Q2 2021 Independence Contract Drilling Inc Earnings Call
Good day and welcome to the independence contract drilling incorporated second quarter 2021 financial results and conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an.
Many task questions to ask a question you May Press Star then 1 on your Touchtone phone and Swift. Your all your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Mr. Philip Choyce Executive Vice President and Chief Financial Officer. Please go ahead Sir.
Good morning, everyone and thank you for joining us today to discuss Icd's second quarter 2021 results.
With me today is Anthony Guy I guess, 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.
For complete discussion of these risks we encourage you to read the company's earnings release and our documents on file with the SEC. In addition, well refer to non-GAAP measures during the call.
Please refer to the earnings release, and our public filings for our full reconciliation of net loss to adjusted net loss EBITDA and adjusted EBITDA and for definitions of our non-GAAP measures with that I'll turn it over to Anthony for opening remarks.
Hello, everyone and Philip will go through the details of our financial results for the second quarter of 2021, and a couple of minutes.
In my prepared remarks today I want to focus on 3 things a brief summary of our financial performance during the recent quarter.
Current market trends that we're seeing.
And some commentary about our outlook.
For the quarter, we reported an adjusted EBITDA loss of $369000.
From an average working rig count of 11.8 rigs. This represented sequential quarterly improvement in adjusted EBITDA of $1.6 million generated from only a modest sequential increase of 1.5 average operating rigs.
Margin per day increased sequentially by approximately 13%.
30 day rate improvement drove much of this increase but our results continue to benefit from our cost rationalization and cost control efforts implemented last year and better absorption of fixed and support cost as a result of more rig activity.
We also spent less on rig reactivation than anticipated.
Philip will go through more of the details, but given our continued success in reactivating rigs and getting steady day rate increases on contract renewals, we expect a return to positive adjusted EBITDA during the third quarter and remain on track to reach our goal of exiting 2021 generating positive free cash flow.
Overall liquidity at quarter's end stood at $35.4 million an improvement from March 31st day.
During the quarter, we selectively accessed our equity line of credit and ATM programs, raising approximately $2.6 million in gross proceeds at an average price of $3.60 per share.
As mentioned on our prior call. We also took advantage of the Pik interest feature under our term loan with respect to our interest payment due at the beginning of the second quarter overall.
Overall liquidity consisted of 6 million of cash on hand, 11, 3 million of availability under our undrawn revolver and $15 million under our term loan accordion and $3.1 million remaining available under our equity line of credit.
Now on to the business.
Our rig contract and go for the first half of 'twenty 'twenty..1 was 15 rigs by the end of the second quarter.
We achieved that with our 14th and 15th rig contracted and studying their first wells in July.
8 are in the Permian for in the Haynesville and 2 in South, Texas and 1 in the Austin chalk using.
Using August 'twenty 'twenty is the baseline this is more than a 4 fold increase in ICD contracted rigs compared to an approximate 2 times industry wide increase over the same period.
Overall since the beginning of the second quarter and including the 2 rigs reactivated in July we have reactivated for rigs, including 3.300 series rigs and stacked our loan 100 series rig which was replaced by a 300 series rig.
I think this is a good time to highlight why we believe our 300 series rigs represent an underappreciated value proposition inherent in ICD.
We acquired these rigs in the Sidewinder merger, but until recently, we've never had the opportunity to market. These rigs to ICD customers and an improving rig count environment. For example, we had 3 of these rigs operating in February of 2020, pre pandemic and already have 6 operating today with more reactivation as planned as the <unk>.
Market continues to improve.
Our marketing team has done a fantastic job marketing the value proposition that these rigs to our customer base and these rigs are a big reason why ICD utilization growth is substantially outperforming the overall market.
Looking forward at future reactivation, we expect those to be predominantly 300 series spec rigs with our goal to have approximately half of the operating fleet comprised of the spec of Rick.
In comparison, we only had 14 per cent of these types of rigs in our operating fleet right before the pandemic. So in addition to strong utilization. We expect these rigs to drive forward day rate and margin momentum even in comparison to prior historical levels for.
For the industry and ICD the second quarter was a continuation of the acceleration trends we saw during the first quarter, albeit at a slower pace as we expected.
For the remainder of the year, we expect to continue to see rig count improvements however, even with the improvements in commodity prices. We expect these improvements to be at a more modest pace compared to the first half for the year due to the physical budget calendar.
Lack of capital access and continued financial discipline on the part of our customers E&P companies.
