Independence Contract Drilling Inc. Q1 2023 Earnings Call
Good day and welcome to the independence contract drilling first quarter 2023 financial results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions.
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To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to Philip Choyce, Executive Vice President and Chief Financial Officer. Please go ahead.
Good morning, everyone and thank you for joining us today to discuss Icd's first quarter 2023 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, well refer to non-GAAP measures during the call.
Please refer to the earnings release, and our public filings powerful reconciliation of net income to adjusted net income EBITDA and adjusted EBITDA and for definitions of our non-GAAP measures.
With that I'll turn it over to Anthony for opening remarks.
Hello, everyone and thank you for joining us for our first quarter 2023 earnings conference call.
During my prepared remarks today I want to talk about four items first I want to highlight our first quarter 2023 results second I want to talk about the current market for Super spec pad optimal rigs.
Third I want to update you on the transition efforts around our Haynesville flight.
I don't want to close out with how all of this is impacting ICD from a financial perspective, and where our focus will be.
But first just a few comments on the quarter overall Icd's first quarter results came in ahead of expectations in terms of adjusted net income revenues margin per day and adjusted EBITDA.
Philip will go through the detail, but I want to point out that our reported revenue per day margin per day in quarterly adjusted EBITDA.
We're again all records for ICD. This is the third quarter in a row, we produced record results in one or more of these areas and provides another data point regarding icd's operating and financial transformation since exiting the pandemic overall adjusted net income came in at $2 4 million buoyed by sequential margin per day improvement.
Percent that drove sequential improvements in adjusted EBITDA of 16%.
In addition to being a record quarter financially the end of the first quarter also marks an important pivotal milestone in transition for ICD when it comes to strategic focus and capital allocation priorities.
Since August of 'twenty, 'twenty, our focus and capital allocation decisions were driven by the need to increase operating scale and <unk>.
Signaled in our last conference call the delivery of our 21st rig will be the last rig we reactivate.
Until market conditions, improve which means meaningfully reducing our overall net debt and related financial ratios will be our highest priority from a strategic and capital allocation perspective. In fact, we improved our net working capital position by $11 7 million and as of today, we have already repaid 3 million of revolver.
Since the end of the first quarter, and we'll look to steadily reduce net debt going forward.
Philip will go through more details in his prepared remarks regarding our plans around this very important initiative for ICD and our stockholders.
Now turning to the market in terms of the overall market and outlook for pad optimal super spec rigs in our target markets of Texas and the contiguous states demand for pad optimal Super spec rigs remains strong in the Permian basin well.
While the overall Baker Hughes rig count for U S land shows a rig reductions since the end of the fourth quarter 2022 most of that reduction occurred in unconventional oil basins outside of the Permian in fact, Permian basin added rigs since the beginning of the year, while the Haynesville has seen a drop but there'll be more rig count.
<unk> come in in the Haynesville, which I'll address in a minute.
We are witnessing some churn in the Permian rig market.
What we're seeing is lower spec rigs, including some AC rigs being replaced with higher specification AC rigs being made available by some Permian and Eagle Ford E&ps trimming their rig count or being displaced by higher specification rigs relocating into the basin from the Haynesville in other basins.
As a consequence, we are seeing a little more rig on rig competition, where rig additions are occurring or a rig replacement opportunity exists.
As we indicated last quarter, we expected to see day rate momentum slow and that expectation is playing out.
While margin per day remains robust we expect it will flatten for the next few quarters it could be choppy for us during the second and third quarters in particular on the cost line as rigs transition from the Haynesville to the Permian still not a bad situation for ICD given current levels, what those levels will allow us to do in terms of pursuing our corporate goals around.
Deleveraging.
We remain optimistic about market momentum accelerating again in the back part of the year, primarily in the Permian based on our expectation that W. T. I will remain elevated in the back half of 2023 rolling into 2024, we believe the Haynesville rig market will remain challenging for at least the rest of this year.
In spite of the Choppiness in the Permian rig market.
Mentioned earlier that we were successful in securing a contract for a 21st operating rig which went to work in the Permian basin early in the second quarter.
Twenty-first rig was a reactivation project that we started back in October of last year would be our last reactivation for a while like.
Like our other 300 series rigs this rig brings to bear the technical capabilities that our target customers prefer today, including being Super spec pad optimal three before mud pump to generator configuration, and enhanced setback and racking capacity.
