Q3 2021 Independence Contract Drilling Inc Earnings Call
Good day and welcome to the Independence contract drilling Inc. Third quarter 2021 conference call.
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I would now like to turn the conference over to Philip Choyce, Executive Vice President and Chief Financial Officer. Please go ahead.
Good morning, everyone and thank you for joining us today to discuss Icd's third 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.
Number of factors and uncertainties could cause actual results in future periods to differ materially from what we talk about today.
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, we'll refer to non-GAAP measures during the call. Please refer to the earnings release and our public filings for a full reconciliation of net loss to adjusted net loss.
EBITDA and adjusted EBITDA and for definitions of our non-GAAP measures and with that I'll turn it over to Anthony for opening remarks.
Hello, everyone. Philip will go through the details of our financial results for the third quarter of 2021 and a couple of minutes for the most part we pre released our third quarter financial results and an investor presentation filed with the SEC at the beginning of October.
I won't focus much on that in my prepared remarks today and will let Philip summarized those items for you.
Rather in my prepared remarks today I want to focus on three things where.
Where we see ICD with respect to its overall financial goals for 2021.
Our outlook for further day rate progression in rig reactivation and operations.
And I want to close with some commentary on where we see ICD positioned over the next 12 months or so from a fleet perspective.
When we began this year, we had two overarching financial goals as we continue to recover from the pandemic trough, which was so difficult for us and our industry first we wanted to return to positive EBITDA and second we wanted to exit the year such that the company's operating fleet would be generating positive free cash flow in 2022 and beyond.
So how are we doing toward these goals.
Well with this quarter, we have returned to positive EBITDA and more importantly, with our operating rig count set to increase to 17 rigs by year end and strong forward visibility on day rate progression through the remainder of the year and into 2022 buoyed by our short term contract structure and increasing 300 series utilization, we've clearly set.
The table to reach our overarching free cash flow goal that we set for ourselves in summary, we're on track to enter 2022 with all of our financial goals for the company intact, which we believe sets the table nicely for how we want to position the company throughout 2022 and beyond.
Realizing continued revenue and margin per day progression as the market improves as vital for ICD, if we want to achieve our overall financial operational and strategic goals and we're laser focused on this.
In the third quarter, we reported revenue per day of $17141 per day and margin per day or 3456, all sequential improvements are in line with our expectations, but lower than where we need to be.
In order to realize our goals, but looking forward. We're very excited about how we see the fourth quarter playing out and extremely excited about what we see in the first quarter of 2022 and beyond.
Philip will provide more details, but for the fourth quarter. We currently expect revenue per day to improve sequentially between seven and 8% and margin per day to improve sequentially between 30% and 40%, but what is more exciting and what I want to highlight is what we.
Spec to see as we enter 2022, when we begin to realize the full benefit from fourth quarter contract repricing.
Assuming current spot market day rates, we are realizing on contract repricing is continue we expect first quarter 2022 revenue per day to improve 20% to 21% compared to third quarter levels and most importantly margin per day to improve between 105, and 110% compared to reported third quarter numbers.
And with the macro setup, we are optimistic about further improvements in 2022.
Even beyond these levels.
Obviously, this represents significant and accelerating improvement and if you step back for a minute and what I want to highlight here is what we're expecting right now as we enter 2022 is margin per day higher than what we were reporting pre pandemic.
Given where we believe we are in the current up cycle, which we believe is just in the very early innings. I believe this is quite impressive. So what is driving this what is different about ICD now compared to when we entered the pandemic.
Or when we operated in previous cycles.
As we've highlighted on past conference calls, we are focusing more on shorter term contracts and what we believe.
Are the early stages of this up cycle. This allows us to ratchet day rate improvement on renewals quicker than ICD did in the past for example, we will reprice, all but one of our contracts to current market rates during the fourth quarter of this year and a large number of these repricing occur at the end of the quarter. This drives the expected.
Significant margin per day improvement moving into 2022.
Backlog is important and there are opportunities today for term contracts and building our backlog and will begin focusing on those when day rates improve some more from where they are today. However, we are very constructive on this market and we will remain patient in this regard which is a different approach at ICD compared to previous cycles.
Also.
We also are fully realizing cost synergies from our sidewinder merger.
On the cost side, we're seeing some labor cost increases is still pay returns to pre pandemic levels and we expect that to have occurred by the end of this year.
But what we think is likely to materialize is factored into our forward looking views more importantly day rate increases and cost escalators in our contracts will allow us to manage and pass on labor cost to our customers without significant impact to our margins.
But most importantly, icd's operating fleet mix is different and how we're marketing our fleet to maximize margins and returns is different than in prior cycles.