Towards the end of this year and into next year, we do expect to see a step up in demand in rig count.
Even with continued financial discipline by our customers, we expect their 'twenty 'twenty, 2 capex budgets to increase based upon higher commodity prices and legacy hedges rolling off and.
And we also expect a greater proportion of their budgets compared to 2021 will be directed towards drilling new wells simply based on the tremendous decrease in DUC inventories we've seen throughout the year. We are seeing all of this play out in our conversations with our customers and in our contract discussions.
While day rates across our industry today are lower than what they need to be to satisfy expected demand for more rigs. We continue to see steady day rate improvement on contract renewals and given our current short term contract structure expect to continue to realize improvements on renewals throughout the remainder of the year.
We believe an important barometer on day rates is when our customers begin approaching us regarding term contracts with longer tenors, such as 1 year and recently these opportunities and discussions have started to appear I believe this is a function not only other factors I just mentioned, but also a recognition on the part of our customers have supply tightness, which.
Evolving in the rig market and more confidence on the part of our customers and the overall outlook for commodity prices going forward.
Overall price competition has been more intense in the Permian basin compared to the Haynesville, even though there are substantially more rigs working in the Permian.
I believe this is a function of a larger number of competitors and diversity of work prospects and rig requirements in the Permian and the Haynesville, where I C. D. As a key player in operations are targeting high pressure high temperature natural gas place operating requirements are more challenging and drilling contractors need the equipment and required institutional expertise to drill these technically.
Demanding wells, thus there are fewer competitors and less price competition.
Operating requirements in the Haynesville also are more tilted towards rigs with higher racking and setback such as our 300 series rigs, which are in very short supply across all markets. However, as supply tightens. The Permian is starting to catch up and our highest day rate contract since the onset of the pandemic was recently executed for work in that basin.
Our contracts are predominantly pad to pad contract and on renewals. We continued to secure day rate increases in the 500 to 1000 dollar per day range and bigger increases for our 300 series rigs when we're able to match customer requirements with those rigs capabilities.
Current spot market day rates for our 200 series rigs had been in the 16 to $17000 range plus adders, while current spot market day rates for our 300 series rigs, which are in shorter supply are currently higher in the upper teens day.
I write bias is higher for both classes of rigs.
Compared to the last 3 months, we are seeing a significant uptick in demand beginning in the September October time period, and as mentioned we are now being presented with some term contract opportunities beginning in the same period.
Much of this incremental demand is for work lines that extend through much of next year as customers began preparing for 2022 activity and of course higher commodity prices and legacy hedges rolling off.
So there are a lot of factors that we believe will lead to continuing day rate improvements, but most important is the limited supply of Super spec rigs.
As discussed on our last conference call utilization for true Super spec rigs is much higher today.
Then we believe most people realize.
Most importantly, there are minimal super spec rigs available that have not been idle for well over 12 months and for an incremental 300 series type rig there's virtually none available.
Thus incremental rig demand must be met from idle stacked rig inventory. This is significant for several reasons, especially in a market where the incremental rig contract generally reprice as the market for.
First it places a premium on active hot rigs with experienced crews that have been working together on a customer's drilling program customers will not want to give up these rigs.
As our industry is forced to reach back into the inventory of stacked rigs. This will require a significantly higher capital investment and particular for rigs stacked 18 months or longer as will be the case on coming reactivation.
Hiring and labor is already becoming more challenging and this will likely become a bigger issue and an improving rig count environment.
For day rates and operating margins will be an economic necessity for the drilling contractor to satisfy this demand.
And finally.
And a point I believe is under underappreciated, we expect utilization of true Super spec rigs that that is AC rigs with 1500 horsepower draw works.
3 pumps 4 engines and walking to reach 80 per center more soon assuming overall U S land rig counts steadily improves and accelerates into 2022.
There may be other AC skidding rigs or the like available, but the cost of conversion to true Super spec status is in the millions on top of the cost to reactivate as I just discussed.
As I mentioned term contracts are beginning to appear.
And become part of the contract discussions with our customers today all of our contracts are short term and expired this year, which we deemed prudent given our view on future day rate improvement.
Terming up at current spot market day rates is not something we're interested in at this time, but we do think it would be prudent to have some term contracts in place as we move forward into an improving market.
The percentage of our total fleet locked up long term contracts will depend on where we are in the cycle the customer and the type of rig involved.
