Q1 2024 Independence Contract Drilling Inc Earnings Call
Operator: Good day, and welcome to the Independence Contract Drilling Inc. first quarter 2024 financial results and conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Philip Choyce, Executive Vice President and CFO. Please go ahead.
Philip A. Choyce: Good morning, everyone, and thank you for joining us today to discuss ICD's first quarter 2024 results. With me today is Anthony Gallegos, our President and Chief Executive Officer.
Philip A. Choyce: 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 discussed today. For a complete discussion of these risks, we encourage you to read the company's earnings release and our documents on file with the SEC. In addition, we will refer to non-GAAP measures during the call.
Philip A. Choyce: Please refer to the earnings release in our public filings for a full reconciliation of net loss to adjusted net loss, EBITDA, and adjusted EBITDA, and for our definitions of our non-GAAP measures. With that, I'll turn it over to Anthony for opening remarks.
John Anthony Gallegos: Thank you, Philip. Hello, everyone.
John Anthony Gallegos: I want to say thank you for joining us for our first quarter 2024 earnings conference call. During my prepared remarks, I'll talk about the positioning and progress we made during the first quarter, our outlook for the rest of this year, and offer some perspective on the current super spec rig market. First, just a few comments looking back on the first quarter.
John Anthony Gallegos: Our financial results for the quarter were better than our prior guidance, driven by slightly better utilization and strong cost control during the quarter. ICD's utilization outperformance and a flat to declining overall rig count environment were possible given our brand and reputation in the marketplace, and helped by the relocation of a working rig from Haynesville to our Permian market, where the rig went straight to work for a new customer. Cost efficiencies were driven by the hard work of our rig and support staff and the cost reduction initiatives we implemented early in the quarter. We also completed one additional 200 to 300 series conversion early in the quarter, which is our fifth such conversion.
John Anthony Gallegos: Today, only one of our operating rigs is a 200-series rig, and it is scheduled for conversion later this year, with actual timing being dictated by customer preference. Now, I'd like to talk about what we're seeing and how we're responding to the market for superspec rigs in our target market. In summary, our premium market continues to hold up pretty well, and the Haynesville market remains challenged in the short and medium terms. We started 2024 with three rigs working in the Haynesville, and in January, we relocated one of those three rigs to West Texas.
John Anthony Gallegos: In the process of relocating that rig, we cannibalized an opportunity we previously had earmarked for an incremental ICD rig ad. As a result, today we are working two rigs in Haynesville, and we expect to run two rigs in that market for the foreseeable future. We want to maintain a presence in the Haynesville and like exposing an appropriate portion of our fleet to NatGas activity, and we appreciate and want to maintain the brand and reputation we've earned over the last decade in the Haynesville. We are optimistic about a longer-term activity rebound in the basin. But we don't expect to see that until the second half of 2025 at the earliest.
John Anthony Gallegos: On the other hand, our West Texas market has been the growth vehicle for ICD over the last year as we've been successful in adding rigs across our customer base and increasing term contract exposure where it makes sense. This is in spite of a steady decline in overall rig count in that basin over the last 12 months. Our reputation for service and professionalism, as well as our 200-300 Series Conversion Program or Catalyst for this market outperformance.
John Anthony Gallegos: During the first quarter, we moved the last EIDL 300 series rig from Hainesville to the Permian Market, and I expect that rig will go to work for one of the most active public E&P operators in West Texas late in the second quarter. Contracts are not yet signed, but I feel very good about our chances with this formal contract. Standing here today, all indications are for a flat-ish overall rig count in the Permian during the first half of this year in the low 300-ish rig range, primarily due to capital discipline and consolidation amongst E&P companies and flattish WTI prices.
John Anthony Gallegos: And my expectation is for our average rig count to be flat during the second quarter with a bias upwards in the second half of 2024. We also expect elevated churn and rig movement within the Permian market to continue, driven by the rebalancing of fleets following the expected closings of announced E&P consolidation transactions. Thus, incremental rig add opportunities for ICD and the Permian during the second quarter will come primarily from high-grade opportunities where we displace lower-spec and underperforming competitor rigs. These opportunities are very competitive, but so far, we've been successful in winning more than our fair share.
John Anthony Gallegos: We do expect to see the overall Permian rig count tick up in the back half of this year, driven by incremental activity on the part of private EMPs where ICD has a very strong presence. Right now, we are actively marketing 16 rigs in the Permian Basin, but because of rig churn, we do not expect all of those rigs to be working throughout the quarter. Overall, I would expect us to operate 13 to 14 average net rigs in the Permian over the next quarter and two rigs in the Haynesville with a bias towards 17 average net rigs during the back half of the year based upon our expectations for an increase in private operator rig counts that we believe will alleviate the current rig churn that ICD is experiencing.
