Q3 2022 Independence Contract Drilling Inc Earnings Call
Good day and welcome to the independence contract drilling third quarter 2022 results conference call.
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I would now like to turn the conference over to Philip Choyce. Please go ahead.
Good morning, everyone and thank you for joining us today to discuss Icd's third quarter 2022 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 a complete discussion of these risks we encourage you to read the company's earnings release, and our documents on file with the SEC and.
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 the definitions of our non-GAAP measures and before I turn it over to Anthony I just wanted to make one comment we did file with the SEC today, along with our press release and updated inverse.
<unk> presentation, which will be available on our website as well. So we encourage people to go take a look at that when they have a chance.
And with that I'll turn it over to Anthony for opening remarks.
Thank you Hello, everyone and thank you for joining us today for our third quarter earnings Conference call. During my prepared remarks today I want to focus on a couple of key topics.
First a significant margin expansion that continued during the third quarter and our prospects for continued margin progression which are bright.
Second operational achievements during the third quarter and our outlook for additional rig reactivation.
And third some overall strategic objectives, we are laying the groundwork for as we look forward into 2023 and beyond.
The first just a few comments on the quarter overall Icd's third quarter results came in well ahead of expectations on revenues margins and adjusted EBITDA.
We reported revenue per day of 28646 and margin per day of 11341.
This is a 15% increase in revenue per day, and a 27% increase in margin per day compared to second quarter reported results.
We had some one time items affect our reported SG&A numbers during the quarter, which Philip will go through in his prepared remarks, but overall, we're pleased to report third quarter adjusted EBITDA of 12, and a half million dollars, which is a 35% increase from the second quarter also higher than expectations.
I want to point out that our reported revenue per day and margin per day are all records for ICD.
To put this quarter's performance into perspective, the only time ICD as reported higher quarterly adjusted EBITDA was during the fourth quarter of 2018, when all 32 of our rigs. We're operating we only operated about 18 rigs this quarter.
Which given we believe we're still in the early innings of this up cycle really highlights how much stronger and well positioned ICD is today than we were at anytime in our history.
We look forward to opportunities to report record EBITDA in the coming quarters and beyond.
More excitingly, we expect this momentum to continue.
Market conditions and demand for our pad optimal super spec rigs continues to be robust and we are forecasting meaningful significant improvements in margin per day, driven by continued recognition of the value provided by our rig fleet, including increasing market penetration of our 300 series rigs are 200 to 300 series conversion opportunities and additional.
No planned rig reactivation, which are in the pipeline fill.
Philip will provide more detailed guidance for the fourth quarter, but I wanted to highlight that we are we currently expect our margin per day to increase to between 12500 13000 per day.
And looking into the first quarter, we expect margin per day to further increase over reported third quarter results by 28% to 32%.
Now, it's not just our rig margins that are on par with or exceeding those of our larger public company peers, we believe our operations and the value we provide to our customers are best in class as well so to provide you. Some tangible evidence of this we were proud during the third quarter to be the highest rated U S land drilling contractor for service and professionalism.
Energy point research, a leading third party industry source for such information. This is the fifth consecutive year. We have received this coveted award.
That same poll of E&P companies operating in the United States. We were also one of three drilling contractors recognized for overall customer satisfaction.
I point this out because we talk a lot about our rigs and our 300 series rig penetration, but it's our operating and field personnel, who work hard every day to exceed our customers' expectations at the well site, which ultimately is driving so much of ICD success.
During the third quarter, we reactivated our 18th rig, which you went to work under a one year contract our 19th rigs mobilizing now also under a one year contract in our 20th rig is contracted and scheduled for mobilization later in the fourth quarter.
Both of these additional rigs you're going to work in the Haynesville and will generate revenue per day in the high thirty's, allowing us to achieve simple payback of both rigs reactivation capex and less than one year.
We have slated or twenty-first in 'twenty second rigs for reactivation during the first quarter next year and reactivation work is already underway.
In our last call I mentioned that 200 to 300 series conversion program, which we had commissioned the first conversion is in progress as we speak for an existing customer of ICD and will be completed later. This week, we have accomplished so much this year and I couldn't be more proud of how our operations and field personnel have continued to deliver high levels of customer service and performance.
Which our customers have come to expect from ICD. This is especially noteworthy given the unprecedented challenges involving the labor market and supply chain, which continued to plague the global business community.
