Good day and welcome to Independence Contract Drilling Incorporated Fourth Quarter and Year End 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 sir.

Good morning, everyone, and thank you for joining us today to discuss ICD's fourth quarter 2020 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.

Hello everyone. Philip will go through the details of our financial results for the fourth quarter of 2020. In my prepared remarks today, I want to talk about the progress we've made putting the rigs back to work, offer some perspective about the current rig market and talk briefly about our progress pursuing our ESG strategy. So as we exited 2020, we were pleased that the momentum that began at the end of the third quarter continued through the fourth quarter and into the new year. As you'll see, we've been busy putting the pieces back together after the historic downturn in industry activity during the second and third quarters of last year. Thinking about the fourth quarter specifically, we've reported an EBITDA loss, even though we continued to add contracted rigs during the quarter. During the quarter, reactivation costs impacted our results by approximately $700,000, our financial results were bolstered by our cost rationalization and cost control efforts implemented last year and better absorption of fixed and support cost as a result of more rig activity, which manifested itself in a sequential decrease in our per day operating cost. In addition to significantly improving our operating rig count during the quarter, which I'll discuss shortly, we continue to improve our overall financial liquidity. We entered into a $5 million equity line of credit agreement that will allow us to sell stock and add liquidity. I want to point out that execution of transactions under this program are totally at our discretion and as of today we have not yet executed any transactions. Overall, liquidity at quarter end stood at $39.8 million consisting of $12.3 million at cash on hand, $7.5 million of availability under our undrawn revolver, $15 million under our term loan accordion and the $5 million available under the new equity line of credit. As mentioned on prior conference calls, as rigs come back to work, the boring base under our revolver grows, and again becomes a source of capital for us. And you're seeing that transpire now as our rigs go back to work, revolver availability increased 44% since the end of the third quarter and we expect to continue to see sequential improvements in our boring base as market conditions improve and our rig count increases.

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Thanks, Anthony. During the quarter, we reported an adjusted net loss of $16.3 million, or $2.65 per share, and an adjusted EBITDA loss of $1.5 million. Excluded in calculating adjusted net loss are two discrete items. First, we recorded an impairment expense of $24.4 million associated with five rigs and other ancillary equipment. From a rig configuration perspective, there is nothing unusual about these five rigs. From a technical perspective, they meet the typical definition for super-spec rig. However, from a capital investment perspective, these five rigs will require the most investment to reactivate from stack. And when we look forward, even in an improving market, we do not expect all pad-optimal rigs in the U.S. land fleet will resume operations, and do not believe that these five rigs will be reactivated, most market improvements exceed our expectations. (0:15:45): Now moving on to other items for the quarter, we operated 7.7 average rigs in line with guidance provided on our prior conference call. We expect utilization to increase sequentially by over 30% during the first quarter of 2021, compared to fourth quarter averages with further sequential increases expected in the second quarter. Revenue per day of $16,720 fell sequentially based upon one rig operating on a standby basis for part of the quarter and contract fleet mix associated with additional rig reactivations that prevailing spot rates. We did not record any early termination revenue during the quarter. Cost per day of $13,719 was favorable compared to guidance and reflects economies associated with higher operating days compared to expectations as well as strong cost control. Costs per day exclude approximately $700,000 associated with rig reactivations and $500,000 unabsorbed manufacturing overhead costs. As mentioned SG&A included $500,000 associated with transaction costs related to the equity line of credit. Excluding these costs, SG&A was $2.9 million including non-cash compensation expense of $400,000, a slight sequential increase relating to professional fees for year-end matters. During the quarter, cash payments for capital expenditures were approximately $1.5 million offset by proceeds from asset disposals of $2.7 million. There was approximately $900,000 of CapEx accrued at quarter end, which we expect will flow through during the first quarter of 2021. Our backlog at December 31, 2020 sit at $6.1 million, all of it expires in 2021. Obviously, this is substantially below historical levels and almost all of our rigs are now operating on short-term pad-to-pad contracts, which we have never included in our reported backlog. As Anthony mentioned, current spot dayrates remain depressed and with our expectation for improvement throughout the remainder of the year, we believe our reported backlog will remain depressed for the time being until we reach a point where dayrate and market economics for longer-term contracts make sense for both us and our customer. once (0:18:48): However, we do expect to get through an SBA audit of our loan forgiveness calculations and eligibility for the loan, so the actual length of time this process will take and its outcome is currently unknown. Until we have a final forgiveness determination, the full amount of the PPP loan will remain on our balance sheet. Anthony mentioned at year end, we had total liquidity of $39.8 million. Looking at this efficiency of this, we obviously reported an EBITDA loss for the third and fourth quarters of 2020 and are generating negative free cash flow. (0:19:54): Let me continue with moderate improvements in our operating rig count and modest improvements in spot dayrates perhaps $500 to $750 per quarter. We believe we can approach free cash flow neutrality late in 2021 and improve on that in 2022. But given the levers available to pull at this time, we're very comfortable with our financial liquidity position. Now moving on to fiscal 2021 and first quarter guidance. On fiscal 2021 numbers, as mentioned, our CapEx budget is $5.8 million comprised primarily of maintenance items, our budget for SG&A is $15.2 million including $3.2 million of non-cash compensation expense. Anthony mentioned that all of our 2021 Long-Term Incentive Awards constitute at risk performance-based compensation. Expense associated with these awards is subject to variable accounting tied to increases or decreases in our stock price and other performance measures, which will create variability between quarters and these reported numbers, as well as our estimates. Our cash based SG&A expense guidance reflects an increase for resumption of our annual incentive plan, which also is performance-based and at risk. Overall, approximately $4.5 million of our annual SG&A expense estimate is tied to at risk performance-based compensation, which may or may not be realized if market conditions do not improve or deteriorate or we do not meet our financial and operational goals. Depreciation expense for the year we approximated about $10 million per quarter, interest expense about $3.8 million per quarter and tax expense that's going to be de minimis perhaps $100,000 per quarter. (0:22:39): We expect revenue per day to come in between $14,900 and $15,000 per day and cost per day to come in around $11,700 and $11,900 per day. And these per day amounts exclude pass-through revenue and expenses. We also expect to incur an additional 1.2 million associated with the four rigs reactivating during the first quarter and $700,000 on unabsorbed overhead costs during the quarter. These costs are not included in and on top of our cost per day guidance. We expect SG&A expenses to approximate for $4.1 million. Including this estimate is approximately $1 million of non-cash compensation expense. Sequential increase in non-cash compensation relates to variable accounting on at-risk performance-based compensation driven by recent increases in our stock price with the ultimate amount based on our stock price at quarter end. And sequential increases in cash SG&A expense relate to the expected accruals under our annual incentive plan, which also is at-risk tied to achieving predetermined performance measures. For the quarter, we expect interest expense and depreciation expense to be approximately $3.8 million and $10 million respectively and tax expense to be approximately $100,000. CapEx, we expect approximately $2 million to flow through our cash flow statement during the quarter. And we also do expect a small seasonal working capital bill associated with the payment of year end property tax payments in addition to working capital investment associated with the growing operating rig count. And with that, I'll turn the call back over to Anthony.

