Independence Contract Drilling, Inc.

Good day and welcome to the Independence Contract Drilling Second Quarter 2022 Financial Results and Conference Call. All participants will be in a 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 a 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 second 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 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. With that, I'll turn it over to Anthony for opening remarks.

Hello, everyone. Today, I have several exciting opportunities to discuss, starting with how our 200 to 300 series conversions and related increase in our marketing fleet will significantly enhance ICD strategic positioning, within the U.S. land rig market. I also want to highlight our view that the U.S. land rig market continues to be very tight with increasing day rate and utilization momentum. I want to leave you with these three focus points for why ICD is ideally positioned to take advantage of this tight market and generate significant returns for all of our stakeholders. First, as forecasted to you, ICD's margin per day EBITDA progression in the first half of 2022 has been substantial. During the pandemic recovery, a priority for ICD has been to rapidly close the margin gap between us and our larger public company peers. Both our utilization and margin acceleration off the COVID bottom has been the fastest in the industry, and there's more to come. In the second quarter, our margin per day increased sequentially by 56%, and we expect margins will continue to expand significantly through the remainder of this year and into 2023. we are finally starting to realize the results of strategic planning and initiatives that began several years ago, which were put on hold as a result of the COVID pandemic. The second theme of my comments today is our announcement relating to our 200 to 300 series conversion program and increase in our marketed fleet to 26 rig. This initiative has important strategic ramifications for ICD, not only from a margin generation point of view, but also with respect to ICD's market positioning moving forward, given our belief we are still in the early innings of a multi-year upcycle for U.S. land. And finally, I want to emphasize how extremely tight SuperSpec rig supply is today, especially in ICD's target markets, and a very exciting opportunity in front of ICD to reactivate rigs into this market and into our evolving and expanding customer base. Now, just a few comments on the quarter. we reported revenue per day of $24,875 and margin per day of $8,946. This represented a 14% sequential increase in revenue per day, and as I just mentioned, a 56% increase in margin per day compared to the first quarter of 2022, exceeding the guidance we provided during our last quarterly earnings call. Overall, we reported adjusted EBITDA of $9.2 million, representing a 158% sequential increase from the prior quarter and also higher than prior quarter's guidance. Over the last 12 months, our reported margin per day have expanded 183%, the highest growth percentage among public U.S. land drillers. So what is driving this margin acceleration? Because we are not as big and we don't offer all the ancillary services or include rental drill pipe in our margins as many of our larger competitors do. I'll get to this more in a moment, but it comes from an intense focus on client satisfaction driven by safe and efficient operations and the continued penetration of our 300-series rigs, improved marketing strategies and execution, and a reputation and awards for industry-leading service and professionalism within our target markets. I also believe our geographic focus, and in particular our underappreciated presence in the Hainesville, contributes favorably. 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 margin improvements in the upcoming quarters. For the third quarter, we're forecasting approximately 14% sequential increases in margin per day. And based on the contracts we have in place today and a significant number of ICD rigs that will re-rate again throughout the fourth quarter and into 2023, meaningful sequential margin progression should continue. Thus, combined with the incremental 300-series rigs we will add over the next couple of quarters, we expect robust sequential growth and adjusted EBITDA to continue into 2023. While our strategy thus far in this recovery has been on securing shorter-term pad-to-pad contracts as day rates have continued to strengthen, in particular for our 300-series rigs where spot rates are now firmly in the low to mid-30s, depending on contract adders, we have begun evaluating and in some cases signing some longer-term contracts. For example, our 18th rig, which just mobilized, is on a one-year term contract in the Hainesville, and we recently signed another one-year contract and a few six-month contracts. Overall, we remain very constructive on further day rate improvements, but believe current economics and the ever-present cyclicality of our industry now warrant some backlog and probably makes sense as we enter our customers' 2023 budgeting season. And we looked at reactivate additional rigs. I think it's also worthwhile at this point to mention our evolving customer mix, which I think also contributes to our improving financial performance and overall market positioning. As we sit here today, we have 18 rigs operating. Seven are working in the Hainesville, ten are working in the Permian, and one is working on the Gulf