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Independence Contract Drilling, Inc. (ICD)

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Independence Contract Drilling Inc. (ICD)

Q2 2018 Earnings Conference Call

August 2, 2018 12:00 ET

Executives

Byron Dunn - President, Director & CEO

Philip Choyce - EVP & CFO

Analysts

Connor Lynagh - Morgan Stanley

Kurt Hallead - RBC Capital Markets

Taylor Zurcher - Tudor, Pickering, Holt & Co.

Daniel Burke - Johnson Rice & Company

Presentation

Operator

Good day, and welcome to the Independence Contract Drilling Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] Please also note, today's event is being recorded.

I would now like to turn the conference over to Phil Choyce, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Philip Choyce

Good morning, everyone, and thank you for joining us today to discuss ICD's second quarter 2018 results. With me today is a Byron Dunn, 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 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 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 Byron for opening remarks.

Byron Dunn

Well, thank you, Philip. Good morning, everyone, and thank you for joining us today.

This morning, I will review ICD's second quarter, provide color on the current and anticipated day rates and utilization environment, we expect through year-end, and update you on the timing of our acquisition of Sidewinder. Philip will provide details on our second quarter financials, provide third quarter guidance, and then we'll take questions from call participants.

In the second quarter, ICD generated record revenue and continued full utilization of our pad-optimal ShaleDriller fleet. Improving day rates and full quarter realization of the field level of cost efficiency initiatives we discussed on the first quarter call, drove sequential margin per day improvement exceeding 13%. Our cash cost per day at the rig level has improved to $11,150 per day, and our fully burdened rig level operating cost per day has improved to $13,000 per day. These changes to our field cost structure will persist.

During the quarter, day rates for pad-optimal rigs continued to increase in line with the guidance we provided on our first quarter call, and on a fleet-wide average basis, our average day rate continued a robust recovery with sequential as well as year-on-year positive incrementals. Current day rates for new term fixtures at pad-optimal rigs are in the $23,000 to $25,000 per day range. Some additional color on this. Market conditions for pad-optimal rigs with experienced crews are solid and improving with demand for pad-optimal rigs in our target market exceeding supply. Just this week, we signed a new term contracts at the highest day rate we have received since the downturn began in 2014.

We expect pad-optimal rigs day rates to continue to improve through the balance of 2018 and into 2019, and we are currently negotiating term contracts at the shorter end of the term contract tenure range only going further up in one year, in special situations, or where capital investment requires a combination of higher day rate and longer tenure for payback in return. At ICD, we see no reason to lock in today's low day rates and longer term arrangements when we are confident in U.S. land drilling fundamentals. At March 31, 2018, we reported a pro forma backlog of $91 million, with a fleet average day rate of approximately $20,200 per day.

Today, we reported pro forma backlog as of June 30, 2018, of $104 million with an average day rate exceeding $21,000 per day. Operationally, ICD is hitting on all cylinders. Our 15th ShaleDriller rig commenced drilling operations last week, ahead of schedule. And although final costs have not been booked, the rig's total construction cost should come in below, or at worst, in line with the budgetary cost estimates we provided The Street earlier.

As I mentioned on pretty much every recent conference call, demand for pad-optimal land drilling rigs in our target market exceeds what the U.S. fleet can deliver. And demand continues to grow as our clients, the top-tier players in the shales, bend their cost curve down, optimize their production profiles and accelerate their cash flows through expansion of wellbore manufacturing operations on ever larger pads and design successively more complex pad drilling programs. These large pad-drilling programs are most efficiently and economically executed by pad optimal equipment, and in many cases where we have partnered with our clients, can only be executed by pad optimal rigs.

With regard to Permian take away issues, let me say that we continue to see growing incremental demand for ShaleDriller pad-optimal rigs by both existing and new customers. Many of our Permian customers are among the largest in the basin, and have invested in infrastructure for years to eliminate take away bottlenecks. Many of these companies were criticized for this capital spend during the downturn, but now they are seeing significant returns from these investments. Our smaller cap customers are in varying stages of their development cycle, depending on acreage position. Therefore, they do not see take away bottlenecks having a direct effect on their active rig count and drilling CapEx.

Read the rest of this transcript on seekingalpha.com