Q3 2020 Independence Contract Drilling Inc Earnings Call
Good morning, welcome to the independence contract drilling corridor 2020 financial results Conference call.
This expense will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After todays presentation will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the.
Well go to Philip Choice Executive Vice President and Chief Financial Officer go ahead.
Good morning, everyone and thank you for joining us today to discuss <unk> third quarter 2020 results.
With me today is Anthony Guy goes, our president and Chief Executive Officer.
Before we begin I would like to remind all participants that our comments today will include forward looking statements.
Which are 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.
For a 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, we refer to non-GAAP measures during the call. Please.
Please refer to the earnings release in our public filings for a full reconciliation of that loss to adjusted net loss EBITDA adjusted EBITDA and for definitions of our non-GAAP measures.
With that I'll turn it over to Anthony for opening remarks.
Thanks Hello.
Philip will go through the details of our financial results for the third quarter of 2020.
In my prepared remarks, I want to talk about the evolving market dynamics and the challenges and opportunities for IC di in our industry and offer some perspective about the current rig market.
Without a doubt during the third quarter I C D and our industry experienced the full effects of the downturn, resulting from the unprecedented destruction in demand for.
Oil and gas cost recovery 19.
Indeed, the Baker Hughes U.S. land rig count fell to a low of 244 rigs during the quarter, representing a 40% decline from previous all time lows experienced in 2016.
This drove us to reporting an EBITDA loss for the quarter as our rig count trough temporarily to an all time low of three operating rigs early in the quarter and several higher priced legacy contracts expired during the quarter, even with better than expected results from our cost rationalization that control efforts.
However, as we signaled on our last quarterly conference call. We expected third quarter would represent the trough for U.S. land drilling activity and I see these operating rig count as we sit here today that appears to have been accurate forecast.
Since you're in that perspective, we entered the third quarter with five rigs drilling temporarily dropped to three which I mentioned.
And exited the third quarter was six rigs drilling.
Since the end of the third quarter I'm pleased to announce we have reactivated two additional rigs I continue to be an active discussions regarding multiple other opportunities for reactivations lighter in the fourth quarter as well as during the first half of 2021 there.
There are several factors driving our recent incremental rig adds and our expectations for additional reactivation.
You've heard me discuss on prior conference calls I see these leading presence in the Haynesville and East, Texas gas plays a market I see be organically developed throughout the 2015 and 16 downturn.
Drilling in these high pressure high temperature environments required acquired expertise and has established reputation which I said he has it's.
It's not as simple as moving a rig and from an all play to a gas why customers expect your crews in operations to be experienced operating in these challenging environments.
I see D has the expertise and established reputation in these markets.
Natural gas pricing has stabilized and improved in large part due to declines in associated gas production from declining oil production, we are seeing demand for our rigs outpaced the overall market.
Of course, we're also seeing additional opportunities based upon our all driven customers confidence with oil prices recently stabilizing at about 40 or block.
Obviously, there's been a whole pull back from there in the last week, but.
But that has not yet made it any conversations we are having.
We would expect further reactivation opportunities to develop an oil based place above what we're currently seeing once customer confidence and $50 a barrel debit YOD develops but.
For the most part recent and near term opportunities are skewed toward private operators and it does appear that more operators are open to considering performance based contracts, we'd like to see this trend continues everybody can win and that type of contracting structure.
In addition to significantly improving our operating rig count during the quarter, we continue to improve our overall financial liquidity by successfully completing our ATM stock offering raising additional gross proceeds during the quarter of 3.6 million.
At quarter end, we had 18.8 million in cash and our overall liquidity was 39 million consisting of 5.2 million of availability under our Undrawn revolver and 50 million under our term loan accordion.
Along with cash on hand.
As we mentioned on previous calls our.
Revolver would not be a significant source of liquidity when our rig count reach trough levels. However, as we move forward into what we expect to be an improving operating rig count for IC di our revolver borrowing base will grow as accounts receivable increased.
Yes, we expect our revolver to again be a source of liquidity available to us to fund required working capital investments for rig Reactivations and an improving operating rig count environment.
