Independence Contract Drilling, Inc.

Good day and welcome to the Independence Contract Drilling Incorporated fourth quarter and year-end 2020 financial results conference call. All participants will be in the 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 stars and one on your touchtone phone. To withdraw your question, please press stars and two. Please note this event is being recorded. I would now like to turn the conference over to Philip Choice, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today to assess ICD's fourth quarter 2020 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 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 in 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. With that, I'll turn it over to Anthony for opening remarks.

Hello, everyone. Phillip will go through the details of our financial results for the fourth quarter of 2020. In my prepared remarks today, I want to talk about the progress we've made putting rigs back to work, offer some perspective about the current rig market, and talk briefly about our progress pursuing our ESG strategy. So as we exited 2020, we were pleased that the momentum that began at the end of the third quarter continued through the fourth quarter and into the new year. As you'll see, we've been busy putting the pieces back together after the historic downturn in industry activity during the second and third quarters of last year. Speaking about the fourth quarter specifically, we reported an EBITDA loss, even though we continued to add contracted rigs during the quarter. During the quarter, reactivation costs impacted our results by approximately $700,000. Our financial results were bolstered by our cost rationalization and cost control efforts implemented last year, and better absorption of fixed and support cost as a result of more rig activity, which manifested itself in a sequential decrease in our per day operating cost. In addition to significantly improving our operating rig count during the quarter, which I'll discuss shortly, we continue to improve our overall financial liquidity. We entered into a $5 million equity line of credit agreement that will allow us to sell stock and add liquidity. I want to point out that execution of transactions under this program are totally at our discretion, and as of today, we have not yet executed any transactions. Overall, liquidity at quarter end stood at $39.8 million, consisting of $12.3 million of cash on hand, $7.5 million of availability under our undrawn revolver, $15 million under our term loan accordion, and the five million available under the new equity line of credit. As mentioned on prior conference calls, as rigs come back to work, the borrowing base under our revolver grows and again becomes a source of capital for us. And you're seeing that transpire now as our rigs go back to work. Revolver availability increased 44% since the end of the third quarter, and we expect to continue to see sequential improvements in our borrowing base as market conditions improve and our rig count increases. During the fourth quarter, we reactivated three additional drilling rigs, and since the beginning of 2021, we have reactivated an additional three rigs plus an additional rig that will commence operations mid-March. At an expected first quarter exit rate of 12 operating rigs, we will have increased our operating rig count in the past eight months by 300%. Throughout this ramp-up, our operations, support, and corporate teams performed exceptionally well. When you reactivate rigs out of stack, you must navigate the unexpected, and you still must hit the ground running for your client, particularly in these highly competitive times. And that means operating safely with minimal downtime and startup delays. And our operating teams have done exactly that and more while tripling the size of our operating fleet over a couple of quarters. All of our reactivated rigs have been reactivated safely, on time, on budget, and with very minimal downtime. And our operations are exceeding our customers' expectations. In fact, we're very proud that during the fourth quarter we were awarded Energy Point Research's Award for Service and Professionalism for the second year in a row. In addition, we've broken several records for our customers, including four during the fourth quarter. For example, we drilled a 15,200 foot well and ten and a half days for one client. We drilled a 5,700 foot lateral in 24 hours for another client breaking the previous record the same rig had just set with the same client. And for a third client we set records for fastest footage drilled in 24 hours and record intermediate to spud times as well. I couldn't be more pleased with this and impressed with our operations given we only had an average of 7.7 rigs working during the quarter. As a consequence of this positive contracting momentum, we now have rigs operating in three primary basins within our target market. As of today, we have five rigs working in the Permian, including one in the Delaware and four in the Midland Basin, four rigs working in the Hainesville in East Texas, and with the rig which will begin mobilizing mid-March, we'll have three rigs working in South Texas, including two in the Eagleford. Our market share in the Hainesville is 8.5%. It's 2.6% in the Permian and 9.3% in the Eagleford. We currently do not have any rigs working on federal lands. We're in the final phases of our upgrade campaign. We're all working ICD rigs except 1,000 horsepower AC rig will be equipped with four generators and three mud pumps. In addition, we've deployed three of the 300 series shell drillers you've heard me describe previously. In other words, we have the right rigs for customers today. Those ENPs that demand plenty of hydraulic horsepower powered by generating capacity to run all three mud pumps simultaneously and when necessary, extreme racking and setback capability. We accomplish this with minimal cash outlay, primarily by employing unused equipment, thereby maximizing our returns in this challenging environment. On the day rate front, trough day rates settled in the mid-teens for ICD's 1,500 horsepower pad optimal fleet and slightly lower for our 1,000 horsepower AC rig working. At these day rates, new contracts and renewals have primarily been on a pad-to-pad basis, thus our reported backlog at year-end was very low compared to historical levels. By year-end 2020, all of our higher day rate legacy contracts, which we executed pre-pandemic, had expired. On a positive note, except for these expiring legacy contracts, all recent recontracting efforts have resulted in day rate increases over trough levels, but we still have a ways to go. We believe, however, that most of the easy, low-hanging rig reactivations in the U.S. land rig fleet have occurred. We believe industry-wide reactivation costs are higher for rigs stacked over nine months, thereby requiring higher day rates to generate economic returns as rigs return to active