Q4 2021 Independence Contract Drilling Inc Earnings Call
Good day and welcome to you.
Contract drilling fourth quarter and year end 2021 financial results conference call.
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I would now like to turn the conference over to culturally executive Vice President and Chief Financial Officer. Please go ahead.
Good morning, everyone and thank you for joining us today to discuss Icd's fourth quarter 2021 results with me today is anti 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 a 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, when we 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.
Thanks, Phil and Hello, everyone.
Philip will go through the details of our financial results for the fourth quarter of 2021, and a couple of minutes for.
For the most part we pre released our fourth quarter financial results and an investor presentation filed with the SEC in January so I won't focus much on that in my prepared remarks today and will let Philip summarized those items for you.
Today I want to focus on three things I want to provide you an update on the market and our expectations for continued day rate March margin expansion in 2022 one.
I want to provide you some context on our geographic and customer evolution during the fourth quarter.
And I want to close with a summary of our 2022 strategic and financial goals.
I'm proud to report that ICD achieved its two primary financial goals during 2021 word.
We achieved positive EBITDA as we exited the third quarter and improved on that in the fourth quarter. Most importantly, the company's operating fleet was generating positive cash flow entering 2022.
With expected annualized EBITDA exceeding expected maintenance capex and cash interest payments as.
As we exited 2021, our improved financial performance was a function of frequent re pricings that came from our short term contract posture and our increasing 300 series utilization.
Driving day rate improvements on contract renewals and new contract placements.
Achieving these goals provided ICD the springboard, we needed for 2022, which will allow us to meaningfully increase cash flow and continue to execute on our business plan.
In the fourth quarter, we reported revenue per day of $19042 and margin per day or $3538.
As noted in our press release margin per day was impacted by year end incentive compensation accruals for field level managers of approximately $343 per day.
Excluding that accrual margin per day was $3881, representing a 12% sequential increase.
We ended the year with 17 rigs contracted.
<unk> will provide more details, but during the fourth quarter, we achieved a sequential increase in revenue per day up approximately 11%.
More important I want to reaffirm what we expect to see here in the first quarter of 2022, we expect first quarter 2022 revenue per day to improve another 13% to 14% compared to fourth quarter levels and most importantly margin per day to improve between 45, and 50% compared to our adjusted fourth quarter level of 3008.
$181.
First quarter margin expectations due reflect cost associated with the reinstatement of field manager incentive comp.
Yes, Lee first quarter day rate increases more than offset labor inflation associated with pay adjustments implant implemented at the end of the fourth quarter.
As we sit here in March we have good visibility towards the second quarter as well for the second quarter based on contracts. We have in place right. Now we would expect second quarter revenue per day to improve.
20% to 23% compared to fourth quarter reported levels and margin per day to improve approximately 95 to 100 per cent compared to reported fourth quarter levels.
This continued improvement is a function of having 17 rigs working benefiting from pad to pad repricing and our ability to pass through some cost inflation related primarily to the labor market.
These large sequential increases in day rate and margin. We are seeing are things we have forecasted on prior earnings calls and.
In our not only indicative of the strong market. We're in but also our intentional strategy to focus on shorter term contracts leading to rapid margin improvement.
This focus and the outstanding efforts of our sales operations and support teams continues to provide benefits as seen in our sequential improvements we remain resolute in our belief that the industry is in the early stages of the cycle and maintaining a short term posture as it relates to contract terms in the near term will allow faster margin expansion.
And ultimately result in margins exceeding pre pandemic levels.
During the fourth quarter, we repriced contracted are re contracted 11 rigs, including four rigs placed with new customers. In every case the day rate increased significantly.
We saw average increases of $4100 per day, or roughly 25% with some increases approaching 40%, which drives our confidence in the large margin expansion embedded in our first and second quarter guidance and more importantly, as the market continues to improve driven by very tight rig supply all of our rigs will have at least one.
One more rate adjustment in the back half of 2022 which we believe will continue to drive positive momentum throughout this year.
