Q1 2022 Independence Contract Drilling Inc Earnings Call
Good day and welcome Gary.
Independence contract drilling incorporate first quarter 2022 financial results and conference call.
All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation will be an opportunity to ask questions.
We felt that this event is being recorded.
I would now like to turn the call over to Mr. Philip Choyce, Executive Vice President and Chief Financial Officer.
Go ahead.
Good morning, everyone and thank you for joining us today to discuss Icd's first quarter 2022 results.
With me today is Nancy 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 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 refer to non-GAAP measures during the call.
Please refer to the earnings release, and our public filings for our full work 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.
I will go through the details of our financial results for the first quarter of 2022 and a couple of minutes.
Before that I want to briefly discuss the very strong demand for our pad optimal super spec fleet.
I want to describe how ICD is positioning itself. So that we may continue to participate in and benefit from this up cycle.
And I want to close by sharing a couple of recent contract awards, which I think illustrate the very positive effects of the transformation, which ICD is undergoing which benefits all of our stakeholders, including our employees our customers and our stockholders.
First just a few comments on the quarter.
We've reported revenue per day of $21823.
Margin per day or $5754.
This represented a 15% sequential increase in our revenue per day, and a 63% increase in our margin per day compared to the fourth quarter of 2020 one.
Overall, we reported adjusted EBITDA of $3 6 million, representing a 146% sequential increase from the prior quarter. This is the third straight quarter, we have reported meaningful sequential margin and EBITDA improvements, which illustrates the significant operating leverage in our business as we continue to navigate that.
Current up cycle.
What I think is most impressive about these first quarter sequential improvements that we were able to achieve them, even though we absorbed sequential labor increases of approximately $900 per day.
And had approximately 31 idle nonoperating days associated with rigs transferring between customers more idle days than we expected, which was primarily driven by trucking delays and relocating rigs.
Most importantly market conditions and demand for our pad optimal super spec rigs continues to improve rapidly. So I'm quite optimistic about continued meaningful sequential improvements in upcoming quarters.
For the second quarter, we're forecasting 30% to 35% sequential increases in margin per day and based on the contracts. We have in place today and a significant number of rigs that will rewrite again throughout the third quarter, we expect meaningful sequential growth in margin per day, and adjusted EBITDA continuing during the back half of the year.
And into 2023.
Okay.
When I look forward I believe we are in the early innings of the most constructive market for pad optimal super spec rigs, we have seen and there are several factors driving this dynamic which make us quite excited about icd's future.
First we remain constructive on oil and natural gas prices.
Commodity prices continued to strengthen during the first quarter as a result of several factors and ICD will continue to benefit from our particular commodity exposure as a consequence of the geographic positioning of our rigs.
We remain laser focused on what we believe are the two most important oil and natural gas basins in North America.
The Permian and the Haynesville.
Through this market position roughly two thirds of our rigs are targeting all and a third are targeting natural gas.
We believe this to be the optimum split for our fleet at this time and our concentration in two basins allows us to benefit from greater economies of scale and contributes to better rig margin and more meaningful free cash flow as the cycle continues to unfold.
Second the market for pad optimal super spec rigs such as our shell Driller fleet is as tight as I've ever seen.
For the most part they're virtually no hot Super spec pad optimal rigs available today.
If an E&P operator wants an incremental super spec rig it will likely have to come out of stack and reactivation costs today are very significant.
Unlike past cycles, we're not seeing a flood of spending to reactivate rigs, even though demand from our customers might be there.
Capital discipline on the part of our customers our competitors in our industry is vastly different compared to prior cycles, driven by limited capital markets investor requirements, focusing on returns over growth and balance sheets that will not support on <unk> growth.
For the most part contract drillers are not reactivating drilling rigs unless the day rate and contractual terms provide adequate returns on capital and rapid payback of the incremental investments.
But the market needs more pad optimal super spec rigs and we expect the U S land rig count in particular in our target basins will continue to increase this.
This demand coupled by industry capital discipline is driving day rates and margins higher at a pace not seen before.