John Anthony Gallegos: Day rates have generally moved sideways year to date in light of the flattish overall rig count in the lower 48. We expect this day rate trend to continue for the next couple of quarters. Day rate revenues and daily margins for super spec rigs are healthy, but obviously lower than they were a year ago. Day rate revenues in the Permian for our 300 series rigs have remained stable around the $30,000 range, and for our remaining 200 series rigs, in the high 20s. Day rate revenues for our two rigs in Haynesville are lower than these levels.
John Anthony Gallegos: So as I wind up my prepared remarks, I'd like to reiterate that our strategic operating priority today is maintaining current levels of utilization here in the second quarter and growing our reported average rig count by the end of the year. We have a lot of wood to chop as most of our contracts are short-term in nature, but most of our customers have rig lines that stretch through most, if not all, of this year.
John Anthony Gallegos: I believe we have appropriately positioned our rig fleet through the two additional Hainesville to Permian relocations early in the first quarter. However, as we expect, the effects of lower natural gas prices and customer consolidation and capital allocation priorities will continue to put a drag on the Haynesville market the rest of this year. I expect we will continue to see opportunities to solidify our Permian Basin presence as this year plays out, as the benefits of our 300-series rigs, combined with our operational and HS&E performance and ICD impact offerings continue to bring new customers into the fold and allow us to expand existing customer relationships.
John Anthony Gallegos: In the face of a likely flat overall Permian rig count through the summer of this year, it is imperative that we continue to punch above our weight class to drive incremental ICD rig utilization, but I believe we've shown that we're more than able to do that. I'll make some additional concluding remarks before opening the call to questions. Right now, I want to turn the call over to Philip to discuss our financial results and financial outlook in a little more detail.
Philip A. Choyce: Thanks, Anthony. During the quarter, we reported an adjusted net loss of $7.2 million, or $0.50 per share, and adjusted EBITDA of $11.8 million. We operated 15.1 average rigs during the quarter in line with our prior conference call guidance. Margin per day during the quarter came in at $11,829 per day, exceeding guidance due to very strong cost control. Early termination of revenues during the quarter was de minimis. SG&A costs were $4.3 million, which included approximately $216,000 of stock-based and deferred compensation expenses.
Philip A. Choyce: Cash SG&A expense of $4 million during the quarter was aligned with guidance and included approximately $300,000 in one-time charges associated with cost initiatives implemented during the quarter. Stock-based compensation expense was lower than guidance driven by variable accounting tied to changes in our stock price. Interest expense during the quarter aggregated $9.9 million. This included $2.7 million associated with non-cash amortization and deferred issuance costs and debt discount, which we excluded when presenting adjusted net income. Tax benefit for the quarter was $231,000.
Philip A. Choyce: During the quarter, cash payments for capital expenditures and net of disposals were approximately $8.2 million and included $8.1 million of payments related to prior period items. Additionally, there was approximately $4 million of capex accrued and accounts payable at quarter end. Moving on to our balance sheet, where we paid $3.5 million in convertible notes at quarter end, and at quarter end, we also paid in kind $13.3 million of accrued interest due on the convertible notes.
Philip A. Choyce: Borrowings under our revolving credit facility were $8.3 million at quarter end, a slight increase compared to the prior year end associated with working capital investments. Overall, net working capital investments during the quarter increased by $6.3 million associated with normal seasonal ad valorem taxes and annual incentive compensation payment. Our financial liquidity at quarter end was $20.4 million, comprised of cash on hand of $6.9 million and $13.5 million of availability under our
Philip A. Choyce: Now moving on to guidance for the second quarter of 2024, right now, we have 17-18 rigs actively in play for ICD from a marketing perspective, but a handful of these rigs' utilization is affected by elevated churn and basin relocations between the Haynesville and Permian markets. Our two rigs operating in Haynesville also have the additional headwinds of a very challenged market.
Philip A. Choyce: Anthony already outlined our expectation for a relatively flat reported average rig count for the second quarter, as well as our expectation for some improvement during the back half of the year as we redress some of the near-term utilization headwinds. Overall, during the second quarter, we expect operating days to approximate 1,350 days, relatively flat on an average rate basis with the first quarter. We expect margin per day to come in between $9,750 and $10,250 per day with a sequential decline relating to lower day rates on contract renewals as all legacy contracts have now expired and some small increases in cost per day compared to the first quarter. As Anthony mentioned, our two Haynesville rigs are operating at lower day rates compared to the broader U.S. land market.