Obviously, improving market dynamics is a welcome sight, but it does not come without its challenges as I C D and our industry pivot to expanding market dynamics.
On past conference calls you've heard me discuss what I believe are in I see these industry, leading operating people development processes and procedures and in this environment I believe they are providing a real competitive advantage.
Over the past 60 days, we have successfully recruit recruit and reactivated five rigs on budget.
Met our customers compressed time tables and incurred minimal operating downtime post startup.
As we move forward I expect our established systems and processes, which support our culture for safety and operating excellence to increasing importance.
As we are considered for additional contracts.
Although we have retained experienced personnel to fill all of our skilled and support positions as we reactivate rigs I C D and others in our industry will at some point need to train new entry level Floorhand personnel as our industry continues to recover and reactivate rigs.
And I see we have demonstrated systems and processes in place to manage these challenges effectively.
In addition, as rigs that were stacked for longer periods of time our reactivated.
There will be all of the expected cost and challenges associated with getting these rigs ready to resume operations.
Well I see we have followed detailed stack out preservation stacked rig maintenance procedures for all of those rigs in order to minimize reactivation cost capex and NPT and we are seeing the benefits from these investments already.
Of course, as we pivot to an improving operating environment I do expect rig on rig competition to remain high.
The reality is that the U.S. land contract drilling industry is bouncing off an operating base that was at an all time low in that environment increased competition is unavoidable, everyone is fighting hard for each contracting opportunity.
At this beginning stage of the recovery, where we are today historical operational excellence and customer confidence in a drilling contractors ability to successfully and timely react to reactivate a rig and operate safely with minimal operational downtime is very important.
I see he is very well positioned in this arena, we demonstrated capabilities across our target markets.
In addition, because of the extremely low operating base and the large number of stacked super spec rigs.
You're going to be less opportunities for equipment differentiation between the high specification rigs that are being reactivated today.
You've heard me talk on past conference calls that the market decline that really began in late 2018 made it very difficult for IC di to realize the true benefits from its merger with Sidewinder.
Well I think in the post pandemic recovery.
We will begin to see those benefits manifest themselves.
I see now markets rigs with three comps bore engines and rigs with greater than 27000 feet of racking capacity.
And we continue to make progress in the field with respect to drilling optimization software.
And our rigs continue to exceed our customers expectations, including recent record wells in the Permian in the Haynesville measured by days to TD in one case. According to one of our Haynesville customers, we help them save over a million dollars on a well during October.
Overall point being even as competition increases in this recovery, we expect to win more than our fair share of these battles, including with customers for whom we've never had the opportunity to work for until now.
And of course in the business climate I, just described there's going to be day rate pressure and because the industry did not entered this downturn with as much contract backlog compared to previous downturns, there's going to be less backlog support to help insulate operating margins.
Today day rates on renewed rig reactivations are typically in the mid teen range with opportunities for higher day rates based upon rate configuration.
Other contract terms.
For the most part recent Reactivations had been for short term pad to pad type tenors and thus are not included in our reported backlog numbers.
As we enter next year I expect to see day rate improvement as markets continue to heal in particular as the initial low hanging fruit type reactivations dry up and reactivation costs increase for rigs that had been stacked longer I believe day rate improvement becomes an economic necessity in order for contractors to justify taking a regatta staff.
Back.
In addition, and very important for IC days recently reactivated and re contracted rigs first quarter 2021 contract extensions and new contracts on hot rigs should see day rate improvement compared to fourth quarter spot day rates.
Given the increasing importance of BSG matters I would be remiss, if I did not mention that I see continues to emphasize and when possible utilize the carbon reducing features of its drilling rigs.
I see deal has been touting the dual fuel capabilities of its drilling rigs since our inception Kurt.
Currently three quarters of our operating rigs are utilizing or in the process of utilizing the dual fuel capabilities of our rigs. We expect this percentage to only increase in the future.
Also we've operated I see the rigs using the electrical power grid.
