Independence Contract Drilling, Inc.
Q2 2021 Earnings Call Transcript

Published: 7 Aug 2021

[Operator:]

Good day, and welcome to the Independence Contract Drilling, Incorporated, Second Quarter 2021 Financial Results and Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Philip Choyce, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

[Philip Choyce:]

Good morning, everyone, and thank you for joining us today to discuss ICD's second quarter 2021 results. With me today is Anthony Gallegos, 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. In addition, we refer to non-GAAP measures during the call. Please refer to the earnings release and our public filings for our full reconciliation of net loss to adjusted net loss, EBITDA and adjusted EBITDA and for definitions on our non-GAAP measures. With that, I'll turn it over to Anthony for opening remarks.

[Anthony Gallegos:]

Hello, everyone. Philip will go through the details of our financial results for the second quarter of 2021 in a couple of minutes. In my prepared remarks today, I want to focus on 3 things

[Philip Choyce:]

Thanks, Anthony. During the quarter, we’ve reported an adjusted net loss of $14.6 million or $2.18 per share and adjusted EBITDA loss of $369,000. Reactivation costs during the quarter were $192,000. We operated 11.8 average rigs, slightly below guidance on the second quarter conference call. The variance relates primarily to our 14th and 15th rigs reactivating in July as opposed to during the second quarter. We expect utilization to increase sequentially by approximately 18% during the third quarter of 2021 compared to our second quarter average, with further sequential increases expected in the fourth quarter of this year. Revenue per day of $16,514 per day came in slightly higher than guidance and increased sequentially based upon increasing dayrates and reduced standby days compared to the first quarter. We did not record any early termination revenue during the quarter. Cost per day of $13,352 per day was in line with guidance. Cost per day excludes approximately $192,000 associated with rig reactivations and $400,000 of unabsorbed overhead costs. These costs were favorable to guidance as cost and efficiency initiatives continue to favorably impact operations. SG&A costs of $4.1 million, which included approximately $900,000 of stock-based and deferred compensation expense was in line with prior guidance, with the sequential increase primarily attributable to variable accounting on stock-based comp associated with increases in stock price at quarter end. During the quarter, cash payments for capital expenditures net of disposals was approximately $2.5 million. These payments included approximately $1 million relating to prior quarter equipment deliveries. There's approximately $3.1 million of CapEx accrued at quarter end, which we expect will flow through during the third quarter of 2021. Our capital budget was based upon a 15-rig fleet. Assuming reactivation of an additional 2 rigs by the end of the current year, we expect 2020 CapEx to increase by approximately $2 million compared to our original budget. Overall, we would expect approximately $4.5 million to flow through our cash flow statement for CapEx, net of dispositions, for the back half of the year. Our backlog at June 30, 2021, stood at $14.8 million, all of which expires in 2021. Obviously, our backlog continues to be below historical levels as most of our rigs are now operating on short-term pad-to-pad contracts, which capitalizes on our view of continued dayrate improvement. Moving on to the balance sheet. At quarter end, we’ve reported net debt, excluding finance leases and net of deferred financing costs of $134.6 million. This net debt is comprised of our term loan and $10 million PPP loan. Finance leases reflected on our balance sheet at quarter end were approximately $6.8 million. Our PPP loan balance does not reflect any potential forgiveness. We submitted our forgiveness application to our lender requesting forgiveness of the entire $10 million loan amount during the first quarter, and following our lenders review, our forgiveness application was submitted to the SBA during the second quarter. Given the nature of the process, we do not know when a final determination or application will be made by the SBA. Now moving on to third quarter guidance. We expect operating days to approximate 1,276 days, representing 13.9 average rigs working during the quarter. This includes reactivation of our 14th and 15 rigs during July as well as a couple of rigs that will have idle time while transferring between customers during the quarter. We expect margin per day to come in between $3,700 and $3,900 per day, representing an approximate 20% sequential increase at the midpoint of this range. We expect revenue per day to come in between $16,700 and $16,900 per day, with many of the dayrate increases on contract rolls, only partially benefiting the third quarter. Cost per day is expected to range between $12,900 and $13,100 per day, lower than the second quarter as we continue to gain efficiencies from a larger operating base. These per day amounts exclude pass-through revenues and expenses. As Anthony mentioned, we continue to see dayrate improvement on contract renewals with most renewals signed during the current quarter, likely not fully benefiting our results until the fourth quarter of this year. So we do expect additional sequential revenue per day improvement after the third quarter and continued efficiency gains at the cost line as more rigs go to work. We also expect to incur an additional $500,000 during the third quarter associated with planned rig reactivations. These costs are not included on top of, in addition to our cost per day guidance. Unabsorbed overhead expenses will be about $600,000 and also are not included in our cost per day guidance. We expect SG&A expenses to be flat with the second quarter with some variability on the stock-based component that is subject to variable accounting. We expect interest expense and depreciation expense to be consistent with the second quarter as well. And for CapEx, again, we expect about $3.6 million net of dispositions to flow through our cash flow statement during the third quarter. And with that, I will turn the call back over to Anthony.

[Anthony Gallegos:]

Thank you, Philip. I have no further comments at this time. Operator, let's go ahead and open up the line for questions.

[Operator:]

And the first question will come from Daniel Burke with Johnson Rice. Please go ahead

[Daniel Burke:]

Hey, good morning guys.

[Anthony Gallegos:]

Hey Daniel.

