Independence Contract Drilling, Inc. (NYSE:ICD) Q4 2023 Earnings Call Transcript
Independence Contract Drilling, Inc. (NYSE:ICD) Q4 2023 Earnings Call Transcript February 28, 2024
Independence Contract Drilling, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. And welcome to the Independence Contract Drilling, Inc. Fourth Quarter and Year End 2023 Financial Results and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Philip Choyce, Executive Vice President and Chief Financial Officer. Please go ahead.
Philip Choyce: 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-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. And with that, I’ll turn it over to Anthony for opening remarks.
Anthony Gallegos: 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 superspec rig market and 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 series 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 and budgeted for the remaining 200 series rig 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 series to 300 series conversions to-date. And this fleet transformation paid significant dividends for ICD in 2023, as we navigated a severely depressed Haynesville 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 series -- 200 series to 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 multiyear 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 part paydown opportunity in our indenture by paying down a total of $15 million worth of convertible notes, including a $5 million paydown in the fourth quarter. We have mentioned in the past that positioning the company for 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, Philip 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 superspec rigs and 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 Haynesville market. It’s no secret that the Haynesville 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 Haynesville rig count overall and for ICD. We had three rigs working in the Haynesville 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 series to 300 series conversion during the rig move and placing it on a six-month contract with a new customer, all with zero operate 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 Haynesville 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 Haynesville 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 a 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 superspec rigs are still healthy, but obviously lower than they were a year ago. This is more pronounced for incremental rig adds with new customers, for example, compared to when we renew or rollover a contract with existing customers, and as you might expect, there’s more day rate pressure in the Haynesville 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 $20,000s. 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 series 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 rig -- 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 Haynesville 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 series 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 have shown that we are 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 Haynesville, 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 net 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 Haynesville presents.
So rolling all this up, I’m confident that ICD is ready for the year which has now started. Our 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.
Philip Choyce: For the fourth quarter of 2023, we reported an adjusted net loss of $8.6 million or $0.61 per share and adjusted EBITDA of $9.9 million. In calculating adjusted EBITDA and loss per share, we excluded $600,000 associated with non-cash SG&A marketing expense during the quarter, which related to an amendment to some contractual assets. We also excluded $14.7 million associated with a non-cash impairment charge. The impairment charge relates to idle equipment that we do not believe will be usable in the company’s fleet of 26 marketed rigs on a go-forward basis, as well as capital spares that will be disposed of in connection with efforts to consolidate the company’s yard locations. During the quarter, we operated 14.9 average rigs in line with our prior conference call guidance.
Margin per day during the quarter came in at $12,313 per day at the high end of guidance. However, as Anthony mentioned, reactivation costs of $2.1 million exceeded guidance from our last conference call and there were no early termination revenues during the quarter. SG&A costs were $5.7 million during the quarter, which included approximately $1.8 million of stock-based and deferred compensation expense, as well as the non-cash operating expense I previously mentioned. Cash SG&A expense during the quarter was $3.9 million, relatively flat with the third quarter and in line with guidance. Interest expense during the quarter aggregated $9.8 million. This included $2.6 million associated with non-cash amortization of deferred issuance costs and debt discount, which we excluded when presenting adjusted net income.
Tax benefit for the quarter was $900,000, and during the quarter, cash payments for capital expenditures net of disposals were approximately $2.7 million. Moving on to our balance sheet, we paid $5 million of convertible notes at par at quarter end. The overall adjusted net debt during the quarter was reduced by $4 million. Our financial liquidity at quarter end was $26.2 million, comprised of cash on hand of $5.6 million and $20.6 million of availability under our revolving credit facility. Now, moving on to guidance for fiscal 2024 and the first quarter of 2024. As Anthony mentioned, we have set our capital expenditure budget at $18.2 million net of disposals for 2024. This includes completion of a 200 series to 300 series conversion on the loan 200 series rig we have operating today.
Budget is based upon 17 operating rigs in the near-term. As Anthony mentioned, we are expecting a relatively flat operating rig count for at least the first half of 2024. We would expect to adjust our capital budget upward on any incremental rig adds that increase our operating rigs above 17 earlier than these expectations. I would note that due to white space created by rig churn, our reported average operating day during a particular quarter will likely be below 17 until we begin reactivating additional rigs. We have set our cash SG&A budget for 2024 at $15.3 million. This is a reduction of approximately 8% compared to fiscal 2023 and represents consolidation of various corporate functions that occurred early in 2024. Non-cash stock-based compensation during 2024 is expected to be approximately $5 million, but much of this is tied to variable accounting and is driven by increases or decreases in relation to our stock price at period’s end.
We are budgeting interest expense in 2024 to approximate $30 million. In addition, we expect to recognize $12 million of non-cash interest expense associated with amortization of debt discount and offering costs. And finally, we expect our effective tax rate in 2024 to be approximately 5%. Now, moving on to more specific guidance for the first quarter of 2024, we expect operating days to approximate 1,343 days. We expect margin per day to come in between $10,400 per day and $11,000 per day with a sequential decline relating to lower day rates on contract renewals. Breaking out the components, we expect revenue per day to range between $30,100 and $30,400 and costs per day to range between $19,300 and $19,600. Based upon cost efficiency initiatives instituted at the beginning of 2024, we are expecting positive trends in our overall costs per day compared to 2023.
Unresolved overhead expenses will be about $800,000 during the quarter and we’ve excluded those expenses from our cost per day guidance. This includes approximately $200,000 associated with relocating rigs from the Haynesville to the Permian. We expect first quarter cash SG&A expense to be approximately $4.4 million, which includes severance costs of approximately $400,000. Cash SG&A during the year is somewhat front-loaded due to year-end professional fees. Similar to our expectations around costs per day, we are expecting positive trends in our cash SG&A expense in future quarters based upon cost efficiency initiatives instituted at the beginning of the year. Stock-based compensation expense for the quarter should approximate $1.4 million, assuming no material changes to our stock price that would impact variable awards.
The first quarter, we expect interest expense to approximate $10 million, and of this amount, approximately $2.7 million will relate to non-cash amortization of deferred financing costs and debt discounts. Appreciation expense for the first quarter is expected to be flat with the fourth quarter and we expect our tax benefit during the quarter to be de minimis. And with that, I’ll turn the call back over to Anthony.
Anthony Gallegos: Thanks, Phillip. So wrapping all this up, I believe ICD performed very well last year as we navigated many challenges successfully. In the process, we grew our Permian Basin presence and we were able to expand some key customer relationships and attain some new customers, all the while delivering world-class performance, including industry-leading HS&E results. We continue to make progress on the three most important strategic initiatives we have, which include paying down debt, increasing our exposure to the 300 series market and leveraging our ICD impact offerings. So, with that, we’d like to take your questions. Operator, please open up the line for Q&A.
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