Q1 2023 Independence Contract Drilling Inc Earnings Call
Participants
Philip Choyce; EVP & CFO; Independence Contract Drilling, Inc.
Anthony Gallegos; President & CEO; Independence Contract Drilling, Inc.
Don Crist; Analyst; Johnson Rice & Company L.L.C.
Steve Ferazani; Analyst; Sidoti & Company, LLC
Dave Storms; Analyst; Stonegate Capital Markets
David Marsh; Analyst; Singular Research
Dick Ryan; Analyst; Oak Ridge Financial
Presentation
Operator
Good day and welcome to the Independence Contract Drilling Inc. first quarter 2023 financial results conference call. (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 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 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 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.
Anthony Gallegos
Hello, everyone, and 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 super spec pad-optimal rigs; third, I want to update you on the transition efforts around our Haynesville 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. Philip 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 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 in adjusted EBITDA of 16%. In addition to being a record quarter financially, the end of the first quarter also marks an important pivotal milestone and transition for ICD when it comes to strategic focus and capital allocation priorities.
Since August of 2020, our focus in 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 US 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 beginning of the year, while the Haynesville has seen a drop. But there will be more rig count reductions coming in the Haynesville, 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 Eagle Ford E&Ps trimming the rig count or being displaced by higher specification rigs relocating into the basin from the Haynesville 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 dayrate 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 Haynesville 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 Haynesville 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 would 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, three by four 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 US 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 Haynesville E&P companies.
ICD started 2023 with approximately 50% of our working fleet, 10 rigs deployed in the Haynesville market. And for us, the decision to relocate rigs from the Haynesville to the Permian was obvious. In response to the impending Haynesville rig count decline on our prior earnings call, we set forth our plans to relocate a portion of our Haynesville 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 million 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 end].
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 are 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 pad-optimal super-spec 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 Haynesville at this time. For those rigs, as of today, we have successfully re-contracted 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 Haynesville 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 adjusted EBITDA ratio meaningfully towards a range of less than 1 to 1.5 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 2.5 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 McNease 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.
Philip Choyce
Thanks, Anthony. During the quarter, we reported an adjusted net income of $2.4 million or $0.14 per fully diluted share and adjusted EBITDA of $21.4 million. We operated 19.4 average rigs during the quarter. Our 21st rig commenced operations early April and did not benefit the quarter.
Revenue per day during the quarter was $34,870 and margin per day was $15,665, all sequential improvements. Cost per day of $19,205 increased sequentially, primarily due to higher R&M expense. First quarter costs also include seasonal increases for payroll taxes. In the quarter, we incurred $600,000 of unreimbursed costs related to our Haynesville to Permian relocation program, which are excluded from our cost per day metrics.
Selling, general and administrative costs were $6.7 million during the quarter, which included approximately $1.8 million of stock-based and deferred compensation expense, sequential decreases in cash SG&A over the fourth quarter primarily relate to lower incentive compensation accruals compared to the prior quarter.
Interest expense during the quarter aggregated $8.7 million. This included $2.4 million associated with non-cash amortization of deferred issuance and debt discount, which we've excluded when presenting adjusted net income. We paid accrued interest on our convertible notes in-kind at the end of the quarter.
Tax benefit for the quarter was de minimis. During the quarter, cash payments for capital expenditures net of disposals was approximately $18.1 million, approximately $16.2 million related to payment of prior year CapEx accrued at year end. Breaking these cash payments out, approximately 75% related to rig reactivations and 200 to 300 Series conversions, which included payments associated with our 20th rig, which has commenced operations in late December; as well as our 21st rig, which we completed during the quarter; 20% related to maintenance CapEx; and 5% related to investments in drill pipe, capital inventory, and spares.
As Anthony mentioned, we have paused our rig reactivation program. So for the time being, going forward, CapEx will principally relate to maintenance CapEx and tubular purchases. Overall, we have not adjusted our CapEx budget for 2023, which was front-end weighted. As Anthony mentioned, we currently remain on schedule with our rig relocation program and currently do not expect any major adjustment to our rig operating assumptions for the year that would impact our maintenance CapEx assumptions.
