.

We never put anything in stone, but I would say the migration to next generation fleet, the economics are going to pull back pretty strongly. Both these next generation fleets have meaningfully lower emissions. The very latest next generation fleets are also going to have, greater safety, higher reliability, better performance. And then just from a straight numbers perspective, the delta in fuel costs today between burning natural gas and burning diesel is large.

It's a big deal. So just the economic driver of fuel cost savings is likely going to have continued customer pull to get next generation fleet equipment. But again, for us, it's not an expanding -- it's not growing our fleet. It's just simply a disciplined, returns driven upgrade cycle in our fleet that will be and is being pulled by our customers.

Arun Jayaram -- J.P. Morgan -- Analyst

Great. I was wondering if you could just follow up. It's just give us a sense for the two digiFrac fleets that were to be deployed starting in the third quarter or later this year? Give us a sense of how those deployments are going in terms of timing and perhaps how the contract terms for the latest two newbuilds are trending relative to your initial two that you plan to put in the field.

Ron Gusek -- President

Already business run. Yes. Obviously, customers are excited to see that technology out in the field and we're excited to get it deployed out there. We continue to see strong demand.

We are navigating some supply chain challenges, not so much on the home side. We have we have pumps being delivered on schedule. We're struggling a little bit more on the power generation side. So that's holding us back a bit.

We still expect to deploy our first two fleets this year in Q4 likely and the next two weeks probably in Q1 is our expectation today. And as you think about as you think about how that contracting is evolved, you kind of want to think about how the business -- really the market has evolved over time. If you think about when we announced those first contracts, we were in a little bit different environment then versus where we find ourselves today. Leading edge pricing, even for a tier two diesel fleet, has moved pretty dramatically over the last three to four months.

And so as we think about contracting next generation fleets, to the point Chris made earlier, the fuel savings opportunity there is massive. Maybe I'll order $20 million to $25 million annually. And so we think about what are leading edge tier two diesel pricing is and then the fuel savings opportunity there. And of course, we want to capture some meaningful piece of as well, and that provides guidance as to where we want to set pricing for our next generation capacity we're deploying.

Arun Jayaram -- J.P. Morgan -- Analyst

Great. Thanks a lot.

Operator

Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead with your question.

Neil Mehta -- Goldman Sachs -- Analyst

Great. Chris and Michael, congrats on a solid quarter here. Now, I wanted to build on some of your comments. You mentioned you don't expect to add capacity.

But broadly speaking, do you see current profitable profitability levels as incentivizing your competitors set about adding capacity? The market overall, I guess where we're going with that is do you see discipline fading at all?

Chris Wright -- Chief Executive Officer

We haven't seen any of that. In the committee, we're close to all the equipment builders there. I don't know of any fleets being built that are not really driven by ESG or specs. I don't know of any street kind of capacity as they probably are.

But if there is, it's very small, very little, certainly among the bigger players who are an increasing share of the marketplace these days. Yes, I don't think there's any appetite. A, you couldn't do it. "Oh, the market's great today.

I want three more fleets." Well, sign up for 15 months and you'll get them. Well, what's the market going to be in 15 months? And people, I think, are obviously burned from overbuilding or redeploying too many idled equipment in the past. So, no, we have not seen a fading of discipline. We've seen a pretty rational dialog between us and our customers in a marketplace today where our customers have just fantastic returns, and we're still riding a wave behind that, but we're moving in that direction as well.

Michael Stock -- Chief Financial Officer

Just in point out. I mean, really, if you think about it, it's is about 10% attrition a year now. Attrition can be delayed somewhat if it's a very strong market, but eventually it comes. Right.

So I think that that's one of the things you've got to look at when we look at sort of what is being built and it seems to be balancing with attrition over the long term. 

Neil Mehta -- Goldman Sachs -- Analyst

Good perspective. And the follow up is just around labor. A year ago on these calls, we were spending a lot of time talking about how tight the labor environment is and just talk about what you're seeing right now. Are you still facing labor challenges and and how are you mitigating some of those risks?

Chris Wright -- Chief Executive Officer

Yes. Labor markets remain tight. I would say you're seeing a few more people coming back into the labor force, so incrementally better than it was six months ago, but still a very tight labor market. Nothing like we've seen in the last ten or 12 years.

