Independence Contract Drilling, Inc.

Good day and welcome to the Independence Contract Drilling, Inc. First Quarter 2023 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 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 first quarter 2023 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 and our public filings for our full reconciliation of net income to adjusted net income, 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. Thank you for joining us for our first quarter 2023 earnings conference call. During my prepared remarks today, I want to talk about four items. First, I want to highlight our first quarter 2023 results. Second, I want to talk about the current market for SuperSpec PAT optimal rigs. Third, I want to update you on the transition efforts around our Hainesville fleet. And I want to close out with how all of this is impacting ICD from a financial perspective and where our focus will be. But first, just a few comments on the quarter. Overall, ICD's first quarter results came in ahead of expectations in terms of adjusted net income, revenues, margin per day, 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, again, all records for ICD. This is the third quarter in a row we've produced record results in one or more of these areas and provides another data point regarding ICD's operating and financial transformation since exiting the pandemic. Overall, adjusted net income came in at $2.4 million, buoyed by sequential margin per day improvements of 8%, that drove sequential improvements and adjusted EBITDA of 16%. In addition to being a record quarter financially, the end of the first quarter also marks an important pivotal milestone in transition for ICD when it comes to strategic focus and capital allocation priorities. Since August of 2020, our focus and capital allocation decisions were driven by the need to increase operating scale. As signaled in our last conference call, the delivery of our 21st rig will be the last rig we reactivate until market conditions improve, which means meaningfully reducing our overall net debt and related financial ratios will be our highest priority from a strategic and capital allocation perspective. In fact, we improved our net working capital position by $11.7 million, and as of today, we have already repaid $3 million of revolver debt since the end of the first quarter. and we'll look to steadily reduce net debt going forward. Philip will go through more details in his prepared remarks regarding our plans around this very important initiative for ICD and our stockholders. Now, turning to the market, in terms of the overall market and outlook for pad-optimal super-spec rigs in our target markets of Texas and the contiguous states, demand for pad-optimal super-spec rigs remains strong in the Permian Basin. While the overall Baker Hughes rig count for U.S. land shows a rig reduction since the end of the fourth quarter 2022, most of that reduction occurred in unconventional oil basins outside of the Permian. In fact, the Permian Basin added rigs since the beginning of the year while the Hainesville has seen a drop, but there will be more rig count reductions coming in the Hainesville, which I'll address in a minute. We are witnessing some churn in the Permian rig market And what we're seeing is lower spec rigs, including some AC rigs, being replaced with higher specification AC rigs being made available by some Permian and Eagleford ENPs trimming their rig count or being displaced by higher specification rigs relocating into the basin from the Hainesville and other basins. As a consequence, we are seeing a little more rig-on-rig competition where rig additions are occurring or a rig replacement opportunity exists. As we indicated last quarter, we expected to see day rate momentum slow and that expectation is playing out. While margin per day remains robust, we expect it will flatten for the next few quarters and could be choppy for us during the second and third quarters, in particular on the cost line as rigs transition from the Hainesville to the Permian. Still not a bad situation for ICD given current levels and what those levels will allow us to do in terms of pursuing our corporate goals around deleveraging. We remain optimistic about market momentum accelerating again in the back part of the year, primarily in the Permian, based on our expectation that WTI will remain elevated in the back half of 2023, rolling into 2024. We believe the Hainesville rig market will remain challenging for at least the rest of this year. In spite of the choppiness in the Permian rig market, I mentioned earlier that we were successful in securing a contract for our 21st operating rig, which went to work in the Permian Basin early in the second quarter. This 21st rig was a reactivation project that we started back in October of last year and will be our last reactivation for a while. Like our other 300 series rigs, this rig brings to bear the technical capabilities that our target customers prefer today, including being super spec, pad optimal, 3x4, mud pump to generator configuration, and enhanced setback and racking capacity. The rig went to work for an existing customer, which happens to be one of the largest private E&P companies operating in the Permian Basin. Now I'd like to provide a quick update regarding the transition efforts involving our Haynesville rig fleet. During our last earnings call, I described what we expected the impact of low natural gas prices would be in the Haynesville drilling rig market. For reference, natural gas