And we continue our ongoing process of reducing cycle times loads and other environmental impacts associated with moving our rigs from pad to pad.
Those of you that follow the company now that we have been very forward leaning on the governance front, including tying a substantial portion of executive comp to quantifiable measures, which are closely aligned with our shareholders interest.
On the social front, well once again undertaken an aggressive campaign over the holidays to get back to the communities, where we operate through our Santa's roughneck campaign and other initiatives, including terrible to charitable efforts here in Houston.
Where our corporate headquarters is based.
On the capital side of things all additional Rick conversions and major upgrades remain suspended and Capex remains focused solely on maintenance items as well as third pump fourth engine configurations.
In this regard we already own the Thompson engines to outfit any of our rigs we would expect could be mobilized over the next 12 to 18 months with this configuration.
So summing all of this up I believe IC di is very well positioned to execute operationally as we recover from this unprecedented downturn.
And we're on a pathway to drive returns for all of our stakeholders our financial flexibility has improved during this downturn and our management team remains pleasures, meaning.
We are incentivized accordingly to focus on cash flow generation and financial returns over the longer term.
Our systems and processes, which support our operations are best in class and our rig fleet is young flexible and 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.
We are firmly implanted with a strong brand and reputation for providing the safest and most efficient contract drilling services in north Americas, most prolific oil and gas producing regions, which reside in Texas in a contiguous states.
With that I will turn the call back over to sell so he can walk us through the financial results for the company.
Thanks, Anthony during the quarter, we reported an adjusted net loss of $15.5 million or $2.73 per share and an adjusted EBITDA loss of half a million dollars.
With respect to other items during the quarter.
Rig utilization of 17% representing approximately five average rigs came in higher than guidance provided on our prior quarter conference call due to the reactivation of additional rigs during the back half of the quarter.
As Anthony mentioned, we also have reactivate additional rigs since the end of the quarter and absent any additional rig reactivations expect utilization to increase by almost 50% during the fourth quarter compared to third quarter averages right.
Revenue per day of $18078 came in lower than guidance based upon contract and fleet mix associated with additional rig reactivations at prevailing spot rates.
Revenue per day stacks exclude approximately $1.2 million of early termination revenue recognized during the quarter.
They also exclude pass through costs of approximately $800000 during the quarter.
On a sequential basis, we had to higher day rate contracts expired during the third quarter, which contributed to the sequential decline.
Looking forward, we have two rigs operating under higher legacy day rate contracts. Both of those contracts are scheduled to continue through the end of the year.
Cost per day, a $14155 was also favorable compared to guidance reflect economies associated with higher operating days compared to expectations as well as strong cost control.
Cost per day exclude approximately $900000 associated rigs with the rig reactivation and the activation costs during the quarter.
Cost per day also exclude unabsorbed yard overhead costs of approximately $500000 and pass through costs of approximately $800000.
[noise] best DNA expenses of $2.8 million included noncash compensation expense of approximately $700000.
This was somewhat sequentially lower and lower than guidance sequential improvements in cash EPS unit cost reflect cost cutting initiatives implemented during the quarter, which exceeded our original forecast as well as reduced furlough costs.
Depreciation expense came in slightly lower than forecast and tax expenses interest expenses came in consistent with our prior guidance.
During the quarter cash payments for capital expenditures were approximately $600000 offset by proceeds from asset disposals of $1.4 million. There was approximately $600000 of capex accrued at quarter end that we expect will flow through the.
Flow through the cash flow statement during the fourth quarter.
Moving onto our balance sheet at September Thirtyth reported net debt, excluding finance leases and net of deferred financing costs of 118.3 million. This net debt is comprised of our term loan and 10 million dollar PPP loan.
Finance leases reflected on our balance sheet at quarter end were approximately $9.5 million.
I want to point out that our entire PPP loan balance was reclassified reclassified to long term based upon new guidance published by the SP AG.
We currently expect approximately half of this balance to be forgiven and payments on the unforgiven portion to be to begin during the fourth quarter of 2021 and continue through April of 2022.
