Q1 2020 Earnings Call
Good day and welcome to the independence contract drilling first quarter 2020 conference call. All participants will be in listen only mode. So do you need assistance. Please signal conference specialist by pressing the star to you followed by zero. After todays presentation, there will be an opportunity to ask questions to ask a question you May press star.
Then one way or Touchtone phone withdraw your question. Please press Star then too. Please note that this event that's being recorded I would now like to turn the conference over to fill up choice Executive Vice President and Chief Financial Officer of Independence contract drilling. Please go ahead Sir.
Good morning, everyone. Thank you for joining us today does just to discuss I see these first quarter 2020 result.
With me today that the Guy gets our president and Chief Executive Officer.
Before we began oh <unk> I would like to remind all participants that our comments today will include forward looking statements.
Subject to certain risks and uncertainties.
A number of factors and uncertainties could cause actual results in future periods to differ materially from what we talk about today.
Our complete discussion of these risks we encourage you to read the Companys earnings release in our documents on file with the FCC.
In addition, we refer to non-GAAP measures during the call.
Please refer to the earnings release in our public filings for a full reconciliation.
Net loss to adjusted that lost EBITDA adjusted EBITDA for definitions of our non-GAAP measures.
With that I'll turn it over to Anthony for opening remarks.
Thank you fill up before I get started I'd like to take a moment on behalf of the I.C.D. family and say. Thank you did the thousands of frontline workers. During this cobot 19 pandemic.
Got it taking care of our sick in elderly.
Help the millions who I found themselves out of work.
Kemper grocery store stocked kept her highways open provided the energy needed to keep our homes comfortable and our car school appeal.
And to the men and women on the frontline comforting those in our society dealing directly with the most impactful effects of this virus.
We had I C D or eternally grateful for your hard work and sacrifice during this extremely challenging time as we navigate the impact of this unprecedented to that.
As a country, we've overcome a lot in our history well also overcome this in no small apart because if he runs like you.
Now turning to the business Philip will go through the details of our results for the first quarter up 2020 in my prepared remarks, I want to talk briefly about our first quarter.
Offer some perspective regarding the current environment and how it's impacting the land drilling rig market and I C D.
And discuss some key initiatives, we have undertaken in response to all of this.
Obviously, the back end up the first quarter played out in ways no one predicted.
The strong reaction by our customers to significantly lower oil prices with Swift and dramatic.
Unfortunately, I believe the recall that we are seeing still has a couple of months to play out.
As recently as February I C. D had 22 rigs contracted and we were in advance discussions to start at three more rigs in our target markets by the end of March.
As the Koby 19 virus firmly in planted itself in the United States and early to mid March and we started seeing the global economy shut down as local state and federal governments responded we saw all prices decline and unprecedented ways, culminating in the May Debbie T.I. futures contract closing at a negative number on Monday April the 20.
Just before contract expiration.
There was a first wave of upstream N P. Capex cuts during March followed by another wave of cuts during April as oil prices continued to fall and all supply in storage concerns continue to Mount.
And it wouldn't surprise me, if we see more catched expectations.
These are some of the reasons why you saw analyst another's continue to revise lower already reduced capex and rig count expectations for 2020 and beyond.
As you saw in our press release earlier today I see these contracted rig count began to decline as the effects of the covered 19 pandemic group, we exited the quarter with 17 rigs operating and since quarters than we've had another six rigs go idle as if the data this call.
This has happened against the backdrop 367 rigs being laid down across our industry since the February twentyth rig count of 774.
Last week's declined to 60 rigs means the rig count was at 407, representing a 47, but the percent decline over the last two months.
The Permian alone dropped 34 rigs last week like everyone I suppose we expect to see this downward trend in working rigs continued throughout the second quarter.
During the quarter and prior to the onset of the covered 19 pandemic. We successfully completed a handful of third party upgrades to our fleet.
In terms of contracting activity prior to the cobot 19, taking effect, we executed for new contracts with three new operators and executed for extensions with existing customers during the first quarter <unk>.
I see de had one contract early terminated at the end of the first quarter and we've had two more early terminations here in the second quarter.