Moving onto our balance sheet, from a working capital perspective in addition to payments on prior year CapEx deliveries, our first quarter balance sheet reflects the normal seasonal impacts from the payments of year-end incentive compensation, ad valorem taxes, and related payments. Those payments aggregated $5.5 million during the quarter. And overall, as a result of these payments and the payments on the CapEx, net working capital increased approximately $11.7 million during the quarter.
Adjusted net debt at quarter end was $194 million. This amount represents the face amount of our convertible notes and borrowings under our ABL net of cash and ignores impacts from debt discounts, deferred financing costs, and finance leases. As Anthony mentioned, following reactivation of our 21st rig, our capital allocation focus has now pivoted away from reactivations towards debt reduction. And since quarter end, we have already paid down $3 million of debt.
Financial liquidity at quarter end was $22.1 million, comprised of cash on hand and $15.4 million of availability on our revolving credit facility. And this is in addition to the working capital improvement I just mentioned.
Now, moving on to second quarter guidance. The operating days were approximate 1,632 days, representing 17.9 average rigs earning revenue during the quarter, which assumes several of our recently idle rigs commence operations late May to mid-June on contracted opportunities we are currently pursuing. Those projects slid to the right or did not materialize. Exposure to the quarter was approximately 60 operating days.
We expect margin per day to come in generally flat with the first quarter but with some cost inefficiencies associated with higher contractual churn, given the number of rigs moving between basins. And overall, we estimate margins come in between $15,000 and $15,500 per day.
Unabsorbed overhead expenses will be about $600,000 during the quarter and also not included in our cost per day guidance. And then unreimbursed costs associated with our Haynesville to Permian relocation program are expected to be approximately $2 million during the quarter and are not included in our cost per day guidance.
We expect second-quarter cash SG&A expense to be approximately $5 million and stock-based compensation expense to be approximately $1.9 million. We expect interest expense to be approximately $9.8 million; of this amount, approximately $2.6 million relate to non-cash amortization of deferred financing costs and debt discounts. And depreciation expense for the second quarter is expected to be relatively flat with the first quarter. And finally, we expect tax expense to be de minimis for the second quarter.
And with that, I will turn the call back over to Anthony.
Anthony Gallegos
Thanks, Philip. Before opening up the call for questions, I want to briefly summarize ICD's strategic positioning and what it all means for ICD's stockholders. Here are a couple of points for you to consider. First, our utilization and margin growth since August of 2020 has been best-in-class. This speaks to the quality of our people, our assets, and our performance.
Also, today, our daily rig margins are the best in ICD's history and on par with, and exceeding, some of our larger company peers as we continue to earn recognition from our customers for industry-leading customer service and professionalism. The company has never performed better, and I believe all of this will be on display over the remainder of 2023 as we navigate transitioning a large part of our rig fleet from the Haynesville to the Permian.
Second, we have the youngest and we believe best-in-class rig fleet. The market for pad-optimal super-spec rigs remains strong outside of the gas driven basis. We continue to demonstrate our fiscal discipline by deferring further investments and additional reactivations beyond the 21st rig, which came out early second quarter. And finally, we have substantially improved our liquidity and balance sheet and expect continued progress as we move through 2023 and beyond.
Although softness in gas drilling markets will impact the pace of rig reactivations and is requiring us to reposition some rigs, ICD has never been in a better position to navigate these types of short-term challenges. Our operational strength and reputation with our customers has never been stronger, our fleet, which has been transformed by the market penetration of our 300 Series rigs, has never been more valuable.
I'd like to thank our many operations, support, and corporate team members, which work hard every day to deliver high levels of safety, performance, customer service, and professionalism, which our customers expect from ICD.
With that, operator, let's go ahead and open up the line for questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions) Don Crist, Johnson Rice.
Don Crist
Good morning, gentleman. How are you all today?
Philip Choyce
Good.
