Participants
Philip Choyce; Executive Vice President & Chief Financial Officer; Independence Contract Drilling Inc
J. Anthony Gallegos; President, Chief Executive Officer, Director; Independence Contract Drilling Inc
Alex Hantman; Analyst; Sidoti & Co
Don Crist; Analyst; Johnson Rice
David Storms; Analyst; Stonegate Capital
Presentation
Operator
Good day and welcome to the Independence Contract Drilling Inc. first quarter 2020. For financial results and conference call (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Philip Joyce, Executive Vice President and CFO. Please go ahead.
Philip Choyce
Good morning, everyone, and thank you for joining us today to discuss ICD’s First Quarter 2024 results. With me today as Antigua goes 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 talked 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 a full reconciliation of net loss, adjusted net loss, EBITDA and adjusted EBITDA, and for our definitions of our non-GAAP measures.
With that, I’ll turn it over to Anthony for opening remarks.
J. Anthony Gallegos
Thank you, Phil, and hello, everyone. I want to say thank you for joining us for our first quarter 2024 earnings conference call. During my prepared remarks, I’ll talk about the positioning and progress we made during the first quarter. Our outlook for the rest of this year and offer some perspective on the current super-spec rig market. First, just a few comments. Looking back on the first quarter, our financial results for the quarter were better than our prior guidance, driven by slightly better utilization and strong cost control during the quarter, ICD’s utilization outperformance and a flat to declining overall rig count environment was possible given our brand and reputation in the marketplace and helped by the relocation of a working rig from the Haynesville to our Permian market, where the rate rig went straight to work for a new customer cost efficiencies were driven by the hard work of our rig and support staff and the cost reduction initiatives we implemented early in the quarter. We also completed one additional 200 to 300 series conversion early in the quarter, which is our fifth such conversion. They only one of our operating rigs is a 200 series rig. It is scheduled for conversion later this year, with actual timing being dictated by customer preference.
Now I’d like to talk about what we’re seeing and how we’re responding to the market for super-spec rigs in our target markets. In summary, our Permian market continues to hold up pretty well in the Haynesville market remains challenged in the short and medium term, we started 2024 with three rigs working in the Haynesville. And in January, we will have relocated one of the folks, three rigs to West Texas and the process of relocating that rig. We cannibalized an opportunity we previously had earmarked for an incremental ICD rig yet. As a result today, we are working two rigs in the Haynesville and we expect to run two rigs in that market for the foreseeable future. We want to maintain a presence in the Haynesville and like exposing an appropriate portion of our fleet to nat gas activity. And we appreciate and want to maintain the brand and reputation we’ve earned over the last decade in Haynesville, we are optimistic about a longer-term activity rebound in the basin, but we don’t expect to see that until the second half of 2025 at the earliest. On the other hand, our West Texas market has been the growth vehicle for ICD over the last year as we’ve been successful in adding rigs across our customer base and increasing term contract exposure where it makes sense. This is in spite of a steady decline in overall rig count in that basin over the last 12 months, our reputation for service and professionalism as well as our 200 to 300 series conversion program.
Our catalyst for this market outperformance during the first quarter, we moved the last idle 300 series rig from the Haynesville to the Permian market. And I expect that rig will go to work for one of the most active public E&P operators in West Texas late in the second quarter. The contracts not yet signed, but I feel very good about our chances with this formal customer standing here today, all indications are for a flattish overall rig count in the Permian during the first half of this year in the low 300 ish rig range, primarily due to capital discipline and consolidation amongst E&P companies and flattish WTI prices and my expectation is for our average rig count to be flattish during the second quarter with a bias upwards in the second half of 2024. We also expect elevated churn and rig movement within the Permian market to continue driven by the rebalancing of fleets following the expected closings of announced E&P consolidation transactions, thus incremental rig add opportunities for ICD in the Permian during the second quarter will come primarily from high-grade opportunities where we displace lower spec and under performing competitor rigs. These opportunities are very competitive. But so far, we’ve been successful in winning more than our fair share. We do expect to see overall Permian rig count tick up in the back half of this year, driven by incremental activity on the part of private E & P’s where ICD has a very strong presence right now. We are actively marketing 16 rigs in the Permian Basin. But because of rig churn, we do not expect all of those rigs to be working throughout the quarter. Overall, I would expect us to operate 13 to 14 average net rigs in the Permian over the next quarter.