duty. One other point I want to mention, as we move forward, one thing the industry is experiencing is small, discrete delays driving pockets of off-contract time and lower revenue, lower cost standby days. associated with our customers' planning processes. In the current environment, capital allocation decisions by some E&Ps are being pushed more to the last minute, which affects permitting, site construction lead time, and sometimes trickles down to when our mobilization can commence. I bring this up only to highlight that we expect to have more lower revenue, lower cost standby days during the first quarter of 2021 as a result of this. Phillip will provide more details in his remarks. In terms of day rates in the rig market today, I think it's generally understood that pricing is not where it needs to be for our industry to be a viable investment opportunity. There have been too many available rigs chasing too few opportunities post-pandemic. The high fixed cost of running a drilling company coupled with undercapitalized balance sheets compel too many drilling contractors to chase incremental work at the expense of day rate. Spot market day rates, ex-reimbursables, remains in the mid-teens. The fragmentation in the business is partly a driver of this factor. The elasticity of demand at lower commodity prices also contributes to the knife fight between service providers chasing work. At sub $50 barrel oil, day rates matter is what we hear from customers. The good news is the longer their overall activity remains depressed relative to historical levels of demand, the greater the likelihood that marginal players in the day work contract business will struggle to arrange capital investment required to fund upgrades, mobilizations, and overall startup expense including working capital for incremental rigs. I'm aware of one private drilling contractor that previously offered AC rigs in the South Texas and West Texas markets having gone out of business. I think it's worth noting that we'll reach the end of the easy upgrades later this year. Many contractors have taken equipment from idle rigs to upgrade and reactivate rigs since the rig count bottomed last summer. This is an important point as higher upfront capital investment should require higher day rates or longer-term contracts in order to justify the capex and capital investment associated with adding incremental rigs. Look, ICD is no different except that we focus on these drivers every day. It is for this reason that we are reducing our marketed supply. This will allow us to focus on a smaller fleet and be more discerning when committing to starting up additional rigs. I think for ICD at current spot rates, we reached this point between 15 and 18 rigs contracted. Beyond this point, the investment required does not make sense at current market day rates. Instead, we can generate more operating margin running fewer rigs at higher day rates, and once day rates move up, we can reach back into our inventory of stacked rigs. Like I indicated earlier, industry needs to do a better job at generating sustainable free cash flow, better returns, and eventual profits in order to attract and retain talent and investors to oilfield services. Continuing with this returns-focused theme and moving on to governance matters, ICD's board has approved the capital expenditure budget for 2021 of $5.8 million, a significant reduction compared to the $14.2 million spent last year. Most of this is maintenance, with the remainder principally allocated to third pump, fourth engine additions, and for our 300-series rigs, racking capacity additions to the 27,000 to 29,000-foot racking levels. I'd like to close today with a couple of comments regarding ESG. At ICD, we're focused on doing our part toward the industry's efforts. Regarding the E and ESG, all of our rigs are dual fuel capable, and many of them are employing this carbon reducing technology today by using natural gas in combination with diesel as feedstock for our generators. More impressively, earlier this month, we commenced another ICD rig, which is operating using electricity from the utility grid for power to run the rig and its equipment. Outfitting and running our rigs in this manner not only results in cost savings for our customers, but also eliminates 100% of the pollution at the pad site compared to running four generators on a drilling location, which is how rigs typically receive their electrical power. We are always looking for other customers that are willing to undertake this same strategy, and we are excited about the prospects for our industry to continue addressing these challenges. Regarding the G and ESG, we've been very forward leaning on the governance front historically, tying a substantial portion of executive comp to quantifiable measures which are closely aligned with our shareholders' interests. ICD's board recently set compensation metrics for 2021, and this year, 100% of the executive team's long-term incentive comp is performance-based and 100% at risk. I point this out because in a returns-based world, I think ICD is pulling all the levers available to drive returns and align ourselves with our shareholders. We're rationalizing assets, investing in only our most economical assets and structure and compensation that's 100% aligned with shareholder interest, including tying TSR metrics not only to a peer group, but to a broader market index across all industries. On the social front, we completed a very successful campaign over the holidays to give back to the communities where we operate through our Santa's Roughneck campaign and other initiatives, including charitable efforts here in Houston, where our corporate headquarters is based. So summing all of this up, I believe ICD is very well positioned to execute operationally as we recover from this unprecedented downturn, and we're on a pathway to drive returns for all of our stakeholders. Our financial flexibility has improved since the 2020 downturn, and our management team remains incentivized accordingly to focus on cash flow generation and financial returns over the longer term, with our management team winning only if our shareholders do. Our systems and processes which support our operations are best in class, and our rig fleet is young, flexible, and engineered to maximize manufacturing efficiencies for our customers. We're breaking records, winning accolades for professionalism and service, and meeting and exceeding our customers' expectations across the fleet every day. Our rigs are drilling optimization capable and participating alongside our customers in pursuit of ESG initiatives. We're firmly implanted with a strong brand and reputation for providing the safest and most efficient contract drilling services in North America's most prolific oil and gas producing regions, which reside in Texas and the contiguous states. And with that, I'll turn the call back over to Phillip so he can walk us through the financial results for the company.