Q2 2020 Independence Contract Drilling Inc Earnings Call
Good morning.
Welcome to independence contract drilling.
One quarter 2020 conference call.
All participants will be in listen only mode should you need assistance, placing known the conference specialist by pressing star.
Followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note that this event is the record it I would now like to turn the conference over to Philip Choice Executive Vice President and Chief Financial Officer. Please go ahead.
Good morning, everyone and thank you for joining us today to discuss <unk> second quarter 2020 results.
With me today that the Guy goes our president and Chief Executive Officer.
Before we began I would like to remind all participants that our comments today will include forward looking statements.
Subject to certain risks and uncertainties.
And number of factors and uncertainties could cause actual results in future periods to differ materially from what we talk about today.
Well complete discussion of these risks we encourage you to read the company's earnings release, and our documents on file with the FCC.
In addition refer to non-GAAP measures starting to call.
Please refer to the earnings release, our public filings for a full reconciliation of that lost two adjusted that lost EBITDA and adjusted EBITDA and for definitions are non-GAAP.
Yeah, I'll turn over to happy for opening remarks.
Thanks Fellas.
Well go through the details of our financial results for the second quarter at 2020 in my prepared remarks.
I want to talk about the world, which evolved during the quarter and the actions, which we have taken to address those challenges.
Offer some current perspective about the rig market today.
And outline our outlook for the next couple of quarters.
Without a doubt during the second quarter I understood experience the full effects of the unprecedented downturn, resulting from oil and gas demand destruction caused by cobot 19 I call. This unprecedented.
Because although our industry has experienced very difficult downturns in the past. Most recent late 2015 to 2016 and the 2008 2009 periods. This one is very different.
First the pace of activity decline.
It is unprecedented from February 20 step to July 20, Threerd, the U.S. land rig count dropped from 790 rigs to 251 rigs a 68% decline and just a few months.
In addition, covert 19 didn't hit when our industry was in an uptick the rig count already had been declining throughout 2019, and as a result contract drillers, including I.C.D. and all of our competitors did not enter this downturn with large contract backlogs to insulate us as we had previous downturns.
[noise] all this makes its current economic climate extremely difficult and we had I C. D have acted swiftly and decisively to pull levers available to us to rationalize our cost structure and to maximize financial liquidity.
As events unfold in the second quarter. This year, we knew that I C. D's contract utilization would decline along with our competitors and we felt we needed to brace for a steep in for a long slowdown.
We took immediate and significant action to preserve and enhance liquidity, which necessitated canceling capex projects reducing cost.
Shrinking our support organization and raising capital where possible.
And the process, we right size the organization for a lot less activity compared to what we expected just a month earlier me, while preserving our ability to provide the safest and most efficient operations possible to our customers.
During our last earnings call I explained our cost mitigation efforts, including salary and head count reductions all the way to the board level. So I won't go through that again.
But you can see the immediate impacted these changes in our reported results for the second quarter.
Our operating cost per day declined to below $13000, a 13% sequential decline.
And our run rate S. DNA after excluding furlough and professional fee expenses associated with onetime corporate activities to increase liquidity sequentially fell 34% quarter to quarter. In fact, as a result of these cost cutting initiatives during the quarter and in spite of the significant decline in operating activity.
We were able to produce a 35% sequential increase in reported margin per day.
On the Capex right, we halted everything that maintenance items and as a result, new capex during the quarter fell to approximately $500000.
And as I mentioned on our previous conference call. In addition to maintaining the safest and most efficient they weren't drilling operations maximizing financial liquidity during unprecedented times like these is paramount.
During the second quarter I C D made tremendous progress in this regard.
Overall, we implemented measures that increase the company's near term liquidity and reduced near term non operating expenditures by over $20 million on a combined basis.
These efforts included.
The carrying a 10 million dollar loan pursuant to the payroll protection program under the Cures Act, which has been used to fund permitted expenses under the reference Act.
Based upon recent changes in the P.P.P. regulations. We currently estimate 5 million of these loan proceeds will be forget it.