Anthony Gallegos
Doing good, Don.
Don Crist
I wanted to start with rig demand. One of the other companies that reported today offered up a rig count assumption that kind of surprised me and I thought was very aggressive of another 50 to 75 rigs coming off the market by late summer. Are you seeing any significant reduction in demand because that would imply that you would see some softness in the oil markets as well? And just curious, if you're seeing anything of that magnitude out there?
Anthony Gallegos
Don, thanks for the question. 50 to 75 rigs by the end of the summer feels extreme to me. But as you know, I don't have a lot of visibility into the conventional oil or conventional gas markets or markets outside of our target markets. I think we've been pretty clear on what we expect is going to happen in the Haynesville. We see another 15 to 20 rigs coming out of the Haynesville. That's in motion.
I know there's been some questions on why we haven't seen it up until now and I think that's really a function of when decisions were made to scale back activity and just how long the wells take to drill and how many wells there are in a pad in the Haynesville. So I think here in the second quarter, you've started to see that deceleration. We expect that's going to continue.
Again, staying within our target market, Eagle Ford has given up some rigs as well. I think since the beginning of the year, that market's down about 10 rigs. That's -- call it, 15%. Could be a little bit more trimming down there, especially in the gas [vendor.] But I would just point out, about three-quarters of the rigs working in the Lower 48 today are in the US unconventional oil basins.
And while we've seen some softness on oil prices, it has moved back up [here] recently. I think the actions that Opec+ took a couple of weekends ago is helpful certainly. When we're talking to customers about activity; Q3, Q4, this year, most of them are talking about not just flat activity but in some cases, actually adding rigs. So that feels extreme to me, 50 to 75 rigs. But I do think it is going to drop a little more from here in our target markets and that's going to principally be in the Haynesville.
Don Crist
Okay. And to just follow on to that, obviously, there's a lot of discussion around LNG and filling up the pipes before that LNG comes on in call it, late '24, early '25. Are you seeing any early discussions, particularly in the gas basins on putting rigs back to work in the third, fourth quarter or early '24?
Anthony Gallegos
Not a lot, Don. The takeaway issues are going to be there for a little bit. We've got to get the infrastructure built out along the Gulf Coast. There are a few customers that have started talking to us about, hey, we're going to need a high spec rig sometime in 2024. And they're concerned that a lot of that capacity will have moved out of the market by then. So I do know that's on their minds, but we're certainly not aware of a lot of people planning to recommence activity here in 2023.
Don Crist
Okay. And just one final one from me. Obviously, you bought back a little bit of debt, and you have the $5 million that you're required to offer in the second quarter. But what about cash taxes -- I mean cash interest versus payment in-kind, are you contemplating that decision now for the fall?
Philip Choyce
So we'll make the next decision, Don, end of September. And whether we would pick that next six interest payments, we'll have to see where we're at that point in time, where the market is. That may depend on whether the lenders have elected to take the buydown, the $5 million, at the end of June -- at the end of September. That could impact it as well.
And we'll make that decision at the end of September for whether we pick that six-month interest payment up until March. And our plan would be not to pick any interest after March of 2024. And hopefully, we're not taking interest after September.
Don Crist
Okay. And can you remind me exactly what that cash would be if you paid it in cash?
Philip Choyce
Yes, it's going to be SOFR plus 12.5%. So it's going to be close to 17%.
Don Crist
Okay. I appreciate it. Thank you.
Operator
Steve Ferazani, Sidoti.
Steve Ferazani
Good morning, everyone. Appreciate all the detail on the call. You're obviously not the only contractor looking to move rigs into the Permian. So I guess this is kind of a two-part question. One, how many rigs do you really think that can be absorbed, specifically on the super-spec, whether you'd be able to replace enough lower spec rigs? And then what's your anticipation for pressure on dayrates knowing that multiple contractors are looking to move rigs there?