And two rigs in the Haynesville with a bias towards 17 average net rigs during the back half of the year, based upon our expectations for an increase in private operator rig count that we believe will alleviate the current rig churn that ICD is experiencing. Day rates have generally moved sideways year to date in light of flattish overall rig count in Lower 48. We expect this day rate trend to continue the next couple of quarters. Day rate revenues and daily margins for super-spec rigs are healthy, but obviously lower than they were a year ago, day rate revenues in the Permian for our 300 series rigs have remained stable around the $30,000 range. And for our remaining 200 Series rigs the high 20s a day rate revenues for our two rigs in the Haynesville are lower than these levels.
So as I wind down my prepared remarks, I’d like to reiterate that our strategic operating priority today is maintaining current levels of utilization here in the second quarter and grow in our reported average rig count by end of year. We have a lot of wood to chop as most of our contracts are short term in nature, but most of our customers have rig lines that stretch through most, if not all of this year, I believe we have appropriately positioned our rig fleet through the two additional Haynesville, the Permian relocations early in the first quarter as we expect the effects of lower nat gas prices and customer count consolidation and capital allocation priorities will continue to put a drag on the Haynesville market. The rest of this year, I expect we will continue to see opportunities to solidify our Permian Basin presence as this year plays out as the benefits of our 300 series rigs combined with our operational and HS&E performance and 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 through the summer this year it is imperative that we continue to punch above our weight class to drive incremental ICD rig utilization. But I believe we’ve shown that we’re more than able to do that. I’ll make some additional concluding remarks before opening the call up for questions right now, I want to turn the call over to Phillippe to discuss our financial results and financial outlook in a little more detail.
Philip Choyce
Thanks, Anthony. During the quarter, we reported an adjusted net loss of 7.2 million or $0.5 per share and adjusted EBITDA of 11.8 million. We operated 15.1 average rigs during the quarter, in line with our prior conference call. Guidance. Margin per day during the quarter came in at $11,829 per day exceeding guidance by various due to very strong cost control. Early termination revenues during the quarter or de minimus SG&A costs were 4.3 million which included approximately $216,000 of stock-based and deferred compensation expenses. Cash SG&A expense of 4 million during the quarter was in line with guidance and included approximately $300,000 in one-time charges associated with cost initiatives implemented during the quarter. Stock-based compensation expense was lower than guidance, driven by variable accounting tied to changes in our stock price.
Interest expense during the quarter aggregated 9.9 million. This included 2.7 million associated with noncash amortization of deferred issuance costs and debt discount, which we excluded when presenting adjusted net income tax benefit for the quarter was $231,000 during the quarter, cash payments for capital expenditures, net of disposals were approximately 8.2 million and included 8.1 million of payments related to prior period items. And there was approximately 4 million of CapEx accrued in accounts payable at quarter end.
Moving on to our balance sheet. We repaid 3.5 million of convertible notes at quarter end. And at quarter end, we also paid in-kind 13.3 million of accrued interest due on the convertible notes. Borrowings under our revolving credit facility were 8.3 million at quarter end, a slight increase compared to prior year end associated with working capital investments. Overall net working capital investments during the quarter increased by $6.3 million associated with normal seasonal ad valorem taxes and annual incentive compensation payments.
Our financial liquidity at quarter end was 20.4 million, comprised of cash on hand of 6.26 0.9 million and 13.5 million of availability under our revolving credit facility.
Now moving on to guidance for the second quarter of 2020. For right now, we have 17, 18 rigs actively in play for ICT from a marketing perspective, but a handful of these rigs utilization is affected by elevated churn and basin relocations between the Haynesville and Permian markets. Our two rigs operating in the Haynesville also have the additional headwinds of a very challenged market. Anthony already outlined our expectation for a relatively flat reported average rig count for the second quarter, as well as our expectation for some improvement during the back half of the year as we address some of the near term utilization headwinds. Overall, during the second quarter, we expect operating days to approximate 1,350 days, relatively flat on an average rate basis with the first quarter, we expect margin per day to come in between 9,750 and $10,250 per day. With a sequential decline related to lower day rates on contract renewal renewals as all legacy contracts have now expired and some small increases in cost per day compared to the first quarter. As Anthony mentioned, our two Haynesville rigs are operating at lower dayrates compared to the broader US land market. Breaking out the components, we expect revenue per day to range between 29,029 thousand $500 per day and cost per day to range between 18,919 thousand $400 per day, unabsorbed overhead expenses will be about 1 million, and we have excluded these expenses from our cost per day guidance. The increase in these costs is associated with the consolidation of our Houston operating yard into our West Texas operations, which will occur during the second and third quarter of 2024 and a result in annual operating cost savings thereafter of 1 million or more Once completed, we expect second quarter cash SG&A expense to be approximately 3.7 million and non-cash stock-based compensation expense to be approximately 1 million, assuming no material changes to our stock price that would impact variable awards. Interest expense to be approximately 10.4 million. Of this amount, approximately 2.9 million relate to non-cash amortization of deferred financing costs and debt discounts. Depreciation expense for the second quarter is expected to be flat with the first quarter. We expect the tax benefit for the second quarter bill to be in line with the first quarter as well.