Operationally, our ongoing safety and other operational initiatives continue to pay dividends as evidenced by a year to date <unk> are well below one.
And operational uptime approximately 99%.
So as we transitioned into the cobot 19 downturn.
Rig operations were performing exceptionally well.
Now I'd like to share some perspective about the actions I C. D is taken to confront the significant challenges our industry faces today.
In any environment, our first and most important concern is the safety and well being of our employees their families and those of our other stakeholders.
I could not be more proud of how our team of professionals have responded and adapted to the current extremely challenging conditions.
I Reagan feel based personnel have adapted well to the social distancing another protocols prescribed and our infectious disease control plan, which was activated early March.
Because of our coordinated planning and execution of our plan, we have avoided significant supply chain disruptions, ensuring we could continue to supply and operator rigs and the new World Cup at 19 [noise].
Corporate I T and other support functions have performed exceptionally well and supported the company without a hitch, while working remotely for the past 45 days plus.
Operationally speaking cobot 19 has not had a material impact on us and I. Thank the professional men and women at work at I.C.D. for their diligence and perseverance and ensure in mission integrity. During this unprecedented time.
In parallel with ensuring worker safety in light of Cobot 19, we took actions beginning mid March to rightsize, our cost structure through reducing headcount salary and other elements of compensation for all personnel.
Arriving at our plan, we put everything on the table with the goal of reducing cost in order to preserve liquidity. Meanwhile, retaining our ability to provide they weren't drilling services in a manner our customers expect.
In terms of head count and pay reductions each level of the company, including the board of Directors Executive management and every department within the company was impacted.
Most of the sport head count reductions our transactional in nature and some are driven by the elimination of management layers, which is warranted given given the lower levels of activity, which we envisioned.
Overall, we reduced the number of director and executive positions and reduced corporate and support headcount by approximately 40%.
The net effect of these cost reductions is an expected drop in annualized cash DNA of approximately $5 million.
Imperative budgeted levels and also a reduction in our operating cost per day on a steady state basis.
Unfortunately, as our rig count drops we will experience stacking cost associated with rig preservation leased in storage as we deal with the unprecedented number of idle rigs, we will need to address.
Some of our operating cost are fixed in nature, so as our operating rig count moves toward trough levels I reported cost per day.
Patrick will be under pressure driven by these necessary items in pure up.
We also suspended all capital expenditures, except for a central maintenance items associated with operating rigs, which reduces our capital expenditure budget by approximately $3 million or about 30%.
Much of this capex budget was already committed during the first quarter on completed mud pump upgrades and <unk> equipment overhauls does it go forward Capex run rate for the remainder of the year and until operating conditions improve will be substantially lower.
From a rig count trajectory perspective based on what our customers have told us. So far we expect we will exit the second quarter was six rigs operating including two working on natural gas directed projects.
Looking past the second quarter, we have four rigs with contracts expiring in the third quarter, one of which just drilling gas wells and two with contracts expiring late in the fourth quarter, one of which is working on gas projects.
Re contracting opportunities today are few and far between.
But there are a couple of conversations going on and we believe our equipment reputation and operating history in the Haynesville can bring us an opportunity or to natural gas prices continue to improve helped by the decline in associated gas productions from that or shale basins.
From a day rate perspective.
I'd say, there really isn't a spot day right marker out there I could point you to our place any competence in.
Right now for the most part working rigs technical specification or performance doesn't matter with respect to the old directed projects.
When your contracts up to the operator, we'll turn the rig to you.
Or may not wait and just early term the Rick.
I'd like to spend a few minutes talking about liquidity at IC date in times like these keeping your eye on the ball is critical and today that ball is liquidity.
Everything that we've done over the last two months has been to enhance liquidity for the company.
We summarized our current liquidity and the press release, we issued earlier today.
At the end of March we were sitting with almost 10 million in cash barring base of 20.1 million under our ideal with availability of 8.6 million and committed 15 million dollar term loan accordion that was undrawn.
At the end of the first quarter, we did draw down some additional cash from a b L, which increased our cash and debt balances at quarter end.
