Good morning, and welcome to Independent Contract Drilling’s Third Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.I would like to now 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 third 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 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’d 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 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.

Thank you, Philip. In my prepared remarks, I’d like to briefly discuss my view on the third quarter results, some comments on the rig market and what’s playing out today and a quick summary of some strategic initiatives we have underway. First, the third quarter was definitely choppy for ICD, with rigs continuing to transition between customers, which caused our reported cost per day to be higher than we would like.This was not due to cost increases for our operating rigs, but due to continued transition-related cost, such as labor, as we moved rigs around in our customer base. But we exited the third quarter with more rigs earning revenues under contracts than we began the quarter. In fact, if you exclude the three SCR rigs that we took out of our marketed fleet at the end of the second quarter, we actually increased our contracted pad-optimal AC rig count by three rigs during the quarter.In addition to these incremental adds, during the quarter, we successfully recontracted 11 rigs, including adding another one to our South Texas operation, all resulting in a net increase in contracted pad-optimal rigs. And as we look forward, we still have strong conviction that our contracted rig count will increase on a net basis as we enter next year. And with that point, I’d like to offer some more detailed perspective on the current market and how ICD strategically fits into what’s going on in the U.S. land market today.It is common knowledge that what our industry has seen in 2019 and what we expect to see in 2020 and beyond is a shift in E&P operator behavior as they focus on returns and operating within free cash flow as capital markets are mostly closed for purposes of financing growth capital. We believe this is the new normal, range-bound oil prices between $50 and $70 per barrel and a North American rig count generally range-bound between 800 and 1,000 rigs.And the companies that will succeed in this environment will be the ones that manage their business across this new paradigm rather than overreacting one way or another to supply and demand cyclical swings. And the disruption and choppiness in the market we’ve seen over the past several quarters and will likely see over a few more is simply rearranging the pieces to efficiently operate in this environment.Just as an example, during the third quarter alone, we had five rigs moved to new operators. Our customers have reduced rig counts in 2019, even in the face of higher commodity prices compared to their 2019 budgets, and are more focused than ever on operating efficiencies and a multi-well pad-based manufacturing model.To be competitive, our customers require rigs and operations that maximize efficiencies, reduce costs and maximizes production. And we’re seeing that in the rig fleet dynamics we are experiencing today. The AC rig count now represents 75% of the U.S. fleet, up 10% just in the past 12 months. Super-spec rig count remains robust, and dayrates are holding up relatively well even in a rapidly declining rig count environment. And in the past six months, we’ve seen a greater willingness of our customers to evaluate and consider new technologies such as drilling optimization software in order to maximize overall efficiencies.Simply put, there is more going on in the contract drilling industry than just a declining rig count. Within this decline, we believe we are seeing the final fundamental shift away from legacy equipment, the old way of doing business, and to operations and equipment that maximize drilling efficiency. In our opinion, there’s equipment that has been laid down in the past 12 months that will never operate again in this new world order. And there’s more to come.In other words, the final manifestation of the ongoing rig replacement cycle is underway. And ICD is extremely well positioned to participate in this evolving market dynamic. Our rig fleet is young. Our rigs are pad-optimally engineered to maximize manufacturing efficiencies for our customers. And we’re focused on North America’s most prolific oil and gas producing regions.Our merger integration is complete, and we’re now marketing our larger rig fleet across an expanded customer base as they prepare their 2020 budget. As noted in our press releases over the last couple of weeks, we’ve made significant progress with respect to drilling optimization software. We have one system deployed and a second being deployed with one of the world’s largest major operators as we speak.As you may recall, as opposed to choosing a path in which we internally develop these systems, we chose to partner with a few third-party providers, several of the largest oilfield service companies in the world in developing software and equipping our rigs with this new technology. And over the past 12 months, we’ve established third-party solutions that now are able to be deployed across our entire drilling rig fleet.In short, our entire fleet is ready as our customers continue to adopt these software solutions as a method to drive operating efficiencies, increase reliability and ultimately drive down development costs. We’re very excited to prove the value-creation capability of this software when used in combination with our pad-optimal ShaleDriller rigs and as a pathway toward earning incremental margin for our rigs. ICD’s rig fleet is very well positioned to compete in this evolving market.Of course, in the near-term, the market is choppy and forward visibility regarding customer plans for 2020 remains cloudy. Very few E&P operators have released their budget plans for next year, but the consensus view seems to be, at best, flattish upstream E&P spending for 2020 compared to 2019. But for the reasons I just outlined, even in a flattish type environment, we at ICD believe we will be increasing our operating rig count as we move into 2020.Since the end of the third quarter, we’ve already executed extensions on four operating rigs. We also have two rigs that we expect will reenter the marketed fleet that will meet the highest technical specifications in the industry, including three pumps, four engines, 25,000 feet of racking capacity, enhanced hook load, if needed, and drilling optimization ready. In other words, rigs that E&P operators must have in order to effectively operate in the overall market I just discussed, and most important for us, rigs our customers are willing to pay robust dayrates for.And contract discussions for next year are very strong, with more opportunities for rig activations than we have idle rigs, with some excellent customer high-grading opportunities. Dayrate and contract tenders are generally lower and shorter than we would like. Most of the work today is pad-to-pad to six-month contracts, even though most customers have longer work lines for the rigs.Lastly, I’d like to discuss some important strategic initiatives underway. We’ve been active under the stock buyback authorization granted by our Board this summer. As we move forward, we will balance repurchases against required investments in our fleet, debt repayment and available cash flows. But where we are today and what we perceive as an obvious dislocation between our public market valuation and the real value of our pad-optimal fleet and company, we expect to continue to be active in our buyback program.On the debt and liquidity side, we’re in a very good position. Our trailing 12-month net debt to adjusted EBITDA ratio is 2.3 times, and our net debt to total cap is approximately 24%. We do not have a debt maturity for four years until October 2023, and we have committed accessible liquidity at 9/30, comprised of our cash and our undrawn revolver and term loan accordion of $46 million. Our debt is prepayable all or in part at any time.On our fleet, we’re nearing completion of our first SCR to AC conversion, which is NOVOS capable. As I mentioned earlier, our ICD rig 303, which had its hook load capability upgraded to 1 million pound and setback capability enhanced, is complete and currently being marketed. Looking forward, I believe these will be the final two upgrades we complete until market conditions improve. We will continue to add third mud pumps and fourth engines to our fleet, as customers require, where we can earn incremental dayrate that justifies the expenditure. But we expect our 2020 capital budget to be substantially lower than our 2019 expenditures, likely in the $10 million to $14 million range, with maintenance CapEx next year representing approximately $8 million of this estimate.So with that, I’ll turn the call back over to Philip, so he can walk us through the financial results for the company.