I want to touch on contract backlog well our strategy thus far in the recovery has been on securing shorter term pad to pad contracts as day rates have continued to strengthen and accelerate over the last three or four months. We have began increasing our backlog of term contracts when it makes sense for both ICD and our customer.
Since the second quarter, we've increased our backlog, 87% to 102 million approximately 69% of this backlog extends into 2023.
We did not have to cut our rates to secure this backlog in fact, our backlog extending into 2023 is priced at approximately 35300 per day the equivalent of over $17500 margin per day based upon third quarter cost day metrics all of our term.
Racks contain margin protection features that protect our contracted margins against labor and other inflationary cost increases. This 2023 backlog pricing gives us a great deal of confidence about further margin progression beyond the first quarter 2023 guidance I just provided.
While we are increasing our contractual backlog, we're not calling the top of the market for day rate progression by any means and right now most of our rigs will reprice at least once more over the next three to six months instead.
Instead, we are laying on layering on some contract backlog because we as we think about the large capital investments now required to reactivate rigs and consider the significant margin generating opportunities available in our market today we.
We feel like it makes sense, where a portion of our available days to be termed out.
This approach will provide us with continued exposure to future increases in margin per day opportunities. Meanwhile, helping to lock in a portion of our future cash flow to help position us regarding our near and longer term strategic initiatives.
As we think about additional rig reactivation and conversions beyond our 22nd rig.
We'll be balancing a variety of strategic factors first and foremost we'll continue to look for full contractual payback for all rig reactivation and conversions essentially what we've been doing.
In addition, we will look to balance the timing of these projects against several competing factors, including our level of contractual backlog, our desire to reduce or eliminate future dilution from additional pik interest, especially considering the rising rate environment, we're in and expect it to persist working capital liquidity and evaluating where we are.
In terms of marketing and contract Windows for additional rigs, which we believe will be anchored around our customers' annual budgeting cycle based on what we've seen here in the back half of this year I bring this up because while we are doing the things necessary today to put ourselves in a position to be able to reactivate our 20, <unk> and 24th rigs during the summer of 2023 well.
Also may consider pushing those reactivation is toward the end of 2023, if it allows us for example, the ability to stop picking interest earlier than we previously indicated without sacrificing plan working capital improvements.
So as I bring these prepared opening remarks to a close I want to say that in ICD, we're very focused on creating a pathway towards steadily decreasing our net debt position as we move towards the refinancing window for our convertible notes one of our long term goals is to reduce our net debt to adjusted EBITDA ratio meaningfully.
We intend to do this through a combination of increasing adjusted EBITDA and accompanying free cash flow generation as we build our operating scale and eventually slow our investments in additional rig reactivation.
For reference we are currently at 341 times lever on an annualized basis, using our third quarter results.
So while we have some work to do in this regard our forward visibility relating to rig reactivation and margin progression gives us a great deal of confidence that we will make meaningful progress towards this goal in 2023 and beyond.
Some additional concluding remarks, but right now I want to turn the call over to Philip to discuss financial results and outlook in a little bit more detail.
Thanks, Anthony during the quarter, we reported an adjusted net loss of $4 $8 million or <unk> 35 per share and adjusted EBITDA of $12 $5 million. We operated 17.4 average rigs during the quarter.
Anthony previously mentioned, our revenue per day and margin per day metric. So I will not focus on those during my prepared remarks.
SG&A costs were $7 million, which included approximately $1 $7 million of stock based and deferred compensation expense, both cash SG&A and stock based comp expense were higher than guidance. Due a couple of items cash SG&A was negatively impacted approximately $300000 by dispute settlement and sequential increases in cash SG&A.
Over the second quarter also were driven by higher incentive compensation accruals based upon improvements in the company's financial performance and increases in stock based compensation expense related to full quarter Expensing of awards granted in June of this year.
Interest expense during the quarter aggregated $8 $1 million. This included $2 million associated with noncash amortization of deferred issuance cost and debt discount, which we excluded when presenting adjusted net income.
We paid a crude interest under our carnival convertible notes and cod at the end of the quarter.
Tax benefit for the quarter was $700000.
During the quarter cash payments for capital expenditures net of disposals were approximately $9 $4 million breaking this capex capex out approximately 54% related to rig reactivation and 200 to 300 series conversions, 39% related to maintenance capex of 5% related to investments in drill pipe capital inventory spares.