Anthony Gallegos
Great. Thank you, Steve. We do think there is capacity in the Permian market to receive incremental super-spec supply. You have to remember, if you dial back in to say, Q3 last year, things were still pretty good. It was hard for some operators to get their hands on the latest, greatest technology. So there are some immediate opportunities for us to displace rigs that are lower spec.
There's more SCR rigs running than you might realize out there, for example. And then there are some AC rigs that are outfitted with only two mud pumps or maybe they only had three generators. And of course, the equipment that we're looking to move into the basin has all of that. Three mud pumps, four gens. We have the ability and a pathway toward enhanced setback capacity and stuff like that. So even in a flat environment in the Permian, we think there are opportunities to put these rigs in.
I would point out that since the beginning of the year, the Permian has added almost a dozen rigs. So it may feel choppier, but we're pretty confident that we'll be able to move these rigs from the Haynesville and put them to work in the Permian.
Your other question regarding dayrate. It's interesting, the lower spec rig that is facing the threat of being displaced, in many cases, that's the only way he can compete is on that lower dayrate. But as we get deeper into this, especially as we begin to deploy technology across the industries, super-spec rig fleet, customers are seeing the value that those rigs can provide, and that value can be reduced days versus depth. It could be in better hole geometry.
But those are things that it's going to be really, really tough for that lower spec rig to compete against even at a much lower dayrate. So we feel pretty confident that the market will be able to absorb the equipment coming in. We think that there will be some pressure on dayrates, but nothing extreme.
And I'll just close with, we're not aware of a lot of rigs moving into the basin. We've said what we're going to do and we're in the process of doing that. I think there's been a couple that have come out of the Eagle Ford as well, but certainly not aware of a bunch of rigs heading out to the Permian Basin from these other [place]. (inaudible)
Steve Ferazani
That's helpful. Right. That's helpful. So I guess the biggest question mark on 2Q will really be the timing of the three rigs you've moved; when they might begin drilling again. Do you have any -- can you provide any color on that?
Anthony Gallegos
Yes, I think what we've said is we have a goal of getting back to 21 rigs operating by the end of the year. Steve, obviously that's going to require a supportive market, which we believe is going to be out there. Lot of balls in the air right now. The first step was getting the rigs out there with minimal financial impact to ICD. And I think we've done a great job at getting that done. Now, it's finding the right contracting opportunities for them.
We've been pretty vocal and told people, expect to see a rig or two idle any given quarter for the next two quarters, which was Q2 and Q3. So pretty optimistic that during the fourth quarter, we're able to get back to the 21 rigs operating, assuming that WTI and Brent react the way that we expect it to.
Steve Ferazani
So the assumption for us should be to assume -- it would be safer to assume those three rigs are not drilling this quarter.
Philip Choyce
They'll be in and out. There's a lot of --
Steve Ferazani
Okay.
Philip Choyce
Steve, there's a lot of churn within the fleet. So at any given point in time, when you think about those -- some of those rigs have drilled actually in the second quarter and then we relocated them. And they're looking for their next opportunity and the timing of those opportunities are late May, mid-June type opportunities. If they move to the left for whatever reason, then obviously those rigs wouldn't be working in the last part of June. And we talked about the 60 days.
There's probably -- if you think about moving into the third quarter, there's really 19 rigs that we think can operate during the quarter, but they're not all going to operate every single day as we have to reposition the fleet. So that will give you a little bit of an idea of what we might be dealing with in the third quarter. And then we think, the fourth quarter, we've really got -- all the rigs have a chance to operate during the quarter. Now, whether they all operate the full quarter, that's a different question.
Steve Ferazani
Of course. That's helpful. Thanks. And just again, one last in. You did mention that the potential for some of the remaining Haynesville rigs going out to standby terms at different points in the second half. How do you weigh moving them versus what you can get staying there? And I know things change, so.
Anthony Gallegos
Yeah, so some of that's going to be decided by our customer whether they choose to pay standby rate and have a stay on location. A couple of those rigs are -- once contracted into the fourth quarter this year, for example. And as long as they're willing to continue to pay the standby rate, obviously, we wouldn't be able to market that rig. So they would drive that.
