Good day, and welcome to the Independence Contract Drilling Second Quarter 2019 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.

Good morning, everyone, and thank you for joining us today to discuss ICD's Second 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 our full reconciliation of net loss to adjusted net loss, EBITDA and adjusted EBITDA and for our definitions of our non-GAAP measures.And with that, I'll turn it over to Anthony for opening remarks.

Thank you, Philip, and thank you, everyone, for joining us today for the call. We'll follow our typical structure for this call with Philip providing financial details, while I provide some thoughts on our second quarter results, the overall market and some of the strategic initiatives we have underway here at ICD.As we discussed on our first quarter conference call, we expect that our second quarter operations to be choppy and challenged by limited visibility, transitory downtime and cost per day inefficiencies as we work to recontract rigs released in response to customer budget reductions. Well, that's exactly how things played out. More specifically, ICD's contracted rig count during the quarter was disproportionately impacted by one large customer in particular that elected to cut his rig count in half from 36. In addition, we saw other customers pare back their contracted rig fleet as well. Later in the quarter, we had some customers unexpectedly cancel or delay high probability drilling opportunities, which further impacted our utilization during the back half of the quarter more than we originally expected. Probably more than you know, we were successful in renewing and recontracting several rigs. In fact, we signed 11 extension or new contracts during the quarter, and dayrates held up relatively well considering the market conditions with our revenue per day actually coming in higher than our original guidance.As we discussed in our first quarter call, we expected our average cost per day to be higher sequentially due to fewer operating days to absorb costs as well as costs associated with transitioning between customers, idle rigs and extra crews. Also, the greater reduction in operating days drove our cost per day higher than we originally forecasted. Philip will go through the specifics in his prepared remarks, but you should be aware that we do expect these cost inefficiencies to trickle over into the third quarter as we continue to recontract the idle rigs.Visibility into customers' forward plans remains cloudy. Many of them have remained resolute in their efforts to not increase drilling and completion spending from what they originally budgeted. In addition, we hear the 2019 E&P budgets were front-end loaded and therefore, biased toward the first half of the year. From what we've seen this year, I believe that is the case. For ICD and our industry, the months of May and June were ones in which we saw a downward inflection in contracted rig utilization. Like many, we missed slightly in our call on when the rig count would trough, but the good news is that for ICD, at least, we believe our contracted rig count bottomed out at the end of the second quarter. And although there could be further declines to the overall U.S. land rig count during the remainder of this year, we do not expect our operating rig count to deteriorate further. In fact, we're actually seeing it increase now, and we expect it will continue to improve through the remainder of the year based upon current discussions with customers.During the first half of this year, our fleet geographic distribution remained relatively constant between the Permian and Haynesville plays. However, I'm pleased that during the second quarter, we successfully re-entered the Eagle Ford with a rig operating in there now, and we expect to reposition more down there during the third quarter. All of our operating rigs today are AC rigs as the remaining operating SCRs have all been removed from the operating fleet and will not be reactivated until their planned AC conversions to 300 Series pad-optimal status are complete.I'll let Philip walk you through the details of our rig count progression, but I'm pleased that we have re-contracted additional rigs since the end of the second quarter, and we're in active discussions relating to the activation of additional rigs between now and the end of the year. These discussions include stacked rigs and the reintroduction into our marketed fleet of two idle rigs, which have been undergoing budgeted and previously disclosed upgrade and conversion projects to 300 Series pad-optimal status. We are nearing completion of our hook load and setback upgrades to ICD 303, and we're in active discussions with customers regarding potential contracts at dayrates