prices had declined significantly in the prior couple of quarters, and we were anticipating a significant decline in the number of working rigs in the Haynesville as E&P companies scaled back drilling activities aligning to an oversupplied U.S. natural gas market. You can see that reduction has commenced in earnest here in the second quarter as drilling contractors are finishing up the pads that they were on during the first quarter when those rig count trimming decisions were made by Hainesville E&P companies. ICD started 2023 with approximately 50% of our working fleet, 10 rigs deployed in the Hainesville market. And for us, the decision to relocate rigs from the Hainesville to the Permian was obvious. In response to the impending Hainesville rig count decline on our prior earnings call, we set forth our plans to relocate a portion of our Hainesville rig fleet to the Permian Basin with a goal to reach effective utilization of 21 operating rigs by the end of the year following this rebalancing. At that time, we estimated relocation costs could range between $3 to $4 million. Today, I'm pleased to report that we remain on schedule to achieve these goals with the caveat that we are still in the early stages of the process right now. And we have seen some recent choppiness in oil prices, which, if this trend continues, could slow the pace of ICD reaching 21 operating rigs by the end of the year. Two rigs have already been relocated and are drilling in the Permian with minimal transitional idle time, and I'm pleased that our out-of-pocket transition costs for both of these rigs were primarily absorbed by our customers. Three additional rigs have been physically relocated, Out-of-pocket trucking costs for these relocations also were not material and below our budgeted estimates. One of these three rigs is earning early-term revenue, and we would not expect it to recommence operations until the third quarter while we were marketing the other two rigs into opportunities with customers who currently plan for late May and mid-June start dates. Overall, we believe market demand and strength in the Permian for Pat Offmel SuperSpec rigs, as well as our customer base, will be strong enough to absorb rig additions to the basin. That leaves us with five rigs remaining in the Hainesville at this time. For those rigs, as of today, we have successfully recontracted or signed extensions for two rigs, which had contract expirations occurring during the first quarter or early second quarter. For the other three rigs, which we have contract terms extending in the third and fourth quarters, we expect those rigs to continue operating or earning standby revenue during their terms, depending on customer requirements. Depending on market conditions in the Hainesville later this year, any of these rigs also could be candidates to move west depending on the interplay between the two rig markets. The big picture, we're on track with our rig relocation plans and overall transition costs are coming in better than expected at this time. Again, we are still in the early process but we feel confident in our outlook so long as oil prices remain constructive. I am pleased that today all of our strategic and financial goals around generating significant free cash flow and reducing overall leverage remain intact. We expect 2023 to be a record year for ICD from a revenue per day, margin per day, EBITDA, and free cash flow perspective. I'm excited that in the near term, our free cash flow and net debt reduction plans have commenced and will accelerate as we improve our working capital position by paying down debt, and putting cash on the balance sheet as we slow our capital investments and additional rig reactivations. Strategically, we remain laser focused on creating a pathway toward generating free cash flow and steadily decreasing our net debt position as we move towards the refinancing window for our convertible notes. In fact, here in the second quarter, we must offer to repurchase $5 million worth of our convertible notes at par. The offer is at the lender's option So if they don't accept that offer, the cash will remain on our balance sheet. Overall, we must make offers over the next seven quarters, which if accepted by our lenders, will total $15 million over the balance of 2023 and $14 million in 2024. In addition, depending upon market conditions, we may also be in a position to stop picking interest sooner than we've previously indicated, which also is likely dependent upon the elections of our lenders relating to the mandatory offers I just outlined. As we have discussed, one of our long-term goals is to reduce our net debt to adjust the EBITDA ratio meaningfully towards a range of less than one to one and a half times during the refinancing window involving our convertible notes, which begins in early 2025. For reference, we are currently 2.27 times levered on an annualized basis using our first quarter results, which even with the completion of rig reactivation capex and seasonal first quarter working capital investments represented an improvement over the same metric of two and a half times at year end. As I mentioned earlier, we've already begun the process of paying down debt. Everything's in place for ICD to achieve its short and long-term financial and strategic goals. Before I hand the call over to Philip, as I'm sure everyone is aware, Danny McNeish retired from our board a few weeks ago. I wanted to thank Danny for his many years of service to ICD's board. 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.