We believe we are very early in the cycle. So I don't expect to see ICD lock up a substantial portion of our fleet on term contracts.
We are in some for some discussions today regarding a couple of term contracts. If we sign these contracts day rate will be higher than where spot market day rates are today, and we're considering only a subset of our total fleet at this time.
I want to share a little bit more on our outlook for the balance of this year. It's very important that we returned to cash flow neutrality and better as soon as possible. We're doing all the right things we need more rigs operating in day rates continuing to increase as we discussed we have been steadily moving towards this goal with improving day rates and utilization.
We expect to be EBITDA positive during the third quarter and continue to target being free cash flow positive as we exit 'twenty 'twenty 1.
As we navigate the second half of 2021 we expect the pace of rig count increases to accelerate from current levels as the industry approaches the fourth quarter and continuing as we close out this year.
As mentioned, we expect refresh 'twenty 'twenty, 2 capital budgets, the depleted DUC inventory and higher oil and gas prices respond more drilling activity by E&P companies.
In this environment, we expect day rates will continue to increase especially for super spec rigs.
I expect we'll be bidding day rates for Super spec rigs before the end of the year they start with it too.
With continued upside during 2022.
Just on our current market outlook I would expect ICD to reactivate another 2 or 3 rigs over the next couple of quarters on top of the rigs we've already reactivated with the opportunity for additional reactivation in 2022.
I would be remiss, if I did not close with a discussion on our progress regarding ESG.
All of our rigs are high line in dual fuel capable and offer environmentally friendly crown lighting and other options for our customers to consider when our customers require such features we're more than willing to provide them.
The day approximately 2 thirds of our operating rigs are utilizing high line or dual fuel options.
And about 65 per cent you'd allows our crown lighting options.
We expect utilization of these green package options to rapidly increase as our customers continue to prioritize and focus and plan for operations designed to reduce and eliminate carbon emissions.
Also you should be on the lookout for our inaugural sustainability report, which will be issued later this month. The report will highlight many of the company's efforts toward promoting a more sustainable world.
So summing all this up good things are happening at ICD.
We continue to punch above our weight as we recover from last year's unprecedented downturn, we're transitioning to positive EBITDA currently and expect continued improvement on that front.
And we're on a pathway toward meeting our free cash flow objectives, and driving returns for all shareholders and stakeholders.
Our financial flexibility has improved since the twenty-twenty downturn and our management team remains incentivized accordingly to focus on cash flow generation and financial returns over the longer term with our management team winning only if our shareholders day.
Our rigs are in demand and our systems and processes, which support our operations are best in class.
Our rig fleet is young flexible and engineered to maximize manufacturing efficiencies for our customers. We're breaking records for winning accolades for service and professionalism and working hard to exceed our customers' expectations every day.
Our rigs are drilling optimization capable and participating alongside our customers in pursuit of ESG initiatives firmly implanted with a strong brand and reputation in our target market for providing the safest and most efficient contract drilling services in north America's most prolific oil and gas producing regions, which reside in Texas and the contiguous states we can.
Turning to gain market share and are excited about our prospects over the next several quarters.
So with that I'll turn the call back over to Philip So he can walk us through the second quarter 2021 financial results for the company.
Thanks, Anthony during the quarter, we reported an adjusted net loss of $14.6 million for $2.18 per share and adjusted EBITDA loss of $369000 for.
Activation costs during the quarter were $192000.
We operated 11.8 average rigs slightly below guidance on our second quarter conference call. The variance relates primarily to our 14th and 15th rigs reactivating in July as opposed to during the second quarter.
We expect utilization to increase sequentially by approximately 18% during the third quarter of 2021 compared to our second quarter average with further sequential increases expected in the fourth quarter of this year.
Revenue per day of $16514 per day came in slightly higher than guidance and increase sequentially based upon increasing day rates and a reduced standby days compared to the first quarter. We did not record any early termination revenue during the quarter.
Cost per day of $13352 per day was in line with guidance cost per day excludes approximately $190190.2000 associated with rig reactivation and $400000 of Unabsorbed overhead costs.
These costs were favorable to guidance as cost and efficiency initiatives continue to favorably impact operations SG&A costs of $4.1 million, which included approximately $900000 of stock based and deferred compensation expense was in line with prior guidance with the sequential increase primarily attributable to variable accounting on stock based comp.
Associated with increases in stock price at quarter end.
During the quarter cash payments for capital expenditures net of disposals was approximately $2.5 million. These payments included approximately $1 million related to prior quarter equipment deliveries there's.