Looking forward our sources of liquidity will be cash on hand availability under our ideal and availability under our term loan accordion.
In addition to declining cash flows from reduced activity one of the challenges.
We have which will evolve as this year plays out will be driven by our a our balances which will come down as a function of our reduced contracted rig count.
We therefore expect availability under a b L to decline as a result, which will reduce the eligible they are collateral balance that is used to determine availability.
As we look out over the next couple of quarters, we expect we will need to draw down.
On our term loan accordion during 2020 to support operations and fund other non operating expenses.
It was with this view combined with the unprecedented deterioration in industry fundamentals.
And uncertain macroeconomic backdrop.
The lack of capital market availability for micro cap companies in the U.S. land all felt service industry.
And after assessing the company's liquidity requirements and available sources of liquidity to fund operations.
The company applied for and received a 10 million dollar loan issued pursuant to the payroll protection program under the cares Act, which will be used to fund permitted expenses under the referenced that.
Philip will go through some of the details, but this long will be a very important source of funding for the company as we deal with the impacts of Cobot 19 on our business.
Obviously, when we talked about the new normal on previous earnings calls, we Didnt expect what we've seen year to date.
However, I believe some of the important trends that we predicted will accelerate as a result, the current crisis, which includes the needs for further consolidation in the land drilling space.
The challenges in finding growth capital in financial markets, our customers prioritizing efficiency and cost control over production growth and our customers maintaining a laser focused on maximizing drilling efficiencies.
For the challenges with an eye Cds control.
I believe we remain very well placed in this paradigm, where the pad optimal fleet and technology offerings, which will enable our rigs to deploy some of the best drilling optimization solutions in the marketplace and the results of these efforts will be meaningful to our customers.
We've rationalized, our SGN a structure and operating cost and are continuing to evaluate ways to reduce cost and very importantly, it put in place scalable robust financial and operating systems, including industry, leading Hs Sunny and people development processes prepared by our employees and our target customers.
Also we worked for a wide array of MP companies, including many of the largest independents and Super major oil companies operating in IC These target markets.
We have said many times in the new normal for our industry. We believe further consolidation of pad optimal rigs blades is an economic necessity for a whole host the reasons.
And and that could never be more true then in a cobot 19 world.
We can't predict when further consolidation will happen there are structural and social challenges that must be overcome.
But I see d. as a willing consolidation participant with it demonstrated capability and we are extremely well positioned with institutional knowledge supported by robust systems and processes underlying a proven track record of successfully integrating competitors.
We have shown our ability to unleash substantial value creation opportunities for our shareholders, our employees and our customers through consolidation and we're ready to execute on these initiatives again.
So summing all this up I believe I C. D is very well positioned to participate in the evolving need for consolidation.
In the meantime, we have pulled and we'll continue to pursue the levers available to the company to help us whether the current storm.
Management is properly incentivized and possesses and employs a pleasure mentality.
Our systems and processes, which support our operation are best in class.
And our rig fleet as young flexible and Didnt engineered to maximize manufacturing efficiencies for our customers.
Our rigs are drilling optimization capable and ready for the continued focus and actions by our customers regarding E.S.G. concerns of mandates wants their focus returns to drilling oil and gas wells, we're firmly implanted with a strong brand and reputation for providing the safest in most efficient contract drilling services in north America's most prolific oil and gas producing regions.
Which we write reside in Texas and the contiguous states.
So with that I'll turn the call back over to fill up so he can walk us through the financial results for the company.
Thanks, Anthony during the quarter, we reported an adjusted net loss of 10.6 million or $2.82 per share and adjusted EBITDA of $5.1 million excluded in calculating adjusted net loss and adjusted EBITDA was a noncash impairment of six point $16.6 million.
Associated with the write down of equipment in assets held for sale and 1.1 million of severance costs, resulting from personnel reductions associated with Covance nothing.
With respect to other items during the quarter reported revenue per day was $19823 consistent with quarterly guidance and representing a sequential decline of $418 per day.
Rig utilization of 66% came in slightly below guidance provided our year end quarter conference call, primarily due to rig count declines at quarter end caused by the cobot 19 pandemic.