Thanks, Anthony. During the quarter, we reported an adjusted net loss of $7.9 million or $0.10 per share and adjusted EBITDA of $7.7 million. Excluded in calculating adjusted net loss was a non-cash impairment of $2 million associated with goodwill recorded in the Sidewinder transaction. Overall, reported results are consistent with our preliminary numbers we reported a couple of weeks ago, although the final non-cash goodwill impairment was slightly higher based upon final purchase price accounting for the transaction.With respect to other items during the quarter, revenues included $300,000 of early termination revenue. Excluding this early termination revenue, revenue per day was $20,559 per day, representing a sequential decline of $309 per day. Rig utilization of 76% came in below guidance provided on our second quarter conference call, primarily due to a delay in scheduled rig reactivations during the quarter.Cost per day of $14,914 per day came in higher than our guidance relating to the reductions in operating days and higher-than-anticipated crew and rig transition costs. SG&A of $3.8 million, including non-cash compensation expense of $600,000 came in consistent with guidance, as full realization of merger synergies occurred during the quarter. Depreciation, interest and tax expense came in consistent with our prior guidance. Cash payments for capital expenditures, net of disposals, insurance recoveries and capital lease additions, was $7.7 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 September 30, we reported net debt, excluding finance leases and net of deferred financing costs, of $118.2 million. This debt – this net debt is entirely comprised of our term loan, which requires no amortization and does not mature until October of 2023, four years from now. The facility is prepayable at any time and contains minimal financial covenant.At September 30, we had total liquidity of $46 million, comprised of cash on hand and availability under our undrawn revolver and term loan accordion. Our backlog at September 30 stood at $57.8 million, representing 7.4 rig years of work. At quarter-end, we had seven rigs operating under short-term contracts, not included in this reported backlog.Now moving on to guidance for the fourth quarter of 2019. We expect to see the following. We expect operating days to increase approximately 5% over the third quarter. Revenue per day is expected to range between $19,900 and $20,200 per day, with the expectation that we see minimal to no benefit in the fourth quarter from the two rigs undergoing upgrades that Anthony discussed in his prepared remarks.Cost per day during the fourth quarter are expected to range between $13,700 and $14,100 per day, sequentially lower than the third quarter, but still reflecting some inefficiencies associated with rig transition costs. SG&A, depreciation, interest and tax expense, are all expected to be flat compared to the third quarter.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.

