Prospectus Summary
PROSPECTUS SUMMARY This summary contains basic information about us and the offering. Because it is a summary, it does not contain all the information that you should consider before investing in our Class A common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and the accompanying notes included elsewhere in this prospectus.Except as otherwise indicated or required by the context, all references in this prospectus to “Liberty Inc.,” the “Company,” “we,” “us” or “our” relate to Liberty Oilfield Services Inc. and its consolidated subsidiaries after giving effect to the corporate reorganization contemplated immediately prior to the completion of this offering. References in this prospectus to “selling shareholders” refer to those entities identified as selling shareholders in “Principal and Selling Shareholders.” References in this prospectus to “Liberty LLC” refer to Liberty Oilfield Services New HoldCo LLC, the entity which will own our operating subsidiaries, Liberty Oilfield Services LLC and LOS Acquisition Co I LLC (as combined, our “accounting predecessor”). References in this prospectus to “Liberty Holdings” refer to Liberty Oilfield Services Holdings LLC, the entity which currently owns our operating subsidiaries.
Except as otherwise indicated, all information contained in this prospectus assumes the underwriters do not exercise their option to purchase additional shares and excludes Class A common stock reserved for issuance under our long-term incentive plan. While the equipment and amount of HHP required for a customer project varies, we calculate our total HHP, as used in this prospectus, by multiplying our number of fleets by 40,000 HHP.
LIBERTY OILFIELD SERVICES INC.
Overview
We are a rapidly growing independent provider of hydraulic fracturing services to onshore oil and natural gas exploration and production (“E&P”) companies in North America. We have grown organically from one active hydraulic fracturing fleet (40,000 HHP) in December 2011 to 11 active fleets (440,000 HHP) in January 2017. The demand for our hydraulic fracturing services exceeds our current capacity, and we expect, based on discussions with customers, to deploy six additional fleets (240,000 HHP) by the end of 2017, for a total of 17 active fleets (680,000 HHP). Our additional fleets consist of one new fleet under construction and five fleets we recently acquired and are upgrading to our specifications. We provide our services primarily in the Permian Basin, the Denver-Julesburg Basin (the “DJ Basin”), the Williston Basin and the Powder River Basin and expect to deploy one or more fleets for customers in the Eagle Ford Shale in the second half of 2017. Our customer base includes a broad range of E&P companies, including Extraction Oil & Gas, Inc., SM Energy Company, Centennial Resource Development, Inc., Continental Resources, Inc., Devon Energy Corporation, Noble Energy, Inc. and Anadarko Petroleum Corporation.
Our founders and existing management were pioneers in the development of data-driven hydraulic fracturing technologies in shale plays. Prior to founding Liberty Holdings, the majority of our management team founded and built Pinnacle Technologies, Inc. (“Pinnacle Technologies”) into a leading fracturing technology company. In 1992, Pinnacle Technologies developed the first commercial hydraulic fracture mapping technologies, analytical tools that played a major role in launching the shale revolution. Our extensive experience with fracture technologies and customized fracture design has enabled us to develop new technologies and processes that provide our customers with real time solutions that significantly enhance their completions. These
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technologies include hydraulic fracture propagation models, reservoir engineering tools, large, proprietary shale production databases and multi-variable statistical analysis techniques. Taken together, these technologies have enabled us to be a leader in hydraulic fracture design innovation and application.
We believe the following characteristics distinguish us from our competitors and are the foundations of our business: forming ongoing partnerships of trust and innovation with our customers; developing and utilizing technology to maximize well performance; and promoting a people-centered culture focused on our employees, customers and suppliers. We have developed strong relationships with our customers by investing significant time in fracture design collaboration, which substantially enhances their production economics. Our technological innovations have become even more critical as E&P companies have increased the completion complexity and fracture intensity of horizontal wells. We are proactive in developing innovative solutions to industry challenges, including developing: (i) our proprietary databases of U.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; and (iii) our hydraulic fracturing fluid system tailored to the reservoir properties in the DJ Basin which materially reduces completion costs without compromising production. We foster a people-centered culture built around honoring our commitments to customers, partnering with our suppliers and hiring, training and retaining people that we believe to be the best talent in our field, enabling us to be one of the safest and most efficient hydraulic fracturing companies in the United States.