that justify the modest CapEx investment, which we have made in this rig to increase its technical capabilities to be among the very highest in the industry.And I would like to point out, as we discussed on our first quarter call, we have several more rigs in the fleet that we can make similar racking and hook load upgrades with very modest CapEx. None are planned at this time, but I just want to point out that these organic opportunities can be executed upon easily and provided the economic justification is available in the contracts which we're able to secure. In addition, we have commenced the first of four SCR to AC 300 Series pad-optimal conversions, which is scheduled for completion at the end of the third quarter of this year. Just a reminder that we've ordered the long lead-time equipment for the four remaining conversions last year in October, so the incremental costs to affect these budgeted AC conversions is not significant. These converted rigs will be NOVOS ready, meaning we would not spend the incremental CapEx for NOVOS until a suitable contract has been secured. In that regard, I want to note that we continue to make very good progress with respect to execution upon our drilling optimization strategy and things are coalescing towards ICD rigs employing this technology before year-end, which has been my goal.I would like to emphasize that many other opportunities for rig reactivations late third quarter and fourth quarter includes some very good customer high-grade opportunities that simply weren't available to us pre-merger, which we can now pursue due to ICD's greater operating scale. Either ICD did not have a rig available for the customer pre-merger or the customer wanted a 300 series specification rig, which we are now able to market post-merger without significant CapEx requirements on our part.Moving on to dayrates. Day rate and contract tenders are generally lower and shorter than we would like, even though revenue per day for the company is improving, and we have signed several 1-year contracts during the second quarter. Current market dayrates are bifurcated between rigs with two pumps and rigs with three pumps and 4th gens and between rigs where we're negotiating a contract extension and rigs which are idle and competing in the open market against offerings from our competitors. In other words, when customers require third pump, 4th gens type additions and the like, we have been successful in getting them to pay for those investments. As promised, our merger integration was complete as we rolled into the third quarter, and as we are seeing full benefits of the merger synergies which we have achieved. With those significant initiatives and costs now behind us, we are now fully engaged in implementing ICD's post-merger strategy.As I previously mentioned, we are poised to act upon customer high grading opportunities previously not available to ICD pre-merger, and we are actively executing upon the organic free cash flow generating investment opportunities embedded in the Sidewinder assets acquired in the strategic combination, which will allow us to grow earnings and cash flow even in the world of range-bound commodity prices and fiscal discipline like we currently see today.In this post-merger integration world, in which we expect to now begin realizing the significant value from the strategic combination, including generation of free cash flow. Even in a weaker market like we see today, it makes sense that we evaluate all possible uses of free cash flow moving forward, taking into account current market conditions. In that vein, I'm pleased that our Board of Directors has authorized a stock repurchase program of up to $10 million. Philip will discuss a few of the details regarding this program in his prepared remarks, but given where market valuations are today in light of our free cash flow generating capability, asset base, customer base and strategic opportunities, executing within this stock repurchase program makes an awful lot of sense to us.I'd like to close out my prepared remarks. We talked previously about how ICD aligned executive comp with shareholder interest that we're focused on returns with a particular emphasis on ROIC. I hope you're seeing that focus manifested in everything we do. We are committed to delivering safe, efficient operations and generating industry-leading shareholder returns while achieving high levels of customer satisfaction. Our company is on strong financial footing, operates a very young and capable rig fleet, and I believe we're making the right investment decisions as we navigate a pathway toward achieving our objectives, which will be accelerating when the market conditions improve in the future.With that, I'll turn the call back over to Philip.

