Independence Contract Drilling, Inc.
Q3 2021 Earnings Call Transcript

Published: 2 Nov 2021

[Operator:]

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

[Philip Choyce:]

Good morning, everyone, and thank you for joining us today to discuss ICD's third 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 of our non-GAAP measures. And with that, I'll turn it over to Anthony for opening remarks.

[John Gallegos:]

Hello, everyone. Philip will go through the details of our financial results for the third quarter of 2021 in a couple of minutes. For the most part, we've pre-released our third quarter financial results in an investor presentation filed with the SEC at the beginning of October. So I won't focus much on that in my prepared remarks today, and we'll let Philip summarize those items for you. Rather in my prepared remarks today, I want to focus on three things

[Philip Choyce:]

Thanks, Anthony. During the quarter, we reported an adjusted net loss of $13.7 million or $1.87 per share and adjusted EBITDA of $700,000. Reactivation cost expense during the quarter totaled $100,000. We operated 13.8 average rigs during the quarter. We expect utilization to increase sequentially by approximately 9% during the fourth quarter of 2021 compared to our third quarter average, which includes a few rigs transferring between customers, with further sequential increases expected during the first quarter of next year. As Anthony mentioned, we reactivated our 16th rig in October and our 17th rig should come online at year-end. Revenue per day came in at $17,141, which was at the high end of our guidance and increased sequentially based upon increasing dayrates from contract renewals. Again, as Anthony mentioned, we expect this trend to continue due to the short-term nature of the contracts we are signing today. Cost per day were $13,685, which was higher than guidance. Cost per day excludes approximately $100,000 associated with rig reactivation and $400,000 of unabsorbed overhead costs. Costs were impacted slightly by higher labor costs as field pay increases were instituted during the back half of the quarter. Looking forward, we expect to be back to pre-pandemic pay levels by year-end, and I'll provide some guidance on what that means to our run rate costs in a moment. SG&A costs were $4.1 million during the quarter, which included approximately $800,000 of stock-based and deferred compensation expense. The stock-based comp portion of SG&A was lower than guidance, primarily related to variable accounting associated with stock price declines at the end of the quarter compared to second quarter levels. However, given recent stock price increases, some of these benefits will likely flow back to our fourth quarter P&L as a result of the variable accounting treatment. Looking out into 2022 as pay and benefits return to pre-COVID levels, I would expect our SG&A -- cash SG&A costs to increase by about $200,000 per quarter over current levels. Moving on to CapEx, during the quarter, cash payments for capital expenditures net of disposals was approximately $4.3 million, of which $3.1 million related to prior quarter deliveries. This was higher than our original expectations. Anthony mentioned the drill pipe conversions we are undertaking, but we did experience slightly higher capitalized costs on the 2 rigs reactivated during the quarter, and we brought forward some purchases for some items based upon supply chain concerns. Looking forward, reactivation costs on our 16th and 17th rigs were aggregated in the $3 million range, and there are a few long lead time items for future rig reactivations we could bring forward into the fourth quarter based on stretching supply chains. With these items, along with maintenance CapEx on our operating rigs, we would expect approximately $4 million to flow through our cash flow statement for CapEx net of dispositions during the fourth quarter. Our backlog at September 30 stood at $19.7 million, of which 52% expires in 2021. Obviously, our backlog is substantially lower than historical levels. as most of our rigs are now operating on short-term pad-to-pad contracts, which is allowing ICD to capitalize on our view of continued dayrate improvement opportunities. Moving on to our balance sheet, at quarter end, we reported net debt, excluding finance leases and net of deferred financing costs