Independence Contract Drilling, Inc.

Good day and welcome to the Independence Contract Drilling Third Quarter 2022 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 file. 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. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss ICD's third 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 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 debt loss to adjusted debt loss, EBITDA and adjusted EBITDA, and for the definitions of our non-GAAP measures. And before I turn it over to Anthony, I just wanted to make one comment. We did file with the SEC today, along with our press release, an updated investor presentation, which will be available on our website as well. So we encourage people to go take a look at that when they have a chance. And with that, I'll turn it over to Anthony for opening remarks.

Thank you, Philip. Hello, everyone. Thank you for joining us today for our third quarter earnings conference call. During my premier remarks today, I want to focus on a couple of key topics. First, the significant margin expansion that continued during the third quarter and our prospects for continued margin progression, which are bright. Second, operational achievements during the third quarter and our outlook for additional rig reactivations. And third, some overall strategic objectives we are laying the groundwork for as we look forward into 2023 and beyond. But first, just a few comments on the quarter. Overall, ICD's third quarter results came in well ahead of expectations on revenues, margins and adjusted EBITDA. We reported revenue per day of 28,646 and margin per day of 11,341. This is a 15% increase in revenue per day and a 27% increase in margin per day compared to second quarter reported results. We had some one-time items affect our reported SG&A numbers during the quarter, which Phillip will go through in his prepared remarks. But overall, we're pleased to report third quarter adjusted EBITDA of $12.5 million, which is a 35% increase from the second quarter, also higher than expectations. I want to point out that our reported revenue per day and margin per day are all records for ICD. To put this quarter's performance into perspective, the only time ICD has reported higher quarterly adjusted EBITDA was during the fourth quarter of 2018 when all 32 of our rigs were operating. We only operated about 18 rigs this quarter, which given we believe we're still in the early innings of this up cycle, really highlights how much stronger and well-positioned ICD is today than we were at any time in our history. We look forward to opportunities to report record EBITDA in the coming quarters and beyond. More excitingly, we expect this momentum to continue. Market conditions and demand for our PAT optimal super spec rigs continues to be robust, and we are forecasting meaningful significant improvements in margin per day driven by continued recognition of the value provided by our rig fleet, including increasing market penetration of our 300 series rigs, our 200 to 300 series conversion opportunities, and additional plan rig reactivations, which are in the pipeline. Phillip will provide more detailed guidance for the fourth quarter, but I wanted to highlight that we currently expect our margin per day to increase to between 12,500 and 13,000 per day. And looking into the first quarter, we expect margin per day to further increase over reported third quarter results by 28% to 32%. Now, it's not just our rig margins that are on par with or exceeding those of our larger public company peers. We believe our operations and the value we provide to our customers are best in class as well. So to provide you some tangible evidence of this, we were proud during the third quarter to be the highest rated US land drilling contractor for service and professionalism by Energy Point Research. a leading third-party industry source for such information. This is the fifth consecutive year we have received this coveted award. In that same poll of EMP companies operating in the United States, we were also one of three drilling contractors recognized for overall customer satisfaction. I point this out because we talk a lot about our rigs and our 300 series rig penetration, but it's our operating and field personnel who work hard every day to exceed our customers' expectations at the well site which ultimately is driving so much of ICD's success. During the third quarter, we reactivated our 18th rig, which went to work under a one-year contract. Our 19th rig is mobilizing now, also under a one-year contract, and our 20th rig is contracted and scheduled for mobilization later in the fourth quarter. Both of these additional rigs are going to work in the Haynesville and will generate revenue per day in the high 30s, allowing us to achieve simple payback of both rigs' reactivation capex in less than one year. We have slated our 21st and 22nd rigs for reactivation during the first quarter next year and reactivation work is already underway. In our last call, I mentioned the 200 to 300 series conversion program which we had commissioned. The first conversion is in progress as we speak for an existing customer of ICD and will be completed later this week. We have accomplished so much this year and I couldn't be more proud of how our operations and field personnel have continued to deliver high levels of customer service and performance which our customers have come to expect from ICD. This is especially noteworthy given the unprecedented challenges involving the labor market and supply chain, which continue to plague the global business community. I want to touch on contract backlog. While our strategy thus far in the recovery has been on securing shorter-term, pad-to-pad contracts, as day rates have continued to strengthen and accelerate over the last three or four months, we have begun increasing our backlog of term contracts when it makes sense for both ICD and our customer. Since the second quarter, we've increased our backlog 87% to 102 million. Approximately 69% of this backlog extends into 2023. We did not have to cut our rates to secure this backlog. In fact, our backlog extending into 2023 is priced at approximately $35,300 per day, the equivalent of over $17,500 of margin per day based upon third quarter cost day metrics. All of our term contracts contain margin protection features that protect our contracted margins against labor and other inflationary cost increases. This 2023 backlog pricing gives us a great deal of confidence about further margin progression beyond the first quarter 2023 guidance I just provided. While we are increasing our contractual backlog, we are not calling the top of the market for day rate progression by any means. And right now, most of our rigs will reprice at least once more over the next three to six months. Instead, we are layering on some contract backlog because as we think about the large capital investments now required to reactivate RIGS and consider the significant margin generating opportunities available in our market today, we feel like it makes sense for a portion of our available days to be termed up. This approach will provide us with continued exposure to future increases in margin per day opportunities, meanwhile helping to lock in a portion of our future cash flow to help position us regarding our near and longer term strategic initiatives. As we think about additional rig reactivations and conversions beyond our 22nd rig, we'll be balancing a variety of strategic factors. First and foremost, we'll continue to look for full contractual payback for all rig reactivations and conversions, essentially what we've been doing. In addition, we will look to balance the timing of these projects against several competing factors, including our level of contractual backlog, our desire to reduce or eliminate future dilution from additional pick interest, especially considering the rising rate environment we're in and expecting to persist, working capital liquidity, and evaluating where we are in terms of marketing and contract windows for additional rigs, which we believe will be anchored around our customers' annual budgeting cycle based on what we've seen here in the back half of this year. I bring this up because while we are doing the things necessary today to put ourselves in a position to be able to reactivate our 23rd and 24th rigs during the summer of 2023, we also may consider pushing those reactivations toward the end of 2023 if it allows us, for example, the ability to stop picking interest earlier than we previously indicated without sacrificing planned working capital improvements. As I bring these prepared opening remarks to a close, I want to say that at ICD, We're very focused on creating a pathway towards steadily decreasing our net debt position as we move towards a refinancing window for our convertible notes. One of our long-term goals is to reduce our net debt to adjusted EBITDA ratio meaningfully. We intend to do this through a combination of increasing adjusted EBITDA and accompanying free cash flow generation as we build our operating scale and eventually slow our investments and additional rig reactivations. For reference, we are currently at 3.41 times lever on an annualized basis using our third quarter results. So while we have some work to do in this regard, our forward visibility relating to rig reactivations and margin progression gives us a great deal of confidence that we will make meaningful progress towards this goal in 2023 and beyond. I'll make some additional concluding remarks, but right now I want to turn the call over to Philip to discuss financial results and outlook in a little bit more detail.