There's approximately $3.1 million of Capex accrued at quarter end, which we expect will flow through during the third quarter of 2021.
Our capital budget was based upon a 15 rig fleet. So I mean, assuming reactivation of an additional 2 rigs by the end of the current year, we expect 2020 capex to increase by approximately $2 million compared to our original budget.
Overall, we would expect approximately $4.5 million to flow through our cash flow statement for Capex net of dispositions for the back half of the year.
Our backlog at June 30 of 2021 stood at $14.8 million, all of which expires in 2021.
Obviously, our backlog continues to be below historical levels as most of our rigs are now operating on short term pad to pad contracts, which capitalizes on our view of continued day rate improvement.
Moving onto the balance sheet at.
At quarter end, and we reported net debt, excluding finance leases and net of deferred financing costs of $134.6 million.
<unk> net debt is comprised of our term loan and $10 million PPP loan book.
Finance leases reflected on our balance sheet at quarter end for approximately $6.8 million.
A P. P. P loan balance does not reflect any potential forgiveness, we submitted our for forgiveness application to our lender requesting forgiveness of the entire $10 million loan amount during the first quarter and following our lenders review a forgiveness application was submitted to the SBA during the second quarter.
Given the nature of the process, but you didn't do not know when a final determination our application will be made by the SBA.
Now moving onto third quarter guidance.
We expect operating days to approximate 1276 days, representing 13.9 average rigs working during the quarter.
This includes reactivation of our 14th or 15 rigs during July as well as a couple of range that will have idle time I'll transferring between customers during the quarter.
We expect margin per day to come in between.
3700, $3900 per day, representing an approximate 20% sequential increase at the midpoint of this range.
We expect revenue per day to come in between 16007 hundred 16900 per day with many other day rate increases on contract roles only partially benefiting the third quarter.
Cost per day is expected to range between $12000.913100 per day lower than the second quarter as we continue to gain efficiencies from our larger operating base.
Per day amounts exclude pass through revenues and expenses.
As Anthony mentioned, we continue to see day rate improvement on contract renewals with most renewals signed during the current quarter likely not fully benefiting our results until the fourth quarter of this year. So we do expect additional sequential revenue per day improvement after the third quarter and continued efficiency gains as the car at the cost line as more rigs go to work.
We also expect to incur an additional $500000 during the third quarter associated with planned rig reactivation.
Also not included in on top of or on top of in addition to our cost per day guidance items.
Unabsorbed overhead expenses will be about $600000 and also are not included in our cost per day guidance.
Expect SG&A expense to be flat with the second quarter with some variability on the stock based component and that are subject to variable accounting.
Interest expense and depreciation expense to be consistent with the second quarter as well.
And for for Capex again, we expect about $3.6 million net of dispositions to flow through our cash flow statement during the third quarter.
With that I will turn the call back over to Anthony.
Thank you Philip and I have no further comments at this time operator, let's go ahead and open up the line for questions.
We will now begin the question and answer session.
Ask a question you May press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then 2.
And at this time, well pause momentarily to assemble our roster.
Okay.
And the first question will come from Daniel Burke.
With Johnson Rice. Please go ahead.
Yeah, Hey, good morning, guys.
Hi, Daniel.
Hey, Anthony your comment on our future reactivation as being predominantly 300 series and you highlighted some of the capabilities of the rigs.
But I just wanted to better understand the thought that that incremental reactivation will be 300 series is that is.
Is that more or is it a function of the capability of the 300 series or is it more realistically a reflection of reduced ready inventory on the 200 series side.
It's great question, Danielle I think it's more a reflection of just where we see a demand a large incremental demand in the marketplace. It's also a function of where we can continue to differentiate ourselves in the marketplace, among amongst our competitors and especially our competitors' rigs.
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It's where we think we're going to get the most bang for our investment book and as we are continue to recover from.
From the you know the effects of what played out last year.
Very excited about this class of rig you know this is something that obviously hammered a lot in our prepared remarks, but when you think about ICD today I think this is something that's a very underappreciated.
When people think about the company.
Pre merger ICD, we needed 2 things 1 we needed scale and second.
Second we needed bigger rigs rigs that could could could prosecute larger developments in U S shale and in the Sidewinder merger.
<unk> gave us.
Both of those unfortunately, as you know the market's been tough since then but.
Certainly as you know U S shale continues to mature the number of wells on pads also the lateral lengths are all increasing.
