Independence Contract Drilling, Inc.

Drilling Inc. Fourth Quarter and Year End 2023 Financial Results and 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 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 fourth 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-GATT measures during the call. Please refer to the earnings release in 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. And with that, I'll turn it over to Anthony for opening remarks.

Hello, everyone. Thank you for joining us for our fourth quarter 2023 earnings conference call. During my prepared remarks, I'll talk about the current super spec rig market and some progress we've made on some important strategic initiatives. Also, I'll close out by talking about our plans for 2024. But first, just a few comments looking back on the fourth quarter and full year in which ICD achieved some meaningful accomplishments. Most important, we continued our fleet evolution towards 300 series specification, and this trend was turbocharged in the back part of the year. To provide some context, we initiated our 200 to 300 series conversion program about 18 months ago, And at the beginning of 2023, we had completed only one conversion, and only 50% of our operating rigs met 300-series specification. Since the beginning of 2023, however, we have transformed our operating fleet. Today, 90% of our operating rigs meet 300-series specifications, with five conversions having occurred since September 1st. Today, all but one of our former 200-series rigs operating. Today is a 300-series rig budgeted for the remaining 200-series rigs to be converted later this year depending on customer requirements. I'd be remiss if I did not point out that we have received full cash payback or more during the initial contract term on the capex required for all of our 200 to 300 series conversions to date. And this fleet transformation paid significant dividends for ICD in 2023 as we navigated a severely depressed Hainesville gas market and an overall decline in the Permian rig count as well. In fact, as of today, we've increased our Permian rig count by over 40% compared to the beginning of 2023, even while the overall rig count in the basin declined 15%. Along with our reputation for operational excellence and customer service, our ability to efficiently execute our 200-300 series conversions drove this significant market outperformance. And as we enter 2024, our conversion strategy is continuing to pay dividends on contract renewals and extensions. For example, We just executed several multi-year contract extensions with one of the Permian's largest operators and signed another term contract with a new Permian customer. The majority of these contract extensions involved 300 series rigs that were converted by us in 2023. In 2023, we also began to take advantage of the PAR pay down opportunity in our indenture by paying down a total of $15 million worth of convertible nodes, including a $5 million pay down in the fourth quarter. We've mentioned in the past that positioning the company for a potential refinancing of our convertible notes is a high priority for us. As you may have noticed in our press release today, although our convertible notes do not mature until March of 2026, the refinancing window for these notes will open later this year, and we have appointed a special committee of independent directors to proactively begin the process of reviewing and evaluating opportunities regarding the notes and any other strategic opportunities that can be considered in connection with that review. Moving on to our fourth quarter results, Phillip will provide more details during his prepared comments, but I wanted to make a few. While our margins came in on the higher end of our guidance, our overall results came in at the low end, almost entirely due to higher rig reactivation expenses, much of which was related to higher labor and related expenses originally earmarked to perform maintenance and upgrade CAPEX on rig reactivations that ultimately did not materialize. The offset, of course, is that outlays for CAPEX during the fourth quarter. was only 2.7 million. Now I'd like to talk about the market for super spec rigs in our target markets, including what we are seeing from a day rate perspective and what has changed from our last conference call. Obviously, our Permian market has held up pretty well based on ICD's increased rig utilization in that basin, but let me begin with our gas-directed Hainesville market. It's no secret that the Hainesville market was severely depressed throughout 2023, But early in Q4 of last year, as we entered the winter season, we started to see some small opportunities for rig ads in 2024. Unfortunately, the combination of further declines in commodity prices, driven by a very warm winter, has paused these opportunities. With these factors, combined with duck inventory builds in the area and customer consolidation, our expectation today, unfortunately, is for further decline in the Hainesville rig count overall and for ICD. We had three rigs working in the Hainesville at the beginning of this year. However, two of our customers with whom we were anticipating contract extensions notified us that they were not going to continue their programs. We've already relocated one of these rigs to West Texas, including completing a 200 to 300 series conversion during the rig move and placing it on a six-month contract with a new customer, all