Global Decarbonization And Cost Pressures Will Weaken Fossil Fuel Prospects

Key Takeaways

• Declining fossil fuel demand, regulatory pressure, and resource exhaustion threaten long-term revenue, margins, and industry relevance.
  
• Technological change and input cost inflation risk eroding profitability and limiting Liberty Energy's ability to meet shareholder expectations.
  
• Successful tech innovation, diversified energy solutions, and strong customer relationships position Liberty Energy for resilient earnings and improved profitability despite industry volatility.

Catalysts

Provides hydraulic fracturing services and related technologies to onshore oil and natural gas exploration, and production companies in North America.

• The ongoing acceleration of global decarbonization and surging investment in renewables threaten to depress long-term demand for fossil fuel extraction and associated services, leading to the very real possibility that Liberty Energy's revenue base will stagnate or decline beyond the next cycle as E&P customers shift capital away from oil and gas.
  
• Tougher environmental regulations and growing pressure on carbon emissions are expected to steadily increase Liberty Energy's operational costs and capital spending requirements, reducing long-term net margins and heightening the risk of regulatory disruptions to core business lines.
  
• Heavy dependence on mature North American shale plays, which are already showing signs of resource exhaustion and increased competition, puts Liberty Energy at risk of revenue contraction as the number of prime drilling locations continues to decrease and competitive pricing intensifies.
  
• Rapid technological advancements in well completion and drilling efficiency industry-wide are likely to reduce aggregate demand for hydraulic fracturing fleets, undermining the need for Liberty's high-tech but capital-intensive fleet and limiting future earnings growth even as legacy equipment is retired.
  
• Persistent cost inflation in key inputs such as sand, water, labor, and specialized equipment may outpace Liberty Energy's ability to push through price increases, compressing margins, eroding profitability, and making it increasingly difficult for the company to deliver on shareholder return expectations.

Liberty Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Liberty Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Liberty Energy's revenue will decrease by 2.1% annually over the next 3 years.
• The bearish analysts are not forecasting that Liberty Energy will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Liberty Energy's profit margin will increase from 5.3% to the average US Energy Services industry of 7.4% in 3 years.
• If Liberty Energy's profit margin were to converge on the industry average, you could expect earnings to reach $283.3 million (and earnings per share of $1.86) by about August 2028, up from $216.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, down from 8.2x today. This future PE is lower than the current PE for the US Energy Services industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 2.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Liberty Energy Future Earnings Per Share Growth

Risks

• Liberty Energy's demonstrated ability to increase revenue and adjusted EBITDA by 7% and 8% respectively, even during an industry-wide activity slowdown, highlights operational efficiencies and market share gains that could help support strong earnings and mitigate some cyclical revenue pressures.
  
• The company's successful rollout of technologically advanced assets like digiPrime and digiFleet platforms, with extended asset life and industry-leading efficiency, reduces operating costs and capital expenditures over time-supporting improved net margins and stronger free cash flow over the long term.
  
• The strategic expansion into integrated power solutions, including distributed natural gas generation and future small modular nuclear deployments through the Oklo partnership, provides Liberty Energy with diversified, long-duration growth opportunities beyond hydraulic fracturing, potentially enhancing both future revenue and earnings stability.
  
• Strong customer relationships with major E&P and industrial clients, combined with long-term contracts and industry alliances, increase utilization resilience and provide a degree of earnings and cash flow visibility-even in the face of periodic market softness or commodity price volatility.
  
• Industry trends toward higher attrition of aging diesel fleets, accelerating the retirement of less efficient competitors, may tighten supply more quickly than expected and drive a faster recovery in pricing and fleet utilization for Liberty Energy's advanced assets, supporting a rebound in both revenue and profitability when the market turns.

Valuation

• The assumed bearish price target for Liberty Energy is $10.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Liberty Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $283.3 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $10.97, the bearish analyst price target of $10.0 is 9.7% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.