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Independence Contract Drilling, Inc. (ICD)

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Independence Contract Drilling, Inc. (ICD)

Q1 2019 Earnings Conference Call

May 02, 2019 12:00 PM ET

Company Participants

Philip Choyce – Executive Vice President and Chief Financial Officer

Anthony Gallegos – President and Chief Executive Officer

Conference Call Participants

Kurt Hallead – RBC

Taylor Zurcher – Tudor, Pickering, Holt

Connor Lynagh – Morgan Stanley

Daniel Burke – Johnson Rice

Thomas Curran – B. Riley FBR

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Independence Contract Drilling First Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. At this time, I would like to turn the conference over to Philip 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 first quarter 2019 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 loss to adjusted net income, 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

Good morning, everyone. I'm pleased to say we are following up our better-than-expected fourth quarter results with very good results for the first quarter this year, especially considering a pretty challenging market brought about by the oil price decline in the fourth quarter of last year and our customers' response. In fact, we are reporting adjusted net income for the second consecutive quarter. These results were made possible because of the intense focus on safe operations, on our continued successful integration and on cost control and synergy realization, which drove better-than-expected financial performance in our cost lines again during the quarter.

During the first quarter, we averaged 30.3 operating rigs, which represents 95% utilization of our marketed fleet. During the quarter, we had several wins in the form of contracts renewed and new and incremental contracts with existing customers. Overall, fleet utilization tracked our expectations very closely, and I'm pleased with how things are shaping up. The recent commodity price issues that resulted in a reduction in our customers' operating budgets as well as our customers' focus on operating within free cash flow had not materially affected the utilization of our pad-optimal fleet.

While first and second quarter utilization is choppy, it is still robust as pad-optimal rigs with good performance have and will continue to find follow-on work as the industry adjusts drilling programs and reallocates drilling rigs accordingly. So really, what we have experienced and will experience in the second quarter is just transitory downtime as we reshuffle the deck and redistribute the pad-optimal fleet across our customer base in our target markets with summary contracting opportunities being driven by fleet high grading and some based on incremental rig ads.

Philip will provide more detail on his prepared remarks regarding first quarter financials. However, I'd like to provide some additional color. We exited 2018 with 32 rigs contracted. During the first quarter, we signed six contract extensions and dealt with three rigs where operators were not continuing the rigs drilling program, which resulted in the expected transitory downtime during the quarter. Two of these rigs were quickly recontracted and have already recommenced operations during the second quarter.

The third rig is being upgraded to 300 Series specifications and will be equipped with 25,000 feet racking capacity and 1 million pounds hookload when the upgrade is complete. The rig already had three mud pumps and four engines. This rig was a legacy Sidewinder rig and a very good example of perhaps an underappreciated value point associated with the organic earnings and free cash flow growth we can achieve from the Sidewinder fleet acquired in the combination.

Once this 300 Series upgrade is complete, this rig's specifications will be the highest in the industry and should earn leading-edge dayrates in the market. And the total incremental CapEx for us to complete the upgrade for this rig is only $1.3 million, on which we will earn sub two-year paybacks and superior investment returns. Our target date for this rig to reenter our operating fleet is the beginning of the third quarter. We have six additional legacy Sidewinder AC rigs operating today that can be upgraded to these specs at similar CapEx levels. Again, more low risk, organic high return, free cash flow-generating growth opportunities that we can execute upon.

With respect to the second quarter, we continue to experience some transitory downtime issues, but it also appears to be the trough as rig inquiries over the past 30 days have increased. We have a very good line of sight on numerous recontracting opportunities, and I fully expect transitory issues to resolve during the back half of the year and most likely in the third quarter as we deal with the few remaining rigs we need to reallocate amongst our customer base. Some have already been recontracted, and for the remaining, we have multiple opportunities for mid to late May or June reactivations. As we sit here today, we only have three idle uncontracted rigs, including the rig undergoing the 300 Series upgrade I previously discussed. So fleet utilization for the quarter should remain robust, troughing around 90% or so.

Read the rest of this transcript on seekingalpha.com