Capex is trending higher based upon supply chain constraints, causing us to bring forward drill pipe and other capital spare purchases as well as rig reactivation expenses of course are also inflationary pressures.
Particular, reorder earlier than expected long lead time items for our twenty-first twenty-second rigs during the quarter aggregating approximately $5 million.
Moving on to our balance sheet adjusted net debt was $174 million at quarter end. This amount represents the face amount of our convertible notes and borrowings under our ABL and ignores impacts from debt discounts deferred financing and finance leases, we did not issue any shares under our ATM program during the quarter.
Our financial liquidity at quarter end was 27 $5 million comprised of $7 $6 million of cash on hand, and $19 $9 million available under our revolving credit facility.
Moving on to fourth quarter guidance.
We expect operating days to approximate 1690 days, representing 18.4 average rigs working during the quarter.
We expect to exit the year with 20 rigs operating in our 'twenty, one and 'twenty second rigs reactivated during the first quarter of 2023 or potentially early second quarter in the case of the 22nd rig.
We expect margin per day to come in between 12005 hundred $13000 per day.
We expect revenue per day to come in between 30000, 130000 and $300 per day with many of the day rate increases on contract roles only partially benefiting the fourth quarter.
Cost per day is expected to range between 17000 and $317600 per day.
Based on contracts in hand, and assuming spot market pricing and operating costs remained stable right. Now we would expect first quarter 2023 margins to come in between 14005 hundred $15000 per day.
Unabsorbed overhead costs for the fourth quarter will be about $600000 and are not included in our cost per day guidance.
We expect fourth quarter cash SG&A expense to be approximately $5 million stock.
Stock based compensation expense is expected to be approximately $1 $7 million.
We expect interest expense to approximate $8 $2 million of this amount approximately $2 million or relate to noncash amortization of deferred financing and debt discounts.
Depreciation expense for the fourth quarter is expected to be flat with the third quarter.
We expect any tax expense or benefit during the fourth quarter to be negligible.
For capital expenditures, we expect approximately 13 $5 million net of dispositions to flow through our cash flow statement during the fourth quarter. The majority of this will relate to the completion of our 19th and 20 rigs as well as the acceleration of the purchase of long lead time items for our 'twenty, one and twenty-second rigs. Some also relates to upgrades for which we will be reimbursed by customers.
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With that I will turn the call back over to Anthony.
Thanks, Bill before opening it opening up the call for questions I want to briefly summarize icd's strategic positioning and what I think it means for ICD stockholders as we think about this positioning I think it's important to highlight how much we've truly transformed our company, thus far and the opportunities for our investors going forward as we round out 2022.
And step into 2023.
First our utilization and margin growth coming out of the pandemic is best in class since coming off the pandemic bottom we've started up more rigs than anyone else in the contract drilling industry as a percentage of each contractors working fleet at the pandemic. Bob also today, our daily rig margins are the best in Icd's history and are on par with in exceeding some of them.
Larger company peers as we continue to earn recognition from our customers for industry, leading customer service and professionalism.
We have the youngest and we believe the best in class rig fleet the market for pad optimal Super spec rigs is as tight as we've ever seen and ICD is one of only a few drilling contractors with visible excess rig capacity that can be economically reactivated into this market. We continue to demonstrate our fiscal discipline by securing contracts earn full simple payback.
Back on the reactivation Capex, we are investing and finally, we are building contractual backlog and we have substantially improved our liquidity and balance sheet and expect meaningful improvements in leverage ratios and other debt metrics as we move through 2023 and beyond.
So summing all of this up ICD checks all the boxes, whether you're looking for best in class assets, leading rig margins are an outstanding customer base and rigs focused on the most important oil and gas shale plays in U S. Unconventional ICD delivers on those metrics with all this in place or operations or closing any historical financial gap between us and our loss.
Your public company peers, and we believe all of these efforts and results will work toward closing the stock valuation gap between ICD and our peers as we continue to exit path execute upon ICD strategic initiatives.
So with that operator, let's go ahead and open up the line for questions.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And the first question will come from Don Crist with Johnson Rice. Please go ahead.
Good morning, gentlemen, how are you all day.
Good Dan how are you doing great down there as well.
I wanted to touch on slide 21 of your presentation with the revenue per day and contracted backlog and just ask you know I know, there's differences between rigs and operators and contracts.
From series two series 300 rigs.
I wanted to know.
Is is the numbers for 23 of those representative of average numbers or is that just the couple.