I mentioned that I wanted to discuss customer and geographic evolution, which occurred for our fleet.
The fourth quarter was transformational for ICD in this regard in addition to reactivating in contracting our 17th rig which is an ICD 300 series rig working for a large public independent in West, Texas. We also completed our geographic consolidation strategy by moving all of our rigs into our West, Texas and Haynesville operations.
This involved mobilizing two active rigs from the Eagle Ford to West, Texas, and a third act to break from the Eagle Ford to the Haynesville.
While we remain positive on the Eagle Ford and the opportunities. It presents the industry, we elected to leverage our strong operational presence in our two core markets that'd be in West, Texas in Haynesville, which we believe will drive operational and cost efficiencies.
After this consolidation 65% of our rigs are working in West, Texas, and 35% are working in our Haynesville market I believe this to be a very healthy balanced exposure to both oil and natural gas directed drilling activity.
With ICD laser focused on serving north America's Premier unconventional oil and natural gas place.
While completing the three geographic relocations, we were able to increase the number of ICD rigs contracted the multi rig customers in two cases and establish a contractual relationship with another first time customer with whom we're already discussing adding a second rig later this year.
We also enhanced our customer mix over the past quarter, I think icd's balanced exposure to both public and private E&ps is somewhat misunderstood.
So I want to point this out today of our 17 contracted rigs almost half our working for public E&ps and if those working for private E&ps today. Four currently working for one of the largest operators of any type in the Permian basin.
Moving on to how we view the market for rig reactivation and the opportunity for ICD I think it's important to emphasize how tight the rig market is today, which is driving our positive day rate margin expectations.
Theres minimal excess supply of Super spec rigs today and operators Lucky if they're able to find a hot rig available just to give you. Some context on this about two weeks ago. We had a 300 series rig come free due to one of our customers an ability to have a follow up Pat available, but we had a commitment on that rig within hours at signet.
It can be higher day rates.
So as the industry adds drilling rigs there.
They're going to have to reactivate rigs that had been stacked for more than two years, which is quite costly for the drilling contractor all in rig reactivation costs are increasing for the industry and we estimate total cost incurred to reactivate a rig has increased at ICD to approximately $3 million per rig for the next couple of reactivation we believe.
This will drive further increases in day rates and margins across our industry as we're focused on driving meaningful meaningful returns on capital for our shareholders.
So what is the opportunity set for ICD to reactivate rigs we.
We have seven idle rigs in our marketed fleet today all of these rigs are 300 series rigs rigs meeting, our 300 series specification or in the shortest supply in the industry and they command the highest day rates.
Our most recent contracts we have signed today for 300 series rigs will generate margins greater than $10000 per day on an all in basis.
And we would expect to do even better than that on a rig reactivation meeting paybacks on these rig reactivation investments are well under one year for our next three rigs cost and 3 million per reactivation and one year payback for our last four reactivation that will cost more in the four and a half million range the pointed.
As demand exists for this class of rig and its extremely strong of.
Of course, there are labor and supply chain headwinds that have to be managed as well but.
But the market needs these rigs.
And we would have reactivated all of these rigs already at the company had the financial liquidity and resources to make those investments.
That brings me to my final topic I want to discuss in my prepared remarks, which are icd's goals and objectives for 2022, obviously, providing the safest and most reliable operations as always our first priority, but right. After that for 2022 first and foremost we need to address our term loan indebtedness and our financial liquidity, which is.
Holding us back from aggressively executing on the opportunities in front of us.
Although the term loan doesn't mature until October 2023, it will be classified as a current liability on our third quarter 2022 financials absent an extension or refinancing.
It will be challenging in.
It may be unlikely.
We commenced additional rig reactivation until we address our term loan maturity. So given these factors and the overall improvements in the business climate. We believe now is the opportune time to address our term loan and liquidity, even if headwinds exist and the overall credit markets and the trailing 12 month financial performance contract drilling industry and ICD.
