Independence Contract Drilling, Inc.

And welcome to the Independence Contract Drilling, Inc. Fourth Quarter and Year-End 2021 Financial Results 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 one on your touch-tone phone. 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 Philip Choice, Executive Vice President and Chief Financial Officer. Please go ahead.

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

Thanks, Phillip. Hello, everyone. Phillip will go through the details of our financial results for the fourth quarter of 2021 in a couple of minutes. For the most part, we pre-released our fourth quarter financial results in an investor presentation filed with the SEC in January. So I won't focus much on that in my prepared remarks today, and we'll let Phillip summarize those items for you. Today, I want to focus on three things. I want to provide you an update on the market and our expectations for continued day rate and margin expansion in 2022. I want to provide you some context on our geographic and customer evolution during the fourth quarter. And I want to close with a summary of our 2022 strategic and financial goals. I'm proud to report that ICD achieved its two primary financial goals during 2021. We achieved positive EBITDA as we exited the third quarter and improved on that in the fourth quarter. Most importantly, the company's operating fleet was generating positive cash flow entering 2022 with expected annualized EBITDA exceeding expected maintenance capex and cash interest payments. As we exited 2021, our improved financial performance was a function of frequent repricings that came from our short-term contract posture and our increasing 300-series utilization. both driving day rate improvements on contract renewals and new contract placements. Achieving these goals provided ICD the springboard we needed for 2022, which will allow us to meaningfully increase cash flow and continue to execute on our business plan. In the fourth quarter, we reported revenue per day of $19,042 and margin per day of $3,538. As noted in our press release, margin per day was impacted by year-end incentive compensation accruals for field-level managers of approximately $343 per day. Excluding that accrual, margin per day was $3,881, representing a 12% sequential increase. We ended the year with 17 rigs contracted. Phillip will provide more details, but during the fourth quarter, we achieved a sequential increase in revenue per day of approximately 11%. More important, I want to reaffirm what we expect to see here in the first quarter of 2022. We expect first quarter 2022 revenue per day to improve another 13% to 14% compared to fourth quarter levels, and most importantly, margin per day to improve between 45% and 50% compared to our adjusted fourth quarter level of $3,881. First quarter margin expectations do reflect costs associated with reinstatement of field manager incentive comp, Obviously, first quarter day rate increases more than offset labor inflation associated with pay adjustments implemented at the end of the fourth quarter. As we sit here in March, we have good visibility toward the second quarter as well. For the second quarter, based on contracts we have in place right now, we would expect second quarter revenue per day to improve 20% to 23% compared to fourth quarter reported levels and margin per day to improve approximately 95% to 100%. compared to reported fourth quarter levels. This continued improvement is a function of having 17 rigs working, benefiting from pad-to-pad repricings, and our ability to pass through some cost inflation related primarily to the label market. These large sequential increases in day rate and margin we are seeing are things we have forecasted on prior earnings calls and are not only indicative of the strong market we're in, but also our intentional strategy to focus on shorter-term contracts leading to rapid margin improvement. This focus and the outstanding efforts of our sales, operations, and support teams continues to provide benefits as seen in our sequential improvements. We remain resolute in our belief that the industry is in the early stages of this upcycle, and maintaining a short-term posture as it relates to contract terms in the near term will allow faster margin expansion and ultimately result in margins exceeding pre-pandemic levels. During the fourth quarter, we repriced, contracted, or recontracted 11 rigs, including four rigs placed with new customers. In every case, the day rate increased significantly. We saw average increases of $4,100 per day, or roughly 25%, with some increases approaching 40%, which drives our confidence in the large margin expansion embedded in our first and second quarter guidance. And more importantly, as the market continues to improve, driven by very tight rig supply, All of our rigs will have at least one more rate adjustment in the back half of 2022, which we believe will continue to drive positive momentum throughout this year. I mentioned that I wanted to discuss customer and geographic evolution, which occurred for our fleet. The fourth quarter was transformational for ICD in this regard. In addition to reactivating and contracting our 17th rig, which is an ICD 300 series rig working for a large public independent in West Texas, We also completed our geographic consolidation strategy by moving all our rigs into our West Texas and Hainesville operations. This involved mobilizing two active rigs from the Eagleford to West Texas and a third active rig from the Eagleford to the Hainesville. While we remain positive on the Eagleford and the opportunities it presents the industry, we elected to leverage our strong operational presence in our two core markets, that being West Texas and Hainesville, which we believe will drive operational and cost efficiencies. After this consolidation, 65% of our rigs are working in West Texas, and 35% are working in our Hainesville market. I believe this to be a very healthy, balanced exposure to both oil and natural gas directed drilling activity, with ICD laser focused on serving North