A couple of rigs that you have contracted today and what would that delta be would it be 10% last one on average across your entire fleet or something like that.
Yeah. So what's that are in that presentation. What's in that backlog is going to be a mix of mix of rigs throughout the quarters.
Obviously towards the end.
Quarter Theres not that many rigs in the backlog.
The there is a mix of 300 series and 200 series rigs in there and a couple of them are our contracts on a rig reactivation, we're putting outbid the 19th and the 20th rigs that we have contracted the delta between the 200 series rig and up 300 series rig is probably $2500 a day.
It could be a little less could be a little more depending on the application and the customer.
We are seeing for the 300 series rigs at the high end.
Day rates in the high Thirty's and we have we do have.
With revenue per day could be over for a particular contract could be over $40000 a day with adders, it's not quite that high for on the high end for our 200 series rigs, but again, it's going to be a couple of thousand dollar stay below.
Okay. So just looking at kind of modeling purposes.
These are good numbers for kind of an average across your fleet does that is that a correct that wouldn't be I would say even more towards the 300 series certainly on the higher day rates.
Okay. So yeah, we want.
Sorry go ahead.
Yeah, we can from it from a day rate perspective, we're going to get.
You're going to be a mix of rigs.
Leading edge, what I, just talked about but not every rig is going to get a leading edge because not every customer requires the same type of equipment, as but yes, but different customers different drilling programs.
Okay and as far as the 200 series upgrades, obviously last quarter, you talked about a couple of them in the pipeline, where do we stand on that and obviously youre doing your first one now, but how many more in the pipeline and what's the interest level there too.
You know a majority of your 200 to 300 series upgrade.
Yeah, Don the first one as we noted is underway will be completed by the end of the week, we are doing that in the field.
Rig move that's a little longer than normal.
Customers onboard with that.
So that one will be complete we talked about doing a couple of them by the end of the year, our timing on the second and the third is kind of slipped into 2023, and that's really being driven more by the customer's requirement.
Then anything else in terms of converting all of the fleet.
No. We never said that we're going to do that I don't know that we'll have to do that we're only going to do it where there's an opportunity there for us to invest in incremental capex and earn a return on that incremental capex. So really pleased with what we've been able to do with our 200 series rigs.
Notwithstanding the upgrades rigs continued to perform very very good day.
Day rates on those are continue to move up like they are with the rest of our fleet.
So we look at that 200 300 series conversion of that class of Bragg is really something more optimistic for the company.
We do have a couple of kits on the ground. So that you know when our marketing team is talking to current customers and prospective customers.
It's something that we can execute on a very easily and very quickly.
So that's how we're thinking about them.
Okay and just one final one for me you know obviously, you've started to turn them up a little bit of your fleet here versus you know mid part of 'twenty. Two as you take advantage of pricing what is the optimal level. There is do you want to get to 40 or 50% of your fleet contracted.
With one plus near term backlog or what's your thoughts around that.
Yeah. So obviously, we want to think about where we are in the cycle certainly the the free cash flow generating opportunities that are available will factor into that decision as well. So you know what we've said and how we think about it is just looking at it.
From a portfolio perspective.
Yes.
Where we see.
No longer offer better opportunities may be for the the bigger rigs maybe you don't go quite as long on those if you're not investing incremental capex.
Whereas the other part of the fleet you might put a little more term on the books around those but.
I would expect us as we roll into 2023, especially as our customers begin to announce.
Announce what their plans are that's going to provide us ample opportunities to to look and try to find that optimal amount of our backlog relative.
Relative to the available days that we'll have in 2023, so it's not a hard and fast number.
I I would expect us to continue to add some backlog, but but not look to commit everything that we have and we just think there's more upside from where we are today.
Yeah.
I appreciate all color I'll get back in queue.
Yes, Sir thank you.
Thank you and the next question comes from Steve <unk> with Sidoti. Please go ahead.
Good morning. Thank you I appreciate it I appreciate all the color on the call well have to get a sense if youre seeing any shifts in demand are there any particular strong pockets. It sounds like the two rigs you're sending out most recent breakthroughs that are coming out are coming into the haynesville and any diversification in demand in any.
Areas should be more targeting.
No we've been really pleased with the way our.
Our geographic markets have played out over the year, obviously very very excited Steve about what's happening in the Haynesville.
We were able to grow for example, our market share in the Haynesville over the.