Cost per day at $14648 was slightly higher than guidance, mainly due to reduced operating days and rig stacking costs of began towards the end of the quarter.
That's DNA of 3.8 million, including non cash compensation expense of approximately point sixmillion came in lower than guidance with the difference principally relating to reduction incentive compensation accruals.
Depreciation tax expense and interest expense came in consistent with our prior guidance.
During the first quarter cash payments for capital expenditures net of disposals included five point.
5.3 million associated with changes in accounts payable from year end current year projects included completion third pump upgrades and equipment overalls completed on progress prior the coven 19 pandemic manifesting itself.
Moving onto our balance sheet at March 31st reported net debt, excluding finance leases and net of deferred financing costs of $128.9 million. This net debt is comprised of our term loan and $11 million <unk> revolver borrowings.
[noise] finance leases reflected on our balance sheet at quarter end were reduced by $1.2 million associated with payments and the return of certain leased vehicles as operating breakouts began to fall at quarter end.
In addition to borrowings at the ended the quarter to add cash to the balance sheet anticipated borrowings on our revolver. During the first quarter were associated with seasonal items, such as AD valorem taxes in prior year incentive compensation payments.
At March 31st we had total liquidity a $33.4 million comprised of cash on hand, and 23.6 million of availability under revolver on term loan accordion.
Our backlog at March 31st contracts with original terms with six months or more stood at $26.4 million all of which expire in 2020.
We had three rigs operating on short term contracts at quarter end not included in this reported backlog.
As Anthony mentioned, we expected to exit the second quarter was six rigs operating we have four contracts with terms expiring throughout the third quarter two contracts with terms expire late in the fourth quarter.
Now moving on to second quarter guidance on operations as well as liquidity.
The caveat that forward visibility is almost nonexistent with respect to customer intentions.
We expect operating days to approximate 836 days, representing nine point average rigs working during the quarter with an exit rate of six rigs operating.
We expect revenue per day to come in between 19000, $820200 and cost per day to come in around 13000 $614000 per day.
Excluding from these cost per day.
And so items, our early term revenues and stacking in furlough costs, which we expect to substantially offset each other during the quarter.
We expect SGN expensed approximate $3.1 million during the quarter, including $600000, a noncash stock based comp and after the second quarter expect an annualized run rate on cash us junaid approximate 29, and not enough million dollars annualized the stock based compensation on top of that.
We expect interest expense to approximate $3.6 million during the quarter, including 1 million of noncash interest expense and depreciation to remain relatively flat with the first quarter and we expect tax expense during the quarter to be negligible.
Capital expenditures, we've reduced our annual budget to $75 million. The majority of which was spent during the first quarter at March 31st we have 2.8 million of Capex accrued and accounts payable level flow through our cash flow statement and expect another million or so and maintenance capex on top of that through the remainder of the year.
Now moving onto our balance sheet and financial liquidity.
As a pre release mentioned at March 31st we had total liquidity of $33.4 million.
Looking forward, we expect our required non operating expenditures will consist of three point million $3.1 million per quarter of interest expense, partially $1 million per quarter, a finance lease payments and approximately 2.9 million payment that has shown as a current liability on our balance sheet as a payable to an affiliate.
The remainder of 2020, we would estimate these payments to be approximately $15.2 million. In addition to capex.
Fund these payments and operations, we expect to begin drawing down our term loan accordion as required.
With respect to working cap at our revolver, although we will harvest cash as rig counts fall as Anthony discussed our revolver availability is tied to our eligible accounts receivable balance. This is operations vol availability will fall in other words, we don't expect our revolver bid revolver to be a meaningful source of liquidity going forward to fund nonoperating expenses or cash.
Flow shortfalls.
That's after assessing our situation the unprecedented impacts of cobot 19 on our business in the lack of clarity of when the market will stabilize we applied for and received a $10 million alone under the Paycheck protection program. The cares Act.
Fund from this loan can be used for payroll utilities leases interest payments on certain obligations.
The loan is eligible for forgiveness based on expenditures during the eight week period, following the loan of which 75% must be payroll related.
Mount forgiving as based on a comparison of the company's pre covered head count compared to the eight week period following receipt of the low.