I guess where I was trying to go with my comments is for the balance of the fleet where we have optionality and can make a decision, if we see strengthening in the Permian market in the back part of this year rolling into next year the way that we expect, obviously that contracting opportunity is probably going to pull that rig west, is how we're thinking about things.
Steve Ferazani
That's helpful. Thanks, Anthony. Thanks, Philip.
Anthony Gallegos
Thanks, Steve.
Operator
Dave Storms, Stonegate Capital Markets.
Dave Storms
Morning.
Anthony Gallegos
Good morning.
Dave Storms
Just wanted to touch on the backlog a bit. I saw it come down quarter over quarter. Was this by design as you're signing contracts -- new contracts? Or is this an -- is there another story here?
Anthony Gallegos
I'll start. I think it's really just a function of the market, Dave, and maybe some of the pressure that we've seen around dayrates. Again, our outlook is for a much stronger contracting environment in the back part of this year. And most of the fleet, except for the term contracts we signed in the back half of last year, is working pad to pad right now. So we -- for us, something won't show up in our backlog unless it's six months or longer. And a lot of the contracts that we signed recently have been shorter than that.
Philip Choyce
Yeah, we had five rigs move -- already move from the Haynesville to Permian. They were all rolling off term contracts, so. And when they renewed -- and obviously, there's a couple of them we just talked about, we're actually trying to renegotiate -- enter into new contracts with those. Now, those are all contracts pad to pad that won't actually hit our backlog numbers.
So I think our backlog could decline a little bit more. Reported backlog. As we move from first quarter to second quarter for the same reason. I think most of the contracts we're looking to sign are going to be pad to pad. There could be some six-month contracts or longer, but it just remains to be seen.
Dave Storms
Understood. Very helpful. And then I know you mentioned in your prepared remarks that you're still on pace for the $3 million to $4 million worth of relocation costs, but you're still in the early stages of that. What factors are you looking at that might maybe leave that to be more in the $3 million range as opposed to the $4 million range?
Philip Choyce
So the bucket of costs that you're talking about are transportation costs to move the rig from the Haynesville to the Permian. We've done very well on that. We've -- for the most part, we've had our customers absorb the lion's share of all of those costs.
The other portion of it is, because we're in a -- it is a choppy situation when you're moving rigs, we've worked really hard to maintain our crews and our people. And so there are some inefficiencies there that are part of that number. And what will help that go lower than the [other] will be just how quickly these rigs get re-contracted.
So if we're able to execute upon what we just talked about in our second quarter goals as far as these couple of rigs coming up here at the end of May and June, then that's going to be very helpful on having a more positive impact on those costs. But the big variable is going to be just how quickly the rigs get re-contracted and the cost of maintaining the crews during that period of time.
Dave Storms
That's very helpful. Thank you.
Anthony Gallegos
Thank you, Dave.
Operator
David Marsh, Singular.
David Marsh
Yes, hi. Thanks for taking the questions. So I'm just trying to work through the comments with regard to margin projection for the second quarter. Is there an implication that dayrates are going to be sequentially flattish in that? Or is it more of a cost side that's driving the more conservative outlook on margin.
Philip Choyce
Well, when you compare first quarter margins to our guidance, the guidance is slightly lower. There were some capital equipment revenues in the first quarter that we won't have in the second quarter, which really has nothing to do with dayrate, it had to do with customers paying for certain upgrades to the rigs.
I don't think we're going to have -- we aren't forecasting that as much in the second quarter. As Anthony mentioned, there is some pressure on dayrates. So when you think about the margin going forward, it's not going to grow above that number, we think, for the third quarter either. I think it's going to be flat.
Could there be pressure on it? Potentially. There could be around the cost line, is probably where I'd be most concerned about it. But it really just depends on the cost line and really depends on how quickly we get the rigs back to work so that our overhead and things like that get fully absorbed.
David Marsh
Okay. That's helpful. And then just on the commodity side, could you guys talk about generally at a high-level what types of price levels for nat gas and what types of price levels for oil do you believe that you need to have to have kind of a stabilized fleet and with the ability to make good dayrates and good margins for everybody involved?
