Independence Contract Drilling, Inc.

Hello and welcome to the Independence Contract Drilling, Inc. Fourth Quarter and Year End 2022 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 telephone keypad. To withdraw from the question queue, 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 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 in our public filings for our full reconciliation of net income and loss to adjusted net income and loss, EBITDA and adjusted EBITDA, and for definitions of our non-GAAP measures. And with that, I'll turn it over to Anthony for opening remarks.

Hello, everyone. Thank you for joining us for our fourth quarter earnings conference call. During my prepared remarks today, I want to talk about three things. First, I want to highlight our 2022 accomplishments. Second, I want to describe the current market for SuperSpec PET optimal rigs and how that will impact ICD. And third, I want to close out with what we're focused on as we navigate 2023 and beyond. But first, just a few comments on the quarter. Overall, ICD's fourth quarter results came in well ahead of expectations in terms of revenues, margins, and adjusted EBITDA. Phillip will go through the detail, but I want to point out that our reported revenue per day, margin per day, and quarterly adjusted EBITDA were all again records for ICD. This is the second quarter in a row we've produced record results. In addition, as the full year 2022 played out, we saw adjusted EBITDA increase by more than five times measuring fourth quarter to the first quarter of last year. And we're well positioned so that 2023 will be the best year by wide margin in ICD's history, whether it's revenue per day, margin per day, or overall free cash flow. As we closed out last year, we achieved additional strategic goals. In addition to generating rig margin per day exceeding most of our industry peers, we ended the year with 20 rigs operating having activated two additional rigs during the fourth quarter. Both of those rigs went to work in the Hainesville on very good contracts. In addition, we successfully completed our first 200 to 300 series conversion involving a rig working for a customer in West Texas. Proving that our 200 to 300 series conversions are technically and commercially viable was very important for us as we can now market 100% of our marketed fleet with 300 series specification if the market pulls us that way. On the operational and safety front, our safety performance based upon reported TRIR was over 20% better than the U.S. land average as reported by the International Association of Drilling Contractors. We accomplished so much in 2022, and I'm very proud of how our operations and support teams continue to deliver high levels of customer service, performance, and professionalism, which our customers expect from ICD. This is especially noteworthy given the unprecedented challenges involving the labor market and supply chain challenges, which continue to plague the global business community, and more recently, the softness in natural gas prices. Looking ahead, we're finalizing the reactivation of our 21st rig in our Odessa, Texas yard, which is another 300-series rig. This reactivation project was started back in October of last year and will be our last reactivation for a while. Like our other 300 series rigs, this rig possesses the technical capabilities that our target customers prefer today. We're in final contract negotiations for this rig and expect the rig will be mobilized into its maiden contract involving work in West Texas during the second quarter. All in all, ICD entered 2023 in a very strong position. Whether from a margin per day In cash flow generation perspective, or a fleet composition perspective, where we have materially increased the percentage of rigs marketed with our 300 series specification, ICD has never been stronger. All of the hard work we put into positioning ICD while bouncing off the pandemic bottom will be on full display as we navigate the new year. And with that, I want to shift to our current market perspective, and in particular, what's on everyone's mind, what the softness in natural gas prices means for ICD strategically in 2023. First, let me address the overall market and outlook for rig activity for pad-optimal superspec rigs in our target markets of Texas and the contiguous states. Overall, demand for pad-optimal superspec rigs remains strong. Today, overall utilization remains above 90% in the industry, and we expect continued improvement in our rig margin per day in the first quarter, driven by contract rollovers as we repriced rigs contracted early last year. Phillip will provide more detailed guidance, but I wanted to highlight that we currently expect our margin per day to increase to between $15,000 and $15,500 per day in the first quarter ahead of our prior guidance for that quarter. However, the sharp decline in natural gas prices during the past four months has created a disparity between our two primary operating basins. In the Permian, which is oil-directed activity, demand remains robust. and we're expecting an overall uptick in the super spec rig count in that basin in 2023. In terms of our Hainesville market, which is tied to natural gas commodity prices, we are seeing softness in the Hainesville rig market driven by E&P's response to Henry Hub natural gas prices, which have declined from $9.68 on August 22nd to $2.12 per million BTU last week. As we're nearing