[Daniel Burke:]

Anthony, your comment on future reactivations being predominantly 300 Series, and you highlighted some of the capabilities of the rigs -- of those rigs. But I just wanted to better understand. I mean, the thought that incremental reactivations will be 300 Series. Is that a function of the capability of the 300 series? Or is it more realistically a reflection of reduced ready inventory on the 200 Series side?

[Anthony Gallegos:]

It's a great question, Daniel. I think it's more a reflection of just where we see demand, large incremental demand in the marketplace. It's also a function of where we can continue to differentiate ourselves in the marketplace amongst our competitors and especially our competitors' rigs. It's where we think we're going to get the most bang for our investment buck as we continue to recover from the effects of what played out last year. Very excited about this class of rig, this is something that obviously hammered a lot in our prepared remarks, but when you think about ICD today, I think this is something that's very underappreciated when people think about the company. Premerger ICD, we needed 2 things. One, we needed scale. And second, we needed bigger rigs, rigs that could prosecute larger developments in U.S. shale and the Sidewinder merger gave us both of those. Unfortunately, as you know, the market has been tough since then. But certainly, as U.S. shale continues to mature, the number of wells on pads, also the lateral lengths are all increasing, which requires a little different tool. And the 300 Series, we think are ideally suited for that. And I think if you look at the uptick in our rig count over the last 9 to 12 months, you certainly see that play out in our contracted rig count.

[Daniel Burke:]

That's helpful. And then I guess in a way to stay on the topic of reactivations, it looks like from the Q3 guide that the next tranche of two to three rigs that you see is likely to reactivate, probably tilt towards start dates in the fourth quarter. I just wanted to understand if that's correct. And again, what the depth of inquiry levels that you see against your available fleet at this point?

[Anthony Gallegos:]

Yes. Consistent with the guide, certainly, what we've seen here in the third quarter, specifically during the months of July and August is the rig count has slowed down. That's consistent. Even though it's still increasing, it's not increasing by double digits, its single-digit type increases week-to-week maybe it's flat another week. And that's consistent with what we saw 3 months ago, what we were seeing last month. But where we get really excited is when we're talking to customers, there's just a significant amount of work that we see that is evolving for start dates in the fourth quarter, really starting in October. And historically, certainly, the last 3, 4 years, we've seen this break in activity as we round out the calendar year. That is not going to happen this year. It's clear with the way the year has played out, with what's happened to commodity prices, the fiscal discipline that our customers have demonstrated over this year that I think they're actually going to pull CapEx from 2022 into this year, get a running start into the new year, and then CapEx budgets next year will be bigger than they were this year. So that's what we're seeing coming. So yes, you're reading it right. We also need to be careful how we pace the reactivations. There's a lot that goes around that. There's a reactivation process itself. There are a few select upgrades that we do on some of these rigs. And then of course, you've got -- you have to hire the crews, you've got to reactivate the rig. You've got to start it up, you've got to mobilize it. So the guide that Philip provided is consistent with being able to do all that in a way that we can continue to operate safely, but also to exceed our customers’ expectations.

[Daniel Burke:]

Got it. And then maybe a last one, Anthony, if I could coax you into discussing it. The discussion on term being at a premium to spot rates is certainly intuitive at this point in the marketplace. And of course, it would depend upon duration, but what type of premium to spot do you need to induce you into considering a term contract? I mean playing it short has been the appropriate strategy. And given where your cash flow is currently, I think there's a decent argument to be made for staying on the spot side of the market. When do you make that shift?

[Anthony Gallegos:]

Yes. I think it's going to be driven by your outlook, obviously and I think you can tell from everything that we've said today, we're very bullish about the outlook certainly next year. We believe the dayrates will continue to increase, not just from a supply demand standpoint, but just from an economic necessity standpoint. So as we sit down and evaluate those opportunities, we're going to think about the type of rig, the relationship with the customer, is the customer going to use the full capabilities of the rig that's in discussion or not. Obviously, we're going to have a view on where we think rates will be over that term period, whether it's six months, 12 months. And think about it from a, I would say, from a blended average type perspective. And that's why I would say, if we were to do a term contract today, it would obviously be at rates higher than where spot market is today. If you do that right, the average of that rate over the term is going to be consistent with where you see dayrates, spot market rates moving over that period as well. I guess what I wanted to highlight in the call today was just that up until really the last couple of months, we've not had customers reach out and want to have that conversation. And that's certainly been a change here over the last couple of months.

[Daniel Burke:]

Appreciate all the comments guys. I’ll leave it there. Thank you.

[Anthony Gallegos:]

Okay, thank you, Daniel.

[Operator:]

This will conclude our question-and-answer session. I would like to turn the conference back over to Anthony Gallegos for any closing remarks. Please go ahead, sir.

[Anthony Gallegos:]

Okay. Thank you, Chuck. Guys, as we end the call, I'd like to say thank you to everyone for joining us. Also, I want to say thank you to all the ICD employees, former and current, who have contributed to our success over the years as we celebrate our 10th anniversary here this year. I also want to thank them for their professionalism and focus on our customers. The results of those efforts and that focus are evident today. As just this morning, we were awarded for the third year in a row, Energy Research Point's award for service and professionalism. And I'm really proud of that achievement, I just want to say thank you to all of our employees for that. Also, I want to make our investors aware that ICD will be presenting at EnerCom's 26th Annual Oil and Gas Conference in Denver occurring August 15 through the 18th. So here in the middle of the month. We look forward to speaking to you again on our next call. I hope to catch up with you before then as well. Thank you again, everyone, for your interest and support in ICD. With that, we'll end the call here.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.