with zero off-rate time. While movement of this rig did cannibalize an opportunity we previously had earmarked for an incremental rig add, The rig is performing exceptionally well, and we feel we have a very good opportunity to add a second rig with that customer later this year, assuming their plans remain in place. For the second Hainesville rig, where we received notice, we have been successful in placing that rig on a follow-on opportunity with a different customer, but it is a short-term program, and we are continuing to market the rig for follow-on opportunities. The takeaway of all this is that we expect to run two or so rigs in the Hainesville for the foreseeable future and are scaling our operations accordingly. Our West Texas market, on the other hand, has held up much better, and we obviously have been successful in adding rigs across our customer base and increasing term contract exposure where it makes sense. And we currently have 14 rigs running in West Texas. However, capital discipline and increasing consolidation of E&P companies kept a lid on the overall rig count in the Permian Basin during the second half of 2023, and all indications today are for a flattish overall rig count in the Permian during the first half of this year. We also expect continued elevated churn and rig movement within this overall flat rig count driven by rebalancing of fleets following the closings of recent E&P consolidation transactions. Thus, incremental rig ads for ICD and the Permian are going to be predominantly directed toward high-grade opportunities, displacing lower spec and or underperforming competitor rigs. These opportunities are very competitive, but so far we have been successful in winning more than our fair share. In light of the flattish rig count overall at around 600 rigs, day rates in general have moved sideways, which is what we expect for the first half of 2024. Day rates and daily margins for super spec rigs are still healthy, but obviously lower than they were a year ago. This is more pronounced for incremental rig ads with new customers, for example, compared to when we renew or roll over a contract with existing customers. And as you might expect, there's more day rate pressure in the Hainesville than in the Permian. Spot market day rates on competitive awards can be up to a couple thousand dollars per day lower than rollover rates, owing to efficiencies earned and friction costs of changing out rigs that are performing at today's required level of performance. Day rates in the Permian for our 300 series rigs have remained stable in the low $30,000 range, and for our remaining 200 series rig, the high 20s. There are some competitors bidding rigs at day rates less than this, but the largest providers have held up their pricing, which is helpful. We continue to earn full cash on cash payback over the initial contract for any CapEx associated with a 200 to 300 series conversion. In light of this backdrop, our strategic operating objectives and priorities as we move forward are as follows. While we still believe we can return to a 21 operating rig fleet, that goal has been pushed to the right in light of the market dynamics I just described. During the first half of 2024, our priority will be to navigate the increased churn and choppiness we are seeing in the Hainesville and from customer consolidation in the Permian and focus on maximizing utilization on the rigs we currently have operating as we expect to deal with some rig movements here in the first half of this year as the effects of lower gas prices and customer consolidation and capital allocation priorities work their way through the system. Beyond that, I expect we will see opportunities to grow our Permian Basin presence as this year plays out. as the benefits of our 300 series rigs and our 200 to 300 series conversion program combined with our ICD impact offerings continue to bring new customers into the fold and allow us to expand existing customer relationships. In the face of a likely flat overall Permian rig count in the near term, we will likely need to continue to punch above our weight class to drive incremental rig reactivations, but I think we've shown that we're more than able to do that. Obviously, if the Permian rig count moves Upward sooner, that will only increase our opportunities for rig reactivation and margin improvements in the first half of 2024. As I mentioned, given further declines in the Hainesville, we don't see a recovery in that basin until mid-2025, given the very warm winter, which is winding down, large gas storage levels, significantly lower nat gas prices, and the duck inventories, which E&P companies have assembled. But we are leaving the door open for an eventual return when market dynamics in that basin turn more positive for drilling contractors with strong brands and reputations in the challenging operating environment which the Hainesville presents. So rolling all this up, I'm confident that ICD is ready for the year which has now started. Overall CapEx budget net of disposals for 2024 has been set at $18.2 million, and we have set our cash SG&A budget for fiscal 2024 at $15.3 million. both reflective of a flatter operating environment, which we are now experiencing. I'll make some additional concluding remarks before opening the call up for questions, but right now I want to turn the call over to Philip to discuss our financial results and financial outlook in more detail.