In addition to providing much needed liquidity to fund ongoing operations. During these unprecedented times and enabling us to retain key personnel. The long also enable several additional liquidity enhancing events, which we executed on during the quarter.
We worked with our term loan lender to permit us at our election to pick one quarterly interest payment. We also successfully extended the due date on the final payment obligation pursuant to the sidewinder merger until the middle of 2022.
Combined these two modifications pushed out approximately $6 million and required future on non operating expenditures.
And we successfully raised approximately $7.3 million gross proceeds pursuant to an ATM offering through the ended the quarter issuing shares at a gross selling price of $6.15 per share well above the average b wells during the period. The ATM has been in place.
At quarter end, we had approximately $3.7 million of additional capacity under this ATM program.
During the quarter, we also repaid all outstanding borrowings under our revolving credit facility.
Availability at quarter end was approximately $9 million, but as mentioned in our protocol as our rig count declines the borrowing base NSR availability to borrow under this facility will decrease until our IR balances began to increase again.
Yes, although the facility will support working capital investments when rigs returned to work. It is not expected to be a significant source of liquidity to fund non operating expenditures or operating shortfalls.
Overall as a result of these efforts we exited the quarter with total liquidity, a 41 point Sixmillion, an increase of 8.2 million compared to March 31st 2020, including cash availability under our term loan accordion and revolving line of credit.
At June 30, even after a thing all outstanding borrowings under our revolving line of credit our cash balance stood at over $17 million, representing a 7.6 million dollar increase compared to March 30, Onest 2020.
Now I'd like to offer some perspective about the current rig market.
As you saw in our press release earlier today I cities contracted rig count continued to decline as the industry slowdown accelerated during the second quarter.
As I mentioned during our first quarter conference call. It has been the case in the current market that when a rigs contract is up the operator returns the rig regardless of the rigs operating performance and this trend continued throughout the second quarter and into the third quarter. Although we are starting to see if you green shoot opportunities from private operators I forget two of them all.
[music].
We exited the first quarter with 17 rigs operating and we ended the second quarter with five rigs under contract and operating across the Permian Eagle Ford in Haynesville basins.
Throughout much of the second quarter, there was essentially no demand for incremental rigs because of the slow down and overall activity.
Essentially all N P operators have reduced their contracted rig fleet in line with overall E. N. P. Capex reduction efforts in spite of this I C. D was able to negotiate a one year extension for one of our rigs in the Haynesville.
However for the most part throughout the last five months, there simply have not been opportunities to supply incremental rigs to customers as they have all focused on decreasing their overall rig activity levels.
However, starting in late May and continuing through July we began having constructive conversations with a handful of customers regarding possible rig adds later this year is already bounded and stable asked about $40 a barrel.
These customers include existing and prior customers of IC D and also operators that would be nuclear new customers for us.
Generally these are private operators, but one is a very large independent.
Example, we're at the contract execution phase for an eight well program in the Permian for one of our stack rigs out there.
The us we are optimistic that the third quarter will be the trough for IC. These operating rig count and we expect to began adding operating rigs late third quarter and during the fourth quarter.
However forward visibility for us and our customers is very difficult and nothing has certain and these unprecedented times.
Looking back over the last 15 months, it's now obvious that the current slowed down really began in late 2018 as oil prices began to soften from the mid seventys in the summer of that year dropping to the mid forties in December 2018, before increasing again for the first four months of 2019 of key.
Source the steepened subsequent decline in oil prices hit warp speed during the second quarter of this year because of the virus and its effects.
Because of that I see D never had the chance to show what purse merger post merger I C. D 2.0 can do with its larger operating fleet and expanded footprint and key operating basins as a result of our strategic combination which closed in October of 2018.
I point this out because as we talk about current marketing activity for IC D. Some of the discussions we're having or with customers that we haven't worked with before.
We are in these discussions today because of our high quality rig fleet industry, leading systems and processes larger operating fleet and strong reputation for providing excellent customer service.
Before our 2018 strategic combination we like the rig fleet size to have meaningful conversations with a select group a very active operators.
Our larger high specification rig fleet and very good operational performance today warrants and operators attention and therefore enables us to have constructive conversations with a very large independents and super majors that we have not worked for previously.