The rig went to work for an existing customer which happens to be one of the largest private E&P companies operating in the Permian basin.
Now I'd like to provide a quick update regarding the transition efforts involving our haynesville rig fleets.
During our last earnings call I described what we expected the impact of low natural gas prices would be in the haynesville drilling rig market for reference natural gas prices had declined significantly in the prior couple of quarters, and we were anticipating a significant decline in the number of working rigs in the Haynesville.
E&P companies scale back drilling activities aligning to an oversupplied U S natural gas market.
You can see that reduction has commenced in earnest here in the second quarter as drilling contractors are finishing up the pads. They were on during the first quarter when those rig count trimming decisions were made by Haynesville E&P companies.
ICD started 2023 with approximately 50% of our working fleet Gen rigs deployed in the Haynesville market and for US the decision to relocate rigs from the Haynesville to the Permian was obvious.
In response to the impending Haynesville rig count decline on our prayers aren't prior earnings call. We set forth our plans to relocate a portion of our Haynesville rig fleet to the Permian basin with a goal to reach effective utilization of 'twenty, one operating rigs by the end of the year. Following this rebalancing at that time, we estimated relocation costs could rain.
Between $3 million to $4 million and today I'm pleased to report that we remain on schedule to achieve these goals with the caveat that we are still in the early stages of the process right now and we have seen some recent choppiness in oil prices, which if this trend continues could slow the pace of ICD, reaching 21 operating rigs.
By the end of the year and.
Two rigs have already been relocated and are drilling in the Permian with minimal transitional idle time, and I'm pleased that our out of pocket transition cost for both of these rigs were primarily absorbed by our customers three additional rigs have been physically relocated out of pocket trucking costs for these relocations also were not material and below our budgeted.
Estimates.
One of these three rigs is earning early term revenue and we would not expect it to recommence operations until the third quarter, while we were marketing the other two rigs into opportunities with customers, who currently planned for late May and mid June start dates.
Overall, we believe market demand and strength in the Permian for pad optimal super spec rigs as well as our customer base will be strong enough to absorb rig additions to the basin.
That leaves us with five rigs remaining in the Haynesville at this time for those rigs as of today. We have successfully re contracted or are signed extensions for two rigs, which had contract explorations occurring during the first quarter early second quarter.
The other three rigs, which we have contract terms extending into third and fourth quarters. We expect those rigs to continue operating our earning standby revenue during their terms depending on customer requirements.
Depending on market conditions and the Haynesville later this year any of these rigs also could be candidates to move west depending on the interplay between the two rig markets.
So big picture, we're on track with our rig relocation plans and overall transition cost are coming in better than expected at this time again, we are still in the early process, but we feel confident in our outlook. So long as oil prices remain constructive.
I am pleased that today, all of our strategic and financial goals around generating significant free cash flow and reducing overall leverage remain intact. We expect 2023 to be a record year for ICD from a revenue per day margin per day, EBITDA and free cash flow perspective.
I'm excited that in the near term our free cash flow and net debt reduction plans have commenced and will accelerate as we improve our working capital position by paying down debt and putting cash on the balance sheet as we slow our capital investments in additional rig reactivation.
Strategically we remain laser focused on creating a pathway toward generating free cash flow and steadily decreasing our net debt position as we as we move towards the refinancing window for our convertible notes in fact here in the second quarter, we must offer to repurchase $5 million worth of our convertible notes at par the offers at the learner.
There's option so if they don't accept that offer the cash will remain on our balance sheet.
Overall, we must make offers over the next seven quarters, which if accepted by our lenders will total $15 million over the balance of 'twenty 23, and $14 million in 2024th.
In addition, depending on upon market conditions. We may also be in a position to stop picking interest sooner than we previously indicated which also is likely dependent upon the elections of our lenders are relating.
Relating to the mandatory offers I just outlined.
As we have discussed one of our long term goals is to reduce our net debt to adjusted EBITDA ratio meaningfully towards a range of less than one to one and a half times during the refinancing window involving our convertible notes, which began in early 2025 for reference we are currently.
2.27 times Levered on an annualized basis, using our first quarter results, which even with the completion of rig reactivation capex and seasonal first quarter working capital investments represented an improvement over the same metric of two and a half times at year end.
As I mentioned earlier, we've already begun the process of paying down debt everything's in place for ICD to achieve its short and long term financial and strategic goals.