of $130.9 million. This debt was comprised of our term loan and reflects $4.3 million drawn on our revolver. The PPP loan was fully forgiven during the quarter and resulted in a onetime benefit of $10.1 million or $1.38 per share. This benefit was excluded in our reported adjusted EPS and EBITDA numbers. Finance leases reflected on our balance sheet at quarter end were approximately $6 million. During the quarter, we raised approximately $2.2 million under our ATM and equity line of credit programs at an average share price of $3.03 per share. Financial liquidity at quarter end was $31.1 million, comprised of $4.3 million cash on hand, $8.9 million available under our revolving credit facility, $15 million available under our term loan accordion and $2.9 million remaining under our equity line of credit. We did enter into a credit facility amendment that effectively permitted us to draw down our accordion to fund the October 1, 2021, interest payment. Also subsequent to quarter end, we completed our current authorized ATM program, raising another $5.4 million in proceeds at an average price of $3.41 per share. All of this bolsters financial liquidity in aid of decisions on future rig reactivations. Now moving on to fourth quarter guidance. We expect operating days to approximate 1,380 days, representing 15 average rigs working during the fourth quarter, which is an almost 9% sequential increase from the third quarter. This includes the reactivation of our 16th rig in October and the transition of a few rigs between customers. Our 17th rig won't reactivate until year-end and is not expected to benefit this quarter. We expect fourth quarter margin per day to come in between $4,650 and $4,800 per day, representing approximate 37% sequential increase over third quarter at the midpoint of the range. We expect revenue per day to come in between $18,300 and $18,500 per day, an approximate 8% sequential increase with many of the dayrate increases on contract roles only partially benefiting the fourth quarter. Cost per day is expected to range between $13,600 and $13,800 per day, higher than the third quarter as we absorbed increases associated with pay increases instituted towards the back half of the third quarter, offset partially by efficiencies from a larger operating rig base. We also expect to incur an additional $500,000 of operating expenses associated with 2 planned rig reactivations. These costs are not included and are on top of and 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. As I mentioned, we're expecting further pay increases later in the fourth quarter, which will impact our go-forward cost per day metrics. For the most part, we are able to cost -- pass these along to our customers, and they will be partially offset also by efficiencies gained from a larger operating base. Again, as we expect to enter 2022 with 17 rigs operating, a 23% increase compared to our third quarter average rig count. On the cost per day side, what we'd expect to see with a 17-rig operating fleet once we return to pre-pandemic pay levels is our cost trending around the $13,500 per day level, excluding pass-through costs, which we rebill to customers or recoup through dayrate adders. Moving into 2022, we do expect run rate SG&A costs will increase somewhat once we return to pre-COVID pay and benefits. Fourth quarter cash SG&A expense is expected to be flat with the third quarter, but we expect to see our quarterly run rate to increase by approximately $200,000 per quarter beginning in the first quarter of 2022, as pre-COVID rates and benefits are reinstituted. On the stock-based compensation portion of SG&A, given where our stock price is trading today, we expect variable accounting on stock-based comp to cause an increase in our quarterly stock-based comp during the fourth quarter. Best estimate based on current share prices is those expenses will come in around $900,000 for the quarter. So overall SG&A, including cash and stock-based comp for the fourth quarter is expected to come in around $4.1 million to $4.2 million. We expect interest expense to be approximately $3.9 million during the quarter and depreciation expense to be consistent with third quarter results. For the quarter, we expect total weighted outstanding shares to be approximately 9.4 million. And with that, I'll turn the call back over to Anthony.