Because the company had already begun reducing head count beginning in March prior to receiving alone would do not expect the full amount of loan to be forgiven.
Additional guidance is expected from the government on how loan forgiveness will be calculated but we are operating right now under the assumption that approximately $3 million will be forgiven.
Unforgiving amounts bear interest at 1% and our paid back in 18 equal monthly installments, beginning November 27th 2020.
And with that I'll turn the call back over to Anthony.
Thanks, Phil I have no further comments at this time operator, let's go ahead and open up the line for questions.
Oh.
Thank you well now begin the question and answer session.
If you have a question. Please press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
And our first question will come from tailored Searcher with Tudor Pickering Holt. Please go ahead.
Hey, good morning, and thank you Anthony I wanted to start but.
A question about about one of your comments on the Haynesville I mean, clearly been big player there and.
For the past several years and the natural gas outlook has a at least improve somewhat over the past.
Several weeks and months and so I'm just curious what the nature of any potential discussions you're having with customers in the haynesville are like today are those discussions even taking place today or is it too soon and do you expect to some some sort of uptick in rig count in the haynesville towards a lot of portion of 2020.
Yeah Taylor. Thanks for the question great questions. Good to talk about something positive, but yes. We have had continued to have.
Discussions with customers over there.
Both current customers in other words people that we are working for today are just recently worked for and then some additional ones that we've continued to stay in contact with up over over the last a couple of years is I think about the rest of the year I mean, that's the one area, where there's some optimism at least for the next couple of quarters.
From my perspective look I'm encouraged by what you see happening and the commodity.
You'd look at what expectations are in terms of associated gas and what's going to happen there as well as get shut in which which is happening as you know.
I think there's reasons for some optimism not just for the industry, but specifically for IC D. Here over the next couple of quarters. So yes, I am optimistic there are discussions that are underway I think that is some upside to.
Some of the numbers and as that we think about over the the rest of this year.
Obviously, its cost him optimism cautious optimism just given what's happening a big picture, but I love the position that were in as Weve stacked rigs to say you know we have strategically stacked sum up in that area.
Again on on the assumption and expectation that that it puts us at a and an advantage as we continue to talk to these customers as the rest of your plays out.
Got it.
At least encouraging him and I follow up is just on the current liquidity position right now you've got 11 million drawn on the revolver and it sounds like.
Tap into the 15 million accordion on on the term loan at some point moving forward and if we look at the debt covenants that you have it in the revolver today clearly that the availability on the revolver will come down with receivables, but you expect <unk>, we need to put the the 11 million you have drawn on it into the.
Korean or you expect that that 11 million to be relatively safe from a from a debt covenant perspective over the course of 2020.
Hello. This is Phil if theres two debt covenants that we've got one that our term loan there is a minimum 10 million dollar minimum liquidity covenant ended a spring fixed charge covenant that doesn't come into play and the.
And the revolver until we have less than $4 million of availability. So we're not there yet we will be harvest, we will get we will bring cash into the business as rig stack and working capital so that cash some of that we'll pay down the revolver dip a revolver balance now so.
So will we just don't see the revolver as a meaningful source of sourcing will support the operations of the business, but it won't source aren't offering.
Just because the availability is going to come down we will have to pay part of that revolver balance back as far as far as our rigs come back, but we will be getting cash and to do that as well as our working capital converts to cash.
Okay understood well thanks for the answers appreciate it.
Thank you.
Our next question will come from Kurt held with RBC. Please go ahead.
Hey, good morning, hopefully all your respective families are doing well in staying healthy.
Yes, Sir Thank you Kurt hope the same for you yeah. Indeed indeed.
I appreciate the color commentary, maybe just following up on that line of questioning and typically on the working capital.
Phil.
What kind of what kind of cash contribution.
Are you expecting on a full year basis from working capital.
From from as it goes down but it's about.
I'd say, each operating rigs probably six to $700000 a positive working capital so.
We're going to harvest that much cash say as we go moving from the 17 rigs are so at the end of the quarter that we had.
Operating down to the six rigs that we expect.
