2023-12-07 10:58:08 ET
Summary
- Liberty Energy reported better-than-expected Q3 2023 financial results, beating revenue and earnings estimates.
- The company provides hydraulic fracturing services to exploration companies in the U.S. oil & gas industry.
- Liberty Energy stock may be undervalued as the company continues to focus on equipment efficiency.
- I'm Bullish [Buy] on Liberty Energy shares at around $18.50.
A Quick Take On Liberty Energy
Liberty Energy Inc. ( LBRT ) reported its Q3 2023 financial results on October 18, 2023, beating both revenue and consensus earnings estimates.
The firm provides hydraulic fracturing services to exploration companies in the U.S. oil & gas industry.
Given that my discounted cash flow calculation indicates the stock may be undervalued, combined with the firm’s positioning in a market that will reward efficiency in 2024, my outlook on LBRT is Bullish [Buy] at around $18.50.
Liberty Energy Overview And Market
Liberty Energy Inc. began operations in late 2011 and provides hydraulic fracturing to E&P (Exploration & Production) companies in the oil & gas industry located onshore in North America.
Management is headed by CEO Chris Wright, who has been CEO since 2016 and CEO of Liberty Holdings since its formation in 2011. Wright was previously the founder and CEO of Pinnacle Technologies, which commercialized a system for tiltmeter and micro-seismic fracture mapping.
The company provides its services primarily in the Permian Basin, Denver-Julesburg Basin, the Williston Basin, the Eagle Ford Shale, and the Powder River Basin.
Liberty seeks customers from among E&P firms in the basins mentioned above through its direct sales and business development efforts.
According to a 2021 market research report by Fortune Business Insights, the global hydraulic fracturing market was an estimated $11.7 billion in 2020 and is forecast to reach $28.9 billion by 2028.
This represents a forecast CAGR of 9.5% from 2021 to 2028.
Major competitive or other industry participants include:
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Halliburton
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Schlumberger
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Baker Hughes
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Ovivo
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Aquatech International
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Veolia.
Liberty Energy’s Recent Financial Trends
Total revenue by quarter (blue columns) has plateaued in recent quarters; Operating income by quarter (red line) has also flatlined recently:
Seeking Alpha
Gross profit margin by quarter (green line) has remained steady in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have been stable:
Seeking Alpha
Earnings per share (Diluted) have also reached a plateau in recent quarters:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, LBRT’s stock price has risen 26.02% vs. that of the Baker Hughes Company ( BKR ) gain of 15.35%:
Seeking Alpha
For balance sheet results, the firm ended the quarter with $26.6 million in cash and equivalents and $223.0 million in total debt, all of which was categorized as long term.
Over the trailing twelve months, free cash flow was $367.4 million, during which capital expenditures were $590.2 million. The company paid $29.7 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Liberty Energy
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 0.8 |
Enterprise Value / EBITDA | 3.1 |
Price / Sales | 0.7 |
Revenue Growth Rate | 35.8% |
Net Income Margin | 12.6% |
EBITDA % | 24.9% |
Market Capitalization | $3,350,000,000 |
Enterprise Value | $3,770,000,000 |
Operating Cash Flow | $957,600,000 |
Earnings Per Share (Fully Diluted) | $3.44 |
Forward EPS Estimate | $3.27 |
Free Cash Flow Per Share | $2.10 |
SA Quant Score | Strong Buy - 4.84 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
GuruFocus
Based on the DCF, the firm’s shares would be valued at approximately $24.24 versus the current price of $18.83, indicating they are potentially currently undervalued.
As a reference, a relevant partial public comparable would be much larger Baker Hughes:
Metric (Trailing Twelve Months) | Baker Hughes | Liberty Energy | Variance |
Enterprise Value / Sales | 1.5 | 0.8 | -46.9% |
Enterprise Value / EBITDA | 9.8 | 3.1 | -68.5% |
Revenue Growth Rate | 18.5% | 35.8% | 93.3% |
Net Income Margin | 6.9% | 12.6% | 83.5% |
Operating Cash Flow | $3,030,000,000 | $957,600,000 | -68.4% |
(Source - Seeking Alpha.)
Despite a much higher growth rate and higher net income margin, Liberty is being valued by the market at lower multiples than Baker Hughes.
Commentary On Liberty Energy
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted the firm’s strong results despite a soft N. American fracking activity market.
The one-year Baker Hughes U.S. Oil Rig count shows a steady downward trend in recent quarters, as the chart illustrates below:
Investing.com
The oilfield industry has been subject to the discipline of major E&P firms, avoiding the mistakes of others in past years by focusing on efficient capital allocation and eschewing a market share grab at the expense of profits.
Management reduced its active fleet count by one fleet and expects normal seasonal softness in Q4 but doesn’t plan to idle additional fleets at least through Q1 2024.
I prepared a chart showing the frequency of various keywords and terms used by management and analysts from the most recent conference call:
Seeking Alpha
The results show a moderate amount of negativity due to the prevalence of negative terms such as "recession," "uncertain," "challenge," "headwind," "macro," and "volatile."
Analysts questioned the leadership about guidance, digiFleet activity and market conditions.
Management was relatively conservative in its guidance for Q4 due to typical seasonal factors.
The feedback on its digiFleets (digiPrime pumps) has been very positive due to their higher power density and lower fuel consumption profile.
On market conditions, customers are focused on efficiency and cost reductions, so management expects pricing to remain stable but for the firm to gain market share due to its technology deployment in its fleets.
For the quarter’s results, total revenue for Q3 2023 rose by 2.3% year-over-year, while gross profit margin increased by 3.7%.
Selling and G&A expenses as a percentage of revenue increased by 0.3% YoY, and operating income grew by 11.7%.
The company's financial position is reasonably strong, with liquidity against its long-term-only debt supported by very strong free cash flow.
Looking ahead, 2023 consensus revenue growth suggests a 14.7% increase over 2022, which would represent a significant downturn in growth compared to 2022’s growth rate over 2021.
Management’s ability to improve the fleet with higher power density pumps that are more energy efficient is a plus.
Given my discounted cash flow calculation indicates the stock may be undervalued combined with the firm’s positioning in a market that will reward efficiency, my outlook on LBRT is Bullish [Buy] at around $18.50.
For further details see:
Liberty Energy's Focus On Efficiency May Carry It Through 2024