So incremental improvement, the right direction. What we focused on is very liberty, specific opportunities about why it's a great place to work at liberty, why people love their jobs here, why we have low turnover. So what do you do in on the ground effort? And we're going there are great schools where people are learning to become electricians, welders and setting in those groups, having them do internships at Liberty. That's having NCAA like signing ceremony that people sign on to join Liberty, whether it's out of Alabama or Mississippi or somewhere, that may not be right in the middle of the oil patch.

So I give huge credit to our recruiting and HR team. I've just had to change the game a bit to find and attract people to come in. But people come here and if you treat them well and they have a great job, this is an exciting industry. So they're all solvable problems.

But yes, it is a challenge and it is a significant constraint. I would say others in turnover in our industry as a whole, I would say, is probably still quite high and most everything in our industry is shorthanded today. So I don't want to get too much comfort on the labor problems. They're real.

But I think Liberty's been doing a pretty good job navigating that.

Operator

Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead with your question.

John Daniel -- Daniel Energy Partners -- Analyst

Hey, guys. Phenomenal quarter. Congratulations. Quick question on the incremental fleets.

How much of that growth is driven by your ability to tie your own sand and access to that sand versus just better overall industry demand?

Chris Wright -- Chief Executive Officer

Look, it's people in business almost all from existing customers like that wanted either want to do a little bit of incremental activity or maybe they split their work between Liberty and somebody else and somebody else is struggling and they're not getting consistent throughput. They're not getting things done the way they'd like them to be done. But I think that that's the whole there is we know you guys. We trust you guys.

You can deliver, and what are the economics it would take to get a little more of that? It's all of that package, of course, John, but we buy a lot of sand from third parties as well. Look, we're in a bunch of different basins. So it's not just that we have sand mines, but it's that we have relationships and history that in a case procurement market, I would say our goal has always been to not just be the preferred frac provider, but to be the preferred partner to our suppliers as well.

Michael Stock -- Chief Financial Officer

So a little color on that to the activations and not on specific basis. They are actually [Inaudible] which to some degree helps in the ability to source labor and support those fleets and the supply chain to support those fleets. The key things you're asking at this present point in time when you're regulating a fleet is really is, can you source the labor? Can you source -- can supply chains support them? That's a key event because you are putting your fleet to work and it's delayed or some have issues is not -- I'm not going to address.

John Daniel -- Daniel Energy Partners -- Analyst

OK. Got it. The other one for me is just look at the backdrop. I mean, clearly, demand is good.

You guys are obviously performing well. How do we transition, do you think there's the opportunity, Chris or Mike, to transition finally to sort of take your pay arrangements for these fleets? Just what would happen if you went and asked that customer today to lock this something up and the transition away from dedicated fleets is that in line of sight?

Chris Wright -- Chief Executive Officer

I mean, there are deals like that today where, the buyer fire needs something. And so we'll have guarantees of our economics that they struggle on operations and are able to, you know, have a frac piece move as fast as we like. We have some contract protections in there that that protect our economics. So those absolutely exist today.

But again, for us, winning in the long run in this industry is always about how can we win together? Not, hey, if things change, you're screwed and we win. That's just that's what that is. They didn't exist in our industry. And even then we generally did not engage in that.

We've always had a partnership mentality. We always will have a partnership mentality. Now, I know you're rolling your eyes right now and saying, well, Chris, that that partnership was harsh for you guys the last two or three years. And there's some truth to that and therefore they the benefits disproportionately going to swing a bit more our way going forward.

Yes. Yes, of course they are. But we've got to always be prepared to deal with what comes.

John Daniel -- Daniel Energy Partners -- Analyst

Scary. You've got a camera in my truck. OK. Last one for me and hopefully [Inaudible] guys on this one.

But you noted that you'll start the year in '23 with a fleet cam in the low forties. Is that assuming too good you have fleets in the and can you say how many in Canada? Just remind me.

Chris Wright -- Chief Executive Officer

We don't we don't give fleet breakdowns by base and all that. John, we -- we've always been careful about that. So looking forward, it's just sort that they -- yes, I would say it has taken in a couple digiFrac fleets that are going to be are going to be rolled and they will be rolling in in the fourth quarter.

John Daniel -- Daniel Energy Partners -- Analyst

OK. Got it. Thank you, guys. Great quarter then.

Chris Wright -- Chief Executive Officer

I appreciate you driving [Inaudible] in that truck.

Operator

Our next question comes from Roger Read with Wells Fargo. Please go ahead with your question.

Roger Read -- Wells Fargo Securities -- Analyst

Yes. Thank you. Good morning. I guess some of these questions have been asked.