Thank you, Anthony. During the quarter, we reported an adjusted net loss of $5.5 million or $0.07 per share and adjusted EBITDA of $12.8 million. The quarter included a $2.7 million or $0.03 per share tax charge associated with recalibrating our overall tax accrual in the first half of the year. As a reminder, we're not a federal taxpayer today, and we expect our full year 2019 tax expense to approximate $800,000. Excluding this additional tax expense, adjusted net loss was $0.04 per share.Merger and related asset disposal impairment costs are excluded when arriving at adjusted net income and EBITDA. With respect to other items during the quarter, revenue per day for the quarter was $20,868, excluding the effect of early termination revenue. Rig utilization of 83.7% came in below guidance provided on our first quarter conference call and slightly below updated guidance we published mid-quarter relating to contract early terminations. Sequential pricing improvements relate to improved pricing on contract roles. Cost per day of $14,155 was unfavorable compared to our guidance with the increase relating to the reduction in operating days compared to the expectations and higher crew transition costs related to decrease in operating rigs.SG&A expense of $3 million, including noncash compensation expense of $400,000, came in below guidance with sequential improvements in cash SG&A being driven primarily by reduced incentive compensation accruals due to reduced activity levels as well as realization of merger synergies. Depreciation and interest expense came in consistent with our prior guidance. As mentioned, we did record an additional tax charge during the quarter associated with the application of our annual estimated effective tax rate for the year to the unadjusted net loss we reported during the first six months of the year. Net tax expense for the first half of the year is only $358,000. Tax expense for the year will be comprised of Louisiana tax and Texas margin tax, and we expect the overall tax expense for the year to net to approximately $800,000.As I've discussed previously, given our NOL position and the full step-up in tax basis we received on the acquired Sidewinder assets, we do not expect to be a cash taxpayer for federal tax purposes in the near term. Cash payments for capital expenditures net of disposals, insurance recoveries and capital lease additions were $9.1 million during the quarter. Our overall 2019 capital budget of $29 million, net of disposals, recoveries and leases remains unchanged.Moving on to our balance sheet. At June 30, we reported net debt excluding capitalized leases of $119.7 million, a decrease from March 31, as we repaid all remaining outstanding balances under our revolving line of credit during the quarter. At June 30, we had total liquidity comprised of cash on hand and availability under our revolver and term loan accordion of $47 million. Our backlog of contracts with original terms of six months or more was $84.2 million, representing 10.76 rig years of work. 66% of this backlog is realizable in 2019. And excluded from this backlog are four rigs operating under contracts with original terms of less than six months.Now moving on to guidance. We exited the quarter with 22 rigs operating with rig count reductions continue in early July for a few rigs, including two SCR rigs that we have removed from our operating fleet, as Anthony discussed. However, we have been successful in recontracting additional AC rigs, and even in a market characterized by limited forward visibility, a pretty good line of sight towards additional reactivations toward the end of the third quarter and during the fourth quarter. Right now we expect to average about 22 rigs working in the third quarter but expect to exit the third quarter with 24 rigs operating and exiting the fourth quarter with 25 to 27 rigs operating.As mentioned, we removed our SCR rigs from our marketed fleet until conversions are complete, and there are two to three rigs remaining in our marketed AC fleet that we don't expect to reactivate this year. And with that backdrop, we expect to see the following during the third quarter: We expect operating days to approximate 1,980 to 1,990 days; revenue per day is expected to be approximately $20,500 to $20,800, after excluding the effect of early termination compensation; cost per day during the third quarter will range between $13,800 and $13,950 sequentially lower than the second quarter, but still reflecting inefficiencies associated with transitioning crews as rigs move during the quarter. Given the transitory issues relating to our operating rig count are diminishing, we do expect costs to return to more normalized levels in the fourth quarter and thereafter. SG&A expense should approximate $3.8 million, including $600,000 of noncash stock-based compensation. Depreciation interest expense should be flat with the second quarter. Tax expense for the third quarter should be approximately $300,000.And finally, as Anthony mentioned, the merger integration was completed as of June 30, so we expect go forward merger-related expenses to be de minimis. And as Anthony discussed and was set forth in our press release, our Board of Directors has authorized a stock repurchase program and up to $10 million. The cadence of this program will be bookended and based upon the volume restrictions contained in Rule 10B-18, as always certain covenants contained in our loan agreements they require the company to maintain certain fixed charge coverage ratios or revolver availability when conducting the repurchase program.And with that, I will turn the call back over to Anthony.