Philip A. Choyce: Breaking out the components, we expect revenue per day to range between $29,000 and $29,500 per day, and cost per day to range between $18,900 and $19,400 per day. Unabsorbed overhead expenses will be about $1 million, but we have excluded these expenses from our cost-per-day guidance.
Philip A. Choyce: The increase in these costs is associated with the consolidation of our Houston Operating Yard into our West Texas operations, which will occur in the second and third quarters of 2024 and will result in annual operating cost savings thereafter of $1 million or more once completed. We expect second-quarter cash SG&A expense to be approximately $3.7 million and non-cash stock-based compensation expense to be approximately $1 million, assuming no material changes to our stock price that would impact variable awards.
Philip A. Choyce: Interest expense is expected to be approximately $10.4 million. Of this amount, approximately $2.9 million will relate to non-cash amortization of deferred financing costs and debt discount. Appreciation expense for the second quarter is expected to be flat with the first quarter. We expect the tax benefit for the second quarter to be in line with the first quarter as well.
Philip A. Choyce: Before I turn the call back over to Anthony, I wanted to discuss capital and balance sheet priorities as we navigate the remainder of this year and move into next year. We have made the election to pick our next interest payment due under our convertible notes on September 30th of this year and will likely pick subsequent interest payments as well. Our anticipation is that our lenders will continue to accept mandatory offers to repurchase notes at par, which will somewhat offset increases in the overall convertible note balance.
Philip A. Choyce: Our expectations for relatively flat market conditions are obviously one driver for our decision to continue to pick interest, but there are several other key considerations. Most important, the peak interest rate under our notice is lower than our cash rate by 300 basis points. So from a cash-on-cash perspective through maturity, we believe this decision is best for managing our overall net debt. Another important consideration is to manage overall liquidity while budgeting to pay down our revolver balance prior to its maturity in September of 2025.
Philip A. Choyce: Our expectation is that it will be challenging to extend or replace a facility until our convertible notes are refinanced or their maturity is extended. In that regard, as we previously announced, our Board of Directors has initiated a formal review process to begin evaluating alternatives with respect to refinancing our convertible notes and other strategic opportunities and formed a committee of independent directors for that purpose. Obviously, there's going to be no assurance at this time that this process or evaluation will result in any one or more transactions or any particular transaction or strategic outcome or the timing of any such outcome. And with that, I'll turn this all back over to you.
John Anthony Gallegos: Thanks, Philip. So, rolling all this up, I'm pleased with our efforts here today to position the company to maximize the opportunities that are available to us here in 2024. We continue to grow our Permian Basin Presence, which is the most important land rig market in the lower 48. In the process, we continue to make progress on the three most important overall strategic initiatives we have, which include paying down debt, increasing our exposure to the 300-series market, and leveraging our operational and H.S&E performance, along with our ICD impact offerings to win incremental contracts and eventually better margin per day.
Operator: So with that, we will take your questions. Operator, please open up the line for Q&A. We will now begin the question and answer session.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Alex Hantman with Sidoti & Co. Please go ahead.
Alex Hantman: Yes, hi, this is Alex on behalf of Steve Farazani. A few questions on my end. First, on day rates, you know, I know some of the guidance is decreasing the margin there. Can you talk about any stabilization in pricing that you're feeling and if we're getting a premium for the super spec rigs and if that's a function of, you know, competitors being less disciplined in pricing or just sort of a function of the weaker market, too much supply, that kind of thing?
John Anthony Gallegos: Well, Alex, I appreciate the question. I hope you're doing well.
John Anthony Gallegos: I think that rates have played out this year pretty much the way that we expected. Things have kind of moved sideways, especially on the higher end 300-series spec rigs. Where you've seen a decrease in average day rate revenues for us has really been around contract renewals. For example, we had a rig that rolled off a one-year contract that was put in place quite a while ago.
John Anthony Gallegos: Currently, it's repricing. The rate's lower today than it was a year ago, and I think that's what you're seeing. In terms of our guidance, we expect things to move sideways for the next quarter or two here. That's what we're seeing. That's a function of just the churn that we're experiencing in the market, especially out in the Permian. The overall rig count out there is more or less flat, and it's been flat for the last few months, but there is a lot of churn below the surface, and that's what's creating the headwind on day rate revenues, but still, on a historical basis, they're okay Obviously, they're lower than they were a year ago, but I'm pleased with what the company has been able to do and generate in the first quarter in light of the current market.
Alex Hantman: Thank you for the context, very helpful. And a second question on SG&A, you know, so it was much lower, which is great. Is that sustainable, and could you talk a little bit more about, you know, how you're able to achieve some of that?