Today, leading edge spot market day rates are about $30000 for.
For pad optimal super spec drilling rigs, but costs are higher and even at these leading edge day rates. We believe further day rate increases and longer tenor contracts will be necessary in order for contract drillers to make the necessary investments to reactivate additional rigs in the U S that the U S land market requires.
In terms of Icd's marketing strategy I expect our strategic decision to focus on short term pad to pad contracts, which has been driving meaningful sequential margin improvements to really pay dividends over the remainder of 2022 and beyond.
Right now we do not have a single contract with a term extending past mid October of this year.
What that means is all of our rigs will be repriced during our customers' normal annual budgeting season, and our entire fleet should rewrite to at least current market day rates by the fourth quarter of this year.
And with our term loan refinancing now behind us.
We have recommenced, our rig reactivation program with our 18th rigs scheduled to enter the market early to mid July with two additional rigs to follow later in 2022.
All three of these rigs are 300 series rigs, which are in the shortage supplying command the highest day rates and demand for these types of rigs remains very strong.
Reactivation cost for these three rigs should range between three and a half in four and a half million dollars and we will achieve simple payback periods of less than one year on these investments.
Moving forward with the day rate and margin expansion, we're anticipating I expect we will begin evaluating opportunities with our customers to begin adding term coverage to our contract portfolio as we navigate the second half of 2022 and beyond.
All of this sets up very nicely for ICD with the market, we see in front of US we are expecting meaningful free cash flow generation that we can use to not only fund future rig reactivation with very attractive returns and paybacks, but also decrease our net debt position over time and substantially reduce and normalize our overall.
Debt to EBITDA ratios.
Of course, while the market and demand for our contract drilling services continues to improve there are headwinds that ICD and our industry must continue to address.
The labor market is tight state as we've ever seen it competition for people exist not only within our industry, but with other industries as well this is particularly acute for the entry level position.
Also supply chain challenges exist as the global economies continue to recover from the pandemic and its effects.
Philip will go through more of the details, but we are making some investments to ensure the critical spares needed to support our business are available.
In spite of all of these challenges our operating teams and personnel are doing a fantastic job as we strive every day to provide the safest and most reliable contract drilling services in the U S contract drilling industry.
As I close out this portion of my prepared remarks, I want to highlight that it's not just our day rate margins that are improving.
Performance of our rigs remains strong whether the metric of safety downtime rig move times or days versus depth and that is reflected in our evolving customer mix.
Two highlights I'd like to share include a couple of recent contract awards.
We have recently commenced a contract involving a 300 series rig.
With one of the Permian very largest most active public independent operators, a very demanding and well respected customer that we have not previously had the opportunity to work with we also believe this customer will be an attractive candidate for additional 300 series rig additions.
And on the ESG front, we're very proud that we were selected by current customer one of the largest internationally in PS in the world to drill their pilot carbon capture well program here in the lower 48.
Selection of IC deeper there's hope high profile project over our larger public competitors is further validation of the quality of our equipment. The professionalism of our drilling and support teams and reflects the confidence our customers have an ICD to do everything we can to exceed their expectations, while providing the safest and most efficient contract.
Drilling services possible.
I'll make some additional concluding remarks, but right now I'd like to turn the call over to Philip to discuss financial results and the outlook in a little bit more detail.
Thanks Anthony.
During the quarter, we reported an adjusted net loss of $11.2 million or 99 per share and adjusted EBITDA of $3 $6 million.
Reactivation cost expense during the quarter were negligible.
We operated 16.3 average rigs during the quarter.
We expect utilization to be relatively flat during the second quarter, but good to improve again as reactivated rigs in our fleet beginning in the third quarter.
Revenue per day came in at $21823, representing a 14, 6% sequential increase.
Cost per day of $16069.
A little higher than guidance sequential increases were expected based upon field pay increases instituted at the end of 2021.
However cost per day metrics were impacted by fewer operating days associated with longer transition time for a couple of rigs moving between customers, which is primarily primarily the result of trucking delays.
SG&A cost for the quarter were $5 $2 million, which included approximately $1 million of stock based deferred compensation expense.