Thanks, Phil. I have no further comments at this time. Operator, let's go ahead and open up the line for questions.

[Operator Instructions] The first question is from Connor Lynagh of Morgan Stanley.

So we've gotten some different data points on land rig pricing through earnings season here and it strikes me that you guys are signing contracts and growing your rig count. So I'm wondering if you could qualify for us. How is the pricing on those contracts relative to contracts you were signing, say, three months, six months ago? Is pricing moving down? Or is it really not affecting the higher-spec rigs at this point?

No. I think -- Connor, it's Anthony. As I tried to lay out in the prepared remarks, it really is a function of what you're marketing. In other words, what -- how it's equipped. Does it have a third pump or not? Can you run the fourth pump -- gens simultaneously with the other 2, but also if you're negotiating a rollover situation with your customer. In a situation where it's open, the rig's idle, you're competing against offerings from other people, it's obviously a much more competitive situation. But I can say that in the situations where we do have, for example, the third pump or some other equipment that's offered with the rig, I think we are able to earn a premium for that relative to the market. I think the way we would bookend it is there's probably about a $4,000 a day spread between rigs on the lower end that may get caught between contracts that may not have a third pump and something you're marketing to an existing customer where it has the third pump on it.So look, I think it's held up reasonably well, given the uncertainty in the marketplace throughout the second quarter. Certainly, the contracts that we've signed since the end of the quarter, we've not had to necessarily compete on price. It's been more on the equipment offering and especially the reputation and the operational performance of the company. And I think you'll see that roll through the financials as we look at our average day rate in the third quarter and beyond.

That's helpful. Just in regards to the upgrades, and I apologize if I missed this, but the upgrades that you've already got planned and they have the long lead-time components for. Do you already have a customer in sight and contract in sight for those? Or are you -- is it just -- it's low cost, and you might as well have the rig market above or when there is demand?

No. We've been able to generate pretty impressive interest in both of those rigs. And just to provide a little color here. The one that's going to come out first, which is rig 303 here in Houston, it was a legacy Sidewinder rig. Just by its design and capability, big rig designed for pad development -- high-density pad developments. This is a rig that had three pumps on it, had the fourth-gen. All we've done is going in and increase its setback capacity to around 26,000 feet of 5-inch drill pipe and also increase its hook load capacity to 1 million pounds. And not every opportunity out there requires those capabilities, but I think I mentioned in a prior call, there is a niche out there. It's primarily driven by the intermediate casing strengths, the diameter of the casing where you're setting your pick-off point maybe lower than you would in other plays. And in those situations, the customer really doesn't have a lot of options. And it's incumbent upon us to line those opportunities up to make sure that we've been prequalified with those customers that we've negotiated the MSAs that are required in order to contractually engage with them. And we've got a handful of opportunities that we're pursuing right there. That rig should come out. It will come out here in August. I would expect it to be out and running at early September at the latest. At a day rate that is going to justify that incremental investment that we've made in the rig.The other upgrades that we have underway are the AC conversions of the SCR rigs that we had. We have four of those in the fleet today. We did order the long lead-time items last year in October and that includes a new 2,000 horsepower drawworks, new VFD house, and a new driller's cabin and the Amphion control system. And what's important there is you think about the Amphion control system in the same way that you would with your iOS on your iPhone. It allows you by having the platform to then bring NOVOS and place it on top. Now there is a nominal investment that's made to do that. What we've said is we're not going to make that investment, that last investment until we have a customer that's willing to pay us for the increased capabilities. But I would say, Connor, that six, nine months ago, I think there was a lot of curiosity in the industry about that technology and those capabilities and what the value proposition is. I think with what's happened with commodity prices this year, the intense focus our customers are under in terms of being good stewards with their capital, there is a lot more conviction in the marketplace today. And I think for the early adopters, the guys that have jumped out there have used that technology, I think there is a very strong recognition of the value that's created.So yes, we are in a very good discussions with customers on both of those upgrades. And I think we're going to be pleased with what we're able to land in the way of a contract for those two classes of rigs.

The next question is from Ryan [ph] of B. Riley FBR.

Just to follow-up on those two rig upgrades scheduled for completion in the third quarter. How much, if any, CapEx is remaining to complete the two of those?

It's all budgeted for third quarter. It will be probably $5 million for both of them will flow through. A lot of the equipment is already here, but the actual payments will flow through the third quarter, probably about $5 million.

Got you. And turning to the three SCR rigs...