Philip A. Choyce: Yeah, so SG&A actually was a little elevated in the first quarter compared to our guidance for the first quarter. Some of that's seasonal.
Philip A. Choyce: We also had some one-time costs, some reorg costs that we incurred in the first quarter. We're tracking along on a cash SG&A basis, you know, maybe $15 million a year-ish on an annualized basis. The stock-based comp, that was lower for the quarter. A lot of that had to do with variable accounting on our awards due to the change in stock price. So I don't expect it to be that low this next quarter, but it'll all depend on what happens to our stock price over the next three months.
Alex Hantman: Thanks for clarifying that. Last question, you know, just zooming out; curious to get your view on 2025.
John Anthony Gallegos: In terms of the rig market, look, we're, you know, it's optimistic, it's, you know, you think about where oil prices are today, it's, you know, you'd think there'd be a little bit more excitement out there, but our customers continue to demonstrate, you know, tremendous discipline sticking to their guns in terms of what their priorities are, what they've communicated to their investors, you know, a lot of Quarters between now and then and uh... We'll just have to see.
Alex Hantman: I appreciate that. That's all for me. Thank you.
Operator: The next question comes from Don Crist with Johnson Rice. Please go ahead.
Donald Peter Crist: Morning guys, how are y'all this morning? Doing good, Don. Hope you're well. I am.
Donald Peter Crist: I wanted to ask about costs. You know, costs have been rising for quite a while, but it looks like you were able to take a big, decent chunk out of the first quarter. Are there any specific drivers behind that? It sounds like they may go up just a touch here in the second quarter, but what actually happened on the cost side in the first quarter that had them pull back some?
John Anthony Gallegos: Yeah, well, first, Don, in January, we did institute some measures to kind of right-size the organization for what was obvious at that point would be a lower level of activity in 2024 compared to what we thought as we began to put our budget together in the third and fourth quarters of last year. So you see that primarily in some in SG&A, but operations support, you know, field support type. Some of it also was timing, you know, our smaller size, drill line purchases, and when they flow through and how many flow through can have an impact.
John Anthony Gallegos: I think we have made progress. Some of the cost reductions are sustainable, but I would point out that as we enter the summer months, we typically see costs move up. It's a couple hundred bucks a day, and that's going to be, you know, just driven by heat. Some of it's obvious around radiators and AC units and stuff like that, but there's some other stuff that's not so obvious, such as just, believe it or not, water, Gatorade, and that kind of stuff.
John Anthony Gallegos: So yeah, I do think that some of it is sustainable. We'll probably give some of it back in Q2, just because of the reasons that I pointed out. But again, really pleased with the way that the company's performed, especially on the cost line year to date.
Donald Peter Crist: I appreciate that color and You know, obviously, you've done a very, very good job over the past nine months or so moving stuff from Haynesville to Permian and displacing and high-grading some of your customers' rigs out there, but can you just touch on who you're butting up against? Are we pretty much at the point where all the high-spec rigs are working and the lower-spec rigs have been displaced, or is there still some of that to go, you know? More or less surrounding that comment that you had, you know, maybe putting another rig back to work in the back half of the year.
John Anthony Gallegos: I do think there's more to come, Don. You know, just on the decision to move rigs in the first quarter, I have no doubt that was the right move. You know, if you think about markets around the country, Hainesville has been hit hardest, and that's following what was a really tough 2023, as you know. Thought we had a better chance of putting those two rigs to work, and the Permian 1 went straight to work. Unfortunately, we cannibalized an opportunity, as we mentioned.
John Anthony Gallegos: But the other one, I'm really excited about the contract that we're working on for the second rig. I expect that rig to go back up late Q2, early Q3. I do think there are some lower-spec rigs that are still under contract today, so that's going to provide some opportunities in the near term for our fleet. And then, as we look out over the balance of this year, I do think that the rig count in the Permian will begin to tick up during Q3 and Q4, and that's going to be primarily driven by private E&P activity.
John Anthony Gallegos: Those are guys that we've had longstanding relationships with. So look, nothing's a layup in this business anymore. I feel pretty optimistic about running flat here in Q2. And then the bias, is it one rig, is it two? We'll see in the back part of this year.
Donald Peter Crist: I appreciate the color, but I'll turn it back.
Operator: The next question comes from David Storms with Stonegate Capital. Please go ahead.
David Joseph Storms: Morning. Just hoping we could touch back on the rig they relocated to the Permian. Could you just maybe give us a little more color around what the thought process was as to, you know, you mentioned the catapultization and, you know, was that customer-driven than the 300 Series rig? Or was that just a timing and cost consideration?