Before I turn the call back over to Anthony, I did want to discuss capital and balance sheet priorities that we as we navigate the remainder of this year and move into next year. We have made the election to pick our next interest payment due under our convertible notes on September 30th of this year, and will likely pick subsequent interest payments as well. Our anticipation is that our lenders will continue to accept mandatory offers to repurchase notes at par, which will somewhat offset increases in the overall convertible note balance. Our expectations for relatively flat market conditions is obviously one driver for our decision to continue to pick interest, but there are several other key considerations. Most important, the PIC interest rate on our notes is lower than our cash rate by 300 basis points. So from a cash-on-cash perspective through maturity, we believe this decision is best for managing our overall net debt and other info important considerations to manager manage overall liquidity while budgeting to pay down our revolver balance prior to its maturity in September of 2025. Our expectation is it will be challenging to extend or replace the revolver facility until over our convertible notes are refinanced. The maturity is extended in that regard. As we previous previously announced, our Board of Directors has initiated a formal review process to begin evaluating alternatives with respect to refinancing our convertible notes and other strategic opportunities and formed a committee of independent directors for that purpose. Obviously, there can be no assurance at this time that this process or evaluation will result in any any one or more transactions or any particular transaction or strategic outcome or the timing of any such outcome.
And with that, I’ll turn the call back over to Anthony.
J. Anthony Gallegos
Thanks, Phil. So rolling all this up, I’m pleased with our efforts year to date to position the Company to maximize the opportunities that are available to us here in 2024, we continue to grow our Permian Basin presence, which is the most important land rig market in the Lower 48 in the process. We continue to make progress on the three most important overall strategic initiatives we have, which include paying down debt, increasing our exposure to the 300 series market and leveraging our operational and HS&E performance, along with our ICT impact offerings to win incremental contracts and eventually better margin per day.
With that, we will take your questions. Operator, please open up the line for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Alex Henderson, Sidoti & Co.
Alex Hantman
Yes, hi, this is Alex on for Steve Ferazani. And a few questions on my end. The first on dayrates, and I know some of that again, as is decreasing the margin there. Can you talk about any stabilization in pricing that you’re feeling and you’re getting a premium for the super-spec rigs end? Is that a function of your competitors being less disciplined in pricing or just sort of a function of a weaker market too much supply that kind of stuff?
J. Anthony Gallegos
Well, Alex, appreciate the question.
Have we done well, I think that the rates have played out this year pretty much the way that we expected. Things have kind of moved sideways, especially in on the higher end 300 series spec rigs where you’ve seen a decrease in the average day rate revenues for us has really been around the contract renewals. For example, we had a rig that rolled off a one year contract that was put in place quite a while ago. Obviously, it’s repricing and the rate’s lower today than it was a year ago. And I think that’s what you’re seeing in terms of our guidance, we expect things to move sideways for the next quarter or two, and that’s what we’re seeing. That’s a function of just the churn data that we’re experiencing in the market, especially out in the Permian. The overall rig count out there is more or less flat, has been flat for the last few months. But there is a lot of churn below the surface and that’s what’s creating that headwind on day rate revenues. But still on a historical basis, they’re okay. Obviously, they’re lower than they were a year ago, but pleased with what the company has been able to do and generate in the first quarter in light of the current market.
Alex Hantman
Thank you for the context very helpful. And second question on SG&A, yes, it is much lower, which is great. Is that sustainable? And could you talk a little bit more about how you’re able to achieve?
Yes, some of that?
Philip Choyce
Yes.