While our industry experienced a significant downturn from late 2014 through the first half of 2016, we significantly increased our capacity while maintaining full utilization. We performed approximately 50% more hydraulic fracturing stages in 2015 than in 2014 and approximately 20% more hydraulic fracturing stages in 2016 than in 2015. During the downturn, total U.S. marketable fracturing capacity declined between 40% and 60%. In contrast, over 95% of our capacity was active and deployed during this period, and we expect to maintain this level of utilization through the next 12 months as we deploy five upgraded fleets and one new fleet. We believe our utilization reflects the strong partnerships we have built with our customers as well as the quality of our assets, employees and services.
Industry Trends and Market Recovery
Demand for our hydraulic fracturing services is predominantly influenced by the level of drilling and completion by E&P companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our hydraulic fracturing services is driven by the completion of hydraulic fracturing stages in unconventional wells, which, in turn, is driven by several factors including rig count, well count, service intensity and the timing and style of well completions.
Overall demand and pricing for hydraulic fracturing services in North America has declined from their highs in late 2014 as a result of the downturn in hydrocarbon prices and the corresponding decline in E&P activity. While the pricing for our hydraulic fracturing services declined substantially and has not returned to its 2014 highs, the industry has witnessed an increase in demand for these services in the third and fourth quarters of 2016 as hydrocarbon prices have recovered somewhat, and we are currently experiencing price increases. We expect this demand to continue to increase as E&P companies increase drilling and completion activities. According to Baker Hughes Incorporated’s (“Baker Hughes”) North American Rig Count, the number of active total rigs in the United States reached a recent low of 404, as reported on May 27, 2016, but has since increased by 63% to 658 active rigs as reported on December 30, 2016. If hydrocarbon prices stabilize at current levels or rise further, we expect to see further increased drilling and completion activity in the basins in which we operate.
In addition to increased industry activity levels, we expect to benefit from increased horizontal drilling as well as other long-term macro industry trends that improve drilling economics such as (i) greater rig efficiencies
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that result in more wells drilled per rig in a given period and (ii) increased complexity and service intensity of well completions, including longer wellbore laterals, more and larger fracturing stages and higher proppant usage per well.
These industry trends will directly benefit hydraulic fracturing companies like us that have the expertise and technological ability to execute increasingly complex and intense well completions. Given the improved returns that E&P companies have reported for new well completions, we expect these industry trends to continue.
We believe industry contraction and the resulting reduction in total U.S. marketable fracturing capacity since late 2014 will benefit us as industry demand increases. Industry sources report this capacity has declined between 40% and 60% from its peak of approximately 17 million HHP in 2014 and approximately 75% of this capacity is currently active and deployed. A number of our competitors have filed for bankruptcy or have otherwise undergone substantial debt restructuring, significantly reducing available capital and their ability to quickly redeploy fleets. In contrast, our rigorous preventive maintenance program, in addition to scheduled and in-process fleet additions and upgrades, has positioned us well to benefit from improving market dynamics. During the recent downturn, many oilfield service companies significantly reduced their employee headcounts, which will constrain their ability to quickly reactivate fleets. Over the same period, we retained our high quality and experienced employees, did not conduct lay offs and substantially increased our workforce.
