Independence Contract Drilling, Inc.

Independence Contract Drilling Incorporated First Quarter 2022 Financial Results and Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, you'll be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the call over to Mr. Philip Shorys, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss ICD's first quarter 2022 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 our definitions of our non-GAAP measures. And with that, I'll turn it over to Anthony for opening remarks.

Hello, everyone. Philip will go through the details of our financial results for the first quarter of 2022 in a couple of minutes. Before that, I want to briefly discuss the very strong demand for our pad optimal super spec fleet. I want to describe how ICD is positioning itself so that we may continue to participate in and benefit from this upcycle. And I want to close by sharing a couple of recent contract awards, which I think illustrate the very positive effects of the transformation which ICD is undergoing, which benefits all of our stakeholders, including our employees, our customers, and our stockholders. First, just a few comments on the quarter. We reported revenue per day of $21,823 and margin per day of $5,754. This represented a 15% sequential increase in our revenue per day and a 63% increase in our margin per day compared to the fourth quarter of 2021. Overall, we reported adjusted EBITDA of 3.6 million, representing 146% sequential increase from the prior quarter. This is the third straight quarter we have reported meaningful sequential margin and EBITDA improvements, which illustrates the significant operating leverage in our business as we continue to navigate the current upcycle. What I think is most impressive about these first quarter sequential improvements is that we were able to achieve them even though we absorbed sequential labor increases of approximately $900 per day and had approximately 31 idle non-operating days associated with rigs transferring between customers, more idle days than we expected, which was primarily driven by trucking delays and relocating rigs. Most importantly, market conditions and demand for our pad optimal super spec rigs continue to improve rapidly, so I'm quite optimistic about continued meaningful sequential improvements in upcoming quarters. For the second quarter, we're forecasting 30% to 35% sequential increases in margin per day, and based on the contracts we have in place today and a significant number of rigs that we'll re-rate again throughout the third quarter, we expect meaningful sequential growth in margin per day and adjusted EBITDA continuing during the back half of the year and into 2023. When I look forward, I believe we are in the early innings of the most constructive market for pad optimal super spec rigs we have seen. And there are several factors driving this dynamic, which make us quite excited about ICD's future. First, we remain constructive on oil and natural gas prices. Commodity prices continue to strengthen during the first quarter as a result of several factors and ICD will continue to benefit from our particular commodity exposure as a consequence of the geographic positioning of our rigs. We remain laser-focused on what we believe are the two most important oil and natural gas basins in North America. That's the Permian and the Hainesville. Through this market position, roughly two-thirds of our rigs are targeting oil and a third are targeting natural gas. We believe this to be the optimum split for our fleet at this time, and our concentration in two basins allows us to benefit from greater economies of scale and contributes to better rig margin and more meaningful free cash flow as this cycle continues to unfold. Second, the market for pad optimal super spec rigs, such as our shell driller fleet, is as tight as I've ever seen. For the most part, there are virtually no hot super spec pad optimal rigs available today. If an ENP operator wants an incremental super spec rig, it will likely have to come out of stack and reactivation costs today are very significant. Unlike past cycles, we're not seeing a flood of spending to reactivate rigs, even though demand from our customers may be there. Capital discipline on the part of our customers, our competitors, and our industry is vastly different compared to prior cycles, driven by limited capital markets, investor requirements focusing on returns over growth, and balance sheets that will not support untethered growth. For the most part, Contract drillers are not reactivating drilling rigs unless the day rates and contractual terms provide adequate returns on capital and rapid payback of the incremental investments. But the market needs more pad optimal super spec rigs and we expect the U.S. land rig count, in particular in our target basins, will continue to increase. This demand, coupled by industry capital discipline, is driving day rates and margins higher at a pace not seen before. Today, Leading-edge spot market day rates are above $30,000 for pad optimal super spec drilling rigs. But costs are higher, and even at these leading-edge day rates, we believe further day rate increases and longer tenor contracts will be necessary in order for contract drillers to make the necessary investments to reactivate additional rigs that the U.S. land market requires. In terms of ICD's marketing strategy, I expect our strategic decision to focus on short-term pad-to-pad contracts, which has been driving meaningful sequential margin improvements to really pay dividends over the remainder of 2022 and beyond. Right now, we do not have a single contract with a term extending past mid-October of this year. What that means is all of our rigs will be repriced during our customers' normal annual budgeting season, and our entire fleet should re-rate to at least current market day rates by the fourth quarter of this year. And with our term loan refinancing now behind us, we have recommenced our rig reactivation program with our 18th rig scheduled to enter the market early to mid-July, with two additional rigs to follow later in 2022. All three of these rigs are 300 series rigs, which are in the shortest supply and command the highest day rates, and demand for these types of rigs remains very strong. Reactivation costs for these three rigs should range between $3.5 and $4.5 million, and we will achieve simple payback periods of less than one year on these investments. Moving forward, with the day rate and margin expansion we are anticipating, I expect we will begin evaluating opportunities with our customers to begin adding term coverage to our contract portfolio as we navigate the second half of 2022 and beyond. All this sets up very nicely for ICD. With the market we see in front of us, we are expecting meaningful free cash flow generation that we can use to not only fund future rig reactivations with very attractive returns and paybacks, but also decrease our net debt position over time and substantially reduce and normalize our overall debt to EBITDA ratios. Of course, while the market and demand for our contract drilling services continues to improve, there are headwinds that IECD and our industry must continue to address. The labor market is tight, as tight as we've ever seen it. Competition for people exists not only within our industry, but with other industries as well. This is particularly acute for the entry-level position. Also, supply chain challenges exist as the global economies continue to recover from the pandemic and its effects. Philip will go through more of the details, but we are making some investments to ensure the critical spares needed to support our business are available. In spite of all these challenges, Our operating teams and personnel are doing a fantastic job as we strive every day to provide the safest and most reliable contract drilling services in the U.S. contract drilling industry. As I close out this portion of my prepared remarks, I want to highlight that it's not just our day rate margins that are improving. Performance of our rigs remains strong, whether the metric is safety, downtime, rig move times, or days versus depth, and that is reflected in our evolving customer mix. Two highlights I'd like to share include a couple of recent contract awards. We have recently commenced a contract involving a 300 series rig with one of the Permian's very largest, most active public independent operators, a very demanding and well-respected customer that we have not previously had the opportunity to work with. We also believe this customer will be an attractive candidate for additional 300 series rig additions. And on the ESG front, We're very proud that we were selected by a current customer, one of the largest international EMPs in the world, to drill their pilot carbon capture well program here in the lower 48. Selection of ICD for this high-profile project over our larger public competitors is further validation of the quality of our equipment, the professionalism of our drilling and support teams, and reflects the confidence our customers have in ICD to do everything we can to exceed their expectations while providing the safest and most efficient contract drilling services possible. I'll make some additional concluding remarks, but right now, I'd like to turn the call over to Philip to discuss financial results and the outlook in a little bit more detail.