We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Kurt Hallead with RBC. Please go ahead.

Hey, good morning.

Good morning, Kurt.

Hi, Kurt.

I appreciate that color and update. So I’d say, Anthony, the commentary regarding the opportunity to put some rigs back to work is, say, a little bit more optimistic than we’ve heard from some others, though it’s not too far from, say, consensus viewpoint, right? In the context, as you kind of look out beyond, say, fourth quarter 2019 and into the first part, I was wondering if you can give us some additional context around the discussions you’re having with the customer base and maybe some early insights as to how they’re thinking about their budgets and spending plans for next year as well.

Sure. That’s a great question, Kurt. Just a – you may recall, we – our utilization was hit earlier in the year, driven by a number of factors, certainly influenced by a particular customer that dropped some of our rigs, not related to performance, just budget exhaustion early in the year, recalibration of spend, those kind of things. So we suffered earlier in the year is what I’m trying to say. We came out, said, the rest of the year we’ll be adding rigs. I think the performance of ICD over the third quarter showed that to be the case. We certainly ended the quarter with more rigs working than we began, and we’re reaffirming that guidance that we’re going to continue to add rigs.Where we’re going to add rigs are to some existing customers, but what I’m really excited about, some of the good discussions we’re having right now are with customers that will be new to ICD. These are guys that, prior to the merger, both of the legacy companies may have been too small to have serious conversations like that with him. And now we’re able to have that discussion. Some of them are high-grade opportunities, where the customer has recalibrated spend. He’s reduced its rig count to where he plans to be as he rolls into 2020. But now he’s looking across this fleet and seeing – and finding opportunities where performance can be improved, and we’re certainly in those kind of discussions.The two rigs, which we upgraded here in the back part of the year, one is ready to go. We’re in discussions on that rig. And then we’re really excited about the AC conversion. We’re nearing completion of that project. We’re about to start the commissioning phase here in early November. That rig, as we’ve discussed, is NOVOS capable. So all of the interest surrounding technology, that rig has three pumps, it’s got all the bells and whistles on it that a customer would like in the U.S. unconventionals.So I think when you think about the rig class, the rig capabilities, the specifications and all, we’ve got the right rig. We’re talking to the right customers. Clearly, as we think about 2020, it feels like overall upstream E&P spend at best will be flattish. I’ve seen some numbers. It’s way too early in the process to confirm, but maybe it’s down slightly year-over-year. But – I guess the case that we’re trying to make is that even in a flattish to even slightly down environment, we would expect to see ICD continue to increase its contracted rig count.