America's premier unconventional oil and natural gas place. While completing the three geographic relocations, we were able to increase the number of ICD rigs contracted to multi-rig customers in two cases, and establish a contractual relationship with another first-time customer with whom we're already discussing adding a second regulator this year. We also enhanced our customer mix over the past quarter. I think ICD's balanced exposure to both public and private EMPs is somewhat misunderstood. So I want to point this out. Today, of our 17 contracted RIGs, almost half are working for public EMPs, and of those working for private EMPs today, four are currently working for one of the largest operators of any type, in the Permian Basin. Moving on to how we view the market for rig reactivations and the opportunity for ICD. I think it's important to emphasize how tight the rig market is today, which is driving our positive day rate margin expectations. There's minimal excess supply of super spec rigs. Today an operator's lucky if they're able to find a hot rig available. Just to give you some context on this, about two weeks ago we had a 300 series rig come free due to one of our customers' inability to have a follow-up pad available. But we had a commitment on that rig within hours at significantly higher day rates. So as the industry adds drilling rigs, they're going to have to reactivate rigs that have been stacked for more than two years, which is quite costly for the drilling contractor. All-in rig reactivation costs are increasing for the industry, and we estimate total cost incurred to reactivate a rig has increased at ICD to approximately $3 million per rig for the next couple of reactivations. We believe this will drive further increases in day rate and margins across our industry as we're focused on driving meaningful returns on capital for our shareholders. So what is the opportunity set for ICD to reactivate rigs? We have seven idle rigs in our marketed fleet today. All of these rigs are 300 series rigs. Rigs meeting our 300 series specification are in the shortest supply in the industry and they command the highest day rates. The most recent contracts we have signed today for 300 series rigs will generate margins greater than $10,000 per day on an all-in basis. And we would expect to do even better than that on a rig reactivation, meaning paybacks on these rig reactivation investments are well under one year for our next three rigs costing $3 million per reactivation, and one year payback for our last four reactivations that will cost more in the $4.5 million range. The point is demand exists for this class of rig, and it's extremely strong. Of course, there are labor and supply chain headwinds that have to be managed as well. But the market needs these rigs, and we would have reactivated all these rigs already if the company had the financial liquidity and resources to make those investments. That brings me to my final topic I want to discuss in my prepared remarks, which are ICD's goals and objectives for 2022. Obviously, providing the safest and most reliable operations is always our first priority. But right after that, for 2022, first and foremost, we need to address our term loan indebtedness and our financial liquidity, which is holding us back from aggressively executing on the opportunities in front of us. Although the term loan doesn't mature until October 2023, it will be classified as a current liability on our third quarter 2022 financials, absent an extension or refinancing. It will be challenging. it may be unlikely that we commence additional rig reactivations until we address our term loan maturity. So given these factors and the overall improvements in the business climate, we believe now is the opportune time to address our term loan and liquidity, even if headwinds exist in the overall credit markets and the trailing 12-month financial performance contract drilling industry and ICD. As disclosed in our SEC filings and in our press release, we have been actively engaged in seeking opportunities to comprehensively address the term loan, which will likely involve equity or equity-linked securities. And I can assure you that we've been working diligently on this, but we will not be at a point to comment publicly with any details on whether we will be successful in this regard until we have binding commitments from third parties. Another overall objective is to position the company so that we exit 2022 and enter 2023 earning average margins per day across our entire fleet of $10,000 per day or more. This isn't a forecast, but where we think we need to be and where we think we can take the company based on the market opportunities that we believe are going to be available to us. From my prior remarks, you can see our margin progression is accelerating and we're moving in the right direction. Assuming a successful term loan resolution that provides us additional financial liquidity We believe making steady progress towards and ultimately achieving this objective will be the springboard to the reactivation of additional drilling rigs and untapping the value for our stakeholders that we believe is embedded in ICD. To close out my prepared remarks, I'm happy to say that I'm proud of where we are today. We're generating positive EBITDA again and delivering and expecting to continue to deliver very meaningful sequential improvements over the next several quarters. Given rig supply tightness, I believe there are existing opportunities for the company as the super spec market continues to benefit from increased EMP demand for super spec rigs. We are expecting 2022 margins per day to be higher than what we were reporting pre-pandemic, driven by improved 300 series fleet mix and a more opportunistic contracting strategy and associated pricing. We believe we're in the very early innings of this upcycle, and we look forward to capitalizing on the opportunities in front of us. With that, I'll turn the call back over to Philip so he can walk us through the fourth quarter 2021 financial results for the company.