Maybe dig in just a little bit deeper on what you're seeing in terms of who's coming to you to to bid for potential new fleets or any future reactivation. And have we seen that as a difference between sort of oil and gas basins understanding? You don't like to disclose exactly where the fleets are, but as you think about what's going on in the bidding side, what you're seeing from your customers.

Chris Wright -- Chief Executive Officer

I would say it's pretty balanced right now. It's strong across the sector was strong meaning that the economics are good, as they're told, for incremental demand, but the pull is for very small incremental demand. The fleet count -- the fleet cap from the start of the year to today, maybe is nearly 10% growth a little bit fast at the start of the year. Probably moves a few percent from here to the end of the year.

And we sort of model next year and sort of flattish at the end of this year. And there simply isn't, you know, people wanting 20 more fleets next year. I simply don't think they're there. So we expect to see that continued sort of flattish with a slow upwards and active fleet count.

And I would say reasonably balance between oil and gas. The end markets in both are are pretty strong right now. But in both markets, everyone across our customer and just friends, you are current customers. You know the mindset across everyone is it's hard to add incremental supply and it wouldn't be good if we all had a lot of incremental supply, gas, oil and gas production.

And so I think it's a pretty disciplined silver state of affairs in the industry today.

Roger Read -- Wells Fargo Securities -- Analyst

Yes. Thanks for that. And then maybe as a way to tie that into sort of production expectations as we look to the end of this year and next year. You mentioned earlier in the call, challenges for operating efficiency for the industry.

This would tie in a little bit with the labor issues. But if you think about a relatively stable capacity in '23, I mean, does that imply that if we don't get significant operating efficiency improvements, trained labor, etc., that it'll be hard to deliver more wells and more production in '23?

Chris Wright -- Chief Executive Officer

Well, what is the current activity level in sort of like the biggest proxy for what's going to happen to US oil and gas production and the rate at which powered are saying are going underground. Way more important than rig count way. Frankly, it's better than rig count, but really it's how is the sand going underground. That's the metric.

We base production predictions. And right now it's not straight, simple as where is the sand going underground? How is it going? Because there are some there's some details around it. What's the current level of activity is driving today, modest growth in both U.S. oil and natural gas production.

I think we've said at the beginning of this year we expect in seven or 800,000 exit over exit oil production growth this year. I think that's a reasonable estimate. We might be a bit above that, but we might be a bit below that. I think that's a reasonable pace at which we're running right now.

Well, and if you keep going at the current rate, we would see a similar growth rate next year. So I think you'll see, again, probably a little less than 2 million barrels a day of us exit rate, oil production growth this year, probably on track to see a similar level next year. Now, why Dan's gone mad, but, you know, 500 to 1,000,000 barrels a day of exit over exit growth rate next year probably and continued. I should be even more cautious here.

Natural gas is growing and will -- production rate will grow, but again, also at a modest rate and at current activities at next year's plans. I think it continues to grow next year at a modest rate.

Roger Read -- Wells Fargo Securities -- Analyst

Great. Thank you. 

Chris Wright -- Chief Executive Officer

Thanks, Roger.

Operator

Our next question comes from Scott Gruber with Citigroup. Please go ahead with your question.

Scott Gruber -- Citi -- Analyst

Morning. So as we've talked to investors the last couple of quarters, you sensed a general kind of disconnect between market expectations for fleet utilization and the trajectory of fleet profitability. Many initially looked at the 2017, 2018 upcycle as a comp, not saying just how weak that upcycle was. And if you look back at 2011, 2012, for fleet profitability, closer to 30 million, is that a level of profitability possible for the underlying business alone this cycle, separate from the the other businesses? Or does the partnership model or cost inflation prevent you appears to be pushing the profitability along toward the 30 million level that we saw about a decade ago?

Chris Wright -- Chief Executive Officer

It's certainly possible. It's certainly did. But look, it's just supply and demand. It's-- yes.

Whatever fleet profitability, low twenties. Now that will likely drift higher. I suspect it probably does. But yes, it's hard to predict where it goes.

I would say we we would hope it doesn't go to 40 million. If it goes to outrageously high levels, that, of course, will be the start of some unwinding of discipline, but that there's still a lag, there's still a risk in there. The economics look awesome. But then I can't get equipment for over a year.

You know, I still think you see some restraint on that. But we see people that really need activity and are willing to pay for the we've deployed these incremental fleets maybe partially to offset people doing wacky things to get wells online and where they are. And so, yes, we don't know where the fleet profitably is going to go, likely to continue to drift higher in the next in the coming quarters. How much or how for how far? We'll see.