Okay. I appreciate that color. Now in the context of the commentary on fourth quarter with dayrates coming down, op costs coming down, so cash margins look like they’re relatively flat with where you were in the third quarter. Again, as you look out on to these opportunity set for 2020, right, there’s been some discussion around leading-edge pricing maybe coming down at the margin. But it looks like overall, it’s not a – there’s not this massive race to the bottom on pricing. So give us some indications on how you see that maybe playing out for your rigs going into next year?

Yes. We’ve talked about the continuum of dayrates and the situation that you may be negotiating, whether it’s a rollover-type contract with an existing customer or whether it’s an incremental add to a new customer where the competitive situation is different, whether you have three pumps or two pumps technology or not and things like that. As you think about where ICD’s average dayrate is, as we think about the – especially the high-grade opportunities that we’re looking at for next year, we would expect those dayrates for those rigs to be at or even above where our average dayrate has been. That allows for some room for the highest in day rates to back off some, but it would still be incremental to where ICD has been and where we are right now. So we believe that there’s a bias upward in our average dayrate, and it’s the fleet mix, it’s the incremental rig adds that we’re looking at and the opportunity set that’s in front of us, Kurt.

Okay, great. And maybe just one dynamic on CapEx. So I know you gave us the net CapEx numbers for both 2019 and 2020. And that’s, I know, net of asset sales and so on. But on a gross CapEx basis, because we kind of match this up with what you guys put in your 10-Qs and the cash flow statement, how do we think about gross CapEx for 2020?

It would be in that range, Kurt, it’s Philip. I’d be in that $10 million to $14 million range. We – there are some asset sales that we’ll look at. We don’t have any plans yet, but it would be in that range.

Okay. Appreciate that. Thank you.

Thanks, Kurt.

The next question comes from Ryan Pfingst with B. Riley FBR. Please go ahead.

Hey, guys. Thanks for taking my questions.

You’re welcome.

Somewhat following up on the 4Q guide, you guys see rig margin and rig count higher. Is it fair to say that 3Q could be a bottom in terms of both ICD’s rig count and rig margin?

It’s Philip. Anthony talked about rig count. So we do think it was a bottom there, I think on margin as well. The third quarter was very difficult for us on a cost per day basis, with lot of transition going on. We see that alleviating some in the fourth quarter. As we move into the next year, we see our costs really normalizing down quite a bit lower from where they were, even what we guided to in the fourth quarter guidance.

And then for the SCR conversion scheduled for completion during the fourth quarter, does that rig have a contract in place once upgraded? And do you share where you expect your operating rig count to exit 4Q?

Yes. So on the rig that’s been upgraded, it does not have a contract today. That’s a project that we commenced back in August, early September. We figured 60 to 90 days, including commissioning. So we’re more or less on track with that. We’ve entered the period where we should be marketing the rig. Of course, this is happening against the backdrop of our customers recalibrating and finalizing budgets and this kind of stuff. So it’s our expectation that construction – or the upgrade and the commissioning will be complete during the month of November. I think as we think about start-up for it, we’re kind of targeting end of the year. It could start a little earlier. It could be a few weeks into 2020, but we’re on track with that. And – sorry, I haven’t caught the other question.

Just if you could share where you guys expect operating rig count to exit 4Q?

Sure. Yes. I think we’ve said kind of 23 to 25, maybe 26 rigs, something like that, as we exit the year. If you had to pin me down today, it’s probably on the lower end of that range, but 23, 24 rigs end of the year is where we expect to be, feel pretty confident about that.

Great. That’s helpful. I’ll turn it back. Thanks, guys.

Thanks, Ryan.

The next question comes from Daniel Burke with Johnson Rice. Please go ahead.

Hey, guys. Good morning.

Good morning, Daniel.

I think I wanted to revisit Kurt’s Q&A and make sure I heard something correctly. Just on revenue per day trends, just to be clear, so you guys expect that, just call it, full year 2020 revenue per day would be kind of at or higher than the kind of $20,000 per day midpoint-ish level of Q4’s guide, is that correct?

That’s what it’s feeling like, Daniel.