So the SG&A actually was a little elevated in the fourth quarter on the first quarter compared to our guidance in the first quarter. Some of that seasonal and we also had some one-time costs on some reorg costs that we incurred in the first quarter. We’re tracking along on a cash SG&A basis, you know, maybe 15 million a year-ish on an annualized basis, the stock-based comp that was lower for the quarter. A lot of that had to do with variable accounting on our awards with the change in stock price. So I don’t expect it to be that low on this next quarter. But it all depends on weather what happens to our stock price over the next three months.
Alex Hantman
Thanks.
For clarifying.
Appreciate that. And last question, just zooming out, curious to get your view on 2025 in terms of the rig market.
J. Anthony Gallegos
Look, we’re not it’s optimistic if you think about where oil prices are today it up, if you think there’d be a little bit more excitement out there, but our customers continue to demonstrate tremendous discipline. I’m sticking to their guns in terms of what their priorities are, what they’ve communicated to their investors. A lot of it quarters between now and then and up. We’ll just have to see appreciate that.
Alex Hantman
That’s all for me. Thank you.
J. Anthony Gallegos
Thank Alex.
Operator
Don Crist, Johnson Rice.
Don Crist
Morning, guys. How are you all this morning doing good will be.
Well, I am on I wanted to ask about the costs. You know, cost have been rising for quite a while, but it looks like you were able to take a big, a decent chunk out in the first quarter. Are there any specific drivers behind that? And it sounds like they may go up just a touch here in the second quarter about what actually happened on the cost side in the first quarter that that had some pullbacks?
J. Anthony Gallegos
Yes.
Well, first on up in January, we did institute some measures to kind of rightsize the organization for what was obvious. That point would be a lower level of activity in 2024 compared to what we thought as we began to put our budget together in the third and fourth quarter of last year. So you see that primarily and some in SG&A, but off support field support type of costs. Some of it also was timing of our smaller size, drill line purchases. And when they flow through and how many flow through can can have an impact. I think we have made progress some of the cost reductions are sustainable. But I would point out that as we enter the summer months, we typically see cost move up a couple hundred bucks a day, and that’s going to be just driven by heat as more of our fleet today as a percentage is it is working in West Texas Permian Basin. I don’t have to tell you how high it gets out there, the impact that has some of it’s obvious around radiators and AC units and stuff like that. But there’s some other stuff that’s not so obvious such as just believe it or not water, Gatorade and that kind of stuff. So yes, I do think that some of it is sustainable. We’ll probably give some of it back in Q2 just because of the reasons that I pointed out. But again, really pleased with the way the companies performed, especially on the cost line year to date.
Don Crist
Appreciate that color. And you know, obviously, you’ve done a very, very good job over the past nine months or so moving stuff from the Haynesville to the Permian and displacing them high-grading some of your customers’ rigs out there, but can you just touch on who you’re butting up against or are we pretty much to the point where all the high spec rigs are working and the lower spec rigs have been displaced or is there still some of that to go out more or less surrounding that comment that you had, you know, maybe putting another rig back to work in the back half of the year?
J. Anthony Gallegos
Yes, I do think there’s more to come. And Dan, just on the decision to move rigs in the first quarter, no doubt that was the right move. If you think about markets around the country, Haynesville has been hit the hardest and that’s following what was a really tough 2023 as you know, but we had a better chance of putting those two rigs to work in the Permian. One went straight to work, and fortunately, we cannibalize an opportunity as we mentioned, but the other one really excited about the contracts that we’re working on for the second rig. I expect that rig would go back up late Q2, early Q3 and up. I do think there are some lower spec rigs that are still under contract today. That’s going to provide some opportunities in the near term for our fleet. And then as we look out over the balance of this year. I do think that rig count in the Permian will begin to tick up during Q3 and Q4, and that’s going to be primarily driven by private E&P activity. And those are guys that we’ve had long-standing relationships with. So it had nothing to lay up in this business anymore, but I feel pretty optimistic about running flat here in Q2 and then devices at one rig at two, we’ll see in the back part of this year.
Don Crist
I appreciate the color.
Operator
I’ll turn it back like into the next question comes from David storms with Stonegate Capital. Please go ahead.
David Storms
Morning.
J. Anthony Gallegos
Morning.
David Storms
Wondering just hoping we could touch back on the break. Dave, relocated to the Permian on. Could you just maybe give us a little more color around what the thought process was to you mentioned the cannibalization. And was that customer driven than the 300 series rig? Was that just timing and cost consideration. Maybe any more color you could give us there would be helpful.