Sequential increases in cash G. In SG&A related to the re institution of pre COVID-19 pay as well as further compensation adjustments to address a tightening labor market.
As well as elevated recruiting and onboarding costs.
During the quarter cash payments for capital expenditures net of disposals were approximately five points of $7 million.
This included $4 $5 million relating to prior year deliveries.
Breaking this capex out approximately $3 million related to rig reactivation $2.4 million related to maintenance capex and $300000 related to investments in capital inventory and spares.
There was approximately $3 8 million of Capex accrued at quarter end, which we expect will flow through during the second quarter of 2022.
Yeah.
Plans to reactivate three additional rigs by the end of 2022 at an aggregate cost of between 12, five and $13 $5 million. We are increasing our 2022 annual capex budget from $10 million to $24 million to account for these rig reactivation as well as investments in capital spares, we plan to bring forward into 2022.
To mitigate supply chain risks and meet customer requirements.
Our backlog of term contracts with original terms of at least six months at March 31 stood at $13 $1 million all of which expires in 2022.
In fact, virtually all of it expires by the end of the third quarter of 2022.
So we are well positioned to take advantage of day rate momentum in an improving market and rewrite our entire fleet by the beginning of the fourth quarter.
Obviously, our backlog is substantially below 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, we completed the refinancing of our term loan in March issuing 157, and a half a million dollars of convertible notes.
Small portion of this convertible debt balance is classified as a derivative liability for GAAP purposes.
A quarter in reported net debt of $141 million net of deferred financing costs.
It was comprised of the convertible notes and seven $8 million drawn on our revolver, but excluded finance leases finance.
Finance leases reflected on our balance sheet at quarter end were approximately $5 $2 million.
During the quarter, we raised approximately $3 $6 million under our ATM program.
Our financial liquidity at quarter end was $21 $3 million comprised of $9 $3 million of cash on hand, and $12 million available under our revolving credit facility.
We also improved our working capital position as a result of the term loan financing with it being approximately $6 million at quarter end, representing a $12 million sequential increase from the <unk>.
2021.
Q4, we intend to further normalized working capital over the remainder of 2023 2020 through cash additions to the balance sheet.
Q4, and our cash flows and funding of our planned capital capital in rig reactivation program.
Anthony discussed our forward outlook for meaningful expansion of day rates and margins and operating cash flows, which we anticipate along with current liquidity will be sufficient to fund these investments.
Our convertible notes provide us the flexibility to pick interest at our option and while we are executing upon our rig reactivation program. We do expect to utilize this option unless additional more desirable capital sources come available to us.
Now moving on to the second quarter guidance.
We would expect operating days to approximately approximate 1531 days, representing 16.8 average rigs working during the quarter we.
We expect margin per day to come in between $7500 and $7750 per day, representing an approximate 32, 5% sequential increase at the midpoint of this range.
We expect revenue per day to come in between 24004 hundred $24500 per day with many of the day rate increases on contract roles only partially benefiting the second quarter.
Cost per day is expected to increase $500 to $700 per day sequentially higher as we incur investments associated with staffing and other costs for future rig reactivation in a very tight labor market.
Unabsorbed overhead expenses will be about $600000 and are not included in our cost per day guidance.
We expect second quarter cash SG&A expense to be approximately 4.1 $4 $1 million.
<unk> based compensation expense is expected to be approximately $1 $1 million.
We expect interest expense to be approximately $6 $4 million and depreciation expense to be flat with the second with the first quarter.
Approximately $400000 of anticipated interest expense will be cash base with the remainder related to amortization of deferred financing costs are related to interest on the convertible notes, we expect to pay in kind.
Under the terms of our convertible notes indenture following expected approval of matters that are 2022 annual meeting in June our Pik interest rate under the notes reduces substantially effective September September 30 of this year.
That would reduce our quarterly interest expense by approximately $1.8 million quarter compared to the second quarter guidance.
Due to a lower interest rate interest rate becoming applicable.
The second quarter, we expect tax expense to be a benefit of approximately $150000.