When I evaluate the competitive landscape today I feel like all drilling contractors are starting from the same place, meaning we all have plenty of high specification rigs available and as a result, I believe IC de can grow market share with these active operators as they begin to put the pieces back together and eventually increase the contracted rig place.
Coming years.
Our operations and marketing teams are doing a fantastic job executing on our mission and telling our story I'm very excited about these prospects in this arena, we just need some help from the commodity markets.
On the day rate front for the discrete rig contracting opportunities that present themselves over the next few quarters, we expect pricing to be difficult.
Right now I still don't believe there's an established spot market and we probably won't see a reliable one develop fourth quarter two.
However, I think because of the concentration of high specification rigs in the hands of a few large drilling contractors, we will see pricing for that class of rig rebound quicker than you might expect starting next year.
I expect for the most part industry players in the high specification rig market will exhibit pricing discipline as the market begins to improve.
Although I expect there may be asked this is driven by particular requirement or need when a drilling contractor maybe proposed pricing that is below where market indicators would imply.
Now I'd like to close with some comments about the revised outlook for the company.
Customers generally tell us that oil prices above $50 barrel oil and gas prices above 285 are needed to grow and sustain drilling activity.
Global oil producers have been aggressive in their efforts to remove all supply from the market and oil prices have stabilized about $40 a barrel as a consequence.
Yes operators are bringing production back online, which may create near term headwinds depending on the pace of growth and the U.S. and global economies, which will soak up excess oil inventories and will be driven for the most part by when and how fast economies reopened and if they can stay open.
The natural gas market was expected to benefit from reductions in associated gas derived from shut in oil production, but that market has experienced headwinds as NPS have restarted shut in oil production and as a result of the impacts from reduced LNG exportation, which has resulted from the slowdown and global economies and.
Reduce need for natural gas in four and energy markets as a consequence, we've recently seen a bottoming and natural gas prices and I think everyone expects gas prices will strengthen as we exit the inventory build period and see see draws began later this year as heating demand returns combined with continued improvement.
In global economic activity in a rebound in the LNG market.
I believe there will be some contracting opportunities around the margin during the balance of this year in the Permian and to a lesser degree in the Eagle Ford. However, I expect overall activity levels for drilling to eventually bottom and more or less moved sideways into we see 2021 drilling and completion budget money began to get spent against the backdrop.
Proving economic activity and strengthening commodity prices.
Based on our discussions, which which have continued over the last couple of months I do expect to see I Cds utilization tied to gas activity began to increase later in the third quarter and continuing through the fourth quarter. This timing has slipped to the right by few months for the reasons I just noted.
Also expect.
We will have some wins in the oil shale basins, but I do not expect to see a lot of increased activity in any of them for the industry. During the balance of this year BRIC markets will remain challenged as we navigate the rest of the year and I think everyone knows that.
So summing all this up I believe IC de has pulled and well continue to pursue the levers available to the company to help us whether the current storm.
Management team or pleasures and are incentivized accordingly to focus on cash flow generation and financial returns over the longer term.
Times are tough, but the IC de team remains motivated and energized our systems and processes, which support our operation our best in class and our rig fleet is young flexible and engineered maximize manufacturing efficiencies for our customers are.
<unk> rigs are drilling optimization capable and ready for the continued focus and actions by our customers regarding yes, GE concerns and mandates once their focus returns to drilling oil and gas wells, we're firmly implanted with a strong brand and reputation for providing the safest and most efficient contract drilling services and north America's most prolific oil.
And gas producing regions, which reside in Texas and the contiguous states.
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 $11 million or $2.73 per share and adjusted EBITDA of $4 million with respect to the other items during the quarter.
Rig utilization of 32% came in slightly below guidance provided on our prior quarter conference call, primarily due to early termination of a rig during the quarter.
Revenue per day $19741 came in slightly higher than guidance based on contract fleet mix and strong underwriting operating uptime performance.
Revenue per day stacks stats exclude $2.2 million early termination revenue recognized during the quarter. They also exclude pass through costs $2.7 million during the quarter.