I'm sorry, Ryan, that's -- it's actually less than that because, for those 2, it's probably about $3 million. I was thinking there is -- we had ordered the long lead-time items for the other SCR grades, and I included that in there as well.

Okay. And with the three SCR rigs that are now decommissioned, can you provide a rough timeline for when you expect those conversions to be completed?

Yes. First one is underway as we speak. That rig will be out and running, we believe, at the beginning of the fourth quarter. The second one will stage the start-up of that conversion here in the third quarter, and our expectation is that it would come out by the end of the year. On the third one, and then there is a fourth one out there as well. We're going to press the hold button on that for right now until we get a little bit more visibility on what 2020 looks like. Look, I'm optimistic. I think there will be demand for those rigs with the upgraded control system, the ability to go to full-on NOVOS capability and all the value that creates. But I want to get a little better read on what the market's going to look like next year. We're encouraged based on early discussions with customers. I believe there is a demand that's coming back in the marketplace in the first quarter. That's really driven nothing -- by nothing more than the calendar. It's our customers being very disciplined, being very resolute in managing their spend for this year. But just to summarize, the first -- the four total. The first one and the second one will be done in the back part of this year. The third and the fourth one, we're going to hold right here to just get a little bit more certainty on where the market is going to be next year before we proceed.

Great, that's helpful. Mind if I could sneak another one in. You touched on it earlier in your prepared remarks, but could you provide some additional color on the high-grading opportunities that weren't possible for ICD before the merger? And then unrelated, can you just provide some commentary on what you're seeing in terms of M&A discussion as we saw one service company divest its drilling rigs in the second quarter?

Yes. On the high-grade opportunities, that's a -- Philip and I spent a lot of time on the road over the last year, talking about the benefits of the merger that we went through last year in October, and we think it's one of the things that's underappreciated out there. And what I mean by that is, if you think about the drama and the time and the effort required to become prequalified with the super majors, for example. These are guys that have continued to pick up rigs during the downturn. They are typically going to drill through cycles. You're not going to have the whipsaw reactions that you have with some of the other customers based on what's happening with the commodity. And when you're a 14-rig or 15-rig company to be able to talk to them and only be able to offer 1 rig, for example, or maybe two over a 12-month period, I think it's a very different discussion when you can offer four or five or more rigs to them over a 12-month period. They want to minimize the number of contractors they have. They want to be comfortable with the contractors that they work with. They want to have some commonality in the equipment that they use from those contractors. And ICD today is in a much better position to have that discussion and ultimately, arrive at contracts than we were a year ago. And that's the point that we're trying to make, Ryan? On M&A side, I think, I know which opportunity you're referring to. That was a -- owned by a company that's rolled up a number of other companies. They're not a drilling company necessarily. I think there are about a dozen rigs in the fleet. They are older legacy style type rigs, not all of them were working, good reputation. But I think it's a situation where that contractor might have missed the boat, so to speak, on where rig technology was going and where it is today. There are some particular drivers with the owner that he needed cash, needed to do some things like that. I don't have a lot of information on who the buyer was. I've heard some rumors, but I'm not in a position to be able to say I know who it is for sure. So I can't say that I know exactly where they're trying to go.But more generally speaking, look, we believe that there needs to be further consolidation in the business. We believe that ICD is a great vehicle to be able to do that. Certainly, with the successful integration of Sidewinder in ICD over the last six to nine months, we've proven that we can do that successfully, that we can integrate without having any negative impact to the operation, and that we can realize full benefits of the synergy opportunities that are there. So we remain open to further consolidation. We'd love to participate in further consolidation. But we also were at a place, as a company, where -- I don't feel like we have a gun to our head. We can be opportunistic and just wait on these opportunities to evolve and hopefully, be able to transact on them here over the coming quarters and years.

We certainly think that the divestiture in Q2 just reinforces how certainly cheap your stock price is right now.

The next question is from Daniel Burke of Johnson Rice.