Scott Gruber -- Citi -- Analyst

Got it. Got it. And then how should we think about the contribution from untracked businesses? It looked like a nice step up in that contribution in Q. So if you think about 3Q, 4Q, and then to '23, will the non-frac businesses your profitability contribution expand at a at a faster pace, the underlying business, the more in line? Yes.

How should we think about the cadence of that contribution?

Michael Stock -- Chief Financial Officer

No, you don't take the strike. The Franklins is the one that expanded a bit quicker. Yes, they're not very good [Inaudible]. The majority of us saying get say monthly, picked up from one and really come together, go through it, frankly.

Yes. That's really a small portion of sort of additional sort of like, as you say, sales that go to. So I would say, you know, kind of the first half, the other one, Scott, is the one that's expanded at a faster rate.

Scott Gruber -- Citi -- Analyst

And that would be expected to continue to lead in the second half.

Michael Stock -- Chief Financial Officer

I mean, that's a fair assumption. I think so.

Scott Gruber -- Citi -- Analyst

OK. [Inaudible]

Operator

Our next question comes from Connor Lynagh with Morgan Stanley. Please go ahead with your question.

Connor Lynagh -- Morgan Stanley -- Analyst

Yes, thanks. Just a question around capital allocation. And I frankly asked this a little bit facetiously, but given where your stock is and just how cheap the valuation is relative to these, you know, leading edge numbers that you're putting up here, why spend anything but the better level of maintenance capex and divert not divert the rest into into buybacks? What's your thinking around that?

Chris Wright -- Chief Executive Officer

It's very much a dialog we have internally. Very much. And and I think one can make -- you could make an argument for that. The question is, we're always playing for the long term our success or growing above average, not just our industry but the S&P 500 return on capital employed since we launched this business tax return on cash investments I think is closely tied to the great partnerships we've had with our customers that want to work with us for the long run, that want to make long term decisions together with us.

So it's very important that we run this business in a way that keeps us the best partner for employees available. Best competitive advantage in our business definitely helps us to deliver elevated returns over the long run. So we'll always continue to invest, keep that competitive advantage. But you're right, today, the attractiveness.

Fortunately, we're coming into a place where we're going to have the free cash flow to pursue a bit of an all of the above approach. But yes, at today's valuations stuff, buybacks be pretty compelling.

Connor Lynagh -- Morgan Stanley -- Analyst

And just to clarify about how you're thinking about the balance sheet in executing those buybacks, I've obviously got a fair bit of capex for the duration of the year here. And it sounds like probably a decent amount of the market remains strong at 2023. Would you feel comfortable levering up a little bit in order to execute buybacks based on where the share price is trading? Or is that something you think of as more of excess free cash flow is what you're going to use for that program?

Chris Wright -- Chief Executive Officer

No. The opportunity today is compelling the window of free cash flow in the very near future. We're quite confident in. So, no, buybacks.

Timing matters. I can say the same thing about capital investment. People tend to invest hugely in their business in capex and buybacks when their business is just killing it and emitting cash. But that's not the best time to invest in capex in your business and in buybacks.

So no, you have to be willing to do those with a lag. And we've talked about this since our IPO at the beginning of cycles is the best time to invest capex in your business. And when the share price is most located is the best time to do buybacks as long as you're not taking balance sheet risk, right? So the very start of the downturn, you don't know how ugly it's going to be, but you've got to be careful or cautious there. But but no, the timing of these things is not tied.

You're not specifically tied to the timing of cash flow.

Connor Lynagh -- Morgan Stanley -- Analyst

Appreciate the context. I'll turn it back.

Operator

Our next question comes from Derek Pothaser with Barclays. Please go ahead with your question.

Unknown speaker

Hey. Good morning, guys. Wanted to hit on pricing a little bit more. Could you talk about where the reactivated tier two diesel fleets were priced relative to the next gen fleets price at the end of last year and earlier this year? How much does this raise the bar for next gen pricing, recontracting and what runway do you have now for profitability expansions that these are repriced in the next six to 12 months?

Chris Wright -- Chief Executive Officer

Yeah. I got to be cautious. We always want to be careful about not giving specific projections because we don't know the future. But you make a good point, Derek.

Right now these these reactivation fleets are obviously contracting and very strong economics. Very strong economics. And if you said, hey, let's take the exact same market environment and add a next generation fleet with huge fuel cost savings and added and lower emissions. Yes, the value of that is is enormous.

And will that impact repricing of fleets? Sure. And of course it will.