Cost per day at $12741 was also favorable compared to guidance and reflected cost cutting initiatives implemented during the quarter.
Cost per day statistics excludes $300000 a decommissioning expense.
Zohr unabsorbed rig overhead a $400000 a pass through costs of $2.7 million.
Cost per day improvements reflect cost cutting initiatives implemented during the quarter, but also benefited by approximately $470 per day from discrete items in the quarter associated with reduced property tax accruals and insurance matters.
SGN expenses of $3.5 million, including non cash compensation expense of approximately $300000.
Sequentially lower the came in about $300000 higher than guidance.
Sequential improvements reflect cost cutting initiatives implemented during the quarter with which exceeded our original forecasts. However, SDN expense during the quarter was negatively affected by approximately $1 million associated with furlough costs associated with retaining employees in connection with obtaining our 10 million dollar PPP loan.
And our onetime costs associated with amendments to our credit facilities merger consideration payment and related items.
With respect to the furlough costs. These represent forgivable costs associated with our PPP loan, but for accounting purposes, we won't reckon, what we do not expected recognize anything associated with loan forgiveness until that process is complete with the SPJ and that will likely occur in 2021.
Depreciation tax expense interest.
Interest expense, Ken and consistent with our prior guidance.
During the quarter cash payments for capital expenditures that a disposals were 2.6 million.
$500000 for expenditures during the quarter of $2.1 million associated with payment for first quarter deliveries there were not cancel as a result of the cobot 19 demand destruction.
Moving onto our balance sheet at June Thirtyth reported net debt, excluding finance leases and that of deferred financing costs 119, and a half million dollars.
That does comprised of our term loan and 10 million dollar PPP low.
We repaid the $11 million outstanding at the end of the first quarter under our revolver and have no amounts outstanding at this time.
Finance leases reflected on our balance sheet at quarter end increased as a result of an additional financing lakes entered into during the quarter reduced by ongoing finance lease payments and cancellation of vehicle fleet leases.
At June Thirtyth, we had total liquidity at $41.6 million comprise a $17.4 million cash on hand, $15 million available under our term loan accordion and $9.2 million of availability under our revolver.
Backlog at June Thirtyth stood at $14.9 million, 84% of which will expire in 2020.
Now moving on to third quarter guidance on operations as well as liquidity with cat with the caveat that forward visibility is almost nonexistent with respect to us customer intentions, we expect operating days to approximate 360 days, representing three point not average rigs during the quarter as Anthony mentioned in his prepared remarks.
We were at the execution phase of contract discussions for rig AD, but even if mobilization occurs during the third quarter. We did not expect a meaningful impact there was approximately 45 days and our guidance associated with those two rig adds.
We expect revenue per day to come in around 19000, $19200 per day and cost per day to come in around 15000 $15500 per day.
As per day amounts exclude pass through revenue and expenses.
Excluded from revenue per day guidance is $1.4 million of expected early termination revenue.
Like excluded from cost per day guidance is approximately one and a half million dollars, we expect incurred during the quarter on yard decommissioning of stacking costs historically exclude from a cost per day stats.
Also pass through costs are excluded from our cost per day guidance.
To conclude sequential decreases and revenue per day reflect re contracting at spot day rates for our 1000 horsepower rig at the end of the second quarter, which remains operating but typically runs about two to $3000 per day less than the rest of our 2000 1500 horsepower Super spec rigs.
And the expected reactivation of rigs towards the end of quarter at lower spot rates.
Sequential increases in cost per day reflect two facts as previously mentioned the second quarter benefit from benefited from discrete items that we do not expected benefit ongoing quarters, that's about $500 per day of the expected increase.
More significant as the 60% drop and operating days compared to the second quarter, which materially impact fixed cost absorption per operating day.
As Anthony mentioned, we expect a third quarter to be the trough or operating rig counts and expect this trend to move favorably when our operating rig count improves.
We expect SGN expense to approximate $3 million, including half a million dollars a noncash stock based compensation expense.
This includes approximately $300000 of furlough costs.
We expect and Carla costs through October of this year when the covered period for making qualified expenditures under our PPP, let expire.
As mentioned PPP loan forgiveness associated with these costs wont be reflected in our financials until next year.