I don't have the done the math exactly in front of me, but it would be something like that that we would that cash would come in the door.
It was 700, Hey, so go from 17 down to six so 11 times whatever 600000 right. That's that's correct yes.
Working capital contribution Okay, Great you guys referenced you tapped into the.
The cares act for the for the loan prepayment protection low.
So I'm assuming that shows up in your debt balance as you go into the second quarter, so should be should be looked.
What do you think the aggregate debt balance is gonna be.
As we move forward about 150 million does that sound about right.
Oh, it would be what we have today.
Plus the plus the 10 million, we just borrowed under the cares Act and then you've got the 11 million at March 31st that we would start paying that down with the cash that comes in.
On the working capital release will use some of that the pay down so that will probably get you close okay, and then and then Anthony context.
Exiting the quarter.
At six rigs.
Again coming back around to the prior question, maybe about natural gas basins or otherwise what kind of discussions are you having.
With respect to.
Putting some rigs to work.
Above and beyond that six.
Second half I guess, you know look I'm very well burst on the fact that every NP companies pretty much shutting down.
During the course of the second quarter There've been some conversations are some commentary I mean piece about increasing activity is it W. T. I wanted to get back into $30 range. So just just curious on your end do you think you're going to flatline six rigs for the rest of the year. If you think theres prospect.
But one or two rigs back to work through the third quarter and into the fourth quarter.
No I think it says it's the latter Kurt look everything you just laid out is consistent with what we're hearing.
When I hear the inbound one question that comes to my mind is is it a drilling engineer that's trying to justify position.
Or are there truly.
Business opportunities there and the thresholds in terms of commodity that we hear customers talk about is kind of two dollar gas and that 30 dollar Debbie tea.
At above those levels, there's at least rigs are going to get released as there is some stuff on the margin that.
It feels like it sounds like our customers would increase activity I just given the nature of the peak we're talking about like said it does include a current customers.
In some cases, it's incremental rigs in other words, they are picking rigs up that they dropped earlier this year late last year.
And in some cases, it's it would be new opportunities for for the company, where we may have an opportunity to displace competitor.
As you said or is it was said earlier IC de has a very strong reputation in the haynesville its reputation in a business that we built ourselves it didn't come through an acquisition or anything like that and we get a lot of inbound calls in inquiries from customers as they think about activity over there. So you know you look at.
Some of the rigs we've had running they run they performed exceptionally well, they're very safe, they're very efficient crews had been together a long time, so as customers think about.
Go forward operations.
Obviously, we're in the mix and I think in some way and in some cases, certainly I think where it into vantage, we just need to see the opportunity evolve into a contracting opportunity and I am optimistic that we'll have some wins in that area. Obviously like you said right now second quarter, there's not a lot is going to happen.
But the opportunities that we're talking about or kind of July August and beyond and we'll see how this summer plays out, but I think I would say that things are lining up such that I would expect us to put a couple of rigs back to work up there later this year.
And then just wasn't one last follow up do you expect to be EBITDA positive during the second or third or remainder of the year.
It's going to depend on how many rigs are running cart.
We just don't know the answer to that.
If it's less than six that's going to be a challenge.
That's more than six then you know we've got we've got a chance to do that but it's going to there's a lot of variables on that.
Well, that's the context I was looking for I really appreciate that thanks.
Okay appreciate occur.
The next question will come from Brian. Thanks.
Finally FBR. Please go ahead.
Hey, good morning, yes.
Morning.
Just a follow up on your customer conversations.
For customers that might want to continue drilling.
Guys, having more discussions around different pricing models instead of maybe just seeing Apple REIT day rate cuts.
Yeah, I think most people are looking at the straight up they work model.
Brian when we talk to them.
Like everybody we've been interested we've even had a couple of performance based contracts we like it.
Obviously theres got to be some upside in the arrangement for us.
But right now I would suggest that most customers are looking at every way to as possible to lower their cost.
And I think more on we're focused on the day rate.
They work type model.
Today.
Gotcha.
Thanks, Anthony and in your prepared remarks, you mentioned consolidation.
What are some of the past you guys could potentially take on the ongoing front almost kind of environment.