I've highlighted this before but I believe it's important to reiterate we believe our 300 series rigs are an underappreciated value proposition embedded in Icd's fleet.
We have 14 300 series rigs in our marketed fleet and at year end, we will already have seven of them operating for perspective, we averaged three 300 series rigs operating in March of 2020 pre pandemic. So we have fundamentally changed our fleet operating mix, we acquired the 300 series rigs in our merger with.
Sidewinder and this is the first time, we've been able to market these rigs across icd's customer base in an improving market.
Rigs meeting 300 series specifications are in very short supply and they command premium day rates today.
Today's spot day rates for this type of rig firmly start with it too and on the leading edge with all the bells and whistles generate revenue per day for us in the mid Twenty's I'd.
I'd be remiss, if I did not mention that our most recent 200 series extensions also had day rates starting with the two as well.
From a business development perspective, we're strategically marketing our fleet differently as this cycle is up unfolding as well we are intentionally targeting customers in the Delaware basin and Haynesville with our 300 series rigs, where the rig size and enhanced capabilities are desired by our customers to execute longer deeper wells that are becoming more commonplace in those.
Fields. This allows us to focus our 200 series rigs in the Midland and Eagle Ford basins.
Where these rigs the ability to move between pads in three days or last maximizes value for our customers.
While the strategy seems simple it was not something we had an opportunity to execute upon pre pandemic not until the market began improving in this current up cycle.
Another reason Icd's day rate and margin margin progression is outpacing the market as we are doing a better job compared to the past and pricing around the edges for value added features of our rigs for example, we're getting up charges. When our biofuel system is utilized for our rigs that wasn't commented in the past. Another Great example is drill pipe.
Over the last several months, we've reevaluated our drill pipe inventory.
We still have quite a few idle strengths and earlier this year, we identified opportunities to modify the types of characteristics effectively converting standard API five inch drill sting strengths to high performance pipe that we are then able to charge our customers by year end, we will have converted four strains and our payback on these investments resulting.
From our upcharge as is measured in quarters not years and there is one final item I want to focus more on while explaining the improvements at ICD as we entered this up cycle all of our rigs are super spec rigs, but when you Peel the onion back on fleet composition I want to point out again that over 60% of our marketed fleet is comprised of 300 series rigs.
It's hard to get precise industry data on this but we believe that icd's percentage composition of rigs meeting 300 series specifications as best in class when compared to our competitors Super spec fleet configurations.
We have been intentionally patient about how we market and reactivate these rigs not just reactivating them for the sake of reactivating them.
Making sure we placed these rigs with customers who need their performance capabilities today.
Today demand for 300 series rigs is increasing as our customers continue to focus on longer laterals and improved hydraulics that resolved from using three mud pumps simultaneously in conjunction with a high torque drill string.
As E&P consolidation continues and they were able to increase the continuity of their acreage and are no longer artificially constrained by lease lines. We expect their need for 300 series type rigs to execute those types of drilling programs to increase for ICD six of the next seven rigs that we will reactivate will be 300 series rigs.
Which we believe will drive further revenue and margin per day improvement next year and beyond benefiting all of our stakeholders.
So as we enter 2022, what does all this mean for ICD strategically.
Obviously, we are very constructive about the market and continue and continued revenue and margin per day improvement driven by dwindling availability of Super spec rigs as well as what we believe are very attractive all in natural gas supply demand fundamentals and a DUC inventory in our core markets that has essentially been wiped out again, we expect ICB will be operating <unk>.
<unk> rigs by year end, seven of which will be 300 series rigs with our entire fleet generating much higher revenue per day than reported third quarter levels. This includes a rig reactivated in October and another one scheduled to go on contract around year end.
Further rig reactivation in 2022 is something that we're focused on and evaluating because demand is definitely there. However, all land rig reactivation costs are increasing for ICD and our industry and we estimate total cost encourage reactivated rig is going to be between two and $2 $5 million.
This includes not just what will flow through the P&L, the capex associated with inspections and overhauls required as we reach deeper into our idle rig fleet.
At current day rates, the investments and reactivation is easily payback in less than a year.
However, reactivation costs will put additional pressure on working capital and liquidity that we must manage and protect.
Potential labor shortages as we compete with other industries for talent also will likely continue to be a headwind on how fast ICD and our industry can reactivate rigs.
Again from a cost perspective, we can pass higher labor costs onto our customers. We're also watching our supply chain carefully and we have brought forward investments in certain items to manage where we see risks potentially materializing and have released reduce lead times on further rig reactivation.
This primarily relates to the drill pipe I mentioned and some discrete capital equipment items.