We expect interest expense to approximately $3.7 million depreciation expensed, approximately $11.2 million and tax expense to be approximately $100000.
For capital expenditures, we expect approximately $1 million to flow through our cash flow statement for the remainder of 2020.
Now moving on to guidance regarding our balance sheet in financial liquidity.
As I previously mentioned at June Thirtyth, we had total liquidity of $41.6 million.
As Anthony discussed we took several actions that reduced near term non operating expenditures.
Looking forward over the next 12 months are required non operating expenditures will consider that will consist of interest expense and finance lease payments and estimated required repayments under our PPP loan.
We estimate these will aggregate to approximately $13.9 million a significant reduction from our prior estimates as result of actions we took during the second quarter.
Again on the PPP loan with theirs with recent changes to the rules governing this program, we expect about half of that $10 million allowed to be forgiven.
With respect to working capital in our revolver, although we will harvest a little more cash from working capital as our rig count troughs during the third quarter. Our revolver availability is tied to our eligible accounts receivable balance. This is operations fall availability falls in other words, we do not expect the revolver to be a source of liquidity going forward, but not operating expenses.
Our cash flow shortfalls, however, as we reactivate rigs it will be a source of liquidity to support required working capital investments.
One final item, we expect weighted average shares outstanding to be approximately 5.2 million during the quarter.
And with that I'll turn the call back over to Anthony.
Thanks, Philip I have no further comments at this time operator, let's go ahead and open the line for questions.
We will now begin the question answer session.
Yes. Good question you May press.
Yes, Tom phone.
If you're using us speakerphone, please pick up your handset before pressing the key.
Your question. Please press Star then too.
I will pause momentarily to assemble our roster.
First question is from Kurt Hallead from RBC. Please go ahead.
Hey, good morning, everybody.
When it got good morning.
Hey, Chris.
Appreciate the the perspective here as we kind of work through third quarter.
And out to the fourth thing has indicated that you're getting some demand for some some additional rigs, let's say you got to potential rigs that are expected to come back into the fold in the third quarter.
As you look out into the for its you know how many additional rigs you think could potentially worked the way back into system.
Hey, cared hope you're doing well I appreciate the question, yes, we are.
Anticipating starting up two rigs here back part of August rolling into September.
Based on the discussions that we have underway with the other.
Clients, we would expect to put a couple of more to work in addition to those two.
By the end of the year.
Yeah, maybe there's some upside beyond that but just based on the quality of the discussions in the nature of the discussions we have underway right now we're pretty confident in two to four between now and into the year.
Okay and then.
With respect to the pricing of that your rigs that are going to work here in the August September time period can you give us some sense as to what price points are those are going to go out it.
Yeah, I'd card I'd speak to that more generally as I've said in the remarks is really not a spot market out there today.
We had various inquiries that come in it it is hard to gauge the seriousness of those when it comes to the actual price that gets submitted its pretty wide range of asks in terms of equipment.
Technology.
That kind of stuff I think the way that I would respond to that as you.
You know anywhere from mid teens, Stephen low Twentys again, depending on what what's being a specified in the way of equipment.
Okay. Obviously, we did we did secure the a the long term one year contract extension on the red over in the Haynesville, but that's our thousand horsepower rigs. So it would obviously be at the lower end.
The of that range.
Not yet and then last follow up for me given the person the guidance in the perspective, you guys on the second I have on the second half of the year.
Just wondering if you expect to be.
Free cash flow and EBITDA positive during the second half.
Kurt I think it's going to be hard run an average of four rigs this quarter and even know putting rigs out next quarter, we're not going to.
Theres going to be some reactivation cost I think is going to be difficult for us to be EBITDA positive certainly this quarter and and I think next quarter is going to be a challenge as well so from a free cash flow perspective, I think it's going to be difficult for us to to generated free cash flow the back half of this year.
Okay.
Okay that color thanks, guys.
Our next question is from Ryan things from B. Riley.
Go ahead.
Hey, good morning, guys.
Hi, how are you good morning.
I'm good. Thank you Phil on the daily rig operating cost looks like it'll be pretty volatile volatile through the rest of the year.