Anthony, you all are fairly short in terms of contract coverage. Can you talk about -- just elaborate a little bit more in terms of the visibility you have, underpinning your conviction that the rig count will trend up through the end of this year?

Yes. It's funny Daniel, we were talking about that the other day. Six, seven months ago, when we looked at our contract backlog in 2020, we knew and I think everybody was aware, we had over 20 rollovers scheduled to occur in the first half of 2019. Of course, six or seven months ago, we thought about that as upside, and it was, based on what we were seeing at the time. Of course, none of us knew how this year was going to play out. We certainly had the hiccup up last year in November with WTI. But I think what changed was the new reaction of our customer base toward maintaining physical discipline, maintaining their strict discipline to the budgets that they had communicated and things like that. And what we saw happen, especially in the second quarter and in particular, in the back part of the second quarter, was customers reducing rig counts, not based on performance, but simply based on when contracts was scheduled to roll over. And because we had so many contracts rolling over in the first half of the year, and in particular, we had so many rigs with one customer that significantly reduced his contracted rig count. It really put us in a situation where -- I wouldn't say we were flat-footed necessarily, but it really created a lot of challenges for ICD as we were negotiating the rollover situation.Obviously, with the fact that we've signed a couple of contracts since the end of the quarter, we're negotiating even more as we speak. I feel like we have regained our footing that we do have a clear pathway in line of sight toward better utilization, certainly in the third quarter, and I believe even beyond. And we're not having to do that necessarily by chasing the market down in terms of dayrates. So that's why we're optimistic about how we see ICD's contracted rig count playing out, certainly over the rest of this year and rolling into 2020.

And Daniel, I'll just point out some of the incremental rigs that we're talking about here are these upgraded rigs that Anthony just described. I think the market opportunities for those are significant. So we're very confident about getting those rigs to work.

Got it. Maybe you'll see one other one. Anthony, you talked about or I thought I heard you talk about, sort of, figuring out the direction you're going to head in terms of the drill optimization strategy. I don't know if that means -- you also pointed to being open to bring in NOVOS? Is that what you're referring to or was it a broader path that you're seeing ahead?

Yes. It's a little broader than that, Daniel. We've been working quietly on this over the course of this year. I think what I've said before, and it's obvious is, look, we don't have a balance sheet, and I don't think there is a need to necessarily go out and try to build this on our own. I believe there is a lot of good efforts out there by people that probably know more about that than we do, that we can leverage off of. So as you think about the ICD fleet, we are going to play in this space. We are going to position ourselves to bring this kind of value to our customers. And the way to think about the fleet is we have 14 rigs today that operate the -- what used to be called the OMRON System. PRECISE is another term they use for it now. Certainly, that's owned by Schlumberger. They've done a lot of work in that area. So obviously, it's incumbent upon us to make sure that we're very plugged in there, that we know where things are going, and ultimately, use that technology to create value for our customers.Of course, with the AC conversions that we have coming, those will all have the Amphion operating system, which will be NOVOS ready, NOVOS enabled, and we'll be able to pull the trigger on that very easily. But the other half of our fleet is not NOVOS, it's not PRECISE. And that's really where we've had to bear down here over the last couple of months to try to figure out a solution there. Not at a point where we can talk about it today, but I'm very optimistic that ICD will have this type of drilling optimization technology deployed certainly by the end of the year on at least 1 rig. And I believe it will be even more. We'll be on even more rigs than just one. So I guess the way I would summarize it is, we are going to leverage off of the good efforts out in the industry today and bring value to our customers and hopefully, be able to put a little bit more money in ICDs pocket in the process.

This concludes our question-and-answer session. I would like to turn the conference back over to Anthony Gallegos for closing remarks.

Okay, guys. I'd just like to say thank you to everyone for dialing in today and listening in on the call. I'd also like to thank you our employees for their hard work and dedication to safe, reliable and efficient operations and for keeping our customers happy. We look forward to seeing you all out on the road and certainly look forward to talking to you again when we talk about our third quarter results. Hope everybody has a safe day, and we'll end it from here. Thank you, all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.