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Independence Contract Drilling, Inc. (ICD)

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Independence Contract Drilling (ICD)

Q3 2018 Earnings Conference Call

November 06, 2018 12:00 PM ET

Executives

Philip Choyce - EVP and CFO

Anthony Gallegos - President and CEO

Analysts

Taylor Zurcher - Tudor, Pickering and Holt

Daniel Burke - Johnson Rice

Ryan Pfingst - B. Riley FBR

Presentation

Operator

Good afternoon and welcome to the Independence Contract Drilling, Inc. Third Quarter 2018 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 third quarter 2018 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 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

Thanks, Phil. Good morning, everyone. I'm very excited to be speaking to you today as ICD's President and Chief Executive Officer. As this is our first public conference call, since closing the Sidewinder combination, and my first opportunity to speak to many of you, we plan to do a few things differently on today's call. I don't plan to spend time on ICD's third quarter results, which don't include any post combination operations anyway.

Phil will cover that in his prepared remarks, although I would be remiss if I didn't point out that we reported record quarterly revenues and sequential margin per day improvement of 18% during the third quarter. Rather this morning, I want to discuss what the Sidewinder combination means for ICD and its shareholders, employees, customers. Where we see the market for our equipment and services, and finally, I'll conclude with a few remarks on the very good progress we've made on the integration front.

To start, I've been asked by many, what is going to change at ICD after the Sidewinder combination? What is going to be different? And my answer has been simple, nothing is changing, but everything is different. To illustrate what I mean, I want to highlight three important ways the company is very different post combination. Those are growth opportunities, free cash flow generation and market presence.

To start, let's talk about growth opportunities. ICD was founded and completed its IPO as a pad-optimal growth story, building the high-specification land rigs in the Lower 48's most prolific oil and gas basins with crews delivering operational excellence with the high commitments to safety and integrity. That business strategy has not and will not change. However, the opportunities available to ICD post combination to achieve growth are fundamentally different.

As a 15 rig company with 100% utilization, ICD's only real growth opportunity pre-combination with Sidewinder with newbuild rigs, which as you know, require hard dayrates that exist in the market today, substantial capital investment and the timing and availability of capital markets to fund these investments, all key ingredients which are totally outside of ICD's ability to control. With the Sidewinder combination complete, the growth opportunities have expanded to include embedded, organic investment opportunities largely within ICD's ability to control.

Now when we talk about growth, what I'm talking about is real growth. Growth and earning power. For example, EBITDA, free cash flow and earnings per share, in other words, not just growth and rig count for the sake of getting bigger. Specifically, embedded today within ICD following the combination are five organic growth opportunities that are low-risk because they have been done before and can be executed using free cash flow. All have very attractive returns and payback periods in today's dayrate and contract tenure environment.

And perhaps more importantly, each of these provide the opportunity to further enhance the equipment's specification and capabilities of ICD's ShaleDriller fleet. For example, we have four SCR rigs today, one which is idle and three which are drilling, that we can rapidly convert to 200 Series AC status. We previously completed two similar AC conversions, one in 2015, which worked throughout the downturn, and one earlier this year. Both of these converted rigs are earning market dayrates in the Permian basin today.

Some of you heard me say before, there are SCR rigs and there are SCR rigs. Unlike the vast majority of the North American SCR rig fleet, which were built in the 1980s and 1990s, our 1500-horsepower SCR rigs were designed and constructed in the 2006 to 2010 time frame in response to the US land rig market shift toward the unconventional resource plays in United States. Consequently, our SCR rigs have modern, fast-moving mass and subs, TDS-11, AC Top Drives, 1600-horsepower mud pumps, large black yards, and all but one have omnidirectional walking systems today.

Half of them already have 7,500-psi mud systems and third shakers, and the balance are in the process of receiving those upgrades now. In other words, all of these rigs need to be pad optimal or AC drawworks and AC control systems to put them in the same class as ICD's 200 Series ShaleDriller rig. The all-in cost for all four AC conversions, including the reactivation of the idle SCR rig, is about 13.5 million, and we expect payback period less than 3 years on this investment.

Read the rest of this transcript on seekingalpha.com