Before I hand, the call over to Philip as I'm sure everyone is aware of Danny Mcneish retired from our board a few weeks ago I wanted to thank Danny for his many years of service to Icd's Board.
I'll make some additional concluding remarks, but right now I want to turn the call over to Philip to discuss our financial results and outlook in a little more detail.
Thanks Anthony.
During the quarter, we reported an adjusted net income of $2 $4 million or 14 cents per fully diluted share and adjusted EBITDA of $21.4 million.
We operated 19.4 average rigs during the quarter or.
Twenty-first rig commenced operations early April and did not benefit the quarter.
Revenue per day during the quarter was $34870 and margin per day was $15665 all sequential improvements.
Cost per day of $19205 increase sequentially, primarily due to higher R&M expense.
First quarter costs also includes seasonal increases for payroll taxes.
During the quarter, we incurred $600000 of unreimbursed costs related to our Haynesville. The Permian relocation program, which are excluded from our cost per day metrics.
Selling general and administrative costs were $6 $7 million during the quarter, which included approximately $1.8 million of stock based on deferred compensation expense.
Sequential decreases in cash SG&A.
Over the fourth quarter, primarily relate to lower and so incentive compensation accruals compared to the prior quarter.
Interest expense during the quarter aggregated $8 $7 million. This included $2.4 million associated with noncash amortization of deferred issuance and debt discounts, which we've excluded when presenting adjusted net income.
We can pay the crude interest under our convertible notes and cod at the end of the quarter.
Tax benefit for the quarter was the debentures.
During the quarter cash payments for capital expenditures net of disposal was approximately $8 $18 $1 million approximately $16 2 million related to payment of prior year Capex accrued at year Ed breaking.
Breaking this these cash payments out approximately 75% related to rig reactivation in 200 to 300 series conversions, which included payments associated with our 20th rig which was commenced operations in late December as well all of our as well as our 21st rig, which we completed during the quarter.
20% related to maintenance, Capex, and 5% related to investments in drill pipe capital inventory and spares.
Anthony you mentioned, we have paused our rig reactivation program suffered for the time being going forward Capex will principally relate to maintenance capex and tubular purchases.
Overall, we have not adjusted our Capex budget for 2023, which was front end weighted as Anthony mentioned, we currently remain on schedule with our rig relocation program and currently do not expect any major adjustment to our rig operating assumptions for the year that would impact our maintenance capex assumptions.
Moving onto our balance sheet from a working capital perspective. In addition to payments on prior year Capex deliveries first quarter balance sheet reflects the normal seasonal impacts on the payments of year end incentive compensation AD valorem taxes and related payments and those payments aggregated $5 $5 million during the quarter.
And overall as a result of these payments and the payments on the Capex net working capital increased approximately $11 $7 million during the quarter.
Adjusted net debt at quarter end was $194 million. This amount represents the face amount of our convertible notes and borrowings under our ABL net of cash and ignores impacts from debt discount and deferred financing costs and finance leases.
As Anthony mentioned following reactivation of our 21st rig our capital allocation focus is now pivoted away from reactivation towards debt reduction and since quarter end, we have already paid down $3 million of debt.
Financial liquidity at quarter end was $22 $1 million for price comprised of cash on hand, and $15 4 million of availability under our revolving credit facility.
This is in addition to the working capital improvement I just mentioned.
Now moving onto second quarter guidance.
The operating days to approximate 1000, and 632 days, representing 17.9 average rigs, earning revenue during the quarter, which assumed several of our recently idled rigs commenced operations late may to mid June on contract opportunities. We are currently pursuing.
Those projects slid to the right or did not materialize exposure to the quarter as approximately 60 operating days.
We expect margin per day to come in generally flat with the first quarter, but with some cost inefficiencies associated with higher contractual churn given the number of days excuse me the number of rigs moving between basins.
Overall, we estimate margins come in between 15015 thousand $500 per day.
On the Unabsorbed overhead expenses will be about $600000. During the quarter and also are not included in our cost per day guidance.
And then on the reimbursed costs associated with our Haynesville Haynesville. The Permian relocation program are expected to be approximately $2 million during the quarter and are not included in our cost per day guidance.
We expect second quarter cash SG&A expense to be approximately $5 million and stock based compensation expense to be approximately $1 $9 million.
We expect interest expense to be approximately $9 $8 million of this amount approximately $2 6 million or relate to noncash amortization of deferred financing costs and debt discounts and.