Unknown speaker

Got it. That's helpful. Switching over to the digiFrac. So you'll have four fleets by early next year.

You talked about the pressure on the power side. Would you supplement with third party turbine providers or grid power or battery power to help get you to where you need to be with those empty you natural gas dependance?

Ron Gusek -- President

But look, I think we certainly contemplate most of the above. And this is never a turbine. We don't view that as an appropriate solution to put out in the field. So I don't think that's the right answer for us.

But, you know, in terms of an opportunity to use some amount of great power, I think that's certainly on the table and and a conversation we're having with some of the potential digiFrac customers. Call it a bit of a hybrid approach in terms of how the power is ultimately provided on location. As you know, there are some some folks in the third party business that have natural gas reserve now have come to the same conclusion we have around the emissions profile from that technology. And and so those would also represent a potential option for us as we think about a piece of the digiFrac going forward.

Unknown speaker

Got it. That's helpful color. Last one, if I could squeeze it in just on the unconventional geothermal investment. You talk about how big of an opportunity this could be for you over the next few years, three to five.

Could you frame frame that and maybe put some numbers around it for us?

Chris Wright -- Chief Executive Officer

I think too early to do that. But obviously we did the investment because we foresaw there was a reasonable chance that this would be meaningful business. So we're excited about that opportunity. Too early to really give numbers around that.

But yes, we're we're obviously not doing it for show or for window dressing. We believe in that business. We believe it can grow to some scale.

Unknown speaker

That's helpful. Thanks, guys. I'll turn it over.

Operator

Our next question comes from Keith Mackey with RBC Capital Markets. Please go ahead with your question.

Keith Mackey -- RBC Capital Markets -- Analyst

Hey, good morning and thanks. Just curious if you can talk a little bit more about what portion of that low forties fleet count would be non next generation fleets under your definition, which I think is tier two dual plus.

Chris Wright -- Chief Executive Officer

Doesn't give me specific numbers. It's definitely less than half, maybe meaningfully less than half. But it's funny. It's still it's still a meaningful flight.

Keith Mackey -- RBC Capital Markets -- Analyst

OK. Got it. Thanks for that. And under next year's initial look at capex of close to 2022 levels.

Can you talk a bit more about how many digiFrac fleets that might contemplate?

Michael Stock -- Chief Financial Officer

When we look at the majority of the candidates above and beyond, this race is really is kind of a [Inaudible] digiFrac. I gave you those numbers to give you kind of a general idea of where things could go. Obviously, those planes will actually be made one customer at a time, but we'll announce them as we go. But yes, the house estimate is that the majority that will be spent on the digiFrac.

Keith Mackey -- RBC Capital Markets -- Analyst

OK. Thanks very much. I'll turn it back.

Operator

Our next question comes from of a Waqar Syed with AltaCorp Capital. Please go ahead with your question.

Waqar Syed -- ATB Capital Markets -- Analyst

Thank you. Congrats, gentlemen. Great quarter. First of all, Michael, just a quick housekeeping question.

Number one, do you envision [Inaudible], of course, in Q3? And if so, what would be the size and, H2, would that be second half? Would that be a source of cash from working capital or still use of cash?

Michael Stock -- Chief Financial Officer

Sorry, Waqar. You broke up while you asking. I think you're making [Inaudible].

Waqar Syed -- ATB Capital Markets -- Analyst

Yes. So in Q3, do you expect any fleet start-up cost and if so, what size?

Michael Stock -- Chief Financial Officer

Yes, we do. And I think, it'll be probably similar to Q2, 20 in Q3, Q4 like that. 

Waqar Syed -- ATB Capital Markets -- Analyst

And then working capital, do you expect that to be a source of cash in H2, second half?

Michael Stock -- Chief Financial Officer

It'll be a slight use of cash flow, use of probably balances in Q4. We've had the seasonal the normal seasonal rollover, seasonal weather all over. It might be a small use of cash in Q3 and possibly a small bounce in Q4.

Waqar Syed -- ATB Capital Markets -- Analyst

Thank you. And just, Chris, just one last question from me. With this recent pullback in oil prices, have you seen any change in discussions with your customers in terms of the direction of leading edge pricing or in any way other concerns about at reducing activity or anything like that, anything negative on pricing and activity.

Chris Wright -- Chief Executive Officer

No, that's nothing there. I don't think fullbacks being significant enough in the out years, it's not meaningful. So there's no changes. No changes yet.