And for capital expenditures, we expect approximately four and a half million dollars net of dispositions to flow through our cash flow statement during the second quarter.
And with that I'll turn the call back over to Anthony.
Thanks, Philip before opening up the call for questions I want to say that we're very pleased with icd's strategic positioning in the current market environment.
We have a strong wind in our sales with very strong demand for our pad optimal super spec rigs.
Our recent contract awards provide tangible evidence and increased confidence that the investments, we're making in our 300 series rigs combined with our consolidated footprint and very good operational performance will generate strong returns on investment and cash flows.
With our recent refinancing complete we continue to position the company. So that all of our stakeholders can continue to participate in this up cycle as we increase our margins EBITDA and free cash flow.
We expect all of this will enable us to reduce our net debt position and significantly improve leverage ratios as we move forward. During this upcycle and untap the value embedded in Icd's rig fleet and operations.
So with that let's go ahead and open up the line for questions.
Okay.
Okay.
Well begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone.
Speakerphone, please pick up your handset before pressing the keys.
With growing your question. Please press Star then two.
We will pause momentarily to assemble the roster.
First question comes from Bonkers with Johnson Rice. Please go ahead.
Good morning, gentlemen, how are you all today.
We're doing good how are you doing good.
I'm hanging in there are the best in Ohio.
You know obviously the rig market is super tight right now and you have short duration on your contracts can can you talk about the delicate dance that you all are doing with the E&ps right now are on term contracts I'm sure that they want to term up rigs for next year and have that assured.
Supply of a rig can you talk about you know where you all are thinking about that could shake out and when you could start adding some term contracts in the mix.
Sure Don.
At least for us.
You know over the last couple of quarters, we've not had a lot of customers wanting to term up rigs.
And of course, you know we've been very vocal in our position given our outlook that we.
We don't want to we didn't want to term up rigs either so I think it's a little bit early I think as we move through the calendar year.
And discussions.
And Ernest began around 2023 programs.
That's where you're going to see more.
<unk> and frankly ourselves.
Be more willing to talk about term.
We just believe with the market for for our class of rigs.
And as tight as it is that.
That there would be plenty of opportunity to continue to show day rate progression over this year and that I'm pleased to say at least through the first three months of the year. That's the way that it's played out.
And of course, it's our expectation that is going to continue so we're not in a great big hurry.
But.
Day rates now as you've heard in the in the remarks are starting at leading edge rates are starting to start with a three.
If you think about what that does in terms of security.
And things like that I believe as we move into the back half of this year, you'll see ICD begin to.
Put a little bit more backlog on the books and be willing to entertain those term types of discussions.
Okay.
You know, obviously capex is going up a touch here.
Can you can we dig into to what spares, you're adding is that is that strings of pipe or kind of.
Other large components that you know have a long lead time today that youre trying to to to firm up to where you don't have any potential issues in the future.
Yeah. So part of it is is drill pipe as you mentioned, but also remember our supply chains across industries are stretched I mean, whether it's the.
The person that provides us parts for our engines are traction motors or things like that Don just given the.
The way things are playing out out there we need to make sure that we have access to equipment that we need to keep our rigs running keep downtime low keep our customers happy.
Fill up did you give the the biggest part of its drill pipe. There's a lot of components of items that will limit for a little bit more than we have before but it's not necessarily new engines or something like that it might be us overhauling and engine and spare.
And things like that but the biggest thing as far as bringing new equipment board is drill pipe.
And what is the lead time for that today is it is it still in that nine month range or is it that's probably six depends what you're ordering about probably.
Six to nine months.
Okay.
You know one of your competitors will not really competitor cactus. This morning talked about some lower spec rigs.
Expected to hit the market.
In the next six to nine months or so do you see.
The e&ps kind of Capitulating here because of the limited availability of low specs or sorry high spec rigs in and looking towards you know older rigs just just to get things done.
The first that I had heard this morning on that any insight on the market.
E&ps go into lower spec rigs.
I think Dan I think and.