Depreciation expense for the second quarter is expected to be relatively flat with first quarter and finally, we expect tax expense to be de minimis for the second quarter.
And with that I will turn the call back over to Anthony.
Thanks, Philip before opening up the call for questions I want to briefly summarize icd's strategic positioning and what it all means for ICD stockholders.
Here are a couple of points for you to consider.
First our utilization and margin growth since August of 2020 has been best in class. This speaks to the quality of our people our assets and our performance also today our daily rig margins are the best in Icd's history and are on par with and exceeding some of our larger company peers as we continue to earn recognition from our customers for.
Industry, leading customer service and professionalism. The company has never performed better and I believe all of this will be on display over the remainder of 2023 as we navigate transitioning a large part of our rig fleet from the Haynesville to the Permian.
Second we have the youngest we believe best in class rig fleet the market for pad optimal Super spec rigs remains strong outside of the gas driven basins. We continue to demonstrate our fiscal discipline by deferring further investments in additional reactivation is beyond the twenty-first rig which came out early second quarter and finally, we have substantial.
We improved our liquidity and balance sheet and expect continued progress as.
As we move through 2023 and beyond.
Although softness in gas drilling markets will impact the pace of rig reactivation and is requiring us to reposition some rigs ICD has never been in a better position to navigate these types of short term challenges our operational strength and reputation with our customers has never been stronger our fleet, which has been transformed by the market penetration of our 300 series rigs.
Has never been more valuable.
I'd like to thank our many operation support and corporate team members, which work hard everyday to deliver high levels of safety performance customer service and professionalism, which our customers expect from ICD.
With that operator, let's go ahead and open up the line for questions.
Thank you we.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Tough to tell you a question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Don Crist with.
Johnson Rice. Please go ahead.
Good morning, gentlemen, how are you all day.
Good isn't good Don.
I wanted to start with with kind of rig demand one of the other companies that reported today offered up a rig count assumption that that kind of surprised me and I thought it was very aggressive of another kind of 50 to 75 rigs coming off the market by kind of late summer.
Or are.
Are you seeing kind of any significant reduction in demand because that would imply that you would see some some softness in the oil markets as well and just curious if you're seeing anything of of that kind of magnitude out there.
And Don Thanks for the question.
50 to 75 rigs by the end of the summer feels extreme to me.
But as you know I mean, I don't have a lot of visibility into the conventional all our conventional gas.
Markets are markets outside of our target markets.
Think we've been pretty clear on what we expect is going to happen in the haynesville.
We see another 15 to 20 rigs.
Coming out of the Haynesville.
It's in motion.
I know there's.
And then some questions on why we haven't seen it up until now and I think that's really a function of when decisions were made to scaled back activity and just how long the wells take to drill and how many wells there are in a pad in the Haynesville. So I think.
Here in the second quarter, you've started to see that deceleration, we expect that's going to continue.
Well again, staying within our target market, our Eagle Ford has given up some rigs as well.
I think since the beginning of the year that market's down about 10 rigs that's call it 15% could be a little bit more trimming down there, especially in the gas window.
But.
I would just point out I mean about three quarters of the rigs working in the lower 48 today or in the U S unconventional oil basins.
And while we've seen some softness in oil prices.
You know it has moved back up here recently I think the actions that are OPEC plus took a couple of weekends ago.
It's helpful.
Certainly when we're talking to customers about activity.
You know Q3 Q4 this year.
You know most of them are talking about.
Not just flat activity, but in some cases actually are adding rigs so.
That feels extremely me 50 to 75 rigs, but I do think it is going to drop a little more from here.
In our target markets.
And that's going to be principally principally in the haynesville.
Okay.
Just follow on to that.
Obviously, theres a lot of discussion around LNG and filling up the pipes before that LNG comes on in call. It late 'twenty early 'twenty five or are you seeing any any early discussions, particularly in the gas basins on putting rigs back to work in the third and fourth quarter.
<unk> early 'twenty four.
Not a lot Don.
The takeaway issues are going to be there for a little bit we've got to get the infrastructure built out along the Gulf coast.
There are a few customers that have started talking to us about hey, we're going to need a high spec rig its sometime in 'twenty 'twenty four and their concern that a lot of that.
Capacity will it moved out of the market by then.
So I do know that's on their minds, but we're certainly not aware of a lot of people planning to recommence activity here in 2023.
Okay and just one final one for me you know obviously you bought back a little bit of debt and you have the $5 million that you're required to offer in the second quarter, but what about cash taxes cash interest versus payment in kind of or are you contemplating that decision now.