Coast on a carbon capture project for a supermajor E&P. Over the past quarter or so, we've added several key large independent public clients to our customer base who we believe are ideal candidates for additional rig ads as we enter the 2023 budgeting cycle. Today, seven of our rigs are working for public ENP operators, and seven of our rigs are operating for the two largest private operators in the Permian and the Hainesville. Overall, that's almost 80% of our operating fleet. I think this is an underappreciated fact regarding ICD. When I would stack up against any of our competitors, which is being driven not only by our superior rig fleet, but by the ICD teams, reputation for service and professionalism in our target markets. When I look forward, I believe we are still in the early innings of the most constructive market for PAT optimal super spec rigs we've ever seen. At this point, I feel it's safe to say that for the most part, the COVID hangover for ICD is over. And what we're seeing now in ICD's improving margins and enhanced customer base and regularization is early manifestation of the benefits from strategic decisions we made as far back as late 2018 when we consummated the merger with Sidewinder and began the integration of the two rigged fleets and leveraging the merged customer base. I've spoken about this before, but I think it's a good time to revisit the question. What is different about ICD now compared to when we entered the pandemic? Why is ICD's utilization, day rate, and margin progression outpacing our larger public company competitors? As we've highlighted on past conference calls, we've been focusing more on shorter-term contracts and what we believe are the early stages of this upcycle. Backlog is important, and as I've mentioned, we are looking to increase that as we move into the 2023 budgeting season, and rigs such as our 300-series rigs earn $15,000 per day, margins are higher. Where there are opportunities for term contracts and building our backlog, especially with target customers at appropriate rates and margins, we will look to execute upon those. I'm not signaling that we wish to term up everything, just that we want to take a balanced portfolio approach in our contracting strategy as we continue to expand ICD's operating rig fleet and earnings capability. Most importantly, ICD's operating fleet mix is different, and how we are marketing our fleet to maximize margins and returns is different. We believe our 300-series rigs are an underappreciated value proposition embedded in ICD's fleet. We acquired all 14 of our current 300-series rigs in our merger with Sidewinder in late 2018, and this current upcycle is the first time we've been able to market these rigs across ICD's expanded customer base and consolidated target markets in an improving market. For reference, we had an average of three 300-series rigs operating in March 2020 pre-pandemic. Today, we have eight operating, and we'll have 10 running by the end of 2022. with additional 300-series rigs available for reactivation in 2023. So we have fundamentally changed our fleet operating mix. Rigs meeting 300-series specifications are in shortest supply, and they command premium day rates. In fact, today, spot market day rates for this class of rigs start with a 3, and with adders, can easily reach the mid-30s or higher. Not every operator requires rigs with 300-series specifications. But as acreage positions become more contiguous, pads get larger, laterals get longer, and wells get deeper and more complex, demand for rigs with these 300 series specifications continues to grow. And as we've been intentionally patient about how we market and reactivate these rigs, not just reactivating them for the sake of reactivating, but making sure we don't outrun our organization's capability while placing these rigs with customers who need their performance characteristics in order to secure these higher margin generating opportunities. And what is abundantly clear over the past 12 months is this. As these rigs enter our operating fleet, our margin progression accelerates, and they are a significant reason why our overall fleet margins today are largely on poor with our larger public company peers and rapidly improving, something we could not say pre-pandemic or even pre-merger 2018. I also believe these rigs enhance our competitiveness in the Hainesville and Delaware basins, which has been an important driver for our evolving geographic mix and improvements in our customer base with respect to larger operators in these place. All this leads me to why I'm so excited about our announcement today regarding our 200 to 300 series rig conversions. This is something we've been working on since prior to the pandemic, making sure the engineering's right, capital costs are identified, so that this opportunity makes strategic, operational, and financial sense. And I couldn't be more excited about what has been accomplished in this regard. So what does all this mean for ICD's fleet capabilities? Simply, it means almost all of our marketed fleet can now be marketed with 300 series specifications. Again, rigs with these specifications are in the highest day rates and highest margins and are in the shortest supply. Prior to this announcement, we had 32 total rigs, of which 24 were included in our marketed fleet. Of these 24 marketed rigs, 14 met the 300-series specification. That's approximately 60% of our marketed fleet. With all of the engineering and operational