Can you guys give a sense of a run rate once things settle down a bit do you think you could get below 13000 on a quarterly basis.
Well, yes, I do if you think about it right now if you just look at the last quarter. We ran under $13000. Today now there were some onetime items in there. So maybe it will normalize it was low thirteens, we're not going to be able to do that the back half of the year just words like have enough rigs operating and we've got to fixed costs, we've got to absorb but if we get.
Back to that nine to 10 rig scenario I think we can get close to 13, I don't know get below it.
And if we get to 12 or so I think we can run at below $13000 today.
That's helpful. Thank you Phil.
And then one of your competitors noted last week that it seems to performance based contracts, becoming the norm overtime and that they're leading with those types of contracts already today would you agree with that and do you see that change happening in the market.
Alright.
I think if the right if you look out longer term I.
I think the hope is that the industry does move more toward a performance based pricing I think as I see the market today and certainly over the next couple of quarters, I think thats going to be tough just given how competitive the rig market is going to be.
The focused today on a lowering cost on the part of our customers.
So yes, we are optimistic the longer term that will be the case, but.
I think in the short term that's going to be a tough sale.
Thanks, Anthony I'll turn it back.
Sure.
Next question is from Daniel Burke from Johnson Rice go ahead.
Yeah, Hey, good morning, guys.
Morning.
Hi, Anthony I thought you gave a pretty good synopsis of the marketing environment out there and Oh, Wow I heard it highlighted that the privates or or possibly going to drive the initial stages of other nudge up in the in land rig count now I know, it's hard to generalize, but can you talk just a little bit longer maybe about.
The appetite you see from the from the public's to resume activity and and.
If not indications for late this year, how you think they'll think about 2021.
Yes, that's a great question Daniel you know that's been a surprise for me over the last several years is.
And in my experience throughout my career.
Super majors would tend to drill through the cycles, which was one of the reasons why you wanted to align yourself with them as a service provider, but today I think just given the unprecedented nature of what everybody's dealing with as you know everybody has pulled in their horns cut capex spend paying very close attention to.
So where they're spending their money.
The discussions that I'm aware of that we're having with the bigger publix.
It's about living within cash flow not just today, but but as they think about.
Next year and even beyond.
Those are the reasons why I think their response in rebound and activity, it's probably going to be more muted. Then then we would like to see.
You know remember also many of them have huge inventories of ducs that they've built up so as they think about that incremental capex dollar.
Return on that spend that's likely where I would expect.
To see them spend that Capex dollar.
And it's going to take a few quarters for them to work those inventories down. So you know I think there will be some things around the margin as I indicated but.
Publix on the other hand.
Their challenge is really access to capital as you know.
So.
Thats the reason why we're a little bit more optimistic that we'll see a.
More of a rebound with the privates and when would the public's over the next couple of quarters.
That's a that's helpful. I appreciate the comments there other ones a little more straightforward and maybe maybe for you fill up you you kind of gave us the pieces, perhaps to do this just a couple of minutes ago, but.
What do you think about it what sort of the range of.
Contracted rigs you need to have to be in sort of EBITDA breakeven or better position.
I think it's more a obviously it depends on day rate, but I think it's hard for us to be EBITDA breakeven.
With.
Less than six rigs operating through the quarter.
And as we go back out remember, we're going to as rigs reactivate. The first couple are going to be pretty easy to get out that I cost money, how much money, but we're going to have some reactivation costs as well so even when we go from six to eight this quarters, where we move or eight to 10, you're going to have some headwinds there on the EBITDA front that that's going to keep it.
Pressed a little bit because we're going have reactivation costs, just like the restaurants to our competitor so on a normalized basis six as we react review.
We got from six to eight were probably positive, but we'll have some reactivation cost as well on there.
Got it okay, great I'll leave it there guys. Thank you for the time.
Great. Thank you.
This concludes our question answer session I would now like to turn the conference back over to.
For closing remarks.
Okay. Thank you for that guys. We just want to thank everybody for making time today to dial in to participate in our second quarter earnings call here.
With that we'll end the call. Thank you everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.