As disclosed in our SEC filings and in our press release, we have been actively engaged in seeking opportunities to comprehensively address the term loan, which will likely involve equity or equity linked securities and I can assure you that we've been working diligently on this but.
But we will not be at a point to comment publicly with any details on whether we will be successful in this regard until we have binding commitments from third parties.
Another overall objective is to position the company. So that we exit 2022 and enter 2023, earning average margins per day across our entire fleet of $10000 per day or more.
This isn't a forecast, but where we think we need to be and where we think we can take the company based on the market opportunities that we believe we're going to be available to us.
From my prior remarks, you can see our margin progression is accelerating and we're moving in the right direction.
Assuming a successful term loan resolution that provides us additional financial liquidity, we believe making steady progress towards and ultimately achieving this objective will be the springboard to the reactivation of additional drilling rigs and on tapping the value for our stakeholders that we believe is embedded in ICD.
So to close out my prepared remarks, I'm happy to say that I'm proud of where we are today, we're generating positive EBITDA again, and delivering and expecting to continue to deliver very meaningful sequential improvements over the next several quarters given rig supply tightness I believe there are existing opportunities for the company as the Super spec market continues to benefit.
Increased E&P demand for Super spec rigs, we are expecting 2022 margins per day to be higher than what we were reporting pre pandemic driven by improved 300 series fleet mix and a more optimistic contracting strategy and associated pricing.
We believe we are in the very early innings of this up cycle and we look forward to capitalizing on the opportunities in front of us.
With that I'll turn the call back over to Philip So he can walk us through the fourth quarter 2021 financial results for the company.
Thanks, Anthony during the quarter, we reported an adjusted net loss of $13 $2 million or $1.35 per share and adjusted EBITDA of $1 $5 million reactivation cost expense during the quarter were negligible.
We operated 15 average rigs during the quarter, we expect utilization to increase sequentially sequentially by approximately 10% during the first quarter of 'twenty, two compared to our fourth quarter average, which includes a few rigs transferring between customers.
And as Anthony mentioned, we have reactivated our 17th Reagan It began drilling mid January .
Revenue per day came in at $19042 per day, representing an 11% sequential increase.
Cost per day of $15504 was higher than guidance cost per day excludes approximately $400000 of unabsorbed overhead costs.
Costs were impacted by higher labor costs as field pay adjustments instituted during the back half of the quarter occurred as well as a $343 per day, Anthony mentioned associated with the year and incentive compensation accruals for our field based managers.
Bill pay now exceeds pre COVID-19 levels, and we rent and we have reinstituted off field manager incentive structure for 2022.
Obviously wage inflation continues for ICD and our industry, but as Anthony mentioned, we were able to more than fully offset these costs through our re pricings and contractual provisions.
SG&A costs for the quarter were $3 9 million, which included approximately $800000 stock based and deferred compensation expense.
During the quarter cash payments for capital expenditures net of disposals were approximately $6 5 million there.
There was approximately $4 $5 million of Capex accrued at quarter end, which we expect will flow through during the first quarter of 2022.
Backlog of term contracts with original terms of at least six months at December 31, 2021 stood at $16 1 million all of which expires in 2022.
In fact, 85% of it expires by the end of the second quarter. So we are well positioned to take advantage of day rate momentum in an improving market.
Obviously, our backlog is substantially below the historical levels as most of our rigs are now operating on short term pad to pad contracts, which capitalizes on our view of a strong market.
Moving onto our balance sheet.
At quarter end, our reported net debt, excluding finance leases and net of deferred financing costs of $136 $3 million.
This debt was comprised of our term loan and $6 $3 million drawn on our revolver.
Finance leases reflected on our balance sheet at quarter end were approximately $5 $8 million.
During the quarter, we raised approximately $7 6 million under our ATM and equity line of credit programs at an average price of $3 39 per share.
Our financial liquidity at quarter end was $27 $3 million comprised of $4 $1 million of cash on hand of 11 $3 million available under our revolving credit facility and $11 $9 million under our term loan accordion.