John Anthony Gallegos: Maybe any more color you could give us there would be helpful.
John Anthony Gallegos: Yeah, I think it's really just... being sober and looking at the Haynesville over the balance of this year, David. And in fact, I think with one of our rigs, we only have two rigs working in the Haynesville today. One just rolled from one customer to the next, and I think we've just won the only incremental opportunity that's out there over the next quarter or two. That market's a bit down over 20 percent year to date.
John Anthony Gallegos: I think there's still some downdraft to come, and I was very confident that the quality of the rig that we moved, the second one, is such that, you know, given what we're seeing in the market, the discussions we're having with customers, I was pretty confident that we'd be able to put it to work in the Permian Basin. So really, the decision was, you know, do I leave it, do we leave it in Haynesville with the odds of it going to work over the next 12 months relatively low, or put a few chips on the table, spend some money to relocate the rig, and we felt like we would have a pretty good opportunity to put it to work in the Permian, and I think that's what's going to happen.
John Anthony Gallegos: And then just one more for me. Can you just talk a little bit more about the customer acquisition process when you're competing to replace some of these lower spec rigs? Is that just a timing thing where you're waiting for their contracts to be up, or are there other considerations to think about?
John Anthony Gallegos: Yeah, that's part of it. You know, there's friction when a customer releases one rig and brings another one in. He has to demobe that rig. He's got to, you know, move another one in.
John Anthony Gallegos: Sometimes you're starting up a rig, so it might not be quite as efficient in the first, you know, few weeks or month as it will be, you know, over the course of a couple of months with that customer. So those are things that the client has to weigh. But you know, we've got some pretty exciting things that we've been working on year to date around, you know, attacking cycle times, the pressure that we feel from customers today around efficiency and reducing days per well, days on the pad.
John Anthony Gallegos: It's as intense as I've ever seen it, and the quality of the equipment that we have, the quality of the people that we have to look at wringing out every last..., where we can demonstrate to them that, you know. One, changing out the rig, the friction that's going to be caused is worth it, but the bigger picture, we're going to help you drill a better well bore, we're going to help you drill that well and that pad in fewer days, and, at the end of the day, we're going to help you lower your cost per foot.
John Anthony Gallegos: I mean, that's the value proposition, that's the pitch, and I think the fact that we've increased our rig count in the Permian by 50% over the last 15 months and not necessarily had to do that based necessarily on rate is a testament to what's going on here at ICD today.
David Joseph Storms: That's all very helpful. Thank you for the commentary.
Operator: The next question comes from Don Crist with Johnson Wright on a follow-up. Please go ahead.
Donald Peter Crist: Anthony, I just wanted to ask about your... Most recent comment, you know, obviously, one of your competitors has kind of moved towards performance-based contracts and is forming, for lack of a better term, more partnerships with the operators today. You know, it sounds like y'all are doing some of that, but have the contracts really reflected that, or can you get any kind of uplift from making more, you know, consistent hole, or saving days, etc.? Any comments around that?
John Anthony Gallegos: Yeah, I think it is showing, Don. Sometimes it shows in utilization, right, where you might win an opportunity that you otherwise might not have won or you may be able to displace someone else's rig, all things being equal, because you can perform better. You know, I do think you are seeing that in day rate revenues, the average day rate revenues at the company. It's not just that we have to necessarily compete on price.
John Anthony Gallegos: Certainly, the market is going to determine a certain baseline in regards to the day rate, but we have to be able to demonstrate that we can add value, and the way that we add value today is first, working safely, not doing anything that's going to harm the environment, but third, reducing, like I said, days on wells and days on pads. And I think you see that reflected today in ICD's utilization, and I think going forward, maybe not Q2, but certainly later this year, rolling into next year, I think you will begin to see that in margin per day.
Donald Peter Crist: Okay, but none of your contracts are structured today where you have a bonus structure or anything like that where if you, you know, meet certain thresholds, you get additional capital, right?
John Anthony Gallegos: That's correct, Don. We have had those discussions in the past. We're open to them. And I would expect at some point we would be able to have that type of structure. We're certainly open to it today.
Donald Peter Crist: I appreciate the follow-up; thank you.
John Anthony Gallegos: This concludes our question and answer session. I would like to turn the conference back over to Anthony Gallegos for any closing remarks.
John Anthony Gallegos: Thank you very much. As I close out this call, I do want to say thank you. Thank you to the many employees at ICD for their hard work and dedication. And we'd also like to thank our customers for their business, and we would like to say thank you to you for taking the time to listen to our earnings call. With that, we'll sign off from here. Thank you.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.