The poll.
So we'll make the next decision dawn.
End of September .
And whether we would pick that next six interest payments.
I'll have to see where we're at at that point in time, where the market is.
That may depend on whether the.
<unk>.
Lenders have elected to.
Yes.
Take the take the buy down to $5 million and at the end of June at the end of September that could impact it as well I will make that decision at the end of September for whether we pick that six month interest payment up until March and our plan would be not to pick any interest after March of 2024, and hopefully we're not baking interest after September .
Okay and can you remind me exactly what that cash would be if you paid in cash.
Yeah, it's gonna be sofer, plus 12, 5%, so it's going to be close to <unk>.
70%.
Okay.
I appreciate it thank you.
Thank you Don.
Our next question comes from Steve.
If there is any with Sidoti. Please go ahead.
Good morning, everyone. Appreciate all the detail on the call.
You're obviously not the only contractor looking to move rigs into the Permian. So I guess, it's kind of a two part question.
One how many rigs do you really think that that can be absorbed.
Specifically on the Super spec, whether you'd be able to replace enough.
Our spec rigs and then.
What are your what's your anticipation for pressure on day rates knowing.
Multiple contractors are looking to move rates there.
Oh, great. Thank you Steve.
We do think there is capacity in the Permian market to receive incremental super spec supply.
You have to remember if you dial back into say Q3 last year things were still pretty good. It was hard for some operators to get their hands on the latest greatest technology. So there there are some immediate opportunities for us to displace rigs that are lower spec there.
More SCR rigs running than you might realize out there for example, and then there are some AC rigs that are outfitted with only two mud pumps or maybe they only had three generators and of course the equipment that we're looking to move into the basin.
Has all of that the three mud pumps for Jens.
Have the ability and a pathway toward enhanced setback capacity and stuff like that.
So even in a flat.
The environment in the Permian, We think there are opportunities to put these rigs in.
I would point out that since the beginning of the year. The Permian has added almost a dozen rigs so.
It may feel choppy here, but.
We're pretty confident that we'll be able to move these rigs from the haynesville and put them to work in the Permian.
Your other question regarding day rate.
It's interesting the lower spec rig.
That is facing the threat of of being displaced.
In many cases, that's the only way he can compete is on that lower day rate, but as we get deeper into this especially as we began to deploy technology across the industries, a super spec rig fleet custom.
Customers are seeing the value that those rigs can provide and that value can be read.
<unk> days versus depth, it could be in better hole geometry.
But those are things that it's going to be really really tough for that lower spec rig two.
To compete against even even at a much lower day rates. So we feel pretty confident that the market will be able to absorb the equipment coming in.
We think that you know.
They'll be some pressure on day rates, but nothing extreme and I just close with.
We're not aware of a lot of rigs moving in to the basin.
We've said, what we're going to do and we're in the process in doing that I think there's been a couple that have come out of the Eagle Ford as well, but certainly not aware of a bunch of rigs heading out to the Permian basin from these other place.
Okay. It's helpful right that is helpful.
So I guess the biggest question Mark on to Q will really be the timing of the three rigs you have moved when they might begin drilling again do you have do you have any.
Any color on that.
Yes, I think what we've said is we we have a goal of getting back to 21 rigs operating by the end of the year.
Steve obviously, that's going to require a supportive.
All market.
Which we believe is going to be out there.
Bob.
You know a lot of just balls in the air right now the first step was getting the rigs out there with minimal financial impact ICD and I think we've done a great job at getting that done now.
Finding the right contracting opportunity for them.
We've been pretty vocal and told people expect to see a rig or two idle any given quarter for the next two quarters, which was Q2 and Q3. So we're pretty optimistic that during the fourth quarter, we're able to get back to the 21 rigs operating.
You know assuming that a W. T on Brent.
Reacts the way that we expect it to.
So is the assumption for us should be to assume.
Would be it would be safer to assume those three rigs are not drilling this quarter.
Well they'll be in and out there's a lot of oh, okay. So there's a lot of churn within within the within the fleet. So at any given point in time when you. When you think about those some of those rigs have drilled in the actually in the second quarter and then we relocated them and are looking for their next opportunity and the timing of those opportunities.
Our late late May mid June type opportunities, if they move to the left.
Or for whatever reason then that obviously those rigs would be working in the last part of June and we talked about the 60 days, there's probably if you think about moving into the third quarter Theres really 19 rigs that we think could operate during the quarter.