This did impact the pace of Capex during the third quarter and our Capex outlook for the remainder of the year.
Although all of this could potentially challenge or slow the pace of reactivation for our industry and ICD. It should drive higher incremental increases in day rate on operating rigs above current levels.
And in a world where the last contract typically repriced the market. This would drive incremental margin and cash flows across our operating fleet beyond where we already see them over the next couple of quarters.
So summing all of this up good things are happening at ICD, we are generating positive EBITDA again with very meaningful sequential improvements expected over the next several quarters and additional upside from there as the Super spec market continues to tighten and we have a clear line of sight towards our goal of generating free cash flow as we enter 2022.
So far in this up cycle, we continue to punch above our weight with our operating rig count expected to increase by year end over 450% from the pandemic trough compared to an overall market increase of only 123% through today.
And with strong line of sight into 2022 on the day rate front, we believe the sequential improvements in our margin per day is punching above our weight as well driven by our improved marketing strategies and 300 series rig penetration within our contracted rig fleet, certainly labor and supply challenges exist and we have to manage them.
That has always been the nature of up cycles. This isn't new.
Successfully manage these issues before and I'm quite confident we will do the same this time as well.
And what I would like to conclude with is this an ICD, we're extremely constructive on the macro outlook when looking at overall oil and natural gas.
Demand supply fundamentals rapidly declining DUC inventories also is encouraging for our business.
To us it is clear that the world is short oil and gas and the signs are everywhere and the lack of overall upstream E&P investment in the industry. Since 2014 is now manifesting itself.
We believe all of this sets up very nicely for an extended up cycle for U S land to solve these issues. We think it's pretty simple the extra needs to accelerate drilling activity and we believe the industry will need more super spec rigs in Icd's core markets to do that.
In a market where super spec supply is already tight we believe the fairway is very wide for ICD over the next few years.
So with that I'll turn the call back over to Philip So he can walk us through the third quarter 2021 financial results for the company.
Yeah.
Thanks, Anthony during the quarter, we reported an adjusted net loss of $13 7 million or $1 87 per share and adjusted EBITDA of $700000.
Reactivation cost expense during the quarter totaled $100000.
We operated $13 eight average rigs during the quarter we.
We expect utilization to increase sequentially by approximately 9% during the fourth quarter of 2021 compared to our third quarter average, which includes a few rigs transferring between customers with further sequential increase as expected during the first quarter of next year as Anthony mentioned, we reactivated our 16th rig in October and our 17th rig should come on.
Your line at year end.
Revenue per day per day came in at $17141, which was at the high end of our guidance and increased sequentially based upon increasing day rates from contract renewals again as Anthony mentioned, we expect this trend to continue through the short term nature of the contracts we're signing today.
Cost per day was $13685, which was higher than guidance.
Cost per day excludes approximately $100000 associated with rig reactivation.
And $400000 of Unabsorbed overhead costs.
Costs were impacted slightly by higher labor costs as field pay increases were instituted during the back half of the quarter.
Looking forward, we expect to be back to pre pandemic pay levels by year end and I'll provide some guidance on what that means to our run rate costs in a moment.
SG&A costs were $4 $1 million during the quarter, which included approximately $800000 of stock based and deferred compensation expense stock.
Stock based comp portion of SG&A was lower than guidance, primarily related to variable accounting associated with stock price declines at the end of the quarter compared to second quarter levels.
However, given recent stock price increases some of these benefits will likely flow back to our fourth quarter P&L as a result of the variable accounting treatment.
Looking out into 2022 is paying benefits returned to pre COVID-19 levels I would expect our SG&A cash SG&A costs to increase by about $200000 per quarter of our current levels.
Moving on to Capex during the quarter cash payments for capital expenditures net of disposals was approximately $4 3 million of which $3 $1 million related to prior quarter deliveries. This was higher than our original expectations. Anthony mentioned the drill pipe conversions, we are undertaking, but we did experienced slightly higher capitalized cost.
On to on the two rigs reactivated during the quarter and we brought forward some purchases for some items based upon supply chain concerns.
Looking forward reactivation costs on our 16th and 17 rigs were aggregated in a $3 million range and there are a few long lead time item items for future rig reactivation, we could bring forward into the fourth quarter based on stretching supply chains.
With these items along with maintenance Capex on our operating rigs, we would expect approximately $4 million to flow through our cash flow statement for Capex net of dispositions during the fourth quarter.
Our backlog at September 30th stood at $19 7 million of which 52% expires in 2021.
Obviously, our backlog is substantially lower than historical levels as most of our rigs are now operating on short term pad to pad contracts, which is allowing ICD to capitalize on our view of continued day rate improvement opportunities.