J. Anthony Gallegos
Yes. I think it’s really just being sober and looking at the Haynesville over the balance of this year, David. And in fact, I think with one of our we only have two rigs working in the Haynesville to day one just rolled from one customer to the next. And I think we’ve just won the only incremental opportunity that’s out there over the next quarter or two of that. That market’s been down over 20% year to date. I think there’s still some downdraft to come and have was very confident that that quality of rig that we moved.
The second one is such that given our what we’re seeing in the market, the discussions we’re having with customers, I was pretty confident that we’d be able to put it to work in the Permian Basin. So really the decision was do I leave it, do we leave it in the Haynesville and the odds of it going to work over the next 12 months, relatively low or put a few chips on the table spent some money to relocate the rig. And we felt like we would have a pretty good opportunity to put it to work and the Permian. And I think that’s what’s going to happen, sir.
David Storms
Very helpful. And then just one more for me. Can you just talk a little bit more about the customer acquisition process when you’re competing to replace some of these lower spec rigs. Is that just also a timing thing where you’re waiting for they’re contracts to be up? Are there other considerations to think about?
J. Anthony Gallegos
Yes, that’s part of it.
You know, there’s friction when a customer releases one rig and brings another one and is a demo that rig has got to move another one and sometimes you’re starting up a rig. So it might not be quite as efficient in the first few weeks or month as it will be over the course of a couple of months with that customer so those are things that the client passed away. But we’ve got some pretty exciting things that we’ve been working on year to date around attacking cycle times of the pressure that we feel from customers today around efficiencies and reducing days per well days on the pad. It’s as intense as I’ve ever seen it and the quality of the equipment that we have the quality of the people that we have to look at wringing out every last bit of efficiencies. It’s really gone well for us year to date. So we’ve got data now we’ve got things that we can show customers where we can demonstrate to them that while changing out the rig, the friction that’s going to be cost is worth it. But bigger picture, we’re going to help you drill a better wellbore. We’re going to help you drill that well on that pad in fewer days. And at the end of the day, reduce your cost per foot.
I mean that’s the value proposition. That’s the pitch.
And I think the fact that we’ve increased our our rig count in the Permian by 50% over the last 15 months and not having to do that based necessarily on rate is a testament see what’s going on here at ICD today.
David Storms
So very helpful. Thank you for the commentary.
J. Anthony Gallegos
Thank you, Dave.
Operator
Next question comes from Don Crist with Johnson Rice with a follow-up. Please go ahead.
Don Crist
Anthony, I just wanted to ask about your most recent comment. You know, obviously, one of your competitors has kind of moved towards performance-based contracts and is forming for lack of a better term, more partnerships with the operators today. You know, it sounds like you are doing some of that, but has the contracts really reflected that or you can get many kind of uplift from make it more, you know, consistent hole or or saving days, et cetera. I mean, any comments around that?
J. Anthony Gallegos
Yes, I think it is showing, Dan. Sometimes it shows in utilization, right, where you might win an opportunity that that you otherwise might not have won or you may be able to displace someone else’s rig, all things being equal before because you can perform better. I do think up you are seeing that in day rate revenues, the average day rate revenues at the company, it’s not just that we have to necessarily compete on price.
Certainly the market’s got to determine a certain baseline in regards to the day rate, but we have to be able to demonstrate that we can add value.
And the way that we add value today is first working safe not doing anything that’s going to harm the environment. But third, reducing like said, days on well days on pad. And I think you you see that reflected today in ICD’s utilization I think going forward, maybe not Q2, but certainly later this year, rolling into next year, I think you begin to see that margin per day.
Don Crist
Okay.
But none of your contracts are structured today with either a bonus structure or anything like that where if you meet certain thresholds, you get additional capital, right?
J. Anthony Gallegos
That’s correct, Dan.
We are we’ve had those discussions in the past, we’re open to them up. And I would expect at some point we would would be able to have that type of structure. We’re certainly open to it today.
Don Crist
I appreciate the follow-up.
Thank you.
J. Anthony Gallegos
Yes, sure, Dan.
Thank you.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Anthony Gallegos for any closing remarks.
J. Anthony Gallegos
Thank you very much. So as I close out this call, I do want to say thank you. Thank you to the many employees at ICD for their hard work and dedication.
I would also like to thank our customers for their business, and we’d like to say thank you to you for taking the time to listen Earnings Call. So with that we’ll sign off from here.
Operator
Thank you. Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