But they're not all going to operate every every single day as we as we have to reposition the fleet. So that I'll kind of give you a little bit of an idea of what we might be dealing with in the third quarter and then we think the fourth quarter. We've really got all the rigs have a chance to operate during the quarter now whether they all operate the full quarter. That's a different question of.
Of course of course, that's helpful. Thanks, and just to get one last in you did mentioned the potential for some of the.
Remaining haynesville rigs going out to standby terms at different points in the second half how do you weigh.
Moving them versus what you can get staying there and I know things.
Things change so.
Yeah. So some of that is going to be decided by our customer.
Whether they choose to pay.
Standby rate and have a stay on location.
You know a couple of those rigs are comparable once contracted into the fourth quarter. This year for example, and you know as long as they're willing to continue to pay the standby rate.
Obviously, we wouldn't be able to market that rig so they would drive that I guess, where I was trying to go with my comments as for the balance of the fleet, where we have optionality and can make a decision if we see strengthening in the Permian market in the back part of this year rolling into next year the way that we expect.
Yeah, obviously.
That contracting opportunities probably going to pull that rig west is how we're thinking about things.
That's helpful. Thanks, Anthony Thanks, Philip that's sure Thanks, Steve.
Our next question comes from Dave storms with Stonegate capital markets. Please go ahead.
Good morning.
Good morning, I'm just.
Just wanted to touch on the backlog a bit I saw came down quarter over quarter was this by design as you're signing contracts new contracts or is this is there is there are another story here.
Yes.
I'll start I think it's really just a function of the market.
And.
Maybe some of the pressure that we've seen around day rates again, our outlook is for a much stronger contracting environment in the back part of this year.
And.
Most of the fleet, except for the term contracts, we signed in the back half of last year as you know working pad to pad right now.
We you know for us something won't show up in our backlog unless it's six months or longer.
And most you know a lot of the contracts that we signed recently.
Even shorter than that yeah, we had five rigs moved already moved from the from the Haynesville Permian They were all rolling off term contracts.
And when they renewed and obviously, there's a couple of them. We just talked about we're actually trying to renegotiate enter into new contracts with those now those are all contracts pad to pad that won't won't actually hit our backlog numbers.
So I think our backlog could decline a little bit more reported backlog as we move from first to second first quarter second quarter for the same reason I think most of the contracts. We're looking to sign or are going to be pad to pad there could be some six month contracts are longer but.
It just remains to be seen.
Yeah.
Understood very helpful.
And then I know you mentioned in your prepared remarks that you're still on pace for the $3 million to $4 million worth of relocation costs. What you are still in the early stages of that what factors are you looking at that might maybe we've got to be more.
And the $3 million range as opposed to the <unk>.
$4 million range.
So the the bucket of costs that you're talking about our transportation cost to move the rig from the Haynesville to the Permian, we've done very well on that.
For the most part we've had our customers.
Absorb the lion's share of all of those costs. The other portion of it is because we're in a it is a choppy situation when youre moving rigs.
We worked really hard to maintain our crews and our people and so there are some inefficiencies there that are part of that part of that number and what it'll help that go lower than the other it will be just how quickly these rigs get re contracted so if we're able to execute upon what we just talked about and at our second quarter kind of goals is <unk>.
These couple of rigs coming up here at the end of May and June that that's going to be very helpful. On having a more positive impact on the <unk>.
On those costs, so, but the big variables going to be just how quickly the rigs get re contracted and the kind of the cost of maintaining the crews during that period of time.
Okay.
That's very helpful. Thank you.
Thank you Dave.
Okay.
The next question comes from David Marsh with singular. Please go ahead.
Yeah, Hi, thanks for taking the questions.
So I'm just trying to work through the comments with regard to.
Margin projection for the second quarter I mean is there an implication that day.
Day rates are going to be.
Sequentially flattish in that or is it more of a cost side, that's driving the more conservative outlook on <unk>.
Margin.
But when you compare.
First quarter margins to our guidance the guidance is slightly lower there were some capital equipment revenue in the first quarter that we won't have in the second quarter, which really has nothing to do a day rate it had to do with customers.
<unk> for certain upgrades to the rigs I don't think we're going to have we at forecasting.
That as much in the second quarter.
You mentioned there was some pressure on day rates. So when you when you think about margin going forward, it's not going to grow above that number we think for the third.