At September Thirtyth, we had total liquidity of $39 million comprised of 18.8 million of cash $15 million available under our term loan accordion and 5.2 million available under our revolver.
Backlog at September Thirtyth stood at $12.7 million, 56% of which expires in 2020.
Want to point out that our backlog excludes contracts with the original terms of less than six months.
Now moving on to fourth quarter guidance.
Based upon contracts we have in place today, we expect operating days to approximate 665 days, representing 7.2 average rigs working during the quarter. Additionally, reactivations that occur later in the quarter could modestly improve this but for the most part would benefit 2021 operations.
We expect revenue per day to come in between 16800 $17000 per day and cost per day to come in around 13000 $613800 per day.
On the revenue side. This guidance includes two rigs, earning day rates under legacy contracts as well as our 1000 horsepower rig that earns lower day rates than the rest of our 1500 horsepower shale drilling fleet.
Per day amounts exclude pass through revenues and expenses.
We do not expect aren't any early term revenue during the quarter.
Excluding from cost per day guidance is approximately $800000, we expect incurred during the fourth quarter onto known Reactivations and potential reactivation is at the end of the quarter and beginning of next year. We also expect to incur an additional $640000 on stacked rig and unabsorbed overhead cost during the quarter.
Also pass through costs are excluded from this cost per day guys.
Quintile decreases in revenue per day reflect a higher proportion of operating rigs, earning day rates at prevailing spot rates and again as mentioned we have two from two remaining higher day rate contracts benefit in quarter, both of which expire at the end of the year.
We expect SGN expenses to approximate $2.8 million during the quarter, including $500000 in noncash stock based comp.
We expect interest expense and depreciation expenses to be flat with the third quarter and tax expenses to be approximately $100000.
For capital expenditures, we expect approximately 1.2 million $1.1 million to flow through our cash flow statement for the remainder of 2020.
Now moving on to guidance regarding our balance sheet and financial liquidity as I previously mentioned at September Thirtyth Thirtyth, we had total liquidity of $39 million.
We previously discussed on our conference calls various actions, we took with our term loan lenders to enhance liquidity.
And in addition, as I mentioned recent PPP loan guidance and rules have pushed back repayment of timelines on that loan increased our expected forgiveness about.
Looking forward over the next 12 months are required non operating expenditures will consist of interest expense and finance lease payments aggregating approximately $12.2 million cap.
Capex and operating uses of cash will be in addition to this and any asset sales will be a source of cash with.
With respect to working capital on our revolver as rigs reactivate working capital investments will be required and will be a use of cash I would expect to see corresponding increases in our revolver as accounts receivable base borrowing base that will provide additional liquidity to finance these investments if necessary.
And one final item, we expect weighted average shares to approximately $6.1 million during the fourth quarter and with that I will turn the call back over to Anthony.
Thanks, Phil 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 and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
This time, we will pause momentarily to assemble our roster.
Our first question is from Kurt Hallead from RBC. Please go ahead.
Hey, good morning.
Good morning, Brent.
For that thanks for that detailed summary, so.
I'd like to start.
Any sense Anthony from.
On your perspective, you know you look at the prospect of activating a couple of more rigs here before the end of the year.
You know how many do you think you could potentially what's the underlying demand pull.
Pull through for additional lack of.
Activations as you get into the first quarter.
And then you know at what point do you think you could start to see some better pricing.
For the rigs that are going to be coming back in into the market.
Kurt Thank you for those questions.
Look we're obviously, we're very excited about what's played out for us here over the third quarter.
Happy to say as you read in the press release that that momentum.
For IC di has continued as weve entered into the fourth quarter.
You know starting to hear some feedback.
Feedback and have some discussions with certain customers about how they're thinking about 2021.
Yeah, obviously, all kind of bounces between 41 minutes down to 38 so.
It's up today, depending on when we have those conversations with people up.
They may have a different view about how they think about next year, but looking at the opportunity set that's in front of IC di we're pretty optimistic that we will continue to see this momentum and our contracted rig count.