Waqar Syed -- ATB Capital Markets -- Analyst

OK. Thank you very much. That's all from me today, sir.

Operator

[Operator instructions]. Our next question comes from Marc Bianchi with Cowen. Please go ahead with your question.

Marc Bianchi -- Cowen and Company -- Analyst

Hey, thanks. I want to go back to the '23 capex if it is flat or slightly down. Michael, could you just give us the buckets? Because I'm assuming that the maintenance numbers going up because of just the active fleet counts going up, but maybe just level set us on the three buckets or however you want to describe it for '23.

Michael Stock -- Chief Financial Officer

Yes, it's really a soft circle. I think you sort of have a rough rule of sort of three and a half million of fleet, kind of in that low forties. Obviously, we've got -- you've got inflationary pressures on the license cap, etc., but that's getting -- as we as we improve equipment, we're doing our best to offset that. I think if you take those binders, the having the balance is really associated with all of the decisions that we make up to the [Inaudible] the majority we spent on the deferring.

Marc Bianchi -- Cowen and Company -- Analyst

Got you. OK, great. And one other -- pardon. Go ahead.

Michael Stock -- Chief Financial Officer

That could easily change. If the market changes, we have a lot of flexibility in kind of moving capex and adjusting capex as markets change.

Marc Bianchi -- Cowen and Company -- Analyst

Yes, we saw that this quarter. Right? I guess the the other one for you, Michael, is the 2022 and 2023 cash taxes. Can you give us any sense of what we should be assuming there? Because I'm assuming that's quite a bit different from the book tax. We'll see.

Michael Stock -- Chief Financial Officer

No written cash is relatively minimal. Stick it out of here. Probably 10 to 15 million. At this point, you similar from both taxes.

Obviously we've got a fairly large valuation allowance related to the TRA to protect that 2023. We'll probably talk about that at the next -- as I haven't called it out. I'm going to see a little time with my tax director on some of the interplay there.

Marc Bianchi -- Cowen and Company -- Analyst

OK. But not a meaningfully different number, perhaps in the second half as we're just trying to triangulate on cash flow.

Michael Stock -- Chief Financial Officer

Yes. I would say in general, I think it will be in cash tax payments situation next year. So yes, I think, next year will be a drag on that to the extent we have a multiyear.

Marc Bianchi -- Cowen and Company -- Analyst

Yes. OK. Super. And then the last one for me is just kind of higher level on, you know, customer budgets here.

I mean, the EMPs have absorbed a lot of inflation over the course of the year. And there's at least for the publics, there's a commitment to not increase capex too much. Are you seeing any customers, adjust plans and activity be cut because of the amount of inflation that they've seen? And how are you thinking about that interplay and to '23.

Chris Wright -- Chief Executive Officer

I would say people's goals are based on what they want to do with their production. They want to keep production flat, have very modest production growth. I think that's generally the target is the activity levels. And then they want to work as efficiently as they can to get those activity levels done.

And obviously, frac pricing is a piece of that, but it's just the piece, right. You could you can pay a higher pricing, but pricing, Liberty versus someone else. But that will come out sooner and the efficiency of operations is greater. There are some offsetting cost savings from that.

So, no, I think what producers are keeping relatively anchored is their activity and production plans.

Marc Bianchi -- Cowen and Company -- Analyst

Got it. OK. Thanks. I'll turn it back.

Chris Wright -- Chief Executive Officer

Thanks, Mark. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Wright for any closing remarks.

Chris Wright -- Chief Executive Officer

Yes. I just want to say thanks for everyone's time today, for following in Liberty's business and for being involved in the energy business. Huge shout out to everyone on Team Liberty that 24 seven is working hard to make our business successful and to make the world go round. Thanks all to our customers and suppliers and everyone.

We'll talk to you next quarter.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Anjali Voria -- Strategic Finance and Investor Relations Lead

Chris Wright -- Chief Executive Officer

Michael Stock -- Chief Financial Officer

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Steven Gandara -- Stifel Financial Corp. -- Analyst

Arun Jayaram -- J.P. Morgan -- Analyst

Ron Gusek -- President

Neil Mehta -- Goldman Sachs -- Analyst

John Daniel -- Daniel Energy Partners -- Analyst

Roger Read -- Wells Fargo Securities -- Analyst

Scott Gruber -- Citi -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Unknown speaker

Keith Mackey -- RBC Capital Markets -- Analyst

Waqar Syed -- ATB Capital Markets -- Analyst

Marc Bianchi -- Cowen and Company -- Analyst

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