Third quarter, either I think it's going to be flat could there be pressure on it potentially there could be around the cost line is probably where I'd be most concerned about it.
But it really just depends on the cost line really depends on how quickly we get the rigs back to work so that our overhead and things like that get fully absorbed.
Okay.
Yeah.
Okay. That's helpful. And then just on the on the commodity side I mean could you guys talk about just generally at a high level.
You know what types of price levels for Nat gas and what types of price levels for oil do you believe that you need to have to have you know kind of a stabilized and you know.
With the ability to make good good day rates and good margins for kind of everybody involved.
Yes.
Again, we're drillers, David as you know so we don't make our living.
Calculating that but we've been in the business long enough to get a feel.
For how our customers might react in different environments and to me. When you think about the gas business I think gas needs to be above three.
I think all needs to be.
Above 70, right I think.
What's also as important is trajectory.
And 70 to 75 with a.
You know a bias going lower is going to feel different than a stable environment, where everybody feels like or is it going to stay in the 70 to $75 range and an issue you've got now is gas as you know Nat gas is very very low.
Most people expect it is going to stay in that sub $3 range.
Think about where we are in the year, you think about the build out of infrastructure to export LNG.
Takeaway constraints in the basin all of that just signals to me that like I said in my remarks that get that Haynesville, it's going to be challenging for the rest of this year and I think a good part of next year as well all on the other hand.
It is a global commodity.
There's been a.
You just look at this year and what we've dealt with I mean the cup.
A couple of times, we thought the the the banking situation was going to.
Get much worse are.
Are we going into a recession or not you've seen oil dipped into the 60 <unk> twice since the beginning of the year, it's been a lot of headlines here, but.
You know as you look out in the back part of the year.
Whether the U S is in a recession officially or not I mean, the expectation is like it does every year as global demand for oil is going to increase by at least a percent on a year over year basis China.
And.
The real reopening of the economy and getting the industrial machine going all of that is going to be very very positive for the oil markets and these are the reasons why.
We're so optimistic about the back part of this year in 2024, as we think it's a really strong set up for the commodity in terms of <unk> and Brent and that's what's going to drive our customers' activity, especially out in the Permian.
That's really helpful really appreciate the comments guys. Thanks, congrats on the quarter and best luck going forward here.
Thank you David.
Our next question comes from <expletive> Ryan with Oak Ridge Financial Please go ahead.
Okay.
Thank you Anthony just from a marketing perspective, you know as you look at re contracting.
Are your how is your marketing team doing one when you look at absorbing your rigs coming back to the Permian.
You're seeing that with existing customers or they're making headway into new customers.
First <expletive> they do a fantastic job of course, they are only as good as the.
The service and the equipment that we put into the market. So it's just a really good effort on the part of the whole company, but to answer your question. It's really both of those you look at for example, the twenty-first rig that came out.
At the beginning of April that went to work for our biggest customer we've slid another rig in with that same customer here since the beginning of the year as well.
And then we've gone to work for some E&ps that are we either worked for in the past or we've never had the chance to work for us. It really is a mixture of both of those.
But they they do a really good job the company has a.
I believe a really strong reputation out there for having great people.
Very good equipment, and and a heavy focus on high levels of customer satisfaction and into all of that together.
Whats allowed ICD to bring these rigs over and there's a lot of re contracting that goes on to within the basin that we don't talk a lot about on these kind of calls so hopefully that answers your question.
Sure and with the Retrans or the transitioning of these rigs that you're keeping labor levels constant dull during this pause period.
Okay.
Yes, so far we've been able to do that.
Yeah.
That's some of the inefficiencies that you hear Phillippe talk about and when we talk about our cost per day and margin per day expectations over the next couple of quarters. It's just it's choppy.
You know look if if we felt like the market was going to be tough for a longer period of time than maybe we would've taken some actions we haven't taken up until now but given that we see this as a transitory situation. That's that we're a rebalancing should occur over a couple of quarters.
And the fact that we've been able to re contract rigs on a relatively quick basis. Those are the reasons why.
We've made the decisions that we've made and I think you know our company and our stockholders in the long run are going to get benefit because of that.
Great. Thank you congratulations.
Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Anthony Gallegos for any closing remarks.
Okay, well, we I just want to say, thank you to everybody for making time to hear our first quarter 2023, our earnings call.
Wish you all safety and prosperity and look forward to talking to you again soon thank you.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.