Well I mean, I'm not any cash buyers out there right. So you have to be focused on the big picture. The Big picture in my mind is up more capital efficiency that would result from the consolidation you think about it there's half a dozen companies or maybe.
There's more that to you know all kind of.
Doesn't two dozen type rigs in their fleet were all spending 10 to 15 million a year and SGN a were all pursuing the same customers. We're all working with the same vendors and look IC d. as demonstrated now.
Very good ability at being able to do this and wring out every bit of synergy opportunity that's there and.
As we think about the reasons, it's probably on a relative value basis that you get something like that done.
He has to be.
Debt when you look at opportunities the debt load on the company has obviously gets factored into that.
Their social issues that have to be resolved as well, but my point in bringing it up on the call is that you look we have been banging the drum for a while we think it's necessary. We think what's happening now and industry is going to for some hands and a and we're optimistic about.
Our chances of trying to get some consolidation done.
Got it. Thanks, let me just one more if I said.
Can you guys give a little more detail on a hassle cost structure initiatives are going to.
At the daily operating expenses through the rest of the year.
Yes, yes, but you guys get more rigs to work are we going to see.
Cost come down and states fix.
Well.
Yes so.
Operating how many operating rigs does does matter as far as fixed cost absorption goes for our guidance for the for the second quarter. We are 13 six to 14.
I would expect that to come down a little bit even at say six rigs in the if that's what it wasn't the third quarter were running up obviously are running more than that and it's a little better front and less than its a little worse.
But yes, if we can get.
The more rigs we get back to work then clearly there's fixed cost absorption that.
That.
Helps us out one of the things we are dealing got after deal with actually they are stacking costs this quarter better substantial as a rig comes in the stack, but then there's the ongoing a.
Lease payments, we make where we stack the rig and there's some maintenance you'll do on the rig to keep the engines running and things like that.
As you go forward, that's going to impact our cost per day as well it creates some inefficiencies.
Yes, and this environment.
Great I appreciate the answers guys healthy.
Okay.
The next question will come from Daniel Burke with Johnson Rice. Please go ahead.
Hey, guys good morning.
Right.
Really just a couple of small ones left on the liquidity front you referenced three early terms. It didn't sound like those were included in the contracted counter the exit of six countenance, there's probably not much duration associated with those contracts, but how do you how how we account for the the cash flow.
So see what the early terms in the Q2 guidance.
Is it worth mentioned in those dollars.
So we when we gave the revenue per day, and the operating rig count and the cost per day, we excluded anything out about those those early tarbes. The revenue we're going to get on the early terms between 1 million and a half and $2 million.
That's probably going to be offset by the stacking costs that we have that coming in we're going to have a large number rigs come in that you've got to do preservation on and things during the quarter and that's going to be that's going to be a chunk of change and there's some furlough opportunities that we're able to take for our employees during the quarter as a result to getting the cares Act.
Loan that the those costs are probably offset the early term revenues during the quarter.
Okay and sort of what I missed this is stacked cost in your op cost per day.
No it's not no it's not okay.
Okay that's preservation.
Okay, and then maybe one other one just again.
It sure you have the PPP funds and diligent in how you use them, but we think about the use of the accordion as well as you highlighted is that should we think of that is is really just offloading current borrowings on the revolver or or will the accordion also be needed to fund in addition to that.
Ongoing.
Cost of the business I guess im just trying to figure out how much.
In a way it's a question about free cash flow, Yeah, I think the accordions going to be important and you know money can be fungible here, but if you're booking in the buckets, the accordions going to be in really important for our not operating.
Expenditures as we look forward and we'll we'll look to draw data slow as possible as expensive it's expensive cash.
But.
It will be important as far as funding not operating expenditures as kind of how I think about it.
Okay. That's helpful Alright, although I'll leave it there guys. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Anthony Guy goes for any closing remarks. Please go ahead.
Okay. Thank you everyone. We appreciate you dialing and taken time this morning to to participate in the call.
I would ask that everybody be safe take care of one another do look forward to talking to you and hopefully eventually seeing you again one day soon that will end the call from here. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.