Very excited about what I see playing out in the Haynesville, which as you know is a core market for IC di.
Just to kind of put that into perspective, there's 36 37 rigs running in that basin. Today, we're just over 10% of market share you don't have to go back very far say 2018 time period, when that rig count contracted rig count was double that.
Certainly with what we're seeing in the gas prices today and discussions that we have underway with customers pretty optimistic that that rig count is going to continue to tick up over the next several quarters.
Go back a long time ago, but 2008.
That rig count was in the triple digits, so I'm, not saying, that's necessarily where it's going to go but I think there is an awful lot of runway.
Runway there for IC di and I'm very optimistic that we will continue to earn more than our fair share.
You know as best as measured by market share of those opportunities.
With regard to your second question on pricing, it's as I noted in my prepared remarks, it's still a very very competitive out there.
We are coming off an extremely low base there there's a lot of high spec equipment. That's laying around you have some contractors for the most part I think got into large industry players are being disciplined but you still have some people around the fringe that are bidding very very aggressive.
And I think until.
They get.
Get those rigs out or it's obvious that can't put them back to work.
I think thats going to continue to be a drag on the market. So look we think the rig count is going to continue to tick up we think it will continue to increase quarter over quarter throughout next year.
We're probably a quarter or two away before we can begin to see.
Any real.
Pricing improvement, but in the meantime for IC di it's it's making sure that we can secure the opportunities there in front of us to keep our rigs contracted obviously.
Obviously, working safe keeping our customers happy.
And.
Ensuring that we do everything we can to shore up and maximize liquidity. So that we have a runway to what we believe will be a very improving market over the next.
Several quarters.
Great. Thanks, and then and then Phil on your end right. So the guidance that you provided for fourth quarter.
It looks like that could back out to about a breakeven EBITDA level do you agree and then secondarily as you look out into 2021 with some of these rig activations happening first part of the year, you think you'd be able to generate positive free cash flow.
So I think I'm, probably guiding them still too.
An EBITDA loss in the fourth quarter, a card would be would be kind of how I looked at it.
When you think about free cash flow.
We need to get some more rigs out.
You know to cover that.
However, the capex and those types of things so depending on where day rates are kind of giving you kind of some general Bogeys here you know for running to $18000 a day revenue per day on a quarter and I've got you know.
13, 12 to 13 rigs running I think I should get close to cash flow breakeven. There I'm. Obviously, we're not the revenue per day guidance, we gave today lower than that so we'll need some day rate improvement I wanted to get some more rigs out to get there.
That feels more like a.
If you look at the cadence of what's going on that's probably you know.
Yes could it be the second quarter don't know, it's probably more likely or you know at the back half of the year type of thing will return to that if you look at the cadence of what's going on.
But because it is that's why I could think about that.
Okay, great. Thanks.
Thank you Sir our next question is from Ryan. Thanks from B Riley Securities go ahead.
Hi, good morning, guys.
Morning.
HM.
Up on the two additional reactivations after the end of the quarter.
Could you speak to the customer type on those and maybe if the initial contracts cover the cost of those reactivation.
Yeah, Great question Ryan.
With respect to the customer they're privates in which I think is an important point that I should eliminate if you look out over the last.
Four weeks the majority of the rigs that have gone back to work have been for privates.
I think that's important as you think about IC di we set the company up and you can look in our history and see we work for the biggest of all companies, but we work for a lot of privates too great.
Great relationships.
With those customers and the fact that they they are the ones that have been picking up rigs over the last.
Several weeks is it has been very very beneficial.
For IC day.
So pretty excited there I expect that's going to continue I do think as we roll into 2021, you are going to see some of the larger independents began to to pick some rigs back up some of those will be rigs that have been laid down that we're on contract that are on standby, but I think there will be a few incremental adds to that is.
Well.
To answer the question on the breakeven.
They are they're going to pay for that reactivation cost most of the reactivation costs, you're seeing or which brings me we have to bring the crews back and there's a few things you have to do with these with these initial rigs.
Not a lot of money Thats, probably a couple hundred thousand dollars.