We terminated our equity line of credit agreement prior to year end.
We did enter into a credit facility amendment that permitted us to pay our January one interest payment of approximately $3 $2 million in kind through a reduction drawdown in our available accordion balance.
Also subsequent to year end, we raised another $3 $6 million in proceeds through ATM offerings at an average price of $3 36 per share.
I also want to comment on a noncash charge of approximately $18 million, we reported as income tax expense during the quarter.
We reported and a corresponding deferred tax liability of approximately $18 million on our balance sheet as well.
This charge relates to a 382 ownership change driven by a new large shareholder reporting early in the fourth quarter the.
382 limitation resulted in the loss of approximately $85 million of net operating loss carryforwards.
After giving effect to these losses, our NOL carryforwards at year end stood at approximately $432 million subject to annual use limitations.
As a result of this change we will now begin realizing tax benefits when we generate book losses.
We expect tax expense will continue to be limited to state franchise tax items in 2022.
Now moving onto 2022 year end and first quarter guidance.
Fiscal year 2022 matters, our capital budget for 2022 is $10 million. This is based upon operating of 17 rig fleet.
Actually 8 million relates to maintenance capex around $200 per operating day, and the remaining $2 million relates to carryover costs relating to activation of our 17th rig and discrete capital spare items.
As mentioned in our press release, there was approximately $45 million of 2021 Capex accrued at year end that will also flow through our cash flow statement during 2022.
As Anthony highlighted we likely won't begin to reactivate our 18th rig until we are able to successfully comprehensively address our existing term loan debt, which we're actively.
Working on.
Cash SG&A for the year is estimated to be approximately $15 $5 million and then noncash SG&A expense will be approximately $3 $5 million with the caveat that most of noncash SG&A subject to variable accounting based upon the closing price for our common stock at the end of the applicable reporting period.
The increase in cash SG&A expense from 2021, primarily or primarily relates to return to pre COVID-19 pay normalized incentive compensation accruals.
Which we had lowered during COVID-19 and some salary adjustments due to a tightening labor market.
Depreciation expense for 2022 will be approximately $40 million.
Okay.
Now moving on to first quarter guidance.
We expect operating days to approximate 1485 days, representing six and a half averaged 16 five average rigs working during the quarter, which represents a 10% sequential increase in average rigs compared to the prior quarter.
We have a couple of rigs moving between customers during the quarter.
We expect margin per day to come in between 5800 $5900 per day, representing an approximate 51% sequential increase at the midpoint of this range.
We expect revenue per day to come in between 21620 $1700 per day with many of the day rate increases on contract roles only partially benefiting the first quarter.
Cost per day is expected to range between 15000 and $715900 per day sequentially higher as we absorb increases associated with pay increases instituted at the end of the fourth quarter.
Yeah.
Anthony mentioned that significant margin in day rate expansion is expected to continue into the second quarter.
Unabsorbed unabsorbed overhead expenses will be about $800000 during the quarter and also are not included in our cost per day guidance. This includes approximately $200000 of one time costs associated with exiting a stack yard that is no longer needed.
We expect first quarter cash SG&A expense to be approximately $4 $3 million with a sequential increase associated with returned to pre COVID-19 pay and incentive comp levels.
The adjustments associated with a tightening labor market and seasonal increases in audit and other professional fees.
Stock based compensation expense is expected to be approximately $1 million with a sequential increase being driven by variable accounting based on our closing stock prices at the end of the reporting period.
We expect interest expense to be approximately $4 million and depreciation expense to be approximately $10 million.
We expect tax expense to be a benefit of approximately half a million dollars.
Capital expenditures, we expect approximately $7 million net of dispositions to flow through our cash flow statement. During the first quarter and this includes the four and $5 million of expenditures made in 2021 for which payment will occur this year.
And with that I will turn the call back over to Anthony.
Thanks, Philip before I open up the call for questions I'd like to quickly summarize the three key takeaways from our prepared remarks won the Super spec rig market is extremely tight.