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

Will do. We will now begin the question-and-answer session. And our first question will come from Ryan Pfingst with B. Riley Securities. Please go ahead.

Hi. Good morning guys.

Hi, Ryan.

Good morning, Ryan.

I'm just wondering if you could give some more color on the rig count for the rest of the year. Just based on your discussions with customers, one, do you think now with commodity prices higher, have you had some more discussions about longer-term contracts? And two, if you could just give a little bit more color on pricing and if and when do you expect that to finally pick up a little bit?

Sure. Appreciate the question, Ryan. First, as we think about where we are right now, we're at 11 today, the 12th rig will start mobilizing out of Houston here in the next week, week and a half. That will put us at 12. We're on a pathway and very confident in our plan to get to 15 rigs by the end of the second quarter. I think we have sufficient opportunities. The quality of those discussions is good enough that we have pretty high level of confidence in that. As we think about rig count beyond that, it's really going to become a function of where dayrates are at that time relative to the capital investment that we're going to have to make. I think – and I think this is true of a lot of drilling contractors as we continue to reach deeper into the inventory into rigs that have been stacked for nine months, 12 months plus especially considering equipment upgrades and things like that that must be done to be competitive in today's market. We need to see dayrates move from where they are right now. We tried to signal and tell you guys that we saw dayrates hit a bottom. It's in the rear view mirror now. They are starting to move back up. They're moving up very slowly, but we would need to see this dayrate improvement continue in order to justify the capital was going to be required to start up the rest of those rigs. So our strategy and plan would be – I don't know if it's 15, I don't know if it's 18, but it's somewhere in that range. We'll be there mid-year. We're going to pause. We're going to look at where dayrates are at that time. I don't expect to necessarily put long-term contracts in place where dayrates are or where they're even going to be this summer relative to where we think they're going to be in 2022 and beyond. But that's how we're thinking about that. Your question about pricing, it's a function of utilization as you know. As more rigs go out, it will give us a better opportunity to move pricing more. I think historically people have thought of that threshold at around 80% utilization. I would point out that it's not 80% of the total supply that's out there, but it's going to be 80% of the supply that is in high demand at this time, which of course are the super-spec rigs, rigs that are outfitted with three mud pumps, four gens and things like that. So we still have a couple of quarters to go I think before we see any significant momentum in that area, but I would note that we are seeing pricing improvement even today.

Great. Thank you for all that detail there. And then for the five rigs that are coming out of the marketed fleet, could you just give some additional color on what your plan is for those rigs potentially, maybe marketing them for sale? And then just more generally, could you talk about how the M&A market looks right now for the drilling rig industry?