Philip Choyce
Yeah. Again, we're drillers, David, as you know. So we don't make our living calculating that. But we've been in the business long enough to get a feel for how our customers might react in different environments. And to me, when you think about the gas business, I think gas needs to be above $3. I think oil needs to be above $70, right? I think what's also as important is trajectory. And $70 to $75 with bias going lower is going to feel different than stable environment where everybody feels like oil is going to stay in the $70 to $75 range.
And the issue you've got now is gas -- as you know, nat gas is very, very low. I think most people expect it's going to stay in that sub $3 range. If you just -- you think about where we are in the year, you think about the buildout of infrastructure to export LNG, takeaway constraints in the basin, all that just signals to me that -- like I said in my remarks, that Haynesville is going to be challenging for the rest of this year and I think a good part of next year as well.
Oil on the other hand, as you know, is a global commodity. There's been a -- you just look at this year and what we've dealt with, a couple of times we thought that the banking situation was going to get much worse. Are we going into a recession or not? You've seen oil dip into the 60s twice since the beginning of the year. There's been a lot of headlines here.
But as you look out in the back part of the year whether the US is in a recession officially or not, the expectation is -- like it does every year, is global demand for oil is going to increase by at least 2% on a year-over-year basis. [China]. And the real reopening of the economy and getting the industrial machine going, all of that is going to be very, very positive for the oil markets. And these are the reasons why we're so optimistic about the back part of this year and 2024, is we think it's a really strong setup for the commodity in terms of WTI and Brent. And that's what's going to drive our customers' activity, especially out in the Permian.
David Marsh
That's really helpful. Really appreciate the comments, guys. Thanks. Congrats on the quarter and best luck going forward here.
Philip Choyce
Thank you, David.
Operator
Dick Ryan, Oak Ridge Financial.
Dick Ryan
Thank you. So Anthony, just from a marketing perspective, as you look at re-contracting, how is your marketing team doing when you look at absorbing your rigs coming back to the Permian? Are you seeing that with existing customers or they're making headway into new customers?
Anthony Gallegos
First, Dick, they do a fantastic job. Of course, they're only as good as the service and the equipment that we put into the market. So it's just a really good effort on the part of the whole company.
But to answer your question, it's really both of those. You look at, for example, the 21st rig that came out at the beginning of April, that went to work for our biggest customer. We've slid another rig in with that same customer here since the beginning of the year as well. And then we've gone to work for some E&Ps that we had to work for in the past or we've never had a chance to work for. So it really is a mixture of both of those.
But they do a really good job. The company has, I believe, a really strong reputation out there for having great people, very good equipment, and a heavy focus on high levels of customer satisfaction. And then so all of that together, that's what'll -- what's allowed ICD to bring these rigs over. And there's a lot of re-contracting that goes on, too, within the basin that we don't talk a lot about on these calls. So hopefully, that answers your question.
Dick Ryan
Sure. And with the retransition -- or the transitioning of these rigs, are you keeping labor levels constant during this pause period?
Anthony Gallegos
Yes. So far, we've been able to do that. It's -- that's some of the inefficiencies that you hear Philip talk about when we talk about our cost per day and margin per day expectations over the next couple of quarters. It's just -- it's choppy.
And look, if we felt like the market was going to be tough for a longer period of time, then maybe we would have taken some actions we haven't taken up until now. But given that we see this as a transitory situation, that's -- we're rebalancing should it occur over a couple of quarters. And the fact that we've been able to recontract rigs on a relatively quick basis, those are the reasons why we've made the decisions that we've made. And I think our company and our stockholders, in the long run, are going to get benefits because of that.
Dick Ryan
Great. Thank you. Congratulations.
Anthony Gallegos
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.
Anthony Gallegos
We just want to say thank you to everybody for making time to hear our first quarter 2023 earnings call. I do wish you all safety and prosperity and look forward to talking to you again soon. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