The.
One of the things you see is that we're not adding our support group. We've got a lot of you know kind.
Kind of just minimum amount of support we need and as we get rigs out those costs you know, you'll you're seeing our cost per day go down and you'll continue to see those go down as we get better absorption of those costs because the real only incremental cost on a rig reactivations going to be variable, it's going to be at the rig level. It's the crew and the operating at a rig and.
And those are you know.
We're getting we're getting real margin there are those rigs.
Yeah, Ryan and I would just add I mean, we've turned down a couple of opportunities where the the startup costs could not be recovered on a cash on cash basis in the primary term of the contract. So trying to me very disciplined and as careful as we can be on on those issues, obviously positive cash flow and that's the goal.
If we Didnt think there was a good follow on opportunity either with that customer another customer in that basin.
Might not undertake some of the reactivations, but at a minimum we want to recover.
The cash that we're investing on the front end.
Before we start up a rig.
Got it I appreciate that additional detail there.
And then turning to the leading edge day rates that you've already given some really good detail, but could you maybe give us an idea of where today's range is and or even how that compares to the three months ago.
Yeah, I think at a at best as moved sideways.
It's not uncommon.
When you come out of a downturn for you know when you begin to see the market improved actually see a day rate degradation I think we've we've seen that here over the third quarter.
Like I said earlier, it's very very competitive it really.
Is dependent upon what you're bidding.
For the most part.
For Gen. Three pumps is what what's going back to work today, but if you're talking to a customer that is.
That wants the technology.
Or requires additional racking capacity or something like that obviously the day rates, where those opportunities are higher than the range that we put out this morning, but mid teens is kind of where the standard run of the mill three before for about three type of situation has today.
And then you just add to that based on the individual requirements of that particular customer.
Thank you and then just one more on labor as activity has picked back up and potentially picks back up meaningfully here in the near term have you guys seen any issues with crewing or or do you see potential concerns with growing going forward.
So so far we have not look we were able to furlough.
Furlough.
A lot of people over this downturn certainly.
Certainly the PPP loan that we secured.
That was the purpose of it and we took advantage of that opportunity and did that so we call. It all of those people back here over the last six weeks or so weve been reaching back into our former employee base.
Ace people that were let go earlier.
And calling them back as well.
So so far weve been able as we've started up the rigs that we've started up we've been able to do that with a former IC di employees.
You're bringing up a great point I think this is going to be a challenge for the entire industry as we roll into 2021, not just on the drilling side, but the completion side as well.
Where most companies have have cut.
Cut back pay to some degree.
You know you depending on what sector. The economy, you're looking at there is opportunities out there for people.
Outside of the industry.
This is the second pretty nasty downturn, we've been through and in a very short period of time. So I think people are gonna wisely asking themselves. The question is this an industry that.
But we want to be and.
I think the issue around people is going to become a major bottleneck for the industry as 2021, and especially beyond plays out. So we we havent had a job very recently, we had some job fairs earlier. This year, we are dipping back into and.
And did those.
Names and starting to contact people, we've got we're actually scheduling our first orientation.
Happened here in the next couple of weeks for people that were hiring from outside the company we.
We feel pretty confident that through names that we have from prior efforts and certainly referrals from.
People within IC D. today that you.
Given the cadence that we see rigs going back to work over 2021 that we are going to be able to manage this our systems and processes are there that are going to help ensure operational integrity.
Things like that so we feel like we've got a pretty good handle on this issue, but I think your wise to raise this because like I said in my in.
In my mind this is going to become a major issue for the industry.
Great. Thanks for all that color guys I'll turn it back.
Yes.
This concludes our question and answer session I would now like to turn the conference back over to Anthony He goes for closing remarks.
Okay, well thank you.
Like everybody I want to say, we want to say, thank you to everybody for making time to dial in today and listen and participate.
We will talk to you again for a couple of nine so I want to wish you all a good health and safety.
Nice holiday season, including a happy Thanksgiving and a very Merry Christmas.
Everybody be safe and with that we'll end the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.