Okay. All right, great. I just want to make sure I had that pinned down correctly. And then to flex to the other side of what makes the margin and talk about operating cost per day, Phil, I’ve heard you say you guys have confidence in getting that figure down. But – I mean is there a number of – do you have to get to a certain utilization level or certain kind of active rigs to get back down to the kind of low to mid-$13,000 level? And I know there’s rig level costs and some other cost burden that has to be spread across the rigs. But I wanted to pursue that a little bit.

Yes. So if you look back when we operated, we’re at 100% utilization. We had quarters we ran below $13,000 a day. We actually have synergies we realized from the transaction that could even – we could do better than that in that environment. But we’re not going to get down to there, if we’re running 25 or 26 rigs. There’s going to be some fixed cost absorption that would offset that. But the things that affected us in the third quarter and affect us a little bit in the fourth quarter is rigs moving around between customers.We had five rigs move between customers in the third quarter. We’re going to have some of that this quarter. So within the rig count, you guys don’t see it. There’s a lot of churning back and forth, and it creates inefficiencies. We’ve got to go stack a rig for a couple of weeks here, and we still have to pay the crews, because we don’t want to leave – the crews are extremely important. So as that alleviates itself, and we think it will next year as the budgets come into play, then I see us getting down the $13,500 type of range, I’m pretty comfortable with.I’d like to think we can do better than that, but $13,500 seems a reasonable number for us. If we’re running 25 average, say – if we average between 80% and 90% utilization of the 30 rigs we’ll market next year, that would be 25.5 rigs we market – we run next year on average, we should be in that $13,500 or hopefully a little lower range.

Okay. That’s helpful. And then just the last one from me, small for clarification. Are you guys – current active rig count as of today, is it still about – is it still 23, kind of where you finished the third quarter?

Yes.

Okay, okay. All right, great guys. I’ll leave it there. Thanks very much.

Thank you.

The next question comes from Dan Katz with Morgan Stanley. Please go ahead.

Hey, thanks. Good morning.

Good morning.

So just wanted to get a little bit more color on your capital allocation priorities. I know that you guys said that your current valuation definitely makes share buybacks attractive. But just could you talk a little bit more to how you’re looking at upgrade CapEx versus share buybacks versus debt reduction and how you guys are thinking about that going forward? Thanks.

Yes. Hi, this is Philip. When you think about upgrade CapEx, right now, we don’t have any plans to upgrade any other rigs in our fleet. We’ve got two idle SCR rigs we could upgrade to AC. And there’s two AC rigs that we could upgrade. Those are off the table right now. The only kind of upgrade our CapEx that we’re looking at would be adding third pumps or fourth engines to our rigs and anything related to software, where our customers are willing to pay us for it. That’s what we’re going to look at going forward. As far as capital allocation in the near term, we do think there’s a dislocation in our share price.And so when you think – we think about that versus debt repayment, probably in the near-term leaning more towards share repurchases and debt repayment, then we do need to be thinking about paying down our debt as we move forward. And we can do that. That debt is prepayable at any point in time, all or in part. So as we move later on in next year, we’ll probably be looking more – we’ll start thinking about paying down debt as well.

Got it. Thanks a lot. And then so just kind of with merger synergy realization behind us, are there any other cost savings initiatives that you guys are undertaking? Or is it more just a factor of recontracting rigs, improving utilization and that leads to better fixed cost absorption? Just would love to hear your thoughts on that. Thanks.

Yes, Dan, this is Anthony. Certainly, operating days, better absorption is going to help and benefit us. We’ve really done a really good job on the integration, wringing out every cent of synergy opportunity that we’ve had over this year. Certainly, going forward, we would expect to continue to see some benefits. Obviously, the [indiscernible] (29:19) we’ve secured that. But on the margin, continuing to leverage our combined purchasing power, leveraging the ERP system, specifically the purchasing application, which we use. The same type pressure that I think all service providers are feeling from our customers, obviously, we’re applying that same pressure to our vendors as well.So we’re going to continue to work to lower cost where we can. I think we’ve got a better opportunity as a combined company than we had individually 1 year, 1.5 years ago to do that. But we’re not going to let up the focus is what I’m trying to say. So it’ll be a combination of holding average revenue and even increasing it, but certainly, better absorption, lowering cost where we can by being smarter about what we do and being very selective about the vendors we do it with.