Moving on to our balance sheet at quarter end, we reported net debt, excluding finance leases and net of deferred financing costs of $139 million.
This debt was comprised of our term loan and reflects $4 $3 million drawn on our revolver.
The PPP loan was fully forgiven during the quarter and resulted in a one time benefit of $10 1 million or $1 38 per share. This benefit was excluded in our reported adjusted EPS and EBITDA numbers.
Finance leases reflected on our balance sheet at quarter end were approximately $6 million.
During the quarter, we raised approximately $2 $2 million under our ATM and equity line of credit programs and an average share price of $3 <unk> per share.
Financial liquidity at quarter end was $31 $1 million comprised of $4 $3 million cash on hand, $8 9 million available under our revolving credit facility $15 million available under our term loan accordion and $2 $9 million remaining under our equity line of credit.
We did enter into a credit facility amendment that effectively permitted us to drawdown are according to fund. The October one 2021 interest payment also subsequent to quarter end, we completed our current authorized ATM program raising another $5 4 million in proceeds at an average price of $3 41 per share.
All of this bolsters financial liquidity and Asia decisions on future rig reactivation.
Now moving onto fourth quarter guidance.
We expect operating days to approximate 1380 days representing.
Representing 15 average rigs working during the fourth quarter, which is an almost 9% sequential increase from the third quarter. This includes the reactivation of our 16th rig in October and the transition of a few rigs between customers our 17th rig won't reactivate until year end is not expected to benefit this quarter.
We expect fourth quarter margin per day to come in between.
<unk> 4600, $50 million and $4800 per day.
Representing an approximate 37% sequential increase over third quarter.
At the midpoint of the range.
We expect revenue per day to come in between 18000, and 318500 per day, an approximate 8% sequential increase with many of the day rate increases on contract roles only partially benefiting the fourth quarter.
Cost per day is expected to range between 13000 $613800 per day higher than the third quarter as we absorb increased increases associated with pay increases instituted towards the back half of the third quarter offset partially by efficiencies from our larger operating rig base.
We also expect to incur an additional $500000 of operating expenses associated with two planned rig reactivation of these costs are not included in on top of in addition to our cost per day guidance.
Unabsorbed overhead expenses will be about $600000 and also are not included in our cost per day guidance.
As I mentioned, we're expecting further pay increases later in the fourth quarter, which will impact our go forward cost per day metrics for the most part we are able to cost pass this along to our customers and then they will be partially offset also by efficiencies gained from our larger operating base again is we expect to enter 2022% to 17 rigs operating.
23% increase compared to our third quarter average rig count.
On the cost per day side, what we'd expect to see with the 17 rig operating fleet went through returning to pre pandemic pay levels as our cost trending around the $13500 per day level, excluding pass through costs, which we rebuilt to customers are recouped through day rate adders.
Moving into 2022, we do expect run rate SG&A costs will increase somewhat once we return to pre COVID-19 pay and benefits.
Fourth quarter cash SG&A expense is expected to be flat with the third quarter, but we expect to see while our quarterly run rate to increase by approximately $200000 per quarter beginning in the first quarter of 2022, as pre COVID-19 rates and benefits our reinstituted.
On the stock based compensation portion of SG&A, given where our stock price is trading today, we expect variable accounting of stock based comp that caused an increase in our quarterly stock based comp during the fourth quarter best estimate based on current share prices as those expenses will come in around $900000 for the quarter.
So overall SG&A, including cash and stock based comp for the fourth quarter is expected to come in around four 1% to $4 2 million.
We expect interest expense to be approximately $3 $9 million during the quarter and depreciation expense to be consistent with third quarter results.
For the quarter, we expect total weighted outstanding shares to be approximately $9 $4 million 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 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.
Kelly try your question. Please press Star then two.
Our first question today comes from Daniel Burke with Johnson Rice.
Yeah, Hey, guys can you hear me.
Yes, Sir Hello, Danny.
Morning.
Let's see.
Okay.
Good to hear.
The way the market is trending.
Maybe I guess just to.
When we think about the incremental rig reactivation heading into next year. Anthony could you could you talk about what is this cost escalate with those costs really entail what you need to do to get those incremental 300 series rigs ready.
And then.
Is it realistic to think.
But you could get north of 20 rigs deployed into the market by the second half of next year.
Yeah, Daniel good to hear from you and I appreciate that question. So first part of it.
What all required remember we.
We were starting up rigs last year.
The rigs that had kind of stack last so to speak and then you start working through your inventory the rigs that we're reactivating now are rigs that had been idle over a year.