the end of winter and gas inventory levels remain high on a historical basis, Combined with takeaway constraints in the Haynesville, the outlook for natural gas prices to remain softer longer. With that market backdrop, we see two primary impacts on ICD. First, the overall Haynesville directed rig count is going to decline. We have one customer in particular who has informed us that they will be moving to zero operating rigs. Several current, prior, and prospective customers in the Haynesville are also trimming their active rig fleets. The impact to ICD's Haynesville fleet will include some rig relocations to West Texas, which have already commenced. Right now, we're confident that we'll need to relocate five to six rigs, which will take place primarily during the second and third quarters of this year. The process has already started, with one rig relocating without any operational white space, and I would be remiss if I didn't point out that we received a day rate increase in the process. We are in the final contract negotiations for our second relocation. which will also occur with minimal white space and a day rate increase. We believe market demand and strength in the Permian for pad optimal super spec rigs, as well as our customer base, is strong enough to absorb rig additions to the basin. We are already seeing some lower spec rigs get displaced as a result of the churn underway. Also, rigs brought from the Hainesville into the Permian will likely absorb rig count growth opportunities previously reserved for rig reactivations. In this environment, We expect overall rig reactivations to slow considerably or even stop until this overall rebalancing process is complete and the market is settled. Thus, we have elected to defer the reactivation of what would be our 22nd rig. Overall, during this process, we expect the overall SuperSpec rig market to remain robust and maintain current utilization levels, which are above 90% utilization. As we've mentioned on prior calls, 80% utilization or above is typically where drilling contractors are able to maintain and increase pricing. But over the next two quarters or so, there's going to be some choppiness. As we reshuffle the deck, as a result of what's happening in the Hainesville, I expect there will be more rig-on-rig competition where rig additions are occurring or a rig replacement opportunity exists. This will have some impact on pricing. Principally, we would expect the pace of day rate and margin acceleration to moderate. So as we move past the first quarter and all of the rigs have repriced to current market day rates, I expect day rate and margin improvement to flatten out for ICD after the first quarter. Phillip will provide more financial details on our outlook, but overall it means we will likely move sideways after the first quarter for a quarter or two until the market is rebalanced following rigs transitioning between basins. We remain optimistic about market momentum beginning to accelerate again towards the back part of this year primarily in the Permian, based upon our expectation that WTI will be higher in the back half of 2023. From a rig utilization perspective, while we relocate rigs to the Permian, we are not expecting a major reduction in our overall utilization rate. We will have some rigs in transit, but we do expect to reach full effective utilization of our 21 rigs operating in the fourth quarter or by year end. Overall, we would expect to operate in the neighborhood of 19 to 20 average rigs during this year, taking into account the transition time that might occur on rig relocations during the second and third quarter. Phillip will go through more of the details, but financially our backlog of contracts in the Hainesville will mute much of the potential financial impacts while rigs are transitioning. So how will all this impact ICD this year and strategically? Overall, we do not expect it will have a material overall impact other than to postpone rig reactivations. all of ICD's strategic and financial goals regarding generating significant free cash flow and reducing overall leverage remain intact. As Phillip will discuss, we still expect 2023 to be a record year for ICD from a revenue per day, margin per day, EBITDA, and free cash flow perspective. In fact, in the near term, as we slow our capital investments and additional rig reactivations, our free cash flow and net debt reduction plans will accelerate as we improve our working capital position by putting some cash on the balance sheet. Strategically, we remain very focused on creating a pathway towards steadily decreasing our net debt position as we move towards the refinancing window for our convertible notes. One of our long-term goals is to reduce our net debt to adjusted EBITDA ratio meaningfully towards the range of less than one to one and a half times during the refinancing window involving our convertible notes. For reference, we're currently at two and a half times levered on an annualized basis using our fourth quarter results, And based upon the market expectation I just described, we expect to exit 2023 around two times or below utilizing the same metric. So while we have some work to do in this regard, everything's in place for ICD to achieve its short and long-term financial and strategic goals. I'll make some additional concluding remarks, but right now I want to turn the call over to Philip to discuss our financial results and outlook in a little more detail.