Two because of our Super spec rig fleet, our target markets and our reputation ICD is benefiting from this market tightness and three our outlook and goals for 2022 are reasonable and when attained will allow ICD to achieve meaningful financial and operational improvements during 2022.
Operator, let's go ahead and open up the line for questions.
We will now begin the question and answer session.
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Okay.
Our first question comes from Bob Christy.
Johnson Rice. Please go ahead.
Good morning, guys. How are you all this morning.
Doing good good.
Hope you're well.
I am thank you.
You've talked a lot about the contracts and how many you're going to price. This year can you just give us a sense of what youre kind of contract duration is or do you want to talk about it in a different way how many contracts will roll this out this year.
And how that could afford or.
Translate into into higher pricing going forward.
Yeah, Don I appreciate the question.
We've.
We've been intentional about our contracting strategy as you know.
Rates went down quite a bit as a result of COVID-19 we.
We needed to get them back to somewhere more appropriate.
It's tempting as rates move up, especially in the range, where we are now to begin to maybe term up some rigs, but again, we've been very intentional about wanting to keep contract duration short so that that gives us an opportunity to reprice more frequently and youre beginning to see the results of that flowed through our financials.
<unk>, which is very important first quarter, our fourth quarter was was progress youre going to see even more here in the first especially second quarter, but the average contract duration today for US is kind of pad to pad. We've got a couple that are six months in duration, but youre just talking a very small number of the 17th.
Contracts, which we have so to.
To answer the question it is pretty much pad to pad.
We're expecting a repricing here in the first half of the year.
Done some of those here already.
Through.
Early March will be repricing here in the second quarter and then we expect at least one more repricing between now and the end of the year across the fleet.
I appreciate the color there and can you give us just a sense as to what leading edge pricing is today is it in that upper twenty's yet.
Yeah, we have two classes of rigs that we market at ICD all of our rigs are super spec.
The 200 series and the 300 series rigs are our rigs the 300 series rigs.
Certainly are being priced in the range that youre talking about.
Where we're seeing day rates approaching 30, which I think you've heard some people talk about it.
With the adders, whether it be drill pipe technology things like that.
For our 200 series rigs.
Obviously, they are priced at a little bit less 23, five to 24 is a good baseline number for those rigs, but even for that class of rig we see very high demand for it as well, especially one that's hot.
So that's pretty much the right structure to data.
Okay, and and and on the Labor side, obviously labor is tight in all forms of industry not just in the energy industry today.
What is the ability or how are you passing that through is it just on the day rate side or do you have you know contractual arrangements to way you can pass through or any kind of uplift that may be seen in the back half of the year on the labor side.
Yes, so our contracts have a wage escalation provision and then.
Sometimes there is a minimum threshold that you have to exceed in order to put that to the contract but that to your customer, but it's been my experience in my career and it's certainly playing out.
In this current up cycle as well that customers generally.
Don't push back.
On that because just the human capital.
And the part in the role that it plays in what we do.
Is so important and everybody recognizes the benefits of retention.
We just use the cost escalation provisions in the contract where a contract is short in duration.
We would recover that in.
And the repricing and obviously, we want to have the the increase in day rate more than exceed the increase in cost because we're very focused here at ICD, an increasing margin.
But that's the way it's addressed done okay.
One final one for me I mean, obviously, there's been some movement on the ATM here can you give me a sense as to what share count should be using for the first quarter.
About 11 11 three.
Yeah.
Okay, I'll turn it back I appreciate it.
Thank you dawn.
Yeah.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Anthony Gallegos for any closing remarks.
Yes.
Thank you so much we want to say thank you to everybody for dialing in today as we discussed there are a lot of really good things happening at ICD. We've worked hard over the last 18 months to get here and were looking forward to the rest of this year.
And even in the period beyond.
None of this would be possible if not for our talented and motivated employees and I want to thank them for their hard work and dedication.
So with that we'll sign off from Houston. Thank you everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.