The third quarter and we currently represent about 14% of the market share over there compared to about 3% in the Permian. So we talked in prior calls about.
How you know and in the Haynesville, where want to view the requirements over there not just from a technical standpoint, but especially from an operational standpoint or higher it a it allows us to exploit the.
Competitive advantage that we have relative to.
Some other contractors and continue to build on that presence over there so.
Obviously gas prices have moved up over this year things have been a little bit more flat here over the last couple of months, but a lot of optimism in the industry certainly a lot of optimism within ICD about where the gas market is going over the coming years and I'm very very excited that we can play a part in that.
Are there any haynesville versus Permian or them, our customers more likely to want term in one or the other or is it no difference.
No I think our opportunities to push term maybe are a little better in the haynesville and it and it gets back to just the number of players in that market, it's not quite as fragmented as it is in the Permian for example.
The technical requirements and like I said, certainly the operational requirements are a little bit higher.
So.
Frankly, that's probably where we've put more backlog the term on the books as in the Haynesville market compared to the Permian Sea I would acknowledge that there is an advantage in that respect for us in the haynesville today.
Right right.
As Youre rolling out these rigs I'm, assuming you're adding what roughly 2025 people per rig you're adding how challenging is that becoming.
And how do you mix the cruise Apis.
As you are having.
To add to your tier two crew sizes.
Yes, your numbers are spot on its 22% to 25 people per rig coming out and you know a lot of risk associated with starting up.
New rigs and the way that we manage it is youre going to hire 22 to 25 people, but you don't put them on that rig coming out they get dispersed within our fleet, our operating fleet and we bring 22 people from existing rigs people that have been with us a while that understand and know our systems in.
Processes that you know I bought into our culture.
In terms of how hard has it been we've not had a problem attracting.
Attracting talent and bringing them in the company that the challenge that I think all of us have had as around retention and retaining those people in the problem really is in the challenge really has been at that lowest level that entry level within the company youre dealing with somebody that is going to be very young at most likely.
You know first time to.
Have a job, especially one as demanding as orange level positions are and we continue to try to be very creative in finding ways to enhance that retention because it's not just the dollar impact there there's impacts to safety impacts to efficiency productivity client satisfaction.
And all of those things so.
To answer your question is as we have continued to bring rigs out.
We have been able to find that talent and and continue to be very very focused in the company on what we call people development, which is making sure that we have.
Talent, that's ready to step up and take that next position.
Okay.
Thanks, Anthony Thanks, Phil I appreciate the time thank you.
Dave.
The next question will be from Jeff Robertson from water Tower Research. Please go ahead.
Good morning, Anthony and Philip Anthony you talked about Rick you talked about reactivating rigs 23, and 'twenty four middle part of next year.
And then you also mentioned.
The decisions around how long do you want to pick interest on the notes just given where rates are can you talk a little bit more about the specifics of what your thought processes around continuing to pick interest through I believe it's the first quarter of 'twenty four and how that plays into your capital assumptions for incremental reactivation.
Yeah, I'll I'll I'll give you my views and then I'll, let Phil chime in as well, but you know look we yes. We've said all along we want to be very very deliberate in making capital investment decisions.
One big difference in oilfield services, and certainly ICD today versus prior cycles is.
We don't want to grow just simply to grow.
It's undeniable that we live in a world and live in times with tremendous uncertainty.
I'm very proud and pleased that we're going to meet our goal of ending this year with 20 rigs operating.
Another couple in the pipeline that are going to come out in the first quarter and where margins are today with 20 to 22 rigs running.
We believe that it will give us the scale to achieve the longer term goals as we're thinking about where do we want to take the company.
You do have to be mindful of where capex is today on incremental startups.
But we're going to be spending 8 million plus on rigs in this kind of time period.
That as you know has a variable rate interest on it so as interest rates have moved up.
That service cost is going up as well so.
That's kind of how I'm thinking about it in a fill up you want to add anything yeah. So the pik interest feature does two things for us It gives us capital to reactivate rigs right now, but the other important piece of it it's allowing us to improve our working capital position, we do have some goals there to.
Add cash to our balance sheet and two.
Remove all that we do have some debt borrowed on our revolver. So if we can get to a $15 million to $20 million cash and no revolver debt, that's kind of where we'd like to have the company.
