Independence Contract Drilling, Inc.

Good morning and welcome to the Independence Contract Drilling Third Quarter 2023 Financial Results 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. Thank you for joining us today to discuss ICD's third quarter 2023 results. With me today is Nancy 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 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. Thank you for joining us for our third quarter 2023 earnings conference call. During my prepared remarks today, I want to talk about three things. First, I will talk about the super spec rig market. Second, I want to talk about the progress we made on some important strategic initiatives during the third quarter. And lastly, I want to close out talking about our plans as we exit 2023. But first, just a few comments looking back on the third quarter, which was a meaningful quarter for ICD on several fronts. First and foremost, we believe the third quarter represents the low point for ICD operating utilization as we expect our operating fleet utilization to increase over the next several quarters. The third quarter also represented the end of the transition of rigs from our Hainesville market to the Permian and the elevated churn associated with repositioning our working fleet with customers with longer-term drilling programs. During the quarter, we also saw increased rig inquiries that are leading to rig reactivations during the fourth quarter and a line of sight for more reactivations in 2024. All of this manifested itself in our third quarter results. Phillip will provide more details during his prepared comments, but overall, ICD's third quarter results came in at the low end of our prior guidance. Cost per day was impacted by higher labor costs as we staffed up for known fourth quarter reactivations. We also had slightly lower operating days compared to expectations driven by rig churn as we prioritized repositioning rigs with customers with longer-term drilling programs. During the third quarter, we continued the pursuit of our most important strategic initiative, which is deleveraging Our balance sheet by paying down a second $5 million tranche of convertible notes at part. We look forward to continuing to take advantage of these opportunities to pay down debt. We have one more at the end of the fourth quarter and four additional opportunities next year. Equally important to continuing to take advantage of pay down opportunities is positioning the ICD fleet in a manner that optimizes refinancing opportunities for the convertible debt when the debt refinancing window begins to open approximately 12 months from now. We believe that involves returning to approximately 21 rigs operating with a higher concentration of 300 series rigs, working for the right type of customer, and stair-stepping our contractual day rates in a manner that maximizes day rate opportunities when we believe market conditions will be stronger. With that background, I'd like to talk a minute about the market for super spec rigs in our target markets, what we're seeing from a rig reactivation and day rate perspective, and ICD's priorities. as we navigate what we expect to see over the next several quarters. As expected, we saw the US land rig count decrease over the third quarter. That was driven by the continued decline of drilling activity in the Hainesville and Permian, softer commodity prices during the summer, and strong capital discipline on the part of E&P companies. For ICD, this resulted in an overall decline in average operating rigs during the quarter, but as I mentioned before, we believe the third quarter is the bottom for us. Based upon what we are seeing, our expectation is that overall rig counts in our target markets will improve over the next several quarters. Some of these opportunities are high grade efforts on the part of E&Ps attracted to our 300 series rigs. We expect the Hainesville to remain relatively muted until at least later in 2024. In the near term, I think the impending winter withdrawal season will determine Hainesville activity levels in the first half of 2024. We also believe rig ads in the near term are going to be weighted more toward privates, a key customer base for us. From a day rate perspective, in light of the existing softness in U.S. land rig count and the fact that new contracting opportunities have only just begun to emerge, we have seen some pressure on day rates. This is more pronounced for incremental rig ads than for renewals with existing customers. And as you might expect, there's more day rate pressure in the Hainesville than in the Permian. Day rates for our 300 series rigs have generally stabilized in the low $30,000 range, and for our 200 series rigs, the high $20,000 range. But I'd be remiss if I did not mention there are instances where we have lost work to competitors who have gone below these levels. As we get through this initial wave of reactivation, our expectation is that opportunities for day rate improvement will increase as smaller contractors' pad-optimal fleets are more fully utilized, and competition for incremental rig ads concentrates within fewer drilling contractors. We're also seeing increased demand for our 300 series rigs, which are principally 100% utilized at this time, which is leading to increased opportunities for our 200 to 300 series conversion solution. So what are the near-term priorities that we believe maximize our strategic objectives as we move forward during this expected uptick in activity? We would like our fleet to return to 21 operating rigs by the middle of 2024, and we would like to continue increasing the penetration of our 300 series rigs via our 200 to 300 series conversion so that at least 75% of our operating rigs are earning 300 series day rates by mid 2024. We also want to maintain our Hainesville presence to maximize opportunities there later in 2024 and beyond when incremental LNG exportation capacity is expected to come online. We believe this setup maximizes ICD's opportunity to return to margin per day levels that existed prior to the 2023 slowdown. In the near term, as we reactivate rigs, there will be some day rate pressure. Thus, we will be looking to sign most of our contracts on shorter terms, which will allow for contract renewals at higher rates when we believe the market will be stronger. In addition, we want full payback on the initial contract for any reactivation that involves CapEx expenditures associated with our 200 to 300 series conversions. How are we doing pursuing these priorities? First, with respect to the Hainesville, I'm very pleased that we now have three of our four rigs there placed with customers with long-term drilling programs. We have one more 300 series rigs in the Hainesville that we expect to contract here in the fourth quarter for an early 2024 reactivation. There was a lot of rig churn over the last few quarters to achieve this setup, but we believe that is behind us. Overall, in an environment in which we return to 21 operating rigs mid-summer 2024, I'd like to have five operating in the Hainesville, which will be an appropriate balance in terms of commodity and basin exposure for our company and allows us to leverage our strong brand and reputation for tailoring technology and equipment solutions to exceed our customers' expectations. We expect to end 2023 with 17 rigs operating, with another rig likely contracted for an early 2024 reactivation. In this regard, we've already signed two contracts for mid-fourth quarter reactivation, and are in advanced discussions for additional reactivations here in the fourth quarter. We also have begun dialogue for additional reactivations mid to late first quarter 2024, but I would consider those more in the early stages of discussion, which makes their outcomes much harder to predict at this time given the indecisiveness and lack of formal guidance from ENPs regarding their 2024 upstream CAPEX plants. With respect to 200 to 300 series conversions, we completed two additional 200 to 300 series conversions during the third quarter, and last week completed an additional conversion supported by a signed contract that more than guarantees full simple payback of the CapEx investment. With the completion of the most recent conversion last week, we have now converted four of our 200 series rigs to 300 series specification. Bigger picture, this means that about three quarters of the 17 to 18 rigs we expect to be operating at year end will be 300 series rigs with opportunities to increase that percentage as we move through 2024. This is big for us as these conversions have important strategic implications for ICB as they provide higher margin potential and additional exposure to the rig market segment with the highest specification requirements for the most technologically demanding work in the industry. By comparison, If you look at the end of the first quarter of this year when we were generating record margins and operated approximately 20 rigs, only half of those rigs were 300 series rigs. In addition to the conversions, we're continuing to execute on a rollout of our ICD impact offerings including technology. We deployed additional systems during the third quarter and also here in the fourth quarter including oscillation, stick slip mitigation, and back to bottom software, EDR packages, and high torque drill pipe systems And we will have additional rigs operating using the utility grid here in the fourth quarter. We are excited about what ICD impact means for our customers, the environment, and other stakeholders of our company going forward. And I expect the provision of these offerings will continue to enhance our financial performance, as I indicated to you during our last earnings call. So rolling all this up, I'm confident that ICD has experienced the worst of the 2023 slowdown. and we have commenced adding working rigs and repositioning our fleet to maximize utilization and margin potential as market conditions improve. I'll make some additional concluding remarks before opening the call for questions, but right now I want to turn the call over to Philip to discuss our financial results and outlook in a little more detail.