Independence Contract Drilling, Inc.

Good day and welcome to the Independence Contract Drilling Incorporated second quarter 2021 financial results and conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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 one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Philip Choice, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

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 complete discussion of these risks, we encourage you to read the company's earnings release and our documents on file at 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 are 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 second quarter of 2021 in a couple of minutes. In my prepared remarks today, I want to focus on three things. A brief summary of our financial performance during the recent quarter, current market trends that we're seeing, and some commentary about our outlook. For the quarter, we reported an adjusted EBITDA loss of $369,000 from an average working rig count of 11.8 rigs. This represented sequential quarterly improvement in adjusted EBITDA of 1.6 million generated from only a modest sequential increase of 1.5 average operating rigs. Margin per day increased sequentially by approximately 13%. Steady day rate improvement drove much of this increase, but our results continue to benefit from 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. We also spent less on RIG reactivations than anticipated. Phillip will go through more of the details, but given our continued success in reactivating RIGs and getting steady day rate increases on contract renewals, we expect to return to positive adjusted EBITDA during the third quarter and remain on track to reach our goal of exiting 2021 generating positive free cash flow. Overall, liquidity at quarters in stood at $35.4 million, an improvement from March 31st. During the quarter, we selectively accessed our equity line of credit and ATM programs, raising approximately $2.6 million in gross proceeds at an average price of $3.60 per share. As mentioned on our prior call, we also took advantage of the pick interest feature under our term loan with respect to our interest payment due at the beginning of the second quarter. Overall liquidity consisted of $6 million of cash on hand, $11.3 million of availability under our undrawn revolver, $15 million under our term loan accordion, and $3.1 million remaining available under our equity line of credit. Now on to the business. Our rig contracting goal for the first half of 2021 was 15 rigs by the end of the second quarter. We achieved that with our 14th and 15th rig contracted and sputting their first wells in July. Eight are in the Permian, four in the Hainesville, and two in South Texas and one in the Austin Chalk. Using August 2020 as the baseline, this is more than a fourfold increase in ICD contracted rigs compared to an approximate two times industry-wide increase over the same period. Overall, since the beginning of the second quarter and including the two rigs reactivated in July, we have reactivated four rigs, including three 300-series rigs, and stacked our lone 100-series rig, which was replaced by a 300-series rig. I think this is a good time to highlight why we believe our 300-series rigs represent an underappreciated value proposition inherent in ICD. We acquired these rigs in the Sidewinder merger. But until recently, we've never had the opportunity to market these rigs to ICD customers in an improving rig count environment. For example, we had three of these rigs operating in February of 2020 pre-pandemic and already have six operating today with more reactivations planned as the market continues to improve. Our marketing team has done a fantastic job marketing the value proposition of these rigs to our customer base. And these rigs are a big reason why ICD utilization growth is substantially outperforming the overall market. Looking forward at future reactivations, we expect those to be predominantly 300 series spec rigs with our goal to have approximately half of the operating fleet comprised of this spec of rig. In comparison, we only had 14% of these types of rigs in our operating fleet right before the pandemic. So in addition to strong utilization, We expect these rigs to drive forward day rate and margin momentum, even in comparison to prior historical levels. For the industry and ICD, the second quarter was a continuation of the acceleration trends we saw during the first quarter, albeit at a slower pace as we expected. For the remainder of the year, we expect to continue to see rig count improvements. However, even with the improvements in commodity prices, we expect these improvements to be at a more modest pace compared to the first half of the year, due to the physical budget calendar, lack of capital access, and continued financial discipline on the part of our customers' E&P companies. Towards the end of this year and into next year, we do expect to see a step-up in demand in rig count. Even with continued financial discipline by our customers, we expect their 2022 CapEx budgets to increase based on higher commodity prices and legacy hedges rolling off. and we also expect a greater proportion of their budgets compared to 2021 will be directed toward drilling new wells simply based on the tremendous decrease in duct inventories we've seen throughout the year. We are seeing all of this play out in our conversations with our customers and in our contract discussions. While day rates across our industry today are lower than what they need to be to satisfy expected demand for more rigs, we continue to see steady day rate improvement on contract renewals, and given our current short-term contract structure, expect to continue to realize improvements on renewals throughout the remainder of the year. We believe an important barometer on day rates is when our customers begin approaching us regarding term contracts with longer tenors, such as one year. And recently, these opportunities and discussions have started to appear. I believe this is a function not only of the factors I just mentioned, but also a recognition on the part of our customers of supply tightness which is evolving in the rig market, and more confidence on the part of our customers in the overall outlook for commodity prices going forward. Overall price competition has been more intense in the Permian Basin compared to the Hainesville, even though there are substantially more rigs working in the Permian. I believe this is a function of a larger number of competitors and diversity of work prospects and rig requirements in the Permian. In the Hainesville, where ICD is a key player and operations are targeting high-pressure, high-temperature natural gas plays, Operating requirements are more challenging and drilling contractors need the equipment and required institutional expertise to drill these technically demanding wells. Thus, there are fewer competitors and less price competition. Operating requirements in the Hainesville also are more tilted toward rigs with higher racking and setback, such as our 300 series rigs, which are in very short supply across all markets. However, as supply tightens, the Permian is starting to catch up in our highest day rate contract since the onset of the pandemic. was