Our Competitive Strengths
We believe that the following strengths will position us to achieve our primary business objective of creating value for our shareholders:
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cycle view during the equipment design and fabrication process enables us to reduce operational downtime and maintenance costs, while enhancing our ability to provide reliable, consistent service. Our modern fleets have an average age of approximately 3.5 years. We have purchased or ordered eight new fleets (320,000 HHP) since 2012, including our newest fleet due to arrive in the second quarter of 2017. In 2016, we took advantage of the industry downturn and more than doubled our capacity through the opportunistic acquisitions of nine fleets (360,000 HHP) built within the last five years and are investing significant capital to upgrade them to our specifications. Taken together, we expect to have 17 fleets (680,000 HHP) deployed to customers before the end of 2017. We believe that our modern, well-maintained fleets allow us to provide a high level of service to our customers. In addition, we have built a strong relationship with the assembler of our custom-designed hydraulic fracturing fleets and believe we will continue to have timely access to new, high capability fleets as we continue to grow.
Our Business Strategy
We believe that we will be able to achieve our primary business objective of creating value for our shareholders by executing on the following strategies:
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primarily conduct operations grew by 83%, from a low of 201 active rigs to 368 active rigs over the same period. In addition to the recent increase in rig count, we have witnessed a longer term trend in increased horizontal drilling activity and intensity as evidenced by the proportion of active horizontal rigs today relative to the number of total active rigs and the amount of proppant utilized per well, which is a measure of fracturing intensity. For example, according to Baker Hughes, as reported on December 30, 2016, horizontal rigs accounted for approximately 81% of all rigs drilling in the United States, up from 74% as of December 31, 2014. Further, Coras Oilfield Research (“Coras”) reports that the amount of proppant used per well has grown from six million pounds per well in 2014 to over ten million pounds per well in 2016. Our services are essential to the development of oil and natural gas wells in the major shale plays that we serve in the United States. As a result of these trends of increased activity and intensity, the prices we are able to charge for our hydraulic fracturing services have begun to recover and we expect further price strengthening.
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net proceeds from this offering, and we will have no outstanding debt immediately after this offering. We expect to finance our organic growth primarily with cash generated from our operations as well as proceeds from this offering.
Recent Developments
Titan Frac Acquisition On February 9, 2017, we entered into a definitive agreement to purchase hydraulic fracturing assets (112,500 HHP) owned by Titan Frac Services LLC (the “Titan Frac Acquisition”). We expect 2017 capital expenditures of approximately $5 million to upgrade these assets to our specifications. We expect to close the Titan Frac Acquisition in late February 2017, at which time we will have a total capacity of approximately 752,500 HHP, consisting of 18 hydraulic fracturing fleets plus additional support HHP.
Preliminary Results for the Three Months Ended December 31, 2016 Although our results of operations for the three months ended December 31, 2016 are not yet final, the following unaudited information reflects our preliminary expectation with respect to such results based on information currently available to management.
Based on the preliminary results, we estimate that revenue, on an actual basis, will be within a range of $155 million to $157 million for the three months ended December 31, 2016, as compared to $101 million for the same period of 2015. This increase is primarily attributable to an increase in the number of hydraulic fracturing fleets deployed in the fourth quarter of 2016 as compared to the fourth quarter of 2015.
Based on the preliminary results, we estimate that cost of services (excluding depreciation and amortization) will be within a range of $132 million to $134 million for the three months ended December 31, 2016, as compared to $88 million for the same period of 2015. This increase is attributable to incremental costs of increased activity levels, primarily associated with the additional fleets that we deployed during 2016.
Based on the preliminary results, we estimate that general and administrative expenses will be within a range of $12 million to $14 million for the three months ended December 31, 2016, as compared to $13 million for the same period of 2015. In total, our general and administrative expenses remained relatively constant, as a $6.4 million decrease in bad debt expense was offset by increases in start-up and asset acquisition costs of $2.2 million and $1.6 million, respectively, as well as other expenses associated with our expanded operations in the fourth quarter of 2016 as compared to the fourth quarter of 2015.
Based on the preliminary results, we estimate that depreciation and amortization expenses will be approximately $11 million for the three months ended December 31, 2016, as compared to $10 million for the same period of 2015. This increase is primarily attributable to depreciation and amortization related to the additional hydraulic fracturing fleets deployed during the second half of 2016.