[John Gallegos:]

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

[Operator:]

. Our first question today comes from Daniel Burke with Johnson Rice.

[Daniel Burke:]

Yes, guys, can you hear me?

[John Gallegos:]

Yes, sir. Hello, Danny.

[Daniel Burke:]

Let's see. Good to hear the way the market is trending. Maybe, I guess, just a -- when we think about the incremental rig reactivations headed into next year, Anthony, could you talk about what -- as those costs escalate, what those costs really entail, what you need to do to get those incremental 300 Series rigs ready? And then is it realistic to think that you could get north of 20 rigs deployed into the market by the second half of next year?

[John Gallegos:]

Yes. Daniel, it's good to hear from you, and I appreciate that question. So first part of it, what I'll require -- remember, we -- as we were starting up rigs last year, we started up the rigs that had kind of stacked last, so to speak, and then you start working through your inventory. The rigs that we're reactivating now are rigs that have been idled over a year. In addition, we've moved some pieces around over the course of the year to try and lower CapEx on earlier reactivation. So as we reach deeper into this inventory now, the big difference today versus the past, there's the obvious time, equipment that just sits there idle, rubber elements deteriorate, things rust. But probably the bigger difference is the equipment recertifications and overhauls that are required. So as you think about start-ups, at least at ICD in the fourth quarter and the first half of next year compared to a year ago, we're having to send in top drives and drawworks and mud pumps and stuff like that. And that's the bigger driver when you think about the CapEx to start up rigs today versus a year ago. On your second question, obviously, we want to make sure the market is going to be there before we pull the trigger on incremental reactivations, feel pretty confident based on our comments that it will be. So we've got to pace these things in a way that we can bring them out and do it that exceeds our customer expectations, but most importantly, is done in a safe way. Not sure you meant to ask about people, but you guys have heard me talk a couple of times now, people is -- the access to people, attracting and retaining people to our industry is a big challenge. That's not unique to ICD, that's everyone in the business. And I think it's driven as much by what's happening around the industry, obviously, in addition to just the growth in the business. So for ICD, yes, it's going to be, can we make the decision that we can do this in a way that's safe and exceeds our customers' expectations, do we have enough and sufficient liquidity to pull the trigger and make that decision, and are we confident that we will have access to the people that will allow us to achieve our goals. So yes, I do think it's possible. It's probably going to be a slower pace of reactivations than what we saw in 2021. But I do think a bogey of 20, maybe it's not the middle of the year, maybe it's Q3. But sometime midyear, Q3, I do think it's very possible, based on what I see.

[Daniel Burke:]

Okay. Great. I appreciate that. And then -- see, Anthony, I always appreciate your candor in addressing the rate environment out there. It was helpful to get the commentary on where fully loaded 300 Series rates kind of settled or are right now. Maybe just for context, could you just -- maybe just for context, talk a little bit about just where rates were, call it, middle of this year, June of this year versus where they are today, just to kind of, again, maybe expand on the level or magnitude of rate escalations that you all have witnessed?

[John Gallegos:]

Yes. There's a lot of confusion out there, Daniel, because we -- our fleet, we've been exposed to spot market rates since February of this year, which is when our last legacy contract rolled over. So as you -- as people listen to and consider the commentary that we provide compared to what maybe peers are reporting, our peers have had more legacy contracts that were negotiated last year or even the year before that have continued to be part of their fleet mix today. So when you think about where spot market rates were back in the summer, the 300 Series market was evolving at that time. We've been talking about it now for a few quarters. I think it's obvious now that, that is, in fact, a niche that's evolved. But if you look at things on an apples-to-apples basis, and I'm really looking at 200 Series rigs, it was anywhere in the upper teens, depending on what particular dayrate adders may be involved in the contract. Whereas today, which is just 1 quarter, 1 1/2 quarters down the road, the contracts that we're negotiating even for our 200 Series rigs, as we said in our comments, start with a 2. And it's -- is the rig available, is it crude, has it been working, those are the things that our customers are really interested to hear about. And if you've got a rig that has been working for a while, you're in a pretty good position when you're talking to customers today, especially guys that are looking to add rigs to their fleet. Sometimes it's a high-grade opportunity. Maybe they want to do something different, maybe they want to do something safer, maybe they want to do it more efficiently. And that puts you in even a stronger position as you're having those discussions with customers. But it's a few thousand dollars a day difference just in the last few months and very focused on that, as you probably know.

[Daniel Burke:]

Yes, very helpful background there. I guess the last quick one, just to calibrate, Philip, if you wouldn't mind, do you have the current fully diluted share count?

[Philip Choyce:]

Yes, it's nine point -- about 9.4 million shares.

[Daniel Burke:]

9.4 million. Okay. Yes. I mean I could get into the vicinity, but wanted to make sure I was in the right spot.

[Operator:]

This concludes our question-and-answer session. I'd like to go ahead and turn the call back over to Anthony Gallegos for any closing remarks.

[John Gallegos:]

Okay. Thank you so much. Guys, I just want to say thank you to everyone for dialing in today. We greatly appreciate your interest and support in ICD. I definitely would like to say a quick thank you to our customers for the trust and the business that they provide to ICD. Definitely want to say thank you to our employees for their hard work and dedication because without them, we would not be able to achieve these results, and we definitely couldn't be the company that we aspire to be. Just a side note, this Thursday, we'll be celebrating our 10th birthday as a company. Big for us. We've accomplished a lot in a very short period of time and definitely looking forward to the next decade and even beyond. So as I close out here, I just want to say I look forward to talking to everyone as we report our fourth quarter results next year. And with that, we'll end the call.

[Philip Choyce:]

Thank you, everybody.

[Operator:]

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