We think about an opportunity if we could if we if there's an opportunity to push a rig that we may put out in the middle of the summer to the fall, we're actually that's a better marketing window, because it's closer to our budget our customers' budgeting season, and we can remove for example that last pick interest payment because the way we think about that pick interest of if were.
Out of Reagan, where picking interest that that interest component as a as a capital cost of that rig and so we're looking at that as part of our return analysis as well so that would be the.
The reason.
Do we think about it.
And just to follow up on Slide 26, where you talk about the.
Potential debt reduction.
Really good potential improvement in the leverage ratio.
Philip is there a point in time, where our leverage ratio target, where you think the company could take advantage of.
To consider some sort of capital market alternatives to refinance the convertible notes into something more conventional.
Yeah. So the convertible notes has a.
Defeasance period begins 18 months prior to maturity. So that's going to be in early 2015. There is a make whole so doing it earlier is more expensive than doing it later that would be the window, where we can look at refinancing alternatives and that's really what we're trying to do is.
And Anthony mentioned, we want at that point in time in that window to have our debt to net debt to EBITDA ratio as low as possible. So we can either refinance the notes and pay them off in their entirety with free cash flow or if there's a portion we need to refinance we're going to do that on a regular way refinancing and.
If you look at where we're going at that slide you are talking about right. There we're not we're assuming.
The margins that are consistent with what our first quarter guidance says.
And so.
So we feel very good about our ability to do that in a market that we think is going to be constructive during this period of time.
Yeah.
Cash balance that you're showing growing this should be a big.
The big benefit as you think about the options with those notes.
I would like to thank you for taking my questions. This morning.
Thank you Jeff.
Thank you and the next question will be from Dave storms from Stonegate. Please go ahead.
Morning, gentlemen, thanks for taking my call just want to circle back on <unk> question with regards to contract lengths.
Are you currently happy with the length of the contracts or it's rates begin to rise should we expect to see contract lengths.
That would expand even further.
Yeah, Dave starting to layer on some six month and one year contract side.
I'll tell you we're in discussions right now on an 18 month contract as well so yes, I would I believe that the demand the incremental demand is coming into the market.
Around 2023 programs is going to create so much competition.
For Super spec pad optimal rigs that there will be opportunities to to contract rigs for longer than one year and certainly in that environment. You would expect to see day rates continue to move up.
And in that environment, I would expect us to take advantage of those opportunities and put even more backlog on the books again not contracting everything I think we want the exposure we want the torque that the pad to pad contracts are going to provide.
But certainly these kind of economics, I would expect us to take advantage of that.
And Dave I think the other thing to think about not just us but the industry. The reactivating the rig that are reactivating or getting more expensive. There is inflation there is supply chain constraints and things like that so as you look at the cost to reactivate rigs and at what ICD or even one of our competitors are going to need to reactivate those rigs.
As you are probably going to see rates need to improve and youre going to possibly see contract tenders go out because you are looking at not only you want contractual payback of those reinvestments, which you want to ensure and surety returns as well.
So are you seeing any pushback from customers. When you go to negotiate some of these contracts are do they see it in their best interest as well to lock in these rates and it's kind of a win win where you're also able to essentially the fees some of the costs for reactivating somebody's rigs.
Yeah.
Don't know that I would phrase it as pushback, there's we're at historical levels in terms of day rates in U S land.
No.
Maybe not sticker shock, probably not the right word but.
Clearly as 2022 has played out.
We've been optimistic with day rates will continue to increase our there are some e&ps that believe they.
Maybe they've reached the ceiling, but.
No. We're very optimistic that day rates will continue to go up you think about the types of capital investments that are being made.
Listen to any of our competitors talk about maintenance Capex. For example that that number continues to go up as well and look at the end of the day, we have to earn returns in excess of our cost of capital and when you look at you know the current economics around this today.
Maybe we're treading water.
In that regard.
But we have to generate returns in excess of our cost of capital or we're destroying value. So I believe that that is it.
Another big difference in oilfield services today compared to prior cycles is that I believe we're all thinking about things in this way.
And all of that tells me that day rates will continue to increase if for no. Other reason just just from an economic necessity standpoint.
Yeah.
That's perfect. Thank you.
Sure. Thank you.
And again, if you have a question. Please press Star then one.
The next question is from David Marsh from singular research. Please go ahead.
Hey, guys. Thanks for taking the questions.
Just quickly on the on the convert.
Is there any kind of feature in the convertible note that would allow you guys to.