We're focused on U S. Unconventional as you know, we don't have a lot of exposure or opportunities to see into the particular markets that may be driving that type of commentary if I had to guess, that's probably a reflection of where oil and gas prices.
Is or maybe there's some conventional activity and basins outside of our two core markets that may be stimulating.
That sort of demand that would be my guess, because we certainly when we think about our target customers the programs that that our engineered our rigs are engineered to prosecute.
They they require.
Pad optimal rigs rigs that can walk they require.
Super spec capability AC driven equipment three before configuration in terms of mud pumps and generators and things.
So.
We certainly have not had that put in front of us as a.
As another opportunity for our customers, but I think it's probably a reflection of the markets, where we can be.
Right.
Good quarter I appreciate I appreciate the color and look forward to catching up in about a month or so after that.
Thank you dawn.
Okay.
Thank you next question comes from John Daniel Simmons. Please go ahead.
Hey, guys are not Simmons, but this morning, John how are you.
I'm surviving I wanted a follow up to John's question.
Just a little bit but.
Given just how tight the market is.
I would've assumed that more E&P companies would be coming to you asking for for term.
I'm just curious.
Why that might not be the case your thoughts.
Yeah.
The market has moved really fast John I mean, you know as well as I do you just dial back three or four months ago, what the outlook was.
When you talk to people.
A lot of times, the commentary around where the market was going where it would be in a year from now it was but look at the strip. The 12 month strip for example, and as this year has played out no. One saw the geopolitical situation that or update in February and the impact that's had I think it's a it's I think it's a function of the market moving very fast.
Last I think it's the short term focus on the part of the customers I think maybe there is some.
Some surprise at how fast rates have moved and certainly where they are right now.
Those are reasons why.
Neither party has been that interested in terming up rigs up till this point yeah. Mark did you have I think I think it's also a function of you know power.
How are customers you know their capital discipline them and set their budgets for next year.
So signing a term contract into the into that.
That type of commitment maybe in the past they were more willing to do that I think they are waiting more for their budget. Their budgetary seasons. So I think there's gonna be more opportunities when that happens.
Okay, and then just sort of a confrontational question. So forgive me in advance, but just trying to get it right.
But it.
This is the same.
Times are tough tough business, where our customers beat on you when things get soft and vice versa. So I'm just really hear your thoughts on this but.
It would seem to me an existing customer would want to keep a high performing hot rig, which you have right.
And assuming that's the case, which I'm sure it is.
Again.
Why not take a more aggressive approach with respect to contract.
Renewals and I understand the need that'd be a customer service business.
My own I'm, just I want to hear your thoughts at all.
Yeah. So John I think we have not just ICD, but the.
The industry has taken a much more aggressive approach Ah I assume you're referring to pricing.
Well I mean, clearly, yes, I mean, we've definitely seen a price and the industry has done a great job, but now that youre getting the price and margins are expanding nicely.
Just why not sit down I'm, just making this up and I'm not trying to again not trying to be a joke, but like why don't you, saying Hey, if you want to keep this rig that's going to mature in October you need to sign up right now for another 12 months today. So that what you have now a firm backlog of much more duration.
Just your thoughts I don't need yes, no because up until now John we've not wanted to 12 month term contract fair enough. Okay.
At day rates right, we think there's further headroom.
And where rates are going to go I think.
We're breaching the $30000 a day Mark now on a spot market, leading edge day rate basis, and I think that's gonna look and feel a lot like when we went through 'twenty.
Got it.
There's a psychological kind of barrier. That's there it's taken a little time I think for for.
For people to get their head around that.
That but I don't think it stops there either so.
Are there enough submit that we'd not wanted to term contracts up till now.
Fair enough. Thank you for indulging me and it's remarkable to see the change in performance.
No problem John Thanks for your questions you bet.
Thank you. This concludes our question and answer session.
Like to turn the call back over to Mr. Anthony Guy angles for closing remarks.
Okay, well. Thank you very much guys, we'd like to say thank you to everybody for participating in today's call are certainly want to wish everyone, a safe and productive day and with that we'll sign off from Houston. Thank you Dave.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.