Which.
You know requires a little different tool and the the 300 series. We think are ideally suited for that and I think if you look at the uptick in our our rig count you know over the last 9 to 12 months.
You certainly see the.
C N that see that play out in our contracted rig count.
Got it that's helpful and then I guess in a way to stay on the topic of reactivation.
It looks like from the Q3 guide that the next tranche at a 2 to 3 rigs that you see as likely to reactivate probably probably tilt towards a start dates in the fourth quarter I just wanted to understand if that's that's correct and are you now.
Again, what the but the depths of inquiry levels are that you see against your your your available fleet at this point.
Yes.
Consistent with our with the guide certainly what we've seen here in the third quarter specifically during the months of July and August is up.
The rig count has slowed down and that's consistent you know, even though it's still increasing its not increasing by double digits. It's single digit type increases week to week, maybe it's flat and other weak.
And that's consistent with what we saw 3 months ago, what we were seeing last month, but where we get really excited is when we're talking to customers. There's just.
A significant amount of work that we see that that is evolving for start dates in the fourth quarter really starting in October and historically certainly the last you know.
3 for years, we've seen this break in and activity as we round out the calendar year that is not going to happen. This year, it's clear with the way the year's played out with what's happened to commodity prices the physical discipline that our customers have have demonstrated over this year that I think they're actually going to pull.
No Capex from 2022, and this year get a running start.
You know into the new year and then.
Capex budget next year will be bigger than they were this year. So that's what we're seeing coming so yes, you're reading it right.
We also need to be careful how we pace. The the reactivation is theres a lot that goes around that they're they have there's a there's a reactivation process itself. There. There are a few select upgrades that we do on some of these rigs and then of course, you've got to you have to hire the crews you've got to reactivate the rig you've gotta started up you've got to mobilize it so the <unk>.
God that fill up provided is consistent with being able to do all that in a way that we can continue to operate safely but also.
To exceed our customers' expectations.
Got it and then.
Maybe maybe a last 1 Anthony if I could if I could coax you're discussing it.
B the discussion on churn being at a premium to spot rates is certainly intuitive at this point in the marketplace.
And of course, it would depend upon duration book, but what type of premium to spot do you need to do share considering a term contract and he played it sure. It has been the appropriate strategy and given where your cash flow is currently I think there's a decent argument to be made for for staying on the spot side of the market what do you make that shift.
Yeah, I think it's going to be driven by your outlook, obviously and I think you can tell from everything that we've said today, we're very bullish about the the outlook certainly next year. We believe the day rates will continue to to increase not just from a supply demand standpoint, but just from an.
Amit necessity standpoint, so you know as we sat down and evaluate those opportunities we're going to think about the type of rig that you know the relationship with the customer as the customer are going to use the full capabilities of the rig that's in discussion or not obviously, we're going to have a view on where we think rates will be over that.
Term period, whether it's 6 months 12 months.
And.
Think about it from a I would say from a blended average type perspective.
And that's why I would say you know if we were to do a term contract today. It would obviously be at rates higher than where spot market is today.
You know if you do that right you.
The average of that rate over the term.
It's going to.
To be consistent with where you see day rates.
Spot market rates moving over that period as well.
I guess, what I wanted to highlight in the call. Today was just that you know up until really the last couple of months.
We've not had customers reach out and want to have that conversation.
And that's certainly been a change here over the last couple of months.
Okay.
I appreciate all the comments guys I'll leave it there. Thank you.
Okay. Thank you Daniel.
This will conclude our question and answer session I would like to turn the conference back over to Anthony Gallegos for any closing remarks. Please go ahead Sir.
Okay. Thank you Chuck our guys as we end the call I'd like to say, thank you to everyone for joining US also want to say thank you to all the ICD employees.
Former and current who have contributed to our success over the years as we celebrate our 10th anniversary here. This year I also want to thank them for their professionalism and focus on our customers.
The results of those efforts and that focus are evident today.
It's just this morning, we were awarded for the third year in a row, our energy research points Award for service and professionalism.
And it really proud of that achievement and just want to say thank you to all of our employees for that also want to make our investors aware that ICD will be presenting at intercom, 26th annual oil and gas conference in Denver occurring August 15th through the 18th.
Here in the middle of the month, we look forward to speaking to you again on our next call hope to catch up with you before then as well.
Thank you again, everyone for your interest and support in ICD with that we'll end the call here.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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