recently executed for work in that basin. Our contracts are predominantly pad-to-pad contracts, and on renewals we continue to secure day rate increases in the $500 to $1,000 per day range and bigger increases for our 300-series rigs when we're able to match customer requirements with those rigs' capabilities. Current spot market day rates for our 200-series rigs have been in the $16,000 to $17,000 range plus adders, while current spot market day rates for our 300-series rigs which are in shorter supply, are currently higher in the upper teens. Day rate bias is higher for both classes of rigs. Compared to the last three months, we are seeing a significant uptick in demand beginning in the September-October time period, and as mentioned, we are now being presented with some term contract opportunities beginning in this same period. Much of this incremental demand is for work lines that extend through much of next year as customers begin preparing for 2022 activity and of course higher commodity prices and legacy hedges rolling off. So there are a lot of factors that we believe will lead to continuing day rate improvements, but most important is the limited supply of super spec rigs. As discussed on our last conference call, utilization for true super spec rigs is much higher today than we believe most people realize. Most importantly, there are minimal super spec rigs available that have not been idle for well over 12 months, and for an incremental 300 series type rig, there's virtually none available. Thus, incremental rig demand must be met from idle, stacked rig inventory. This is significant for several reasons, especially in a market where the incremental rig contract generally reprices the market. First, it places a premium on active hot rigs with experienced crews that have been working together on a customer's drilling program. Customers will not want to give up these rigs. Second, As our industry is forced to reach back into the inventory of stacked rigs, this will require significantly higher capital investment, in particular for rigs stacked 18 months or longer, as will be the case on coming reactivations. Hiring and labor is already becoming more challenging, and this will likely become a bigger issue in an improving rig count environment. Higher day rates and operating margins will be an economic necessity for the drilling contractor to satisfy this demand. And finally, and a point I believe is underappreciated. We expect utilization of true super spec rigs, that is AC rigs with 1500 horsepower draw works, three pumps, four engines, and walking to reach 80% or more soon, assuming overall US land rig counts steadily improves and accelerates into 2022. There may be other AC skidding rigs or the like available, but the cost of conversion to true super spec status is in the millions on top of the cost to reactivate, as I just discussed. As I mentioned, term contracts are beginning to appear and become part of the contract discussions with our customers. Today, all of our contracts are short term and expire this year, which we deem prudent, given our view on future day rate improvements. Terming up at current spot market day rates is not something we're interested in at this time, but we do think it'd be prudent to have some term contracts in place as we move forward into an improving market. The percentage of our total fleet locked up on term contracts will depend on where we are in the cycle, the customer, and the type of rig involved. We believe we are very early in this cycle, so I don't expect to see ICD lock up a substantial portion of our fleet on term contracts. We are in some discussions today regarding a couple of term contracts. If we sign these contracts, day rate will be higher than where spot market day rates are today, and we're considering only a subset of our total fleet at this time. I want to share a little bit more on our outlook for the balance of this year. It's very important that we return to cash flow neutrality and better as soon as possible. We're doing all the right things. We need more rigs operating and day rates continuing to increase. As we've discussed, we've been steadily moving towards this goal with improving day rates and utilization. We expect to be EBITDA positive during the third quarter and continue to target being free cash flow positive as we exit 2021. As we navigate the second half of 2021, we expect the pace of rig count increases to accelerate from current levels as the industry approaches the fourth quarter and continuing as we close out this year. As mentioned, we expect refreshed 2022 capital budgets, the depleted duck inventory, and higher oil and gas prices will spawn more drilling activity by EMP companies. In this environment, we expect day rates will continue to increase, especially for super spec rigs. I expect we'll be bidding day rates for super spec rigs before the end of the year to start with a two with continued upside during 2022. Based on our current market outlook, I would expect ICD to reactivate another two or three rigs over the next couple of quarters on top of the rigs we've already reactivated with the opportunity for additional reactivations in 2022. I would be remiss if I did not close with a discussion on our progress regarding ESG. All of our rigs are high-line and dual-fuel capable and offer environmentally friendly crown lighting and other options for our customers to consider. When our customers require such features, we're more than willing to provide them. Today, approximately two-thirds of our operating rigs are utilizing high-line or dual-fuel options, and about 65% utilize our crown lighting options. We expect utilization of these green package options to rapidly increase as our customers continue to prioritize and focus and plan for operations designed to reduce and eliminate carbon emissions. Also, you should be on the lookout for our inaugural sustainability report, which will be issued later this month. The report will highlight many of the company's efforts toward promoting a more sustainable world. So summing all this up, good things are happening at ICD. We continue to punch above our weight as we recover from last year's unprecedented downturn. We're transitioning to positive EBITDA currently and expect continued improvement on that front, and we're on a pathway toward meeting our free cash flow objectives and driving returns for all shareholders and 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 rigs are in demand, and our systems and processes which support our operations are best in class. Our rig fleet is young, flexible, and engineered to maximize manufacturing efficiencies for our customers. We're breaking records, we're winning accolades for service and professionalism, and working hard to exceed our customers' expectations every day. Our rigs are drilling optimization capable and participating alongside our customers in pursuit of ESG initiatives. Firmly implanted with a strong brand and reputation in our target market, 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. We continue to gain market share and are excited about our prospects over the next several quarters. So with that, I'll turn the call back over to Philip so he can walk us through the second quarter 2021 financial results for the company.