In addition, we moved some pieces around over the course of the year to try and lower Capex on earlier reactivation. So as we reach deeper into this inventory now the big difference today versus the past there is the obvious time equipment that just sits there idle.
Rubber elements.
Deteriorate.
<unk> robust, but probably the bigger differences the equipment re certifications and overhauls that are required. So as you think about startups at least that ICD in the fourth quarter and the first half of next year compared to a year ago.
We're having to send to and top drives and draw works and mud pumps and stuff like that and that's the bigger driver. When you think about the capex to startup break today versus a year ago.
On your second question.
Obviously, we want to make sure the market is going to be there before we pull the trigger on incremental reactivation feel pretty confident based on our comments that it will be so we got to pace. These things in a way that we can bring them out and do it.
Exceeds our customer expectations, but most importantly is done in a safe way.
Not sure you meant to ask about people, but you guys have heard me talk a couple of times now people is the access to people attracting and retaining people to our industry is a big challenge.
That's not unique to ICD, that's that's everyone in the business.
I think it's driven as much by what's happening around the industry.
Obviously in addition to just the growth in the business. So for ICD, yes, it's going to be can we make the decision that we can do this in a way that's safe and exceeds our customers' expectations.
Do we have.
Enough and sufficient liquidity to pull the trigger and make that decision and are we confident that we will have access to the people that will allow us to achieve our goals.
So yes, I do think it's possible, it's probably going to be a slower pace of reactivation than what we saw in 2021, but.
I do think a bogey of 'twenty, maybe it's not the middle of the year, maybe it's Q3.
But sometime midyear Q3, I do think it's very possible based on what I see.
Okay, Great I appreciate that and then.
So Anthony I always appreciate your candor in addressing the rate environment out there it was helpful.
To get to get the commentary on.
We're fully loaded 300 series rates kind of setup are right now.
Maybe just for context could you just.
Maybe just.
For context talk a little bit about just where rates were call. It middle of this year June this year versus where they are today, just just to kind of again, maybe expand on the level or magnitude of rate Escalations that you all have witnessed.
Yes, there is a lot of confusion out there Daniel because we our fleet we've been exposed to spot market rates since February of this year, which is when our last legacy contract rolled over so as you as people listened to and considered a commentary that we provide compared to what may be peers are reporting.
Our peers that have had more legacy contracts that were negotiated last year or even the year before that have continued to be part of their fleet mix. Today. So when you think about where spot market rates were back in the summer.
The 300 series market was evolving at that time, we have been talking about it now for a few quarters I think it's obvious now that that is in fact, a niche that's evolved but if you look at things on an apples to apples basis, and I'm really looking at 200 series rigs.
It was anywhere in the in the upper teens.
Depending on what particular day rate adders may be involved in the contract.
Whereas today, which is just a quarter quarter and a half down the road.
Yeah.
The contracts that we're negotiating and even for our 200 series rigs as we said in our comments start with it too.
<unk>.
It's.
As the rig available is it crude hasnt been working those are the things that our customers are really interested in here about and if you've got a rig that has been working for a while.
Youre in a pretty good position when youre talking to customers today, especially guests that are looking to add rigs to the fleet, sometimes its a high grade opportunity maybe they they want to do something different and maybe they want to do something safer maybe they want to do it more efficiently and that puts you in even a stronger position as you are having those discussions with customers.
It's a few thousand dollars a day difference just in the last few months.
<unk>.
Very focused on that.
As you probably know.
Yes.
Very helpful background, there I guess the last.
Quick one just to calibrate Phillips.
Wouldn't mind do you have the current fully diluted share count.
Yes, it's nine points about $9 4 million shares.
Okay, Yeah, I mean, I could get in the vicinity, but wanted to make sure I was in the right spot. Okay, well look guys again, thanks for the time this morning I appreciate it.
Thank you.
This concludes our question and answer session I would like to go ahead and turn the call back over to Anthony Gallegos for any closing remarks.
Okay. Thank you so much guys I just wanted to say, thank you to everyone for dialing in today.
Greatly appreciate your interest and support.
And ICD.
Definitely would like to say a quick thank you to our customers for the trust in the business that they provide to ICD.
Definitely I want to say, thank you to our employees for their hard work and dedication because without them, we would not be able to achieve these results.
We definitely couldn't be the company that we aspire to be.
Just a side note. This Thursday, we will be celebrating our 10th birthday as a company.
Big for US we've accomplished a lot.
In a very short period of time and definitely looking forward to the next decade and even beyond.
So as I close out here just want to say look forward to talking to everyone. As we report our fourth quarter results next year and 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.