Kress conversion of it if the stock closes above the strike price for a certain number of days is that something you guys would consider at all.
As it's drafted now the conversion is not theres not a mandatory convert feature in there like that.
So it's the conversions at the option of the holder.
Got it.
And I'm just doing some quick math I'm getting about.
I'm getting about 37 7 million shares at the current.
Our value if it were fully converted is that the right number.
It would be a 170 <unk>.
$1 million divided by $4 51, so.
Whatever that number is like.
I think you're about right yes.
Okay.
Beyond that I know, it's probably still a little bit in the planning stages do you guys have a capex budget for 'twenty three yet.
No. We're just starting to work on that now.
The two big variables will be ultimately what is our maintenance capex on a per operating rig basis, but also.
How many incremental rigs are we going to bring out for 2023. So we have started that process. We are working on it now.
But it's a bit early to two to give you guys any guidance today.
Sure completely understand.
And then lastly, when you look kind of across the industry. I mean, obviously, we have a pretty strong.
Your utilization and where you're going where do you think the industry is kind of.
Globally in.
Here in the U S with regards to.
With regards to utilization.
I think it's very high and the reason I say that is if you look at where demand is coming from today in the United States. It's in the U S unconventional plays and within those plays.
In order to be effective you have to have what we call a super spec pad optimal rig.
When you you know best we can tell when you look at that market today.
Utilization is well above 90%.
Another key difference today compared to prior cycles is most of that capacity is controlled by just a handful of companies and where I get really excited is.
When people talk about what 2023 will look like I think the consensus is theres, obviously theres going to be.
More demand for rigs are there theres numbers out there ranging from 50 to 100 incremental rigs over the next 12 months, but what gets me really excited is when you look at where is that incremental supply going to come from there's only four or five companies out. There ICD is one that has some capacity that can come up.
It's something that's reasonable in terms of economics, but half of that incremental supply of Super spec rigs is held by one Guy one company.
And it's 48% of it and that Guy just came out and said he's only going to bring out 16 rigs in the next 12 months.
So this is something that's probably underappreciated by people, but I think it speaks to how strong the market is today and how strong we believe it's going to be in 2023. So obviously, we're very excited for all of those reasons.
Yeah.
Thanks, guys, that's great insight really appreciate it thank you.
Sure.
Thank you Dave. The next question. The next question is a follow up question from Don Crist from Johnson Rice. Please go ahead.
Thanks for letting me back in guys I, just wanted to ask about the supply chain and more specifically drill pipe because one of the major suppliers reported a couple of days ago and said that there was some weakness in there you know growing backlog for five five inch drill pipe can you just talk about that market.
And just overall supply chain and kind of where you see it trending into the first half of 'twenty three.
So we don't there are some drilling contractors that actually buy and rent there are five and a half drop five and half inch drill pipe with their rigs we're not we don't do that.
Not included in our in our day rates and things like.
So we're not buying that type of drill pipe, we're typically buying five inch pipe when we buy it you are looking at six to nine months.
So what we're seeing delivery times.
So that's really that's really what you're looking for there that's pushed out a little bit.
But it's not it's manageable, but it is pushing out.
And what about the other components for.
The reactivation is it getting better or worse or about the same as it's been over the last call it six months or so.
And that gets pushed out a little bit we talked six months ago. When we're talking about reactivating one of our rigs were not really buying a lot of brand new equipment. We're overhauling engines top drive mud pumps that haven't been used for a while and just like other contractors. The first rigs that went out we put them out with the pumps and engine and top drives it where the easiest.
To put out and now we're kind of all at the end of our inventory. So it's really a lot of maintenance capex and a lot of ways that we're having to spend on the front end and just like everyone is supply constraint a lot of those those shops are also supply constraints. So we've got to get into queue sooner sooner rather than later and so that's why we brought.
Forward some of like in particular, the March rig we've already we've already ordered a lot of items for that rig.
Just because we needed to keep it in the queue and we will be doing the same thing on the on the on the on the 20, <unk> and 24th rigs as well.
So that's pushed out a lot it's not 12 months, but it's there's things, we're having to order six six or seven months before.
Before rigs going to be reactivated.
I appreciate the color. Thanks.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Anthony can Diego for any closing remarks.
Alright. Thank you I just wanted to be brief here and thank everyone for their time and dialing in this morning and participating in our call and want to wish you all a safe and productive day. Thank you.
Thank you Sir.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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