Based on the preliminary results, we estimate that interest expense will be approximately $2 million for the three months ended December 31, 2016, as compared to $1 million for the same period of 2015. This increase is primarily attributable to higher interest rates on borrowings under our Credit Facility (as defined herein) for the fourth quarter of 2016 as compared to the fourth quarter of 2015, partially offset by lower interest expense related to our capital leases.
Based on the preliminary results, we estimate that net loss will be within a range of $2 million to $4 million for the three months ended December 31, 2016, as compared to a net loss of $10 million for the same period of 2015. The improved results are primarily attributable to the factors discussed above and a $2.6 million gain on the sale of certain assets recognized in the fourth quarter of 2016.
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Based on the preliminary results, we estimate that Adjusted EBITDA will be within a range of $10 million to $12 million for the three months ended December 31, 2016, as compared to a $7 million for the same period of 2015. The increase primarily relates to higher revenue generated from increased activity during the fourth quarter of 2016 as compared to the fourth quarter of 2015, partially offset by incremental costs of owning and operating additional hydraulic fracturing fleets.
EBITDA and Adjusted EBITDA Description and Reconciliation EBITDA and Adjusted EBITDA are not financial measures presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as new fleet or new basin start-up costs, costs of asset acquisitions, gain or loss on the disposal of assets, asset impairment charges, bad debt reserves and non-recurring expenses that management does not consider in assessing ongoing performance.
EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that we believe are useful to external users of our combined financial statements, such as industry analysts, investors, lenders and rating agencies 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 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.
The following table presents a reconciliation of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three months ended December 31, 2016 (estimated) and 2015 (actual):
The preliminary financial information included in this registration statement reflects management’s estimates based solely upon information available to us as of the date of this submission and is the responsibility of management. The preliminary financial results presented above are not a comprehensive statement of our financial results for the three months ended December 31, 2016. In addition, the preliminary financial results presented above have not been audited, reviewed, or compiled by our independent registered public accounting firm Deloitte & Touche LLP. Accordingly, Deloitte & Touche LLP does not express an opinion or any other form of assurance with respect thereto and assumes no responsibility for, and disclaims any association with, this information. The preliminary financial results presented above are subject to the completion of our financial closing procedures, which have not yet been completed. Our actual results for the three months ended December 31, 2016 are not available and may differ materially from these estimates. Therefore, you should not place undue reliance upon these preliminary financial results. For instance, during the course of the preparation of the
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respective financial statements and related notes, additional items that would require material adjustments to be made to the preliminary estimated financial results presented above may be identified. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. Accordingly, the revenue and net income (loss) for any particular period may not be indicative of future results. See “Cautionary Note Regarding Forward-Looking Statements.”
Corporate Reorganization
We were incorporated as a Delaware corporation in December 2016. Following this offering and the related transactions, we will be a holding company whose only material asset will consist of membership interests in Liberty LLC. Liberty LLC owns all of the outstanding equity interest in the subsidiaries through which we operate our assets. After the consummation of the transactions contemplated by this prospectus, we will be the sole managing member of Liberty LLC and will be responsible for all operational, management and administrative decisions relating to Liberty LLC’s business and will consolidate financial results of Liberty LLC and its subsidiaries.
In connection with the offering:
After giving effect to these transactions and the offering contemplated by this prospectus, Liberty Inc. will own an approximate % interest in Liberty LLC (or % if the underwriters’ option to purchase additional
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shares is exercised in full), and the Liberty Unit Holders will own an approximate % interest in Liberty LLC (or % if the underwriters’ option to purchase additional shares is exercised in full) and all of the Class B common stock. Please see “Principal and Selling Shareholders.”
Each share of Class B common stock has no economic rights but entitles its holder to one vote on all matters to be voted on by shareholders generally. Holders of Class A common stock and Class B common stock will vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our amended and restated certificate of incorporation. We do not intend to list Class B common stock on any exchange.