plans in place for these 200 to 300-series conversions, we have now increased our marketed fleet to 26 rigs, of which 25 can now be marketed with 300-series specifications. In other words, we've increased the 300-series component of our marketed fleet to 96%, up from 60%. And when you consider what we've been able to accomplish so far with margin progression, the ability to convert 200-series rigs in our operating fleet to 300-series specifications will only accelerate margin expansion and our comparative competitive posture with respect to our larger public company peers. In addition to our 18 operating rigs, we now have eight additional rigs, all 300-series rigs, that can be reactivated as market conditions warrant. Based upon current rates and estimated reactivation costs, we expect to earn one year or better paybacks on these reactivation investments. Regarding the 200 to 300 series conversion opportunities, it's important to note we currently have contracts to sign to convert two of our operating 200 series rigs to 300 series specifications. These conversions will occur late Q3 and early Q4, and we are negotiating a third conversion commitment that would occur here during 2022. CapEx cost to affect these conversions is minimal, especially compared to the significant strategic consequences of these actions. We expect each conversion to cost approximately $650,000. In addition, we can execute the conversions on a long rig move, only a handful of days, so there is minimal operational downtime, and based upon current day rate differentials between 200 and 300 series spot market rates, we expect these conversion investments to pay back in less than a year. However, similar to how we've been careful in marketing our 300 series rigs to customers who will value and pay for these rigs' additional capabilities, we will do the same when considering additional conversions of existing 200 series rigs to 300 series specifications. When customers require it and are willing to compensate us for the capital investments and added performance characteristics, we will make the conversions. In the meantime, our 200 series super spec rigs remain in very high demand, and they are also earning substantial margins that continue to increase. So we're in a very enviable position with a very young, flexible rig fleet capable of satisfying all of our customers' drilling requirements, whatever their rig needs may be. We've spoken about the tightness in the super spec market in the past, and that tightness continues, and this is particularly exciting for ICD when you consider not only our current 18-rig operating fleet, but the additional eight rigs. we have available for reactivation. Again, all 300 series rigs. The market for pad optimal super spec rigs, such as our shell driller fleet, is as tight as I've ever seen, and in particular for our 300 series rigs. For the most part, there are no hot super spec pad optimal rigs available today. If an EMP operator wants an incremental super spec rig, it will likely have to come out of stack, and reactivation costs for all drilling contractors today are very significant. And another thing I believe may be underappreciated, not only is there a very limited supply of incremental pad optimal rigs that must come out of stack, but because most contractors are sold out, there is only a small number of contract drillers an operator can go to if they want an incremental super spec rig. ICD is fortunate to be one of them. This is the market dynamic which we are marketing our eight incremental 300 series rigs into, and why we are so excited about these opportunities and what they mean for our company our customers, and our stockholders. The market needs more pad-optimal super-spec rigs, in particular rigs meeting 300-series specifications, and we expect the U.S. land rig count in particular in our target bases 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's spot market day rates for 300-series rigs are above $30,000, and with adders approach mid-30,000s, or even higher. And rigs meeting 200 series specifications aren't far behind. So as I close out this portion of my prepared remarks, I want to reiterate 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 to death. And that is reflected in our involving customer mix. I want to thank our sales and marketing team for their hard work in making sure that we have very attractive contracting opportunities. I also could not be prouder of how our operational teams and field and support personnel have responded to the challenges before them, whether it's the unprecedented tight labor market, supply chain challenges and disruptions that persist, or all that they do to safely and effectively reactivate rigs and manage and exceed our customers' increasing and evolving performance expectations. I think we sometimes get distracted talking so much about our equipment performance that we don't highlight ICD's focus on our people and culture. In reality, it is the ICD people in our culture that make the difference. It is our dedicated employees who get the rigs out safely, on time, on budget, and with minimal downtime and operational disruption. They earn the accolades our company has received for industry-leading service and professionalism and why our premier customer list and margins continue to expand. I'll make some additional concluding remarks, but right now I want to turn the call over to Phillip to discuss financial results and outlook in a little more detail.