Great. Thanks a lot for the color. I’ll turn it back.

Thank you.

The next question comes from Taylor Zurcher with Tudor, Pickering and Holt. Please go ahead.

Hey, good morning.

Good morning.

I wanted to follow-up on the earlier question on capital allocation for next year. I mean, clearly, Phil, you mentioned that near term, it sounds like share repurchases have climbed the sort of pecking order. But as we think about 2020, I mean, are you willing to share any – or do you have any sort of internal target for absolute net – or absolute debt reduction next year vis-à-vis beyond that you might look at share repurchases? Or is it really kind of a wait-and-see approach right now?

There’s no absolute target today. We haven’t finalized our budgets for next year. At that point in time, we may put a target. But today, it’s going to be – with our share price where it is today, we think that’s an incredible value for us. So there’s no – so it will be a wait and see. And obviously, when we put our – we have our final budgets, which we’ll put in place early next year, then we may have an absolute target that the board sets for us.

Okay. Understood. On the cost line, fully understand the inefficiencies in the past couple of quarters, and that will spill over into Q4. As we think about Q1, I tend to think about that quarter as having some lumpy payroll taxes and things like that in there, and so costs are typically sequentially higher. Should we be modeling – theoretically, you’ll have a higher rig count in Q1, at least on the outlook you provided today. So will the fixed cost absorption impact be enough to outweigh some of those lumpy items that typically occur in Q1.

I think we’ll be lower than where we guided today for the fourth quarter, for the first quarter. I think we’re going to get some more benefits if the rigs we have planning to come out during that quarter. I think we’ll see lower cost per day than what we guided to for the fourth quarter. I don’t think it will be $13,500 a day, I think, because of the reasons you just added – you talked about.

Okay. And I’ll sneak one more in. You mentioned in Q&A and prepared remarks that a lot of these new contracts you’re signing or the ones you see on the horizon 2020 are more well-to-well type programs. And in here now, it feels like there’s a lot of churn within your rig fleet, with rigs trading hands. Is part of that – just as you work with new customers, they kind of want to test out ICD for the first time and are keeping the program pretty short because of that? Or do you see the market really turn into more of a well-to-well in three to six-month type kind of market in 2020, just given where operators’ budgets are likely to come in next year?

Yes, so I’ll take that. This is Anthony. So the churn that you referred to is driven – has been driven for ICD, and I think it’s true for a lot of our peers by budget exhaustion. A rig that’s been working – was working with a guy for the first 9, 10 months of the year, budget – the rig line ended. He released the rig. We – I guess, my – the point I would make is that we were able to successfully recontract that rig. So it wasn’t that someone tried us out and it didn’t work out and we had to move on down the road. It’s, like I said, taking a rig that had finished with that particular customer, put it with a new customer. That has primarily been the reason for the churn.I think the fact that we’ve also been able to not only recontract working rigs, but now bring out idle rigs also is a testament to the brand, the reputation – operational reputation that we’ve built in the marketplace as well. It’s a tough market out there, no doubt about it. I mean we’re off about 23% year-to-date on rig count. Certainly feels like we’re nearing the bottom. You think you’re at the bottom and you see another two dozen rig decline, like we did last week, but it does feel like we’re nearing the bottom. And we would expect to see overall rig count bottom out here in the next month or so and begin to go the other way early in 2020.

Understood. I appreciate the responses. Thank you.

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

Okay, guys. We sure appreciate everybody making time to dial in today. I appreciate your interest and support of ICD. Obviously, we’re available if you have any questions. Please feel free to reach out. And I look forward to seeing you out on the road or talking to you if not beforehand. That’s all from here.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.