Sure. I'll start with, and Phillip may have some comments, he'd want to add on the five rigs coming out of the market. It's not that they're – they don't have a future. It's just again with the returns focused orientation, which we have today we are repurposing some equipment to make the smaller marketed fleet more marketable, so think about mud pumps obviously engines and things like that. Is there a scenario in 2022 and beyond where those rigs could become competitive again? Absolutely. It's going to, as you know, be driven by commodity prices and of course demand. But that's how we're thinking about those rigs. We just wanted to get more focused on a smaller marketed fleet and try to generate as much free cash flow as we can with that subset of the fleet and that's where we are. Philip?

Yes, I look at it as a capital allocation decision. We looked at that – at our rig fleet, we looked at what is reasonable to assume that we'll go back to work in the future and none of us can predict exactly what the rig count is going to be. If it goes back to a thousand, I think these rigs would be coming back to work, but that's not our prediction. So we really looked at that. The specifications of these rigs, there is nothing different about these rigs particularly than our other rigs. It's just at the end of the day, we don't see in a – kind of as we look out in the future based on kind of what forecasts are potentially for rig counts after everything kind of gets more to a normal basis, these may come back to work. So that's the decision there. Right now, we have no plans to sell those rigs. And so that's really kind of the basis for those decisions.

And, Ryan, just on the M&A question, I mean, you guys know we've been very vocal about our view and the need for consolidation within the industry. I believe most people understand that the worst is behind us now. As you know, there have been a couple of companies that now have come out of the restructuring process. So as we think about the better macro environment, certainly the better outlook for the industry and the fact that some people that we would expect to be participating in M&A are now on the other side of the restructuring that hopefully 2021 will present some opportunities, not just in the rig business, but across the oil field services. So we'll continue to pay attention to that. We have a strategy as ICD on a standalone basis. Obviously, we need more scale, more rigs running. We're very confident that given the overhead that we have in place, the infrastructure around that, the systems and processes that underlie it that ICD is an excellent company and entity to participate in a much needed consolidation within oil field services.

Great. Well, thank you guys for taking my questions and hope you're doing well otherwise down at Texas, I'll turn it back.

Yes, there. Thank you.

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

Yes, good morning guys.

Good morning, Daniel.

Good morning, Daniel.

I just had a couple of clarifications left, I guess, I was still a little unclear that the five rigs are – are you going to be utilizing components from those rigs such that you will suppress your maintenance capital requirements this year? Or should we consider them to be the cold stacks untouched?

No, these – to the extent we utilize components, it will be to – if we're putting a third pump fourth engine on one of the other 25 rigs, it will reduce that kind of what I would call them – I call them more growth to CapEx if you think about it. We reduced that if we were going to use those parts otherwise they're available for capital spare. I don't think it's going to reduce maintenance CapEx on any of the rigs that we operate.

Okay. That's helpful. And then Anthony, I thought your comment on sort of looking to get to 15 to 18 rigs whenever that might be and then – then taking a pause made sense, but could you – what do you think your reactivation costs are per rig once you get to that threshold? I mean, what does that next incremental rigs reactivation costs look like? Just trying to understand the dayrate environment you'd have to see to move the count beyond that 15 to 18.

Yes. So look we've talked about this. I think it's generally known. We we've spent between $300,000 and $600,000 per startup. As we thought about incremental contracts, we've wanted to ensure that at a minimum over the primary term of any contract that we take today that on a cash on cash basis, we at least recover that. Now, obviously, you can't do that long-term, but this year as we think about 2021 in particular, it's a year of transition, it's a year of positioning because again our outlook for next year and beyond is better. So as we think about that next tranche and I don't know if it's the 18th rig, the 19th rig or the 17th rig, you're looking at a multiple of that. It's not $3 million. It's going to depend on how long the rig has been idle. If we have used any of its equipment and upgrading another rig and stuff like that, but internally we have a strategy from an equipment standpoint. We know exactly what needs to be done to get to 20 rigs and ultimately back to 100% utilization. But right now the focus is to get to enough operating scale where we get to cash flow neutrality. That's our goal for this year and ultimately to generate more positive cash flows, so that we can do some other things with that. But hopefully that answers your question.

Yes, it does. And then maybe just a final, again, a small question to ask. When you're in that sort of mid 15 to 18 rig range, maybe for Philip, and assuming normalized standby activity, where do you think your operating cost per day is going to be?

Yes, so assuming there is no cost inflation or anything like that, we would be under $13,000 a day getting – moving all the – moving away from the standby things that obviously impact the reported number, but assuming those rigs are operating and we eliminate standby. We would be under $13,000 in that.

Okay. That's helpful. All right, guys. Well, thanks for letting me ask a few.

Great, thank you, Daniel.

This concludes our question-and-answer session. I would like to turn the conference back over to Anthony Gallegos, President and Chief Executive Officer, for any closing remarks. Please go ahead, sir.

Okay. Guys we sure appreciate you're taking a few minutes out of your busy day to dial-in today and listen, appreciate your support of ICD, wish everyone safety and health here in the new year and we'll signoff from here now. Thank you all

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